FORM 10-Q

 

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended April 30, 2005

 

Commission File Number 0-15266

 

BIO-REFERENCE LABORATORIES, INC.

481 Edward H. Ross Drive, Elmwood Park, NJ  07407

(201) 791-2600

 

NEW JERSEY

 

22-2405059

(State of incorporation)

 

(IRS Employer Identification No.)

 

Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý    No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ý    No o

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 12,695,767 shares of Common Stock ($.01 par value) at June 1, 2005.

 

 



 

BIO-REFERENCE LABORATORIES, INC.

 

FORM 10-Q

 

APRIL 30, 2005

 

I N D E X

 

PART I.   FINANCIAL INFORMATION

 

 

 

 

Item 1.  Financial Statements

 

 

Consolidated Balance Sheets as of April 30, 2005 (unaudited) and October 31, 2004

 

 

 

 

 

Consolidated Statements of Operations for the three months and six months ended April 30, 2005 and April 30, 2004 (unaudited)

 

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended April 30, 2005 and April 30, 2004 (unaudited)

 

 

 

 

 

Notes to consolidated financial statements (Unaudited)

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

 

PART II.  OTHER INFORMATION

 

 

 

 

Item 6.

Exhibits

 

 

 

 

Signatures

 

 

 

 

Certifications

 

 



 

BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY

 

CONSOLIDATED BALANCE SHEETS

[Dollars In Thousands Except Per Share Data]

 

ASSETS

 

 

 

April 30,
2005

 

October 31,
2004

 

 

 

(Unaudited)

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

8,258

 

$

6,681

 

Accounts Receivable - Net

 

46,980

 

40,952

 

Inventory

 

1,591

 

1,277

 

Other Current Assets

 

1,825

 

1,863

 

TOTAL CURRENT ASSETS

 

58,654

 

50,773

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT

 

17,051

 

13,501

 

LESS: Accumulated Depreciation

 

5,944

 

4,225

 

TOTAL PROPERTY, PLANT AND EQUIPMENT - NET

 

11,107

 

9,276

 

 

 

 

 

 

 

OTHER ASSETS:

 

 

 

 

 

Deposits

 

468

 

426

 

Goodwill (Net of Accumulated Amortization of $2,401)

 

8,190

 

8,190

 

Intangible Assets (Net of Accumulated Amortization of $3,099 and $2,795 respectively)

 

2,115

 

2,438

 

Other Assets

 

1,183

 

1,048

 

 

 

 

 

 

 

TOTAL OTHER ASSETS

 

11,956

 

12,102

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

81,717

 

$

72,151

 

 

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

 

1



 

BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY

 

CONSOLIDATED BALANCE SHEETS

[Dollars In Thousands Except Per Share Data]

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

April 30,
2005

 

October 31,
2004

 

 

 

(Unaudited)

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts Payable

 

$

11,606

 

$

10,801

 

Accrued Salaries and Commissions

 

2,525

 

2,139

 

Accrued Taxes and Expenses

 

566

 

1,081

 

Revolving Note Payable - Bank

 

16,437

 

10,333

 

Current Maturities of Long-Term Debt

 

1,273

 

1,273

 

Capital Lease Obligations—Short-Term Portion

 

1,808

 

1,331

 

TOTAL CURRENT LIABILITIES

 

34,215

 

26,958

 

 

 

 

 

 

 

LONG-TERM LIABILITIES:

 

 

 

 

 

Capital Lease Obligations–Long-Term Portion

 

3,785

 

3,092

 

Long-Term Debt—Net of Current Portion

 

425

 

1,061

 

Other Long-Term Liabilities

 

 

367

 

 

 

 

 

 

 

TOTAL LONG-TERM LIABILITIES

 

4,210

 

4,520

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

Preferred Stock $.10 Par Value; Authorized 1,059,589 shares, None Issued

 

 

 

Series A Senior Preferred Stock, $.10 Par Value; Authorized Issued and Outstanding; None

 

 

 

 

Series A - Junior Participating Preferred Stock, $.10 Par Value, Authorized 3,000 Shares; None Issued

 

 

 

Common Stock, $.01 Par Value; Authorized shares, 35,000,000 Issued and Outstanding shares 12,695,767 at April 30, 2005 and 12,657,939 shares at October 31, 2004

 

127

 

127

 

 

 

 

 

 

 

Additional Paid-In Capital

 

30,282

 

30,099

 

 

 

 

 

 

 

Retained Earnings

 

13,183

 

10,831

 

Totals

 

43,592

 

41,057

 

Deferred Compensation

 

(300

)

(384

)

 

 

 

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

 

43,292

 

40,673

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

81,717

 

$

72,151

 

 

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

 

2



 

BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF OPERATIONS

[Dollars In Thousands Except Per Share Data]

[UNAUDITED]

 

 

 

Three months ended
April 30,

 

Six months ended
April 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

NET REVENUES:

 

$

40,049

 

$

33,647

 

$

76,884

 

$

62,597

 

 

 

 

 

 

 

 

 

 

 

COST OF SERVICES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and Amortization

 

$

769

 

$

406

 

$

1,450

 

$

754

 

Employee Related Expenses

 

9,316

 

7,651

 

18,253

 

14,529

 

Reagents and Laboratory Supplies

 

6,071

 

5,181

 

11,595

 

9,785

 

Other Cost of Services

 

4,205

 

3,860

 

8,453

 

7,076

 

TOTAL COST OF SERVICES

 

$

20,361

 

$

17,098

 

$

39,751

 

$

32,144

 

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT ON REVENUES

 

$

19,688

 

$

16,549

 

$

37,133

 

$

30,453

 

 

 

 

 

 

 

 

 

 

 

General and Administrative Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and Amortization

 

$

297

 

$

192

 

$

585

 

$

382

 

General and Administrative Expenses

 

11,501

 

8,926

 

22,421

 

17,349

 

Bad Debt Expense

 

5,397

 

3,904

 

9,980

 

7,581

 

 

 

 

 

 

 

 

 

 

 

TOTAL GENERAL AND ADMIN. EXPENSES

 

$

17,195

 

$

13,022

 

$

32,986

 

$

25,312

 

 

 

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

$

2,493

 

$

3,527

 

$

4,147

 

$

5,141

 

 

 

 

 

 

 

 

 

 

 

OTHER (INCOME) EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

$

320

 

$

151

 

$

574

 

$

308

 

Interest Income

 

(22

)

(8

)

(42

)

(13

)

 

 

 

 

 

 

 

 

 

 

TOTAL OTHER EXPENSES - NET

 

$

298

 

$

143

 

$

532

 

$

295

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

$

2,195

 

$

3,384

 

$

3,615

 

$

4,846

 

 

 

 

 

 

 

 

 

 

 

Provision for Income Taxes

 

768

 

1,425

 

1,263

 

1,967

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

1,427

 

$

1,959

 

$

2,352

 

$

2,879

 

 

 

 

 

 

 

 

 

 

 

NET INCOME PER COMMON SHARE - BASIC:

 

$

.11

 

$

.16

 

$

.19

 

$

.25

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF SHARES - BASIC:

 

12,682,213

 

11,920,106

 

12,674,451

 

11,721,356

 

 

 

 

 

 

 

 

 

 

 

NET INCOME PER COMMON SHARE - DILUTED:

 

$

.11

 

.15

 

.18

 

.22

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF SHARES - DILUTED:

 

13,251,988

 

13,187,758

 

13,266,845

 

13,002,727

 

 

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

 

3



 

BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

[Dollars In Thousands Except Per Share Data]

 

[UNAUDITED]

 

 

 

Six months ended
April 30,

 

 

 

2005

 

2004

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net Income

 

$

2,352

 

$

2,879

 

Adjustments to Reconcile Net Income to Cash Provided by Operating Activities:

 

 

 

 

 

Deferred Compensation

 

84

 

97

 

Depreciation and Amortization

 

2,035

 

1,136

 

Deferred Income Taxes

 

600

 

 

Provision for Bad Debts

 

9,980

 

7,581

 

Change in Assets and Liabilities:

 

 

 

 

 

(Increase) Decrease in:

 

 

 

 

 

Accounts Receivable

 

(16,009

)

(11,113

)

Inventory

 

(314

)

(93

)

Other Current Assets

 

(899

)

141

 

Deferred Charges

 

(140

)

(44

)

Other Assets and Deposits

 

(24

)

242

 

Increase (Decrease) in:

 

 

 

 

 

Accounts Payable and Accrued Liabilities

 

676

 

(278

)

 

 

 

 

 

 

NET CASH - OPERATING ACTIVITIES

 

(1,659

)

548

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

Acquisition of Equipment and Leasehold Improvements

 

$

(1,592

)

$

(1,344

)

Acquisition of Business Entity

 

 

(546

)

 

 

 

 

 

 

NET CASH - INVESTING ACTIVITIES

 

$

(1,592

)

$

(1,890

)

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from Exercise of Options

 

$

183

 

$

1,481

 

Payments of Long-Term Debt

 

(637

)

 

Payments of Capital Lease Obligations

 

(822

)

(693

)

Increase (Decrease) in Revolving Line of Credit

 

6,104

 

2,470

 

 

 

 

 

 

 

NET CASH - FINANCING ACTIVITIES

 

$

4,828

 

3,258

 

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

$

1,577

 

$

1,916

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIODS

 

6,681

 

3,966

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIODS

 

$

8,258

 

$

5,882

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

623

 

$

308

 

Income Taxes

 

$

2,583

 

$

1,967

 

 

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

 

4



 

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

[Dollars In Thousands Except Per Share Data]

 

During the six month period ended April 30, 2005 and April 30, 2004 the Company entered into capital leases totaling $1,993 and $1,065 respectively.

 

During the six month period ended April 30, 2005 and April 30, 2004 the Company recorded deferred compensation costs of approximately $84 and $97, respectively.

 

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

 

5



 

BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Dollars In Thousands Except Per Share Data]

(UNAUDITED)

 

[1] In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments [consisting only of normal adjustments and recurring accruals] which are necessary to present a fair statement of the results for the interim periods presented and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

 

[2] The results of operations for the six months ended April 30, 2005 are not necessarily indicative of the results to be expected for the entire year.

 

[3] The consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes for the year ended October 31, 2004 as filed with the Securities and Exchange Commission in the Company’s Annual Report on Form 10-K.

 

[4] The significant accounting policies followed by the Company are set forth in Note 2 to the Company’s consolidated financial statements in the October 31, 2004 Form 10-K.

 

[5] Revenues are recognized at the time the services are performed.  Revenues on the statement of operations are net of the following amounts for allowances and discounts.

 

 

 

Three Months Ended
April 30

 

Six Months ended
April 30

 

 

 

[Unaudited]

 

[Unaudited]

 

 

 

2005

 

2004

 

2005

 

2004

 

Medicare/Medicaid

 

$

28,590

 

$

23,275

 

$

54,165

 

$

43,790

 

Other

 

38,404

 

28,671

 

69,899

 

51,498

 

 

 

$

66,994

 

$

51,946

 

$

124,064

 

$

95,288

 

 

A number of proposals for legislation or regulation continue to be under discussion which could have the effect of substantially reducing Medicare reimbursements for clinical laboratories.  Depending upon the nature of regulatory action, if any, which is taken and the content of legislation, if any, which is adopted, the Company could experience a significant decrease in revenues from Medicare and Medicaid, which could have a material adverse effect on the Company.  The Company is unable to predict, however, the extent to which such actions will be taken.

 

[6] An allowance for contractual credits and uncollectible accounts is determined based upon a review of the reimbursement policies and subsequent collections for the different types of payors. The aggregate allowance, which is net against accounts receivable was $46,254 at April 30, 2005 and $38,102 at October 31, 2004 and is comprised of the following items:

 

 

 

[Unaudited]
April 30, 2005

 

October 31, 2004

 

Contractual Credits/Discounts

 

$

38,901

 

$

31,067

 

Doubtful Accounts

 

7,353

 

7,035

 

 

 

$

46,254

 

$

38,102

 

 

[7] In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs – an amendment to ARB No. 43.” This statement provides guidance to clarify the accounting for abnormal amounts of idle facility expense, freight handling costs, and wasted material (spoilage), among other production costs. Provisions of ARB No. 43 stated that under some circumstances, items such as idle facility expense, excessive spoilage and other costs may be so abnormal as to require treatment as current period charges. This statement requires that those items be recognized as current period charges regardless of whether they meet the criterion of “so abnormal.” In addition, SFAS 151 requires that

 

6



 

allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. Adoption of the Statement is not expected to have a material impact on the financial statements of the Company.

 

In November 2004, the FASB issued SFAS No. 152 “Accounting for Real Estate Time-Sharing Transactions – An amendment of SFAS No. 66 and 67. This Statement amends SFAS No. 66. “Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement also amends SFAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects,” to state the guidance for (a) incidental costs and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to guidance in SOP 04-2, effective for financial statements with fiscal years beginning after June 15, 2005. Adoption of this Statement is not expected to have a material impact on the financial statements of the Company.

 

In November 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets – an amendment to APB No. 29.” This Statement amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. Adoption of this statement is not expected to have a material impact on the financial statements of the Company.

 

In December 2004, the FASB issued SFAS No. 123 (Revised 2004). “Share-Based Payment.” The statement requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instrument issued. The statement covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The Company will be required to adopt SFAS 123 ( R ) as of November 1, 2005. The adoption may have a material impact on the consolidated financial statements of the Company.

 

[8] At April 30, 2005, the Company had three stock-based employee compensation plans. The Company accounts for those plans under the measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provision of FASB Statement No. 123 to stock-based employee compensation.

 

 

 

Three Months Ended
April 30,

 

Six Months Ended
April 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss): As Reported

 

$

1,427

 

$

1,959

 

$

2,352

 

$

2,879

 

Deduct: Stock Based Employee compensation expense determined under the fair value based method-Net of Tax

 

$

(569

)

$

(16

)

$

(1,058

)

$

(681

)

Pro-Forma Net income

 

$

858

 

$

1,943

 

$

1,294

 

$

2,198

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings (Loss) Per Share: 

 

 

 

 

 

 

 

 

 

As Reported

 

$

.11

 

$

. 16

 

$

.19

 

$

. 25

 

Pro-Forma

 

$

.07

 

$

. 16

 

$

.10

 

$

. 19

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings (Loss) Per Share: 

 

 

 

 

 

 

 

 

 

As Reported

 

$

.11

 

$

. 15

 

$

.18

 

$

. 22

 

Pro-Forma

 

$

.06

 

$

. 15

 

$

.10

 

$

. 17

 

 

7



 

[9] The following disclosures present certain information on the Company’s intangible assets as of April 30, 2005 (Unaudited) and October 31, 2004. All intangible assets are being amortized over their estimated useful lives, as indicated below, with no estimated residual value.

 

Intangible Assets

 

Weighted-Average
Amortization
Period

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Balance

 

At April 30, 2005 [Unaudited]

 

 

 

 

 

 

 

 

 

Software Costs

 

5 years

 

$

1,535

 

$

1,096

 

$

439

 

Customer Lists

 

20 years

 

1,697

 

903

 

794

 

Covenants not-to-Compete

 

2 years

 

5

 

2

 

3

 

Employment Agreements

 

7 years

 

825

 

726

 

99

 

Costs Related to Acquisitions

 

19 years

 

997

 

300

 

697

 

Patent

 

17 Years

 

156

 

73

 

83

 

Totals

 

 

 

$

5,215

 

$

3,100

 

$

2,115

 

 

Intangible Assets

 

Weighted-Average
Amortization
Period

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Balance

 

At October 31, 2004

 

 

 

 

 

 

 

 

 

Software Costs

 

5 years

 

$

1,535

 

$

943

 

$

592

 

Customer Lists

 

20 years

 

1,697

 

860

 

837

 

Covenants not-to-Compete

 

2 years

 

5

 

1

 

4

 

Employment Agreements

 

7 years

 

825

 

661

 

164

 

Costs Related to Acquisitions

 

19 years

 

1,015

 

260

 

755

 

Patent

 

17 Years

 

156

 

70

 

86

 

Totals

 

 

 

$

5,233

 

$

2,795

 

$

2,438

 

 

The aggregate intangible amortization expense for the three months ended April 30, 2005 and 2004 was $153 and $127, respectively and for the six months ended April 30, 2005 and 2004 was $307 and $254, respectively. The estimated intangible asset amortization expense for the fiscal year ending October 31, 2005 and for the four subsequent years is as follows:

 

Fiscal Year
Ended
October 31,

 

Estimated
Amortization
Expense

 

2005

 

$

619

 

2006

 

476

 

2007

 

223

 

2008

 

150

 

2009

 

130

 

Thereafter

 

840

 

Total

 

$

2,438

 

 

8



 

[10] In October 2004, the Company entered into an amended revolving note payable loan agreement with a bank.  The maximum amount of the credit line available to the Company is the lesser of (i) $30,000 or (ii) 50% of the Company’s qualified accounts receivable [as defined in the agreement]. The amended loan agreement provides for an “acquisition subline” of up to $10,000 which can be repaid in 36 equal monthly installments. The amendment to the Loan and Security Agreement provides for interest on advances to be subject to the bank’s prime rate or 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 April 30, 2005, the Company had elected to have $7,000 of the total advances outstanding converted into a Eurodollar rate loan with a variable interest rate of 4.15% at April 30, 2005.  The remaining outstanding advances during that period were subject to the bank’s prime rate of interest.  At April 30, 2005, advances outstanding of $9,437 were subject to interest at the prime rate (5.75%).  The credit line is collateralized by substantially all of the Company’s assets. The line of credit is available through October 2007 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 April 30, 2005, the Company utilized $18,983 (including $2,546 utilized under the “acquisition subline”) and had $11,017 of available unused credit under this revolving note payable loan agreement.

 

[11] Subsequent Event. On June 2, 2005, the Board of Directors authorized the repurchase of up to 500,000 shares of the Company’s common stock over the period ending October 31, 2007.

 

9



 

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[Dollars In Thousands Except Per Share Data, Or Unless Otherwise Noted]

 

Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains historical information as well as forward-looking statements. Statements looking forward in time are included in this Quarterly 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. For a further discussion concerning risks to our business, the results of our operations and our financial condition, reference is made to our Annual Report on Form 10-K for the year ended October 31, 2004.

 

OVERVIEW:

 

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 49% 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:

 

                                          our failure to obtain and retain new customers and alliance partners, or a reduction in tests ordered or specimens submitted by existing customers.

                                          changes in payor mix.

                                          adverse results from investigations of clinical laboratories by the government, which may include significant monetary damages and/or exclusion from the Medicare and Medicaid programs.

                                          loss or suspension of a license or imposition of a fine or penalties under, or future changes in, the law or regulations of CLIA-88, or those of Medicare, Medicaid or other federal, state or local agencies.

                                          future changes in federal, state, local and third party payor regulations or policies (or in the interpretation of current regulations) affecting governmental and third-party reimbursement for clinical laboratory testing.

                                          failure to comply with the Federal Occupational Safety and Health Administration and the failure to comply with HIPAA, which could result in significant fines as well as substantial criminal penalties.

                                          failure to maintain our days sales outstanding levels.

                                          our ability to attract and retain experienced and qualified personnel.

                                          our failure to integrate newly acquired businesses (if any) and the cost related to such integration.

 

10



 

COMPARISON OF SECOND QUARTER 2005 VS SECOND QUARTER 2004

 

NET REVENUES:

 

Net revenues for the three month period ended April 30, 2005 were $40,049 as compared to $33,647 for the three month period ended April 30, 2004; which represents a 19% increase in net revenues. This increase is due to a 12% increase in patient counts and an increase in revenue per patient of 6% due to a shift in business to higher reimbursement esoteric testing. Our wholly owned subsidiary, CareEvolve, had net revenues of $226 for the three month period ended April 30, 2005.

 

The number of patients serviced during the three month period ended April 30, 2005 was 719 thousand which was 12% greater when compared to the prior fiscal year’s three month period. Net revenue per patient for the three month period ended April 30, 2005 was $55.22 compared to net revenue per patient of $52.24 for the three month period ended April 30, 2004, an increase of $2.98 or 6%.

 

COST OF SERVICES:

 

Cost of Services increased from $17,098 for the three month period ended April 30, 2004 to $20,361 for the three month period ended April 30, 2005, an increase of $3,263 or 19%. This increase is related to the increase in net revenues of 19%. Employee related expenses increased by $1,665 (22%) and is attributable to the hiring of additional technical and professional personnel dedicated to the expansion of the Company’s cancer and esoteric testing business. Depreciation increased from $406 for the period ended April 30, 2004 to $769 for the period ended April 30, 2005, an increase of $363 or 89%, and is consistent with our investment in infrastructure and capacity. Total depreciation and amortization increased from $598 for the period ended April 30, 2004 to $1,066 for the period ended April 30, 2005 or 78%.

 

GROSS PROFITS:

 

Gross profits increased from $16,549 for the three month period ended April 30, 2004 to $19,688 for the three month period ended April 30, 2005; an increase of $3,139 or 19%. Gross profit margin remained constant at 49%, reflecting a cost structure rising in relation to net revenues due to the Company’s cancer and esoteric business.

 

GENERAL AND ADMINISTRATIVE EXPENSES:

 

General and administrative expenses for the three month period ending April 30, 2004 was $13,022 as compared to $17,195 for the quarter ended April 30, 2005, an increase of $4,173 or 32%. This increase was caused by an $833 (26%) increase in marketing expenses driven by the expansion of the Company’s cancer and esoteric testing business. In addition, there was a $512 (54%) increase in data processing and computer related expense, caused by the development of interfaces with Electronic Medical Record (“EMR”) Systems, physician management systems and data importation of major payor data in our data analytics division, a $367 (235%) increase in expenses related to outside professional fees of which a majority of the increase related to implementing Sarbanes-Oxley Section 404, a $1,493 (38%) increase in bad debt expense attributable in part to the implementation of HIPAA regulations causing some commercial insurance claims to go past the required cycle and therefore are required contractually to be rebilled as self-pay claims, and a $104 (54%) increase in depreciation and amortization expense caused by an increase in infrastructure and capacity. Total Depreciation and Amortization increased from $598 for the period ended April 30, 2004 to $1,066 for the period ended April 30, 2005 or 78%. Other cost increases were primarily due to the increase in revenue for the three month period ended April 30, 2005.

 

INTEREST EXPENSE:

 

Interest expense increased to $320 during the three month period ending April 30, 2005 from $151 during the three month period ended April 30, 2005.  This increase is due to an increase in the interest rates on the PNC Bank line of credit utilized by the Company and the increase in capital expenditures financed through capital leases. Management believes that this trend will continue in the future due to the continued use of our revolving line of credit to fund our expansion and growth and the expectation that interest rates will continue to increase.

 

11



 

INCOME:

 

We realized net income of $1,427 for the three month period ended April 30, 2005, as compared to $1,959 for the three month period ended April 30, 2004 a decrease of 27%.  Pre-tax income for the period ended April 30, 2005 was $2,195, compared to $3,384 for the three month period ended April 30, 2004, a decrease of $1,189 (35%).  The provision for income taxes decreased from $1,425 for the three month period ended April 30, 2004 to $768 for the period ended April 30, 2005. CareEvolve had a net loss of $275 on a consolidated basis for the three month period ended April 30, 2005.

 

SIX MONTHS 2005 COMPARED TO SIX MONTHS 2004

 

NET REVENUES:

 

Net Revenues for the six month period ended April 30, 2005 were $76,884 as compared to $62,597 for the six month period ended April 30, 2004; this represents a 23% increase in net revenues. This increase is due to a 13% increase in patient counts and revenue per patient increased 7% due to a continuing shift in business to higher reimbursement esoteric testing. Our wholly owned subsidiary, CareEvolve, had net revenues of $574 for the six month period ended April 30, 2005 or 4% of the increase in net revenues on a consolidated basis.

 

The number of patients serviced during the six month period ended April 30, 2005 was 1,367 thousand which was 13% greater when compared to the prior fiscal year’s six month period. Net revenue per patient for the six month period ended April 30, 2005 was $55.33, compared to net revenue per patient for the six month period ended April 30, 2004 of $51.59, an increase of $3.74 or 7%.

 

COST OF SERVICES:

 

Cost of Services increased to $39,751 for the six month period ended April 30, 2005 from $32,144 for the six month period ended April 30, 2004. This represents a 24% increase in direct operating costs. Employee related expenses increased by $3,724 (26%) and is attributable to the hiring of additional technical and professional personnel dedicated to the expansion of the Company’s cancer and esoteric testing business. Depreciation increased from $754 for the period ended April 30, 2004 to $1,450 for the period ended April 30, 2005, an increase of $696 or 92%, and is consistent with our investment in infrastructure and capacity. Total Depreciation and Amortization increased from $1,136 for the period ended April 30, 2004 to $2,035 for the period ended April 30, 2005, an increase of $899 or 79%.

 

GROSS PROFITS:

 

Gross profits on net revenues, increased to $37,133 for the six month period ended April 30, 2005 from $30,453 for the six month period ended April 30, 2004; an increase of $6,680 (22%). Gross profit margins decreased to 48% from 49%. Gross Profit margin decreased 1% in the current period reflecting an increase in direct costs in relation to net revenues and the result of increased expenses in technical and professional personnel in the Company’s cancer and esoteric testing business.

 

GENERAL AND ADMINISTRATIVE EXPENSES:

 

General and administrative expenses for the six month period ended April 30, 2005 were $32,986 as compared to $25,312 for the six month period ended April 30, 2004.  This represents an increase of $7,674 or 30%. This increase was caused by a $1,794 (29%) increase in marketing expenses driven by the expansion of the Company’s cancer and esoteric testing business. In addition, there was a $1,061 (54%) increase in data processing and computer related expense, caused by the development of interfaces with EMR Systems, physician management systems and data importation of major payor data in our data analytics division, a $339 (49%) increase in expenses related to outside professional fees of which a majority of the increase related to implementing Sarbanes-Oxley Section 404, a $2,399 (32%) increase in bad debt expense attributable in part to the implementation of HIPAA regulations causing some commercial insurance claims to go past the required cycle and therefore are required contractually to be rebilled as self-pay claims, and a $203 (53%) increase in depreciation and amortization expense caused by an increase in infrastructure and capacity. Total Depreciation and Amortization increased from $1,136 for the period ended April 30, 2004 to $2,035 for the period ended April 30, 2005, an increase of $899 or 79%. Other cost increases were primarily due to the increase in revenue for the six month period ended April 30, 2005.

 

12



 

INTEREST EXPENSE:

 

Interest expense increased to $574 during the six month period ending April 30, 2005 as compared to $308 during the six month period ending April 30, 2004, an increase of $266. This increase is due to an increase in the interest rates on the PNC Bank line of credit utilized by the Company and the increase in capital expenditures financed through capital leases. Management believes that this trend will continue in the future due to the continued use of our revolving line of credit to fund our expansion and growth and the expectation that interest rates will continue to increase.

 

INCOME:

 

We realized net income of $2,352 for the six months ended April 30, 2005 as compared to $2,879 for the six month period ended April 30, 2004.  Pre-tax income for the six month period ended April 30, 2005 was $3,615, as compared to $4,846 for the six month period ended April 30, 2004, a decrease of $1,231 (25%).  The provision for income taxes decreased from $1,967 for the six month period ended April 30, 2004 to $1,263 for the six month period ended April 30, 2005. CareEvolve had a net loss of $199 on a consolidated basis for the period ended April 30, 2005.

 

LIQUIDITY AND CAPITAL RESOURCES:

 

Our working capital at April 30, 2005 was $24,439 as compared to $23,815 at October 31, 2004, an increase of $624. Our cash position increased $1,577 during the current period. We borrowed $6,104 in short term debt and repaid $1,459 in existing debt.  We had current liabilities of $34,215 at April 30, 2005. We utilized $1,659 in cash from operations during the period ended April 30, 2005 compared to cash generated from operations for the period ended April 30, 2004 of $548.

 

Accounts receivable, net of allowance for doubtful accounts, totaled approximately $46,980 at April 30, 2005, an increase of approximately $6,028 from October 31, 2004, or 15%. This increase was primarily attributable to increased revenue.  Cash collected during the six month period ended April 30, 2005 increased 17% over the prior comparable six month period.

 

Credit risk with respect to accounts receivable is generally diversified due to the large number of patients comprising the client base. We have significant receivable balances with government payors and various insurance carriers. Generally, we do not require collateral or other security to support customer receivables, however, we continually monitor and evaluate our client acceptance and collection procedures to minimize potential credit risks associated with our accounts receivable. While we maintain what we believe to be an adequate allowance for doubtful accounts of $46,254, there can be no assurance that our ongoing review of accounts receivable will not result in the need for additional reserves. Such additional reserves could have a material impact on our financial position and results of operations.

 

In October 2004, the Company entered into an amended revolving note payable loan agreement with a bank.  The maximum amount of the credit line available to the Company is the lesser of (i) $30,000 or (ii) 50% of the Company’s qualified accounts receivable [as defined in the agreement]. The amended loan agreement provides for an “acquisition subline” of up to $10,000 which can be repaid in 36 equal monthly installments. The amendment to the Loan and Security Agreement provides for interest on advances to be subject to the bank’s prime rate or 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 April 30, 2005, the Company had elected to have $7,000 of the total advances outstanding converted into a Eurodollar rate loan with a variable interest rate of 4.15% at April 30, 2005.  The remaining outstanding advances during that period were subject to the bank’s prime rate of interest.  At April 30, 2005, advances outstanding of $9,437 were subject to interest at the prime rate (5.75%).  The credit line is collateralized by substantially all of the Company’s assets. The line of credit is available through October 2007 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 April 30, 2005, the Company utilized $18,983 (including $2,546 utilized under the “acquisition subline”) and had $11,017 of available unused credit under this revolving note payable loan agreement.

 

13



 

We intend to expand our laboratory operations through aggressive marketing while also diversifying into related medical fields through acquisitions.  These acquisitions may involve cash, notes, common stock, and/or combinations thereof.

 

On June 2, 2005, the Company announced that the Board of Directors had authorized the repurchase of up to 500,000 shares of the Company’s common stock over the period ending October 31, 2007. While there are no current plans for any stock repurchases, the Company expects to make any such repurchases from time to time in the over-the-counter market at prevailing market prices during the period.

 

In the table below, we set forth our enforceable and legally binding obligations as of October 31, 2004. Some of the figures we include in this table are based on management’s estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties, and other factors. Because these estimates and assumptions are necessarily subjective, the enforceable and legally binding obligations we will actually pay in the future periods may vary from those reflected in the table.

 

 

 

Five Years

 

FY2005

 

Long – Term Debt

 

$

2,334

 

$

1,273

 

Capital Leases

 

5,521

 

1,525

 

Operating Leases

 

4,835

 

1,422

 

Purchase Obligations

 

6,104

 

2,714

 

Employment/Consultant Contracts

 

6,462

 

2,338

 

Total

 

$

25,256

 

$

9,272

 

 

Our cash balance at April 30, 2005 totaled $8,258 as compared to $6,681 at October 31, 2004.  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 2005.

 

Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains historical information as well as forward-looking statements. Statements looking forward in time are included in this Quarterly 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. For a further discussion concerning risks to our business, the results of our operations and our financial condition, reference is made to our Annual Report on Form 10-K for the year ended October 31, 2004.

 

Impact of Inflation

 

To date, inflation has not had a material effect on our operations.

 

New Authoritative Pronouncements

 

In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs – an amendment to ARB No. 43.” This statement provides guidance to clarify the accounting for abnormal amounts of idle facility expense, freight handling costs, and wasted material (spoilage), among other production costs. Provisions of ARB No. 43 stated that under some circumstances, items such as idle facility expense, excessive spoilage and other costs may be so abnormal as to require treatment as current period charges. This statement requires that those items be recognized as current period charges regardless of whether they meet the criterion of “so abnormal.” In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. Adoption of the Statement is not expected to have a material impact on the financial statements of the Company.

 

14



 

In November 2004, the FASB issued SFAS No. 152 “Accounting for Real Estate Time-Sharing Transactions – An amendment of SFAS No. 66 and 67. This Statement amends SFAS No. 66. “Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement also amends SFAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects,” to state the guidance for (a) incidental costs and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to guidance in SOP 04-2, effective for financial statements with fiscal years beginning after June 15, 2005. Adoption of this Statement is not expected to have a material impact on the financial statements of the Company.

 

In November 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets – an amendment to APB No. 29.” This Statement amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. Adoption of this statement is not expected to have a material impact on the financial statements of the Company.

 

In December 2004, the FASB issued SFAS No. 123 (Revised 2004). “Share-Based Payment.” The statement requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instrument issued. The statement covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The Company will be required to adopt SFAS 123 ( R ) as of August 1, 2005. The adoption may have a material impact on the consolidated financial statements of the Company.

 

Item 3.

 

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 significant foreign sales so that our exposure to foreign currency exchange rate risk is minimal.

 

We do have exposure to both rising and falling interest rates. At April 30, 2005, advances outstanding of approximately $9,437 under our Loan Agreement with PNC Bank were subject to interest charges at the Bank’s then prime rate of 5.75%. In addition, we elected to have the remaining $7,000 of advances outstanding at said date converted into a Eurodollar rate loan with a variable interest rate of 4.15%.

 

We estimate that our monthly cash interest expense at April 30, 2005 was approximately $96 and that a one percentage point increase or decrease in short-term rates would increase or decrease our monthly interest expense by approximately $25.

 

Item 4.

CONTROLS AND PROCEDURES

 

(a) Explanation of disclosure controls and procedures.  The Company’s chief executive officer and its chief financial officer after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15-d-15(e) have concluded that as of April 30, 2005, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which this quarterly report was being prepared.

 

(b) Changes in internal controls.  There was no change in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15-d-15 that occurred during the Company’s last fiscal quarter ended April 30, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

15



 

PART II - OTHER INFORMATION

 

Item 6.

 

EXHIBITS AND REPORTS ON FORM 8-K

 

3.2

 

Amendments to Article III Section 2 and Article III Section 4 of the By-Laws adopted June 1, 2005.

31A

 

Certification of Chief Executive Officer

31B

 

Certification of Chief Financial Officer

32A

 

Certification Pursuant to 18 U.S.C. Section 1350 of Chief Executive Officer

32B

 

Certification Pursuant to 18 U.S.C. Section 1350 of Chief Financial Officer

 

16



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

BIO-REFERENCE LABORATORIES, INC.

 

 

(Registrant)

 

 

 

 

 

 

/S/ Marc D. Grodman

 

 

Marc D. Grodman, M.D.

 

President and Chief Executive Officer

 

 

 

 

 

/S/ Sam Singer

 

 

Sam Singer

 

Chief Financial and Accounting Officer

 

 

 

 

Date: June 6, 2005

 

 

17