SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

FORM 10-K

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended  October 31, 2001

 

Commission file number 0-15266

 

BIO-REFERENCE LABORATORIES, INC.

481 Edward H. Ross Drive, Elmwood Park, New Jersey  07407

201-791-2600

 

 

Securities registered pursuant to Section 12(b) of the Act:    None

 

Securities registered pursuant to Section 12(g) of the Act:  Common Stock, $.01 par value

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý   No   o.

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or in any amendment to this Form 10-K.   o

 

On January 18, 2002, the aggregate market value of the voting stock of Bio-Reference Laboratories, Inc. (consisting of Common Stock, $.01 par value and Series A Senior Preferred Stock, $.10 par value) held by non-affiliates of the registrant was approximately $58,810,000 based upon the last sales price for such Common Stock on said date in the over-the-counter market as reported by the NASDAQ Small Cap System.  On such date, there were 11,137,913 shares of Common Stock of the Issuer outstanding.

 

PART I

 

Item. 1.Business

 

Overview

 

We believe that we are the largest regional clinical laboratory servicing the greater New York metropolitan  area. We offer a comprehensive list of laboratory testing services utilized by healthcare providers in the detection, diagnosis, evaluation, monitoring and treatment of diseases.

 

We currently process over 1.6 million requisitions each year. A requisition form accompanies a patient’s specimen. It indicates the tests to be performed and the party to be invoiced for the tests. Our clients include doctors, employers, clinics and governmental units. We have a network of over 40 patient service centers.

 

In addition to our clinical testing business, we also collect and analyze laboratory, pharmaceutical and other data through our PSIMedica business unit. This unit is a clinical management knowledge service. It uses customer data from disparate sources to provide administrative and clinical decision support systems to enable our customer to provide quality and efficient healthcare to its population.

 

We are a New Jersey corporation. We may at times refer to ourselves and our subsidiaries as the “Company.” We are the successor to Med-Mobile, Inc., a New Jersey corporation that was organized in 1981. Our executive offices are located at 481 Edward H. Ross Drive, Elmwood Park, NJ  07407, telephone number: 201-791-2600.

 

The Clinical Laboratory Testing Market in the United States

 

We believe that the U.S. market for clinical laboratory testing generates approximately $30 billion in annual revenue. All laboratory tests are performed by one of three types of laboratories: hospital laboratories, physician office laboratories or independent clinical laboratories. We believe at least 50% of the clinical laboratory tests done in the United States were performed in a hospital laboratory, over 25% performed by an independent clinical laboratory and the balance in a physician office laboratory.

 

During the last few years, the fundamentals of the industry have been improving. In the cost containment era of the 1990s, the industry was negatively impacted by the rapid growth of managed care, stringent government regulation and investigations into fraud and abuse. These factors  led to revenue and profit declines and industry consolidations, especially among commercial clinical laboratories. As a result, fewer but larger clinical laboratories emerged which have greater economies of scale, compliance with government billing regulation and other laws and a better approach to pricing their services. These changes resulted in improved profitability. Also, a significant slow down in the growth of managed care and a decrease in the influence by managed care organizations (brought about by the Clinton Administration) on the ordering of clinical testing by providers has caused a growth in testing volumes.

 

We believe the industry will continue to experience growth in testing volume due to the following:

 

·      Aging of the population of the United States;

·      Awareness by patients of the value of laboratory tests;

·      Decrease in the cost of tests;

·      Decrease in the influence of managed care organizations on the ordering patterns of their physicians.

·      Development of sophisticated and specialized tests for early detection of disease and disease management;

·      Diagnosis and monitoring of infectious diseases such as AIDS and Hepatitis C;

·      Early detection and prevention as a means of reducing healthcare costs in the long run;

·      Employer sponsored wellness programs;

·      Research and development in genomics.

 

Business Strategy

 

We are a regional clinical laboratory with subspecialty testing capabilities. As a regional laboratory, we service the New York metropolitan area, and currently conduct business in most New York State counties, as well as in most of New Jersey and some parts of Pennsylvania and Connecticut. As a regional laboratory, we primarily offer laboratory services to physician offices in these areas with an infrastructure that includes a comprehensive logistical department, extensive phlebotomy services and phlebotomy draw stations scattered around our geographic area. We have also developed expertise in certain testing areas with specific emphasis in cancer pathology, and diagnostics as well as molecular diagnostics. These services are marketed as a business unit, called GenPath, which services customers outside of routine physician office testing. We have developed certain specialized markets, such as in the areas of correctional health, substance abuse testing, fertility testing and molecular diagnostics. Testing in these areas also may be supported outside of physician office services.

 

We have one of the largest regional marketing staffs of any laboratory in the country, some of whom are trained specifically in Oncology and call on Oncology practices and hospitals.

 

We believe that our large marketing staff and strong infrastructure within our designated area can be leveraged to bring new technologies to physicians and healthcare providers. Over the past year, our volume of testing in the area of molecular diagnostics has increased. We expect to introduce HIV genotyping under a preferred marketing arrangement with Visible Genetics, Inc. commencing in January, 2002. We believe that laboratory data has great value in managing the healthcare of a population, but can only be properly utilized when combined with medical claims and pharmacy data. Our medical information unit, PSIMedica, seeks to combine laboratory data with these other data elements so as to improve the quality and efficiency of healthcare. We seek to continue our strong growth not only through our marketing organization, new technologies and superior service, but by providing value added analytics in conjunction with laboratory results.

 

Our mission is to be recognized by our clients as the best provider of clinical laboratory testing, information and related services. The principal components of our strategy to achieve our mission are as follows:

 

·      Capitalize on our position within the clinical market:

·      Lead in the providing of medical information:

·      Provide the highest quality service:

·      Pursue strategic growth opportunities.

 

Services

 

The clinical laboratory testing business consists of routine testing and esoteric testing. Routine testing generates approximately 75% and esoteric testing generates approximately 25% of our net revenues. The net revenue generated by our PSIMedica business unit and our subsidiaries has been minimal to date.

 

Routine Testing

 

Routine tests measure various health parameters such as the functions of the heart, kidney, liver, thyroid and other organs. Below is an abbreviated list of some commonly ordered tests:

 

·      Blood Cell Counts;

·      Cholesterol levels;

·      HIV-related tests;

·      Pap Smears;

·      Pregnancy;

·      Substance Abuse

·      Urinalysis;

 

We perform these tests at our two processing facilities (Elmwood Park, New Jersey and Valley Cottage, New York).

 

We operate 24 hours a day, 365 days a year. We perform and report most routine tests within 24 hours. Tests results are delivered via driver or electronically.

 

Esoteric Tests

 

Esoteric tests are tests that require sophisticated equipment, materials, highly skilled personnel, professional attention and are ordered less frequently than routine tests. These tests are generally priced higher than routine tests. Esoteric tests are usually in these medical fields:

 

·      Endocrinology (the study of glands and their hormone secretions)

·      Genetics (the study of chromosomes, genes and their protein products)

·      Immunology (the study of the immune system)

·      Microbiology (the study of microscopic forms of life)

·      Oncology (the study of abnormal cell growth)

·      Serology (the study of body fluids)

·      Toxicology (the study of chemicals and drugs and their effects on the body)

 

In September 2001, we announced that we entered a Preferred Marketing Agreement with Visible Genetics, Inc. to offer the Visible Genetics TRUGENE (TM) HIV-1 Genotyping Test to our customers treating patients with HIV infections. It is our belief, after a thorough review of scientific evidence, that this product provides the most informative, valuable and accurate testing available for AIDS patients at this time. Through our strong presence in the New York metropolitan area’s HIV patient care market, together with our leading position in the prison health market in the eastern United States, we will be able to deliver the product to areas where it is highly needed.

 

Medical Information

 

Our PSIMedica business unit is a Clinical Knowledge Management (“CKM”) System that uses data derived from various sources to provide both administrative and clinical analysis of a population. The source data consists of enrollment (demographic) data, claims data, pharmacy data, laboratory results data, and any other data that may be available. The system uses sophisticated algorithms to cleanse and configure the data so that analysis can be comprehensive and meaningful. The data is maintained on multiple levels of analysis enabling review of data from the global level to the most minute transactional detail. The system includes a base set of queries that provide basic functionality and allows on-line real-time ad hoc query capability enabling the user to customize analysis to the best needs of the organization using the system. In addition to the basic queries provided by the system, PSIMedica Quality Indicators (“PQI”) provide comprehensive, disease state oriented queries that disclose the quality and efficiency of the care and service. These indicators have been designed to provide the customer with standards and outcome predictors based on a medical standards basis. During fiscal 2001, we completed development of certain PSIMedica programs. These programs are designed to provide information intelligence and intervention programs to healthcare entities thereby enabling such entities to achieve cost effectiveness and to promote improved healthcare. Our PSIMedica programs are currently being marketed to businesses such as Health Plans, Integrated Delivery Networks, Disease Management Companies, Insurers, Clinical Trial Companies and other healthcare providers that most benefit from the ability of the system to combine both clinical and administrative analysis. In the second quarter of fiscal 2001, we executed a Joint Marketing Agreement with a prescription benefit manager which provides prescription benefit management services to more than 100 Health and Welfare funds.The chairman of the board of the prescription benefit manager is the brother of our chief executive officer. Previously, the prescription benefit manager had transmitted certain Data and Support Data to us to assist in our development of our PSIMedica products. Pursuant to the Joint Marketing Agreement, the prescription benefit manager agreed to assist us over the next five years in obtaining contracts for the sale of our PSIMedica programs to its customers and to continue to provide customer data and support data to us on an on-going basis. In consideration therefore, we issued 220,000 shares of our Common Stock to the prescription benefit manager. To date, PSIMedica has generated minimal revenues.

 

Other Products

 

CareEvolve, our wholly owned subsidiary, is a physician-based connectivity portal. It has been built as a highly flexible, scalable, comprehensive desktop solution for physicians to manage their day-to-day practice and personal needs. We have further designed this product to work as a platform with plug and play capability. The underlying philosophy behind the system is that healthcare is local and that the physician must be enabled to provide customized local solutions. This system is currently being used by us as an Internet solution for the distribution of laboratory services. It is being marketed to our physicians to encourage them to upgrade to the full service subscription package, as well as to non-customers on a subscription basis. CareEvolve provides physician-patient and physician-payor electronic communications services. The CareEvolve system is designed to communicate laboratory orders and results, e-mail prescriptions and refills, establish payor eligibility, process payment claims, manage disease programs for specified disease states and provide other physician services (collectively the “CareEvolve Services”). We believe that the primary usefulness of the CareEvolve Services has been proven. At the end of fiscal 2001, we were not yet marketing the Care Evolve Services commercially, but were in negotiation with strategic partners with marketing and distribution capacity to market and distribute the CareEvolve Services to clinical laboratories throughout the United States.

 

Effective December 31, 2001, we executed a Strategic Marketing Alliance Agreement with Roche Diagnostics Corporation (“Roche”).  Pursuant to the Strategic Marketing Alliance Agreement, Roche agreed to advance $1 million to CareEvolve to fund CareEvolve’s ongoing operating expenses as approved by a six-man Steering Committee consisting of three Roche designees and our three designees. Roche agreed during the five-year term of the Agreement to provide certain of its managerial marketing personnel for training by Care Evolve and to cause these personnel to market the CareEvolve Services along with Roche services and products. In addition, Roche agreed to cause its sales personnel to exercise reasonable efforts to market and sell the CareEvolve Services. We agreed that we will cause our personnel and CareEvolve personnel to also exercise reasonable efforts to market and sell the CareEvolve Services. We have agreed to share any net after-tax income generated through the sale, licensing or commercialization of the CareEvolve Services during the term of the Strategic Marketing Alliance Agreement on a 50-50 basis with Roche. The Strategic Marketing Alliance Agreement can be terminated (a) at any time upon the mutual written agreement of the parties; (b) on the first or on any subsequent anniversary of the date of the Agreement by either party; (c)  by a non-breaching party in the event of a material breach by the other party; (d) by either party in the event of the insolvency of the other party; (e) by Roche if our vendor agreement with Med-Unite (which allows CareEvolve physician subscribers to access certain on-line Med-Unite services including on-line claims eligibility and claims processing) expires or is terminated for any reason; and (f) in the event of a Steering Committee Deadlock which can not be resolved. If Roche terminates the Agreement for any of the causes set forth in (c)  (d) or (e) above, or if we terminate the Agreement pursuant to (b) above effective during the first two years, or if either of us terminates the Agreement pursuant to (f) above within the first two years, Roche is entitled to be repaid an amount equal to all monies it advanced to CareEvolve less all CareEvolve operating expenses approved by the Steering Committee and paid prior to termination. In addition, in the event of any such termination, Roche shall be entitled to 50% of the net after tax income generated through sales, licensing or commercialization of the CareEvolve Services to Roche accounts until the later of five years after execution of the Agreement or two years after termination. In the event we terminate the Agreement pursuant to (b) above within the first two years, Roche is automatically granted an irrevocable, worldwide, perpetual royalty-free nonexclusive license to use the CareEvolve Services. Roche has also been granted an option during the term of the Agreement to purchase an up to 50% equity interest in CareEvolve from us at fair market value at the time of exercise of the option as well as a right of first refusal in connection with any proposed sale by us of CareEvolve. Roche has also been granted the option during the term of the Agreement to initiate negotiations to purchase a minority investment in us and we have agreed to negotiate in good faith if Roche initiates such negotiations. At the present time, there is no indication that Roche intends to exercise any such option.

 

Payors and Clients

 

We provide laboratory services to a range of healthcare providers. A “payor” is the party who pays for the tests while the “client” is the party that refers the tests to us. We may consider an organization that has a contract with us, such as a clinic or governmental agency, both a payor and a client. Some states, such as New York and New Jersey, prohibit us from billing physician clients. During fiscal year 2001, no single client accounted for more than 10% of our net revenues.

 

The following table reflects the current estimates of the breakdown of net revenue by payor for the twelve  months ended October 31, 1999, 2000, and 2001.

 

		Years Ended October 31,
		1999		2000		2001
Direct Patient Billing		14	%	12	%	8	%
Commercial Insurance		27	%	36	%	47	%
Professional Billing		34	%	24	%	24	%
Medicare		22	%	24	%	18	%
Medicaid		3	%	4	%	3	%
		100	%	100	%	100	%

 

Clients

 

Physicians who order clinical tests for their patients represent one of the primary sources of our testing volume. Fees invoiced to patients and third parties are based on our fee schedule, which may be subject to limitations on fees imposed by third-party payors. Medicare and Medicaid reimbursements are based on fee schedules set by governmental authorities.

 

Employers, Governmental Agencies

 

We provide laboratory services to governmental agencies and large employer groups. We believe we are the largest regional laboratory providing service to correctional facilities in the northeast. All of these clients are charged on a contractual basis.

 

Sales and Marketing

 

We employ 55 full and part-time sales and marketing representatives. All of our sales and marketing personnel operate in a dual capacity, as both marketing and client support representatives. This ensures that all of our salespersons are intimately involved with the client. We believe that this is unique in the industry and is extremely helpful in client retention, since it provides a strong connection between the physician and our staff.

 

Client Service Coordinators

 

We utilize the services of 25 full and part-time client service coordinators, all of whom are trained in medical and laboratory terminology. This staff is used as an interface with physicians and nurses and augments the client support provided by our sales force. They also report highly abnormal and life threatening results to the ordering physician immediately via telephone in order to provide speedy medical resolution to any patient problem.

 

Logistical Support

 

We employ 127 full and part-time couriers. They pick up patient specimens from physician offices, nursing homes, clinics and correctional facilities.

 

Strategic Growth Opportunities

 

In addition to increasing our core business through  internal growth and pursuing our strategy of increased utilization of our laboratory information through our PSIMedica business unit, we intend to target growth opportunities both inside and outside of our core laboratory business.

 

·                  Selective  Acquisitions: The clinical laboratory industry is still highly fragmented. Historically, acquisition has been one method that has fueled our growth. We will continue to look for acquisitions that can be integrated into our existing processing facility without maintaining duplicate facilities or which will provide us with entry into new product or geographic areas. This strategy will enable us to reduce costs and gain economies of scale from the elimination of redundant facilities and equipment and the reduction of personnel.

·                  Specialty Testing: We will continue to increase our penetration into the specialty testing market, especially genomics. The current annual value of gene-based testing in the United States is approximately one billion dollars. We believe that with our contract with Visible Genetics, we have positioned ourselves to take advantage of this market.

·                  Medical Information: Our medical information unit, PSIMedica, seeks to combine laboratory data with these other data elements so as to improve the quality and efficiency of healthcare.

 

Billing

 

Billing for laboratory services is extremely complicated. We must bill various payors, such as patients, Medicare, Medicaid, insurance companies and employer groups, all of which have different billing requirements. Compliance with applicable laws and regulations as well as internal compliance procedures adds complexity to this process.

 

Our bad debt expense is the result of issues that are not credit-related as is the case in most industries. It is due in most part to missing or incorrect billing information on our requisitions; this occurs because we depend on the healthcare provider to supply us with the information. We perform the tests and report the test results as requested on the requisition regardless of whether the demographic information is correct or even missing altogether. We then attempt to obtain any missing information and correct the billing information received from the healthcare provider. This adds to the complexity, slows the invoicing process, and generally increases the aging of our accounts receivable. When all issues are not resolved in a timely manner, the item is written-off to Bad Debt Expense. Other items such as pricing differences and payor disputes also complicate billing. Adjustments to receivables as a result of these types of matters are accounted for as revenue adjustments and are not written-off to Bad Debt Expense.

 

Competition

 

We compete with three types of providers in a highly fragmented and competitive industry: hospital laboratories, physician-office laboratories and other independent clinical laboratories. Our major competitors in the New York metropolitan area are: Quest Diagnostics and Laboratory Corporation of America. Although we are much smaller than these national laboratories, we compete successfully with them in our region because of the following factors:

 

·      Fewer layers of staff

·      A more responsive business atmosphere

·      Customized service

 

We believe our response to medical consultation is faster and more personalized than in the national laboratories. Our client service staff only deals with basic technical questions and those that have medical or scientific significance are referred directly to other senior scientists and medical staff.

 

Quality Assurance

 

Medical testing is essentially a process of communication and data transfer. In order to provide accurate and precise information to the physician, it is essential that we maintain a well structured and vigorous quality assurance program. Our goal is to continually improve this process. We hold the required Federal and State licenses necessary to permit our operation of a clinical laboratory at both  of our facilities in New Jersey and New York. We submit to vigorous proficiency tests (or surveys) in all tests that we perform. We are also subject to unannounced inspections from the various state licensing agencies.

 

Our laboratories are accredited by the College of American Pathologists (“CAP”). This accreditation includes on-site inspections and participation in the CAP proficiency testing program or an equivalent. CAP is an independent organization of board certified pathologists approved by the Center for Medicare  and Medicaid Services (“CMS”) to inspect clinical laboratories in order to determine compliance with the standards required by the Clinical Laboratory Improvement Amendments of 1988 (“CLIA-88")

 

Our Quality Assurance Committee, headed by a Quality Assurance Coordinator and composed of supervisors from all departments, meets daily to assess and evaluate the laboratory's quality.  Based on the information received from the committee, recommendations are made to correct conditions which have led to errors.  Management, department supervisors and members of the assurance committee continually monitor the laboratory's quality.  Depending on the test, two or three sets of Quality Control materials are run in each analytical assay to assure precision and accuracy.  Patient population statistics are evaluated each day.  Highly abnormal samples are repeated to assure their accuracy.

 

We believe that all of these procedures are necessary, not only in assuring a quality product, but also in maintaining Federal and state licensing.  These high standards of quality are an important factor in what we regard as our excellent rate of client retention.

 

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.  CMWMA mandates the sterilization of certain medical waste and a tracking system to insure disposal at an approved facility.  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.

 

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.  Although in the past, legislation has been enacted which reduced the permitted Medicare reimbursement for clinical laboratory services from previously authorized levels, none of the reductions enacted to date has had a material adverse effect on us. For many of the tests performed for Medicare beneficiaries or Medicaid recipients, laboratories are required to bill Medicare or Medicaid directly, and to accept Medicare or Medicaid reimbursement as payment in full.

 

The Clinton Administration, Congress and various Federal agencies have examined the rapid growth of Federal expenditures for clinical laboratory services, and the use by the major clinical laboratories of dual fee schedules ("client" fees charged to physicians, hospitals, institutions and companies with whom a laboratory deals on a bulk basis and which involve relatively low administrative costs, and "patient" fees charged to individual patients and third party payors, including Medicare, who generally require separate bills or claims for each patient encounter and which involve relatively high administrative costs).  The permitted Medicare reimbursement rate for clinical laboratory services has been reduced by the Federal government in a number of instances over the past several years to a present level equal to 74% of the national median of laboratory charges.  A number of proposals for legislation or regulation are under discussion which could have the effect of substantially reducing Medicare reimbursements to clinical laboratories through reduction of the present allowable percentage or through other means.  In addition, the structure and nature of Medicare reimbursement for laboratory services is also under discussion and 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. We are unable to predict, however, the extent to which any such actions will be taken.

 

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 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.  The quality standard and enforcement procedure regulations became effective on September 1, 1992, although certain personnel, quality control and proficiency testing requirements will be phased-in over a number of years.   Our laboratory completed its first CLIA inspection under CLIA-88 guidelines and received its certificate of compliance effective February 7, 1996.

 

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 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 (“HIPPA”), 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, 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 would be required to comply with either. Laboratories are required to submit a compliance plan to HHS by October 16, 2003. HHS will provide a model form for submitting the compliance plan.

 

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 cannot predict if some of our practices may be interpreted as violating these statutes and regulations.

 

Insurance

 

We maintain professional liability insurance of $3,000,000 per occurrence, $3,000,000 in the aggregate. In addition, we maintain excess commercial insurance of $2,000,000 per occurrence and $3,000,000 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. Similarly, although we believe that we will be able to continue to obtain adequate insurance coverage, due to the events of September 11, 2001, we cannot assure that we will be able to do so at acceptable costs.

 

Employees

 

At October 31, 2001, we had 586 full-time employees and 242 part-time employees.  This includes:

 

•                  three executive officers

•                  Vice President of Technical Operations

•                  Marketing Vice-President,

•                  142 full-time and 44 part-time technicians, and/or technologists (including physicians, pathologists and Ph.D.'s)

•      231 full and part-time semi-technical employees

•      54 full and part-time marketing representatives

•      219  full and part-time clerical employees

•      127 full and part-time drivers.

•      2 Right Body Foods employees

•      4 CareEvolve.com employees

 

None of our employees are represented by a labor union. We regard relations with our employees as satisfactory.

 

Special Note Regarding Forward-Looking Statements

 

This Annual Report on Form 10-K includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in this Report, including without limitation, statements regarding our financial position, business strategy, products, products under development, markets, budgets and plans and objectives of management for future operations, are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations are disclosed in statements set forth under “Cautionary Statements” and elsewhere in this Report, including, without limitation, in conjunction with the forward-looking statements included in this Report. All subsequent written and oral forward-looking statements attributable to us, or persons on our behalf, are expressly qualified in their entirety by the Cautionary Statements and such other statements.

 

Cautionary Statements

 

In addition to the other information in this Annual Report on form 10-K, the following factors should be considered carefully in evaluating us. See also “Special Note Regarding Forward-Looking Statements.”

 

Risks Associated with Growth:

 

Over the last several years, we have experienced substantial growth and have expanded our operational capabilities. 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 it 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.

 

We are currently being represented by counsel in connection with certain overpayments purportedly made to us by Medicare during 1998 and prior. Our counsel has advised us, based on his review of the documents, that many of the claims Medicare thought were duplicate payments were not in fact duplicates. Counsel also advised that in view of the complexity of this issue, he believes the final overpayment would be an amount negotiated between us and Medicare. We have reserved $150,000 on our financial statements for this matter.

 

In addition, our laboratory operations are required to be licensed or certified under CLIA-88, CMS 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

 

The public and the federal government continue to focus attention on reforming the healthcare system in the United States. 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.

 

Uncertainties Related to Accounts Receivable

 

All of our services are rendered on a list fee for services. We therefore 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 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 an additional provision. Such additional provision may 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 significantly greater financial resources 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

 

We fund our operations through a revolving loan agreement (“The “Loan Agreement”) with PNC Bank. At October 31, 2001, we were utilizing approximately $12,600,000 of this credit facility. The loan has been extended on a number of occasions and is currently due on September 30, 2004. The Loan Agreement requires us to be in compliance with various affirmative and negative covenants concerning our operations and financial condition. Although we have been able to obtain waivers from PNC Bank in the past for failure to meet certain of the covenants under the Loan Agreement, the availability of any future required waivers cannot be assured. Any failure on our part to obtain a renewal or an extension of the loan, when due, or to obtain a waiver from PNC Bank, if required, would have a material adverse effect on our business and financial condition.

 

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 an effect on the market price of our Common Stock. In addition, any announcement of a pending legal action could have a negative impact on the market price of our Common Stock regardless of the outcome of any such matter.

 

Item 2 - Properties

 

Our executive offices and New Jersey processing facility occupy approximately 56,000 square feet of leased space in two one-story brick facilities at 481-487 Edward H. Ross Drive, Elmwood Park, New Jersey.  The lease for these facilities, which expires in February 2004, provides for a monthly rental of $31,391. Our New York processing facility occupies approximately 11,000 square feet of leased space in a two-story brick facility at 140 Route 303, Valley Cottage, New York. The lease for this facility, which expires in April 2002, provides for a monthly rental of $12,177. Our testing equipment maintained at both of our processing facilities is in good condition and in working order.  We believe that these facilities, as presently equipped, have the capacity to generate up to approximately $120,000,000 in net revenues based on the type of testing now being performed by us. We maintain fire, theft and liability insurance coverage for our facilities in what we believes are adequate amounts.  We also lease 44 additional relatively small draw stations throughout the New York metropolitan area to collect specimens from physician-referred patients for testing at both of our processing facilities.

 

Item 3 - Legal Proceedings

 

On December 19, 2000, we and our wholly owned BRLI No.1 Acquisition Corp. subsidiary, as plaintiffs, instituted a lawsuit in the United States District Court for the District of New Jersey against Rebecca Klafter, her husband Mitchell Klafter and Right Body Foods, Inc. (“RBF”) as defendants. In our complaint, we alleged that in connection with our December 1999 purchase of the health food business of RBF and the simultaneous employment of Rebecca Klafter as the Director of the business purchased, the defendants made material misrepresentations and misleading statements to the plaintiffs regarding the business being purchased.  We are seeking rescission of the acquisition and all of the agreements entered into in connection therewith, together with restitution, with interest, of all moneys paid and consideration given, including shares of our Common Stock, to any of the defendants in connection therewith, or in the alternative, damages in excess of $1 million plus interest and costs.

 

The defendants filed an answer and counterclaims on January 22, 2001 naming us as well as our chief executive officer and our chief operating officer as counterclaim defendants. In addition to denying the substantive allegations of the complaint and stating various affirmative defenses, the defendants demanded that Rebecca Klafter be rehired, that all payments required to be made to her under her agreements with the plaintiffs be made and that the plaintiffs be required to remove all restrictions against her ability to sell the shares received by her in the acquisition. In addition, the defendants asserted a claim of sexual harassment on behalf of Rebecca Klafter against us and BRLI No.1 Acquisition Corp. and alleged that the two officers aided and abetted the two corporations in discriminating and in retaliating against Ms. Klafter. In addition to seeking the removal of restrictions against the shares, the defendants are seeking an indeterminate amount of compensatory damages including back pay, “front” pay, bonuses, incentive pay and overtime, punitive damages, interest and costs.

 

The litigation is in its initial stages so that no prediction can be made as to the probable outcome of this lawsuit.

 

Item 4 - Submission of Matters to a Vote of Security Holders

 

Our Annual Meeting of Stockholders was held on October 26, 2001. At the meeting, the following two individuals were elected by the following vote to serve as Class I directors, each for a term of three years and until his successor is duly elected and qualified.

 

 

The other directors of the Company whose term continued are as follows: