**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C.  20549**

 

**FORM 10-K**

 

**ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

For the fiscal year ended  October 31, 2003

 

Commission file number 0-15266

 

BIO-REFERENCE LABORATORIES, INC.

481 Edward H. Ross Drive, ElmwoodPark, New Jersey  07407201-791-2600

 

| New Jersey               |   | 22-2405059                            |
|--------------------------|--------|---------------------------------------|
| (State of incorporation) |   | (I.R.S. Employer  Identification No.) |

 

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

 

Securities registered pursuant toSection 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) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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 ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of the registrant’s knowledge,in definitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or in any amendment to this Form 10-K.           o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes o   No  ý

 

On January 16, 2004, the aggregatemarket value of the voting stock of Bio-Reference Laboratories, Inc.(consisting of Common Stock, $.01 par value and Series A Senior PreferredStock, $.10 par value) held by non-affiliates of the registrant wasapproximately $148,300,000 based upon the last sales price for such CommonStock on said date as reported on the NASDAQ National Market System.  On such date, there were 11,451,023 sharesof Common Stock of the registrant outstanding.

 

 

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**PART I**

 

Item. 1.Business

 

Overview

 

We believe that we are the largest independent regional clinicallaboratory servicing the greater New York metropolitan area. We offer acomprehensive list of laboratory testing services utilized by healthcareproviders in the detection, diagnosis, evaluation, monitoring and treatment ofdiseases.

 

We currently process over 2 million requisitions each year. Arequisition form accompanies a patient’s specimen. It indicates the tests to beperformed and the party to be invoiced for the tests. Our clients includedoctors, employers, clinics and governmental units. We have a network of over 50patient service centers for collection of patient specimens.

 

In addition to our clinical testing operations, we operate a clinicalknowledge management service through our PSIMedica business unit.  This system uses customer data fromlaboratory results, pharmaceutical data, claims data and other data sources toprovide administrative and clinical decision support systems which enable ourcustomers to provide quality and efficient healthcare to their populations.

 

We also operate a web-based connectivity portal solution forlaboratories and physicians through our CareEvolve subsidiary. This whollyowned subsidiary is operated in conjunction with Roche Diagnostics(“Roche”).  We use this portal ourselvesto provide laboratory ordering and results to our physician customers.  Together with Roche, we are marketing thisconnectivity solution to other laboratories throughout the country.

 

We are a New Jersey corporation. We may at times refer to ourselves andour subsidiaries as the “Company.” We are the successor to Med-Mobile, Inc., aNew Jersey corporation that was organized in 1981. Our executive offices arelocated 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 testinggenerates approximately $35-40 billion in annual revenue.  Nearly all laboratory tests are performed byone of three types of laboratories: hospital laboratories, physician officelaboratories or independent clinical laboratories. We believe approximately 55%of the clinical laboratory tests done in the United States were performed in ahospital laboratory, approximately 29% performed by an independent clinicallaboratory and the balance in a physician office or other laboratory.

 

During the last few years, the fundamentals of the industry have beenimproving. In the cost containment era of the 1990s, the industry wasnegatively impacted by the rapid growth of managed care, stringent governmentregulation and investigations into fraud and abuse. These factors led torevenue and profit declines and industry consolidations, especially amongcommercial clinical laboratories. As a result, fewer but larger clinicallaboratories have emerged with greater economies of scale, more effectivecompliance with government billing regulation and other laws and a betterapproach to pricing their services. These changes resulted in improvedprofitability.  In addition, new andemerging technologies continue to provide greater testing opportunities forclinical laboratories.

 

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

 

•                                          Agingof the population of the United States;

•                                          Awarenessby patients of the value of laboratory tests;

•                                          Decreasein the cost of tests;

•                                          Decreasein the influence of managed care organizations on the ordering patterns oftheir physicians.

•                                          Developmentof sophisticated and specialized tests for early detection of disease anddisease management;

•                                          Diagnosisand monitoring of infectious diseases such as AIDS and Hepatitis C;

 

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•                                          Earlydetection and prevention as a means of reducing healthcare costs;

•                                          Employersponsored wellness programs;

•                                          Researchand development in genomics.

 

Business Strategy

 

We are a regional clinical laboratory with subspecialty testingcapabilities. As a regional laboratory, we service the New York metropolitanarea, and currently conduct business in most New York State counties, as wellas in most of New Jersey and some parts of Pennsylvania and Connecticut. Weprimarily offer laboratory services to physician offices in these areas with aninfrastructure that includes a comprehensive logistical department, extensivephlebotomy services and phlebotomy draw stations scattered around ourgeographic area. We have also developed expertise in certain testing areas withspecific emphasis in cancer pathology and diagnostics as well as moleculardiagnostics. These services are marketed as a business unit, called GenPath,which services customers outside of routine physician office testing. We havedeveloped certain specialized markets, such as in the areas of correctionalhealth, substance abuse testing, fertility testing and molecular diagnostics.Testing in these areas also may be supported outside of physician offices.

 

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

 

We believe that our large marketing staff and strong infrastructurewithin our designated area can be leveraged to bring new technologies tophysicians and healthcare providers. Over the past year, our volume of testingin the area of molecular diagnostics has increased.  We believe that laboratory data has great value in managing thehealthcare of a population, but can only be properly utilized when combinedwith medical claims and pharmacy data. Our medical information unit, PSIMedica,seeks to combine laboratory data with these other data elements in order toprovide information analytics that will help to improve the quality andefficiency of healthcare. We seek to continue our strong growth not onlythrough our marketing organization, new technologies and superior service, butby providing value added analytics in conjunction with laboratory results.

 

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

 

•                                          Capitalizeon our position within the clinical market:

•                                          Leadin the providing of medical information:

•                                          Providethe highest quality service:

•                                          Pursuestrategic growth opportunities.

 

Services

 

The clinical laboratory testing business consists of routine testingand esoteric testing. Routine testing generates approximately 72% and esoterictesting generates approximately 28% of our net revenues. The net revenuegenerated by our PSIMedica business unit and our subsidiaries has been minimalto date.

 

Routine Testing

 

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

 

•                                          BloodCell Counts;

•                                          Cholesterollevels;

•                                          HIV-relatedtests;

•                                          PapSmears;

•                                          Pregnancy;

•                                          SubstanceAbuse

•                                          Urinalysis;

 

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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 mostroutine tests within 24 hours. Tests results are delivered via driver orelectronically.

 

Esoteric Tests

 

We also perform esoteric tests that require sophisticated equipment andmaterials, highly skilled personnel, professional attention and are orderedless frequently than routine tests. These tests are generally priced higherthan 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)

 

Medical Information

 

Our PSIMedica business unit is based on a Clinical Knowledge Management(“CKM”) System that uses data derived from various disparate sources to provideboth administrative and clinical analysis of a population. The source dataconsists of enrollment (demographic) data, claims data, pharmacy data,laboratory results data, and any other data that may be available. The systemuses sophisticated algorithms to cleanse and configure the data so thatanalysis can be comprehensive and meaningful. The data is maintained onmultiple levels of analysis enabling review of data from the global level tothe granular transactional detail.  Thesystem includes a base set of queries that provide basic functionality andallows on-line real-time ad hoc query capability enabling the user to customizeanalysis to the best needs of the organization using the system. In addition tothe basic queries provided by the system, PSIMedica Quality Indicators (“PQI”)provide comprehensive, disease state oriented queries that disclose the qualityand efficiency of the care and service. These indicators have been designed toprovide the customer with standards and outcome predictors based on a medicalstandards basis.  We are using PSIMedicato market value-added clinical laboratory services to bulk purchasers ofclinical laboratory solutions, as well as marketing our PSIMedica programs tobusinesses such as Health Plans, Integrated Delivery Networks, DiseaseManagement Companies, Insurers, Clinical Trial Companies and other healthcareproviders that most benefit from the ability of the system to combine bothclinical and administrative analysis.

 

Other Products

 

CareEvolve, our wholly owned subsidiary, is a physician-basedconnectivity portal.  This systemprovides a complex, sophisticated system for ordering laboratory services anddelivering laboratory results.  Thesystem is designed to be physician-centric and to provide a highly flexible,scalable, comprehensive desktop solution for physicians to manage theirday-to-day practice and personal needs, as well as to handle their clinicallaboratory ordering and reporting.  Thisproduct has been designed to work as a platform with plug and play capabilitythat can easily be used by other laboratories that also need a web-basedsolution for their physician customers. We have entered into a Strategic Marketing Agreement with RocheDiagnostics to operate a Joint Venture for the sale and distribution ofCareEvolve services to other laboratories throughout the country.  Under the terms of the Strategic MarketingAgreement, Roche supports the marketing of CareEvolve to clinical laboratoriesthrough its extensive diagnostic marketing force.  The joint venture is managed by a Steering Committee thatconsists of executives from both companies. Roche holds an option exercisableto purchase up to a 50% equity interest in this wholly owned subsidiary.

 

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 partythat refers the tests to us. We may consider an organization that

 

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has a contract with us, such as a clinic or governmental agency, both apayor and a client. Some states, such as New York and New Jersey, prohibit usfrom billing physician clients. During fiscal year 2003, no single clientaccounted for more than 10% of our net revenues.

 

The following table reflects the current estimates of the breakdown ofnet revenue by payor for the twelve months ended October 31, 2001, 2002,and 2003.

 
|                   |   | **Years  Ended October 31,** |   |
|------------------------|--------|-----------------------------------|--------|
|                   |   | **2001**                          |   | **2002** |   | **2003** |   |
|                   |   |                              |   |   |   |   |   |
| Direct Patient Billing |   | 12                                | %      | 9 | % | 7 | % |
| Commercial Insurance   |   | 37                                | %      | 37 | % | 43 | % |
| Professional Billing   |   | 23                                | %      | 26 | % | 20 | % |
| Medicare               |   | 24                                | %      | 25 | % | 27 | % |
| Medicaid               |   | 4                                 | %      | 3 | % | 3 | % |
|                   |   | 100                               | %      | 100 | % | 100 | % |

 

Clients

 

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

 

Employers, Governmental Agencies

 

We provide laboratory services to governmental agencies and largeemployer groups. We believe we are the largest regional laboratory providingservice to correctional facilities in the Northeastern United States. All ofthese clients are charged on a contractual basis.

 

Sales and Marketing

 

We employ full and part-time sales and marketing representatives. Allof our sales and marketing personnel operate in a dual capacity, as bothmarketing and client support representatives. This ensures that all of oursalespersons are intimately involved with the client. We believe that this isunique in the industry and is extremely helpful in client retention, since itprovides a strong connection between the physician and our staff.

 

Client Service Coordinators

 

We utilize the services of full and part-time client servicecoordinators at our Elmwood Park facility, all of whom are trained in medicaland laboratory terminology. This staff is used as an interface with physiciansand nurses and augments the client support provided by our sales force. Theyalso report highly abnormal and life threatening results to the orderingphysician immediately via telephone in order to provide speedy medicalresolution to any patient problem.

 

Logistical Support

 

We employ full and part-time couriers. They pick up patient specimensfrom and deliver printed reports to physician offices, nursing homes, clinicsand correctional facilities.

 

Strategic Growth Opportunities

 

In addition to increasing our core business through internal growth andpursuing our strategy of seeking opportunities with bulk purchasers oflaboratory services through our PSIMedica business unit, we intend to targetgrowth opportunities both inside and outside of our core laboratory business.

 

•                  SelectiveAcquisitions:   The clinical laboratoryindustry is still highly fragmented. Historically, acquisition has been onemethod that has fueled our growth. We intend to continue to look foracquisitions that can be integrated into our existing processing facility

 

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without maintaining duplicate facilities or which will provide us withentry into new product or geographic areas. This strategy, if successfullyimplemented,  will enable us to reducecosts and gain economies of scale from the elimination of redundant facilitiesand equipment and the reduction of personnel.

•                  SpecialtyTesting: We also intend to continue to increase our penetration into thespecialty testing market, especially genomics. The current annual value ofgene-based testing in the United States is approximately one billion dollars.We believe that we have positioned ourselves to take advantage of this market.

•                  MedicalInformation: Our medical information unit, PSIMedica, seeks to combinelaboratory data with these other data elements so as to improve the quality andefficiency of healthcare.

 

Billing

 

Billing for laboratory services is extremely complicated. We must billvarious payors, such as patients, Medicare, Medicaid, insurance companies andemployer groups, all of which have different billing requirements. Compliancewith applicable laws and regulations as well as internal compliance proceduresadds complexity to this process.

 

Our bad debt expense is the result of issues that are notcredit-related as is the case in most industries. It is due in most part tomissing or incorrect billing information on our requisitions; this occurs becausewe depend on the healthcare provider to supply us with the information. Weperform the tests and report the test results as requested on the requisitionregardless of whether the demographic information is correct or even missingaltogether. We then attempt to obtain any missing information and correct thebilling information received from the healthcare provider. This adds to thecomplexity, slows the invoicing process, and generally increases the aging ofour 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 pricingdifferences and payor disputes also complicate billing. Adjustments toreceivables as a result of these types of matters are accounted for as revenueadjustments and are not written-off to Bad Debt Expense.

 

Competition

 

We compete with three types of providers in a highly fragmented andcompetitive industry: hospital laboratories, physician-office laboratories andother independent clinical laboratories. Our major competitors in the New Yorkmetropolitan area are Quest Diagnostics and Laboratory Corporation of America.Although we are much smaller than these national laboratories, we believe thatwe compete successfully with them in our region because of the followingfactors:

 

•                  Fewer layers ofstaff

•                  A moreresponsive business atmosphere

•                  Customizedservice

 

We believe our responses to medical consultation are faster and morepersonalized than those of the national laboratories. Our client service staffonly deals with basic technical questions and those that have medical orscientific significance are referred directly to other senior scientists andmedical staff.

 

Quality Assurance

 

Medical testing is essentially a process of communication and datatransfer. In order to provide accurate and precise information to thephysician, it is essential that we maintain a well structured and vigorousquality assurance program. Our goal is to continually improve this process. Wehold the required Federal and State licenses necessary to permit our operationof 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 weperform. We are also subject to unannounced inspections from the various statelicensing agencies.

 

Our laboratories are accredited by the College of American Pathologists(“CAP”). This accreditation includes on-site inspections and participation inthe CAP proficiency testing program or an equivalent. CAP is an independentorganization of board certified pathologists approved by the Center forMedicare and Medicaid Services (“CMS”) to inspect clinical laboratories inorder to determine

 

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compliance with the standards required by the Clinical LaboratoryImprovement Amendments of 1988 (“CLIA-88”)

 

Our Quality Assurance Committee, headed by a Quality AssuranceCoordinator and composed of supervisors from all departments, meets daily toassess and evaluate the laboratory’s quality. Based on the information received from the committee, recommendationsare made to correct conditions which have led to errors.  Management, department supervisors andmembers of the assurance committee continually monitor the laboratory’squality.  Depending on the test, two orthree levels of Quality Control materials are run in each analytical assay toassure precision and accuracy.  Patientpopulation 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 inassuring a quality product, but also in maintaining Federal and statelicensing.  These high standards ofquality are an important factor in what we regard as our excellent rate ofclient retention.

 

Regulation of Clinical Laboratory Operations

 

The clinical laboratory industry is highly regulated and subjected tosignificant Federal and state regulation. This includes inspections and auditsby governmental agencies. These agencies may impose fines, criminal penalties,or other enforcement actions to enforce laws and regulations. These penaltiescan include revocation of a clinical laboratory’s license. Changes inregulations may increase the cost of testing or processing claims.

 

Waste management is subject to Federal and state regulations governingthe transportation and disposal of medical waste including bodily fluids.  Federal regulations require licensure ofinterstate transporters of medical waste.  In New Jersey, we are subject to the Comprehensive Medical WasteManagement Act, (“CMWMA”), which requires us to register as a generator ofspecial medical waste.  CMWMA mandatesthe sterilization of certain medical waste and a tracking system to insuredisposal at an approved facility.  Allof our medical waste is disposed of by a licensed interstate hauler.  The hauler provides a manifest of thedisposition of the waste products as well as a certificate of incinerationwhich is retained by us. These records are audited by the State of New Jerseyon a yearly basis.

 

Regulation of Reimbursement for Laboratory Services

 

Containment of health-care costs, including reimbursement for clinicallaboratory services, has been a focus of ongoing governmental activity.  Omnibus budget reconciliation legislation,designed to “reconcile” existing laws with reductions and reimbursementsrequired by enactment of a Congressional budget can adversely affect clinicallaboratories by reducing Medicare reimbursement for laboratory services.  Although in the past, legislation has beenenacted which reduced the permitted Medicare reimbursement for clinicallaboratory services from previously authorized levels, none of the reductionsenacted to date has had a material adverse effect on us. For most of the testsperformed for Medicare beneficiaries or Medicaid recipients, laboratories arerequired to bill Medicare or Medicaid directly, and to accept Medicare orMedicaid reimbursement as payment in full.

 

The current administration, Congress and various Federal agencies haveexamined the rapid growth of Federal expenditures for clinical laboratoryservices, and the use by the major clinical laboratories of dual fee schedules(“client” fees charged to physicians, hospitals, institutions and companies withwhom a laboratory deals on a bulk basis and which involve relatively lowadministrative costs, and “patient” fees charged to individual patients andthird party payors, including Medicare, who generally require separate bills orclaims for each patient encounter and which involve relatively highadministrative costs).  The permittedMedicare reimbursement rate for clinical laboratory services has been reducedby the Federal government in a number of instances over the past several yearsto a present level equal to 74% of the national median of laboratorycharges.  A number of proposals forlegislation or regulation are under discussion which could have the effect ofsubstantially reducing Medicare reimbursements to clinical laboratories throughreduction of the present allowable percentage or through other means.  In addition, the structure and nature ofMedicare reimbursement for laboratory services is also under discussion and weare unable to predict the outcome of these discussions. Depending upon the natureof congressional and/or regulatory action, if any, which is taken and thecontent of legislation, if any, which is adopted, we could experience asignificant decrease in revenues from Medicare and

 

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Medicaid, which could have a material adverse effect on us. We areunable to predict, however, the extent to which any such actions will be taken.

 

CLIA-88

 

CLIA-88 extended Federal licensing requirements to all clinicallaboratories (regardless of the location, size or type of laboratory),including those operated by physicians in their offices, based on thecomplexity 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 acytotechnologist may review in a twenty-four hour period.  CLIA-88 also established a more stringentproficiency testing program for laboratories and increased the range andseverity of sanctions for violating Federal licensing requirements.  A number of these provisions, includingthose that imposed stricter cytology standards and increased proficiencytesting, have been implemented by regulations applicable only to laboratoriessubject to Medicare certification. On February 28, 1992, HHS publishedthree sets of regulations implementing CLIA-88, including quality standardregulations establishing Federal quality standards for all clinical laboratories;application and user fee regulations applicable to most laboratories in theUnited States which became effective on March 30 1993; and enforcementprocedure regulations applicable to laboratories that are found not to meetCLIA-88 requirements.  The qualitystandard regulations establish varying levels of regulatory scrutiny dependingupon the complexity of testing performed. Under these regulations, a laboratory that performs only one or more ofseventy eight routine “waived” tests may apply for a waiver from mostrequirements of CLIA-88.  We believethat most tests performed by physician office laboratories will fall intoeither the “waived” or the “moderately complex” category.  The latter category applies to simple orautomated tests and generally permits existing personnel in physicians’ officesto continue to perform testing under the implementation of systems that insurethe integrity and accurate reporting of results, establishment of qualitycontrol systems, proficiency testing by approved agencies, and biannualinspection.  Our testing is often muchmore complex and as a result, we are subject to full compliance with CLIA-88.The quality standard and enforcement procedure regulations became effective onSeptember 1, 1992, most personnel, quality control and proficiency testingrequirements have been implemented; the remainder will be phased in over anumber of years.   Our laboratorycompleted its first CLIA inspection under CLIA-88 guidelines and received itscertificate of compliance effective February 7, 1996.

 

Compliance Program

 

The Office of Inspector General has published a Model ComplianceProgram for the clinical laboratory industry. This is a voluntary program forlaboratories to demonstrate to the Federal government that they are responsibleproviders. We have implemented a voluntary compliance program adhering to thestandards set forth in the Model Compliance Program.

 

Confidentiality of Health Information

 

Pursuant to the Health Insurance Portability and Accountability Act of1996 (“HIPAA”), on December 28, 2000, the Secretary of HHS issued finalregulations that would establish comprehensive federal standards with respectto the use and disclosure of protected health information by a health plan,healthcare provider or healthcare data clearinghouse. The regulations establisha regulatory framework on various subject matter, including:

 

•                  Thecircumstances under which disclosures and uses of protected health informationrequire the patient’s consent, authorization or no patient consent orauthorization.

•                  The content ofnotices of privacy practices for protected health data.

•                  Patients’ rightsto access, amend and receive an accounting of the disclosures and uses ofprotected health information.

•                  Administrative,technical and physical safeguards required for that use or for disclosure ofprotected health data.

 

These regulations establish a “minimum” and would default to morestringent state laws. Therefore, we are required to comply with both sets ofstandards. Laboratories were required to submit a compliance plan to HHS byOctober 16, 2003.  We have filedour application for a one year extension for compliance with the TransactionData Set Regulations and intend to file our compliance plan during

 

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the extension period in accordance with the model form provided by HHS.HIPAA provides for significant fines as well as substantial criminal penaltiesfor violations of the Act.

 

Fraud and Abuse Regulations

 

Medicare and Medicaid anti-kickback laws prohibit clinical laboratoriesfrom making payments or furnishing other benefits to influence the referral oftests billed to federal programs. Federal enforcement agencies (including boththe Federal Bureau of Investigation and the Office of the Inspector General)liberally interpret and aggressively enforce statutory fraud and abuseprovisions of these anti-kickback statutes. According to public statements madeby 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 beeninterpreted in the courts.  We believewe operate lawfully within these statutes; however, we cannot predict if someof our practices may be interpreted as violating these statutes andregulations.

 

Insurance

 

We maintain professional liability insurance of $3,000,000 peroccurrence, $3,000,000 in the aggregate. In addition, we maintain excesscommercial insurance of $2,000,000 per occurrence and $3,000,000 in theaggregate. We believe that our present insurance coverage is sufficient tocover currently estimated exposures, but we cannot assure that we will notincur liabilities in excess of the policy limits.  In addition, although we believe that we will be able to continueto obtain adequate insurance coverage, we cannot assure that we will be able todo so at acceptable costs.

 

Employees

 

At October 31, 2003, we had 720 full-time and 302 part-timeemployees serving in executive positions, as technicians and technologists (includingphysicians, pathologists and PhDs), in marketing and as drivers and inbookkeeping, clerical and administrative positions. None of our employees arerepresented by a labor union. We regard relations with our employees assatisfactory.

 

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, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended. All statements other than statements of historical fact included inthis Report, including without limitation, statements regarding our financialposition, business strategy, products, products under development, markets,budgets and plans and objectives of management for future operations, areforward-looking statements. Although we believe that the expectations reflectedin such forward-looking statements are reasonable, we can give no assurancethat such expectations will prove to have been correct. Important factors thatcould cause actual results to differ materially from our expectations aredisclosed in statements set forth under “Cautionary Statements” herein andelsewhere in this Report, including, without limitation, in conjunction withthe forward-looking statements included in this Report. All subsequent writtenand oral forward-looking statements attributable to us, or persons on ourbehalf, are expressly qualified in their entirety by the Cautionary Statementsand such other statements.

 

Cautionary Statements

 

In addition to the other information in this Annual Report on Form10-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 andhave expanded our operational capabilities. We intend to develop further andexpand both our core laboratory business and other products. This growth andexpansion has placed, and will continue to place, a significant strain on ourresources. We cannot assure that we will be able to successfully manage acontinuation of the rate of growth similar to that which we have experienced inthe past, should it occur.

 

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Fluctuations in Operating Results:

 

Our quarterly and annual operating results can be affected by a widevariety of factors, many of which are outside of our control and which have inthe past and could in the future materially and adversely affect our operatingresults. These factors include the quantities and timing of specimens received,pricing pressures, reimbursement changes, availability and cost of diagnosticsupplies, cost of logistic and delivery systems, changes in product mix,retention and expansion of our marketing staff, timing of payments fromgovernmental agencies and third-party payors and the effect of adverse weatherconditions. We rely principally upon our internal logistic group for pick-upand delivery of specimens. However, as we shift our product mix we have begunto rely on Federal Express, UPS and other such providers for this service. Anydisruption in this service, as occurred on September 11, 2001 when theNational Airspace System (“NAS”) was shut down for a week, could have amaterial 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 toextensive and rapidly changing federal, state and local laws and regulationsgoverning licensure, billing practices, financial relationships, referrals,conduct of operations, purchase of existing businesses and other aspects of ourbusiness. We cannot predict the timing or impact of any changes in these lawsand regulations or their interpretations by regulatory bodies, and we cannotassure that these changes will not have a material adverse effect on us.

 

Current federal laws governing federal healthcare programs, as well assome state laws, regulate certain aspects of the relationship betweenhealthcare providers, including us, and their referral sources. The FederalAnti-Kickback Law and the Stark Law generally prohibit providers and othersfrom soliciting, offering, receiving or paying, directly or indirectly, anymonies in return for either making a referral for a service or item orpurchasing, ordering or leasing a service or item, and prohibits physicians frommaking such referrals to entities in which they have an investment interest orwith which they have a compensation arrangement. Exceptions to these laws arelimited. Violations are punishable by disallowance of claims, civil monetary orcriminal penalties and or exclusion from Medicare. Government authorities (bothfederal and state) have become more aggressive in examining laboratory billingpractices, and in seeking repayments and even penalties based on how theservices were billed, regardless of whether the carriers had furnished clearguidance.

 

At November 1, 1998, we were being represented by counsel inconnection with various reviews being conducted by our Medicare carrier. Onereview involved overpayments that occur in the normal course of business.  We remitted approximately $75,000 toMedicare in connection with this matter. At October 31, 2002, we had established a reserve of $154,000 onour financial statements for the remaining liability.  In January 2003, Medicare determined that the remainingoverpayment was $78,684 and interest on this amount was $2,392.  We remitted the total amount of $81,076 toMedicare in January 2003, bringing the matter to a close.

 

In addition, our laboratory operations are required to be licensed orcertified under CLIA-88, CMS and various State and local laws. We are alsosubject to federal and state laws relating to the handling and disposal ofmedical waste and radioactive materials, as well as the safety and health oflaboratory employees. Although we seek to structure our practices to complywith these laws and regulations, no assurances can be given regardingcompliance in any given situation. The possible sanctions for failure to complywith these laws and regulations may include the denial to conduct business,significant fines and criminal penalties. Any significant fine or criminalpenalty could have a material adverse effect on our financial condition. Anyexclusion or suspension from participation in a CMS program, any loss oflicensure or accreditation or the inability to obtain the required licensewould 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 partypayors are constantly negotiating prices with the goal

 

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of lowering their costs, which may result in lower profit margins forus. Reimbursement rates have been established for most, but not every service.We cannot collect from third party payors for services that these payors havenot approved for reimbursement. As is common with all laboratories, there is acertain amount of variability with respect to reimbursement among third partypayors. Furthermore, third party payors have, on occasion ceased reimbursementswhen certain tests are ordered for patients with certain diagnoses whilemaintaining reimbursement when those tests are ordered for other diagnosesdeemed appropriate by the carrier. In addition, Medicare or Medicaid mayretroactively audit its payments to us and may determine that certain paymentsmust be returned.

 

Potential Healthcare Reform

 

The public and the federal government continue to focus attention on reformingthe healthcare system in the United States. Several legislative proposals havebeen introduced in Congress and state legislatures in recent years that wouldeffect major reforms of the healthcare systems. In addition, CMS has made anumber of proposals regarding the payment and coverage of laboratory servicesincluding the development of national coverage policies. Because of theuncertainties in regard to the nature, timing and extent of any suchreimbursement changes, audits and reform initiatives, we are unable to predictthe effect of these changes on us.

 

Insurance

 

Although we believe that our present insurance coverage is sufficientto cover currently estimated exposures, we cannot assure that we will not incurliabilities in excess of the policy limits. In addition, although we believe that we will be able to continue toobtain adequate insurance coverage, we cannot assure that we will be able to doso at acceptable costs.

 

Uncertainties Related to Accounts Receivable

 

All of our services are rendered on a list fee for services. Wetherefore assume the financial risk related to collection of these receivablessuch as:

 

•                  Delays attendantto reimbursement by third party payors

•                  Difficulties ingathering complete and accurate billing information

•                  Inability tocollect accounts

•                  Long collectioncycles

 

There have been times when our accounts receivable have increased at agreater rate than revenue growth and, therefore, has adversely affected ourcash from operations. We have taken steps to implement systems and processingchanges intended to improve billing procedures and related collection results.We believe that we have made progress by reorganizing our accounts receivableand billing functions and that our allowance for doubtful accounts is adequate.However, we cannot assure that our ongoing assessment of accounts receivablewill not result in the need for additional provisions. Such additionalprovisions, if implemented, could have a material adverse effect on ouroperating results.

 

Competition

 

We operate in a business which is characterized by intense competition.Our major competitors in the New York metropolitan area, Quest Diagnostics andLaboratory Corporation of America, are large national laboratories whichpossess greater name recognition, larger customer bases and significantlygreater financial resources and employ substantially more personnel than we do.Many of our competitors have long established relationships. We cannot giveassurances that we will be able to compete successfully with such entities inthe future. Our ability to attract and retain sales representatives andmanagement may also affect our ability to compete in this marketplace.

 

Dependence on Bank Financing

 

We fund our operations through a line of credit under a revolving loanagreement (the “Loan Agreement”) with PNC Bank.  At October 31, 2003, we were utilizing approximately$8,700,000 of the credit line.  Thecredit facility has been increased and extended on a number of occasions and iscurrently due on September 30, 2004. Borrowings under the credit line are collateralized by substantially allof

 

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our assets as well as through the assignment to PNC Bank of a$4,000,000 face amount insurance policy on the life of the president of ourcompany.  The Loan Agreement requires usto be in compliance with various affirmative and negative covenants concerningour operations and financial condition. Among other provisions, it imposes requirements for maintaining fixedcharge coverage, various financial ratios and certain insurance coverage.Although we have been able to obtain waivers from PNC Bank in the past forfailure to meet certain of the covenants under the Loan Agreement, theavailability of any future required waivers cannot be assured. Any failure onour part to obtain a renewal or an extension of the loan, when due, or toobtain a waiver from PNC Bank, if required, would have a material adverseeffect on our business and financial condition.

 

Dependence on our Chief Executive Officer

 

Our success is substantially dependent on the efforts and abilities ofMarc D.  Grodman, M.D., our founder,president and chief executive officer. We maintain a $4,000,000 “key-man” life insurance policy on Dr.  Grodman’s life payable to the Company in theevent of his death.  The policy has beenassigned to PNC Bank as collateral to secure borrowings under our creditline.  The unavailability of Dr.Grodman, whether as a result of his death, disability or otherwise, could havea material adverse effect upon our business.

 

Possible Volatility of Stock Price

 

There is a history of volatility in the market price for shares ofcompanies in the healthcare marketplace. Factors such as fluctuations in ourquarterly revenues and operating results, announcements of new innovations orservices by us or our competitors, changes in third party payment policies andgovernment regulations may have an effect on the market price of our CommonStock. In addition, any announcement of a material pending legal action couldhave a negative impact on the market price of our Common Stock regardless ofthe outcome of any such matter.

 

Factors In Place To Discourage Takeover Attempts

 

The substantial percentage ownership of our outstanding Common Stock byour executive officers and directors; our charter provision providing for astaggered board of directors so that only one-third of the board is electedeach year to serve a three year term; our Rights Plan which was adopted todiscourage hostile acquisitions of control of the Company; and the requirementthat the holders of not less than 80% of our outstanding Common Stock mustapprove any merger, consolidation, asset sale or acquisition of the Company notapproved by the board may discourage attempts by third parties to tender for orotherwise obtain control of the Company, even if such an attempt might bedeemed beneficial to the Company and its shareholders.

 

Item 2 - Properties

 

Our executive offices and New Jersey processing facility occupyapproximately 56,000 square feet of leased space in two one-story brickfacilities at 481-487 Edward H. Ross Drive, Elmwood Park, New Jersey.  We are currently paying approximately$50,000 in total in monthly rentals for these facilities.  Although the leases for the majority ofthese facilities expire in February 2004, we have given the Landlordnotice of exercise of our option to extend the leases for five additional yearsand are currently in negotiation concerning the terms of the extension.  Our New York processing facility occupiesapproximately 11,000 square feet of leased space in a two-story brick facilityat 140 Route 303, Valley Cottage, New York. The lease for this facility, which expires in April 2005, providesfor a monthly rental of $9,772 and increases to $10,366 in the final year.  Our testing equipment maintained at each ofour processing facilities is in good condition and in working order.  We believe that these facilities, aspresently equipped, have the capacity to generate up to approximately $200,000,000in net revenues based on the type of testing now being performed by us.  We maintain fire, theft and liabilityinsurance coverage for our facilities in what we believe are adequate amounts.  We also lease 52 additional relatively smalldraw stations throughout the New York metropolitan area to collect specimensfrom physician-referred patients for testing at our processing facilities.

 

 

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Item 3 - Legal Proceedings

 

At October 31, 2003 and at the date of this Report, we were notinvolved in any material legal proceedings.

 

On January 22, 2004, we were informed that IMPATH, Inc., as adebtor-in-possession had commenced an adversary proceeding in Bankruptcy Courtin the Southern District of New York against James Weisberger, M.D., our VicePresident, Assistant Chief Medical Officer and Director of Hematopathology,alleging that Dr.  Weisberger had, amongother things, misappropriated certain of IMPATH’s alleged trade secrets and hadunlawfully solicited former IMPATH employees to commence employment withus.  We were not named as a party tothis lawsuit.  Both Dr.  Weisberger and we believe that theallegations in this proceeding are utterly baseless and totally without meritand intend to fully contest the matter.

 

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

 

No matter was submitted to a vote of our security holders during thefourth quarter of fiscal 2003

 

**PART II**

 

Item 5. -  Market forRegistrant’s Common Equity and Related Shareholder Matters

 

Our Common Stock was readmitted for trading on the National Associationof Securities Dealers Automated Quotation (“NASDAQ”) Small Cap System under thesymbol “BRLI” on November 24, 1993. It continued to trade on a continuous basis on the Small Cap Systemuntil March 26, 2002 when our application to list our Common Stock on TheNasdaq® National Market was approved.  Since said date, our Common Stock has traded on the NASDAQNational Market System under the symbol “BRLI.”

 

The following table sets forth the range of high and low closing bidprices for the Common Stock for the periods indicated, as derived from reportsfurnished by Pink Sheets LLC. Such quotations represent prices between dealers,do not include mark-ups, mark-downs or commissions and may not necessarilyrepresent actual transactions.

 
|            |   | **Bid Prices** |   |
|-----------------|--------|----------------|--------|
| **Fiscal Year** |   | **High**       |   | **Low** |   |
|            |   |           |   |   |   |
| **2002**        |   |           |   |   |   |
| First Quarter   |   | $              | 7.875  |   | $ | 4.90 |   |
| Second Quarter  |   | 9.98           |   | 5.76 |   |
| Third Quarter   |   | 11.45          |   | 5.73 |   |
| Fourth Quarter  |   | 8.60           |   | 5.15 |   |
| **2003**        |   |           |   |   |   |
| First Quarter   |   | 7.28           |   | 5.54 |   |
| Second Quarter  |   | 6.19           |   | 4.11 |   |
| Third Quarter   |   | 7.16           |   | 4.70 |   |
| Fourth Quarter  |   | 17.60          |   | 6.84 |   |
|                 |        |                |        |  |  |  |  |

 

On January 16, 2004  thelast sales price for the Common Stock on NASDAQ was $18.01 per share.

 

At October 31, 2003  thenumber of record holders of the Common Stock was 370. Such number of recordowners was determined from our shareholder records and does not includebeneficial owners whose shares are held in nominee accounts with brokers,dealers, banks and clearing agencies.

 

Dividends

 

We have not paid any dividends upon our Common Stock since ourinception and, do not contemplate or anticipate paying any dividends in theforeseeable future.   Furthermore, ourloan agreement with PNC Bank prohibits us from paying dividends or making anydistributions with respect to any shares of our stock without the prior writtenconsent of the Bank.

 

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Recent Sales of Unregistered Securities

 

•                  During fiscalyear 2003, we issued an aggregate 82,140 shares of our Common Stock to fouremployees upon exercise of previously granted stock options at exercise pricesequal to the market price on the date of grant of each option ranging from$.71875 to $1.75 per share and issued 10,000 shares to one employee valued at$1.50 per share for services rendered.

 

•                  See Item11-Stock Options and Note 11 of Notes to the Consolidated Financial Statementsas to our grant of stock options during fiscal 2003.

 

The transactions described above were effected in reliance upon theexemption from the registration requirements of the Securities Act of 1933provided by Section 4(2) of the Act on the basis that such transactionsdid not involve a public offering. Each of the recipients of shares of ourCommon Stock in the above transactions represented that he or she was acquiringthe shares for investment and not with a view to distribution. A restrictivelegend was placed on each of the certificates representing the shares and stoptransfer instructions were issued against such shares.

 

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Item 6.             SelectedFinancial Data

 
|                                       |   | **[In  thousands, except per share data]  Years ended  October 31,** |    |
|--------------------------------------------|--------|---------------------------------------------------------------------------|---------|
|                                       |   | **2003**                                                                  |    | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
| **Operating Data:**                        |   |                                                                      |    |   |   |   |   |   |   |   |   |
| Net Revenues                               |   | $                                                                         | 109,034 |   | $ | 96,631 |   | $ | 80,622 |   | $ | 66,460 |   | $ | 53,856 |   |
| Cost of Services                           |   | $                                                                         | 56,216  |   | $ | 51,706 |   | $ | 44,265 |   | $ | 37,174 |   | $ | 30,850 |   |
| Gross Profit                               |   | $                                                                         | 52,818  |   | $ | 44,925 |   | $ | 36,357 |   | $ | 29,286 |   | $ | 23,006 |   |
| General and Administrative Expenses        |   | $                                                                         | 43,533  |   | $ | 38,853 |   | $ | 32,750 |   | $ | 27,654 |   | $ | 26,432 |   |
| Income [Loss] from Operations              |   | $                                                                         | 9,285   |   | $ | 6,072 |   | $ | 3,607 |   | $ | 1,632 |   | $ | (3,426 | ) |
| Other Expenses - Net                       |   | $                                                                         | 681     |   | $ | 849 |   | $ | 1,660 |   | $ | 1,568 |   | $ | 1,185 |   |
| Provision for Income Tax Expense [Benefit] |   | $                                                                         | 2,064   |   | $ | 301 |   | $ | (414 | ) | $ | (42 | ) | $ | 367 |   |
| Net Income [Loss]                          |   | $                                                                         | 6,540   |   | $ | 4,922 |   | $ | 2,361 |   | $ | 105 |   | $ | (4,978 | ) |
| Net Income [Loss] Per Common Share         |   | $                                                                         | .57     |   | $ | .43 |   | $ | .24 |   | $ | .01 |   | $ | (.68 | ) |
| Net Income [Loss] Per Share - Diluted      |   | $                                                                         | .51     |   | $ | .39 |   | $ | .21 |   | $ | .01 |   | $ | (.68 | ) |
| Cash Dividends Per Common Share            |   | $                                                                         | —  |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
|                                       |   |                                                                      |    |   |   |   |   |   |   |   |   |
| **Balance Sheet Data:**                    |   |                                                                      |    |   |   |   |   |   |   |   |   |
| Total Assets                               |   | $                                                                         | 53,219  |   | $ | 47,442 |   | $ | 44,006 |   | $ | 38,349 |   | $ | 32,318 |   |
| Total Long-Term Liabilities                |   | $                                                                         | 2,202   |   | $ | 1,519 |   | $ | 1,158 |   | $ | 2,378 |   | $ | 2,931 |   |
| Total Liabilities                          |   | $                                                                         | 23,261  |   | $ | 23,235 |   | $ | 25,532 |   | $ | 25,287 |   | $ | 20,948 |   |
| Working Capital                            |   | $                                                                         | 17,671  |   | $ | 12,651 |   | $ | 7,257 |   | $ | 2,820 |   | $ | 3,702 |   |
| Stockholders’ Equity                  |   | $                                                                         | 29,958  |   | $ | 24,207 |   | $ | 18,474 |   | $ | 13,061 |   | $ | 11,369 |   |

 

Item 7. Management’s Discussion and Analysis of Financial Conditionand Results of Operations

 

**Note Regarding Forward-Looking Statements**

 

**This Annual Report on Form 10-K containshistorical information as well as forward-looking statements. Statementslooking forward in time are included in this Annual Report pursuant to the“safe harbor” provisions of the Private Securities Litigation Reform Act of1995. Such statements involve known and unknown risks and uncertainties thatmay cause our actual results in future periods to be materially different fromany future performance suggested herein.**

 

OVERVIEW

 

We are a regional clinical laboratory with focused market testingcapabilities. As a regional laboratory, we service the New Yorkmetropolitan area, and currently do business in most New York State counties,as well as in most of New Jersey and some parts of Pennsylvania andConnecticut. As a regional laboratory, we primarily offer laboratory servicesto physician offices in these areas with an infrastructure that includes acomprehensive logistical department, extensive phlebotomy services andphlebotomy draw stations scattered around our geographic area. We have alsodeveloped expertise in certain focused testing areas with specific emphasis incancer pathology and diagnostics as well as molecular diagnostics. Theseservices are marketed as a business unit, called GenPath, which servicescustomers outside of routine physician office testing.  We have developed certain specializedmarkets, such as in the areas of correctional health, substance abuse testing,fertility testing and molecular diagnostics. Testing in these areas also may besupported outside of physician offices.

 

During the last few years, the fundamentals of the industry have beenimproving. In the cost containment era of the 1990s, the industry wasnegatively impacted by the rapid growth of managed care, stringent governmentregulation and investigations into fraud and abuse. These factors led torevenue and profit declines and industry consolidations, especially amongcommercial clinical laboratories. As a result, fewer but larger clinicallaboratories have emerged with greater economies of scale, more effectivecompliance with government billing regulation and other laws and a betterapproach to pricing their services. These changes resulted in improvedprofitability.  In addition, new andemerging technologies continue to provide greater testing opportunities forclinical laboratories.

 

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Our PSIMedica business unit is a Clinical Knowledge Management (“CKM”)System that uses data derived from various disparate sources to provide bothadministrative and clinical analysis of a population. The source data consistsof enrollment (demographic) data, claims data, pharmacy data, laboratoryresults data, and any other data that may be available. The system usessophisticated algorithms to cleanse and configure the data so that analysis canbe comprehensive and meaningful. The data is maintained on multiple levels ofanalysis enabling review of data from the global level to the granulartransactional detail.  The systemincludes a base set of queries that provide basic functionality and allowson-line real-time ad hoc query capability enabling the user to customizeanalysis to the best needs of the organization using the system. In addition tothe basic queries provided by the system, PSIMedica Quality Indicators (“PQI”)provide comprehensive, disease state oriented queries that disclose the qualityand efficiency of the care and service. These indicators have been designed toprovide the customer with standards and outcome predictors based on a medicalstandards basis.  We are using PSIMedicato market value-added clinical laboratory services to bulk purchasers ofclinical laboratory solutions, as well as marketing our PSIMedica programs tobusinesses such as Health Plans, Integrated Delivery Networks, DiseaseManagement Companies, Insurers, Clinical Trial Companies and other healthcareproviders that most benefit from the ability of the system to combine bothclinical and administrative analysis.

 

CareEvolve, our wholly owned subsidiary, is a physician-basedconnectivity portal.  This systemprovides a complex, sophisticated system for ordering laboratory services anddelivering laboratory results.  Thesystem is designed to be physician-centric and to provide a highly flexible,scalable, comprehensive desktop solution for physicians to manage theirday-to-day practice and personal needs, as well as to handle their clinicallaboratory ordering and reporting.  Thisproduct has been designed to work as a platform with plug and play capabilitythat can easily be used by other laboratories that also need a web-basedsolution for their physician customers. We have entered into a Strategic Marketing Agreement with RocheDiagnostics to operate a Joint Venture for the sale and distribution ofCareEvolve services to other laboratories throughout the country.  Under the terms of the Strategic MarketingAgreement, Roche supports the marketing of CareEvolve to clinical laboratoriesthrough its extensive diagnostic marketing force. The joint venture is managedby a Steering Committee that consists of executives from both companies. Rocheholds an option exercisable to purchase up to a 50% equity interest in thiswholly owned subsidiary.

 

To date, neither our PSIMedica business unit nor CareEvolve hasproduced significant revenues.

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires us to makeestimates and assumptions that affect the reported amounts of revenues andexpenses during the reporting period. While many aspects of our business aresubject to complex federal, state and local regulations, the accounting for ourbusiness is generally straightforward. Our revenues are primarily comprised of a high volume of relatively lowdollar transactions, and about 46% of all our costs consist of employeecompensation and benefits.  Revenues arerecognized at the time the services are performed and are reported at theestimated net realizable amounts from patients, third-party payors and othersfor services rendered including prospectively determined adjustments underreimbursement agreements with third-party payors.  These adjustments are accrued on an estimated basis in the periodthe services are rendered and adjusted in future periods as final settlementsare determined.  These estimates arereviewed and adjusted, if warranted, by senior management on a monthlybasis.  We believe that our estimatesand assumptions are correct; however, several factors could cause actualresults to differ materially from those currently anticipated due to a numberof factors in addition to those discussed under “Cautionary Statements” as wellas elsewhere herein including:

•                                          ourfailure to integrate newly acquired businesses (if any) and the cost related tosuch integration.

•                                          ourfailure to obtain and retain new customers and alliance partners, or areduction in tests ordered or specimens submitted by existing customers.

•                                          adverseresults from investigations of clinical laboratories by the government, whichmay include significant monetary damages and/or exclusion from the Medicare andMedicaid programs.

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

 

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

•                                          failureto comply with the Federal Occupational Safety and Health Administrationrequirements and the recently passed Needlestick Safety and Prevention Act.

•                                          failureto comply with HIPAA, which could result in significant fines as well assubstantial criminal penalties.

•                                          changesin payor mix.

•                                          failureto maintain our days sales outstanding levels.

•                                          increasedcompetition, including price competition.

•                                          ourability to attract and retain experienced and qualified personnel.

•                                          adverselitigation results.

 

We utilize diluted earnings per share (“EPS”) on pre-tax income as aperformance indicator rather than the traditional EPS calculation on an aftertax basis.  This pre-tax EPS takes outthe nuance of tax differences caused by large net operating loss carryforwardswhich create benefits (which we used in the past) and tax expense (which weexpect in the future).  The table belowshows our pre-tax EPS on a diluted quarterly and annual basis for fiscal years2002 and 2003.

 
|    |   | **Quarter  Ended** |   |
|---------|--------|--------------------|--------|
|    |   | **1/31**           |   | **4/30** | ** ** | **7/31** | ** ** | **10/31** | ** ** | **Fiscal  Year** | ** ** |
|    |   |               |   |   |   |   |   |   |   |   |   |
| FY 2002 |   | $                  | .06    |   | $ | .10 |   | $ | .12 |   | $ | .13 |   | $ | .41 |   |
|    |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| FY 2003 |   | .04                |   | .13 |   | .24 |   | .26 |   | .67 |   |
|         |        |                    |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Results of Operations (In thousands, except per patient data)

 

Fiscal Year 2003 Compared to 2002

 

NET REVENUES:

 

Net Revenues for the year ended October 31, 2003 were $109,034 ascompared to $96,631 for the year ended October 31, 2002; this represents a13% increase in net revenues. This increase is due to a 9% increase in patientsserviced and a 4% increase in net revenue per patient. Our laboratoryoperations had net revenues of $108,720 in fiscal 2003.

 

The number of patients serviced during the year ended October 31,2003 was 2,115 which was 9% greater when compared to the prior fiscal year’stwelve month period.  This increase isattributable to a net increase of six new sales representatives and our ongoingmarketing efforts during the current fiscal year. Net revenue per patient forthe year ended October 31, 2003 was $51.41 compared to net revenue perpatient for the year ended October 31, 2002 of $49.63, an increase of$1.78 or 4% as a result of increases in esoteric testing.

 

COST OF SALES:

 

Cost of Sales for the year ended October 31, 2003 was $56,216 ascompared to $51,706 for the year ended October 31, 2002, an increase of9%.  This increase is related to theincrease in net revenues of 13%.

 

GROSS PROFITS:

 

Gross profits on net revenues increased to $52,818 for the year endedOctober 31, 2003 from $44,925 for the year ended October 31, 2002; anincrease of $7,893 (18%), primarily attributable to the increase in netrevenues and the decrease in direct costs relative to the increase in netrevenue. Gross profit margins in the laboratory increased to 48% from 46%,primarily due to the increase in net revenues and efficiencies in directoperating expenses.

 

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GENERAL AND ADMINISTRATIVE EXPENSES:

 

General and administrative expenses for the year ended October 31,2003 were $43,533 as compared to $38,853 for the year ended October 31,2002, an increase of $4,680 or 12%. This increase is in line with the increasein net revenues.  However, insuranceexpense increased approximately $1,057 or 97% over the prior period.

 

INTEREST EXPENSE:

 

Interest expense decreased from $889 during the year endedOctober 31, 2002 to $704 during the year ended October 31, 2003; adecrease of $185. This decrease is due to a decline in the variable interestrates and a decline in the outstanding balance with the PNC line of creditutilized by the Company. Management believes that this trend may not continue inthe future due to the continued use of our revolving line of credit to fund ourexpansion and growth and the expectation that interest rates may increaseduring fiscal year 2004.

 

NET INCOME:

 

We realized net income of $6,540 for the twelve month period endedOctober 31, 2003 as compared to $4,922 for the twelve month period endedOctober 31, 2002, an increase of 33%.

 

Pre-tax income for the period ended October 31, 2003 was $8,604,as compared to $5,223 for the period ended October 31, 2002, an increaseof $3,381 (65%) and was caused primarily by a decrease in expenses in relationto an increase in net revenues.  Theprovision for income taxes increased from $301 for the period endedOctober 31, 2002, to $2,064 for the current twelve month period. This increasewas anticipated due to the full utilization of certain state net operating losscarry-forwards in fiscal 2002 and Federal and State net operating losscarry-forwards during the third quarter of fiscal 2003.

 

Fiscal Year 2002 Compared to Fiscal Year 2001

 

NET REVENUES:

 

Net Revenues for the year ended October 31, 2002 were $96,631 ascompared to $80,622 for the year ended October 31, 2001; this represents a20% increase in net revenues. This increase is due to a 15% increase inpatients serviced and a 5% increase in net revenue per patient. Our laboratoryoperations had net revenues of $96,568 in fiscal 2002.

 

The number of patients serviced during the year ended October 31,2002 was 1,944 which was 15% greater when compared to the prior fiscal year’stwelve month period.  This increase isattributable to a net increase of four new sales representatives and ourongoing marketing efforts during the current fiscal year. Net revenue perpatient for the year ended October 31, 2002 was $49.63 compared to netrevenue per patient for the year ended October 31, 2001 of $47.43, anincrease of $2.20 or 5%,  as a result ofincreases in esoteric testing.

 

COST OF SALES:

 

Cost of Sales for the year ended October 31, 2002 was $51,706 ascompared to $44,265 for the year ended October 31, 2001, an increase of17%.  This increase is related to theincrease in net revenues of 20%. CareEvolve and Right Body Foods (“RBF”) had combined cost of sales of $116 in fiscal year 2002.

 

GROSS PROFITS:

 

Gross profits on net revenues, excluding CareEvolve and RBF, increasedto $44,979 for the year ended October 31, 2002 from $36,935 for the yearended October 31, 2001; an increase of $8,044 (22%), primarily attributable to the increase in net revenues andthe decrease in direct costs relative to the increase in net revenue. Grossprofit margins in the laboratory increased to 46% from 45%, primarily due tothe increase in net revenues and efficiencies in direct operating expenses. Ourtotal gross profit for

 

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fiscal 2002 was $44,925. CareEvolve and RBF had a combined gross lossof $54 for the year ended October 31, 2002.

 

GENERAL AND ADMINISTRATIVE EXPENSES:

 

General and administrative expenses for the year ended October 31,2002 were $38,853 as compared to $32,750 for the year ended October 31,2001, an increase of $6,103 or 19%. This increase was caused primarily by threefactors, 1) an increase in marketing related expense****of $1,544; 2) an increase in bad debt of $1,610; and 3) an increasein computer related expense of $604  allof which are attributable to the Company’s growth.  In addition, business insurance increased $398 and we expected asubstantial increase in this expense category in fiscal year 2003.  During the fourth quarter of fiscal 2002, weterminated the RBF health food business operations and sold the remainingassets for a nominal sum.  During suchquarter, we recorded a write-off of approximately $212 representing the remainingnet book value of the intangible and other deferred assets attributable to thehealth food business.

 

INTEREST EXPENSE:

 

Interest expense decreased from $1,686 during the year endedOctober 31, 2001 to $889 during the year ended October 31, 2002; adecrease of $797.  This decrease is dueto a decline in the variable interest rates associated with the PNC line ofcredit utilized by the Company. Management believes that this trend will notcontinue in the future due to the continued use of our revolving line of creditto fund our expansion and growth and the expectation that interest rates willnot substantially decrease.

 

NET INCOME:

 

We realized net income of $4,922 for the twelve month period endedOctober 31, 2002 as compared to $2,361 for the twelve month period endedOctober 31, 2001, an increase of 108%. Our laboratory operations realized net income of $4,417 for the twelvemonth period ended October 31, 2002 as compared to $1,155 for the twelvemonth period ended October 31, 2001, an increase of $3,262 or 282%.

 

Liquidity and Capital Resources (In thousands)

 

For the Fiscal Year Ended October 31, 2003

 

Our working capital at October 31, 2003 was approximately $17,671as compared to approximately $12,651 at October 31, 2002, an increase of$5,020. Our cash position increased by approximately $563 during the currentperiod. We decreased our short term borrowing by approximately $1,828 andrepaid approximately $1,153 in existing debt and capital lease obligations. Wehad current liabilities of approximately $21,059 at October 31, 2003. Wegenerated approximately $5,593 in cash from operations, an increase ofapproximately $911 as compared to the year ended October 31, 2002.

 

Accounts receivable, net of allowance for doubtful accounts, totaledapproximately $32,913 at October 31, 2003, an increase of approximately$4,214 from October 31, 2002, or 15%. This increase was primarilyattributable to increased revenue.  Cashcollected over the twelve month period ended October 31, 2003 increased10% over the prior twelve month period.

 

Credit risk with respect to accounts receivable is generallydiversified due to the large number of patients comprising the client base. Wehave significant receivable balances with government payors and variousinsurance carriers. Generally, we do not require collateral or other securityto support customer receivables, however, we continually monitor and evaluateour client acceptance and collection procedures to minimize potential creditrisks associated with our accounts receivable. While we maintain what webelieve to be an adequate allowance for doubtful accounts, there can be noassurance that our ongoing review of accounts receivable will not result in theneed for additional reserves. Such additional reserves could have a materialimpact on our financial position and results of operations.

 

In January 2002, we amended our revolving loan agreement with PNCBank.  The maximum amount of the creditline available to the Company is now the lesser of (i) $25,000 or (ii) 50% ofour qualified accounts receivable (as defined in the agreement).  Interest on advances are currently at primeor the

 

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Eurodollar Rate on a portion (fixed) of the line (See Note [5]) to theConsolidated Financial Statements. The credit line is collateralized bysubstantially all of our assets, a $615 CareEvolve promissory note payable outof our share of CareEvolve’s net after-tax income (if any) assigned by us tothe bank and a $4,000 insurance policy on the life of the president of ourCompany also assigned by us to the bank. The line of credit is currently available through September 2004.The terms of this agreement contain, among other provisions, requirements formaintaining defined levels of capital expenditures and fixed charge coverage,various financial ratios and insurance coverage. As of October 31, 2003,we were utilizing approximately $8,718 of this credit facility and hadapproximately $11,282 of additional availability. See “Cautionary Statements-Dependence on Bank Financing.”

 

We intend to expand our laboratory operations through aggressivemarketing while also attempting to diversify into related medical fieldsthrough acquisitions.  Theseacquisitions may involve cash, notes, Common Stock, and/or combinationsthereof.

 

We have various employment and consulting agreements with commitmentstotaling approximately $9,957 over the next five years of which approximately$7,973 is due during fiscal 2004. (See Note 12 to the Consolidated FinancialStatements herein). We have operating and capital leases with commitmentstotaling approximately $6,011 of which approximately $2,474 is due duringfiscal 2004. (See Notes 13 and 14 to the Consolidated Financial Statement).

 

Our cash balance at October 31, 2003 totaled approximately $3,966as compared to approximately $3,403 at October 31, 2002.  We believe that our cash position, theanticipated cash generated from future operations,  and the availability of our credit line with PNC Bank, will meetour anticipated cash needs in fiscal 2004

 

Impact of Inflation

 

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

 

New Authoritative Pronouncements

 

In November 2002, the FASB issued Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires aguarantor to recognize a liability, at the inception of the guarantee, for thefair value of obligations it has undertaken in issuing the guarantee and alsoinclude more detailed disclosures with respect to guarantees. FIN 45 iseffective on a prospective basis for guarantees issued or modified startingJanuary 1, 2003 and requires the additional disclosures in interim andannual financial statements effective for the period ended December 31,2002. The Company’s adoption of the initial recognition and measurementprovisions of FIN 45 effective January 1, 2003, did not have a materialimpact on the Company’s results of operations or financial position.

 

In January 2003, the FASB issued Interpretation No. 46,“Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 requires avariable interest entity to be consolidated by a company if that company issubject to a majority of the risk of loss from the variable interest entity’sactivities or entitled to receive a majority of the entity’s residual returnsor both. Historically, entities generally were not consolidated unless theentity was controlled through voting interests. FIN 46 also requiresdisclosures about variable interest entities that a company is not required toconsolidate but in which it has a significant variable interest. Theconsolidation requirements of FIN 46 apply immediately to variable interestentities created after January 31, 2003 and to variable interest entitiesin which an enterprise obtains an interest after that date.

 

On October 8, 2003, the FASB deferred the implementation date forFIN 46 as it relates to variable interest entities that existed prior toFebruary 1, 2003 and in December 2003 the FASB issued a revised FIN46.  The revised effective date for theCompany is the end of the first reporting period ending after March 15,2004 [April 30, 2004 for the Company]. However, the Company must apply either the revised or the original FIN46 to so called special-purpose entities as of the end of the first reportingperiod ending after December 15, 2003 [January 31, 2004 for theCompany]. Certain disclosure requirements apply to all financial statementsissued after January 31, 2003, regardless of when the variable interestentity was established. The adoption of

 

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this standard is not expected to have a material impact on theCompany’s consolidated financial statements.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment ofStatement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”),which amends and clarifies financial accounting and reporting for derivativeinstruments, including certain derivative instruments embedded in other contracts,and for hedging activities under SFAS 133. SFAS 149 is effective for contractsentered into or modified after June 30, 2003, and for hedgingrelationships designated after June 30, 2003. The adoption of SFAS 149,effective July 1, 2003, did not have a material impact on the Company’sresults of operations or financial position.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for CertainInstruments with Characteristics of both Liabilities and Equity” (“SFAS 150”),which establishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity. SFAS150 is effective for financial instruments entered into or modified after May31, 2003, and otherwise is effective at the beginning of the first interimperiod beginning after June 15, 2003. The Company’s adoption of theinitial recognition and initial measurement provisions of SFAS 150, effectiveJune 1, 2003, did not have a material impact on the Company’s results of operationsor financial position.

 

TheCompany expects that the adoption of the new statements will not have asignificant impact on its financial statements.

 

Item 7A.  Quantitative andQualitative Disclosure About Market Risk

 

Not applicable.

 

Item 8. -  Financial Statementsand Supplementary Data

 

Financial Statements are annexed hereto

 

Item 9. -  Changes in andDisagreements with Accountants on Accounting and Financial Disclosure

 

None

 

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**PART III**

 

Item 10.-                           Directorsand Executive Officers of the Registrant

 

The following table sets forth certain information with respect to eachof the directors and executive officers of the Company.

 
| Name                       |   | Age    |   | Position                                                                        |
|----------------------------|--------|--------|--------|---------------------------------------------------------------------------------|
|                       |   |   |   |                                                                            |
| Marc D. Grodman, M.D.      |   | 52     |   | Chairman of the Board, President, Chief Executive Officer and  Director         |
|                       |   |   |   |                                                                            |
| Morton L. Topfer (b) (c)   |   | 67     |   | Vice Chairman of the Board and Director                                         |
|                       |   |   |   |                                                                            |
| Howard Dubinett            |   | 52     |   | Executive Vice President, Chief Operating Officer and Director                  |
|                       |   |   |   |                                                                            |
| Sam Singer                 |   | 60     |   | Vice President, Chief Financial Officer, Chief Accounting Officer and  Director |
|                       |   |   |   |                                                                            |
| John Roglieri, M.D(b) (d)  |   | 64     |   | Director                                                                        |
|                       |   |   |   |                                                                            |
| Gary Lederman, Esq.(a) (d) |   | 69     |   | Director                                                                        |

 

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(a) Chairman of the Audit Committee

(b) Member of the Audit Committee

(c) Chairman of the Compensation Committee

(d) Member of the Compensation Committee

 

The Audit Committee is comprised of three non-employee members of theBoard of Directors, Gary Lederman (Chairman), John Roglieri and Morton L.Topfer. The Board of Directors deems each such individual as “independent” asdefined in National Association of Securities Dealers Marketplace Rule4200(a)(14). The Board of Directors has determined that based upon his priorexperience, Mr. Lederman may be deemed to be an audit committee financialexpert as described in Item 401 of Regulation S-K promulgated under theSecurities Exchange Act of 1934.  TheAudit Committee met four times during fiscal year 2003. The Audit Committeeconfers with the Company’s auditors and reviews, evaluates and advises theBoard of Directors concerning the adequacy of our accounting systems, ourfinancial reporting practices, the maintenance of our books and records and ourinternal controls. In addition, the Audit Committee reviews the scope of theaudit of our financial statements and the results thereof.

 

The Compensation Committee is comprised of three non-employee membersof the Board of Directors, Morton L. Topfer (Chairman), Gary Ledermanand John Roglieri. The Compensation Committee met once during fiscal year 2003.The Compensation Committee reviews salaries, cash bonuses and compensationplans for our executive officers and eligible employees and makesrecommendations concerning same to the Board of Directors.

 

We do not have an Executive Committee. Officers are elected by and holdoffice at the discretion of the Board of Directors.

 

The following is a brief account of the business experience of each ofour directors and executive officers.

 

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Marc D. Grodman, M.D. founded Bio-Reference Laboratories inDecember 1981 and has been our Chairman of the Board, President, ChiefExecutive Officer and a Director since our formation.  Dr. Grodman is an Assistant Professor of Clinical Medicine atColumbia University College of Physicians and Surgeons and Assistant AttendingPhysician at Presbyterian Hospital, New York City.  From 1980 to 1983, Dr. Grodman attended the Kennedy School ofGovernment at Harvard University and was a Primary Care Clinical Fellow atMassachusetts General Hospital.  From1982 to 1984, he was a medical consultant to the Metal Trades Department of theAFL-CIO.  Dr. Grodman received a B.A.degree from the University of Pennsylvania in 1973 and an M.D. degree fromColumbia University College of Physicians and Surgeons in 1977.  Except for approximately 20 hours per monthspent as Assistant Professor of Clinical Medicine and Assistant AttendingPhysician at Columbia University and Presbyterian Hospital and his rendering ofmedical services on a part time basis to the Uniformed Firefighters Associationof New York City, Dr. Grodman devotes substantially all of his working time tothe business of the Company.

 

Morton L. Topfer became a Director in May 2001 and Vice Chairman of theBoard in March 2002. Mr. Topfer, who holds a bachelor’s degree in physicsfrom Brooklyn College, was awarded an honorary doctorate in engineering fromPolytechnic Institute of New York in June 2000. Mr. Topfer currentlyserves as a member of the board of directors of Dell Corporation (“Dell”).  From 1999 to 2002, he also served ascounselor to Dell’s Chief Executive Officer, a position to which he was electedin December 1999.  Priorthereto,  Mr. Topfer served as Dell’svice chairman for five years. In that position, Mr. Topfer shared theoffice of Chief Executive Officer with Michael S. Dell, Dell’s chairman and CEOand Kevin B. Rollins, Dell’s vice chairman. Prior to joining Dell in May 1994,Mr. Topfer served as corporate executive vice president of Motorola, Inc. andpresident of Motorola’s Land Mobile Products Sector. Mr. Topfer was employed invarious managerial and executive capacities during his 23 year career atMotorola. Before joining Motorola in 1971, Mr. Topfer spent eleven years withRCA Laboratories in various research and development management positions. InJuly 1996, Mr. Topfer was conferred the Darjah Johan Negeri Penang StateAward by the Governor of Penang for his contributions to the development of theelectronics industry in Malaysia. In addition to his serving as a director ofthe Company and of Dell, Mr. Topfer also currently serves as chairman of theboard and as a director of one other publicly owned corporation, MeasurementSpecialties, Inc., a Fairfield, New Jersey manufacturer of pressure transducersand certain consumer products.

 

Howard Dubinett has been our Executive Vice-President and ChiefOperating Officer since our formation in 1981. He became a Director in April 1986.   Mr. Dubinett attended Rutgers University. Mr. Dubinett devotesall of his working time to the business of the Company.

 

Sam Singer has been our Vice President and Chief Financial Officersince October 1987 and a Director since November 1989.  He is responsible for all of our financialactivities. Mr. Singer was the Controller for Sycomm Systems Corporation, adata processing and management consulting company, from 1981 to 1987, prior tojoining us. He received a B.A. degree from Strayer University and an M.B.A.from Rutgers University.  Mr. Singerdevotes all of his working time to the business of the Company.

 

John Roglieri, M.D. became aDirector in September 1995.  He isan Assistant Professor of Clinical Medicine at Columbia University’s College ofPhysicians and Surgeons and an Assistant Attending Physician at PresbyterianHospital, New York City.  Dr. Roglierireceived a B.S. degree in Chemical Engineering and a B.A. degree in AppliedSciences from Lehigh University in 1960,

 

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an M.D. degree from Harvard Medical School in1966, and a Master’s degree from Columbia University School of Business in1978.  From 1969 until 1971, he was aSenior Assistant Surgeon in the U.S. Public Health Service in Washington.  From 1971 until 1973 he was a Clinical andResearch Fellow at Massachusetts General Hospital.  From 1973 until 1975, he was Director of the Robert Wood JohnsonClinical Scholars program at Columbia University.  In 1975 he was appointed Vice-President Ambulatory Services atPresbyterian Hospital, a position which he held until 1980.  Since 1980, he has maintained a privatepractice of internal medicine at Columbia-Presbyterian Medical Center.  From 1988 until 1992, he was also Directorof the Employee Health Service at Presbyterian Hospital. From 1992 through1999, Dr. Roglieri was the Corporate Medical Director of NYLCare, a managedcare subsidiary of New York Life.  Dr.Roglieri was Chief Medical Officer of Physician WebLink, a national physicianpractice management company, from 1999 to 2000. Since 2001, he has been MedicalDirector for New York Life Insurance Company in Manhattan. He is a member ofAdvisory Boards to several pharmaceutical companies, and a member of theEditorial Advisory Boards of the journals Managed Care and Seminars in MedicalPractice. Dr. Roglieri is a subject of biographical record in Who’s Who inAmerica.

 

Gary Lederman, Esq. became a director of the Company in May 1997.  He received his B.A. degree from BrooklynCollege in 1954 and his J.D. degree from NYU Law School in 1957.  He was manager of Locals 370, 491 and 662 ofthe U.F.C.W. International Union from 1961 to 1985. He is retired from theunions and has been a lecturer at Queensboro Community College in the field ofinsurance. He currently serves on an institutional review board for RTL, apharmaceutical drug testing laboratory.

 

There are no family relationships between or among any directors orexecutive officers of Bio-Reference Laboratories. Our Certificate ofIncorporation provides for a staggered Board of Directors (the “Board”)pursuant to which the Board is divided into three classes of directors and themembers of only one class or one-third of the Board are elected each year toserve a three-year term.  Officers areelected by and hold office at the discretion of the Board of Directors.

 

Key Personnel and Consultants

 

The following key personnel and consultants make significantcontributions to the Company’s operations.

 

James Weisberger, M.D. (Age 48) has been employed by the Company sinceSeptember 2003 as Vice President, Assistant Chief Medical Officer andDirector of Hematopathology.  Prior tojoining the Company, he was Director of Hematopathology at IMPATH, Inc.  (1999-2003). He is board certified ininternal medicine, anatomic and clinical pathology, and hematopathology. He hasa New York State Department of Health Certificate of Qualification as aLaboratory Director. He is a Clinical Assistant Professor of Pathology at NewYork Medical College, Valhalla, New York. Prior to joining IMPATH,  he wasan Assistant Professor of Medicine and Pathology at New York Medical College(1995-1999).  He has a BS degree fromStanford University (1977); an MS degree from Stanford University (1978); andan M.D. degree from the University of Pennsylvania (1983).

 

Bader Maria Pedemonte-Coira, M.D. (Age 44) has been employed by theCompany since August 2000 as Medical Director. She is certified by theAmerican Board of Pathology in Anatomic and Clinical Pathology with specialcertification in Hematopathology and

 

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Immunopathology. She holds a New York State Department of HealthCertificate of qualification for Laboratory Director. Dr. Pedemonte’sprofessional appointments include Director of Hematopathology & MolecularPathology at JFK Medical Center in Edison, NJ (1998-2000); Hematopathologist,IMPATH, Inc. New York, NY (1997-1998); and Medical Director &Hematopathologist GenCare-Biomedical Research Laboratory of Bio-Reference(1996-1998). She was Associate Director & Pathologist, Molecular TissuePathology; and Director, Cellular Immunology, Corning Clinical Laboratories(Corning/MetPath) Teterboro, NJ (1991-1996). Dr. Pedemonte is also an AdjunctAssistant Professor of Pathology, Columbia University, College of Physicians& Surgeons, NY. (1991-Present). Dr. Pedemonte currently devotes only aportion of her working time to the business of the Company.

 

Charles T.  Todd, Jr.  (Age 53) is the Senior Vice President ofSales and Marketing of Bio-Reference Laboratories.  Mr.  Todd was the founderand CEO of GenCare Biomedical Research Corporation, a specialty oncologylaboratory that was purchased by the Company in 1995.  He attended Seton Hall University and received a B.S. in Financein 1974.

 

John W.  Littleton (Age 43)joined Bio-Reference Laboratories in September 2002 as the Vice Presidentof Sales.  Prior to joiningBio-Reference Laboratories, Mr. Littleton was Vice President of Sales for Specialty Laboratories and theNortheast Regional Vice President of Sales for Quest Diagnostics.  He received a B.A.. degree from Seton HallUniversity in 1983.

 

John Bennett, M.D., (Age 70) Scientific Advisory Board Chairman,Professor Emeritus, University of Rochester Medical Center, Rochester, NewYork.  Dr.  Bennett has long been recognized as an intellectual force in thetreatment and understanding of leukemias, lymphomas and other cancer-relateddiseases.  He established theFrench-American-British (FAB) Leukemia working Group and is one of the world’sleading authorities on Myelodysplasia. He is founder and Chairman of the MDS Foundation, as well as Editor ofthe AJournalof Leukemia Research.@Dr.  Bennett is currently ProfessorEmeritus and former Head of the Medical Oncology Unit at the University ofRochester Medical Center and formerly was a Professor of Oncology in Medicine, Pathologyand Laboratory Medicine at the University of Rochester Medical School.  For nearly four decades, Dr.  Bennett has been honored by the medicalcommunity as an expert in the field of oncology as evidenced by the numerouschairs he has held in prestigious societies and committees and over 400publications in peer review journals, the majority of which are in the area ofhematologic malignancies.  Dr. Bennettearned his B.A. from Harvard University and his M.D. from BostonUniversity.  He served his residency inmedicine at Beth-Israel Hospital, Boston, Massachusetts and completed afellowship in hematology at Boston City Hospital. He headed the Morphology andCytochemistry Section of the Clinical Center at NIH before joining thefaculty at the University of Rochester. Dr. Bennett serves the Company in anadvisory capacity as chairman of our Scientific Advisory Board.

 

Compliance with Section 16(a) of the Exchange Act

 

Based solely on a review of Forms 3 and 4 and any amendments theretofurnished to the Company pursuant to Rule 16a-3(e) under the SecuritiesExchange Act of 1934, or representations that no Forms 5 were required, webelieve that with respect to fiscal 2003, our officers, directors andbeneficial owners of more than 10% of our equity timely complied with allapplicable Section 16(a) filing requirements.

 

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Item 11. - Executive Compensation

 

The following table sets forth information concerning the compensationpaid or accrued by us during the year ended October 31, 2003 to our ChiefExecutive Officer and our other executive officers who were serving as ourexecutive officers at October 31, 2003. All of our group life, health,hospitalization or medical reimbursement plans, if any, do not discriminate inscope, terms or operation, in favor of the executive officers or directors andare generally available to all salaried employees.

 

SUMMARY COMPENSATION TABLE

 
|                        |   |                          |   |         |    |   |   |                           |   | Long-Term                 |   |
|-----------------------------|--------|-------------------------------|--------|--------------|---------|--------|--------|--------------------------------|--------|---------------------------|--------|
|                        |   | Annual Compensation           |   | Compensation |    |
| Name and Principal Position |   | Year  Ended  October 31, |   | Salary       |    | Bonus  |   | Other  Annual  Compen-  sation |   | Restricted  Stock  Awards |   | Options  (SARs) |   | LTIP  Pay-  outs |   | All  Other  Compen-  sation (a) |   |
|                        |   |                          |   |         |    |   |   |                           |   |                      |   |   |   |   |   |   |   |
| Marc D. Grodman M.D.        |   | 2003                          |   | $            | 499,750 |   | $      | 154,750                        |   | $                         | -0-    |   | -0- |   | $ | -0- |   | $ | -0- |   | $ | -0- |   |
| President and Chief         |   | 2002                          |   | $            | 470,000 |   | $      | 125,000                        |   | $                         | -0-    |   | 4,000 |   | $ | -0- |   | $ | -0- |   | $ | -0- |   |
| Executive Officer           |   | 2001                          |   | $            | 415,921 |   | $      | 125,000                        |   | $                         | -0-    |   | -0- |   | $ | -0- |   | $ | -0- |   | $ | -0- |   |
|                        |   |                          |   |         |    |   |   |                           |   |                      |   |   |   |   |   |   |   |
| Howard Dubinett             |   | 2003                          |   | $            | 240,000 |   | $      | 21,800                         |   | $                         | -0-    |   | -0- |   | $ | -0- |   | $ | -0- |   | $ | -0- |   |
| Executive Vice              |   | 2002                          |   | $            | 191,700 |   | $      | 60,000                         |   | $                         | -0-    |   | 4,000 |   | $ | -0- |   | $ | -0- |   | $ | -0- |   |
| President and Chief         |   | 2001                          |   | $            | 182,004 |   | $      | 60,000                         |   | $                         | -0-    |   | -0- |   | $ | -0- |   | $ | -0- |   | $ | -0- |   |
| Operating Officer           |   |                          |   |         |    |   |   |                           |   |                      |   |   |   |   |   |   |   |
|                        |   |                          |   |         |    |   |   |                           |   |                      |   |   |   |   |   |   |   |
| Sam Singer                  |   |                          |   |         |    |   |   |                           |   |                      |   |   |   |   |   |   |   |
| Vice President and          |   | 2003                          |   | $            | 240,000 |   | $      | 9,600                          |   | $                         | -0-    |   | -0- |   | $ | -0- |   | $ | -0- |   | $ | -0- |   |
| Chief Financial and         |   | 2002                          |   | $            | 180,300 |   | $      | 60,000                         |   | $                         | -0-    |   | 4,000 |   | $ | -0- |   | $ | -0- |   | $ | -0- |   |
| Accounting Officer          |   | 2001                          |   | $            | 171,004 |   | $      | 60,000                         |   | $                         | -0-    |   | -0- |   | $ | -0- |   | $ | -0- |   | $ | -0- |   |
|                             |        |                               |        |              |         |        |        |                                |        |                           |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a) See Item 13 concerning our payment of lifeinsurance premiums pursuant to “split dollar” life insurance programs for ourthree executive officers and the suspension of premium payments in fiscal 2003.

 

Employment Agreements with Executive Officers

 

Dr. Grodman serves as our President and Chief Executive Officer pursuant toa seven-year employment agreement which expires on October 31, 2004.  Dr.  Grodman’s initial minimum annual compensation under the agreement($395,000) has been subject to increases based on increases in the ConsumerPrice Index as well as to increases (including bonuses) at the discretion ofour Compensation Committee. The agreement provides (i) typical health insurancecoverage and $4,000,000 face amount of “split dollar” life insurance insuringDr. Grodman’s life and payable to his estate (excluding benefits required to bepaid to the Company pursuant to the split dollar plan) (ii) the leasing of anautomobile for his use; (iii) participation in fringe benefit, bonus, pension,profit sharing, and similar plans maintained for the Company’s employees; (iv)disability benefits; (v) certain termination benefits; and (vi) in the event oftermination due to a change in control of the Company, a severance paymentequal to 2.99 times Dr. Grodman’s average annual compensation during thepreceding five years.  See Item 13herein as to the suspension of premium payments with respect to Dr.  Grodman’s “split dollar” life insurance.

 

Mr. Dubinett serves as our Executive Vice President and Chief OperatingOfficer pursuant to a five-year employment agreement which was extended infiscal 2002 for two additional years beyond its October 31, 2002termination date.  Mr.  Dubinett’s minimum annual compensation underthe extended agreement is equal to his annual compensation in fiscal 2002 andis subject to increases based on increases in the Consumer Price Index as wellas to increases (including bonuses) at the discretion of our CompensationCommittee.  The agreement provides (i)typical

 

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health insurance coverage and $1,100,000 face amount of “split dollar”life insurance insuring Mr. Dubinett’s life and payable to his estate(excluding benefits required to be paid to the Company pursuant to the splitdollar plan); (ii) the leasing of an automobile for his use; (iii)participation in fringe benefit, bonus, pension, profit sharing, and similar plansmaintained for the Company’s employees; (iv) disability benefits; (v) certaintermination benefits; and (vi) in the event of termination due to a change incontrol of the Company, a severance payment equal to 2.99 times Mr. Dubinett’saverage annual compensation during the preceding five years.  We have the option to extend the extensionperiod of the employment agreement on the same terms and conditions for up toan additional three years through October 31, 2007.  See Item 13 herein as to the suspension ofpremium payments with respect to Mr. Dubinett’s “split dollar” life insurance.

 

Mr.  Singer serves as our VicePresident and Chief Financial Officer pursuant to a five-year employmentagreement which was extended in fiscal 2002 for two additional years beyond itsOctober 31, 2002 termination date. Mr.  Singer’s minimum annualcompensation under the extended agreement is equal to his annual compensationin fiscal 2002 and is subject to increases based on increases in the ConsumerPrice Index as well as to increases (including bonuses) at the discretion ofour Compensation Committee.  Theagreement provides (i) typical health insurance coverage and $800,000 faceamount of “split dollar” life insurance insuring Mr. Singer’s life and payableto his estate (excluding benefits required to be paid to the Company pursuantto the split dollar plan); (ii) the leasing of an automobile for his use; (iii)participation in fringe benefit, bonus, pension, profit sharing, and similarplans maintained for the Company’s employees; (iv) disability benefits; (v)certain termination benefits; and (vi) in the event of termination due to achange in control of the Company, a severance payment equal to 2.99 times Mr.Singer’s average annual compensation during the preceding five years. We havethe option to extend the extension period of the employment agreement on thesame terms and conditions for up to an additional three years throughOctober 31, 2007.  See Item 13herein as to the suspension of premium payments with respect to Mr.  Singer’s “split dollar” life insurance.

 

**Stock Options**

 

Employee Stock Option Plans

 

In July 1989, the Company’s Board of Directors adopted the 1989Employees Stock Option Plan (the “1989 Plan”) which was approved byshareholders in November 1989.  The1989 Plan provided for the grant of options to purchase up to 666,667 shares ofCommon Stock.  Under the terms of the1989 Plan, options granted thereunder could be designated as options whichqualify for incentive stock option treatment (“ISOs”) under Section 422 ofthe Code, or options which do not so qualify (“NQOs”).

 

Under the 1989 Plan, the exercise price of an option designated as anISO could not be less than the fair market value of the Common Stock on thedate the option was granted.  However,in the event an option designated as an ISO was granted to a 10% shareholder(as defined in the 1989 Plan) such exercise price was required to be at least110% of such fair market value. Exercise prices of NQOs options could be less than such fair marketvalue.  The aggregate fair market valueof shares subject to options granted to a participant which are designated asISOs which first become exercisable in any calendar year could not exceed$100,000. All options under the 1989 Plan were required to be granted beforethe Plan’s July 1999 Termination Date so that no further options can begranted under the 1989 Plan.

 

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At October 31, 2002, there were outstanding ISOs issued under the1989 Plan held by six employees and exercisable to purchase an aggregate274,335 shares at an exercise price of $.71875 per share. During fiscal 2003,one employee exercised his ISOs and purchased 5,000 shares and 11,667 shareswere canceled due to termination of employment. As a result, atOctober 31, 2003, there were outstanding ISOs issued under the 1989 Planexercisable to purchase 257,668 shares at an exercise price of $.71875 pershare.

 

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**Description of the 2000 Plan**

 

On August 25, 2000, the Board of Directors adopted the 2000Employee Incentive Stock Option Plan (the “2000 Plan”) reserving an aggregate800,000 shares of Bio-Reference Common Stock for issuance upon exercise of ISOswhich may be granted under the 2000 Plan. Stockholders ratified the adoption of the 2000 Plan at ourDecember 14, 2000 Annual Meeting of Stockholders.  At October 31, 2002, there wereoutstanding ISOs under the 2000 Plan held by 22 employees exercisable topurchase an aggregate 496,000 shares of Bio-Reference Common Stock at exerciseprices ranging from $1.125 to $7.97 per share. During fiscal 2003, we granted additional ISOs under the 2000 Plan to atotal of 79 employees exercisable to purchase an aggregate 281,000 shares ofBio-Reference Common Stock at exercise prices ranging from $4.21 to $11.67 pershare. During fiscal 2003, ISOs issued under the 2000 Plan exercisable topurchase an aggregate 57,000 shares were cancelled due to termination ofemployment. In addition, one employee exercised his ISOs issued under the 2000Plan and purchased 15,000 shares.  As aresult, at October 31, 2003, there were outstanding ISOs issued under the2000 Plan exercisable to purchase an aggregate 705,000 shares at prices rangingfrom $1.688 to $11.67 per share.

 

The 2000 Plan authorizes the grant of options which qualify for ISOtreatment under Section 422 of the Internal Revenue Code, as amended (the“Code”) to purchase up to a maximum aggregate 800,000 shares of the Company’sCommon Stock. Options may only be granted under the 2000 Plan to employees ofthe Company and its subsidiaries (including officers and directors who are alsoemployees).

 

The 2000 Plan will be administered by the Board of Directors or by aStock Option Committee designated by the Board of Directors. The Board or theStock Option Committee, as the case may be, has the discretion to determine theeligible employees to whom, and the price (not less than the fair market valueon the date of grant) at which options will be granted; the periods duringwhich each option is exercisable; and the number of shares subject to eachoption. The Board or the Stock Option Committee has the authority to interpretthe 2000 Plan and to establish and amend rules and regulations relatingthereto.

 

The 2000 Plan provides that the exercise price of an option grantedthereunder shall not be less than the fair market value of the Common Stock onthe date the option is granted. However, in the event an option is grantedunder the 2000 Plan to a holder of 10% or more of the Company’s outstandingCommon Stock, the exercise price must be at least 110% of such fair marketvalue. Under the 2000 Plan, options must be granted before the August 24,2010 Termination Date. No option may have a term longer than ten years (limitedto five years in the case of an option granted to a 10% or greater stockholderof the Company). The aggregate fair market value of the Company’s Common Stockwith respect to which options are exercisable for the first time by a granteeunder the 2000 Plan during any calendar year cannot exceed $100,000. Optionsgranted under the 2000 Plan are non-transferable and must be exercised by anoptionee, if at all, while employed by the Company or a subsidiary or withinthree months after termination of such optionee’s employment due to retirement,or within one year of such termination if due to disability or death. The Boardor the Stock Option Committee, as the case may be, may, in its sole discretion,cause the Company to lend money to or guaranty any obligation of an employeefor the purpose of enabling such employee to exercise an option granted underthe 2000 Plan provided that such loan or obligation cannot exceed fifty percent(50%) of the exercise price of such option.

 

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**Description of the 2003 Plan**

 

On June 3, 2003, the Boardof Directors adopted the 2003 Employee Incentive Stock Option Plan (the “2003Plan”) reserving an aggregate 800,000 shares of Bio-Reference Common Stock forissuance upon exercise of ISOs which may be granted under the 2003 Plan.Stockholders ratified the adoption of the 2003 Plan at our July 31, 2003Annual Meeting of Stockholders. No ISOs had been granted at October 31,2003 pursuant to the 2003 Plan.

 

The 2003 Plan authorizes the grant of options which qualify for ISOtreatment under Section 422 of the Internal Revenue Code, as amended (the“Code”) to purchase up to a minimum aggregate 800,000 shares of the Company’sCommon Stock.  Options may only begranted under the 2003 Plan to employees of the Company and its subsidiaries(including those officers and directors who are also employees).

 

The 2003 Plan will be administered by the Board of Directors or by aStock Option Committee designated by the Board of Directors.  The Board or the Stock Option Committee, asthe case may be, has the discretion to determine the eligible employees towhom, and the prices (not less than the fair market value on the date of grant)at which options will be granted; the periods during which each option isexercisable; and the number of shares subject to each option.  The Board or the Stock Option Committee hasthe authority to interpret the 2003 Plan and to establish and amend rules andregulations relating thereto.

 

The 2003 Plan provides that the exercise price of an option grantedthereunder shall not be less than the fair market value of the Common Stock onthe date the option is granted. However, in the event an option is granted under the 2003 Plan to a holderof 10% or more of the Company’s outstanding Common Stock, the exercise pricemust be at least 110% of such fair market value.

 

Under the 2003 Plan, options must be granted before the June 2,2013 Termination Date.  No option mayhave a term longer than ten years (limited to five years in the case of anoption granted to a 10% or greater stockholder of the Company).  The aggregate fair market value of theCompany’s Common Stock with respect to which options are exercisable for thefirst time by a grantee under all of the Company’s Stock

 

Option Plans during any calendar year cannot exceed $100,000.  Options granted under the 2003 Plan arenon-transferable and must be exercised by an optionee, if at all, whileemployed by the Company or a subsidiary or within three months aftertermination of such optionee’s employment due to retirement, or within one yearof such termination if due to disability or death.  The Board or the Stock Option Committee, as the case may be, may,in its sole discretion, cause the Company to lend money to or guaranty anyobligation of an employee for the purpose of enabling such employee to exercisean option granted under the 2003 Plan provided that such loan or obligationcannot exceed fifty percent (50%) of the exercise price of such option.

 

Non-Qualified Options (NQOs) and Warrants

 

At October 31, 2002, there were outstanding NQOs and Warrantsowned by our employees, directors, various consultants and a software providerexercisable to purchase an aggregate 557,750 shares of Bio-Reference CommonStock at exercise prices ranging from $.71875 to $6.80 per share.  During fiscal 2003, we granted NQOs to fourmembers of our newly formed Scientific Advisory Board exercisable to purchasean aggregate 70,000 shares of Bio-Reference Common Stock at exercise pricesranging from $6.98 to $7.94 per share. During fiscal 2003, two employeesexercised NQOs and purchased an aggregate 62,140 shares of Bio-Reference CommonStock. Also during fiscal 2003, NQOs exercisable to purchase an aggregate31,860 shares were cancelled due to terminations of employment. As a result, atOctober 31, 2003, there were outstanding NQOs and Warrants owned by ouremployees, directors, consultants including members of our Scientific AdvisoryBoard and a software provider exercisable to purchase an aggregate 533,750shares of Bio-Reference Common Stock at exercise prices ranging from $1.00 to$7.94 per share.

 

30

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See Note 11 of Notes to the Consolidated Financial Statements.

 

31

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**OPTION GRANTS IN LAST FISCAL YEAR**

 

No options to purchase Bio-Reference Common Stock were granted to anyof our three Named Executive Officers in fiscal 2003.

 

**AGGREGATED OPTION EXERCISES IN LAST FISCALYEAR AND FISCAL YEAR-END OPTION VALUES**

 

No options were exercised by any of our three Named Executive Officersin fiscal 2003. The following table provides information regarding the value ofeach such officer’s unexercised options at October 31, 2003.

 

 
|            |   | Number of  Unexercised  Options at Fiscal  Year-End |   | Value of Unexercised  In-The-Money  Options  at Fiscal  Year-End (1) |   |
|-----------------|--------|-----------------------------------------------------|--------|----------------------------------------------------------------------|--------|
| Name            |   | Exercisable (E)  Unexercisable (U)                  |   | Exercisable (E)  Unexercisable (U)                                   |   |
|            |   |                                                |   |                                                                 |   |
| Marc D. Grodman |   | 4,000                                               | (E)    | $                                                                    | 39,160 | (E) |
|            |   |                                                |   |                                                                 |   |
| Howard          |   | 213,334                                        | (E)    | 3,385,877                                                            | (E)    |
| Dubinett        |   | 4,000                                               | (E)    | 39,160                                                               | (E)    |
|            |   |                                                |   |                                                                 |   |
| Sam Singer      |   | 4,000                                               | (E)    | 39,160                                                               | (E)    |
|                 |        |                                                     |        |                                                                      |        |  |

 

----

(1)Represents the difference between the exercise price of the options and $16.59,the closing sale price for Bio-Reference Common Stock on October 31, 2003.

 

**Directors’ Compensation**

 

Directors who are not our employees were also paid a $1,000 per quarterdirector’s fee during fiscal year 2003.

 

Item 12. - Security Ownership of Certain Beneficial Owners andManagement

 

The following table sets forth information as of January 16, 2003with respect to the ownership of Common Stock by (i) each person known to us tobe the beneficial owner of more than 5% of our outstanding Common Stock, (ii)each of our directors, (iii) each of our executive officers, and (iv) alldirectors and executive officers as a group. The percentages have been calculated on the basis of treating asoutstanding for a particular holder, all shares of Common Stock outstanding onsaid date owned by such holder and all shares of Common Stock issuable to suchholder in the event of exercise or conversion of outstanding options, warrantsand convertible securities owned by such holder at said date which areexercisable or convertible within 60 days of such date.

 

32

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| Name and Address of  Beneficial Owner                                        |   | Shares of Common Stock  Beneficially Owned(1) |   | Percentage  Ownership |   |
|------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|-----------------------|--------|
|                                                                         |   |                                          |   |                  |   |
| Directors and Executive Officers*                                            |   |                                          |   |                  |   |
|                                                                         |   |                                          |   |                  |   |
| Marc D. Grodman(2)                                                           |   | 1,672,846                                     |   | 14                    | %      |
| Morton L. Topfer(3)                                                          |   | 1,491,200                                     |   | 13                    | %      |
| Howard Dubinett(4)                                                           |   | 481,001                                       |   | 4                     | %      |
| Sam Singer(5)                                                                |   | 344,667                                       |   | 3                     | %      |
| Gary Lederman(6)                                                             |   | 44,700                                        |   | —                |   |
| John Roglieri(7)                                                             |   | 59,500                                        |   | 1                     | %      |
| Executive Officers and Directors as a group  (six persons)(2)(3)(4)(5)(6)(7) |   | 4,093,914                                     |   | 33                    | %      |

 

----

*                 Theaddress of all of the Company’s directors and executive officers is c/o theCompany, 481 Edward H. Ross Drive, Elmwood Park, New Jersey 07407.

 

(1)          Except as otherwise noted, each holder namedin the table has sole voting and investment power with respect to all shares ofCommon Stock shown as beneficially owned.

 

(2)          Includes 895,101 shares owned directly,549,678 shares issuable upon conversion of Series A Preferred Stock and 4,000shares issuable upon exercise of options. Also includes 121,667 shares owned directly and 54,400 shares issuable uponconversion of Series A Preferred Stock owned by Dr. Grodman’s wife, PamGrodman, and 48,000 shares owned by their minor children. Dr. Grodman disclaimsbeneficial ownership of these 224,067 shares.

 

(3)          Includes an aggregate 1,479,200 shares ownedindividually or by CastleTop Capital Management, LP of which Morton L. Topferis the Managing Director; and 12,000 shares issuable upon exercise of options.

 

(4)          Includes 263,667 shares owned directly, and217,334 shares issuable upon exercise of options.

 

(5)          Includes 331,667 shares owned directly, 4,000shares issuable upon exercise of options and 9,000 shares owned by children whoshare Mr. Singer’s household. Mr. Singer disclaims beneficial ownership ofthese 9,000 shares.

 

 (6)        Includes 25,200 sharesowned directly and 19,500 shares issuable upon exercise of options.

 

 (7)        Includes 40,000 sharesowned directly and 19,500 shares issuable upon exercise of options.

 

Item 13. - Certain Relationships and Related Transactions

 

On April 20, 1993, in order to facilitate the Company’s 1993proposed public offering, Dr. Grodman canceled his pro-rata option contained inhis employment contract and all other outstanding options and warrants topurchase shares of Common Stock held by Dr. Grodman, his wife and an affiliatedentity (the “Grodman Group”) exercisable to purchase an aggregate 604,078shares of Common Stock at prices ranging from $1.4438 to $1.50 or an averageprice of

 

33

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$1.47 per share, in consideration for the issuance to the Grodman Groupof 604,078 shares of a new class of senior preferred stock, $.10 par value pershare (“Senior Preferred Stock”).  Eachshare of Senior Preferred Stock had the same voting rights (one vote pershare), dividend rights and liquidation rights as each share of Common Stockand for a period of 10 years after issuance, was convertible into one share ofCommon Stock upon payment of a conversion price of $1.50 per share.  The 604,078 shares of Senior Preferred Stockwere issued to the Grodman Group on August 23, 1993.

 

On May 13, 1997 pursuant to a recapitalization, the Senior Preferredwas retired in exchange for a new class of Series A Senior Preferred Stockissued to the Grodman Group. The new Series A Senior Preferred Stock is convertibleinto an aggregate 604,078 shares of Common Stock on or before May 1, 2007 at aconversion price of $.75 per share and has the same voting rights (one vote pershare), dividend rights and liquidation rights as each share of Common Stock.

 

Wehad established a “split-dollar” insurance program (the “Original InsuranceProgram”) for each of our three Named Executive Officers. Pursuant to theprogram, if the executive died while employed by us, we would have beenreimbursed out of the policy death benefit for the premiums we paid or the cashsurrender value of the policy and the death benefit less such reimbursementwould be paid to the executive’s estate. If the executive left our employ, hewould have been required to pay us back the aggregate premiums we paid or thecash surrender value of the policy but he would have been entitled to ownershipof the policy. As a result of the uncertainty created by passage of theSarbanes-Oxley Act of 2002 (signed into law on July 30, 2002) we suspendedpayment of the premiums on these policies. After July 30, 2002, premiumswere paid by reducing the policy cash values. At October 31, 2003 (and atOctober 31, 2002), the premiums which we paid on these policies aggregated$1,039,000. At October 31, 2003, the aggregate premiums paid exceeded theaggregate net cash surrender value of the policies by approximately $116,000.

 

Effective November 30, 2003, we agreed with each of the threeNamed Executive Officers to terminate the Original Insurance Program. Inconnection with the termination of the Original Insurance Program, the NamedExecutive Officers transferred ownership of the insurance policies to us andagreed to reimburse us for the premiums we paid to the extent required underthe Original Insurance Program.

 

Effective November 30,2003, we adopted a new endorsement “split-dollar” insurance program (the “NewInsurance Program”) for each of the Named Executive Officers. Under the NewInsurance Program, we will be the sole owner of the life insurance policies (includingthe cash value of the policies) and will pay the premium on the policies. Priorto termination of employment, the Named Executive Officer will have the rightto name the beneficiary of the death benefit but will have no access to anypolicy cash value. On retirement, we will transfer our interest in the policyto the retiring Named Executive Officer who will be required to reimburse usfor the premiums we paid. See Note 12 of Notes to the Consolidated FinancialStatements.

 

Item 14.  Controls andProcedures

 

(a) Explanation of disclosure controls and procedures.  Our chief executive officer and our chieffinancial officer after evaluating the effectiveness of our disclosure controlsand procedures (as defined in Exchange Act Rules 13a-14(c) and 15-d 149c) as ofa date within 90 days of the filing date of this Annual Report (the “EvaluationDate”) have concluded that as of the Evaluation Date, our disclosure controlsand procedures were adequate and effective to ensure that material informationrelating to the Company and its consolidated subsidiaries would be made knownto them by others within those entities, particularly during the period inwhich this Annual Report was being prepared.

 

34

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(b) Changes in internal controls.  There were no significant changes in our internal controls or inother factors that could significantly affect our disclosure controls andprocedures subsequent to the Evaluation Date, nor any significant deficienciesor material weaknesses in such disclosure controls and procedures requiringcorrective action.  As a result, nocorrective actions were taken.

 

Item 15 – Principal Accountant Fees and Services

 

The firm of Moore Stephens, P.C. (“Moore Stephens”) certified publicaccountants, audited our accounts and the accounts of our subsidiaries for thefiscal years ended October 31, 2003 and 2002. Moore Stephens and itspredecessor firm have been our auditors since 1988.

 

(1)          Audit Fees

 

Moore Stephens billed us approximately $140,000  for professional services rendered for theaudit of our annual consolidated financial statements for our 2003 fiscal yearand to review the financial statements included in our quarterly reports onForm 10-Q filed with respect to quarterly periods in such fiscal year ascompared to approximately $119,000  forsuch services with respect to our 2002 fiscal year.

 

(2)          Audit-Related Fees

 

Moore Stephens did not render any services related to the performanceof the audit or review of our financial statements for fiscal 2003 and 2002other than the services reported in Item 15 (1) herein.

 

(3)          Tax Fees

 

Moore Stephens billed us approximately $25,000 for tax services forfiscal 2003 and approximately $22,000 for tax services for fiscal 2002. Thefees were billed for tax return preparation.

 

(4)          All Other Fees

 

No fees were billed to us by Moore Stephens with respect to fiscal 2003or fiscal 2002 other than for services described in Item 15 (1) and (3) herein.

 

(5)          Pre-Approval Policies and Procedures

 

The engagement of Moore Stephens to render the above audit and taxservices was approved by our audit committee prior to the engagement.

 

35

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**PART IV**

 

Item 16.                                                       Exhibits,Financial Statement Schedules and Reports on Form 8-K

 

(a)1.                         Financial Statements

 

The following financial statements of the Company are included in PartII, Item 7

 
|   | Report of Independent Certified Public Accountants                                                             |   |
|--------|----------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                           |   |
|   | Consolidated Balance Sheets - October 31, 2003 and 2002                                                   |   |
|   |                                                                                                           |   |
|   | Consolidated Statements of Operations-  Years ended October 31, 2003,  2002 and 2001                 |   |
|   |                                                                                                           |   |
|   | Consolidated Statements of Shareholders’  Equity  Years ended October 31, 2003,  2002, and 2001 |   |
|   |                                                                                                           |   |
|   | Consolidated Statements of Cash Flows -  Years ended October 31, 2003,  2002 and 2001                |   |
|   |                                                                                                           |   |
|   | Notes to Consolidated Financial Statements-                                                                    |   |
|   |                                                                                                           |   |
|   | Schedule II -                                                                                             |   |
|   |                                                                                                           |   |
|   | Years ended October 31, 2003, 2002 and  2001                                                              |   |

 

(b).                              Reportson Form 8-K

No reports on Form 8-K were filed during the Quarter endedOctober 31, 2003.

 

(c).                               Exhibits

 
| **Exhibit No.** |   | **Item**                                                                                                                                     |   | **Incorporated  by  Reference to** |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|
| 3.1*            |   | Amended and Restated Certificate of Incorporation dated  November 15, 1989                                                              |   | (A)                                |
|            |   |                                                                                                                                         |   |                               |
| 3.1.1*          |   | Amendment to Certificate of Incorporation dated October 4, 1991  (authorizing one-for-10 reverse stock split)                           |   | (B)                                |
|            |   |                                                                                                                                         |   |                               |
| 3.1.2*          |   | Amendment to Certificate of Incorporation dated August 23, 1993  (authorizing one-for-three reverse stock split)                        |   | (C)                                |
|            |   |                                                                                                                                         |   |                               |
| 3.1.3*          |   | Amendment to Certificate of Incorporation dated March 23, 1998  (creating Series A Senior Preferred Stock)                              |   | (F)                                |
|            |   |                                                                                                                                         |   |                               |
| 3.1.4*          |   | Amendment to Certificate of Incorporation dated March 31, 1998  (creating Series A Junior Participating Preferred Stock)                |   | (F)                                |
|            |   |                                                                                                                                         |   |                               |
| 3.1.5*          |   | Amendment to Certificate of Incorporation dated September 22,  2003 (increasing authorized shares of Common Stock to 35,000,000 shares) |   | (J)                                |
|            |   |                                                                                                                                         |   |                               |
| 3.2*            |   | By-laws                                                                                                                                      |   | (D)                                |
|            |   |                                                                                                                                         |   |                               |
| 4.1*            |   | Form of Common Stock Certificate, $.01 par value                                                                                             |   | (C)                                |

 

36

----

 
| 10.1*   |   | Lease Agreement for Elmwood Park, New Jersey Premises, expiring in  February, 2004                                                                                                                            |   | (F)    |
|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|    |   |                                                                                                                                                                                                          |   |   |
| 10.2*   |   | Employment Agreement between the Company and Marc Grodman expiring in  October 2004                                                                                                                      |   | (F)    |
|    |   |                                                                                                                                                                                                          |   |   |
| 10.3*   |   | Employment Agreement between the Company and Howard Dubinett as in  effect at October 31, 2001                                                                                                           |   | (F)    |
|    |   |                                                                                                                                                                                                          |   |   |
| 10.3.1* |   | Extension to Employment Agreement between the Company and Howard  Dubinett effective November 1, 2002                                                                                                    |   | (I)    |
|    |   |                                                                                                                                                                                                          |   |   |
| 10.4*   |   | Employment Agreement between the Company and Sam Singer as in effect  at October 31, 2001                                                                                                                |   | (F)    |
|    |   |                                                                                                                                                                                                          |   |   |
| 10.4.1* |   | Extension to Employment Agreement between the Company and Sam Singer  effective November 1, 2002                                                                                                         |   | (I)    |
|    |   |                                                                                                                                                                                                          |   |   |
| 10.5*   |   | The Company’s 1989 Stock Option Plan                                                                                                                                                                     |   | (B)    |
|    |   |                                                                                                                                                                                                          |   |   |
| 10.5.1* |   | The Company’s 2000 Employee Incentive Stock Option Plan.                                                                                                                                                 |   | (G)    |
|    |   |                                                                                                                                                                                                          |   |   |
| 10.5.2* |   | The Company’s 2003 Employee Incentive Stock Option Plan.                                                                                                                                                 |   | (J)    |
|    |   |                                                                                                                                                                                                          |   |   |
| 10.7*   |   | Rights Agreement dated as of March 31, 1998 including Exhibits  thereto between the Company and American Stock Transfer & Trust Company  as Rights Agent                                             |   | (E)    |
|    |   |                                                                                                                                                                                                          |   |   |
| 10.11*  |   | Stock Purchase Agreement dated May 14, 2001, between the Company on  the one hand and CastleTop Investments, L.P. (an affiliate of Morton L.  Topfer) and Morton L. Topfer on the other                       |   | (H)    |
|    |   |                                                                                                                                                                                                          |   |   |
| 10.12*  |   | Strategic Marketing Alliance Agreement dated as of December 31,  2001 between Bio-Reference Laboratories, Inc. and CareEvolve.com, Inc. on the  one hand and Roche Diagnostics Corporation on the other. |   | (H)    |

 

37

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21                                                            Subsidiariesof the Company

 

The following are the Company’s three wholly-owned subsidiaries:

 

| **State of Incorporation**                     |   | **Name under which it****Conducts  or  Conducted Business** |   |
|------------------------------------------------|--------|-------------------------------------------------------------|--------|
| Medilabs, Inc.  New York                  |   | Medilabs                                                    |   |
| BRLI No. 1 Acquisition Corp.   New Jersey |   | Right Body Foods                                            |   |
| CareEvolve.com, Inc.  New  Jersey         |   | CareEvolve                                                  |   |

 
| 31.1   |   | Certification of Chief Executive Officer                                          |
|--------|--------|-----------------------------------------------------------------------------------|
|   |   |                                                                              |
| 31.2   |   | Certification of Chief Financial Officer                                          |
|   |   |                                                                              |
| 32.1   |   | Certification pursuant to 18 U.S.C. Section 1350 of Chief  Executive Officer |
|   |   |                                                                              |
| 32.2   |   | Certification pursuant to 18 U.S.C. section 1350 of Chief  Financial Officer |

 

The exhibits designated above with an asterisk (*) have previously beenfiled with the Commission and, pursuant to 17 C.F.R. Secs. 201.24 and240.12b-32, are incorporated by reference to the documents as indicated below.

 

(A)                              Incorporated by referenceto exhibit filed with the Company’s Registration Statement on Form S-1 (FileNo. 33-31360).

(B)                                Incorporated byreference to exhibit filed with the Company’s annual report on Form 10KSB forthe year ended October 31, 1992.

(C)                                Incorporated byreference to exhibit filed with the Company’s Registration Statement on FormSB-2 (File No. 33-68678).

(D)                               Incorporated byreference to exhibit filed with the Company’s Registration Statement on FormS-18 (File No. 33-5048-NY).

(E)                                 Incorporated byreference to exhibit filed with the Company’s report on Form 8-A datedMarch 31, 1998.

(F)                                 Incorporated byreference to exhibit filed with the Company’s annual report on Form 10-K forthe year ended October 31, 1999.

(G)                                Incorporated byreference to exhibit filed with the Company’s annual report on Form 10-K forthe year ended October 31, 2000.

(H)                               Incorporated byreference to exhibit filed with the Company’s annual report on Form 10-K forthe year ended October 31, 2001.

(I)                                    Incorporated byreference to exhibit filed with the Company’s annual report on Form 10-K forthe year ended October 31, 2002

(J)                                   Incorporated byreference to exhibit filed with the Company’s Registration Statement on FormS-8 (File No.  333-111578).

 

38

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SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, theregistrant caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
| BIO-REFERENCE LABORATORIES, INC.                                                                                                                                                |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                            |   |   |
|                                                                                                                                                                            |   |   |
| By:                                                                                                                                                                             | /S/ Marc D. Grodman |   |
| Marc D. Grodman                                                                                                                                                                 |   |
| Chairman of the Board, President,                                                                                                                                               |   |
| Chief Executive Officer and Director                                                                                                                                            |   |
| Dated: January 28, 2004                                                                                                                                                    |   |
|                                                                                                                                                                            |   |
| In accordance with the Exchange Act, this report has been signed  below by the following persons on behalf of the registrant and in the  capacities and on the dates indicated. |
|                                                                                                                                                                            |   |
| /S/ Marc D. Grodman                                                                                                                                                             |   |
| Marc D. Grodman                                                                                                                                                                 |   |
| Chairman of the Board, President,                                                                                                                                               |   |
| Chief Executive Officer and Director                                                                                                                                            |   |
| January 28, 2004                                                                                                                                                           |   |
|                                                                                                                                                                            |   |
| /S/ Howard Dubinett                                                                                                                                                             |   |
| Howard Dubinett                                                                                                                                                                 |   |
| Executive Vice President,                                                                                                                                                       |   |
| Chief Operating Officer and Director                                                                                                                                            |   |
| January 28, 2004                                                                                                                                                           |   |
|                                                                                                                                                                            |   |   |
| /S/ Sam Singer                                                                                                                                                                  |   |
| Sam Singer                                                                                                                                                                      |   |
| Vice President, Chief Financial Officer,                                                                                                                                        |
| Chief Accounting Officer and Director                                                                                                                                           |
| January 28, 2004                                                                                                                                                           |
|                                                                                                                                                                            |   |
| /S/ Morton Topfer                                                                                                                                                               |   |
| Morton Topfer                                                                                                                                                                   |   |
| Director                                                                                                                                                                        |   |
| January 28, 2004                                                                                                                                                           |
|                                                                                                                                                                            |   |   |
| /S/ John Roglieri                                                                                                                                                               |   |
| John Roglieri                                                                                                                                                                   |
| Director                                                                                                                                                                        |
| January 28, 2004                                                                                                                                                           |
|                                                                                                                                                                            |   |   |
| /S/ Gary Lederman                                                                                                                                                               |   |
| Gary Lederman                                                                                                                                                                   |   |
| Director                                                                                                                                                                        |   |
| January 28, 2004                                                                                                                                                           |   |

 

39

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**INDEPENDENT AUDITOR’S REPORT**

 

To the Board of Directors and Shareholders of

Bio-Reference Laboratories, Inc.

Elmwood Park, New Jersey

 

We have audited the accompanying consolidated balance sheets ofBio-Reference Laboratories, Inc. and its subsidiaries as of October 31,2003 and 2002, and the related consolidated statements of operations,shareholders’ equity, and cash flows for each of the three fiscal years in theperiod ended October 31, 2003. These consolidated financial statements are the responsibility of theCompany’s management.  Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the consolidated financial statements arefree of material misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallconsolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the consolidated financial positionof Bio-Reference Laboratories, Inc. and its subsidiaries as of October 31,2003 and 2002, and the consolidated results of their operations and their cashflows for each of the three fiscal years in the period ended October 31,2003, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

 
|                 | MOORE STEPHENS, P. C.         |
|----------------------|-------------------------------|
|                 | Certified Public Accountants. |
|                 |                          |
| Cranford, New Jersey |                          |
| January 9, 2004 |                          |

 

F-1

----

 

**BIO-REFERENCE LABORATORIES, INC. ANDSUBSIDIARIES**

 

**CONSOLIDATEDBALANCE SHEETS**

**[Dollars In Thousands, Except Per Share Data]**

 
|                                     |   | **October 31,** |       |
|------------------------------------------|--------|----------------------|------------|
|                                     |   | **2003**             | ** ** | **2002** | ** ** |
| ***Assets:***                            |   |                 |       |   |   |
| **Current Assets:**                      |   |                 |       |   |   |
| Cash and Cash Equivalents                |   | $                    | 3,966      |   | $ | 3,403 |   |
| Accounts Receivable - Net                |   | 32,913               |       | 28,699 |   |
| Inventory                                |   | 1,088                |       | 1,081 |   |
| Other Current Assets                     |   | 763                  |       | 876 |   |
| Deferred Tax Asset                       |   | —               |       | 308 |   |
|                                     |   |                 |       |   |   |
| **Total Current  Assets**                |   | 38,730               |       | 34,367 | ** ** |
|                                     |   |                 |       |   | ** ** |
| **Property and Equipment  - At Cost**    |   | 7,485                |       | 4,881 | ** ** |
|                                     |   |                 |       |   | ** ** |
| **Less: **Accumulated  Depreciation |   | 2,722                |       | 1,877 | ** ** |
|                                     |   |                 |       |   | ** ** |
| **Property and  Equipment - Net**        |   | 4,763                |       | 3,004 | ** ** |
|                                     |   |                 |       |   | ** ** |
| **Other Assets:**                        |   |                 |       |   |   |
| Deposits                                 |   | 314                  |       | 293 | ** ** |
| Goodwill - Net                           |   | 5,843                |       | 5,843 | ** ** |
| Intangible Assets - Net                  |   | 2,299                |       | 2,868 | ** ** |
| Other Assets                             |   | 1,270                |       | 1,067 | ** ** |
|                                     |   |                 |       |   | ** ** |
| **Total Other Assets**                   |   | 9,726                |       | 10,071 | ** ** |
|                                     |   |                 |       |   | ** ** |
| **Total Assets**                         |   | $                    | 53,219     |   | $ | 47,442 | ** ** |

 

The Accompanying Notes are an Integral Part of These ConsolidatedFinancial Statements.

 

F-2

----

 
|                                                                                                                                                                             |   | **October 31,** |       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------|------------|
|                                                                                                                                                                             |   | **2003**             |       | **2002** | ** ** |
| ***Liabilities and  Shareholders’ Equity:***                                                                                                                                |   |                 |       |   |   |
| **Current  Liabilities:**                                                                                                                                                        |   |                 |       |   |   |
| Accounts Payable                                                                                                                                                                 |   | $                    | 7,900      |   | $ | 6,871 |   |
| Accrued Salaries and Commissions                                                                                                                                                 |   | 1,719                |       | 2,420 |   |
| Accrued Taxes and Expenses                                                                                                                                                       |   | 1,158                |       | 896 |   |
| Revolving Note Payable - Bank                                                                                                                                                    |   | 8,718                |       | 10,546 |   |
| Current Maturities of Long-Term Debt                                                                                                                                             |   | —               |       | 400 |   |
| Capitalized Lease Obligation - Short-Term  Portion                                                                                                                               |   | 933                  |       | 583 |   |
| Deferred Tax Liabilities                                                                                                                                                         |   | 631                  |       | — |   |
|                                                                                                                                                                             |   |                 |       |   |   |
| **Total Current  Liabilities**                                                                                                                                                   |   | 21,059               |       | 21,716 | ** ** |
|                                                                                                                                                                             |   |                 |       |   |   |
| **Long-Term  Liabilities:**                                                                                                                                                      |   |                 |       |   |   |
| Capitalized Lease Obligations - Long-Term  Portion                                                                                                                               |   | 2,127                |       | 1,423 |   |
| Other Long-Term Liabilities                                                                                                                                                      |   | 75                   |       | 96 |   |
|                                                                                                                                                                             |   |                 |       |   |   |
| **Total Long-Term  Liabilities**                                                                                                                                                 |   | 2,202                |       | 1,519 |   |
|                                                                                                                                                                             |   |                 |       |   |   |
| **Commitments and  Contingencies**                                                                                                                                               |   | **—**           | ** ** | **—** | ** ** |
|                                                                                                                                                                             |   |                 |       |   |   |
| **Shareholders’  Equity:**                                                                                                                                                  |   |                 |       |   |   |
| Preferred Stock, Par Value $.10 Per Share,  Authorized 1,059,589 Shares; None Issued                                                                                             |   | —               |       | — |   |
|                                                                                                                                                                             |   |                 |       |   |   |
| Series A - Senior Preferred Stock, Par  Value $.10 Per Share,  Authorized, Issued and Outstanding 604,078 Shares                                                                 |   | 60                   |       | 60 |   |
|                                                                                                                                                                             |   |                 |       |   |   |
| Series A - Junior Participating Preferred  Stock, Par Value  $.10 Per Share, Authorized 3,000 Shares; None Issued                                                                |   | —               |       | — |   |
|                                                                                                                                                                             |   |                 |       |   |   |
| Common Stock, Par Value $.01 Per Share,  Authorized  35,000,000 Shares; Issued and Outstanding 11,451,023 and  11,588,583 Shares at October 31, 2003 and 2002, Respectively |   | 115                  |       | 116 |   |
|                                                                                                                                                                             |   |                 |       |   |   |
| Additional Paid-in Capital                                                                                                                                                       |   | 27,907               |       | 28,544 |   |
|                                                                                                                                                                             |   |                 |       |   |   |
| Retained Earnings [Deficit]                                                                                                                                                      |   | 2,315                |       | (4,225 | ) |
|                                                                                                                                                                             |   |                 |       |   |   |
| Totals                                                                                                                                                                           |   | 30,397               |       | 24,495 |   |
| Deferred Compensation                                                                                                                                                            |   | (439                 | )          | (288 | ) |
|                                                                                                                                                                             |   |                 |       |   |   |
| **Total Shareholders’  Equity**                                                                                                                                             |   | 29,958               |       | 24,207 |   |
|                                                                                                                                                                             |   |                 |       |   |   |
| **Total Liabilities  and Shareholders’ Equity**                                                                                                                             |   | $                    | 53,219     |   | $ | 47,442 |   |

 

The Accompanying Notes are an Integral Part of These ConsolidatedFinancial Statements.

 

F-3

----

 

**BIO-REFERENCE LABORATORIES, INC. ANDSUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**[Dollars In Thousands, Except Per Share Data]**

 
|                                           |   | **Years  ended  October 31,** |    |
|------------------------------------------------|--------|------------------------------------|---------|
|                                           |   | **2003**                           |    | **2002** |   | **2001** |   |
|                                           |   |                               |    |   |   |   |   |
| **Net Revenues**                               |   | $                                  | 109,034 |   | $ | 96,631 |   | $ | 80,622 |   |
|                                           |   |                               |    |   |   |   |   |
| **Cost of Services:**                          |   |                               |    |   |   |   |   |
| Depreciation and Amortization                  |   | 1,032                              |    | 650 |   | 674 |   |
| Employee Related Expenses                      |   | 26,562                             |    | 23,669 |   | 20,505 |   |
| Reagents and Laboratory Supplies               |   | 16,843                             |    | 15,418 |   | 12,975 |   |
| Other Cost of Services                         |   | 11,779                             |    | 11,969 |   | 10,111 |   |
|                                           |   |                               |    |   |   |   |   |
| **Total Cost of  Services**                    |   | 56,216                             |    | 51,706 |   | 44,265 |   |
|                                           |   |                               |    |   |   |   |   |
| **Gross Profit**                               |   | 52,818                             |    | 44,925 |   | 36,357 |   |
|                                           |   |                               |    |   |   |   |   |
| **General and  Administrative Expenses:**      |   |                               |    |   |   |   |   |
| Depreciation and Amortization                  |   | 689                                |    | 899 |   | 1,011 |   |
| General and Administrative Expenses            |   | 30,038                             |    | 25,613 |   | 21,008 |   |
| Provision for Doubtful Accounts                |   | 12,806                             |    | 12,341 |   | 10,731 |   |
|                                           |   |                               |    |   |   |   |   |
| **Total General and  Administrative Expenses** |   | 43,533                             |    | 38,853 |   | 32,750 |   |
|                                           |   |                               |    |   |   |   |   |
| **Income from  Operations**                    |   | 9,285                              |    | 6,072 |   | 3,607 |   |
|                                           |   |                               |    |   |   |   |   |
| **Other [Income]  Expense:**                   |   |                               |    |   |   |   |   |
| Interest Expense                               |   | 704                                |    | 889 |   | 1,686 |   |
| Interest Income                                |   | (23                                | )       | (40 | ) | (26 | ) |
|                                           |   |                               |    |   |   |   |   |
| Total Other Expense - Net                      |   | 681                                |    | 849 |   | 1,660 |   |
|                                           |   |                               |    |   |   |   |   |
| Income Before Income Taxes                     |   | 8,604                              |    | 5,223 |   | 1,947 |   |
|                                           |   |                               |    |   |   |   |   |
| Provision for Income Tax Expense [Benefit]     |   | 2,064                              |    | 301 |   | (414 | ) |
|                                           |   |                               |    |   |   |   |   |
| Net Income                                     |   | $                                  | 6,540   |   | $ | 4,922 |   | $ | 2,361 |   |
|                                           |   |                               |    |   |   |   |   |
| Net Income Per Common Share - Basic            |   | $                                  | .57     |   | $ | .43 |   | $ | .24 |   |
|                                           |   |                               |    |   |   |   |   |
| Net Income Per Common Share - Diluted          |   | $                                  | .51     |   | $ | .39 |   | $ | .21 |   |

 

The Accompanying Notes are an Integral Part of These ConsolidatedFinancial Statements.

 

F-4

----

 

**BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTSOF SHAREHOLDERS’ EQUITY**

**[Dollars In Thousands]**

 
|                                           |   | **Series A  Senior Preferred Stock** |   | **Common  Stock** |   | **Additional  Paid-in Capital** |       | **Accumulated  [Deficit]** |   | **Deferred  Compensation** |   | **Total  Shareholders’ Equity** |   |
|------------------------------------------------|--------|--------------------------------------|--------|-------------------|--------|---------------------------------|------------|----------------------------|--------|----------------------------|--------|--------------------------------------|--------|
|                                           |   | **Shares**                           |   | **Amount**        |   | **Shares**                      |       | **Amount**                 |   |                       |   |                                 |   |
|                                           |   |                                 |   |              |   |                            |       |                       |   |                       |   |                                 |   |   |   |   |   |
| **Balance - October 31, 2000**            |   | 604,078                              |   | $                 | 60     |                            | 8,505,444  |                       | $      | 85                         |   | $                                    | 24,873 |   | $ | (11,508 | ) | $ | (449 | ) | $ | 13,061 |   |
|                                           |   |                                 |   |              |   |                            |       |                       |   |                       |   |                                 |   |   |   |   |   |
| Shares Issued for Deferred Compensation        |   | —                               |   | —            |   | 200,000                         |       | 2                          |   | 398                        |   | —                               |   | (400 | ) | — |   |
| Stock Options Issued for Deferred Compensation |   | —                               |   | —            |   | —                          |       | —                     |   | 333                        |   | —                               |   | (333 | ) | — |   |
| Amortization of Deferred Compensation          |   | —                               |   | —            |   | —                          |       | —                     |   | —                     |   | —                               |   | 531 |   | 531 |   |
| Shares Issued for Employee Services            |   | —                               |   | —            |   | 11,000                          |       | —                     |   | 33                         |   | —                               |   | — |   | 33 |   |
| Shares Issued for Consulting Services          |   | —                               |   | —            |   | 279,000                         |       | 3                          |   | 309                        |   | —                               |   | — |   | 312 |   |
| Shares Issued to Investors                     |   | —                               |   | —            |   | 1,500,000                       |       | 15                         |   | 1,485                      |   | —                               |   | — |   | 1,500 |   |
| Exercise of Options - Consultants              |   | —                               |   | —            |   | 515,202                         |       | 5                          |   | 670                        |   | —                               |   | — |   | 675 |   |
| Net Income                                     |   | —                               |   | —            |   | —                          |       | —                     |   | —                     |   | 2,361                                |   | — |   | 2,361 |   |
|                                           |   |                                 |   |              |   |                            |       |                       |   |                       |   |                                 |   |   |   |   |   |
| **Balance - October 31, 2001**            |   | 604,078                              |   | 60                |   | 11,010,646                      |       | 110                        |   | 28,101                     |   | (9,147                               | )      | (651 | ) | 18,473 |   |
|                                           |   |                                 |   |              |   |                            |       |                       |   |                       |   |                                 |   |   |   |   |   |
| Amortization of Deferred Compensation          |   | —                               |   | —            |   | —                          |       | —                     |   | —                     |   | —                               |   | 293 |   | 293 |   |
| Reclassification of Warrants                   |   | —                               |   | —            |   | —                          |       | —                     |   | (70                        | )      | —                               |   | 70 |   | — |   |
| Exercise of Options - Employees                |   | —                               |   | —            |   | 532,937                         |       | 5                          |   | 449                        |   | —                               |   | — |   | 454 |   |
| Exercise of Options - Consultants              |   | —                               |   | —            |   | 45,000                          |       | 1                          |   | 64                         |   | —                               |   | — |   | 65 |   |
| Net Income                                     |   | —                               |   | —            |   | —                          |       | —                     |   | —                     |   | 4,922                                |   | — |   | 4,922 |   |
|                                           |   |                                 |   |              |   |                            |       |                       |   |                       |   |                                 |   |   |   |   |   |
| **Balance - October 31, 2002**            |   | 604,078                              |   | 60                |   | 11,588,583                      |       | 116                        |   | 28,544                     |   | (4,225                               | )      | (288 | ) | 24,207 |   |
|                                           |   |                                 |   |              |   |                            |       |                       |   |                       |   |                                 |   |   |   |   |   |
| Amortization of Deferred Compensation          |   | —                               |   | —            |   | —                          |       | —                     |   | —                     |   | —                               |   | 140 |   | 140 |   |
| Shares Issued for Compensation                 |   | —                               |   | —            |   | 10,000                          |       | —                     |   | 15                         |   | —                               |   | — |   | 15 |   |
| Exercise of Options - Employees                |   | —                               |   | —            |   | 82,140                          |       | 1                          |   | 125                        |   | —                               |   | — |   | 126 |   |
| Warrants Issued to Advisory Board              |   | —                               |   | —            |   | —                          |       | —                     |   | 291                        |   | —                               |   | (291 | ) | — |   |
| Common Stock Repurchased and Retired           |   | —                               |   | —            |   | (229,700                        | )          | (2                         | )      | (1,068                     | )      | —                               |   | — |   | (1,070 | ) |
| Net Income                                     |   | —                               |   | —            |   | —                          |       | —                     |   | —                     |   | 6,540                                |   | — |   | 6,540 |   |
|                                           |   |                                 |   |              |   |                            |       |                       |   |                       |   |                                 |   |   |   |   |   |
| **Balance - October 31, 2003**            |   | 604,078                              |   | $                 | 60     |                            | 11,451,023 |                       | $      | 115                        |   | $                                    | 27,907 |   | $ | 2,315 |   | $ | (439 | ) | $ | 29,958 |   |

 

TheAccompanying Notes are an Integral Part of These Consolidated FinancialStatements.

 

F-5

----

 

**BIO-REFERENCE LABORATORIES, INC. ANDSUBSIDIARIES**

 

**CONSOLIDATED STATEMENTSOF CASH FLOWS**

**[Dollars In Thousands]**

 
|                                                                                          |   | **Years ended  October 31,** |   |
|-----------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                          |   | **2003**                          |   | **2002** |   | **2001** |   |
| **Operating  Activities:**                                                                    |   |                              |   |   |   |   |   |
| Net Income                                                                                    |   | $                                 | 6,540  |   | $ | 4,922 |   | $ | 2,361 |   |
| Adjustments to Reconcile Net Income to Net  Cash Provided by [Used for] Operating Activities: |   |                              |   |   |   |   |   |
| Depreciation and Amortization                                                                 |   | 1,722                             |   | 1,549 |   | 1,685 |   |
| Amortization of Deferred Compensation                                                         |   | 140                               |   | 293 |   | 531 |   |
| Provision for Doubtful Accounts                                                               |   | 12,806                            |   | 12,341 |   | 10,731 |   |
| Deferred Income Taxes                                                                         |   | 939                               |   | 262 |   | (504 | ) |
| Stock Issued for Compensation                                                                 |   | 15                                |   | — |   | 344 |   |
|                                                                                          |   |                              |   |   |   |   |   |
| Changes in Assets and Liabilities                                                             |   |                              |   |   |   |   |   |
| [Net of Effects from Acquisitions]:                                                           |   |                              |   |   |   |   |   |
| [Increase] Decrease in:                                                                       |   |                              |   |   |   |   |   |
| Accounts Receivable                                                                           |   | (17,020                           | )      | (13,753 | ) | (13,969 | ) |
| Inventory                                                                                     |   | (7                                | )      | (95 | ) | (251 | ) |
| Other Current Assets                                                                          |   | 113                               |   | (441 | ) | 7 |   |
| Other Assets                                                                                  |   | (203                              | )      | (107 | ) | (150 | ) |
| Deposits                                                                                      |   | (21                               | )      | (33 | ) | 56 |   |
|                                                                                          |   |                              |   |   |   |   |   |
| Increase [Decrease] in:                                                                       |   |                              |   |   |   |   |   |
| Accounts Payable, Accrued Taxes and  Expenses                                                 |   | 569                               |   | (256 | ) | 753 |   |
|                                                                                          |   |                              |   |   |   |   |   |
| Total Adjustments                                                                             |   | (947                              | )      | (240 | ) | (767 | ) |
|                                                                                          |   |                              |   |   |   |   |   |
| **Net Cash -  Operating Activities - Forward**                                                |   | 5,593                             |   | 4,682 |   | 1,594 | ** ** |
|                                                                                          |   |                              |   |   |   |   |   |
| **Investing  Activities:**                                                                    |   |                              |   |   |   |   |   |
| Acquisition of Property and Equipment                                                         |   | (1,105                            | )      | (433 | ) | (471 | ) |
| Capitalized Software Development Costs                                                        |   | —                            |   | (210 | ) | (711 | ) |
| Repayment of Related Party Receivable                                                         |   | —                            |   | 9 |   | 65 |   |
|                                                                                          |   |                              |   |   |   |   |   |
| **Net Cash -  Investing Activities - Forward**                                                |   | (1,105                            | )      | (634 | ) | (1,117 | **)** |
|                                                                                          |   |                              |   |   |   |   |   |
| **Financing  Activities:**                                                                    |   |                              |   |   |   |   |   |
| Proceeds from Long-Term Debt                                                                  |   | —                            |   | — |   | — |   |
| Payments of Long-Term Debt                                                                    |   | (400                              | )      | (1,060 | ) | (1,030 | ) |
| Payments of Capital Lease Obligations                                                         |   | (753                              | )      | (384 | ) | (328 | ) |
| [Decrease] Increase in Revolving Line of  Credit                                              |   | (1,828                            | )      | (2,075 | ) | 621 |   |
| Proceeds from the Exercise of Stock Options                                                   |   | 126                               |   | 519 |   | 675 |   |
| Proceeds from the Sale of Common Stock                                                        |   | —                            |   | — |   | 1,500 |   |
| Common Stock Repurchased                                                                      |   | (1,070                            | )      | — |   | — |   |
|                                                                                          |   |                              |   |   |   |   |   |
| **Net Cash -  Financing Activities - Forward**                                                |   | $                                 | (3,925 | ) | $ | (3,000 | ) | $ | 1,438 | ** ** |

 

The Accompanying Notes are an Integral Part of These ConsolidatedFinancial Statements.

 

F-6

----

 
|                                                    |   | **Years ended  October 31,** |   |
|---------------------------------------------------------|--------|-----------------------------------|--------|
|                                                    |   | **2003**                          |   | **2002** |   | **2001** |   |
| **Net Cash -  Operating Activities - Forwarded**        |   | $                                 | 5,593  |   | $ | 4,682 |   | $ | 1,594 | ** ** |
|                                                    |   |                              |   |   |   |   |   |
| **Net Cash -  Investing Activities - Forwarded**        |   | (1,105                            | )      | (634 | ) | (1,117 | **)** |
|                                                    |   |                              |   |   |   |   |   |
| **Net Cash -  Financing Activities - Forwarded**        |   | (3,925                            | )      | (3,000 | ) | 1,438 | ** ** |
|                                                    |   |                              |   |   |   |   |   |
| **Net Increase in  Cash and Cash Equivalents**          |   | 563                               |   | 1,048 |   | 1,915 | ** ** |
|                                                    |   |                              |   |   |   |   |   |
| **Cash and Cash  Equivalents - Beginning of Years**     |   | 3,403                             |   | 2,355 |   | 440 | ** ** |
|                                                    |   |                              |   |   |   |   |   |
| **Cash and Cash  Equivalents - End of Years**           |   | $                                 | 3,966  |   | $ | 3,403 |   | $ | 2,355 | ** ** |
|                                                    |   |                              |   |   |   |   |   |
| **Supplemental  Disclosures of Cash Flow Information:** |   |                              |   |   |   |   |   |
| Cash paid during the years for:                         |   |                              |   |   |   |   |   |
| Interest                                                |   | $                                 | 723    |   | $ | 926 |   | $ | 1,722 |   |
| Income Taxes                                            |   | $                                 | 326    |   | $ | 274 |   | $ | 15 |   |

 

**Supplemental Schedule of Non-CashInvesting and Financing Activities:**

In fiscal 2003, the Company issued 70,000 common stock options valuedat $291 to members of its Scientific Advisory Board as deferred compensation.

 

In fiscal 2001 and 2000, the Company issued shares of common stock andstock options with values of $400 and $333, respectively, in 2001 and $69 and$108, respectively, in 2000, as deferred compensation.

 

During fiscal 2003, 2002 and 2001, the Company wrote-off approximately$310, $1,540 and $1,380 of furniture and equipment which were fullydepreciated.

 

Approximately $467 and $1,466 of capitalized costs related to covenantsnot-to-compete and employment agreements, which were fully amortized, werewritten off in fiscal 2002 and 2001, respectively.

 

During fiscal 2003, 2002 and 2001, the Company incurred capital leaseobligations totaling approximately $1,807, $1,476 and $229 in connection withthe acquisition of property and equipment.

 

 [See Notes 9, 11 and 18 foradditional non-cash transactions]

 

The Accompanying Notes are an Integral Part of These ConsolidatedFinancial Statements.

 

F-7

----

 

**BIO-REFERENCE LABORATORIES, INC. ANDSUBSIDIARIES**

**NOTESTO CONSOLIDATED****FINANCIAL STATEMENTS**

**[Dollars In Thousands Except Per Share Dataor Unless Otherwise Indicated]**

 

***[1] Organization andBusiness***

 

Bio-Reference Laboratories, Inc. [“Bio-Reference” or the “Company”] wasincorporated on December 24, 1981. Bio-Reference is principally engaged in providing clinical laboratorytesting services, primarily to customers in the greater New York metropolitanarea as well as to customers in a number of other states.  Bio-Reference offers a comprehensive list ofchemical diagnostic tests including blood and urine analysis, blood chemistry,hematology services, serology, radioimmuno analysis, toxicology (including drugscreening), pap smears, tissue pathology (biopsies) and other tissueanalysis.  It operates two clinicallaboratories, one in Elmwood Park, New Jersey and one in Valley Cottage, NewYork, and an andrology laboratory in New York City.  Bio-Reference markets its clinical laboratory testing servicesdirectly to physicians, hospitals, clinics, correctional and other healthfacilities.

 

***[2] Summary ofSignificant Accounting Policies***

 

***Principles ofConsolidation -***The consolidated financialstatements include the accounts of the Company and its wholly-ownedsubsidiaries.  All significantintercompany accounts and transactions have been eliminated.  The operations of subsidiaries are includedin operations commencing from date of acquisition [See Note 18].

 

***Cash and CashEquivalents -***Cash equivalents are comprised ofcertain highly liquid investments with a maturity of three months or less whenpurchased.  The Company had $1,447 and$1,232 in cash equivalents at October 31, 2003 and 2002, respectively.

 

***Inventory -***Inventory is stated at the lower of cost [on a first-in, first-out basis]or market.  Inventory consists primarilyof laboratory supplies.

 

***Property andEquipment -*****Propertyand equipment are carried at cost. Depreciation is computed by the straight-line method over the estimateduseful lives of the respective assets which range from 2 to 15 years.  Leasehold improvements are amortized overthe life of the lease, which is approximately five years.

 

The statements of operations reflect depreciation expense related toproperty and equipment of $1,153, $705 and $721 for the years endedOctober 31, 2003, 2002 and 2001, respectively.

 

On sale or retirement, the asset cost and related accumulateddepreciation or amortization are removed from the accounts, and any relatedgain or loss is reflected in income. Repairs and maintenance are charged to expense when incurred.

 

***Goodwill -***Effective November 1, 2001, the Company evaluates the recoverabilityand measures the possible impairment of its goodwill under SFAS 142, “Goodwilland Other Intangible Assets.”  Theimpairment test is a two-step process that begins with the estimation of thefair value of the reporting unit. The first step screens for potentialimpairment and the second step measures the amount of the impairment, ifany.  Management’s estimate of fairvalue considers publicly available information regarding the marketcapitalization of the Company as well as (i) publicly available informationregarding comparable publicly-traded companies in the clinical laboratorytesting industry, (ii) the financial projections and future prospects of theCompany’s business, including its growth opportunities and likely operationalimprovements, and (iii) comparable sales prices, if available. As part of thefirst step to assess potential impairment, management compares the estimate offair value for the Company to the book value of the Company’s consolidated netassets.  If the book value of theconsolidated net assets is greater than the estimate of fair value, the Companywould then proceed to the second step to measure the impairment, if any.  The second step compares the implied fairvalue of goodwill with its carrying value.

 

F-8

----

 

The implied fair value is determined by allocating the fair value ofthe reporting unit to all of the assets and liabilities of that unit as if thereporting unit had been acquired in a business combination and the fair valueof the reporting unit was the purchase price paid to acquire the reportingunit.  The excess of the fair value ofthe reporting unit over the amounts assigned to its assets and liabilities isthe implied fair value of goodwill.  Ifthe carrying amount of the goodwill is greater than its implied fair value, animpairment loss will be recognized in that period.  No impairment loss was recognized in the years endedOctober 31, 2003 and 2002.

 

Goodwill represents the excess of the cost of companies acquired overthe fair value of their net assets at dates of acquisition.  The statements of operations reflectamortization expense related to goodwill for the year ended October 31,2001 of $419.  The balance sheetreflects accumulated amortization of $2,401 and $2,401 as of October 31,2003 and 2002, respectively [See Note 10].

 

***Other IntangibleAssets -***Intangible assets are amortized using thestraight-line method.  The statements ofoperations reflect amortization expense related to intangible assets of $569,$631, and $545 for the years ended October 31, 2003, 2002 and 2001,respectively.  The balance sheetreflects accumulated amortization of $2,654 and $2,085 as of October 31,2003 and 2002, respectively.

 

***Internal UseSoftware Costs -***The Company accounts for internaluse software costs in accordance with Statement of Position 98-1 [“SOP 98-1”],“Accounting for the Costs of Computer Software Developed or Obtained forInternal Use.”  Per SOP 98-1, theCompany has capitalized certain internal use software and web site developmentcosts totaling approximately $210 and $711 during the years endedOctober 31, 2002 and 2001, respectively. No costs were capitalized during fiscal 2003.  The estimated useful life of costs capitalized is evaluated foreach specific project when completed, at which time such costs begin to beamortized.

 

***Net Service Revenue-***Service revenues are principally generated fromclinical laboratory testing services including chemical diagnostic tests suchas blood and urine analysis, among others. Net service revenues are recognized at the time the testing services areperformed and are reported at the estimated net realizable amounts frompatients, third-party payors and others for services rendered includingprospectively determined adjustments under reimbursement agreements withthird-party payors.  These adjustmentsare accrued on an estimated basis in the period the related services arerendered and adjusted in future periods as final settlements aredetermined.  The Company has asubsidiary that provides non-clinical laboratory services.  Revenues generated from these services arenot material for each of the years presented. Net service revenues on the statements of operations are as follows:

 
|                                        |   | Years ended  October 31, |    |
|---------------------------------------------|--------|-------------------------------|---------|
|                                        |   | 2003                          |    | 2002 |   | 2001 |   |
|                                        |   |                          |    |   |   |   |   |
| Gross Revenues                              |   | $                             | 269,676 |   | $ | 232,772 |   | $ | 196,015 |   |
|                                        |   |                          |    |   |   |   |   |
| Contractual Adjustments and Discounts:      |   |                          |    |   |   |   |   |
| Medicare/Medicaid Portion                   |   | 78,148                        |    | 65,401 |   | 55,628 |   |
| Other                                       |   | 82,494                        |    | 70,740 |   | 59,765 |   |
| Total Contractual Adjustments and Discounts |   | 160,642                       |    | 136,141 |   | 115,393 |   |
|                                        |   |                          |    |   |   |   |   |
| ***Net Revenues***                          |   | $                             | 109,034 |   | $ | 96,631 |   | $ | 80,622 | ** ** |

 

F-9

----

 

***Contractual Creditsand Provision for Doubtful Accounts -***An allowancefor contractual credits is determined based upon a review of the reimbursementpolicies and subsequent collections for the different types of payors.  An allowance for doubtful accounts isdetermined based upon a percentage of total receivables.  The aggregate allowance, which is shown netagainst accounts receivable, was $29,185 and $30,045 as of October 31,2003 and 2002, respectively.

 

As of October 31, 2003 and 2002, accounts receivable is reportednet of an allowance for doubtful accounts which is comprised of the followingitems:

 
|                          |   | October 31, |   |
|-------------------------------|--------|------------------|--------|
|                          |   | 2003             |   | 2002 |   |
|                          |   |             |   |   |   |
| Contractual Credits/Discounts |   | $                | 24,026 |   | $ | 23,010 |   |
| Doubtful Accounts             |   | 5,159            |   | 7,035 |   |
|                          |   |             |   |   |   |
| ***Total Allowance***         |   | $                | 29,185 |   | $ | 30,045 |   |

 

***Deferred IncomeTaxes -***Deferred income tax assets and liabilitiesare computed annually for differences between the financial statement and taxbases of assets and liabilities that will result in taxable or deductibleamounts in the future based on enacted tax laws and rates applicable to theperiods in which the differences are expected to affect taxable income.

 

Valuation allowances are established when necessary to reduce deferredtax assets to the amount expected to be realized.

 

***Earnings [Loss] PerShare -***Basic earnings [loss] per share [“EPS”]reflects the amount of income [loss] attributable to each share of common stockbased on average common shares outstanding during the period.  Diluted EPS reflects Basic EPS while givingeffect to all potential dilutive common shares that were outstanding during theperiod, such as common shares that could result from the exercise or conversionof securities into common stock.  Thecomputation of Diluted EPS is calculated by using the treasury stock method,which assumes that any proceeds obtained from the exercise of such dilutivesecurities would be used to purchase common stock at the average market priceof the common stock during the period. This reduces the gross number of dilutive shares by the number of sharespurchasable from the proceeds of the securities assumed to be exercised.  Securities whose conversion would have ananti-dilutive effect on EPS are not assumed converted.  Securities that could potentially diluteearnings in the future are disclosed in Note 10.

 

***Use of Estimates -***The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

 

***Recoverability andImpairment of Intangible Assets and Other Long-Lived Assets -***Effective November 1, 2002, the Company evaluates the possibleimpairment of its long-lived assets, including intangible assets (which areamortized pursuant to the provisions of SFAS 142), under SFAS No. 144,“Accounting for Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). TheCompany reviews the recoverability of its long-lived assets when events orchanges in circumstances occur that indicate that the carrying value of theasset may not be recoverable. Evaluation of possible impairment is based on the Company’s ability torecover the asset from the expected future pretax cash flows (undiscounted andwithout interest charges) of the related operations. If the expectedundiscounted pretax cash flows are less than the carrying amount of such asset,an impairment loss is recognized for the difference between the estimated fairvalue and carrying amount of the asset. The Company’s adoption of SFAS 144 didnot result in any impairment loss being recorded.  No impairment loss was recognized in the fiscal years endedOctober 31, 2003, 2002 and 2001.

 

F-10

----

 

***Stock Options Issuedto Employees -***The Company adopted Statement ofFinancial Accounting Standards No. 123, “Accounting for Stock-BasedCompensation,” for financial note disclosure purposes and continues to applythe intrinsic value method of Accounting Principles Board [“APB”] Opinion No.25, “Accounting for Stock Issued to Employees,” for financial reportingpurposes.

 

***Advertising Costs -***Advertisingcosts are expensed when incurred. Advertising costs amounted to approximately $188, $105 and $487 for theyears ended October 31, 2003, 2002 and 2001, respectively.

 

***Reclassification -***Certain prior year amounts have been reclassified to conform to the 2003presentation.

 

***[3] Property andEquipment -***Property and equipment - at cost issummarized as follows:

 
|                                           |   | October 31, |   |
|------------------------------------------------|--------|------------------|--------|
|                                           |   | 2003             |   | 2002 |   |
|                                           |   |             |   |   |   |
| Medical Equipment                              |   | $                | 4,119  |   | $ | 3,132 |   |
| Leasehold Improvements                         |   | 1,728            |   | 1,319 |   |
| Furniture, Fixtures and Office Equipment       |   | 994              |   | 402 |   |
| Automobiles                                    |   | 644              |   | 28 |   |
|                                           |   |             |   |   |   |
| Totals                                         |   | 7,485            |   | 4,881 |   |
| Less: Accumulated Depreciation                 |   | 2,722            |   | 1,877 |   |
|                                           |   |             |   |   |   |
| ***Totals - Net of Accumulated Depreciation*** |   | $                | 4,763  |   | $ | 3,004 | ** ** |

 

***[4] IntangibleAssets***

 

Intangible assets are summarized as follows:

 

October 31, 2003:

 
| Intangible  Asset             |   | Weighted-Average  Amortization Period |   | Cost   |   | Accumulated  Amortization |   | Net of Accumulated  Amortization |   |
|-------------------------------|--------|---------------------------------------|--------|--------|--------|---------------------------|--------|----------------------------------|--------|
|                          |   |                                  |   |   |   |                      |   |                             |   |
| Software Costs                |   | 5                                     |   | $      | 1,535  |                      | $      | 647                              |   | $ | 888 |   |
| Customer Lists                |   | 20                                    |   | 1,230  |   | 783                       |   | 447                              |   |
| Covenants Not-to-Compete      |   | 2                                     |   | 119    |   | 119                       |   | —                           |   |
| Employment Agreement          |   | 7                                     |   | 825    |   | 532                       |   | 293                              |   |
| Costs Related to Acquisitions |   | 19                                    |   | 1,088  |   | 512                       |   | 576                              |   |
| Patent                        |   | 17                                    |   | 156    |   | 61                        |   | 95                               |   |
|                          |   |                                  |   |   |   |                      |   |                             |   |
| ***Totals***                  |   | 10                                    |   | $      | 4,953  |                      | $      | 2,654                            |   | $ | 2,299 |   |

 

October 31, 2002:

 
| Intangible  Asset             |   | Weighted-Average  Amortization Period |   | Cost   |   | Accumulated  Amortization |   | Net of Accumulated  Amortization |   |
|-------------------------------|--------|---------------------------------------|--------|--------|--------|---------------------------|--------|----------------------------------|--------|
|                          |   |                                  |   |   |   |                      |   |                             |   |
| Software Costs                |   | 5                                     |   | $      | 1,535  |                      | $      | 328                              |   | $ | 1,207 |   |
| Customer Lists                |   | 20                                    |   | 1,230  |   | 721                       |   | 509                              |   |
| Covenants Not-to-Compete      |   | 2                                     |   | 119    |   | 119                       |   | —                           |   |
| Employment Agreement          |   | 7                                     |   | 825    |   | 403                       |   | 422                              |   |
| Costs Related to Acquisitions |   | 19                                    |   | 1,088  |   | 461                       |   | 627                              |   |
| Patent                        |   | 17                                    |   | 156    |   | 53                        |   | 103                              |   |
|                          |   |                                  |   |   |   |                      |   |                             |   |
| ***Totals***                  |   | 11                                    |   | $      | 4,953  |                      | $      | 2,085                            |   | $ | 2,868 |   |

 

F-11

----

 

The estimated amortization expense related to intangible assets foreach of the five succeeding fiscal years and thereafter as of October 31,2003 is as follows:

 
| Year  Ended  October 31, |   |   |   |
|-------------------------------|--------|--------|--------|
|                          |   |   |   |
| 2004                          |   | $      | 545    |   |
| 2005                          |   | 533    |   |
| 2006                          |   | 391    |   |
| 2007                          |   | 178    |   |
| 2008                          |   | 136    |   |
| Thereafter                    |   | 516    |   |
|                          |   |   |   |
| *Total*                       |   | $      | 2,299  |   |

 

***[5] Revolving NotePayable - Bank***

 

The Company had a revolving notes payable loan agreement with abank.  The maximum amount of the creditline available to the Company is the lesser of (i) $25,000 or (ii) 50% of theCompany’s qualified accounts receivable [as defined in the agreement].  Based on a January 2002 amendment ofthe Loan and Security Agreement, interest on advances will be subject to thebank’s prime rate or Eurodollar rate of interest plus an additional interestpercentage.  The additional interestpercentage charges on Eurodollar borrowings range from 1% to 3% and aredetermined based upon certain financial ratios achieved by the Company.  At October 31, 2003, the Company hadelected to have $6,000 of the total advances outstanding converted into aEurodollar rate loan with a variable interest rate of 2.74% at October 31,2003.  The remaining outstandingadvances during that period were subject to the prime rate of interest.  At October 31, 2003, advances of $2,718were subject to interest at the prime rate. As of October 31, 2003 and 2002, the bank’s prime rate of interestwas 4.00% and 4.75%, respectively.  Thecredit line is collateralized by substantially all of the Company’s assets, theassignment of Care Evolve’s $615 promissory note payable out of the Company’sshare of Care Evolve’s net after-tax income [if any] [See Note 14], and a $4,000life insurance policy on the president of the Company also assigned to thebank.  The line of credit is availablethrough September 2004 and may be extended for annual periods by mutualconsent, thereafter.  The terms of thisagreement contain, among other provisions, requirements for maintaining definedlevels of capital expenditures and net worth, various financial ratios,insurance coverage and the prohibition of the payment by the Company of cashdividends without the prior written consent of the bank.  Effective September 2003, the Companyamended its loan agreement to increase its annual capital expenditure covenantfrom $2,000 to $3,000.  As ofOctober 31, 2003, the Company utilized $8,718 and had $11,282 of availableunused credit under this revolving note payable agreement.

 

The weighted average interest rate on short-term borrowings outstandingas of October 31, 2003 and 2002 was approximately 2.85% and 3.70%,respectively.

 

***[6] Long-Term Debt***

 

In April 1998, the Company entered into an agreement to borrow$4,000 from a Bank.  The note is payablein fifty-eight principal installments of $67 payable through May 2003.  The $4,000 borrowed was comprised of anunsecured portion or $2,000 and a secured portion of $2,000.  This note is in accordance with theprovisions of the Company’s revolving loan agreement [See Note 5] with the samelender.  As of October 31, 2002,borrowings under the note payable were subject to interest of 5.75%.  As of October 31, 2003, the note hasbeen paid in full.

 

F-12

----

 

***[7] Related PartyTransactions***

 

In March 2001, the Company entered into a joint marketingagreement [the “agreement”] with General Prescription Programs, Inc.[“GPP”].  Provisions of the agreementprovide that GPP will assist the Company in marketing its PSIMedica programs tovarious customers.  In addition, GPPwill provide ongoing data and data support to the PSIMedica programdevelopment.  The term of the agreementis for a five year period commencing on October 2001.  In exchange for obtaining GPP marketing andtechnical services, the Company issued GPP 220,000 shares of its common stockwith a fair value of approximately $248 which is being amortized over the fiveyear term of the agreement. For the years ended October 31, 2003, 2002 and2001, the Company recorded an expense of $50 , $50 and $4, respectively.  The Chairman of the Board of GPP is thebrother of the Company’s Chief Executive Officer.

 

***[8] Income Taxes***

 

The reconciliation of income tax from continuing operations computed atthe U.S. federal statutory tax rate to the Company’s effective income tax rateis as follows:

 
|                                                                  |   | October 31, |   |
|-----------------------------------------------------------------------|--------|------------------|--------|
|                                                                  |   | 2003             |   | 2002 |   | 2001 |   |
|                                                                  |   |             |   |   |   |   |   |
| U.S. Federal Statutory Rate                                           |   | 34.0             | %      | 34.0 | % | 34.0 | % |
| State and Local Income Taxes, Net of U.S.  Federal Income Tax Benefit |   | 6.0              | %      | 6.0 | % | 6.0 | % |
| Permanent Differences and Other                                       |   | 13.0             | %      | — | % | — | % |
| Utilization of Net Operating Loss  Carryforwards                      |   | (18.0            | )%     | (18.0 | )% | (35.0 | )% |
| Change in Valuation Allowance                                         |   | (11.0            | )%     | (16.0 | )% | (26.0 | )% |
|                                                                  |   |             |   |   |   |   |   |
| ***Actual Rate***                                                |   | 24.0             | %      | 6.0 | % | (21.0 | )% |

 

The provision [benefit] for income taxes shown in the consolidatedstatements of operations consist of the following:

 
|                                             |   | October 31, |   |
|--------------------------------------------------|--------|------------------|--------|
|                                             |   | 2003             |   | 2002 |   | 2001 |   |
|                                             |   |             |   |   |   |   |   |
| Current:                                         |   |             |   |   |   |   |   |
| Federal                                          |   | $                | 543    |   | $ | — |   | $ | 69 |   |
| State and Local                                  |   | 582              |   | 39 |   | 21 |   |
|                                             |   |             |   |   |   |   |   |
| Deferred:                                        |   |             |   |   |   |   |   |
| Federal                                          |   | 798              |   | 222 |   | (428 | )[1] |
| State and Local                                  |   | 141              |   | 40 |   | (76 | )[1] |
|                                             |   |             |   |   |   |   |   |
| ***Total Provision [Benefit] for Income Taxes*** |   | $                | 2,064  |   | $ | 301 |   | $ | (414 | ) |

 

----

[1] Decrease in deferred tax valuation allowance.

 

F-13

----

 

At October 31, 2003 and 2002, the Company had a net deferred tax[liability] asset of approximately $(631) and $308 , respectively.  The deferred taxes primarily relate totiming differences associated with the deductibility of depreciation, bad debtsand certain accrued expenses and deferred costs.  For fiscal 2003, the valuation allowance decreased by $900.  For fiscal 2003, the Company utilizedapproximately $4,378 (federal) and $2,682 (state) of net operating losscarryforwards to reduce current year taxable income.  For fiscal 2002 and 2001, the Company utilized approximately$2,394 and $2,900 of net operating loss carryforwards to reduce the federal andstate current year taxable income.

 
|                                       |   | October 31, |   |
|--------------------------------------------|--------|------------------|--------|
|                                       |   | 2003             |   | 2002 |   |
|                                       |   |             |   |   | ** ** |
| Deferred Tax Asset:                        |   |             |   |   |   |
| Bad Debt Allowance                         |   | $                | 2,064  |   | $ | 2,814 |   |
| Accrued Expenses                           |   | 277              |   | 263 |   |
| Net Operating Loss Carryforwards           |   | —           |   | 1,751 |   |
|                                       |   |             |   |   |   |
|                                       |   | 2,341            |   | 4,828 |   |
| Deferred Tax Liability:                    |   |             |   |   |   |
| Deferred Costs                             |   | (2,563           | )      | (3,405 | ) |
| Property and Equipment                     |   | (409             | )      | (215 | ) |
|                                       |   |             |   |   |   |
|                                       |   | (2,972           | )      | (3,620 | ) |
|                                       |   |             |   |   |   |
| Valuation Reserve                          |   | —           |   | (900 | ) |
|                                       |   |             |   |   |   |
| ***Deferred Tax [Liability] Asset - Net*** |   | $                | (631   | ) | $ | 308 |   |

 

***[9] CapitalTransactions***

 

***[A] Preferred Stockand Common Stock -***The Company is authorized toissue an aggregate of 1,666,667 shares of preferred stock, $.10 par value.  There are 604,078 shares of Series A Seniorpreferred stock issued and outstanding. The Series A Senior preferred stock is convertible into an aggregate604,078 shares of common stock on or before May 1, 2007 at a conversion priceof $.75 per share and has the same voting rights [one vote per share], dividendrights and liquidation rights as each share of common stock.

 

In July 2003, the stockholders approved an increase in the numberof authorized shares of common stock was increased from 18,333,333 shares to35,000,000 shares.

 

Holders of the Company’s Common Stock are entitled to one vote pershare on matters submitted for shareholder vote.  Holders are also entitled to receive dividends ratably, ifdeclared.  In the event of dissolutionor liquidation, holders are entitled to share ratably in all assets remainingafter payment of liabilities.

 

F-14

----

 

On March 31, 1998, the Company’s Board of Directors adopted aShareholder Rights Plan and declared a dividend distribution of one Right foreach outstanding share of Common Stock and each outstanding share of Series ASenior Preferred Stock.  Each Rightentitles the registered holder to purchase one one-ten-thousandth of a share ofSeries A Junior Participating Preferred Stock [the “Junior Preferred Stock”]from the Company at a price of $4.00. Because of the nature of the dividend, liquidation and voting rights ofthe Junior Preferred Stock, the value of each one-ten-thousandth of a share ofJunior Preferred Stock is intended to approximate the value of one share ofCommon Stock.  Junior Preferred Stockpurchasable upon exercise of the Rights will not be redeemable.  Each outstanding share of Junior PreferredStock will be entitled to a minimum preferential quarterly dividend of $.05 pershare and will be entitled to an aggregate dividend of 10,000 times thedividend declared per share of Common Stock. In the event of liquidation, the holders of the Junior Preferred Stockwill be entitled to a minimum preferential liquidation payment of $10 per shareand will be entitled to an aggregate payment of 10,000 times the payment madeper share of Common Stock.  Each shareof Junior Preferred Stock will have 10,000 votes, voting together with theCommon Stock and the Series A Senior Preferred Stock.

 

In the event of any merger, consolidation or other transaction in whichthe Common Stock is exchanged, each share of Junior Preferred Stock will beentitled to receive 10,000 times the amount received per share of CommonStock.  The Rights are protected bycustomary anti-dilution provisions.  TheRights are not exercisable unless any one of certain triggering events occurincluding the acquisition by an individual or entity and their associates of25% or more of the outstanding shares of Common Stock.  The Shareholder Rights Plan is designed toprotect the Company and its shareholders from coercive, unfair and inadequatetakeover bids and practices.  The Planis designed to strengthen the Board of Directors’ ability to deter a person orgroup from attempting to gain control of the Company without offering a fairprice and equal treatment to all shareholders.

 

In May 2001, the Company completed the sale of 1,500,000 shares of itscommon stock for an aggregate of $1,500 [$1.00 per share] to a singleinvestment limited partnership.  Thegeneral partner of the investment limited partnership was elected to the Company’sBoard of Directors.

 

***[B] EquityTransactions for Services -***For the years endedOctober 31, 2003 and 2001, the Company issued 10,000 and 490,000 shares ofcommon stock for employment and consulting services having a value of $15 and$744 , respectively.  In fiscal 2002, noshares of the Company’s common stock were issued for employment or consultingservices [See Note 11 for common stock options issued for employee andconsulting services].

 

***[10] Income PerShare***

 

The computation of basic and diluted net income per common share was asfollows [in thousands, except per share data]:

 
|                                                |   | For the years ended October 31, |   |
|-----------------------------------------------------|--------|--------------------------------------|--------|
|                                                |   | 2003                                 |   | 2002 |   | 2001 |   |
|                                                |   |                                 |   |   |   |   |   |
| Income Available to Common Stockholders             |   | $                                    | 6,540  |   | $ | 4,922 |   | $ | 2,361 |   |
| Weighted Average Common Shares Outstanding          |   | 11,489                               |   | 11,378 |   | 9,941 |   |
|                                                |   |                                 |   |   |   |   |   |
| Effect of Dilutive Securities:                      |   |                                 |   |   |   |   |   |
| Convertible Preferred Stock                         |   | 542                                  |   | 545 |   | 446 |   |
| Warrants/Options                                    |   | 767                                  |   | 857 |   | 985 |   |
|                                                |   |                                 |   |   |   |   |   |
| Weighted Average Diluted Common Shares  Outstanding |   | 12,798                               |   | 12,780 |   | 11,372 |   |
|                                                |   |                                 |   |   |   |   |   |
| Net Income Per Share - Basic                        |   | $                                    | .57    |   | $ | .43 |   | $ | .24 |   |
|                                                |   |                                 |   |   |   |   |   |
| Net Income Per Share - Diluted                      |   | $                                    | .51    |   | $ | .39 |   | $ | .21 |   |

 

F-15

----

 

For the year ended October 31, 2003, outstanding options topurchase 177,000 shares of Company common stock at exercise prices ranging from$7.79 to $11.67 per share were not included in the computation of dilutedEPS.  For the year endedOctober 31, 2002, outstanding options to purchase 25,000 shares and 50,000shares of the Company’s common stock at $7.97 and $7.79 per share were notincluded in the computation of diluted EPS. Warrants to purchase 24,000 shares of common stock at $3.14 per sharewere outstanding at October 31, 2001 but were not included in thecomputation of diluted EPS. The exercise price of these options and warrantswas greater than the average market price of the common shares and they areconsidered anti-dilutive.  Thesesecurities could potentially dilute EPS in the future.

 

As of November 1, 2001, the Company adopted SFAS No. 142,“Goodwill and Other Intangible Assets;” earlier than required.  In accordance with the provisions of SFASNo. 142, the Company discontinued the periodic amortization of goodwill, but isnow required to annually review the goodwill for potential impairment.  Had SFAS No. 142 been effective in thecomparative prior periods, the following adjusted results of operations wouldhave been achieved.

 
|                            |   | For the Years Ended October 31, |   |
|---------------------------------|--------|--------------------------------------|--------|
|                            |   | 2003                                 |   | 2002 |   | 2001 |   |
|                            |   |                                 |   |   |   |   |   |
| Net Income:                     |   |                                 |   |   |   |   |   |
| Reported Net Income             |   | $                                    | 6,540  |   | $ | 4,922 |   | $ | 2,361 |   |
| Add Back: Goodwill Amortization |   | —                               |   | — |   | 419 |   |
|                            |   |                                 |   |   |   |   |   |
| Adjusted Net Income             |   | $                                    | 6,540  |   | $ | 4,922 |   | $ | 2,780 |   |
|                            |   |                                 |   |   |   |   |   |
| Basic Earnings Per Share:       |   |                                 |   |   |   |   |   |
| Reported Net Income             |   | $                                    | .57    |   | $ | .43 |   | $ | .24 |   |
| Goodwill Amortization           |   | —                               |   | — |   | .04 |   |
|                            |   |                                 |   |   |   |   |   |
| Adjustment Net Income           |   | $                                    | .57    |   | $ | .43 |   | $ | .28 |   |
|                            |   |                                 |   |   |   |   |   |
| Diluted Earnings Per Share:     |   |                                 |   |   |   |   |   |
| Reported Net Income             |   | $                                    | .51    |   | $ | .39 |   | $ | .21 |   |
| Goodwill Amortization           |   | —                               |   | — |   | .03 |   |
|                            |   |                                 |   |   |   |   |   |
| Adjustment Net Income           |   | $                                    | .51    |   | $ | .39 |   | $ | .24 |   |

 

F-16

----

 

***[11] Stock Optionsand Warrants***

 

***[A] EmployeeIncentive Stock Options -***In June 2003, theBoard of Directors adopted, and in July 2003, the stockholders approved,the 2003 Employee Incentive Stock Option Plan [the “2003 Plan”].  The 2003 Plan authorizes the grant ofincentive stock options to purchase up to a maximum aggregate 800,000 shares ofCompany common stock. The 2003 Plan provides that the exercise price of anoption granted thereunder shall not be less than the fair market value of theCommon Stock on the date the option is granted.  However, in the event an option is granted under the 2003 Plan toa holder of 10% or more of the Company’s outstanding Common Stock, the exerciseprice must be at least 110% of such fair market value.  Under the 2003 Plan, options must be grantedbefore the June 2, 2013 Termination Date. No option may have a term longer than ten years (limited to five yearsin the case of an option granted to a 10% or greater stockholder of theCompany).  The aggregate fair marketvalue of the Company’s Common Stock with respect to which options areexercisable for the first time by a grantee under all of the Company’s StockOption Plans during any calendar year cannot exceed $100.  Options granted under the 2003 Plan arenon-transferable and must be exercised by an optionee, if at all, whileemployed by the Company or a subsidiary or within three months after terminationof such optionee’s employment due to retirement, or within one year of suchtermination if due to disability or death. The Board (or a Stock Option Committee, if designated), may, in its solediscretion, cause the Company to lend money to or guaranty any obligation of anemployee for the purpose of enabling such employee to exercise an optiongranted under the 2003 Plan provided that such loan or obligation cannot exceedfifty percent (50%) of the exercise price of such option.  No options have been granted under the 2003Plan.

 

In August 2000, the Company adopted, and on December 15,2000, the stockholders approved, the 2000 Employee Incentive Stock Option Plan[“2000 Plan”].  The 2000 Plan providesfor the granting of incentive stock options to purchase an aggregate of 800,000shares of the Company’s common stock at a price not less than 100% of the fairmarket value per share of the common stock at the date of grant.  However, in the event an option is grantedunder the 2000 Plan to a holder of 10% or more of the Company’s outstandingcommon stock, the exercise price must be at least 110% of fair market value atthe date of grant.  At October 31,2003, the 2000 Plan had 65,000 options available to grant.  Employees of the Company or itssubsidiaries, as determined, are eligible for the 2000 Plan.  The term of the options shall not exceed tenyears from the date of grant.  In fiscal2000, 200,000 options were granted under the 2000 Plan which vest in four equalannual installments commencing January 31, 2002 contingent on the Companyrealizing targeted net revenue levels. In fiscal 2003, 2002 and 2001, 281,000, 241,000 and 50,000 options weregranted under the Plan.  Approximately164,500 of options granted under the plan will vest over the next two fiscalyears.  A total of 15,000, 10,000 and20,000 incentive stock options issued under the 2000 Plan were exercised infiscal 2003, 2002 and 2001, respectively. A total of 57,000 options werecancelled in fiscal 2003.  Optionsissued under the 2000 Plan must be granted before the August 2010termination date.

 

In November 1989, the shareholders approved and the Companyadopted the 1989 Employee Stock Option Plan [“1989 Plan”] which provides forthe granting of options to acquire 666,667 shares of common stock.  Under the terms of this stock option plan,incentive stock options to

 

F-17

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purchase shares of the Company’s common stock are granted at a pricenot less than the fair market value of the common stock at the date ofgrant.  A total of 5,000, 275,337 and45,702 incentive stock options issued under the 1989 Plan were exercised infiscal 2003, 2002 and 2001. Additionally, 11,667 options were cancelled in fiscal 2003.  All options under the 1989 Plan were requiredto be granted before the Plan’s July 1999 termination date so that nofurther options can be granted under the 1989 Plan.

 

These stock options are exercisable up to ten years from the date ofgrant.  The following is a summary ofEmployee Incentive Stock Option Plan transactions:

 
|                                                            |   | 2000 Plan             |   | 1989 Plan                                   |   |
|-----------------------------------------------------------------|--------|-----------------------|--------|---------------------------------------------|--------|
|                                                            |   | Shares Under  Options |   | Weighted Average  Exercise Price  Per Share |   | Shares Under  Options |   | Weighted Average  Exercise Price  Per Share |   |
|                                                            |   | [In Thousands]        |   |                                        |   | [In Thousands] |   |   |   |
|                                                            |   |                  |   |                                        |   |   |   |   |   |
| Outstanding and Eligible for Exercise at  October 31, 2000 |   | 235                   |   | $                                           | 1.22   |   | 595 |   | $ | .73 |   |
|                                                            |   |                  |   |                                        |   |   |   |   |   |
| Granted                                                         |   | 50                    |   | 1.13                                        |   | — |   | — |   |
| Expired                                                         |   | —                |   | —                                      |   | — |   | — |   |
| Exercised                                                       |   | (20                   | )      | 1.13                                        |   | (46 | ) | .72 |   |
|                                                            |   |                  |   |                                        |   |   |   |   |   |
| Outstanding and Eligible for Exercise at  October 31, 2001 |   | 265                   |   | 1.21                                        |   | 549 |   | .73 |   |
|                                                            |   |                  |   |                                        |   |   |   |   |   |
| Granted                                                         |   | 241                   |   | 7.07                                        |   | — |   | — |   |
| Expired                                                         |   | —                |   | —                                      |   | — |   | — |   |
| Exercised                                                       |   | (10                   | )      | 1.68                                        |   | (275 | ) | .72 |   |
|                                                            |   |                  |   |                                        |   |   |   |   |   |
| Outstanding at October 31, 2002                            |   | 496                   |   | 4.27                                        |   | 274 |   | .72 |   |
|                                                            |   |                  |   |                                        |   |   |   |   |   |
| Granted                                                         |   | 281                   |   | 6.34                                        |   | — |   | — |   |
| Cancelled/Expired                                               |   | (57                   | )      | 7.16                                        |   | (11 | ) | .72 |   |
| Exercised                                                       |   | (15                   | )      | 1.13                                        |   | (5 | ) | .72 |   |
|                                                            |   |                  |   |                                        |   |   |   |   |   |
| ***Outstanding at October 31, 2003***                      |   | 705                   |   | $                                           | 4.93   |   | 258 |   | $ | .72 |   |
|                                                            |   |                  |   |                                        |   |   |   |   |   |
| ***Eligible for Exercise at October 31, 2003***            |   | 540                   |   | $                                           | 5.45   |   | 258 |   | $ | .72 |   |

 

F-18

----

 
|                       |   | Options Outstanding             |   | Options Exercisable          |   |
|----------------------------|--------|---------------------------------|--------|------------------------------|--------|
|                       |   | Weighted Average                |   |                         |   | Weighted  Average  Exercise  Price |   |
| Exercise  Price Range      |   | Number of  Shares Under  Option |   | Remaining  Contractual  Life |   | Exercise Price  Per Share |   | Number of  Options |   |   |
|                       |   | [In Thousands]                  |   | [In Years]                   |   |   |   | [In Thousands] |   |   |   |
|                       |   |                            |   |                         |   |   |   |   |   |   |   |
| $.71875 Per Share          |   | 258                             |   | 3.58                         |   | $ | .72 |   | 258 |   | $ | .72 |   |
| $1.125 to $1.688 Per Share |   | 240                             |   | 6.87                         |   | $ | 1.65 |   | 140 |   | $ | 1.62 |   |
| $4.21 to $5.70 Per Share   |   | 152                             |   | 9.48                         |   | $ | 5.12 |   | 109 |   | $ | 5.31 |   |
| $5.94 to $6.82 Per Share   |   | 136                             |   | 8.43                         |   | $ | 6.78 |   | 136 |   | $ | 6.78 |   |
| $7.19 to $8.40 Per Share   |   | 173                             |   | 9.29                         |   | $ | 7.72 |   | 151 |   | $ | 7.74 |   |
| $9.66 to $11.67 Per Share  |   | 4                               |   | 9.83                         |   | $ | 10.67 |   | 4 |   | $ | 10.67 |   |
|                       |   |                            |   |                         |   |   |   |   |   |   |   |
|                       |   | 963                             |   |                         |   |   |   | 798 |   |   |   |

 

F-19

----

 

The weighted average grant date fair value of incentive stock optionsunder the 2000 Plan granted during the year ended October 31, 2003, 2002and 2001 was $5.19, $7.07 and $1.13 per share, respectively.  These options have weighted averageremaining contractual lives of approximately 8 years.

 

The Company accounts for these stock-based compensation awards toemployees under the intrinsic value method in accordance with AccountingPrinciples Board Opinion No. 25 “Accounting for Stock Issued toEmployees.”  No compensation cost wasrecognized for stock-based employee compensation awards for the years endedOctober 31, 2003, 2002 and 2001.

 

***[B] Non-IncentiveStock Options and Warrants -***Non-incentive stockoptions and warrants may be granted to employees or non-employees at fairmarket value or at a price less than fair market value of the common stock atthe date of grant.  The following is asummary of transactions:

 
|                                                            |   | Shares Under  Options  and Warrants |   | Weighted  Average  Exercise Price  Per Share |   |
|-----------------------------------------------------------------|--------|-------------------------------------|--------|----------------------------------------------|--------|
|                                                            |   | [In Thousands]                      |   |                                         |   |
|                                                            |   |                                |   |                                         |   |
| Outstanding and Eligible for Exercise at  October 31, 2000 |   | 948                                 |   | $                                            | .95    |   |
|                                                            |   |                                |   |                                         |   |
| Granted                                                         |   | 572                                 |   | 1.91                                         |   |
| Expired                                                         |   | (180                                | )      | 1.16                                         |   |
| Exercised                                                       |   | (450                                | )      | 1.32                                         |   |
|                                                            |   |                                |   |                                         |   |
| Outstanding and Eligible for Exercise at  October 31, 2001 |   | 890                                 |   | 1.34                                         |   |
|                                                            |   |                                |   |                                         |   |
| Granted                                                         |   | 65                                  |   | 6.19                                         |   |
| Expired                                                         |   | (105                                | )      | .63                                          |   |
| Exercised                                                       |   | (292                                | )      | 1.01                                         |   |
|                                                            |   |                                |   |                                         |   |
| Outstanding and Eligible for Exercise at  October 31, 2003 |   | 558                                 |   | 2.21                                         |   |
|                                                            |   |                                |   |                                         |   |
| Granted                                                         |   | 70                                  |   | 7.60                                         |   |
| Cancelled/Expired                                               |   | (32                                 | )      | 1.77                                         |   |
| Exercised                                                       |   | (62                                 | )      | 1.69                                         |   |
|                                                            |   |                                |   |                                         |   |
| ***Outstanding at October 31, 2003***                      |   | 534                                 |   | $                                            | 2.98   | ** ** |
|                                                            |   |                                |   |                                         |   |
| ***Eligible for Exercise at October 31, 2003***            |   | 464                                 |   | $                                            | 2.37   | ** ** |

 

F-20

----

 

During fiscal 2003, the Company granted 70,000 options to purchasecommon stock to members of a newly formed scientific advisory board.  The exercise prices of these options rangedfrom $6.98 to $7.94 per share. The fair value of each option granted wasestimated on the date of grant using the Black-Scholes option pricingmodel.  The fair value of approximately$291 has been accounted for as deferred compensation and is being expensed overthe terms of the agreements.

 

During the year ended October 31, 2002, the Company issued optionsto purchase 65,000 shares of the Company’s common stock at prices ranging from$3.60 to $7.97 in connection with employment agreements and employeeincentives.  Included in the optionsissued in fiscal 2003 were options issued to directors of the Company topurchase 24,000 shares of common stock at a price of $6.80 per share.

During the year ended October 31, 2001, a total of 278,000 optionsto purchase common shares classified as non-incentive stock options weregranted to employees.  There were no non-incentivestock options granted to employees in fiscal 2003.  The Company accounts for these options under the intrinsic valuemethod in accordance with Accounting Principles Board Opinion No. 25“Accounting for Stock Issued to Employees.” Total compensation cost recognized against income for employeenon-incentive stock options and warrants was $-0- for the years endedOctober 31, 2002 and 2001.

 

During the year ended October 31, 2001, 294,000 shares underoptions were granted to non-employees per various consulting agreements.  No such options were granted in 2003.  The fair value of each option granted wasestimated on the date of grant using the Black-Scholes option-pricingmodel.  The fair value of 244,000options issued n fiscal 2001 of approximately $488 [approximately $2.00 pershare] has been accounted for as deferred compensation and is being expensedover the term of the agreements.  Thefair value of 50,000 options in fiscal 2001 of $27 had been expensed for theyear ended October 31, 2001.  Totalcompensation expense recognized against income for deferred compensation fromthe issuance of stock options and warrants was $293 , $210 and $18 ,respectively, for those options issued in the years ended October 31,2002, 2001 and 2000.  Approximately70,000 non-incentive stock options will vest over the next two fiscal years.

 
|                       |   | Options and Warrants Outstanding                         |   | Options and Warrants Exercisable      |   |
|----------------------------|--------|----------------------------------------------------------|--------|---------------------------------------|--------|
| Exercise  Price Range      |   | Weighted  Number of  Shares Under  Options and  Warrants |   | Average  Remaining  Contractual  Life |   | Weighted Average  Exercise Price  Per Share |   | Number of  Shares Under  Options and  Warrants |   | Weighted  Average  Exercise Price  Per Share |   |
|                       |   | [In Thousands]                                           |   | [In Years]                            |   |   |   | [In Thousands] |   |   |   |
|                       |   |                                                     |   |                                  |   |   |   |   |   |   |   |
| $.71875 Per Share          |   | 16                                                       |   | .58                                   |   | $ | .72 |   | 15 |   | $ | .72 |   |
| $1.00 to $1.125 Per Share  |   | 65                                                       |   | .75                                   |   | $ | 1.03 |   | 66 |   | $ | 1.03 |   |
| $1.19 to $1.4375 Per Share |   | 100                                                      |   | 1.88                                  |   | $ | 1.24 |   | 100 |   | $ | 1.24 |   |
| $2.00 Per Share            |   | 200                                                      |   | 2.25                                  |   | $ | 2.00 |   | 200 |   | $ | 2.00 |   |
| $3.14 Per Share            |   | 24                                                       |   | 2.67                                  |   | $ | 3.14 |   | 24 |   | $ | 3.14 |   |
| $5.91 to $6.80 Per Share   |   | 59                                                       |   | 3.25                                  |   | $ | 6.45 |   | 34 |   | $ | 6.80 |   |
| $6.98 to $7.94 Per Share   |   | 70                                                       |   | 3.36                                  |   | $ | 7.60 |   | 25 |   | $ | 7.56 |   |
|                       |   |                                                     |   |                                  |   |   |   |   |   |   |   |
|                       |   | 534                                                      |   |                                  |   |   |   | 464 |   |   |   |

 

These options have weighted average remaining contractual lives ofapproximately 2 years.  The

 

F-21

----

 

weighted average grant date fair value of non-incentive stock optionsgranted during the years ended October 31, 2003, 2002 and 2001 were $4.16,$6.19 and $1.11 per share, respectively.

 

F-22

----

 

***[A] and [B] ProForma -***The Company issued employees stock optionsthrough stock-based employee compensation plans and also issued employeesnon-incentive stock options.  TheCompany accounts for these options under the measurement principals of APBOpinion No. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations.  No stock-basedemployee compensation cost is reflected in net income, as all options grantedunder these plans as well as employee non-incentive stock options have anexercise price equal to the fair market value of the underlying common stock onthe date of grant.  The following tableillustrates the effect on net income and earnings per share if the Company hadapplied the fair value recognition provisions of FASB Statement No. 123 tostock-based employee compensation.

 
|                                |   | Year ended October 31, |   |
|-------------------------------------|--------|-----------------------------|--------|
|                                |   | 2003                        |   | 2002 |   | 2001 |   |
|                                |   |                        |   |   |   |   |   |
| Net Income [Loss]:                  |   |                        |   |   |   |   |   |
| As Reported                         |   | $                           | 6,540  |   | $ | 4,922 |   | $ | 2,361 |   |
|                                |   |                        |   |   |   |   |   |
| Deduct: Stock Based Employee        |   |                        |   |   |   |   |   |
| Compensation Expense Determined     |   |                        |   |   |   |   |   |
| Under the Fair Value Based Method - |   |                        |   |   |   |   |   |
| Net of Tax                          |   | (1,453                      | )      | (1,841 | ) | (422 | ) |
|                                |   |                        |   |   |   |   |   |
| Pro Forma - Net Income              |   | $                           | 5,087  |   | $ | 3,081 |   | $ | 1,939 |   |
|                                |   |                        |   |   |   |   |   |
| Basic Earnings Per Share:           |   |                        |   |   |   |   |   |
| As Reported                         |   | $                           | .57    |   | $ | .43 |   | $ | .24 |   |
| Pro Forma                           |   | $                           | .44    |   | $ | .27 |   | $ | .20 |   |
|                                |   |                        |   |   |   |   |   |
| Diluted Earnings Per Share:         |   |                        |   |   |   |   |   |
| As Reported                         |   | $                           | .51    |   | $ | .39 |   | $ | .21 |   |
| Pro Forma                           |   | $                           | .40    |   | $ | .24 |   | $ | .17 |   |

 

The fair value used in the pro forma data was estimated by using theBlack-Scholes option-pricing model which took into account as of the grantdate, the exercise price and the expected life of the option, the current priceof the underlying stock and its expected volatility, expected dividends on thestock and the risk-free interest rate for the expected term of the option.  The following is the average of the dataused for the following items.

 
| Year  Ended           |   | Risk-Free  Interest Rate |   | Expected Life |   | Expected  Volatility |   | Expected  Dividends |   |
|-----------------------|--------|--------------------------|--------|---------------|--------|----------------------|--------|---------------------|--------|
|                  |   |                     |   |          |   |                 |   |                |   |
| October 31, 2003 |   | 5.0                      | %      | 7 Years       |   | 87.91                | %      | None                |   |
| October 31, 2002 |   | 5.0                      | %      | 6 Years       |   | 113.40               | %      | None                |   |
| October 31, 2001 |   | 5.7                      | %      | 5 Years       |   | 113.17               | %      | None                |   |

 

F-23

----

 

***[12] EmploymentContracts and Consulting Agreements***

 

During fiscal 2003, the Company established a Scientific Advisory Board[the “Board”] and entered into consulting agreements with members of theBoard.  The terms of the agreement rangefrom three years and two months to four years and three months.

 

The Company has also entered into various employment contracts andconsulting agreements for periods ranging from one to seven years.  At October 31, 2003, the approximateaggregate minimum commitment under these employment contracts and agreements,excluding commissions or consumer price index increases, is as follows:

 
| October 31, |   | Employees and Consultants |   | Advisory Board |   |
|------------------|--------|---------------------------|--------|----------------|--------|
|             |   |                      |   |           |   |
| 2004             |   | $                         | 3,340  |           | $      | 70 |   |
| 2005             |   | 1,238                     |   | 70             |   |
| 2006             |   | 506                       |   | 70             |   |
| 2007             |   | —                    |   | 25             |   |
|             |   |                      |   |           |   |
| ***Total***      |   | $                         | 5,084  |           | $      | 235 |   |

 

The Company entered into an employment agreement which included aprovision for a $250 bonus to be paid over a seven-year period.  At October 31, 2003, the Company had along-term liability of $75 and $50 current liability related to the remainingbonus amount due the employee.  Thebalance due at October 31, 2003 will be paid as follows:

 
| 2004        |   | $      | 50     |   |
|-------------|--------|--------|--------|--------|
| 2005        |   | 50     |   |
| 2006        |   | 25     |   |
|        |   |   |   |
| ***Total*** |   | $      | 125    |   |

 

Some of these agreements provide bonuses and commissions based on apercentage of collected revenues ranging from 1% to 10% on accounts referred byor serviced by the employee or consultant.

 

In addition to the above, the Company has entered into twentyemployment agreements which provide for annual aggregate minimum commitments ofapproximately $4,513 which have no termination dates.

 

In accordance with Section 402 of the Sarbanes-Oxley Act of 2002[the “Act”], companies are prohibited from making future loans to officers anddirectors and also prohibited are any extension of credit after the date of theacts enactment.  While the Company hadentered into and funded “split-dollar” life insurance agreements of severalofficer/directors of the Company before passage of the Act, future premiumscould be deemed an extension of credit. Until further clarification of the issue, the Company suspended payingany additional future premiums.  AtOctober 31, 2003, the life insurance policies are being paid by reducingthe cash values of such life insurance policies.  In the event that any of these officers leave the Company, theyare required to pay the Company back for premiums paid on their life insurancepolicies.  In the event of death,

 

F-24

----

 

the benefit paid to the beneficiary is reduced by the amount ofpremiums paid on behalf of the individual by the Company.  At October 31, 2003 and 2002, $1,039and $1,039, respectively, is included in other assets which represents theamount of premiums paid to date.  As of October 31,2003, the cash surrender value of the life insurance policies were less thanthe balance of premiums paid. [See Note 24]

 

***[13] CapitalizedLease Obligations***

 

The Company leases various assets under capital leases expiring infiscal 2009 as follows:

 
|                                      |   | October 31, |   |
|-------------------------------------------|--------|------------------|--------|
|                                      |   | 2003             |   | 2002 |   |
|                                      |   |             |   |   |   |
| Medical  Equipment                        |   | $                | 3,482  |   | $ | 3,089 |   |
| Furniture,  Fixtures and Office Equipment |   | 221              |   | — |   |
| Automobiles                               |   | 638              |   | — |   |
|                                      |   |             |   |   |   |
| Totals                                    |   | 4,341            |   | 3,089 |   |
| Less:  Accumulated Depreciation           |   | 1,634            |   | 1,511 |   |
|                                      |   |             |   |   |   |
| ***Net***                                 |   | $                | 2,707  |   | $ | 1,578 |   |

 

Depreciation expense on assets under capital leases was approximately$325, $448, and $343 for the years ended October 31, 2003, 2002 and 2001,respectively.

 

Aggregate future minimum rentals under capital leases are:

 
| Years  ended  October 31,                |   |   |   |
|-----------------------------------------------|--------|--------|--------|
|                                          |   |   |   |
| 2004                                          |   | $      | 1,109  |   |
| 2005                                          |   | 891    |   |
| 2006                                          |   | 740    |   |
| 2007                                          |   | 495    |   |
| 2008                                          |   | 171    |   |
| Thereafter                                    |   | 6      |   |
|                                          |   |   |   |
| Total                                         |   | 3,412  |   |
| Less:   Interest                         |   | 352    |   |
|                                          |   |   |   |
| ***Present Value of Minimum Lease Payments*** |   | $      | 3,060  |   |

 

***[14] Commitments andContingencies***

 

The Company leases various office and laboratory facilities andequipment under operating leases expiring from 2003 to 2007.  Several of these leases contain renewaloptions for one to five year periods.

 

Total expense for property and equipment rental for the years endedOctober 31, 2003, 2002 and 2001 was $3,180, $3,218 and $2,976, respectively.  There were no contingent rental amounts duethrough October 31, 2002.

 

F-25

----

 

Aggregate future minimum rental payments on noncancelable operatingleases [exclusive of several month to month leases] are as follows:

 
|             |   | Property |     | Equipment |     |
|------------------|--------|----------|----------|-----------|----------|
| October 31, |   |     |     |      |     |
| 2004             |   | $        | 1,018    |      | $        | 347 |   |
| 2005             |   | 513      |     | 236       |     |
| 2006             |   | 135      |     | 147       |     |
| 2007             |   | 93       |     | 110       |     |
| 2008             |   | —   |     | —    |     |
| Thereafter       |   | —   |     | —    |     |
|             |   |     | * * |      | * * |
| ***Totals***     |   | $        | 1,759    |      | $        | 840 |   |

 

In December 2001, one of the Company’s wholly owned subsidiary[CareEvolve] entered into a five year strategic marketing alliance agreementwith Roche Diagnostic Corporation [“RDC”]. RDC is engaged in the business of manufacturing, marketing and sellingmedical diagnostic equipment and medical supplies to various hospitals andhealth care providers.  The terms of theagreement provide that RDC will provide managerial and sales support toCareEvolve in an effort to further expand the sale of CareEvolve services.  The Company, including CareEvolve, shallhire marketing and management personnel to provide increased selling andmarketing efforts.  RDC will initiallyfund CareEvolve the sum of $1,000 which will be used to fund operations andexpenses of CareEvolve.  Only thoseexpenses approved by a Steering Committee will be authorized to be paid withthe proceeds of the $1,000.  During theterm of the agreement, CareEvolve will pay to RDC and Bio-Reference 50% of thenet after-tax income generated each quarter. In addition, the Agreement grants RDC an option to purchase an equityinterest in CareEvolve from the Company equal to 50% of the ownership inCareEvolve.

 

***[15] Litigation***

 

In the normal course of business, the Company is exposed to a number ofasserted and unasserted potential claims. In the opinion of management, the resolution of these matters will nothave a material adverse effect on the Company’s financial position or resultsof operations.

 

At November 1, 1998, the Company was being represented by counselin connection with various reviews being conducted by the Company’s Medicarecarrier.  One review involvedoverpayments that occur in the normal course of business.  The Company remitted approximately $75 toMedicare in connection with this matter. At October 31, 2002, the Company had established a reserve of $154,on its financial statements for the remaining liability.  In January 2003, Medicare determinedthat the remaining overpayment was $79 and interest on this amount was $2.  The total amount of $81 was remitted by theCompany to Medicare in January 2003, bringing the matter to a close.

 

F-26

----

 

In December 2000, the Company instituted a lawsuit against theformer owners of one of the Company’s wholly owned subsidiaries.  The complaint alleges that in connectionwith the Right Body Foods, Inc. [“RBF”] acquisition and the simultaneousemployment of the former owner as Director of RBF, that materialmisrepresentations and misleading statements were made regarding the businessbeing purchased.  The defendants filed acounterclaim in January 2001 denying the allegations filed in thecomplaint by the Company.  In addition,the defendants asserted a claim of sexual harassment and discrimination againstseveral officers of the Company.  InSeptember 2002, the Company signed a settlement agreement with the formerowner of RBF.  Terms of the settlementagreement provide for the former owner to retain the 200,000 shares of theCompany’s common stock issued in connection with the acquisition.  In exchange, the Company will retainownership of the RBF business [See Note 18]. All other claims that were asserted between the parties were mutuallydismissed.

 

***[16] Insurance***

 

The Company maintains professional liability insurance of $3,000 in theaggregate, with a per occurrence limit of $2,000 .  In addition, the Company maintains excess commercial insurance of$2,000 per occurrence and $3,000 in aggregate. The Company believes, but cannot assure, that its insurance coverage isadequate for its current business needs. A determination of Company liability for uninsured or underinsured actsor omissions could have a material adverse affect on the Company’s operations.

 

***[17] SignificantRisks and Uncertainties***

 

***[A] Concentrationsof Credit Risk - Cash -*** At October 31, 2003and 2002, the Company had approximately $2,923 and $1,132 , respectively, incash and certificate of deposit balances at financial institutions which werein excess of the federally insured limits.

 

***[B] Concentration ofCredit Risk - Accounts Receivable -***Credit riskwith respect to accounts receivable is generally diversified due to the largenumber of patients comprising the client base. The Company does have significant receivable balances with governmentpayors and various insurance carriers. Generally, the Company does not require collateral or other security tosupport customer receivables, however, the Company continually monitors andevaluates its client acceptance and collection procedures to minimize potentialcredit risks associated with its accounts receivable and establishes anallowance for uncollectible accounts and as a consequence, believes that itsaccounts receivable credit risk exposure beyond such allowance is not materialto the financial statements.

 

A number of proposals for legislation continue to be under discussionwhich could substantially reduce Medicare and Medicaid reimbursements toclinical laboratories.  Depending uponthe nature of regulatory action, and the content of legislation, the Companycould experience a significant decrease in revenues from Medicare and Medicaid,which could have a material adverse effect on the Company.  The Company is unable to predict, however,the extent to which such actions will be taken.

 

***[18] Acquisitions***

 

On December 2, 1999, the Company acquired the business of MedicalMarketing Group, Inc. [“MMGI”]. MMGI is engaged in selling Internet websitedesign and other Internet orientated services to medical professionalsincluding individual and group physician practices. The Company issued 140,000shares of common stock in exchange for the title and interest in the WEBbusiness.  In addition, the Companyissued 60,000 shares of common stock in connection with a non-competitionagreement with the former owner of MMGI. At the date of acquisition, the 200,000 shares of the Company’s commonstock issued had a value of approximately $598.  In October 2001, the Company granted options to purchase50,000 shares of the Company’s common stock at an exercise price of $3 pershare to the former owner of MMGI for consulting services.  An expense of approximately $27 was recordedin fiscal 2001.  Such options were alsoexercised in October 2001.

 

F-27

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On December 14, 1999, the Company acquired the business of RightBody Foods, Inc. [“RBF”].  RBF isengaged in the manufacture of health food products at a single facility locatedin New York.  In exchange for acquiringthe majority of the assets of RBF, the Company issued 180,000 shares of itscommon stock. In addition, the Company issued 20,000 shares of common stock tothe former owner of RBF in connection with a non-competition agreement. The200,000 shares of the Company’s common stock issued in connection with theacquisition had a value of approximately $437.

 

In October 2002, the Company terminated the operations of RBF inconjunction with its legal settlement with the former owner.  As a result of management’s decision toterminate RBF operations, the Company recorded a current period write-off ofapproximately $212 representing the net book value of intangible and otherdeferred assets incurred in connection with the initial acquisition ofRBF.  Subsequent to October 31,2002, the Company sold the remaining RBF assets for a nominal sum.

 

Both the MMGI and RBF acquisitions were accounted for under thepurchase method of accounting.   Underthis method, the purchase price was allocated to the acquired assets based ontheir estimated fair value at date of acquisition. In both acquisitions, thepurchase price was primarily allocated to a customer list and non-competitionagreements with the former owners. Each of the customer lists acquired were tobe amortized over a 20 year period utilizing the straight line method ofamortization.  Non-Competition covenantswere to be amortized over the life of the respective covenant under thestraight-line method of amortization. The results of operations for MMGI andRBF have been included in the consolidated statement of operations from therespective dates of acquisition.

 

On April 9, 1998, the Company acquired the assets and certainliabilities of Medilabs, Inc. [“MLI”] from LTC Service and Holdings, Inc.[“Holdings”], a wholly-owned subsidiary of Long-Term Care Services, Inc.[“LTC”].  The acquisition was effective April 9,1998 for accounting purposes and is being accounted for under the purchasemethod.  The operations of Medilabs,Inc. are included in the Company’s results of operations commencingApril 9, 1998.  In connection withthe acquisition of MLI, certain key employees signed employment agreements withthe Company for an unspecified period which included a six monthnon-competition clause.  In addition,LTC, Holdings, two affiliated corporations and an employee of LTC signednon-competition agreements.

 

The agreement also included a provision for a purchase price adjustment[“earn-up”], upon Medilabs, Inc. obtaining a NY State municipal contract forservices and meeting certain revenue criteria. The earn-up was subject to a maximum additional purchase price paymentof $1,250.  During fiscal 2000,Medilabs, Inc. achieved the criteria needed to earn the maximum “earn-up” of$1,250.  At such time additionalgoodwill of $1,250 was recorded.  The“earn-up” was payable in three installments of $625, $313 and $312.  On July 1, 2000, the Company paid thefirst installment of $625.  Theremaining second and third installments of $312 each, due November 2000and May 2001, were paid in fiscal 2001.

 

***[19] Fair Value ofFinancial Instruments***

 

For certain financial instruments, including cash and cash equivalents,trade receivables, trade payables, and short-term debt, it was estimated thatthe carrying amount approximated fair value for the majority of these itemsbecause of their short maturities.  Thefair value of the Company’s long-term debt is estimated based on the quotedmarket prices for similar issues or by discounting expected cash flows at therates currently offered to the Company for debt of the same remainingmaturities.

 

Due to the non-interest bearing nature and unspecified payment terms,it was not practicable to estimate the fair value of amounts due from relatedparties [See also Note 7].

 

F-28

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***[20] HealthInsurance Plan***

 

The Company has a limited self-funded health insurance plan for itsemployees under which the Company pays the initial $125 of covered medicalexpenses per person each year.  TheCompany has a contract with an insurance carrier for any excess up to a maximumof $1,900 per person and $2,000 in the aggregate.  Health insurance premium expense for the years endedOctober 31, 2003, 2002 and 2001 amounted to approximately $385 , $383 and$230 , respectively.  Uninsured employeemedical expenses incurred by the Company amounted to approximately $2,515 ,$2,348 and $1,901 for the years ended October 31, 2003, 2002 and 2001,respectively.  During fiscal 2003, 2002and 2001, employee contributions of $603, $437 and $326 offset, the abovehealth plan costs.

 

***[21] EmployeeBenefit Plan***

 

The Company sponsors the Bio-Reference Laboratories, Inc. 401(k)Profit-Sharing Plan [the “Plan”]. Employees become eligible for participation after attaining the age ofeighteen and completing one year of service. Participants may elect to contribute up to ten percent of theircompensation, as defined in the Plan Adoption Agreement, to a maximum allowedby the Internal Revenue Service.  TheCompany may choose to make a matching contribution to the plan for eachparticipant who has elected to make tax-deferred contributions for the planyear, at a percentage determined each year by the Company.  For the plan years beginning January 1,2003, 2002 and 2001, the Company elected to make a matching contribution of 3%of salary not to exceed $0.25 per participant which amounted to $71, $65 and$51, respectively which were charged to operations.  The employer contribution will be fully vested after the fifthyear of service.

 

***[22] NewAuthoritative Accounting Pronouncements***

 

In November 2002, the FASB issued Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires aguarantor to recognize a liability, at the inception of the guarantee, for thefair value of obligations it has undertaken in issuing the guarantee and alsoinclude more detailed disclosures with respect to guarantees. FIN 45 iseffective on a prospective basis for guarantees issued or modified startingJanuary 1, 2003 and requires the additional disclosures in interim andannual financial statements effective for the period ended December 31,2002. The Company’s adoption of the initial recognition and measurementprovisions of FIN 45 effective January 1, 2003, did not have a materialimpact on the Company’s results of operations or financial position.

 

In January 2003, the FASB issued Interpretation No. 46,“Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 requires avariable interest entity to be consolidated by a company if that company issubject to a majority of the risk of loss from the variable interest entity’sactivities or entitled to receive a majority of the entity’s residual returnsor both. Historically, entities generally were not consolidated unless theentity was controlled through voting interests. FIN 46 also requiresdisclosures about variable interest entities that a company is not required toconsolidate but in which it has a significant variable interest. Theconsolidation requirements of FIN 46 apply immediately to variable interestentities created after January 31, 2003 and to variable interest entitiesin which an enterprise obtains an interest after that date.

 

On October 8, 2003, the FASB deferred the implementation date forFIN 46 as it relates to variable interest entities that existed prior toFebruary 1, 2003 and in December 2003 the FASB issued a revised FIN46.  The revised effective date for theCompany is the end of the first reporting period ending after March 15,2004 [April 30, 2004 for the Company]. However, the Company must apply either the revised or the original FIN46 to so called special-purpose entities as of the end of the first reportingperiod ending after December 15, 2003 [January 31, 2004 for theCompany]. Certain disclosure requirements apply to all financial statementsissued after January 31, 2003, regardless of when the variable interestentity was established. The adoption of this standard is not expected to have amaterial impact on the Company’s consolidated financial statements.

 

F-29

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In April 2003, the FASB issued SFAS No. 149, “Amendment ofStatement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”),which amends and clarifies financial accounting and reporting for derivativeinstruments, including certain derivative instruments embedded in othercontracts, and for hedging activities under SFAS 133. SFAS 149 is effective forcontracts entered into or modified after June 30, 2003, and for hedgingrelationships designated after June 30, 2003. The adoption of SFAS 149,effective July 1, 2003, did not have a material impact on the Company’sresults of operations or financial position.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for CertainInstruments with Characteristics of both Liabilities and Equity” (“SFAS 150”),which establishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity. SFAS150 is effective for financial instruments entered into or modified after May31, 2003, and otherwise is effective at the beginning of the first interimperiod beginning after June 15, 2003. The Company’s adoption of theinitial recognition and initial measurement provisions of SFAS 150, effectiveJune 1, 2003, did not have a material impact on the Company’s results ofoperations or financial position.

 

***[23] SelectedQuarterly Financial Data [Unaudited]***

 
|                                                                 |   | Three months ended |   | Fiscal  Year 2003 |   |
|----------------------------------------------------------------------|--------|--------------------|--------|-------------------|--------|
|                                                                 |   | 1/31/03            |   | 4/30/03           |   | 7/31/03 |   | 10/31/03 |   |   |
|                                                                 |   |               |   |              |   |   |   |   |   |   |   |
| Net Revenues                                                         |   | $                  | 23,759 |              | $      | 25,951 |   | $ | 28,920 |   | $ | 30,404 |   | $ | 109,034 |   |
| Gross Profit                                                         |   | 10,572             |   | 12,241            |   | 14,578 |   | 15,427 |   | 52,818 |   |
| Net Income                                                           |   | 470                |   | 1,523             |   | 2,301 |   | 2,246 |   | 6,540 |   |
| Net Income Per Common Share:                                         |   |               |   |              |   |   |   |   |   |   |   |
| Basic                                                                |   | .04                |   | .13               |   | .20 |   | .20 |   | .57 |   |
| Diluted                                                              |   | .04                |   | .12               |   | .18 |   | .17 |   | .51 |   |
|                                                                 |   |               |   |              |   |   |   |   |   |   |   |
| Weighted Average Common Shares Outstanding  - Basic [in thousands]   |   | 11,595             |   | 11,487            |   | 11,423 |   | 11,451 |   | 11,489 |   |
|                                                                 |   |               |   |              |   |   |   |   |   |   |   |
| Weighted Average Common Shares Outstanding  - Diluted [in thousands] |   | 12,899             |   | 12,665            |   | 12,709 |   | 13,044 |   | 12,797 |   |
|                                                                      |        |                    |        |                   |        |  |  |  |  |  |  |  |  |  |  |  |

 

F-30

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|                                                                 |   | Three months ended |   | Fiscal  Year 2002 |   |
|----------------------------------------------------------------------|--------|--------------------|--------|-------------------|--------|
|                                                                 |   | 1/31/02            |   | 4/30/02           |   | 7/31/02 |   | 10/31/02 |   |   |
|                                                                 |   |               |   |              |   |   |   |   |   |   |   |
| Net Revenues                                                         |   | $                  | 22,295 |              | $      | 23,864 |   | $ | 24,893 |   | $ | 25,579 |   | $ | 96,631 |   |
| Gross Profit                                                         |   | 9,369              |   | 12,648            |   | 12,042 |   | 10,866 |   | 44,925 |   |
| Net Income                                                           |   | 710                |   | 1,260             |   | 1,505 |   | 1,447 |   | 4,922 |   |
| Net Income Per Common Share:                                         |   |               |   |              |   |   |   |   |   |   |   |
| Basic                                                                |   | .06                |   | .11               |   | .13 |   | .12 |   | .43 |   |
| Diluted                                                              |   | .06                |   | .10               |   | .12 |   | .11 |   | .39 |   |
|                                                                 |   |               |   |              |   |   |   |   |   |   |   |
| Weighted Average Common Shares Outstanding  - Basic [in thousands]   |   | 11,104             |   | 11,235            |   | 11,586 |   | 11,586 |   | 11,378 |   |
|                                                                 |   |               |   |              |   |   |   |   |   |   |   |
| Weighted Average Common Shares Outstanding  - Diluted [in thousands] |   | 12,801             |   | 12,889            |   | 13,069 |   | 12,975 |   | 12,780 |   |
|                                                                      |        |                    |        |                   |        |  |  |  |  |  |  |  |  |  |  |  |

 

***[24] SubsequentEvents***

 

In November 2003, the Company entered into a letter of intent toacquire a diagnostic medical laboratory with operations in New York City.  Terms of the agreement provide for theCompany to acquire certain operating assets and liabilities for a purchaseprice of $750 to be paid at closing.

 

Effective November 30, 2003, the Company terminated the originalsplit dollar life insurance agreement with each of the three officers to whichit applied.  In connection with thetermination, the three officers transferred ownership of the insurance policiesto the Company and agreed to reimburse the Company for the premiums paid to theextent required under the original agreement.

 

Effective November 30, 2003, the Companyadopted a new endorsement “split-dollar” insurance program (the “New InsuranceProgram”) for each of the three officers. Under the New Insurance Program, theCompany will be the sole owner of the life insurance policies (including thecash value of the policies) and will pay the premium on the policies. Prior totermination of employment, the officer will have the right to name thebeneficiary of the death benefit but will not have access to any policy cashvalue. On retirement, the Company will transfer its interest in the policy tothe retiring officer who will be required to reimburse the Company for thetotal premiums previously paid.

 

F-38

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***[25] SubsequentEvent (Unaudited)***

 

 On January 22, 2004, theCompany was informed that IMPATH, Inc., as a debtor-in-possession had commencedan adversary proceeding in Bankruptcy Court in the Southern District of NewYork against James Weisberger, M.D., Vice President, Assistant Chief MedicalOfficer and Director of Hematopathology of the Company, alleging that Dr.Weisberger had, among other things, misappropriated certain of IMPATH’s allegedtrade secrets and had unlawfully solicited former IMPATH employees to commenceemployment with the Company.  TheCompany was not named as a party to this lawsuit.  Management of the Company and Dr. Weisberger believe thatthe allegations in this proceeding are baseless and totally without merit andintend to fully contest the matter.

 

**.  ..   .   .   .   .  ..   .   .   .**

 

F-39

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**INDEPENDENT AUDITOR’S REPORT**

 

To the Board of Directors and Shareholders of

Bio-Reference Laboratories, Inc.

Elmwood Park, New Jersey

 

 

Our report on our audit of the basic financial statements ofBio-Reference Laboratories, Inc. and its subsidiaries appears on page F-1.  That audit was conducted for the purpose offorming an opinion on the basic financial statements taken as a whole.  The supplemental schedule II ispresented for purposes of complying with the Securities and ExchangeCommissions Rules and Regulations under the Securities Exchange Act of 1934 andis not otherwise a required part of the basic financial statements.  Such information has been subjected to theauditing procedures applied in the audit of the basic financial statements, andin our opinion, is fairly stated in all material respects in relation to thebasic financial statements taken as a whole.

 

 
|                 | MOORE STEPHENS, P. C.         |
|----------------------|-------------------------------|
|                 | Certified Public Accountants. |
|                 |                          |
| Cranford, New Jersey |                          |
| January 9, 2004 |                          |

 

F-40

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**BIO-REFERENCE LABORATORIES, INC. ANDSUBSIDIARIES**

 

**SCHEDULE II - VALUATION AND QUALIFYINGACCOUNTS FOR THE YEARS ENDED OCTOBER 31,2003, 2002 AND 2001.**

**[In Thousands]**

 
|                             |   | **(b)**                              |   | **(c)**                            |   | **(d)**                                |   | **(e)**                        |     |
|----------------------------------|--------|--------------------------------------|--------|------------------------------------|--------|----------------------------------------|--------|--------------------------------|----------|
| **(a)  Description**             |   | **Balance at  Beginning  of Period** |   | **Charged to  Cost and  Expenses** |   | **Deductions  To Valuation  Accounts** |   | **Balance  at End  of Period** |     |
|                             |   |                                 |   |                               |   |                                   |   |                           |     |
| Year Ended October 31, 2003 |   |                                 |   |                               |   |                                   |   |                           |     |
| Allowance for Doubtful Accounts  |   | $                                    | 7,035  |                               | $      | 12,806                                 |   | $                              | (14,682  | ) | $ | 5,159 |   |
| Contractual Credits/Discounts    |   | 23,010                               |   | 160,642                            |   | (159,626                               | )      | 24,026                         |     |
|                             |   |                                 |   |                               |   |                                   |   |                           |     |
| ***Total Allowance***            |   | $                                    | 30,045 |                               | $      | 173,448                                |   | $                              | (174,308 | ) | $ | 29,185 |   |
|                             |   |                                 |   |                               |   |                                   |   |                           |     |
| Year Ended October 31, 2002 |   |                                 |   |                               |   |                                   |   |                           |     |
| Allowance for Doubtful Accounts  |   | $                                    | 4,973  |                               | $      | 12,341                                 |   | $                              | (10,279  | ) | $ | 7,035 |   |
| Contractual Credits/Discounts    |   | 26,405                               |   | 136,141                            |   | (139,536                               | )      | 23,010                         |     |
|                             |   |                                 |   |                               |   |                                   |   |                           |     |
| ***Total Allowance***            |   | $                                    | 31,378 |                               | $      | 148,482                                |   | $                              | (149,815 | ) | $ | 30,045 |   |
|                             |   |                                 |   |                               |   |                                   |   |                           |     |
| Year Ended October 31, 2001 |   |                                 |   |                               |   |                                   |   |                           |     |
| Allowance for Doubtful Accounts  |   | $                                    | 4,717  |                               | $      | 10,731                                 |   | $                              | (10,475  | ) | $ | 4,973 |   |
| Contractual Credits/Discounts    |   | 18,840                               |   | 115,393                            |   | (107,828                               | )      | 26,405                         |     |
|                             |   |                                 |   |                               |   |                                   |   |                           |     |
| ***Total Allowance***            |   | $                                    | 23,557 |                               | $      | 126,124                                |   | $                              | (118,303 | ) | $ | 31,378 |   |

 

F-41

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