Item 1A. Risk Factors
Because of the following factors, as well as of the factors affecting our operating results and financial condition, financial performance should not be considered to be a reliable indicator of future performance. Investors should not use historical trends to anticipate results in future periods. See also “Special Note Regarding Forward Looking Statements”.
Regulation of Clinical Laboratory Operations
The clinical laboratory industry is highly regulated and subjected to significant Federal and state regulation. This includes inspections and audits by governmental agencies. These agencies may impose fines, criminal penalties, or other enforcement actions to enforce laws and regulations. These penalties can include revocation of a clinical laboratory=s license. Changes in regulations may increase the cost of testing or processing claims.
Waste management is subject to Federal and state regulations governing the transportation and disposal of medical waste including bodily fluids. Federal regulations require licensure of interstate transporters of medical waste. In New Jersey, we are subject to the Comprehensive Medical Waste Management Act, (“CMWMA”), which requires us to register as a generator of special medical waste. All of our medical waste is disposed of by a licensed interstate hauler. The hauler provides a manifest of the disposition of the waste products as well as a certificate of incineration which is retained by us. These records are audited by the State of New Jersey on a yearly basis. We are also subject to Federal requirements. The Federal Hazardous materials transportation law, 49 U.S.C. 5101 et seq., and the Hazardous Materials Regulations (HMR), 49 CFR parts 171-180. The Federal government has classified hazardous medical waste as hazardous materials for the purpose of regulation. These regulations preempt State regulation which must be “substantively the same,” “the non-Federal requirement must conform “in every significant respect to the Federal requirement. Editorial and other similar de minimis changes are permitted.” 49 CFR 107.202(d). The amendments to provisions in 49 U.S.C., 5125 reaffirmed the need to achieve greater uniformity and to promote the public health, welfare, and safety at all levels, Federal standards for regulating the transportation of hazardous materials in intrastate, interstate, and foreign commerce are necessary and desirable. We believe we are in compliance with all Federal and State medical waste regulations.
Regulation of Reimbursement for Laboratory Services
Containment of health-care costs, including reimbursement for clinical laboratory services, has been a focus of ongoing governmental activity. Omnibus budget reconciliation legislation, designed to “reconcile” existing laws with reductions and reimbursements required by enactment of a Congressional budget can adversely affect clinical laboratories by reducing Medicare reimbursement for laboratory services. For most of the tests performed for Medicare beneficiaries or Medicaid recipients, laboratories are required to bill Medicare or Medicaid directly, and to accept Medicare or Medicaid reimbursement as payment in full.
The current administration, Congress and various Federal agencies have examined the rapid growth of Federal expenditures for clinical laboratory services, and the use by the major clinical laboratories of dual fee schedules (“client” fees charged to physicians, hospitals, institutions and companies with whom a laboratory deals on a bulk basis and which involve relatively low administrative costs, and “patient” fees charged to individual patients and third party payors, including Medicare, who generally require separate bills or claims for each patient encounter and which involve relatively high administrative costs). The permitted Medicare reimbursement rate for clinical laboratory services has been reduced by the Federal government in a number of instances over the past several years to a present level equal to 74% of the national median of laboratory charges. Calendar year 2008 marked the final year of a five-year freeze on Laboratory fee updates, as required by the Medicare Modernization Act of 2003. A number of proposals for legislation or regulation are under discussion which could have the effect of substantially reducing Medicare reimbursements to clinical laboratories through reduction of the present allowable percentage or through other means. In addition, the structure and nature of Medicare reimbursement for laboratory services is also under discussion and we are unable to predict the outcome of these discussions. Depending upon the nature of congressional and/or regulatory action, if any, which is taken and the content of legislation, if any, which is adopted, we could experience a significant decrease in revenues from Medicare and Medicaid, which could have a material adverse effect on us. For the first time in five years, as of January 1, 2009 laboratories received a 4.5% across the board increase in reimbursements. Currently laboratories are expected to receive a 1.9% across the board decrease in reimbursements, although nothing has been finalized as of the date of this report.
CLIA-88
CLIA-88 extended Federal licensing requirements to all clinical laboratories (regardless of the location, size or type of laboratory), including those operated by physicians in their offices, based on the complexity of the tests they perform. The legislation also substantially increased regulation of cytology screening, most notably by requiring the Secretary of Health and Human Services, (“HHS”) to implement regulations placing a limit on the number of slides that a cytotechnologist may review in a twenty-four hour period. CLIA-88 also established a more stringent proficiency testing program for laboratories and increased the range and severity of sanctions for violating Federal licensing requirements. A number of these provisions, including those that imposed stricter cytology standards and increased proficiency testing, have been implemented by regulations applicable only to laboratories subject to Medicare certification. On February 28, 1992, HHS published three sets of regulations implementing CLIA-88, including quality standard regulations establishing Federal quality standards for all clinical laboratories; application and user fee regulations applicable to most laboratories in the United States which became effective on March 30 1993; and enforcement procedure regulations applicable to laboratories that are found not to meet CLIA-88 requirements. The quality standard regulations establish varying levels of regulatory scrutiny depending upon the complexity of testing performed. Under these regulations, a laboratory that performs only one or more of seventy eight routine “waived” tests may apply for a waiver from most requirements of CLIA-88. We believe that most tests performed by physician office laboratories will fall into either the “waived” or the “moderately complex” category. The latter category applies to simple or automated tests and generally permits existing personnel in physicians’ offices to continue to perform testing under the implementation of systems that insure the integrity and accurate reporting of results, establishment of quality control systems, proficiency testing by approved agencies, and biannual inspection. Our testing is often much more complex and as a result, we are subject to full compliance with CLIA-88. The quality standard and enforcement procedure regulations became effective on September 1, 1992, most personnel, quality control and proficiency testing requirements have been implemented; the remainder will be phased in over a number of years. Our laboratory completed its first CLIA inspection under CLIA-88 guidelines and received its certificate of compliance effective February 7, 1996. It has been reinspected since on a bi-annual basis and found to be in compliance.
Compliance Program
The Office of Inspector General has published a Model Compliance Program for the clinical laboratory industry. This is a voluntary program for laboratories to demonstrate to the Federal government that they are responsible providers. We have implemented a voluntary compliance program adhering to the standards set forth in the Model Compliance Program.
Confidentiality of Health Information
Pursuant to the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), on December 28, 2000, the Secretary of HHS issued final regulations that would establish comprehensive federal standards with respect to the use and disclosure of protected health information by a health plan, healthcare provider or healthcare data clearinghouse. The regulations establish a regulatory framework on various subject matter, including:
The circumstances under which disclosures and uses of protected health information require the patient=s consent, or authorization or no patient consent or authorization.
The content of notices of privacy practices for protected health data.
Patients= rights to access, amend and receive an accounting of the disclosures and uses of protected health information.
Administrative, technical and physical safeguards required for that use or for disclosure of protected health data.
These regulations establish a minimum and would default to more stringent state laws. Therefore, we are required to comply with both sets of standards. Laboratories were required to submit a compliance plan to HHS by October 16, 2003. We filed our application for a one year extension for compliance with the Transaction Data Set Regulations and filed our compliance plan during the extension period in accordance with the model form provided by HHS. HIPAA provides for significant fines as well as substantial criminal penalties for violations of the Act.
Laboratory Developed Tests (“LDTs”)
Complex laboratories such as BioReference frequently develop testing procedures to provide diagnostic results to customers for tests which are not available using Federal Drug Administration (FDA) approved methods. These tests have been traditionally offered by nearly all complex laboratories for the last few decades. The FDA has been considering changes in the way laboratories are allowed to offer these LDTs. While changes have been considered for some time now, the potential for FDA involvement appears greater now than in the past. Currently all such tests are conducted and offered under approval by CLIA and individual state licensing procedures; the FDA is considering requiring FDA approval on a portion of those currently non-FDA approved tests. There is an associated risk for BioReference that some of the tests that it currently offers might need to be subject to approval by the FDA; there are currently no formal definitions, procedures or FDA processes on how such approvals would be handled.
Fraud and Abuse Regulations
Medicare and Medicaid anti-kickback laws prohibit clinical laboratories from making payments or furnishing other benefits to influence the referral of tests billed to federal programs. Federal enforcement agencies (including both the Federal Bureau of Investigation and the Office of the Inspector General) liberally interpret and aggressively enforce statutory fraud and abuse provisions of these anti-kickback statutes. According to public statements made by the Department of Justice, healthcare fraud has become one of its highest priorities. Many of the anti-fraud statutes are vague or indefinite and have not been interpreted in the courts. We believe we operate lawfully within these statutes; however, we cannot predict if some of our practices may be interpreted as violating these statutes and regulations.
Intellectual Property
BioReference, primarily through its wholly-owned subsidiary, GeneDx, but additionally through its primary laboratory in Elmwood Park has in the past, and may in the future, have the need to deal with intellectual property issues, such as patent issues, trademark issues and copyright issues. BioReference diligently researches all matters that may give rise to an intellectual property issue and has taken substantial legal steps to make sure that all such matters are fully considered and understood. In certain instances the issues are not apparent and in some other cases, BioReference believes that the current intellectual property law may not be appropriate to current conditions or may be in a transitional state of change and BioReference may challenge the law in such instances. There is an associated risk with such challenges that could force BioReference to stop or change a testing procedure in certain instances or could possibly result in financial expense as a result of the Company’s decision.
Insurance
We maintain professional liability insurance of $1,000,000 per occurrence, $3,000,000 in the aggregate. In addition, we maintain excess commercial insurance of $5,000,000 per occurrence and $5,000,000 in the aggregate. We believe that our present insurance coverage is sufficient to cover currently estimated exposures, but we cannot assure that we will not incur liabilities in excess of the policy limits. In addition, although we believe that we will be able to continue to obtain adequate insurance coverage, we cannot assure that we will be able to do so at acceptable cost.
Employees
At October 31, 2009, we had 1,691 full-time and 483 part-time employees serving in executive positions, as technicians and technologists (including physicians, pathologists and PhDs), in marketing and as drivers and in bookkeeping, clerical and administrative positions. None of our employees are represented by a labor union. We regard relations with our employees as satisfactory.
Risks Associated with Growth:
Over the last several years, we have experienced substantial growth and have expanded our operational capabilities. In September 2006, we acquired certain assets and liabilities of two Maryland laboratories, a pathology laboratory and a genetics laboratory for $1,500,000 and $10,000,000, respectively. The genetics laboratory purchase agreement contains certain operational targets, which, if achieved in the four years following the closing, could result in an increase in the purchase price from $10,000,000 to a maximum $17,000,000. During the recently completed fiscal year ended October 31, 2009 as well as for the fiscal year ended October 31, 2008 and October 31, 2007, the genetics laboratory achieved certain of the targets, entitling the prior owners to receive $1,917,000 in cash and an additional 11,548 shares of our Common Stock with respect to each such year. These amounts have been accrued and are reflected in our financial statements. We retained the staffs of these laboratories and continue to operate at the same locations. We intend to develop further and expand both our core laboratory business and other products. This growth and expansion has placed, and will continue to place, a significant strain on our resources. We cannot assure that we will be able to successfully manage a continuation of the rate of growth similar to that which we have experienced in the past, should such growth occur.
Fluctuations in Operating Results:
Our quarterly and annual operating results can be affected by a wide variety of factors, many of which are outside of our control and which have in the past and could in the future materially and adversely affect our operating results. These factors include the quantities and timing of specimens received, pricing pressures, reimbursement changes, availability and cost of diagnostic supplies, cost of logistic and delivery systems, changes in product mix, retention and expansion of our marketing staff, timing of payments from governmental agencies and third-party payors and the effect of adverse weather conditions. We rely principally upon our internal logistic group for pick-up and delivery of specimens. However, as we shift our product mix we have begun to rely on Federal Express, UPS and other such providers for this service. Any disruption in this service, as occurred on September 11, 2001 when the National Airspace System (“NAS”) was shut down for a week, could have a material adverse effect on our operating results. As a result of these factors, our operating results may continue to fluctuate in the future.
Uncertainties Related to Government Regulation and Enforcement
We are a provider of healthcare services. As such, we are subject to extensive and rapidly changing federal, state and local laws and regulations governing licensure, billing practices, financial relationships, referrals, conduct of operations, purchase of existing businesses and other aspects of our business. We cannot predict the timing or impact of any changes in these laws and regulations or their interpretations by regulatory bodies, and we cannot assure that these changes will not have a material adverse effect on us.
Current federal laws governing federal healthcare programs, as well as some state laws, regulate certain aspects of the relationship between healthcare providers, including us, and their referral sources. The Federal Anti-Kickback Law and the Stark Law generally prohibit providers and others from soliciting, offering, receiving or paying, directly or indirectly, any monies in return for either making a referral for a service or item or purchasing, ordering or leasing a service or item, and prohibits physicians from making such referrals to entities in which they have an investment interest or with which they have a compensation arrangement. Exceptions to these laws are limited. Violations are punishable by disallowance of claims, civil monetary or criminal penalties and or exclusion from Medicare. Government authorities (both federal and state) have become more aggressive in examining laboratory billing practices, and in seeking repayments and even penalties based on how the services were billed, regardless of whether the carriers had furnished clear guidance.
In addition, our laboratory operations are required to be licensed or certified under CLIA-88, CMS (Medicare) and various State and local laws. We are also subject to federal and state laws relating to the handling and disposal of medical waste and radioactive materials, as well as the safety and health of laboratory employees. Although we seek to structure our practices to comply with these laws and regulations, no assurances can be given regarding compliance in any given situation. The possible sanctions for failure to comply with these laws and regulations may include the denial to conduct business, significant fines and criminal penalties. Any significant fine or criminal penalty could have a material adverse effect on our financial condition. Any exclusion or suspension from participation in a CMS program, any loss of licensure or accreditation or the inability to obtain the required license would have a material adverse effect on our business.
Uncertainties Related to Third-Party Payors
We typically bill third party payors such as Medicare, Medicaid, Governmental programs and private insurers for our services. Such third party payors are constantly negotiating prices with the goal of lowering their costs, which may result in lower profit margins for us. Reimbursement rates have been established for most, but not every service. We cannot collect from third party payors for services that these payors have not approved for reimbursement. As is common with all laboratories, there is a certain amount of variability with respect to reimbursement among third party payors. Furthermore, third party payors have, on occasion ceased reimbursements when certain tests are ordered for patients with certain diagnoses while maintaining reimbursement when those tests are ordered for other diagnoses deemed appropriate by the carrier. In addition, Medicare or Medicaid may retroactively audit its payments to us and may determine that certain payments must be returned.
Potential Healthcare Reform Including Decreasing Reimbursement Rates
The public and the federal government continue to focus attention on reforming the healthcare system in the United States. At the beginning of calendar year 2005, CMS announced significant cuts to Medicare reimbursement rates for flow cytometry testing. We benefited from a partial restoration of the former reimbursement rates in fiscal 2007. Furthermore, several legislative proposals have been introduced in Congress and state legislatures in recent years that would effect major reforms of the healthcare systems. In addition, CMS has made a number of proposals regarding the payment and coverage of laboratory services including the development of national coverage policies. Because of the uncertainties in regard to the nature, timing and extent of any such reimbursement changes, audits and reform initiatives, we are unable to predict the effect of these changes on us. For the first time in five years, as of January 1, 2009, laboratories received a 4.5% across the board increase in reimbursements. Currently laboratories are expected to receive a 1.9% across the board decrease in reimbursements, although nothing has been finalized as of the date of this report.
Uncertainties Related to Accounts Receivable
All of our services are rendered based upon a fee for services list. We assume the financial risk related to collection of these receivables such as:
Delays attendant to reimbursement by third party payors
Difficulties in gathering complete and accurate billing information
Inability to collect accounts
Long collection cycles
There have been times when our accounts receivable have increased at a greater rate than revenue growth and, therefore, has adversely affected our cash flow from operations. We have taken steps to implement systems and processing changes intended to improve billing procedures and related collection results. We believe that we have made progress by reorganizing our accounts receivable and billing functions and that our allowance for doubtful accounts is adequate. However, we cannot assure that our ongoing assessment of accounts receivable will not result in the need for additional provisions. Such additional provisions, if implemented, could have a material adverse effect on our operating results.
Competition
We operate in a business which is characterized by intense competition. Our major competitors in the New York metropolitan area, Quest Diagnostics and Laboratory Corporation of America, are large national laboratories which possess greater name recognition, larger customer bases, significantly greater financial resources and employ substantially more personnel than we do. Many of our competitors have long established relationships. We cannot give assurances that we will be able to compete successfully with such entities in the future. Our ability to attract and retain sales representatives and management may also affect our ability to compete in this marketplace.
Dependence on Bank Financing
Note 5 to our consolidated financial statements describes bank financing.
Dependence on our Chief Executive Officer
Our success is substantially dependent on the efforts and abilities of Marc D. Grodman, M.D., our founder, president and chief executive officer. The unavailability of Dr. Grodman, whether as a result of his death, disability or otherwise, could have a material adverse effect upon our business.
Possible Volatility of Stock Price
There is a history of volatility in the market price for shares of companies in the healthcare marketplace. Factors such as fluctuations in our quarterly revenues and operating results, announcements of new innovations or services by us or our competitors, changes in third party payment policies and government regulations may have a material effect on the market price of our Common Stock. In addition, any announcement of a material pending legal action could have a negative impact on the market price of our Common Stock regardless of the outcome of any such matter.
Factors In Place To Discourage Takeover Attempts
The substantial percentage ownership of our outstanding Common Stock by our executive officers and directors; our charter provision providing for a staggered board of directors so that only one-third of the board is elected each year to serve a three year term; and the requirement that the holders of not less than 80% of our outstanding Common Stock must approve any merger, consolidation, asset sale or acquisition of the Company not
approved by the board of directors may discourage attempts by third parties to tender for or otherwise obtain control of the Company, even if such an attempt might be deemed beneficial to the Company and its shareholders. See Item 11 - “Employment Agreements with Executive Officers” as to employment agreements signed by the Company which provide for substantial Severance Payments upon termination of employment in the event of a Change in Control of the Company. These Severance Payment provisions may also discourage attempts by third parties to tender for or otherwise obtain control of the Company.
Item 1B.
Item 1B. Unresolved Staff Comments
We did not receive any written comments from the staff of the Securities and Exchange Commission regarding our Exchange Act reports during the last 180 days of fiscal 2009 which were unresolved at October 31, 2009.
Item 2.
Item 2. - Properties
We operate through a regional network of laboratories. The table below summarizes certain information as to our principal facilities as of October 31, 2009.
We believe that each of these facilities as presently equipped has the production capacity for its currently foreseeable level of operations. We also lease additional relatively small draw stations throughout the New York metropolitan area to collect specimens from physician-referred patients for testing at our processing facilities.
Item 3.
Item 3. - Legal Proceedings
At October 31, 2009 and at the date of this Report, we were not involved in any material legal proceedings.
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 2009.
PART II
Item 5.
Item 5. - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Our Common Stock is listed for trading on The NASDAQ Global Market System under the symbol “BRLI”. It traded on the NASDAQ Small Cap System from November 24, 1993 until March 26, 2002 when our application to list our Common Stock on the NASDAQ Global Market System was approved.
The following table sets forth the range of high and low closing bid prices for our 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 4, 2010 the last sale price for the Common Stock on NASDAQ was $39.77 per share.
At October 31, 2009, the number of record owners of the Common Stock was 330. 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 on 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 any cash dividends or making any cash distributions with respect to shares of our Common Stock.
Recent Sales of Unregistered Securities
On September 26, 2006 we issued 230,947 shares of our Common Stock in connection with the acquisition of the operating assets of GeneDx. These shares were valued for the purpose of this acquisition at $21.65 per share, the average closing price for the Common Stock on NASDAQ on the ten trading days immediately preceding the August 29, 2006 signing of the purchase agreement. In December 2009, December 2008 and December 2007, three installments each of an additional 11,548 shares of our common stock were issued to the prior owners of GeneDx, as a result of GeneDx achieving certain operating results during the three annual measuring periods following the closing of the acquisition.
A restrictive legend was placed on the certificates for the 230,947 shares and each of the 11,548 share installments and stop transfer instructions were issued against the shares. The sellers represented that they were acquiring the stock for investment and not with a view to distribution. The shares were issued in reliance upon the exemption from the registration requirements of the Securities Act of 1933 in accordance with Section 4(2) of the Act on the basis that the transaction did not involve a public offering.
Equity Compensation Plan Information
The information required under this item is disclosed in item 12 of this Annual Report on Form 10-K and is incorporated herein by reference.
Issuer Purchases of Equity Securities
On July 14, 2008 the Board of Directors authorized a repurchase of up to 1,000,000 shares of the Company’s common stock over the period ending October 31, 2010. As of October 31, 2009 the Company repurchased 19,700 shares at a cost of approximately $452,000. The shares were canceled upon repurchase.
Item 6.
Item 6. - Selected Financial Data
Item 7.
Item 7. - Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
We are a clinical laboratory located in northeastern New Jersey. Our regional footprint lies within the New York City metropolitan area and the surrounding areas of New Jersey and southern New York State as well eastern Pennsylvania and some areas of western Connecticut; under certain circumstances, we provide services further into New York State, Pennsylvania, Delaware and Maryland. As a regional provider, we are a full-service laboratory that primarily services physician office practices; our drivers pick up samples and deliver reports and supplies, we provide sophisticated technical support, phlebotomy services or patient service centers where appropriate, and electronic communication services in many cases. We have also developed a national reputation for our expertise in certain focused areas of clinical testing. GenPath, the label under which we provide our cancer and oncology services, is recognized for the superior hematopathology services it provides throughout the country. Physicians outside of our regional footprint send samples to our laboratory in order to take advantage of the expertise that we are able to provide in blood-based cancer pathology and associated diagnostics. Our correctional healthcare services are used throughout the country at prisons and jails. The focused markets we serve on a national basis outside of our regional footprint do not require many of the logistical and other ancillary support services required within the region. Even within our regional footprint, we provide the same services that we provide on a national basis as well as some regional focused diagnostic services, such as histology and pathology support services, substance abuse testing, fertility testing, hemostasis testing, women’s health testing, and molecular diagnostics that are unavailable from many of the smaller regional competitors; testing in some of these areas may be provided outside of physician offices.
Over the last few years, there have been fundamental changes in the laboratory services industry. In the 1990s, the industry was negatively impacted by the growth of managed care, increased government regulation, and investigations into fraud and abuse. These factors led to revenue and profit declines and industry consolidations, especially among commercial laboratories. There are currently only three publicly-traded full service laboratories operating in the U.S. While that means that the two national mega-laboratories and BioReference Laboratories are the only remaining publicly traded full service commercial laboratories, there are numerous hospital outreach programs and smaller reference laboratories that compete for the commercial clinical laboratory business scattered throughout the country. Clinical laboratories have had to improve efficiency, leverage economies of scale, comply with government regulations and other laws and develop more profitable approaches to pricing. Moreover, there has been a proliferation of technology advancements in clinical diagnostics over the last decade that has created significant opportunities for new testing and growth.
As a full service clinical laboratory, we are constantly looking for new technologies and new methodologies that will help us to grow. Since the turn of the century, our size alone has made us attractive to companies that are driving the advances in technology. We represent a significant opportunity for these companies to market their products in one of the major population centers of the world-the New York Metropolitan area. We have had several successful strategic relationships with such technology opportunities. In addition to new technology opportunities, we have an extremely seasoned and talented management staff that has been able to identify emerging laboratory markets that are under-served or under-utilized. We are currently developing programs for cardiology, histology and women’s health to go along with our existing hemostasis, hematopathology and correctional healthcare initiatives which have already been established and in which we have been increasing our market share for the past several years. We will continue to vigilantly seek focused diagnostic marketing opportunities where we can provide information, technology, service or support that expand and grow our clinical laboratory.
During the fourth quarter of fiscal 2006, the Company acquired the operating assets of GeneDx, a leading DNA sequencing laboratory. As molecular testing in general becomes a more significant element in the diagnostic testing industry, the Company believes that genetic testing will become an essential diagnostic tool of the future. GeneDx was started by two geneticists from the NIH in 2000. Over the next six years, based on the reputation and expertise of the founders and the outstanding team they built around themselves, along with a very focused and dedicated understanding of the science of genetics, GeneDx became known as one of the premier genetic testing laboratories for the diagnosis of rare genetic diseases. The Company believed that the promise of genetic testing is in the diagnosis of the genetic variants of common diseases. It is the Company’s intention to leverage the expertise and reputation of GeneDx in order to take a leadership role in the expanding area of genetic testing. The Company is seeking cutting edge methods of testing that will be commercially viable diagnostic tools for the advancement of genetic testing. During the past year, GeneDx introduced GenomeDx, a new test based on CGH Array technology, a high-speed, chip-based technology that has allowed GeneDx to move to the forefront of an emerging technology platform. The Company is already expanding the menu of tests offered and employing marketing techniques that were extremely successful in building GenPath, our oncology laboratory. In addition to scientists and technicians to manage testing, GeneDx employs several genetic counselors to help patients and referring physicians and geneticists understand the meaning of the test results. Prior to the acquisition, GeneDx ‘s revenues and profits were increasing at an accelerating rate. This increase has continued through fiscal 2009.
While we recognize that we are a clinical laboratory that processes samples, we also understand that we are an information company that needs to effectively communicate the results of our efforts back to healthcare providers. Laboratory results play a major role in the implementation of physician healthcare. Laboratory results are used to diagnose, monitor and classify health concerns. In many cases, laboratory results represent the confirming data in diagnosing complicated health issues. Since laboratory results play such an important role in routine physician care, we have developed informatics solutions that leverage our role in healthcare. We needed to build a web-based solution to quickly, accurately, conveniently and competitively collect ordering information and deliver results, so we built an internal solution that we call CareEvolve. That solution has been essential to our own operations. We license the technology to other laboratories throughout the country which they utilize to more effectively compete against the national laboratories. These other laboratories licensing our technology are not our competitors since they are outside our regional footprint.
We have also created our PSIMedica business unit which has developed a Clinical Knowledge Management (CKM) System that takes data from enrollment, claims, pharmacy, laboratory results and any other available electronic source to provide both administrative and clinical analysis of a population. The system uses proprietary algorithms to cleanse and configure the data and transfer the resulting information into a healthcare data repository. Using advanced cube technology methodologies, the data can be analyzed from a myriad of views and from highly granular transactional detail to global trended overview. Events such as the Katrina disaster in Louisiana and general pressures from the government have made development of an electronic medical record system and Pay-for Performance reimbursement priority goals in the healthcare industry. A large portion of an individual’s medical record consists of laboratory data and a key performance indicator in any Pay-for-Performance initiative is laboratory result data. Our CKM system is a mature, full functioning solution that will allow us to play a role in these important national initiatives.
To date, neither our PSIMedica business unit nor CareEvolve has produced significant revenues.
Summary
During the quarter ended January 31, 2009, the Company executed a Restitution Agreement with John Littleton, a former Vice President in sales. Mr. Littleton paid the Company $1,600,000 for payments made to him and others that were from our perspective, improperly paid. These payments were paid for a) recruiting fees for new hires paid to parties with an undisclosed relationship to him and b) reimbursement to him or others of improperly or insufficiently documented expenses; both of which are in violation of the Company’s policies (See “Other Income” in table below). As such, in certain areas within the Management’s Discussion and Analysis we will present an analysis of our operating results including the restitution amount and pro-forma operating results excluding the restitution amount (it will be labeled as such).
(Dollars in Thousands except Per Share Data)
Results of Operations (In thousands, except per patient data)
Fiscal Year 2009 Compared to 2008
NET REVENUES:
Net Revenues for the year ended October 31, 2009 were $362,654 as compared to $301,071 for the year ended October 31, 2008; this represents a 20% increase in net revenues. This increase is due to a 14% increase in patients serviced and a 6% increase in net revenue per patient. Our laboratory operations had net revenues of $359,625 in fiscal 2009.
The number of patients serviced during the year ended October 31, 2009 was 4,648, which was 14% greater when compared to the prior fiscal year. Net revenue per patient for the year ended October 31, 2009 was $77.38 compared to net revenue per patient for the year ended October 31, 2008 of $73.09, an increase of $4.29 or 6% as a result of increases in esoteric testing.
COST OF SERVICES:
Cost of Services for the year ended October 31, 2009 was $183,524 as compared to $153,831 for the year ended October 31, 2008, an increase of 19% as compared to a 20% increase in net revenues. Therefore, this increase is in line with the increase in net revenues.
GROSS PROFIT:
Gross profit on net revenues increased to $179,130 for the year ended October 31, 2009 from $147,240 for the year ended October 31, 2008; an increase of $31,890 (22%), primarily attributable to the increase in net revenues. Gross profit margins remained constant year over year at 49%
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses for the year ended October 31, 2009 were $140,808 as compared to $118,683 for the year ended October 31, 2008, an increase of $22,125 or 19%. This increase is 1% less than the increase in net revenues and includes moderate increases to our marketing and sales expenses.
INTEREST EXPENSE:
Interest expense decreased from $2,135 during the year ended October 31, 2008 to $1,512 during the year ended October 31, 2009; a decrease of $623. This decrease is due to a decrease in utilization and in the interest rates on the PNC Bank line of credit, acquisition debt and capital leases. Management believes that this trend will continue in the near term due to the decrease in interest rates.
NET INCOME:
We realized net income of $21,850 for the twelve month period ended October 31, 2009 as compared to $15,617 for the twelve month period ended October 31, 2008, an increase of 40%.
Pre-tax income for the period ended October 31, 2009 was $38,589, as compared to $26,691 for the period ended October 31, 2008, an increase of $11,898 (45%) and was caused primarily by an increase in net revenues. The provision for income taxes increased from $11,074 for the period ended October 31, 2008, to $16,739 for the current twelve month period.
The most profound change on a pro-forma basis would have been that our fully-diluted earnings per share (EPS) went from $1.57 under the current operating results to $1.50 on a pro-forma basis, a difference of $.06 per share, which is more reflective of our true operating results.
Results of Operations (In thousands, except per patient data)
Fiscal Year 2008 Compared to 2007
NET REVENUES:
Net Revenues for the year ended October 31, 2008 were $301,071 as compared to $250,431 for the year ended October 31, 2007; this represents a 20% increase in net revenues. This increase is due to an 11% increase in patients serviced and a 9% increase in net revenue per patient. Our laboratory operations had net revenues of $298,543 in fiscal 2008.
The number of patients serviced during the year ended October 31, 2008 was 4,085, which was 11% greater when compared to the prior fiscal year. Net revenue per patient for the year ended October 31, 2008 was $73.09 compared to net revenue per patient for the year ended October 31, 2007 of $67.14, an increase of $5.95 or 9% as a result of increases in esoteric testing.
COST OF SERVICES:
Cost of Services for the year ended October 31, 2008 was $153,831 as compared to $124,029 for the year ended October 31, 2007, an increase of 24%. This increase is related to the increase in net revenues of 20%. Reagent, laboratory and medical supplies increased at a year over year rate of 25% reflecting a significant increase in the more expensive tests that we offer from payers who reimburse at lower rates than our traditional business trends. In addition, phlebotomy salaries increased 35% when compared to the prior comparable period. Also, pick-up and delivery vehicle operating expenses (energy related costs) continued to have an impact on cost of services. As energy prices subside, we expected to see this category’s impact reduced during the next fiscal year. We introduced some new testing platforms and methodologies over the prior year and have seen a modest research and development increase in the cost of introducing new tests.
GROSS PROFIT:
Gross profit on net revenues increased to $147,240 for the year ended October 31, 2008 from $126,402 for the year ended October 31, 2007; an increase of $20,838 (16%), primarily attributable to the increase in net revenues. Gross profit margins decreased by 1% during the 2008 fiscal year driven by increased expenses outlined above.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses for the year ended October 31, 2008 were $118,683 as compared to $101,345 for the year ended October 31, 2007, an increase of $17,338 or 17%. This increase is 3% less than the increase in net revenues and includes moderate increases to our marketing and sales expenses.
INTEREST EXPENSE:
Interest expense decreased from $2,410 during the year ended October 31, 2007 to $2,135 during the year ended October 31, 2008; a decrease of $275. This decrease is due to a decrease in utilization and in the interest rates on the PNC Bank line of credit, acquisition debt and capital leases. Management believes that this trend will continue in the near term due to the decrease in interest rates.
NET INCOME:
We realized net income of $15,617 for the twelve month period ended October 31, 2008 as compared to $13,957 for the twelve month period ended October 31, 2007, an increase of 12%.
Pre-tax income for the period ended October 31, 2008 was $26,691, as compared to $22,907 for the period ended October 31, 2007, an increase of $3,784 (17%) and was caused primarily by an increase in net revenues. The provision for income taxes increased from $8,950 for the period ended October 31, 2007 to $11,074 for the fiscal 2008 twelve month period.
Results of Operations (In thousands, except per patient data)
Liquidity and Capital Resources (Dollars in thousands except for the $5 million term loan, the equipment financing loan, and their repayment terms as well as the GeneDx contingent payments)
For the Fiscal Year Ended October 31, 2009:
Our working capital at October 31, 2009 was approximately $75,984 as compared to approximately $58,561 at October 31, 2008, an increase of $17,423. Our cash position increased by approximately $4,299 during the current period. We decreased our short term borrowing by approximately $6,379 and repaid approximately $3,727 in existing debt. We had current liabilities of approximately $64,489 at October 31, 2009. We generated approximately $24,366 in cash from operations, an increase of approximately $5,490 as compared to the year ended October 31, 2008.
Accounts receivable, net of allowance for doubtful accounts, totaled approximately $104,995 at October 31, 2009, an increase of approximately $11,300 from October 31, 2008, or 12%. This increase was primarily attributable to increased revenue. Cash collected over the twelve month period ended October 31, 2009 increased 19% over the prior twelve month period.
Net service revenues on the statements of operations are as follows:
The table above illustrates the relationship between contractual adjustments and gross revenues for the fiscal years 2009, 2008, and 2007. Between 2008 and 2009, contractual adjustments increased approximately 350 basis points. The most significant factor in this increase was the increase in market share caused by the acquisition of contracts with low reimbursement third party payors.
Credit risk with respect to accounts receivable is generally diversified due to the large number of patients comprising our 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 and to establish an allowance for uncollectible accounts. As a consequence, we believe that our 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, we could experience a significant decrease in revenues from Medicare and Medicaid, which could have a material adverse effect on us. We are unable to predict, however, the extent to which such actions will be taken. For the first time in five years, as of January 1, 2009, laboratories received a 4.5% across the board increase in reimbursements. Currently laboratories are expected to receive a 1.9% across the board decrease in reimbursements, although nothing has been finalized as of the date of this report.
LABORATORY GROSS RECEIVABLES BY PAYOR GROUP
Billing for laboratory services is complicated and we must bill various payors, such as the individual, the insurance company, the government (federal or state), the private company or the health clinic. Other factors that may complicate billing include:
Differences between fee schedules and reimbursement rates.
Incomplete or inaccurate billing information as provided by the physician.
Disparity in coverage and information requirements.
Disputes with payors.
Internal and external compliance policies and procedures.
Significant costs are incurred as a result of our participation in government programs since billing and reimbursement for laboratory tests are subject to complex regulations. We perform the requested tests and report the results whether the information is correct or not or even missing. This adds to the complexity and slows the collection process and increases the aging of our accounts receivable (“A/R”). When patient invoices are not collected in a timely manner the item is written off to the allowance.
Days Sales Outstanding (“DSO”) for fiscal years 2008 and 2009 were 107 and 95, respectively, a decrease of approximately 13%. These changes are due to constant vigilance on the part of management and internal changes to collection practices. However, when you compare our DSO lag to our collectible net revenues as reported on our financial statements for the periods in question, it varies between 98% to 102%, depending on the period.
Overall, the components of A/R as shown above for the two most recently completed fiscal years under review have not varied much year over year. The percent of A/R over 90 days has increased to 28% as of October 31, 2009 as compared to 26% as of October 31, 2008.
See Note 5 to our consolidated financial statements for information regarding outstanding loans.
See Note 18 to our consolidated financial statements describing our merger and acquisition activities.
The weighted average interest rate on short-term borrowings outstanding as of October 31, 2009 and 2008 was approximately 3.25% and 5.35%, respectively.
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.
Tabular Disclosure of Contractual Obligations
Payments Due By Period
(Dollars in thousands)
Our cash balances at October 31, 2009 totaled approximately $16,995 as compared to approximately $12,696 at October 31, 2008. 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 2010. However, we will be making an approximately two million dollar payment to the prior owners of GeneDx during the first quarter of fiscal year 2010. Therefore, we have approximately $14,995 in cash and approximately $27,548 of credit availability through our PNC credit line.
We do not have any off-balance sheet items.
Impact of Inflation
To date, inflation has not had a material effect on our operations.
New Authoritative Pronouncements
See Note 22 to our consolidated financial statement that discusses new authoritative pronouncements.
Critical Accounting Policies
The preparation of financial statements in conformity with U.S. 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 reported periods.
Accounting for Goodwill
We evaluate the recoverability and measure the possible impairment of goodwill under FASB Codification 350-20 “Goodwill”. 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 our market capitalization 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 our 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 to book value on a consolidated net assets basis. If the book value of the consolidated net assets is greater than the estimate of fair value, we 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.
Accounting for Intangible and Other Long-Lived Assets
We evaluate the possible impairment of our long-lived assets, including intangible assets. We review the recoverability of our long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. Evaluation of possible impairment is based on our ability to recover the asset from the expected future pretax cash flows (undiscounted and without interest charges) of the related operations. If the expected undiscounted pretax cash flows are less than the carrying amount of such asset, an impairment loss is recognized for the difference between the estimated fair value and the carrying amount of the asset.
Accounting for Revenue
Service revenues are principally generated from laboratory testing services including chemical diagnostic tests such as blood analysis, urine analysis and genetic testing among others. Net service revenues are recognized at the time the testing services are performed and are reported at their estimated net realizable amounts. These estimated net realizable amounts from patients, third party payors and others for services rendered, are accrued on an estimated basis in the period the related services are rendered and adjusted in subsequent periods based upon an analysis of the Company’s collection experience from each category of payor group as well as prospectively determined contractual adjustments and discounts with third party payors. Differences between these adjustments and any subsequent revisions are included in the statement of operations in which the revisions are made and are disclosed, if material. Applying this methodology and aggregating its collection experience from all payor groups, the Company has not been required to record an adjustment related to revenue recorded in prior periods that was material in nature.
Accounting for Contractual Credits and Doubtful Accounts
An allowance for contractual credits and discounts is estimated by payor group and determined based upon a review of the reimbursement policies and subsequent collections from the different types of payors. The Company has not been required to record an adjustment in a subsequent period related to revenue recorded in a prior period that was material in nature.
Accounting for Employment Benefit Plan
See Note 21 to our consolidated financial statements for a discussion on Employment Benefit Plans.
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.
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 42% 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 “Risk Factors” as well as elsewhere herein including:
our failure to integrate newly acquired businesses (if any) and the costs 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.
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 (such as the decrease in Medicare reimbursement for Flow Cytometry testing at the beginning of calendar year 2005 described above under Cautionary Statements).
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.
liabilities that result from our inability to comply with new corporate governance requirements.
failure to comply with the Sarbanes-Oxley Act of 2002.
Item 7A.
Item 7A. - Quantitative and Qualitative Disclosures about Market Risk
We do not invest in or trade market risk sensitive instruments. We also do not have any foreign operations or foreign sales so that our exposure to foreign currency exchange rate risk is non-existent.
We do have exposure to both rising and falling interest rates. At October 31, 2009, advances of approximately $12,452,000 under our Loan Agreement with PNC Bank were subject to interest charges at the Bank’s then prime rate of 3.25 %.
We estimate that our monthly cash interest expense at October 31, 2009 was approximately $126,000 and that a one percentage point increase or decrease in short-term rates would increase or decrease our monthly interest expense by approximately $10,400.
See Note 5 to the Consolidated Financial Statements contained herein.
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
Item 9A.
Item 9A. - Controls and Procedures
An evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that those disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.
Management’s Report on Internal Control over Financial Reporting
The management of Bio-Reference Laboratories, Inc. (the “Company”), including its Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes policies and procedures that:
pertain to the maintenance of records that, in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of October 31, 2009. Management based this assessment on criteria for effective internal control over financial reporting described in “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operating effectiveness of its internal control over financial reporting.
Based on this assessment, management has determined that the Company’s internal control over financial reporting as of October 31, 2009 is effective. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. MSPC, Certified Public Accountants and Advisors, a Professional Corporation, an independent registered public accounting firm, has audited our internal control over financial reporting and has expressed an unqualified opinion on the effectiveness of internal control over financial reporting as of October 31, 2009.
Item 9B.
Item 9B. - Other Information
None.
PART III
Item 10.
Item 10.- Directors, Executive Officers and Corporate Governance
The following table sets forth certain information with respect to each of the directors and executive officers of the Company.
(a) Member of the Audit Committee
(b) Chairman of the Audit Committee
(c) Member of the Compensation Committee
(d) Chairman of the Compensation Committee
(e) Member of Nominating Committee
The Audit Committee is comprised of the four non-employee members of the Board of Directors, Gary Lederman (Chairman), Joseph Benincasa, John Roglieri and Harry Elias. The Board of Directors deems each such individual as “independent” as defined by the rules of the National Association of Securities Dealers. The Audit Committee met four times during fiscal year 2009. The Audit Committee confers with the Company’s auditors and reviews, evaluates and advises the Board of Directors concerning the adequacy of the Company’s 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 the Company’s financial statements and the results thereof. The Board of Directors has determined that Gary Lederman is qualified to serve as the Company’s “audit committee financial expert” as defined in Regulation S-K promulgated by the Securities and Exchange Commision.
The Compensation Committee is comprised of four non-employee members of the Board of Directors, John Roglieri (Chairman), Joseph Benincasa, Harry Elias and Gary Lederman. The Compensation Committee met once during fiscal year 2009. The Compensation Committee reviews salaries, cash bonuses and compensation plans for the Company’s executive officers and eligible employees and makes recommendations concerning same to the Board of Directors.
The Company does not have an Executive Committee. Officers are elected by and hold office at the discretion of the Board of Directors.
The Nominating Committee is comprised of the four non-employee members of the Board of Directors, Harry Elias, Joseph Benincasa, Gary Lederman and John Roglieri. Pursuant to its charter, the Nominating Committee’s role is to establish criteria for the selection of directors; to identify individuals qualified to be directors; to evaluate director candidates proposed by stockholders; to recommend individuals to fill vacancies on the Board and to recommend nominees for director at each annual stockholder meeting. The Nominating Committee may consider nominees for director of the Company submitted in writing c/o the Committee at the Company’s executive offices, whether by executive officer of the Company; current directors of the Company, search firms (if any) engaged by the Committee, and, in the circumstances provided below, shall consider nominees for director proposed by a stockholder. Information with respect to the proposed nominee must be provided in writing by the stockholder addressed to the Committee at the Company’s executive offices, and received not less than 90 nor more than 120 days prior to the anniversary date of the prior year’s annual meeting, provided that if the current year’s annual meeting is not scheduled to be held within 30 days of the anniversary date of the prior year’s annual meeting, notice from a stockholder shall be considered timely if it is received not later than the tenth day following the date on which the notice of the annual meeting was mailed or the date on which public disclosure of the date of the annual meeting was made, whichever occurs first. The information shall include the name of the nominee, and such information with respect to the nominee as would be required under the rules and regulations of the Securities and Exchange Commission to be included in the Company’s Proxy Statement if the proposed nominee were to be included therein. In addition, the stockholder’s notice shall also include the class and number of shares the stockholder owns, a description of all arrangements and understandings between the stockholder and the proposed nominee, a representation that the stockholder intends to appear in person or by proxy at the meeting to nominate the person named in its notice, a representation as to whether the stockholder intends to deliver a proxy statement to or solicit proxies from shareholders of the Company and information with respect to the stockholder as would be required under the rules and regulations of the Securities and Exchange Commission to be included in the Company’s Proxy Statement.
The Nominating Committee generally identifies potential candidates for director by seeking referrals from the Company’s management, members of the Board of Directors and their various business contacts. Candidates are evaluated based upon factors such as independence, knowledge, judgment, integrity, character, leadership, skills, education, experience, financial literacy, standing in the community and ability to foster a diversity of backgrounds and views and to complement the Board’s existing strengths. There are no differences in the manner in which the Committee will evaluate nominees for director based on whether the nominee is recommended by a stockholder.
Code of Ethics
The Company has adopted a Code of Ethics that applies to its executive officers and to key financial and accounting personnel. The Company will, upon a stockholder’s written request to Investor Relations, c/o the Company, furnish a paper copy of the Code of Ethics.
The following is a brief account of the business experience of each director and executive officer of the Company.
Marc D. Grodman, M.D. founded the Company in December 1981 and has been its Chairman of the Board, President, Chief Executive Officer and a Director since its formation. Dr. Grodman is an Assistant Professor of Clinical Medicine at Columbia University’s 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’s College of Physicians and Surgeons in 1977. Except for his part time duties as Assistant Professor of Clinical Medicine and Assistant Attending Physician at Columbia University and Presbyterian Hospital, Dr. Grodman devotes all of his working time to the business of the Company.
Since January 2005, Dr. Grodman has been a member of the Board of Directors, and since April 2008, Chairman of the American Clinical Laboratory Association, an industry organization comprised of the largest and most significant commercial clinical laboratories in the United States. Other Board members include the chief executive officers of Quest Diagnostics and Laboratory Corporation of America.
Howard Dubinett has been the Executive Vice-President and Chief Operating Officer of the Company since its formation in 1981. He became a Director of the Company in April 1986. Mr. Dubinett attended Rutgers University. Mr. Dubinett devotes all of his working time to the business of the Company.
Sam Singer has been the Company’s Vice President and Chief Financial Officer since October 1987 and a Director since November 1989. He is responsible for all of the Company’s 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 the Company. He received a B.A. degree from Strayer University and an M.B.A. from Rutgers University. Mr. Singer devotes all of his working time to the business of the Company.
Joseph Benincasa became a Director of the Company in June 2005. Mr. Benincasa currently serves as the Executive Director of The Actors’ Fund of America, a position he has held since 1989. The Actors’ Fund is the leading national, non-profit human services organization providing comprehensive social and health care services, employment, training and housing support to the entertainment profession. It is headquartered in New York City with regional offices in Chicago and Los Angeles. He is a director of St. Peter’s University Medical Center and also sits on the board of directors of Broadway Cares/Equity Fights AIDS; the National Theatre Workshop of the Handicapped; Career Transition for Dancers; the Times Square Alliance; the New York Society of Association Executives and the Somerset Patriots, a minor league baseball team. Mr. Benincasa holds a B.A. degree from St. Joseph’s University and an M. Ed. Degree from Rutgers University. He also attended Fordham University Graduate School of Business.
Harry Elias became a Director of the Company in March 2004. Mr. Elias commenced his employment in sales and marketing with JVC Company of America (“JVC”) in 1967, subsequently being appointed as JVC’s Senior Vice President of Sales and Marketing in 1983 and as Executive Vice President of Sales and Marketing in 1990. In 1995, Mr. Elias was named as JVC’s Chief Operating Officer, a position he occupied until April 2003 when he resigned his positions upon his appointment as JVC’s “Honorable Chairman.” JVC, a distributor of audio and video products headquartered in Wayne, New Jersey is the wholly owned United States subsidiary of Victor Company of Japan, a manufacturer of audio and video products headquartered in Japan. In January 2005, after retiring from JVC, Mr. Elias was appointed Chairman of the Board of and commenced to serve as a consultant to AKAI USA, the sole distributor in the United States of electronic products produced by AKAI, a Chinese manufacturer. Mr. Elias retired from AKAI in 2007 and currently is self-employed as a Business Consultant.
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 served on an institutional review board for RTL, a pharmaceutical drug testing laboratory until his retirement in February 2007.
John Roglieri, M.D. became a Director of the Company in September 1995. He is an Assistant Professor of Clinical Medicine at Columbia University’s College of Physicians and Surgeons and an Assistant Attending Physician at Presbyterian Hospital, New York City. Dr. Roglieri received a B.S. degree in Chemical Engineering and a B.A. degree in Applied Sciences from Lehigh University in 1960, an M.D. degree from Harvard Medical School in 1966, and a Masters degree from Columbia University’s School of Business in 1978. From 1969 until 1971, he was a Senior Assistant Surgeon in the U.S. Public Health Service in Washington, D.C.. 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 Insurance Company (“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 a Medical Director for New York Life in Manhattan. He is a member of advisory boards to several pharmaceutical companies, a member of the Editorial Advisory Board of the journals Managed Care and Seminars in Medical Practice, and is a subject of biographical record in Who’s Who in America.
There are no family relationships between or among any directors or executive officers of Bio-Reference Laboratories. The Company’s Certificate of Incorporation provides for a staggered Board of Directors pursuant to which the Board is divided into three classes of directors and the members of only one class are elected each year to serve a three-year term. Mr. Benincasa, Mr. Lederman and Dr. Roglieri are the Class III directors whose term expires in fiscal 2012. Dr. Grodman and Mr. Dubinett are the Class I directors whose term expires in fiscal 2010.
Key Personnel and Consultants
The following key personnel and consultants make significant contributions to the Company’s operations.
James Weisberger, M.D. (Age 54) joined the Company in September 2003 as Vice President, Assistant Chief Medical Officer and Director of Hematopathology. He is currently employed as the Company’s Chief Medical Officer. Prior to joining the Company, he was Director of Hematopathology at IMPATH, Inc. (1999-2003). He is board certified in internal medicine, anatomic and clinical pathology, and hematopathology. He has a New York State Department of Health Certificate of Qualification as a Laboratory Director. He is a Clinical Assistant Professor of Pathology at New York Medical College, Valhalla, New York. Prior to joining IMPATH, he was an Assistant Professor of Medicine and Pathology at New York Medical College (1995-1999). He has a B.S. degree from Stanford University (1977); an M.S. degree from Stanford University (1978); and an M.D. degree from the University of Pennsylvania (1983).
Charles T. Todd, Jr. (Age 58) is a Senior Vice President engaged in Sales. Mr. Todd was the founder and CEO of GenCare Biomedical Research Corporation (“GenCare”), a specialty oncology laboratory that was purchased by the Company in 1995. He attended Seton Hall University from where he received a B.S. degree in Finance in 1974.
Richard Faherty (Age 63) serves as the Company’s Chief Information Officer and oversees the Company’s two informatics operations. Mr. Faherty provided custom programming and system analysis services to GenCare from 1987 until its acquisition by the Company in 1995. He became a consultant to the Company in 1995 in the information technology area and an employee in 1999. Mr. Faherty is a graduate of the University of Notre Dame (1968) and the Fordham Law School (1975).
John Bennett, M.D., Scientific Advisory Board Chairman, is Professor Emeritus at the University of Rochester Medical Center, Rochester, New York. Dr. Bennett has long been recognized as an intellectual force in the treatment and understanding of leukemias, lymphomas and other cancer-related diseases. He established the French-American-British (FAB) Leukemia Working Group and is one of the world’s leading authorities on Myelodysplasia. He is founder and Chairman of the MDS Foundation, as well as Editor of the Journal of Leukemia Research. Dr. Bennett is currently Professor Emeritus and former Head of the Medical Oncology Unit at the University of Rochester Medical Center and formerly was a Professor of Oncology in Medicine, Pathology and Laboratory Medicine at the University of Rochester Medical School. For nearly four decades, Dr. Bennett has been honored by the medical community as an expert in the field of oncology as evidenced by the numerous chairs he has held in prestigious societies and committees and his authorship of more than 400 publications in peer review journals, the majority of which are in the area of hematologic malignancies. Dr. Bennett earned his B.A. from Harvard University and his M.D. from Boston University. He served his residency in medicine at Beth-Israel Hospital, Boston, Massachusetts and completed a fellowship in hematology at Boston City Hospital. He headed the Morphology and Cytochemistry Section of the Clinical Center at the National Institute of Health (“NIH”) before joining the faculty at the University of Rochester. Dr. Bennett serves the Company in an advisory capacity as chairman of our Scientific Advisory Board.
Sherri Bale, Ph.D., FACMG joined the Company in September 2006, when BioReference Laboratories acquired the operating assets of GeneDx. She received her M.S. and Ph.D. degrees from the University of Pittsburgh, and her post-doctoral training in medical genetics at the National Institute of Health (NIH). She is an American Board of Medical Genetics-Certified Ph.D. - Medical Geneticist and Founding Member of the American College of Medical Genetics. She founded GeneDx with Dr. John Compton, also a long-time NIH scientist, after 16 years at the NIH. For the past eight years, she has served as President and Clinical Director of GeneDx, which specializes in developing and providing molecular diagnostic tests for rare
hereditary disorders. She has authored more than 125 peer-reviewed papers, book chapters, and books in the field. She serves on numerous Boards of patient advocacy and non-profit organizations, and is a member of the Faculty of the Metropolitan Medical Genetics Training Program of the National Human Genome Research Institute, NIH, in Bethesda, MD. She holds a second degree black belt in judo.
John Compton, Ph.D., (Age 61) serves as Scientific Director and Co-President of GeneDx Inc., the operating assets of which were acquired by BioReference Laboratories in September 2006. He has 25 years experience in the development and application of molecular biological techniques to answer questions about genetics and epidermal differentiation, and has authored more than 60 publications in the field. He holds B.S. degrees in Physics and Biology from MIT, received his Ph.D. from the University of California, Berkeley in Biophysics, and did his post-doctoral training in protein-DNA interactions at the Baylor College of Medicine. Following six years as an independent investigator at the Jackson Laboratory, he joined the Laboratory of Skin Biology in the National Institute of Arthritis, Musculoskeletal and Skin Diseases at the NIH in 1991 where he was Staff Scientist in the Genetic Studies Section until 2000, when he and NIH colleague Sherri Bale formed GeneDx to develop and provide molecular genetic testing in rare hereditary disorders. In 2003 they were jointly awarded the Entrepreneur of the Year award by the Technology Council of Maryland. John is also in his eighth year as Mayor of the Town of Washington Grove, MD.
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 2009, our officers, directors and beneficial owners of more than 10% of our equity timely complied with all applicable Section 16(a) filing requirements.
Item 11
Item 11 - Executive Compensation
The table below summarizes the total compensation paid or accrued by us with respect to the years ended October 31, 2007, 2008 and 2009 to our three executive officers and to our two other most highly compensated senior management employees during the period. All of our group life, health, hospitalization or medical reimbursement plans, if any, as well as our 401(k) plan, do not discriminate in scope, terms or operation, in favor of any or our officers, senior management members or directors, and are generally available to all salaried employees.
SUMMARY COMPENSATION TABLE
(1) Under SEC disclosure rules, the term “bonus” does not include awards that are performance based. As a result of this definition, payments under our Incentive Bonus Plan for Senior Management are not considered “bonuses” and are reported under the column captioned “Non-Equity Incentive Plan Compensation”.
(2) The Senior Management Incentive Bonus Plan adopted by the Compensation Committee provided for bonuses as a percentage of salary to be paid to designated members of Senior Management (twelve in total) to the extent the Company’s Total Operating Income equaled certain designated percentages of Total Net Revenues. The amounts in column (g) reflect the cash awards to the named officers under the Senior Management Incentive Bonus Plan. No bonuses were earned under the Plan with respect to fiscal 2008.
(3) The amounts in column (i) All Other Compensation are detailed below.
(a) See “Split Dollar Life Insurance” herein
(b) Mr. Faherty rents an airplane to the Company (when the Company’s owned airplane is unavailable) for corporate flights. Such rentals totaled $95,550 in fiscal 2009, $71,108 in fiscal 2008 and $55,965 in fiscal 2007. In addition, a separate corporation of which Mr. Faherty is the majority shareholder provided networking, data reporting and programming services to the Company in fiscal 2008 and fiscal 2007 for which it received $40,833 and $81,713 in compensation respectively.
Employment Agreements with Named Officers
Dr. Grodman serves as our President and Chief Executive Officer pursuant to a seven-year employment agreement which expires on October 31, 2011. Dr. Grodman has the right to elect to cancel the employment agreement effective at the end of any calendar month commencing October 31, 2008 on not less than 90 days prior written notice, subject to a six month non-competition restriction. The employment agreement is automatically renewable for additional two year periods subject to the right of either party to elect not to renew at least six months prior thereto. The employment agreement provides Dr. Grodman with minimum annual base compensation of $750,000 subject to annual percentage increases to the extent of annual percentage increases in the Consumer Price Index. Dr. Grodman’s minimum annual base compensation for fiscal 2010 as determined by the Compensation Committee is $1,013,439. The Compensation Committee can but is not required to increase Dr. Grodman’s compensation at the end of any fiscal year based upon his and the Company’s performance. The employment agreement also provides Dr. Grodman with business use of an automobile leased by the Company and participation in any fringe benefit and bonus plans available to the Company’s employees to the extent determined by the Compensation Committee. The employment agreement contains provisions governing in the event of Dr. Grodman’s partial or total disability and provides for termination for cause or in the event of Dr. Grodman’s death. Dr. Grodman has the right to terminate the employment agreement in the event of a material change in his duties and responsibilities, the relocation of the Company’s principal executive offices from Elmwood Park, New Jersey to a location more than fifty miles distant or a material breach of the employment agreement by the Company (including a reduction in Dr. Grodman’s benefits under the agreement). In the event of a Change in Control of the Company, Dr. Grodman can elect to terminate the agreement. In that event, he will be entitled to be paid a lump sum Severance Payment equal to 2.99 times the average of his annual compensation paid by the Company for the five calendar years preceding the earlier of the calendar year in which the Change of Control occurred or the calendar year of the Date of Termination, subject to the provisions of Section 409-A of the Internal Revenue Code. See “Split-Dollar Life Insurance” herein as to the Endorsement Split-Dollar Life Insurance Agreement between the Company and Dr. Grodman.
Mr. Dubinett serves as Executive Vice President and Chief Operating Officer pursuant to an employment agreement which has been extended through October 31, 2010. 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 at the discretion of the Compensation Committee. Mr. Dubinett’s minimum annual base compensation for fiscal 2010 as determined by the Compensation Committee is $400,496. The agreement provides for (i) the leasing of an automobile for his use; (ii) participation in fringe benefit, bonus, pension, profit sharing, and similar plans maintained for the Company’s employees; (iii) disability benefits; (iv) certain termination benefits; and (v) 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, subject to the
provisions of Section 409-A of the Internal Revenue Code. See “Split Dollar Life Insurance” herein as to the Endorsement Split Dollar Life Insurance Agreement between the Company and Mr. Dubinett.
Mr. Singer serves as Senior Vice President and Chief Financial Officer pursuant to an employment agreement which has been extended through March 15, 2011. 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 at the discretion of the Compensation Committee. Mr. Singer’s minimum annual base compensation for fiscal 2010 as determined by the Compensation Committee is $400,496. The agreement provides for (i) the leasing of an automobile for his use; (ii) participation in fringe benefit, bonus, pension, profit sharing, and similar plans maintained for the Company’s employees; (iii) disability benefits; (iv) certain termination benefits; and (v) 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, subject to the provisions of Section 409-A of the Internal Revenue Code. See “Split-Dollar Life Insurance” herein as to the Endorsement Split-Dollar Life Insurance Agreement between the Company and Mr. Singer.
Mr. Faherty serves as Chief Information Officer and Director of Information Services pursuant to an employment agreement currently due to expire on October 31, 2011. Mr. Faherty’s initial Base Compensation of $400,000 in fiscal 2005 is subject to increases based upon management’s evaluation of his and the Company’s performance and is also subject to increases based on increases in the Consumer Price Index. The agreement provides for (i) the leasing of an automobile for Mr. Faherty’s use; (ii) participation in fringe benefit and bonus plans available to the Company’s employees; (iii) disability benefits; (iv) certain termination benefits; and (v) in the event of termination due to a Change in Control of the Company, a Severance Payment equal to 2.99 times Mr. Faherty’s average annual compensation during the preceding five years, subject to the provisions of Section 409-A of the Internal Revenue Code.
Mr. Todd serves as a Senior Vice President in Sales pursuant to an Employment Agreement currently due to expire on October 31, 2011. Mr. Todd’s initial Base Compensation of $350,000 in fiscal 2005 is subject to increases based upon management’s evaluation of his and the Company’s performance and is also subject to increases based on increases in the Consumer Price Index. The agreement provides for (i) the leasing of an automobile for Mr. Todd’s use; (ii) participation in fringe benefits and bonus plans available to the Company’s employees; (iii) disability benefits; (iv) certain termination benefits; and (v) in the event of termination due to a Change in Control of the Company, a Severance Payment equal to 2.99 times Mr. Todd’s average annual compensation during the preceding five years, subject to the provisions of Section 409-A of the Internal Revenue Code.
Potential Payments Upon Termination or Change in Control as of October 31, 2009.
The following table sets out the payments that could be paid to each of our three executive officers and to our two other most highly compensated senior management employees upon termination of employment due to death, disability, for Good Reason or a Change in Control, in each case occurring as of October 31, 2009.
(a) Dr. Grodman’s employment agreement entitles him to monthly compensation at his then current Base Compensation for 18 months in the event of his Total Disability. The employment agreement of each of the other employees listed in the table entitles the employee to monthly compensation at his then current Base Compensation for twelve months in the event of his Total Disability.
(b) “Good Reason” entitling the employee to voluntarily terminate his employment agreement includes assignment of duties inconsistent with his current duties, reduction of his Base Compensation, relocation of the Company’s principal executive offices to a location more than 50 miles from the current location and other breaches by the Company of the employment agreement. In the event of his voluntary termination for “Good Reason”, each of the employees listed in the table is entitled to be paid his monthly Base Compensation until completion of his current Employment Period which is as follows: Dr. Grodman - until October 31, 2011; Mr. Dubinett - until October 31, 2010; Mr. Singer - until March 15, 2011 ; and Messrs. Faherty and Todd - until October 31, 2012.
(c) Under Dr. Grodman’s employment agreement, his employment terminates in the event of his death and his beneficiaries would be entitled to the death proceeds of the insurance policy owned by the Company on his life after deducting the Company’s “Interest in the Policy”. In the event of Mr. Dubinett’s death or Mr. Singer’s death while employed by the Company, the decedent’s beneficiaries would be entitled to the death proceeds of the insurance policy owned by the Company on his life after deducting the Company’s “Interest in the Policy” plus additional payments equal to six months of his Base Compensation in effect at the time of his death. See “Split-Dollar Life Insurance” herein. In the event of Mr. Faherty’s death or Mr. Todd’s death while employed by the Company, the decedent’s beneficiaries would be entitled to additional payments equal to six months of his Base Compensation at the time of his death.
(d) In the event of a termination of employment after a “Change in Control” of the Company, the employee is entitled to receive a lump sum Severance Payment equal to 2.99 times the average of his annual compensation paid or payable by the Company in connection with his employment and included in his gross income as compensation income for the five calendar years preceding the calendar year in which the Change in Control occurred, subject to the provisions of Section 409-A of the Internal Revenue Code.
Split-Dollar Life Insurance
Pursuant to the terms of their 1997 employment agreements, the Company had established split-dollar life insurance programs for each of its three Executive Officers. As a result of the passage of the Sarbanes Oxley Act of 2002 (signed into law on July 30, 2002), these three programs were modified. Pursuant to the modification, each of the three Executive Officers assigned ownership of his policies to the Company and new policies were issued to replace the prior policies with annual premiums under the new policies ($70,000 under Dr. Grodman’s policy and $25,000 each under Messrs. Dubinett’s and Singer’s policies) being equal to the premiums paid under the replaced policies. The Company has now executed new “Endorsement Split-Dollar Life Insurance Agreements” with each of its three Executive Officers. Pursuant to the new agreements, the Company has agreed to continue to pay the annual premium on the policy on each officer’s life during the period of his full-time employment by the Company. The Company is the sole owner of the policy and of its net cash surrender value, and in the event of the officer’s death while serving as a full-time employee of the Company, the Company will be entitled to receive that amount of the death proceeds equal to its interest in the policy (the aggregate amount of premiums paid by the Company with respect to the policy less the amount of any loans, if any, from the Insurer to the Company against the cash value or policy proceeds, and
less the aggregate amount of any premiums paid by the officer to the Company in reimbursement of premiums paid by the Company) and the balance of the death proceeds will be paid to the officer’s designated beneficiaries. The premiums paid by the Company on the current policies and the prior policies aggregated approximately $1,662,000 and $1,542,000 at October 31, 2009 and October 31, 2008, respectively. At those dates, the net cash surrender value of the three current policies aggregated approximately $1,373,000 and $1,225,000, respectively and is recorded on the books of the Company at these values.
Stock Options
See Note 11 of Notes to the Consolidated Financial Statements for information on the company’s stock option plans.
Option Grants to Our Three Named Executive Officers (and the Two Other Named Most Highly Compensated Senior Management Employees) in Last Fiscal Year
No options to purchase shares of our Common Stock were granted to any of our three Named Executive Officers or the two other named most highly compensated senior management employees in fiscal 2009.
Option Exercises and Stock Vested
At October 31, 2008 and at October 31, 2009, there were no outstanding options held by our three executive officers, the two other named most highly compensated senior management employees or any of our directors.
During Fiscal 2009 no options were exercised by any member of the Board of Directors.
DIRECTOR COMPENSATION
During fiscal 2009, each director who was not a Company employee was compensated for his services as a director with a quarterly fee of $13,750. In addition, Gary Lederman as chairman of the Audit Committee and John Roglieri M.D. as chairman of the Compensation Committee was each compensated for serving as a Committee Chairman with an additional quarterly fee of $2,750. No director’s fees were paid to our employee directors.
The following table sets forth the compensation paid to our directors in fiscal 2009.
(a) For personal use of Company airplane
(b) Chairman of the Audit Committee
(c) Chairman of the Compensation Committee
Compensation Discussion and Analysis
Background
Through fiscal 2001, the Board of Directors, including the Company’s three executive officers, were responsible for reviewing the compensation paid to the Company’s executive officers, provided that none of the Company’s executive officers could vote with respect to his own compensation package. In fiscal 2002, the Company established a Compensation Committee consisting of three non-employee directors, Morton L. Topfer (Chairman), Gary Lederman and John Roglieri. Mr. Topfer resigned as a director and as a member of the Compensation Committee in February 2004. In March 2004, Dr. Roglieri became the Chairman of the Compensation Committee and Mr. Elias was elected as a member of the Committee. Mr. Benincasa was elected as a member of the Committee in June 2005.
In May 1997, the Company executed an employment agreement with Dr. Grodman which expired on October 31, 2004. Effective November 1, 2004, the Company executed a new seven year employment agreement with Dr. Grodman, the terms of which are described above. See “Employment Agreements with Named Officers.”
In May 1997, the Company also executed employment agreements with Messrs. Dubinett and Singer (each expiring on October 31, 2002). During fiscal 2002, the Compensation Committee authorized extensions of both Messrs. Dubinett and Singer’s contracts for two additional years, with the Company having the option to extend each agreement for two consecutive one-year periods in addition. In consideration for Messrs. Dubinett and Singer executing the extension agreements, the Company agreed that the base compensation during each extension year would not be less than the total cash compensation paid to such individual in fiscal 2002. The Company’s option to extend Mr. Dubinett and Mr. Singer’s employment agreements was further extended through fiscal 2010. In October 2009, Mr. Singer extended his employment agreement until March 15, 2011.
Executive Compensation Philosophy
In view of the fact that our three named executive officers own substantial equity interests in the Company, our compensation program for them focuses primarily on base salary, subject to annual increase based upon a review of the executive’s and the Company’s performance. In addition, to further incentivize our executive officers as well as certain other members of senior management, in 2005, we established a Senior Management Incentive Bonus Plan designed to assist in the Company’s profitability. Bonuses under the Plan are earned and paid only to the extent the Company’s Total
Operating Income equaled certain designated percentages of Total Net Revenues. Plan criteria were met with respect to fiscal 2007 and 2009 so that bonuses were earned and paid, but no bonuses were earned or paid under the Plan with respect to fiscal 2008 as the Plan’s targeted performances were not achieved.
Rationale for Current Employment Agreements with the Three Executive Officers
During the summer of calendar year 2004 with the knowledge that Dr. Grodman’s seven year employment agreement was due to expire in October 2004, the Compensation Committee commenced negotiations with Dr. Grodman for the terms of a new employment agreement. In the course of its negotiations, the Committee took into account among other factors as a barometer of Dr. Grodman’s performance as the Company’s chief executive officer, the substantial increase since 1997 in the Company’s net revenues, operating income and the market price of the Common Stock. Another factor taken into account by the Committee was the compensation being paid to the chief executive officers of a peer group of nine other publicly owned clinical testing laboratories including the two major companies in the industry, Quest Diagnostics, Inc. and Laboratory Corporation of America Holdings. The terms of Dr. Grodman’s “split-dollar” insurance arrangement with the Company and the fact that the proposed new employment agreement did not provide Dr. Grodman with additional equity compensation was also taken into account. After discussion, each of the three members of the Compensation Committee at the time (Dr. Roglieri, Mr. Elias and Mr. Lederman) concluded that the terms of the proposed new employment agreement were fair to and in the best interests of the Company and its stockholders and that the proposed compensation thereunder was not excessive.
The Compensation Committee has determined that the base salaries paid with respect to fiscal 2009, and the terms of the extension agreements with Messrs. Dubinett and Singer, were reasonable in relationship to the services performed, the responsibilities assumed and the results obtained, and were in the best interests of the Company. In connection with Dr. Grodman’s compensation, the Compensation Committee considered the Company’s increase in net revenues, patients serviced, working capital and shareholders’ equity in fiscal 2009 compared with the corresponding period in fiscal 2008. Furthermore, the compensation paid to Messrs. Grodman, Dubinett and Singer for fiscal 2009 comports with the Compensation Committee’s perception of base compensation levels of principal executives employed by other companies, both public and private.
Benefits and Perquisites
Our policy is to provide health benefits as well as access to our 401(k) Plan to which we contribute a maximum of $500 per employee each year, to all of our employees including our three executive officers.
We lease automobiles for their use but amounts reflecting their personal use are reported as income to them subject to tax. Similarly, personal use of the Company airplane by any of our executive officers is reported as income to them, subject to tax. See Footnote (3) to the “Summary Compensation Table”.
Change in Control Benefits
Our employment agreements with our three executive officers provide for substantial Severance Payments to them in the event of a change in control of the Company. This provision provides an additional level of financial security for our three executive officers. These executives could well be asked to evaluate a transaction purportedly expected to maximize shareholder value while resulting in the elimination of their jobs. The Severance Payment provision (2.99 times the annual average of the preceding five years of compensation) could help to minimize the distraction caused by concerns over personal financial security in the context of a proposed change in control.
Stock Option Grant Practices
The Company grants stock options at an exercise price at least equal to the fair market value on the date of the grant. Due to the substantial stock ownership position of our three executive officers, no stock options have been granted to them (or restricted stock awarded to them) in the last three years.
Policy Regarding the One Million Dollar Deduction Limitation
Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public corporations for compensation in excess of $1,000,000 paid for any fiscal year to a corporation’s chief executive officer and to the four other most highly compensated executive officers in office as of the end of the fiscal year. The statute exempts qualifying performance-based compensation from the deduction limit if certain requirements are met. However, shareholder interests may at times be best served by not restricting the Compensation Committee’s discretion and flexibility in developing compensation programs, even though the programs may result in non-deductible compensation expenses. Accordingly, the Compensation Committee may from time to time approve elements of compensation for certain officers that are not fully deductible.
Compensation Committee Interlocks and Insider Participation
During fiscal 2009, the members of the Company’s Compensation Committee were:
John Roglieri M.D. - Chairman
Joseph Benincasa
Harry Elias
Gary Lederman
No member of the Compensation Committee was an officer or employee of the Company in fiscal 2009 or was formerly an officer of the Company.
Compensation Committee Report
The members of the Company’s Compensation Committee hereby state;
(A) We have reviewed and discussed the Compensation Discussion and Analysis contained in this Annual Report on Form 10-K for the year ended October 31, 2009 with the Company’s Management, and
(B) Based on such review and discussions, we have recommended to the Company’s Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K for the year ended October 31, 2009.
COMPENSATION COMMITTEE
By
John Roglieri M.D., Chairman
Joseph Benincasa
Harry Elias
Gary Lederman
Item 12.
Item 12. - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information as of January 4, 2010 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 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.
** Less than one (1%) percent.
(1) Except as 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 1,162,733 shares owned directly. Also includes 173,467 shares owned directly by Dr. Grodman’s wife, Pam Grodman, and 53,200 shares owned by their children. Dr. Grodman disclaims beneficial ownership of these 226,667 shares.
(3) Includes 225,069 shares owned directly.
(4) Includes 53,016 shares owned directly, and 9,600 shares owned by children who share Mr. Singer’s household. Mr. Singer disclaims beneficial ownership of these 9,600 shares.
(5) Includes 15,200 shares owned directly.
(6) Includes 5,000 shares owned directly.
(7) Arbor Capital Management, LLC (“Arbor”) in its capacity as an investment advisor may be deemed the beneficial owner of these 695,600 shares which are owned by investment advisory clients. In its Schedule 13G filing dated January 29, 2009 filed with the Securities and Exchange Commission, Arbor stated that to the best of its knowledge, these 695,600 shares were acquired in the ordinary course of business; were not acquired for the purpose of and do not have the effect of changing or influencing the control of the Company; and were not acquired in connection with or as a participant in any transaction having such purpose or effect.
(8) Wasatch Advisors, Inc (“Wasatch”) in its capacity as an investment advisor may be deemed the beneficial owner of these 1,115,911 shares which are owned by investment advisory clients. In its Schedule 13G filing dated February 17, 2009 filed with the Securities and Exchange Commission, Wasatch stated that to the best of its knowledge, these 1,115,911 shares were acquired in the ordinary course of business; were not acquired for the purpose of and do not have the effect of changing or influencing the control of the Company; and were not acquired in connection with or as a participant in any transaction having such purpose or effect.
Equity Compensation Plan Information
The following table provides information as of October 31, 2009 regarding shares of Common Stock that may be issued pursuant to the Company’s equity compensation plans:
(1) Reflects shares issuable upon exercise of outstanding ISOs granted pursuant to the Company’s 2000 and 2003 Employee Stock Option Plans.
(2) Reflects shares reserved for issuance upon the grant of ISOs which may be granted pursuant to the Company’s 2000 and 2003 Employee Incentive Stock Option Plans.
Item 13.
Item 13. - Certain Relationships and Related Transactions, and Director Independence
No material transactions occurred between the Company and related parties during fiscal 2009. See item 11 herein and footnote 7 to the consolidated financial statements.
Director Independence
The Company’s “independent” directors as independence is defined by Rule 4200(a)(15) of The NASDAQ Stock Market Rules are as follows:
Joseph Benincasa
Harry Elias
Gary Lederman
John Roglieri M.D.
They also comprise all of the members of the Audit Committee, the Compensation Committee and the Nominating Committee.
Item 14.
Item 14. - Principal Accountant Fees and Services
The firm of MSPC, Certified Public Accountants and Advisors, A Professional Corporation (“MSPC”) audited our accounts and the accounts of our subsidiaries for the fiscal years ended October 31, 2009 and 2008. MSPC and its predecessor firm have been our auditors since 1988.
(1) Audit Fees
MSPC billed us approximately $254,500 for professional services rendered in connection with the audit of our annual financial statements for the fiscal year ended October 31, 2009 and the review of the financial statements included in our quarterly reports on Form 10-Q for such fiscal year compared to approximately $235,100 in billings for such services for the fiscal year ended October 31, 2008. In addition, MSPC billed us approximately $15,000 in fiscal 2009 for its audit of our 401(k) Plan for calendar year 2008 as compared to approximately $17,500 of such fees in fiscal 2008 with respect to calendar year 2007.
(2) Audit-Related Fees
MSPC billed us approximately $1,750 for due diligence fees incurred in relation to acquisitions during fiscal 2009 and approximately $86,500 for Sarbanes-Oxley (“SOX”) related audit fees.
(3) Tax Fees
MSPC billed us approximately $70,100 for tax services for fiscal 2009 and approximately $72,500 for tax services for fiscal 2008.
(4) All Other Fees
No fees were billed to us by MSPC with respect to fiscal 2009 or fiscal 2008 other than for services described in Item 14 (1), (2) and (3) herein.
(5) Pre-Approval Policies and Procedures
The engagement of MSPC to render the above audit and tax services was approved by our audit committee prior to the engagement.
PART IV
Item 15.
Item 15. - Exhibits and Financial Statement Schedules
(a)1.
Financial Statements
The following financial statements of the Company are included in Part II, Item 8
Page to Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - October 31, 2009 and 2008
32 - 33
Consolidated Statements of Operations-Years ended October 31, 2009, 2008 and 2007
Consolidated Statements of Shareholders’ Equity Years ended October 31, 2009, 20078, and 2007
Consolidated Statements of Cash Flows - Years ended October 31, 2009, 2008 and 2007
36 - 37
Notes to Consolidated Financial Statements-
38- 49
2.
Financial Statements Schedule
Schedule II - Valuation and Qualifying Accounts for the Years ended October 31, 2009, 2008 and 2007
3.
Exhibits
After 51
Incorporated by
Exhibit No.
Item
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)
3.1.5*
Amendment to Certificate of Incorporation dated September 22, 2003 (increasing authorized shares of Common Stock to 35,000,000 shares)
(J)
3.2*
By-laws
(D)
3.2.1*
Amendments to Article III, Sections 2 and 4 of the By-laws adopted June 1,
(L)
4.1*
Form of Common Stock Certificate, $.01 par value
(M)
10.1*
Lease Agreement for Elmwood Park, New Jersey Premises, expiring in February, 2004
(F)
10.1.1*
Fifth Amendment dated as of July 16, 2004 to Lease for Elmwood Park, New Jersey Premises
(M)
10.1.2*
Sixth Amendment dated as of October 27, 2004 to Lease for Elmwood Park, New Jersey Premises
(M)
10.2*
Employment Agreement between the Company and Marc Grodman expiring in October 2011
(K)
10.3*
Employment Agreement between the Company and Howard Dubinett as in effect at October 31, 2001
(F)
10.3.1*
Extension to Employment Agreement between the Company and Howard Dubinett effective November 1, 2002
(I)
10.3.2*
Extension to Employment Agreement between the Company and Howard Dubinett effective November 1, 2004.
(M)
10.3.3*
Amendment No. 3 to Employment Agreement between the Company and Howard Dubinett dated December 18, 2007.
(P)
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, 2002
(I)
10.4.2*
Extension to Employment Agreement between the Company and Sam Singer effective November 1, 2004
(M)
10.4.3*
Amendment No. 3 to Employment Agreement between the Company and Sam Singer dated December 18, 2007.
(P)
10.5*
Employment Agreement between the Company and Charles T. Todd, Jr. effective November 1, 2005.
(N)
10.6*
Employment Agreement between the Company and Scott Fein effective October 31, 2005.
(N)
10.7*
Employment Agreement between the Company and Richard L. Faherty effective November 1, 2005.
(N)
10.8*
The Company’s 1989 Stock Option Plan
(B)
10.8.1*
The Company’s 2000 Employee Incentive Stock Option Plan.
(G)
10.8.2*
The Company’s 2003 Employee Incentive Stock Option Plan.
(J)
10.9*
The Company’s 2008 Senior Management Incentive Bonus Plan.
10.9.1
The Company’s 2009 Senior Management Incentive Bonus
10.13*
Amended and Restated Loan and Security Agreement as of September 30, 2004 between the Company and PNC Bank, National Association.
(M)
10.13.1*
Fourth Amendment as of October 31, 2006 to Loan and Security Agreement as of September 30, 2004 between the Company and PNC Bank, National Association
(O)
10.13.2*
Fifth Amendment as of October 31, 2007 to Loan and Security Agreement as of September 30, 2004 between the Company and PNC Bank, National Association
(P)
10.13.3*
Sixth Amendment as of May 12, 2008 to Loan and Security Agreement as of September 30, 2004 between the Company and PNC Bank, National Association
Subsidiaries of the Company
The following are the Company’s two wholly-owned subsidiaries:
23.1 Consent of Independent Registered Public Accounting Firm
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification pursuant to 18 U.S.C. Section 1350 of Chief Executive Officer
32.2 Certification pursuant to 18 U.S.C. section 1350 of Chief Financial Officer
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).
(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.
(I)
Incorporated by reference to exhibit filed with the Company=s annual report on Form 10-K for the year ended October 31, 2002
(J)
Incorporated by reference to exhibit filed with the Company=s Registration Statement on Form S-8 (File No. 333-111578).
(K)
Incorporated by reference to exhibit filed with the Company’s current report on Form 8-K (for December 6, 2004).
(L)
Incorporated by reference to exhibit filed with the Company’s quarterly report on Form 10-Q for the quarter ended April 30, 2005
(M)
Incorporated by reference to exhibit filed with the Company’s annual report on Form 10-K for the year ended October 31, 2004.
(N)
Incorporated by reference to exhibit filed with the Company’s annual report on Form 10-K for the year ended October 31, 2005.
(O)
Incorporated by reference to exhibit filed with the Company’s Annual report on Form 10-K for the year ended October 31, 2006.
(P)
Incorporated by reference to exhibit filed with the Company’s Annual report on Form 10-K for the year ended October 31, 2007.
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.
/S/ Marc D. Grodman
Marc D. Grodman
Chairman of the Board, President,
Chief Executive Officer and Director
January 7, 2010
/S/ Howard Dubinett
Howard Dubinett
Executive Vice President,
Chief Operating Officer and Director
January 7, 2010
/S/ Sam Singer
Sam Singer
Vice President, Chief Financial Officer,
Chief Accounting Officer and Director
January 7, 2010
/S/ Joseph Benincasa
Joseph Benincasa
Director
January 7, 2010
/S/ Harry Elias
Harry Elias
Director
January 7, 2010
/S/ Gary Lederman
Gary Lederman
Director
January 7, 2010
/S/ John Roglieri
John Roglieri
Director
January 7, 2010
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Bio-Reference Laboratories, Inc.
Elmwood Park, New Jersey
We have audited the accompanying consolidated balance sheets of Bio-Reference Laboratories, Inc. and its subsidiaries (the “Company”) as of October 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the fiscal years in the three-year period ended October 31, 2009. We also have audited the Company’s internal control over financial reporting as of October 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the fiscal years in the three-year period ended October 31, 2009, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Bio-Reference Laboratories Inc. and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as of October 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
MSPC
Certified Public Accountants and Advisors,
A Professional Corporation
Cranford, New Jersey
January 12, 2010
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
[Dollars In Thousands, Except Share Data]
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
[Dollars In Thousands, Except Share Data]
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
[Dollars In Thousands, Except Share Data]
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
[Dollars In Thousands Except Number of Shares]
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Dollars In Thousands]
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Dollars In Thousands Except Share Data]
Supplemental Schedule of Non-Cash Investing and Financing Activities:
During the fiscal years ended October 31, 2009, October 31, 2008 and October 31, 2007 the genetics laboratory “GeneDx” achieved certain operating targets, entitling the prior owners to receive $1,917 in cash and an additional 11,548 shares of our Common Stock valued at $397, $334 and $390 respectively. As of October 31, 2009, October 31, 2008 and October 31, 2007 these amounts have been recorded as an increase to Goodwill. See note [18] for additional information.
During fiscal 2009, 2008 and 2007, the Company wrote-off approximately $1,261, $2,560 and $2,541 of property which was fully depreciated.
During fiscal 2009, 2008 and 2007 the Company wrote-off approximately $300, $2,333, $-0- of intangible assets that were fully amortized.
During fiscal 2009, 2008, and 2007, the Company incurred capital lease obligations totaling approximately $3,469, $3,679, and $2,241 in connection with the acquisition of property and equipment.
During the twelve month period ended October 31, 2009, October 31, 2008 and October 31, 2007 the Company recorded the tax effect on the exercise of non-qualified stock options. The tax benefit approximated $-0-, $-0-, and $229 and was recorded as an increase to Paid-In Capital and the Deferred Tax Asset.
During the twelve month period ended October 31, 2009, October 31, 2008 and October 31, 2007 the Company financed the purchase of equipment through a term note of approximately $-0 , $-0- and $4,100.
[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
[Dollars In Thousands Except Share Data or Unless Otherwise Indicated]
[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 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, radio-immuno 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, a cytogenetics testing laboratory located in Milford, MA, a pathology laboratory in Poughkeepsie, NY, a pathology laboratory in Clarksburg, MD and a genetics laboratory in Gaithersburg, MD. Bio-Reference markets its laboratory testing services directly to physicians, geneticists, hospitals, clinics, correctional and other health facilities.
The Company’s laboratory testing business currently represents its one reportable business segment. The laboratory testing business accounts for over 98% of consolidated assets, net revenues and net income in each of the three years ended October 31, 2009. All other operating segments include the Company’s non-clinical laboratory testing businesses and consist of our clinical knowledge management service through our PSIMedica business unit and a web-based connectivity portal solution for laboratories and physicians through its CareEvolve subsidiary.
[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.
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 $16,995 and $12,696 in cash and cash equivalents at October 31, 2009 and 2008, respectively.
Inventory - Inventory is stated at the lower of cost [on a first-in, first-out basis] or market. Inventory consists primarily of purchased laboratory supplies, which is used in our various testing laboratories.
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 $8,644, $7,249 and $5,635 for the years ended October 31, 2009, 2008 and 2007, 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 general and administrative expenses. 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 FASB Codification 350-20, “Goodwill.” 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 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 years ended October 31, 2009, 2008 and 2007.
The balance sheet reflects prior Goodwill accumulated amortization of $2,401 as of October 31, 2009 and 2008, respectively.
Other Intangible Assets - Intangible assets are amortized using the straight-line method. The estimated useful life of costs capitalized is evaluated for each specific project when completed, at which time such costs begin to be amortized. The statements of operations reflect amortization expense related to intangible assets of $1,127, $1,137, and $1,196 for the years ended October 31, 2009, 2008 and 2007, respectively. The balance sheet reflects accumulated amortization of $4,647, and $3,820 as of October 31, 2009, and 2008, respectively. During the 2009 fiscal year, the Company wrote off approximately $300 of capitalized costs related to customer lists which were fully amortized. During the 2008 fiscal year, the Company wrote off approximately $2,333 of capitalized costs related to covenants not to compete and employment agreements which were fully amortized.
On November 1, 2008, the Company adopted “Fair Value Measurements” for its financial assets discussed under topic number 820 “Fair Value Measurements and Disclosures” of FASB codification. This topic provides a single definition of fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This topic creates a three-level hierarchy for the inputs used in the valuation techniques to derive fair values where Level 1 is having the highest priority and Level 3 having the lowest priority.
The adoption of “Fair Value Measurements” under topic 820 did not have a material impact on our fair value measurements.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Dollars In Thousands Except Share Data or Unless Otherwise Indicated]
[2] Summary of Significant Accounting Policies [Continued]
Service revenues are principally generated from laboratory testing services including chemical diagnostic tests such as blood analysis, urine analysis and genetic testing among others. Net service revenues are recognized at the time the testing services are performed and are reported at their estimated net realizable amounts. Net realizable amounts from patients, third party payors and others for services rendered are accrued on an estimated basis in the period the related services are rendered, and are adjusted in subsequent periods based upon an analysis of the Company’s collection experience from each category of payor group as well as prospectively determined contractual adjustments and discounts with third party payors. Differences between these adjustments and any subsequent revisions are included in the statement of operations in which the revisions are made and are disclosed, if material. Applying this methodology and aggregating its collection experience from all payor groups, the Company has not been required to record an adjustment related to revenue recorded in prior periods that was material in nature. Revenues on the statements of operations are net of the following amounts for allowances and discounts:
A number of proposals for legislation or regulation continue to be under discussions which could have the effect of substantially reducing Medicare reimbursements for clinical laboratories or introducing cost sharing to beneficiaries. Depending upon the nature of regulatory action, if any, which is taken and the content of legislation, if any, which is adopted, the Company could experience a significant decrease in revenues from Medicare and Medicaid, which could have a material adverse effect on the Company. The Company is unable to predict, however, the extent to which such actions will be taken.
Contractual Credits and Provision for Doubtful Accounts - An allowance for contractual credits and discounts is estimated by payor group and determined based upon a review of the reimbursement policies and subsequent collections from the different types of payors. The Company has not been required to record an adjustment in a subsequent period related to revenue recorded in a prior period, which was material in nature. Agings of accounts receivable are monitored by billing personnel and follow-up activities are conducted as necessary. Bad debt expense is recorded within selling, general and administrative expenses as a percentage of sales considered necessary to maintain an allowance for doubtful accounts at an appropriate level, based on the Company’s experience with its accounts receivable. The Company writes off receivables against the allowance for doubtful accounts when they are deemed to be uncollectible. For client billing, accounts are written off when all reasonable collection efforts prove to be unsuccessful. Patient accounts are written off after the normal dunning cycle has occurred, which may include transfer to a third party collection agency. Third party accounts are written off when they exceed the payer’s timely filing limits. Accounts Receivable on the balance sheets are net of the following amounts for contractual credits and doubtful accounts:
Current Income Taxes - The Company recognizes interest and penalties on settlement of tax liabilities in its income from operations. For the fiscal years 2007 through 2009, no material amounts for interest and penalties have been recorded.
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.
Earnings Per Share - Basic earnings 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.
Recoverability and Impairment of Intangible Assets and Other Long-Lived Assets - The Company evaluates the possible impairment of its long-lived assets under the provisions of FASB codification 350-30-35 and 360-10-35. The Company reviews the recoverability of its long-lived assets on an annual basis. Evaluation of possible impairment is based on the Company’s ability to recover the asset from the expected future pretax cash flows (undiscounted and without interest charges) of the related operations. If the expected undiscounted pretax cash flows are less than the carrying amount of such asset, an impairment loss is recognized for the difference between the estimated fair value and carrying amount of the asset. No impairment loss was recognized in the fiscal years ended October 31, 2009, 2008 and 2007.
Advertising Costs -Advertising costs are expensed when incurred. Advertising costs amounted to approximately $1,387, $1,092 and $627 for the years ended October 31, 2009, 2008 and 2007, respectively.
Reclassifications - Certain prior year amounts may have been reclassified to conform to the current year presentation.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Dollars In Thousands Except Share Data or Unless Otherwise Indicated]
[2] Summary of Significant Accounting Policies [Continued]
Other Income - During the quarter ended January 31, 2009, the Company executed a Restitution Agreement with John Littleton, a former Vice President in Sales. Mr. Littleton paid the Company $1,600 for payments made to him and others that were from our perspective, improperly paid. These payments were paid for a) recruiting fees for new hires paid to parties with an undisclosed relationship to him and b) reimbursement to him or others of improperly or insufficiently documented expenses; both of which are in violation of the Company’s policies. This restitution payment is included in the Category Other Income on the Consolidated Statements of Operations.
Subsequent Events - The management considered subsequent events through the date the financial statements are issued as defined in FASB Codification 855-10-50.
[3] Property and Equipment - Property and equipment - at cost is summarized as follows:
[4] Intangible Assets
Intangible assets are summarized as follows:
October 31, 2009
October 31, 2008
The estimated amortization expense related to intangible assets for each of the five succeeding fiscal years and thereafter as of October 31, 2009 is as follows:
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Dollars In Thousands Except Share Data or Unless Otherwise Indicated]
[5] Revolving Note Payable - Bank
In May 2008, the Company entered into an amended revolving note payable loan agreement with PNC Bank, N.A. The maximum amount of the credit line available to the Company pursuant to the loan agreement is the lesser of (i) $40,000 or (ii) 50% of the Company’s qualified accounts receivable [as defined in the agreement]. The amendment to the Loan and Security Agreement provides for interest on advances to be subject to the bank’s prime rate or the Eurodollar rate of interest plus, in certain instances, an additional interest percentage. The additional interest percentage charges on Eurodollar borrowings range from 1% to 4% and are determined based upon certain financial ratios achieved by the Company. At October 31, 2009, the Company had elected to have all of the total advances outstanding to be subject to the bank’s prime rate of interest of 3.25%. The credit line is collateralized by substantially all of the Company’s assets. The line of credit is available through October 2012 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, fixed charge coverage, and the prohibition of the payment by the Company of cash dividends. As of October 31, 2009, the Company utilized $12,452 of the available credit under this revolving note payable loan agreement.
[6] Long-Term Debt - Bank
Effective as of October 31, 2007, we executed a fifth amendment to the Loan Agreement formalizing the repayment terms of the $5 million term loan from PNC Bank used by our wholly-owned BRLI No. 2 Acquisition Corp. subsidiary to fund the $5 million acquisition cash payment in connection with its purchase of the operating assets of GeneDx, Inc. The term loan is evidenced by a secured promissory note payable over a six year term in equal monthly principal payments of approximately $69, plus interest at an annual rate of 6.85%. The balance on this note as of October 31, 2009 is approximately $2,500.
In January 2007, the Company issued a ten year term note of $4,100 for the financing of equipment. The note is payable in equal monthly installments of approximately $47 including principal and interest, with payment commencing on March 1, 2007 at an effective interest rate of 6.63% per annum. The balance on this note as of October 31, 2009 is approximately $3,227.
Principal repayment for each of the five succeeding fiscal years and thereafter as of October 31, 2009 is as follows:
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Dollars In Thousands Except Share Data or Unless Otherwise Indicated]
[7] Related Party Transactions [Not in Thousands]
See Item 11 - “Executive Compensation” as to rentals paid by the Company to Richard Faherty, one of the Company’s five most highly compensated senior management employees for use of Mr. Faherty’s airplane in fiscal 2009, 2008 and fiscal 2007 (when the Company’s owned airplane was unavailable) and for payments for networking, data reporting and programming services provided to the Company in such years by a separate corporation of which Mr. Faherty is the majority shareholder. Such aircraft rentals totaled $95,550 in fiscal 2009, $71,108 in fiscal 2008 and $55,965 in fiscal 2007 and networking, data reporting and programming services provided to the Company in fiscal 2009, fiscal 2008 and in fiscal 2007 totaled $-0-, $40,833 and $81,713 in compensation respectively.
[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 consists of the following:
At October 31, 2009 and 2008, the Company had a net deferred tax asset [liability] of approximately $13,636 and $8,543, respectively. The deferred taxes primarily relate to timing differences associated with the deductibility of depreciation, bad debts and certain accrued expenses and deferred costs. For fiscal years ended in 2009 and in 2008, the Company had no net operating loss carry-forwards available to reduce current year taxable income.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Dollars In Thousands Except Share Data or Unless Otherwise Indicated]
[8] Income Taxes - Continued
During fiscal year ended October 31, 2009 the Company recorded a net deferred tax benefit of $5,093. This reflects a net benefit of approximately $4,474 in allowance for bad debts, $272 in property and equipment and other intangibles, and $347 in certain accrued expenses. Although realization is not assured and dependent upon things such as generating sufficient taxable income in future periods, management, through sufficient positive evidence, believes it is more likely than not that all of the deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income or changes in the accrued expenses during the future periods are reduced.
At October 31, 2009, fiscal 2005 through 2008 are subject to examination by US federal and state tax authorities. Through the issuance of these financial statements the outcome of these examinations has not been determined.
[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. None was outstanding as of October 31, 2009 and October 31, 2008.
In July 2003, the stockholders approved an increase in the number of authorized shares of common stock from 18,333,333 shares to 35,000,000 shares.
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 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.
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 was designed to protect the Company and its shareholders from coercive, unfair and inadequate takeover bids and practices. The Plan was 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. The Rights Plan expired in March 2008.
The Company implemented a stock repurchase program to repurchase up to 500,000 shares of its common stock in the over-the-counter market on or before October 31, 2004 provided (1) all such repurchases and bids to repurchase effective on any given day shall be made only through a single broker or dealer on that day (2) any such repurchases on a given day shall not be the opening transaction recorded to the consolidated transaction reporting system and no repurchases shall be made during the last half hour before the scheduled close of trading (3) the highest price paid to repurchase any shares shall not exceed the higher of the highest independent bid or the last independent reported sale price and (4) the maximum number of shares that can be repurchased on a given day (excluding block repurchases) shall not exceed 25% of the average daily trading volume reported for the four calendar weeks preceding the week in which the repurchase is made. Common Stock acquired by the Company under the repurchase program are to be retired and canceled. In fiscal 2004 and 2003, the Company repurchased 30,000 and 229,300 shares of the Company’s common stock at a cost of $350 and $1,070, respectively.
On June 1, 2005, the Board of Directors authorized the repurchase of up to 500,000 shares of the Company’s common stock over the period of ending October 31, 2007. As of October 31, 2007, no shares were repurchased under this plan.
On July 14, 2008 the Board of Directors authorized a repurchase of up to 1,000,000 shares of the Company’s common stock over the period ending October 31, 2010. As of October 31, 2009 the Company repurchased 19,700 shares at a cost of $452. The shares were canceled upon repurchase.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Dollars In Thousands Except Share Data or Unless Otherwise Indicated]
[B] Equity Transactions for Services - For the fiscal years ended in 2009 and 2008, the company issued 2,500 and 2,500 shares of the Company’s common stock for employment or consulting services [See Note 11 for common stock options issued for employee and consulting services].
[10] Earnings Per Share
The computation of basic and diluted net earnings per common share is as follows [in thousands, except per share data rounded]:
For the year ended October 31, 2009 options to purchase 5,000 shares of the Company’s common stock at an exercise price of $34.99 per share were not included in the computation of diluted EPS. For the year ended October 31, 2008 options to purchase 2,500 shares of the Company’s common stock at an exercise price of $34.99 per share were not included in the computation of diluted EPS. The exercise price of these options and warrants was greater than the average market price of the common shares and were considered anti-dilutive.
[11] Stock Options and Warrants
[A] Employee Incentive Stock Options - In June 2003, the Board of Directors adopted, and in July 2003, the stockholders approved, the 2003 Employee Incentive Stock Option Plan [the “2003 Plan”]. The 2003 Plan authorizes the grant of incentive stock options to purchase up to a maximum aggregate 800,000 shares of Company common stock. The 2003 Plan provides that the exercise price of an option granted there under 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 2003 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 2003 Plan, options must be granted before the June 2, 2013 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 all of the Company’s Stock Option Plans during any calendar year cannot exceed $100. Options granted under the 2003 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 a Stock Option Committee, if designated), 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 2003 Plan provided that such loan or obligation cannot exceed fifty percent (50%) of the exercise price of such option. In fiscal year ended October 31, 2009, 2008 and 2007, -0-, 20,000 and -0- options were granted under the Plan, respectively. A total of 36,030, 29,313 and 83,220 incentive stock options issued under the 2003 Plan were exercised in fiscal years ended in October 31, 2009, 2008 and 2007, respectively. A total of 5,000, 7,145 and 14,000 options were cancelled in fiscal years ended October 31, 2009, 2008 and 2007.
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. Employees of the Company or its subsidiary, as determined, are eligible for the 2000 Plan. The term of the options shall not exceed ten years from the date of grant. In fiscal years ended October 31, 2009, 2008 and 2007, no options were granted under the Plan. A total of 22,800, 4,500 and 66,600 incentive stock options issued under the 2000 Plan were exercised in fiscal year ended in October 31, 2009, 2008 and 2007, respectively. A total of 55,000, -0-, and 2,000 options were cancelled in fiscal year ended October 31, 2009, 2008 and 2007, 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 -0-, -0-, and 1,000 incentive stock options issued under the 1989 Plan were exercised in fiscal years ended October 31, 2009, 2008 and 2007 respectively. Additionally, no options were canceled in fiscal years ended in October 2009, 2008 and 2007 respectively. All options under the 1989 Plan were required to be granted before the Plan’s July 1999’s termination date so that no further options can be granted under the 1989 Plan. No Options are outstanding in this plan as of October 31, 2009.
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:
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
[Dollars In Thousands Except Share Data or Unless Otherwise Indicated]
[11] Stock Options and Warrants - Continued
*Eligible for exercise at October 31, 2008 were 227 at a weighted average exercise price per share of $17.22
*Eligible for exercise at October 31, 2009 were 188 at a weighted average exercise price per share of $15.59
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
[Dollars In Thousands Except Share Data or Unless Otherwise Indicated]
[11] Stock Options and Warrants - Continued
The weighted average grant date fair value of incentive stock options under the 2003 plan granted during the years ended October 31, 2009, 2008 and 2007 was $-0-, $16.06, and $-0- per share, respectively. These options have weighted average remaining contractual lives of approximately 9 years.
Compensation cost recognized for the year ended October 31, 2009 and October 31, 2008 was $40 for each one of the years, with a related tax benefit of $-0- .
[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:
[12] Employment Contracts and Consulting Agreements
During fiscal 2003, the Company established a Scientific Advisory Board [the “Board”] and entered into consulting agreements with members of the Board. The terms of the agreements range from three years and two months to four years and three months.
The Company has multiple employment contracts with its key executives with expiration dates ranging from October 31, 2010 through October 31, 2013. At October 31, 2009, the approximate aggregate minimum commitment under these employment contracts and agreements, excluding commissions or consumer price index increases, is 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 at - will employment and consulting agreements which together with prior at - will agreements provide for annual aggregate minimum commitments of approximately $19,835 which have no termination dates.
[13] Capitalized Lease Obligations
The Company leases various assets under capital leases expiring in fiscal 2014 as follows:
Depreciation expense on assets under capital leases was approximately $1,237, $1,515, and $1,427 for the years ended October 31, 2009, 2008 and 2007, respectively.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
[Dollars In Thousands Except Share Data or Unless Otherwise Indicated]
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 2010 to 2014. 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, 2009, 2008 and 2007 was $6,172, $5,940 and $5,376, respectively. There were no contingent rental amounts due through October 31, 2009.
Aggregate future minimum rental payments on non cancelable operating leases [exclusive of several month to month leases] are as follows:
The Company has entered into several purchase agreements for reagent supplies through October, 2014. Minimum purchase commitments as of October 31, 2009 are as follows:
Reagent supplies expensed under purchase agreements amount to $7,477, $13,164 and $4,136 for the years ended October 31, 2009, 2008 and 2007, respectively.
[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.
[16] Insurance
The Company maintains professional liability insurance of $3,000 in the aggregate, with a per occurrence limit of $1,000 . In addition, the Company maintains excess commercial insurance of $5,000 per occurrence and $5,000 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.
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
[Dollars In Thousands Except Share Data or Unless Otherwise Indicated]
[17] Significant Risks and Uncertainties
[A] Concentrations of Credit Risk - Cash - At October 31, 2009 and 2008, the Company had approximately $13,772 and $9,850 , 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
In October 2006, the Company completed its acquisition of certain assets of GeneDx, Inc. (GeneDx), a Gaithersburg, Maryland gene-based testing laboratory. In connection with this acquisition the Registrant issued 230,947 shares of its unregistered common stock (the “Stock”) to GeneDx. GeneDx was a private company beneficially owned by two individuals who were unaffiliated with the Registrant at the time of the purchase. In addition to the Stock, the purchase price included a $5 million Cash Payment and the assumption by the Registrant of certain liabilities. The Sellers were also entitled receive an upside Contingent Payment, not to exceed $7 million, dependent upon future performance of GeneDx operations in the years following the acquisition. The 230,947 shares were valued for purposes of the purchase at $21.65 per share, the average closing price for the common stock on NASDAQ on the ten trading days immediately preceding the August 29, 2006 signing of the purchase agreement. The acquisition resulted in goodwill of $4,360 being recorded.
During the recently completed fiscal years ended October 31, 2009, October 31, 2008 and October 31, 2007 the genetics laboratory “GeneDx” achieved certain operating targets, entitling the prior owners to receive $1,917 in cash and an additional 11,548 shares of our Common Stock for each one of these years. For fiscal year ended October 31, 2008 and October 31, 2007 the stock was initially valued at $250 each. Based on former FAS 141 requirements of valuing the contingent consideration at the time when the contingency has been resolved, the Company in fiscal 2008 recognized an additional contingent consideration cost of $224 for the value of shares issued to the prior owners of GeneDx. This consists of $140 recognized for fiscal 2007 and $84 recognized for fiscal 2008. Fiscal 2007 financial statements have not been restated for the $140 adjustment due to immateriality of the amount involved. For fiscal year ended October 31, 2009 the stock was valued at valued at $397. As of October 31, 2009, October 31, 2008 and October 31, 2007 these amounts have been accrued and as an increase to Goodwill, subsequently recorded as an increase to Additional Paid-In Capital when the stock was issued. In addition, the Company reclassified certain intangible assets previously reported as Costs Related to Acquisitions to Goodwill in accordance with promulgated accounting principles.
In October 2006, the Company also completed its acquisition of certain assets of Diagnostic Pathology Services, Inc., a Clarksburg, Maryland laboratory for the sum of $1,500 plus the assumption of certain liabilities. The acquisition resulted in goodwill of $785 being recorded.
[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 $150 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 $2,000 per person and $4,632 in the aggregate. Health insurance premium expense for the years ended October 31, 2009, 2008 and 2007 amounted to approximately $2,327, $1,836 and $1,302, respectively. Uninsured employee medical expenses incurred by the Company amounted to approximately $10,394, $8,238 and $6,893 for the years ended October 31, 2009, 2008 and 2007, respectively. During fiscal years ended October 31, 2009, 2008 and 2007, employee contributions of $2,142, $1,906 and $1,401 offset, the above health plan costs.
[21] Employee Benefit Plan (Dollars Not In Thousands)
The Company sponsors a 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, 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. The Company elected to make a matching contribution which amounted to $644,384 for 2009, $457,544 for 2008, and $359,177 for 2007. These amounts were charged to the Statement of Operations. The Employer contribution will be fully vested after the third year of service.
[22] New Authoritative Accounting Pronouncements
In June 2009, the FASB issued FASB Statement No. 168 ( SFAS No. 168 ), The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. This statement replaces SFAS No. 162 , which was issued in May 2008 and identified the sources of accounting principles and the framework for selecting them. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. Once it’s effective, it will supersede all accounting standards in U.S. GAAP, aside from those issued by the SEC. The FASB Accounting Standards Codification™(Codification) will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, this new Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. Following this Statement, the Board will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates. The Board will not consider Accounting Standards Updates as authoritative in their own right. Accounting Standards Updates will serve only to update the Codification, provide
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
[Dollars In Thousands Except Share Data or Unless Otherwise Indicated]
background information about the guidance, and provide the bases for conclusions on the change(s) in the Codification. In the Board’s (FASB) view, the issuance of this Statement and the Codification will not change current GAAP.
[23] Selected Quarterly Financial Data [Unaudited]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Bio-Reference Laboratories, Inc.
Elmwood Park, New Jersey
Our report on our audit of the basic consolidated financial statements of Bio-Reference Laboratories, Inc. and its subsidiaries appears on page 31. That audit was conducted for the purpose of forming an opinion on the consolidated basic financial statements taken as a whole. The supplemental schedule II is presented for purposes of complying with the Securities and Exchange Commission’s Rules and Regulations under the Securities Exchange Act of 1934 and is not otherwise a required part of the basic consolidated financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements, and in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole.
MSPC
Certified Public Accountants and Advisors,
A Professional Corporation
Cranford, New Jersey
January 12, 2010
BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED OCTOBER 31, 2009, 2008 AND 2007
[In Thousands]
. . . . . . . . . .