**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

** **

**[Mark One]**

 

**x****  ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

** **

**For the fiscal year ended********October 31,2008**

 

**OR**

 

**o**** TRANSITION REPORT PURSUANT TO SECTION 13OR 159d) OF THE SEUCIRITES**

**EXHANGE ACT OF 1934**

 

**For the transition period from             to             **

 

**Commission file number 0-15266**

 

**BIO-REFERENCE LABORATORIES, INC.**

 

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

 

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

(Address of principal executive offices)

 

Registrant’s telephone number **201-791-2600**

 

Securities registered pursuant to Section 12(b) of theAct:    **None**

 

| **Securities registered pursuant to Section 12(g) of the Act:** | ** ** | **Name of Exchange on Which Registered** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|
| Common Stock, $.01 par value                                                                            |       | NASDAQ Global Market                                              |

 

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act.  Yes o  No x.

 

Indicate by check mark if the registrant is not required to file reportspursuant to Section 13 or 15(d) of the Act.  Yes o  No x.

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes x  No o.

 

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

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definitions of “large accelerated filer.” “accelerated filer,”and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 
| Large accelerated filer o | Accelerated filer x | Non-Accelerated filer o | Smaller reporting company o |
|---------------------------|---------------------|-------------------------|-----------------------------|

 

Indicate by checkmark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).  Yes o  No x.

 

The aggregate market value of the voting stock of Bio-ReferenceLaboratories, Inc. (consisting of Common Stock, $.01 par value) held bynon-affiliates of the registrant was approximately $297,400,000 based upon thelast sale price for the Common Stock on April 30, 2008, the last tradingdate of the registrant’s most recently completed second quarter, as reported onthe NASDAQ Global Market System.

 

On January 5, 2009, there were 13,788,343 shares of Common Stockissued and 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 nearly 4.1 million requisitions each year. Arequisition form accompanies a patient 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 over50 patient service centers for collection of patient specimens.

 

In 2006 we acquired GeneDx, a diagnostic genetic testing laboratoryproviding services to national and international customers. GeneDx specializesin testing for rare and complex genetic conditions through the use of DNAsequencing. In 2007 we introduced the first commercially available genome-wideoligonucleotide microarray analysis testing useful for the diagnosis of, amongother conditions, developmental disorders, which has significantly grown GeneDx’sbusiness. The success and growth of GeneDx can be attributed to both the uniquenature of our testing and the highly experienced clinicians and researchers whorun the business.

 

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. We use thisportal ourselves to provide laboratory ordering and results to our physician customers.  We are also marketing this connectivitysolution 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.,a New 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 $52 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 are currentlyperformed in a hospital laboratory, approximately 40% performed by anindependent clinical laboratory and the balance in a physician office or otherlaboratory.

 

During the last few years, the economic fundamentals of the industryhave been improving. 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 and emergingtechnologies continue to provide greater testing opportunities for clinicallaboratories.

 

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

 

Aging of the population of the United States;

Awareness by patients of the value of laboratory tests;

Decrease in the cost of tests;

Decrease in the influence of managed care organizations on the orderingpatterns of their physicians;

Development of sophisticated and specialized tests for early detectionof disease and disease management;

Diagnosis and monitoring of infectious diseases such as AIDS andHepatitis C;

Early detection and prevention as a means of reducing healthcare costs;

Employer sponsored wellness programs;

Research and 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. Throughthe acquisition of the operating assets of GeneDx, we have acquired expertiseand credibility in the area of genetic diagnostic testing and we intend toleverage that resource in the development of expanded genetic diagnostictesting. We have developed certain specialized markets, such as in the areas ofcorrectional health, substance abuse testing, fertility testing and moleculardiagnostics. Testing in these areas also may be supported outside of physicianoffices.

 

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 ourlarge marketing staff and strong infrastructure within our designated area canbe leveraged to bring new technologies to physicians and healthcare providers.Over the past year, our volume of testing in the area of molecular diagnosticshas increased.  We believe thatlaboratory data has great value in managing the healthcare of a population, butcan only be properly utilized when combined with medical claims and pharmacydata. Our medical information unit, PSIMedica, seeks to combine laboratory datawith these other data elements in order to provide information analytics thatwill help to improve the quality and efficiency of healthcare. We seek tocontinue our strong growth not only through our marketing organization, newtechnologies and superior service, but by providing value added analytics inconjunction 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:

 

Capitalize on our position within the clinical market

Lead in the providing of medical information

Provide the highest quality service

Pursue strategic growth opportunities

 

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Services

 

The clinical laboratory testing business consists of routine testing andesoteric testing. Routine testing generates approximately 50% and esoterictesting generates approximately 50% of our net revenues. The net revenuegenerated by our GeneDx and our CareEvolve subsidiaries were 3.94% and .82% infiscal 2007, respectively and 5.7% and .74% in fiscal 2008, respectively as apercentage of total revenue.

 

Routine Testing

 

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

 

Blood Cell Counts

Cholesterol levels

HIV-related tests

Pap Smears

Pregnancy

Substance Abuse

Urinalysis

 

We perform these tests at our main processing facility in Elmwood Park,New Jersey.

 

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 and materials,highly skilled personnel, professional attention and which are ordered lessfrequently than routine tests. These tests are generally priced higher thanroutine 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 thebody)

 

We perform cancer cytogenetic testing at our leased facilities inElmwood Park, NJ and Milford, Massachusetts and genetic testing at our GeneDxleased facilities in Gaithersburg, Maryland.

 

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 ownedsubsidiary, is a physician-based connectivity portal.  This system provides a complex, sophisticatedsystem for ordering laboratory services and delivering laboratory results.  The system is designed to be physician-centricand to provide a highly flexible, scalable, comprehensive desktop solution forphysicians to manage their day-to-day practice and personal needs, as well asto handle their clinical laboratory ordering and reporting.  This product has been designed to work as aplatform with plug and play capability that can easily be used by otherlaboratories that also need a web-based solution for their physician customers.

 

Payors and Clients

 

We provide laboratory services to a range of healthcare providers. A “payor”is the party who pays for the tests while the “client” is the party that refersthe tests to us. We may consider an organization that has a contract with us,such as a clinic or governmental agency, both a payor and a client. Somestates, such as New York and New Jersey, prohibit us from billing physicianclients. During fiscal year 2008, no single client accounted 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, 2006, 2007,and 2008.

 
| ** **             | ** ** | **October 31** | ** ** |
|------------------------|------------|---------------------|------------|
| ** **             | ** ** | **2008**            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                   |       |                |       |   |   |   |   |
| Direct Patient Billing |       | 4                   | %          | 3 | % | 4 | % |
| Commercial Insurance   |       | 47                  | %          | 46 | % | 44 | % |
| Professional Billing   |       | 23                  | %          | 25 | % | 24 | % |
| Medicare               |       | 24                  | %          | 24 | % | 26 | % |
| Medicaid               |       | 2                   | %          | 2 | % | 2 | % |
|                   |       | 100                 | %          | 100 | % | 100 | % |

 

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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 that we are the largest regional laboratoryproviding laboratory testing services to correctional facilities in theNortheastern United States. All of these clients are charged on a contractualbasis.

 

Sales and Marketing

 

We employ full and part-time sales and marketing representatives. All ofour sales and marketing personnel operate in a dual capacity, as both marketingand client support representatives. This ensures that all of our salespersonsare intimately involved with the client. We believe that this is unique in theindustry and is extremely helpful in client retention, since it provides astrong 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, Clarksburg and Gaithersburg facilities, allof whom are trained in medical and laboratory terminology. This staff is usedas an interface with physicians and nurses and augments the client supportprovided by our sales force. They also report highly abnormal and lifethreatening results to the ordering physician immediately via telephone inorder to provide speedy medical resolution 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

 

Overthe last several years, we have experienced substantial growth and haveexpanded our operational capabilities. In September 2006, we acquiredcertain assets and liabilities of two Maryland laboratories, a pathologylaboratory and a genetics laboratory for $1,500,000 and $10,000,000,respectively. The genetics laboratory purchase agreement contains certain operationaltargets, which, if achieved in the four years following the closing, couldresult in an increase in the purchase price from $10,000,000 to a maximum$17,000,000. During the recently completed fiscal year ended October 31,2008 as well as for the fiscal year ended October 31, 2007, the geneticslaboratory achieved certain of the targets, entitling the prior owners toreceive $1,917,000 in cash and an additional 11,548 shares of our Common Stockwith respect to each such year. These amounts have been accrued and arereflected in our financial statements. We retained the staffs of theselaboratories and continue to operate at the same locations. We intend todevelop further and expand both our core laboratory business and otherproducts. This growth and expansion has placed, and will continue to place, asignificant strain on our resources. We cannot assure that we will be able tosuccessfully manage a continuation of the rate of growth similar to that whichwe have experienced in the past, should such growth occur.

 

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 not credit-relatedas is the case in most industries. It is due in most part to missing or incorrectbilling information on our requisitions; this occurs because we depend on thehealthcare provider to supply us with the information. We perform the tests andreport the test results as requested on the requisition regardless of whetherthe demographic information is correct or even missing altogether. We thenattempt to obtain any missing information and correct the billing informationreceived from the healthcare provider. This adds to the complexity, slows theinvoicing process, and generally increases the aging of our accountsreceivable. When all issues are not resolved in a timely manner, the item iswritten-off to bad debt expense through the allowance for doubtful accounts.Other items such as pricing differences and payor disputes also complicatebilling. Adjustments to receivables as a result of these types of matters areaccounted for as revenue adjustments and are not written-off to bad debtexpense.

 

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 of staff

A more responsive business atmosphere

Customized service

 

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 our senior scientists andmedical staff.

 

Quality Assurance

 

                Medical testing isessentially a process of communication and data transfer. In order to provideaccurate and precise information to the physician, it is essential that wemaintain a well structured and vigorous quality assurance program. Our goal isto continually improve this process. We hold the required Federal and Statelicenses necessary to permit our operation of a clinical laboratory at ourfacilities in New Jersey, New York, Maryland and Massachusetts. We submit to vigorousproficiency tests (or surveys) in all tests that we perform. We are alsosubject to unannounced inspections from the various state licensing agencies.

 

Our laboratories are accredited by the College of American Pathologists(“CAP”). This accreditation includes on-site inspections and participation 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 compliance with the standards required by the ClinicalLaboratory Improvement 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 Committee continually monitor the laboratory’s quality.

 

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Depending on the test, two or three levels of Quality Control materialsare run in each analytical assay to assure precision and accuracy.  Patient population statistics are evaluatedeach day. Testing of highly abnormal samples is repeated to assure 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.

 

Special Note Regarding Forward-Looking Statements

 

This Annual Report on Form 10-K includes “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. 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 the caption “Risk Factors” 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 enumerated RiskFactors and such other statements.

 

Item 1A. Risk Factors

 

Because of the following factors, as well as of the factors affectingour operating results and financial condition, financial performance should notbe considered to be a reliable indicator of future performance. Investorsshould not use historical trends to anticipate results in future periods. Seealso “Special Note Regarding Forward Looking Statements”.

 

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 ComprehensiveMedical Waste Management Act, (“CMWMA”), which requires us to register as agenerator of special medical waste. All of our medical waste is disposed of bya licensed interstate hauler.  The haulerprovides a manifest of the disposition of the waste products as well as acertificate of incineration which is retained by us. These records are auditedby the State of New Jersey on a yearly basis. We are also subject to Federalrequirements. The Federal Hazardous materials transportation law, 49 U.S.C.5101 et seq., and the Hazardous Materials Regulations (HMR), 49 CFR parts171-180. The Federal government has classified hazardous medical waste ashazardous materials for the purpose of regulation. These regulations preemptState regulation which must be “substantively the same,” “the non-Federalrequirement must conform “in every significant respect to the Federalrequirement. Editorial and other similar de minimis changes are permitted.” 49CFR 107.202(d). The amendments to provisions in 49 U.S.C., 5125 reaffirmed theneed to achieve greater uniformity and to promote the public health, welfare,and safety at all levels, Federal standards for regulating the transportationof hazardous materials in intrastate, interstate, and foreign commerce are necessaryand desirable. We believe we are in compliance with all Federal and Statemedical waste regulations.

 

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. Formost of the tests performed for Medicare beneficiaries or Medicaid recipients,laboratories are required to bill Medicare or Medicaid directly, and to acceptMedicare or Medicaid 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 companieswith whom 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 laboratory charges.Calendar year 2008 marked the final year of a five-year freeze on Laboratoryfee updates, as required by the Medicare Modernization Act of 2003. A number ofproposals for legislation or regulation are under discussion which could havethe effect of substantially reducing Medicare reimbursements to clinicallaboratories through reduction of the present allowable percentage or throughother means.  In addition, the structureand nature of Medicare reimbursement for laboratory services is also underdiscussion and we are unable to predict the outcome of these discussions.Depending upon the nature of congressional and/or regulatory action, if any,which is taken and the content of legislation, if any, which is adopted, wecould experience a significant decrease in revenues from Medicare and Medicaid,which could have a material adverse effect on us.  For the first time in five years, as of January 1,2009, laboratories will receive a 4.5% across the board increase inreimbursements.

 

CLIA-88

 

                CLIA-88 extendedFederal licensing requirements to all clinical laboratories (regardless of thelocation, size or type of laboratory), including those operated by physiciansin their offices, based on the complexity of the tests they perform.  The legislation also substantially increasedregulation of cytology screening, most notably by requiring the Secretary ofHealth and Human Services, (“HHS”) to implement regulations placing a limit onthe number of slides that a cytotechnologist may review in a twenty-four hourperiod.  CLIA-88 also established a morestringent proficiency testing program for laboratories and increased the rangeand severity of sanctions for violating Federal licensing requirements.  A number of these provisions, including thosethat imposed stricter cytology standards and increased proficiency testing,have been implemented by regulations applicable only to laboratories subject toMedicare certification. On February 28, 1992, HHS published three sets ofregulations implementing CLIA-88, including quality standard regulationsestablishing 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 believe thatmost tests performed by physician office laboratories will fall into either the“waived” or the “moderately complex” category. The latter category applies to simple or automated tests and generallypermits existing personnel in physicians’ offices to continue to performtesting under the implementation of systems that insure the integrity andaccurate reporting of results, establishment of quality control systems,proficiency testing by approved agencies, and biannual inspection.  Our testing is often much more complex and asa result, we are subject to full compliance with CLIA-88. The quality standardand enforcement procedure regulations became effective on September 1,1992, most personnel, quality control and proficiency testing requirements havebeen implemented; the remainder will be phased in over a number of years.  Our laboratory completed its first CLIAinspection under CLIA-88 guidelines and received its certificate of complianceeffective February 7, 1996. It has been reinspected since on a bi-annualbasis and found to be in compliance.

 

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Compliance Program

 

The Office of Inspector General has published a Model Compliance Programfor 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:

 

The circumstances under which disclosures and uses of protected healthinformation require the patient’s consent, or authorization or no patientconsent or authorization.

The content of notices of privacy practices for protected health data.

Patients’ rights to access, amend and receive an accounting of thedisclosures and uses of protected health information.

Administrative, technical and physical safeguards required for that useor for disclosure of protected 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 by October 16,2003.  We filed our application for a oneyear extension for compliance with the Transaction Data Set Regulations andfiled our compliance plan during the extension period in accordance with themodel form provided by HHS. HIPAA provides for significant fines as well assubstantial criminal penalties for violations of the Act.

 

Laboratory Developed Tests (“LDTs”)

 

Complex laboratories such as BioReference frequently develop testingprocedures to provide diagnostic results to customers for tests which are notavailable using Federal Drug Administration (FDA) approved methods. These testshave been traditionally offered by nearly all complex laboratories for the lastfew decades. The FDA has been considering changes in the way laboratories areallowed to offer these LDTs. While changes have been considered for some timenow, the potential for FDA involvement appears greater now than in the past.Currently all such tests are conducted and offered under approval by CLIA andindividual state licensing procedures; the FDA is considering requiring FDAapproval on a portion of those currently non-FDA approved tests. There is an associatedrisk for BioReference that some of the tests that it currently offers mightneed to be subject to approval by the FDA; there are currently no formaldefinitions, procedures or FDA processes on how such approvals would behandled.

 

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 highestpriorities. Many of the anti-fraud statutes are vague or indefinite and havenot been interpreted in the courts.  Webelieve we operate lawfully within these statutes; however, we cannot predictif some of our practices may be interpreted as violating these statutes andregulations.

 

Intellectual Property

 

BioReference, primarily through its wholly-owned subsidiary, GeneDx, butadditionally through its primary laboratory in Elmwood Park has in the past,and may in the future, have the need to deal with intellectual property issues,such as patent issues, trademark issues and copyright issues. BioReferencediligently researches all matters that may give rise to an intellectualproperty issue and has taken substantial legal steps to make sure that all suchmatters are fully considered and understood. In certain instances the issuesare not apparent and in some other cases, BioReference believes that thecurrent intellectual property law may not be appropriate to current conditionsor may be in a transitional state of change and BioReference may challenge thelaw in such instances. There is an associated risk with such challenges thatcould force BioReference to stop or change a testing procedure in certaininstances or could possibly result in financial expense as a result of theCompany’s decision.

 

Insurance

 

We maintain professional liability insurance of $1,000,000 peroccurrence, $3,000,000 in the aggregate. In addition, we maintain excesscommercial insurance of $5,000,000 per occurrence and $5,000,000 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 willbe able to continue to obtain adequate insurance coverage, we cannot assurethat we will be able to do so at acceptable cost.

 

Employees

 

At October 31, 2008, we had 1,484 full-time and 423 part-timeemployees serving in executive positions, as technicians and technologists(including physicians, pathologists and PhDs), in marketing and as drivers andin bookkeeping, clerical and administrative positions. None of our employeesare represented by a labor union. We regard relations with our employees assatisfactory.

 

Risks Associated with Growth:

 

                Over the last several years, we have experiencedsubstantial growth and have expanded our operational capabilities. In September 2006,we acquired certain assets and liabilities of two Maryland laboratories, apathology laboratory and a genetics laboratory for $1,500,000 and $10,000,000,respectively. The genetics laboratory purchase agreement contains certainoperational targets, which, if achieved in the next four years could result inan increase in the purchase price from $10,000,000 to a maximum $17,000,000.During the recently completed fiscal year ended October 31, 2008 as wellas for the fiscal year ended October 31, 2007, the genetics laboratoryachieved certain of the targets, entitling the prior owners to receive$1,917,000 in cash and an additional 11,548 shares of our Common Stock withrespect to each such year. These amounts have been accrued and are reflected inour financial statements. We retained the staffs of these laboratories andcontinue to operate at the same locations. 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 such growth occur.

 

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

 

6

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September 11, 2001 when the National Airspace System (“NAS”) wasshut down for a week, could have a material adverse effect on our operatingresults. As a result of these factors, our operating results may continue tofluctuate 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 physiciansfrom making such referrals to entities in which they have an investmentinterest or with which they have a compensation arrangement. Exceptions tothese laws are limited. Violations are punishable by disallowance of claims,civil monetary or criminal penalties and or exclusion from Medicare. Governmentauthorities (both federal and state) have become more aggressive in examininglaboratory billing practices, and in seeking repayments and even penaltiesbased on how the services were billed, regardless of whether the carriers hadfurnished clear guidance.

 

In addition, our laboratory operations are required to be licensed orcertified under CLIA-88, CMS (Medicare) and various State and local laws. Weare also subject to federal and state laws relating to the handling anddisposal of medical waste and radioactive materials, as well as the safety andhealth of laboratory employees. Although we seek to structure our practices tocomply with 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 of lowering their costs,which may result in lower profit margins for us. Reimbursement rates have beenestablished for most, but not every service. We cannot collect from third partypayors for services that these payors have not approved for reimbursement. Asis common with all laboratories, there is a certain amount of variability withrespect to reimbursement among third party payors. Furthermore, third partypayors have, on occasion ceased reimbursements when certain tests are orderedfor patients with certain diagnoses while maintaining reimbursement when thosetests are ordered for other diagnoses deemed appropriate by the carrier. Inaddition, Medicare or Medicaid may retroactively audit its payments to us andmay determine that certain payments must be returned.

 

Potential Healthcare Reform Including Decreasing Reimbursement Rates

 

                        The public and the federal government continueto focus attention on reforming the healthcare system in the United States. Atthe beginning of calendar year 2005, CMS announced significant cuts to Medicarereimbursement rates for flow cytometry testing. We benefited from a partial restorationof the former reimbursement rates in fiscal 2007. Furthermore, severallegislative proposals have been introduced in Congress and state legislaturesin recent years that would effect major reforms of the healthcare systems. Inaddition, CMS has made a number of proposals regarding the payment and coverageof laboratory services including the development of national coverage policies.Because of the uncertainties in regard to the nature, timing and extent of anysuch reimbursement changes, audits and reform initiatives, we are unable topredict the effect of these changes on us. For the first time in five years, asof January 1, 2009, laboratories will receive a 4.5% across the boardincrease in reimbursements.

 

Uncertainties Related to Accounts Receivable

 

All of our services are rendered based upon a fee for services list. Weassume the financial risk related to collection of these receivables such as:

 

Delays attendant to reimbursement by third party payors

Difficulties in gathering complete and accurate billing information

Inability to collect accounts

Long collection cycles

 

There have been times when our accounts receivable have increased at agreater rate than revenue growth and, therefore, has adversely affected ourcash flow from operations. We have taken steps to implement systems andprocessing changes intended to improve billing procedures and relatedcollection results. We believe that we have made progress by reorganizing ouraccounts receivable and billing functions and that our allowance for doubtfulaccounts is adequate. However, we cannot assure that our ongoing assessment ofaccounts receivable will not result in the need for additional provisions. Suchadditional provisions, if implemented, could have a material adverse effect onour operating results.

 

Competition

 

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

 

### Dependence on Bank Financing

###  

InMay 2008, the Company entered into an amended revolving note payable loanagreement with PNC Bank, N.A. (“the bank”).  The maximum amount of thecredit line available to the Company pursuant to the loan agreement is thelesser of (i) $40,000,000 or (ii) 50% of the Company’s qualifiedaccounts receivable [as defined in the agreement].  The amendment to theLoan and Security Agreement provides for interest on advances to be subject tothe bank’s prime rate or the Eurodollar rate of interest plus, in certaininstances, an additional interest percentage.  The additional interestpercentage charges on Eurodollar borrowings range from 1% to 4% and aredetermined based upon certain financial ratios achieved by the Company. At October 31, 2008, the Company had elected to have all of the totaladvances outstanding to be subject to the bank’s prime rate of interest of4.0%.  The credit line is collateralizedby substantially all of the Company’s assets. The line of credit is availablethrough October 2012 and may be extended for annual periods by mutualconsent, thereafter.  The terms of this agreement contain, among otherprovisions, requirements for maintaining defined levels of capitalexpenditures, fixed charge coverage, and the prohibition of the payment by theCompany of cash dividends. As of October 31, 2008, the Company wasutilizing $18,831,000 of the available credit under this revolving note payableloan agreement.

 

7

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Effectiveas of October 31, 2007, we executed a fifth amendment to the loanagreement formalizing the repayment terms of a $5 million term loan from PNCBank used by our wholly-owned subsidiary, BRLI No. 2 Acquisition Corp. tofund the $5 million acquisition Cash Payment in connection with the purchase ofthe operating assets of GeneDx. The term loan is evidenced by a securedpromissory note payable over a six year term in equal monthly principalpayments of $69,000, plus interest at an annual rate of 6.85%.  Thebalance on this note as of October 31, 2008 was approximately $3,333,000.

 

InJanuary 2007, the Company issued a ten year term note of $4,100,000 forthe financing of equipment.  The note is payable in equal monthlyinstallments of $47,000 including principal and interest, with paymentcommencing on March 1, 2007 at an effective interest rate of 6.63% perannum.  The balance on this note as of October 31, 2008 wasapproximately $3,564,000.

 

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. The unavailability of Dr. Grodman,whether as a result of his death, disability or otherwise, could have amaterial 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 a material effect on the market price of ourCommon Stock. In addition, any announcement of a material pending legal actioncould have a negative impact on the market price of our Common Stock regardlessof the 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; and the requirement that the holders ofnot less than 80% of our outstanding Common Stock must approve any merger,consolidation, asset sale or acquisition of the Company not approved by theboard of directors 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. See Item 11 — “EmploymentAgreements with Executive Officers” as to employment agreements signed by theCompany which provide for substantial Severance Payments upon termination ofemployment in the event of a Change in Control of the Company. These SeverancePayment provisions may also discourage attempts by third parties to tender foror otherwise obtain control of the Company.

 

Item 1B. Unresolved Staff Comments

 

The Company has received a comment letter from the staff (the “Staff”)of the Securities and Exchange Commissions regarding its periodic and currentreports under the Exchange Act. Two of the comments have not yet been resolved.

 

The first comment related to the provision in the GeneDx acquisitionagreement which required the stock portion of the upside contingent purchaseprice to be valued at the value per share of the closing date stock value (i.e.$21.65 per share). The Staff contends that the value of the stock portion ofthe upside contingent purchase price payments should be determined based on itsfair value when the contingency is resolved. It is the Company’s position thatany revaluation of the stock portion of the upside contingent purchase pricepayment would be quantitatively insignificant and would have no material effecton the Company’s financial statements.

 

The second comment requested an analysis to support the Company’sposition that segment reporting is not required for its GeneDx and CareEvolveoperations. The Company is in the process of responding to this comment. TheCompany’s position is that the threshold levels have not been exceeded requiringsegment reporting for these two operations. GeneDx’s and CareEvolve’s revenuesin fiscal 2007 were less than 4% and 1% and in fiscal 2008, less than 6%, and1%, respectively, of the Company’s consolidated revenues. In addition,BioReference and GeneDx basically provide laboratory testing services to thesame class of customers and must meet similar regulatory requirements. TheCompany also believes that GeneDx and BioReference have other similar economiccharacteristics so that separate segment reporting for GeneDx is not required.

 

Item 2. - Properties

 

We operate through a regional network of laboratories. The table belowsummarizes certain information as to our principal facilities as of October 31,2008.

 
| **Location**     | ** ** | **Purpose**             | ** ** | **Type of  Occupance** |
|------------------|------------|-------------------------|------------|-----------------------------|
| Clarksburg, MD   |       | Pathology  Laboratory   |       | Leased                      |
| Elmwood Park, NJ |       | Main  Laboratory        |       | Leased                      |
| Elmwood Park, NJ |       | Corporate  Headquarters |       | Leased                      |
| Gaithersburg, MD |       | Genetics  Laboratory    |       | Leased                      |
| Milford, MA      |       | Oncology  Laboratory    |       | Leased                      |
| Poughkeepsie, NY |       | Pathology  Laboratory   |       | Leased                      |

 

We believe that each of these facilities as presently equipped has theproduction capacity for its currently foreseeable level of operations. We alsolease additional relatively small draw stations throughout the New Yorkmetropolitan area to collect specimens from physician-referred patients fortesting at our processing facilities.

 

Item 3. - Legal Proceedings

 

 At October 31, 2008 and at the date of this Report, we werenot involved in any material legal proceedings.

 

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

 

 No matter was submitted to a vote of our security holders duringthe fourth quarter of fiscal 2008.

 

8

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**PART II**

 

Item 5. - Market for Registrant’s CommonEquity, Related Stockholder Matters and Issuer Purchases of Equity

 

Our Common Stock is listedfor trading on The NASDAQ Global Market System under the symbol “BRLI”. Ittraded on the NASDAQ Small Cap System from November 24, 1993 until March 26,2002 when our application to list our Common Stock on the NASDAQ Global MarketSystem was approved.

 

The following table setsforth the range of high and low closing bid prices for our Common Stock for theperiods indicated, as derived from reports furnished by Pink Sheets LLC. Suchquotations represent prices between dealers, do not include mark-ups,mark-downs or commissions and may not necessarily represent actual transactions.

 
| **Fiscal Year** | ** ** | **Bid Prices** | ** ** |
|----------------------|------------|---------------------|------------|
| ** **           | ** ** | ** **          | ** ** | ** ** | ** ** |
| **2007**             |       |                |       |   |   |
| First Quarter        |       | $                   | 25.56      |   | $ | 21.96 |   |
| Second Quarter       |       | 26.95               |       | 23.49 |   |
| Third Quarter        |       | 28.41               |       | 24.66 |   |
| Fourth Quarter       |       | 35.10               |       | 26.09 |   |
|                 |       |                |       |   |   |
| **2008**             |       |                |       |   |   |
| First Quarter        |       | $                   | 35.21      |   | $ | 26.92 |   |
| Second Quarter       |       | 28.99               |       | 23.95 |   |
| Third Quarter        |       | 25.81               |       | 20.64 |   |
| Fourth Quarter       |       | 30.71               |       | 20.48 |   |

 

On January 9, 2009 thelast sale price for the Common Stock on NASDAQ was $23.57 per share.

 

At October 31, 2008, thenumber of record owners of the Common Stock was 342. 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 anydividends on our Common Stock since our inception and, do not contemplate oranticipate paying any dividends in the foreseeable future. Furthermore, ourloan agreement with PNC Bank prohibits us from paying any cash dividends ormaking any cash distributions with respect to shares of our Common Stock.

 

Recent Sales of UnregisteredSecurities

 

On September 26, 2006 weissued 230,947 shares of our Common Stock in connection with the acquisition ofthe operating assets of GeneDx. These shares were valued for the purpose ofthis acquisition at $21.65 per share, the average closing price for the CommonStock on NASDAQ on the ten trading days immediately preceding the August 29,2006 signing of the purchase agreement. An additional 11,548 shares of ourCommon Stock were issued to the prior owners of GeneDx in December 2007,as a result of GeneDx achieving certain operating results during the firstannual measuring period following the closing of the acquisition.  In December 2008 an additional 11,548shares of our common stock were issued to the prior owners of GeneDx, as aresult of GeneDx achieving certain operating results during the second annualmeasuring period following the closing of the acquisition.

 

A restrictive legend wasplaced on the certificates for the 230,947 shares and each of the 11,548 shareinstallments and stop transfer instructions were issued against the shares. Thesellers represented that they were acquiring the stock for investment and notwith a view to distribution. The shares were issued in reliance upon theexemption from the registration requirements of the Securities Act of 1933 inaccordance with Section 4(2) of the Act on the basis that thetransaction did not involve a public offering.

 

Equity Compensation Plan Information

 

The information requiredunder this item is disclosed in item 12 of this Annual Report on Form 10-Kand is incorporated herein by reference.

 

Issuer Purchases of Equity Securities

 

On October 31, 2007 the June 1,2005 Board of Directors Authorization for the repurchase of up to 500,000shares of the Company’s common stock expired. No shares had been repurchased under this plan.

 

On July 14, 2008 theBoard of Directors authorized a repurchase of up to 1,000,000 shares of theCompany’s common stock over the period ending October 31, 2010.  As of October 31, 2008 the Companyrepurchased 19,700 shares at a cost of approximately $452,000. The shares werecanceled upon repurchase

 

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Item 6. - Selected Financial Data

 
| ** **                           | ** ** | **[In Thousands Except Per Share Data]** | ** ** |
|--------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                           | ** ** | **October 31**                                               | ** ** |
| ** **                           | ** ** | **2008**                                                          | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                 |       |                                                              |       |   |   |   |   |   |   |   |   |
| **Operating Dada:**                  |       |                                                              |       |   |   |   |   |   |   |   |   |
| Net Revenues                         |       | $                                                                 | 301,071    |   | $ | 250,431 |   | $ | 193,134 |   | $ | 163,896 |   | $ | 136,184 |   |
| Cost of Services                     |       | $                                                                 | 153,831    |   | $ | 124,029 |   | $ | 96,079 |   | $ | 83,352 |   | $ | 68,201 |   |
| Gross Profit                         |       | $                                                                 | 147,240    |   | $ | 126,402 |   | $ | 97,055 |   | $ | 80,544 |   | $ | 67,983 |   |
| General and Administrative Expenses  |       | $                                                                 | 118,683    |   | $ | 101,345 |   | $ | 79,074 |   | $ | 67,937 |   | $ | 55,163 |   |
| Income From Operations               |       | $                                                                 | 28,557     |   | $ | 25,057 |   | $ | 17,981 |   | $ | 12,607 |   | $ | 12,820 |   |
| Other Expenses – Net            |       | $                                                                 | 1,866      |   | $ | 2,150 |   | $ | 1,239 |   | $ | 1,118 |   | $ | 634 |   |
| Provision for Income Tax Expense     |       | $                                                                 | 11,074     |   | $ | 8,950 |   | $ | 5,451 |   | $ | 3,868 |   | $ | 3,670 |   |
| Net Income                           |       | $                                                                 | 15,617     |   | $ | 13,957 |   | $ | 11,291 |   | $ | 7,621 |   | $ | 8,516 |   |
| Net Income Per Share                 |       | $                                                                 | 1.13       |   | $ | 1.02 |   | $ | .86 |   | $ | .60 |   | $ | .71 |   |
| Net Income Per Share - Diluted       |       | $                                                                 | 1.12       |   | $ | 1.01 |   | $ | .85 |   | $ | .58 |   | $ | .67 |   |
| **Balance Sheet Data:**              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Total Assets                         |       | $                                                                 | 171,969    |   | $ | 154,574 |   | $ | 120,473 |   | $ | 88,373 |   | $ | 72,151 |   |
| Total Long-Term Liabilities          |       | $                                                                 | 9,439      |   | $ | 9,557 |   | $ | 7,112 |   | $ | 4,934 |   | $ | 4,520 |   |
| Total Liabilities                    |       | $                                                                 | 70,429     |   | $ | 69,307 |   | $ | 51,694 |   | $ | 37,658 |   | $ | 31,478 |   |
| Working Capital                      |       | $                                                                 | 58,561     |   | $ | 48,747 |   | $ | 39,994 |   | $ | 30,515 |   | $ | 23,815 |   |
| Shareholder’s Equity            |       | $                                                                 | 101,540    |   | $ | 85,267 |   | $ | 68,779 |   | $ | 50,715 |   | $ | 40,673 |   |
| **Other Data:**                      |       |                                                              |       |   |   |   |   |   |   |   |   |
| Net Cash – Operating Activities |       | $                                                                 | 18,876     |   | $ | 5,897 |   | $ | 5,200 |   | $ | 2,899 |   | $ | 5,026 |   |
| Net Cash – Investing Activities |       | $                                                                 | (9,901     | ) | $ | (7,774 | ) | $ | (4,676 | ) | $ | (4,990 | ) | $ | (6,762 | ) |
| Net Cash – Financing Activities |       | $                                                                 | (8,176     | ) | $ | 4,820 |   | $ | 4,127 |   | $ | (287 | ) | $ | 4,451 |   |

 

Item 7. -  Management’sDiscussion and Analysis of Financial Condition and Results of Operations

 

OVERVIEW

 

We are a clinical laboratorylocated in northeastern New Jersey. Our regional footprint lies within the NewYork City metropolitan area and the surrounding areas of New Jersey andsouthern New York State as well eastern Pennsylvania and some areas of westernConnecticut; under certain circumstances, we provide services further into NewYork State, Pennsylvania, Delaware and Maryland. As a regional provider, we area full-service laboratory that primarily services physician office practices;our drivers pick up samples and deliver reports and supplies, we providesophisticated technical support, phlebotomy services or patient service centerswhere appropriate, and electronic communication services in many cases. We havealso developed a national reputation for our expertise in certain focused areasof clinical testing. GenPath, the label under which we provide our cancer andoncology services, is recognized for the superior hematopathology services itprovides throughout the country. Physicians outside of our regional footprintsend samples to our laboratory in order to take advantage of the expertise thatwe are able to provide in blood-based cancer pathology and associateddiagnostics. Our correctional healthcare services are used throughout thecountry at prisons and jails. The focused markets we serve on a national basisoutside of our regional footprint do not require many of the logistical andother ancillary support services required within the region. Even within ourregional footprint, we provide the same services that we provide on a nationalbasis as well as some regional focused diagnostic services, such as histologyand pathology support services, substance abuse testing, fertility testing,hemostasis testing, women’s health testing, and molecular diagnostics that areunavailable from many of the smaller regional competitors; testing in some ofthese areas may be provided outside of physician offices.

 

Over the last few years,there have been fundamental changes in the laboratory services industry. In the1990s, the industry was negatively impacted by the growth of managed care,increased government regulation, and investigations into fraud and abuse. Thesefactors led to revenue and profit declines and industry consolidations,especially among commercial laboratories. There are currently only threepublicly-traded full service laboratories operating in the U.S. While thatmeans that the two national mega-laboratories and BioReference Laboratories arethe only remaining publicly traded full service commercial laboratories, thereare numerous hospital outreach programs and smaller reference laboratories thatcompete for the commercial clinical laboratory business scattered throughoutthe country. Clinical laboratories have had to improve efficiency, leverageeconomies of scale, comply with government regulations and other laws anddevelop more profitable approaches to pricing. Moreover, there has been aproliferation of technology advancements in clinical diagnostics over the lastdecade that has created significant opportunities for new testing and growth.

 

As a full service clinicallaboratory, we are constantly looking for new technologies and newmethodologies that will help us to grow. Since the turn of the century, oursize alone has made us attractive to companies that are driving the advances intechnology. We represent a significant opportunity for these companies tomarket their products in one of the major population centers of the world—theNew York Metropolitan area. We have had several successful strategicrelationships with such technology opportunities. In addition to new technologyopportunities, we have an extremely seasoned and talented management staff thathas been able to identify emerging laboratory markets that are under-served orunder-utilized. We are currently developing programs for cardiology, histologyand women’s health to go along with our existing hemostasis, hematopathologyand correctional healthcare initiatives which have already been established andin which we have been increasing our market share for the past several years.We will continue to vigilantly seek focused diagnostic marketing opportunitieswhere we can provide information, technology, service or support that expandand grow our clinical laboratory.

 

During the fourth quarter offiscal 2006, the Company acquired the operating assets of GeneDx, a leading DNAsequencing laboratory.  As moleculartesting in general becomes a more significant element in the diagnostic testingindustry, the Company believes that genetic testing will become an essentialdiagnostic tool of the future.  GeneDxwas started by two geneticists from the NIH in 2000.  Over the next six years, based on thereputation and expertise of the founders and the outstanding team they builtaround themselves, along with a very focused and dedicated understanding of thescience of genetics, GeneDx became known as one of the premier genetic testinglaboratories for the diagnosis of rare genetic diseases.  The Company believed that the promise ofgenetic testing is in the diagnosis of the genetic variants of commondiseases.  It is the Company’s intentionto leverage the expertise and reputation of GeneDx in order to take aleadership role in the expanding area of genetic testing.  The Company is seeking cutting edge methodsof testing that will be commercially viable diagnostic tools for the advancementof genetic testing. During the past year, GeneDx introduced GenomeDx, a newtest based on CGH Array technology, a high-speed, chip-based technology, thathas allowed GeneDx to move to the forefront of an emerging technology platform.The Company is already expanding the menu of tests offered and employingmarketing techniques that were extremely successful in building GenPath, ouroncology laboratory.  In addition toscientists and technicians to manage testing, GeneDx employs several geneticcounselors to help patients and referring physicians and geneticists understandthe meaning of the test results.  Priorto the acquisition, GeneDx ‘s revenues and profits were increasing at anaccelerating rate. This increase has continued through fiscal 2008.

 

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While we recognize that we are a clinicallaboratory that processes samples, we also understand that we are aninformation company that needs to effectively communicate the results of ourefforts back to healthcare providers. Laboratory results play a major role inthe implementation of physician healthcare. Laboratory results are used todiagnose, monitor and classify health concerns. In many cases, laboratoryresults represent the confirming data in diagnosing complicated health issues.Since laboratory results play such an important role in routine physician care,we have developed informatics solutions that leverage our role in healthcare.We needed to build a web-based solution to quickly, accurately, convenientlyand competitively collect ordering information and deliver results, so we builtan internal solution that we call CareEvolve. That solution has been essentialto our own operations. We license the technology to other laboratoriesthroughout the country which they utilize to more effectively compete againstthe national laboratories. These other laboratories licensing our technologyare not out competitors since they are outside our regional footprint.

 

We have also created our PSIMedica businessunit which has developed a Clinical Knowledge Management (CKM) System thattakes data from enrollment, claims, pharmacy, laboratory results and any otheravailable electronic source to provide both administrative and clinicalanalysis of a population. The system uses proprietary algorithms to cleanse andconfigure the data and transfer the resulting information into a healthcaredata repository. Using advanced cube technology methodologies, the data can beanalyzed from a myriad of views and from highly granular transactional detailto global trended overview. Events such as the Katrina disaster in Louisianatwo summers ago and general pressures from the government have made developmentof an electronic medical record system and Pay-for Performance reimbursementpriority goals in the healthcare industry. A large portion of an individual’smedical record consists of laboratory data and a key performance indicator inany Pay-for-Performance initiative is laboratory result data. Our CKM system isa mature, full functioning solution that will allow us to play a role in theseimportant national initiatives.

 

To date, neither our PSIMedica business unitnor CareEvolve has produced significant revenues.

 

Results of Operations (In thousands, exceptper patient data)

 

Fiscal Year 2008 Compared to 2007

 

NET REVENUES:

 

Net Revenues for the year ended October 31,2008 were $301,071 as compared to $250,431 for the year ended October 31,2007; this represents an 20% increase in net revenues. This increase is due toan 11% increase in patients serviced and a 9% increase in net revenue perpatient. Our laboratory operations had net revenues of $298,543 in fiscal 2008.

 

The number of patients serviced during theyear ended October 31, 2008 was 4,085, which was 11% greater when comparedto the prior fiscal year.  Net revenue perpatient for the year ended October 31, 2008 was $73.09 compared to netrevenue per patient for the year ended October 31, 2007 of $67.14, anincrease of $5.95 or 9% as a result of increases in esoteric testing.

 

COST OF SERVICES:

 

Cost of Services for the year ended October 31,2008 was $153,831 as compared to $124,029 for the year ended October 31,2007, an increase of 24%. This increase is related to the increase in netrevenues of 20%. Reagent, laboratory and medical supplies increased at a yearover year rate of 25% reflecting a significant increase in the more expensivetests that we offer from payers who reimburse at lower rates than ourtraditional business trends. In addition, phlebotomy salaries increased 35%when compared to the prior comparable period. Also, pick-up and deliveryvehicle operating expenses (energy related costs) continued to have an impacton cost of services. As energy prices subside, we expect to see this category’simpact reduced during the coming fiscal year. We have introduced some new testing platforms and methodologies over thelast year and have seen a modest research and development increase in the costof introducing new tests.

 

GROSS PROFIT:

 

Gross profit on net revenues increased to$147,240 for the year ended October 31, 2008 from $126,402 for the yearended October 31, 2007; an increase of $20,838 (16%), primarilyattributable to the increase in net revenues. Gross profit margins decreased by1% during the current fiscal yar driven by increased expenses outlined above.

 

GENERAL AND ADMINISTRATIVEEXPENSES:

 

General andadministrative expenses for the year ended October 31, 2008 were $118,683as compared to $101,345 for the year ended October 31, 2007, an increaseof $17,338 or 17%. This increase is 3% less than the increase in net revenuesand includes moderate increases to our marketing and sales expenses.

 

INTERESTEXPENSE:

 

Interest expensedecreased from $2,410 during the year ended October 31, 2007 to $2,135during the year ended October 31, 2008; a decrease of $275. This decreaseis due to a decrease in utilization and in the interest rates on the PNC Bankline of credit, acquisition debt and capital leases. Management believes thatthis trend will continue in the near term due to the decrease in interestrates.

 

NET INCOME:

 

We realized net income of $15,617 for thetwelve month period ended October 31, 2008 as compared to $13,957 for thetwelve month period ended October 31, 2007, an increase of 12%.

 

Pre-tax income for the period ended October 31,2008 was $26,691, as compared to $22,907 for the period ended October 31,2007, an increase of $3,784 (17%) and was caused primarily by an increase indirect expenses in relation to an increase in net revenues.  The provision for income taxes increased from$8,950 for the period ended October 31, 2007, to $11,074 for the currenttwelve month period.

 

Results of Operations (In thousands, exceptper patient data)

 

Fiscal Year 2007 Compared to 2006

 

NET REVENUES:

 

Net Revenues for the year ended October 31,2007 were $250,431 as compared to $193,134 for the year ended October 31,2006; this represents an 30% increase in net revenues. This increase is due toan 20% increase in patients serviced and a 8% increase in net revenue perpatient. Our laboratory operations had net revenues of $247,031, in fiscal2007.

 

The number of patients serviced during theyear ended October 31, 2007 was 3,681, which was 20% greater when comparedto the prior fiscal year.  Net revenueper patient for the year ended October 31, 2007 was $67.14 compared to netrevenue per patient for the year ended October 31, 2006 of $61.95, anincrease of $5.19, or 8% as a result of increases in esoteric testing.

 

COST OF SERVICES:

 

Cost of Services for the year ended October 31,2007 was $124,029 as compared to $96,079 for the year ended October 31,2006, an increase of 29%. This increase is related to the increase in netrevenues of 30%. However, reagent, laboratory and medical supplies increased ata year over year rate of

 

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38% reflecting a significant increase in themore expensive tests that we offer from payers who reimburse at lower ratesthan our traditional business trends. This is in a large part the result ofchanges in managed care contracts in the New York Metropolitan area thatenabled the Company to grow substantially in revenues.

 

GROSS PROFIT:

 

Gross profit on net revenues increased to$126,402 for the year ended October 31, 2007 from $97,055 for the yearended October 31, 2006; an increase of $29,347 (30%), primarilyattributable to the increase in net revenues. Gross profit margins remainedconstant at 50% since both revenues and expenses increased 30%.

 

GENERAL AND ADMINISTRATIVEEXPENSES:

 

General andadministrative expenses for the year ended October 31, 2007 were $101,345as compared to $79,074 for the year ended October 31, 2006, an increase of$22,271 or 28%. This increase is related to the increase in net revenues of 30%

 

INTERESTEXPENSE:

 

Interest expenseincreased from $1,412 during the year ended October 31, 2006 to $2,410during the year ended October 31, 2007; an increase of $998. This increaseis due to increased utilization of our line of credit, the acquisition of ourgenetics laboratory and capital lease acquisitions. Management believes thatthis trend may continue in the future due to the continued use of our revolvingline of credit to fund our growth.

 

NET INCOME:

 

We realized net income of $13,957 for thetwelve month period ended October 31, 2007 as compared to $11,291 for thetwelve month period ended October 31, 2006, an increase of 24%.

 

Pre-tax income for the period ended October 31,2007 was $22,907, as compared to $16,742 for the period ended October 31,2006, an increase of $6,165 (37%) and was caused primarily by a decrease inexpenses in relation to an increase in net revenues.  The provision for income taxes increased from$5,451 for the period ended October 31, 2006, to $8,950 for the currenttwelve month period.

 

Liquidity and CapitalResources (Dollarsin thousands except for the $5 million term loan, the equipment financing loan,and their repayment terms as well as the GeneDx contingent payments)

 

For the Fiscal YearEnded October 31, 2008

 

Our working capital at October 31, 2008was approximately $58,561 as compared to approximately $48,747 at October 31,2007, an increase of $9,814. Our cash position increased by approximately $799during the current period. We decreased our short term borrowing byapproximately $4,421 and repaid approximately $3,800 in existing debt. We hadcurrent liabilities of approximately $60,990 at October 31, 2008. Wegenerated approximately $19,000 in cash from operations, an increase ofapproximately $13,000 as compared to the year ended October 31, 2007.

 

Accounts receivable, net of allowance fordoubtful accounts, totaled approximately $93,718 at October 31, 2008, anincrease of approximately $7,700 from October 31, 2007, or 9%. Thisincrease was primarily attributable to increased revenue.  Cash collected over the twelve month period endedOctober 31, 2008 increased 26% over the prior twelve month period.

 

Net service revenues on the statements ofoperations are as follows:

 
| ** **                                                          | ** ** | **Years Ended  October 31** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                          | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Gross Revenues                                                      |       | $                                     | 1,039,030  |   | $ | 779,953 |   | $ | 522,117 |   |
| Contr. Adjustments and Discounts                                    |       | 737,959                               |       | 529,522 |   | 328,983 |   |
| Net Revenues                                                        |       | 301,071                               |       | 250,431 |   | 193,134 |   |
| Percent of Contractual Adjustments and  Discounts To Gross Revenues |       | 71.0                                  | %          | 67.9 | % | 63.0 | % |
|                                                                     |            |                                       |            |  |  |  |  |  |  |  |

 

The table above illustrates the relationshipbetween contractual adjustments and gross revenues for the fiscal years 2008,2007, and 2006. Between 2007 and 2008, contractual adjustments increasedapproximately 310 basis points. The most significant factor in this increasewas the increase in market share caused by the acquisition of contracts withlow reimbursement third party payors.

 

Credit risk with respect to accountsreceivable is generally diversified due to the large number of patientscomprising our client base.  We havesignificant receivable balances with government payors and various insurancecarriers.  Generally, we do not requirecollateral or other security to support customer receivables. However, wecontinually monitor and evaluate our client acceptance and collectionprocedures to minimize potential credit risks associated with our accountsreceivable and to establish an allowance for uncollectible accounts. As aconsequence, we believe that our accounts receivable credit risk exposurebeyond such allowance is not material to the financial statements.

 

A number of proposals for legislation continueto be under discussion which could substantially reduce Medicare and Medicaidreimbursements to clinical laboratories. Depending upon the nature of regulatory action, and the content oflegislation, we could experience a significant decrease in revenues fromMedicare and Medicaid, which could have a material adverse effect on us. We areunable to predict, however, the extent to which such actions will betaken.  For the first time in five years,as of January 1, 2009, laboratories will receive a 4.5% across the boardincrease in reimbursements.

 

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LABORATORY GROSS RECEIVABLES BY PAYOR GROUP

FY 2008

 
| ** ** | ** ** | **30  DAYS** | ** ** | **%**  | ** ** | **60  DAYS** | ** ** | **%**  | ** ** | **90  DAYS** | ** ** | **%** | ** ** | **>90  DAYS** | ** ** | **%** | ** ** | **TOTAL** | ** ** | **%** | ** ** |
|------------|------------|--------------|------------|--------|------------|--------------|------------|--------|------------|--------------|------------|-------|------------|------------------|------------|-------|------------|-----------|------------|-------|------------|
| Self Pay   |       | $            | 3,655      |   | 20         | %            | $          | 2,930  |       | 16           | %          | $     | 2,627      |             | 14         | %     | $          | 9,114     |       | 50    | %          | $ | 18,326 |   | 100 | % |
| Medicare   |       | 19,019       |       | 54     | %          | 5,360        |       | 15     | %          | 1,921        |       | 5     | %          | 8,861            |       | 25    | %          | 35,161    |       | 100   | %          |
| Medicaid   |       | 3,721        |       | 28     | %          | 2,841        |       | 22     | %          | 2,312        |       | 18    | %          | 4,325            |       | 33    | %          | 13,199    |       | 100   | %          |
| Pro Bill   |       | 10,275       |       | 63     | %          | 1,702        |       | 10     | %          | 1,834        |       | 11    | %          | 2,484            |       | 15    | %          | 16,295    |       | 100   | %          |
| Comm. Ins  |       | 53,022       |       | 51     | %          | 18,263       |       | 18     | %          | 8,111        |       | 8     | %          | 24,363           |       | 23    | %          | 103,759   |       | 100   | %          |
| Total      |       | $            | 89,692     |   | 48         | %            | $          | 31,096 |       | 17           | %          | $     | 16,805     |             | 9          | %     | $          | 49,147    |       | 26    | %          | $ | 186,740 |   | 100 | % |

 

FY 2007

 
| ** ** | ** ** | **30  DAYS** | ** ** | **%**  | ** ** | **60  DAYS** | ** ** | **%**  | ** ** | **90  DAYS** | ** ** | **%** | ** ** | **>90  DAYS** | ** ** | **%** | ** ** | **TOTAL** | ** ** | **%** | ** ** |
|------------|------------|--------------|------------|--------|------------|--------------|------------|--------|------------|--------------|------------|-------|------------|------------------|------------|-------|------------|-----------|------------|-------|------------|
| Self Pay   |       | $            | 2,621      |   | 19         | %            | $          | 1,818  |       | 13           | %          | $     | 1,548      |             | 11         | %     | $          | 7,952     |       | 57    | %          | $ | 13,939 |   | 100 | % |
| Medicare   |       | 14,197       |       | 47     | %          | 4,091        |       | 13     | %          | 2,293        |       | 8     | %          | 9,943            |       | 33    | %          | 30,524    |       | 100   | %          |
| Medicaid   |       | 3,379        |       | 24     | %          | 2,486        |       | 17     | %          | 2,374        |       | 17    | %          | 6,139            |       | 43    | %          | 14,378    |       | 100   | %          |
| Pro Bill   |       | 9,128        |       | 60     | %          | 2,466        |       | 16     | %          | 558          |       | 4     | %          | 3,187            |       | 21    | %          | 15,339    |       | 100   | %          |
| Comm. Ins  |       | 42,431       |       | 42     | %          | 14,582       |       | 14     | %          | 11,236       |       | 11    | %          | 33,839           |       | 33    | %          | 102,088   |       | 100   | %          |
| Total      |       | $            | 71,756     |   | 41         | %            | $          | 25,443 |       | 14           | %          | $     | 18,009     |             | 10         | %     | $          | 61,060    |       | 35    | %          | $ | 176,268 |   | 100 | % |

 

Billing for laboratory services is complicatedand we must bill various payors, such as the individual, the insurance company,the government (federal or state), the private company or the health clinic.Other factors that may complicate billing include:

 

Differences between feeschedules and reimbursement rates.

Incomplete or inaccuratebilling information as provided by the doctor.

Disparity in coverage andinformation requirements.

Disputes with payors.

Internal and externalcompliance policies and procedures.

 

Significant costs are incurred as a result ofour participation in government programs since billing and reimbursement forlaboratory tests are subject to complex regulations. We perform the requestedtests and report the results whether the information is correct or not or evenmissing. This adds to the complexity and slows the collection process andincreases the aging of our accounts receivable (“A/R”). When patient invoicesare not collected in a timely manner the item is written off to the allowance.

 

Days Sales Outstanding (“DSO”) for fiscalyears 2007 and 2008 were 115 and 107, respectively, a decrease of approximately7%. These changes are exaggerated by our primary marketplace, the physicianoffice marketplace. However, when you compare our DSO lag to our collectiblenet revenues as reported on our financial statements for the periods inquestion, it varies between 98% to 102%, depending on the period.

 

Overall, the components of A/R as shown abovefor the two most recently completed fiscal years under review have not variedmuch year over year. The percent of A/R over 90 days has decreased to 26% as ofOctober 31, 2008 as compared to 35% as of October 31, 2007.

 

InMay 2008, the Company entered into an amended revolving note payable loanagreement with PNC Bank, N.A. (“the bank”).  The maximum amount of thecredit line available to the Company pursuant to the loan agreement is thelesser of (i) $40,000 or (ii) 50% of the Company’s qualified accountsreceivable [as defined in the agreement].  The amendment to the Loan andSecurity Agreement provides for interest on advances to be subject to the bank’sprime rate or the Eurodollar rate of interest plus, in certain instances, anadditional interest percentage.  The additional interest percentagecharges on Eurodollar borrowings range from 1% to 4% and are determined basedupon certain financial ratios achieved by the Company.  At October 31,2008, the Company had elected to have all of the total advances outstanding tobe subject to the bank’s prime rate of interest at 4.0%.  The credit line is collateralized bysubstantially all of the Company’s assets. The line of credit is availablethrough October 2012 and may be extended for annual periods by mutualconsent, thereafter.  The terms of this agreement contain, among otherprovisions, requirements for maintaining defined levels of capitalexpenditures, fixed charge coverage, and the prohibition of the payment by theCompany of cash dividends. As of October 31, 2008, the Company wasutilizing $18,831 of the available credit under this revolving note payableloan agreement.

 

Effectiveas of October 31, 2007, we executed a fifth amendment to the loanagreement formalizing the repayment terms of a $5 million term loan from PNCBank used by our wholly-owned subsidiary, BRLI No. 2 Acquisition Corp. tofund the $5 million acquisition Cash Payment in connection with the purchase ofthe operating assets of GeneDx. The term loan is evidenced by a securedpromissory note payable over a six year term in equal monthly principalpayments of $69, plus interest at an annual rate of 6.85%.  The Balance onthis note as of October 31, 2008 was approximately $3,333.

 

In January 2007, the Company issued a tenyear term note of $4,100 for the financing of equipment.  The note ispayable in equal monthly installments of $47 including principal and interest,with payment commencing on March 1, 2007 at an effective interest rate of6.63% per annum.  The balance on this note as of October 31, 2008 wasapproximately $3,564.

 

In September 2006, we acquired certainassets and liabilities of two Maryland laboratories, a pathology laboratory anda genetics laboratory for $1,500,000 and $10,000,000, respectively. Thegenetics laboratory purchase agreement contains certain operational targets,which, if achieved in the four years following the closing, could result in anincrease in the purchase price from $10,000,000 to a maximum $17,000,000.During the recently completed fiscal year ended October 31, 2008 as wellas for the fiscal year ended October 31, 2007, the genetics laboratoryachieved certain of the targets, entitling the prior owners to receive$1,917,000 in cash and an additional 11,548 shares of our Common Stock withrespect to each such year. These amounts have been accrued and are reflected inour financial statements.

 

The weighted average interest rate onshort-term borrowings outstanding as of October 31, 2008 and 2007 wasapproximately 5.35% and 7.39%, respectively.

 

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We intend to expand our laboratory operationsthrough aggressive marketing while also attempting to diversify into relatedmedical fields through acquisitions. These acquisitions may involve cash, notes, Common Stock, and/or combinationsthereof.

 

Tabular Disclosure ofContractual Obligations

**Payments Due By Period**

(Dollars in thousands)

 
| ** **                                                       | ** ** | **Total**  | ** ** | **FY 2009** | ** ** | **FY 2010** | ** ** | **FY 2011** | ** ** | **FY 2012** | ** ** | **FY 2013  and thereafter** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|---------------------------------------|------------|
| ** **                                                       | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **                            | ** ** |
| Long-Term Debt                                                   |       | $          | 6,904      |             | $          | 1,180            |       | $                | 1,194      |             | $          | 1,217                                 |       | $ | 1,243 |   | $ | 2,069 |   |
|                                                             |       |       |       |             |       |             |       |             |       |             |       |                                  |       |
| Capital Leases                                                   |       | $          | 5,732      |             | $          | 2,469            |       | $                | 1,807      |             | $          | 1,051                                 |       | $ | 405 |   | $ | -0- |   |
|                                                             |       |       |       |             |       |             |       |             |       |             |       |                                  |       |
| Operating Leases                                                 |       | $          | 2,829      |             | $          | 2,294            |       | $                | 455        |             | $          | 62                                    |       | $ | 14 |   | $ | 5 |   |
|                                                             |       |       |       |             |       |             |       |             |       |             |       |                                  |       |
| Purchase Obligations                                             |       | $          | 49,691     |             | $          | 17,042           |       | $                | 15,153     |             | $          | 9,432                                 |       | $ | 6,446 |   | $ | 1,618 |   |
|                                                             |       |       |       |             |       |             |       |             |       |             |       |                                  |       |
| Long-Term Liabilities under Employment and  Consultant Contracts |       | $          | 12,622     |             | $          | 3,976            |       | $                | 3,568      |             | $          | 3,069                                 |       | $ | 1,469 |   | $ | 540 |   |
| Total                                                            |       | $          | 77,778     |             | $          | 26,961           |       | $                | 22,177     |             | $          | 14,831                                |       | $ | 9,577 |   | $ | 4,232 |   |

 

Our cash balances at October 31, 2008totaled approximately $12,696 as compared to approximately $11,897 at October 31,2007.  We believe that our cash position,the anticipated cash generated from future operations,  and the availability of our credit line with PNC Bank, will meet our anticipatedcash needs in fiscal 2008. However, we will be making an approximately twomillion dollar payment to the prior owners of GeneDx during the first quarterof fiscal year 2009. Therefore, we have approximately $10,700 in cash andapproximately $21,200 of credit availability through our PNC credit line.

 

We do not have any off-balance sheet items.

 

Impact of Inflation

 

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

 

New Authoritative Pronouncements

 

InMay 2008, the FASB issued two new Financial Accounting Standards No. 162“The Hierarchy of Generally Accepted Accounting Principles” and No. 163 “Accountingfor Financial Guarantee Insurance Contracts—an interpretation of FASB StatementNo. 60”.  FAS #162 identifies the sources of accounting principlesand the framework for selecting the principles to be used in the preparation offinancial statements of nongovernmental entities that are presented inconformity with generally accepted accounting principles (GAAP) in the UnitedStates (the GAAP hierarchy).  This Statement is effective 60 daysfollowing the SEC’s approval of the Public Company Accounting Oversight Boardamendments to AU Section 411, *TheMeaning of* Present Fairly in Conformity With Generally AcceptedAccounting Principles.  This statement is not expected to have a materialimpact on the reporting of our results of operations. FAS #163 is primarilygeared towards financial guarantee insurance contracts by insuranceenterprises.  It is not expected to have any material effect on thereporting of our results of operations.

 

InMarch 2008 the FASB issued Financial Accounting Standards No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities—an amendment of FASBStatement No. 133.  This statement is effective for all interimperiods beginning November 15, 2008.  This Statement changes thedisclosure requirements for derivative instruments and hedgingactivities.  This statement is not expected to have a material impact onthe reporting of our results of operations.

 

InDecember 2007 the FASB issued FAS  141(R) “Business Combinations”and FAS 160 “Noncontrolling Interests in Consolidated Financial Statements” These statements are effective for fiscal years, and interim periods within thosefiscal years in the case of FAS 160, beginning on or after December 15,2008. Earlier adoption is prohibited. Together these statements revise theaccounting rules with respect to accounting for business combinations.

 

Specifically,the objective of FAS 141(R) is to improve the relevance, representationalfaithfulness and comparability of the information that the reporting entityprovides in its financial reports about a business combination and its effects.This statement thus establishes principles and requirements for how theacquirer:

 

·Recognizes and measures in its financial statementsthe identifiable assets acquired, the liabilities assumed, and anynoncontrolling interest in the acquiree

 

·Recognizes and measures the goodwill acquired in thebusiness combination or a gain from a bargain purchase

 

·Determines what information to disclose to enableusers of the financial statements to evaluate the nature and financial effectsof the business combination.

 

Theobjective of FAS 160 is to improve the relevance, comparability, andtransparency of the financial information that a reporting entity provides inits consolidated financial statements by establishing accounting and reportingstandards that require:

 

·The ownership interests in subsidiaries held byparties other than the parent be clearly identified, labeled, and presented inthe consolidated statement of financial position within equity, but separatefrom the parent’s equity.

 

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·The amount of consolidated net income attributable tothe parent and to the noncontrolling interest be clearly identified andpresented on the face of the consolidated statement of income.

 

·Changes in a parent’s ownership interest while theparent retains its controlling financial interest in its subsidiary beaccounted for consistently. A parent’s ownership interest in a subsidiarychanges if the parent purchases additional ownership interests in itssubsidiary or if the parent sells some of its ownership interests in itssubsidiary. It also changes if the subsidiary reacquires some of its ownershipinterests or the subsidiary issues additional ownership interests. All of thosetransactions are economically similar, and this Statement requires that they beaccounted for similarly, as equity transactions.

 

·When a subsidiary is deconsolidated, any retainednoncontrolling equity investment in the former subsidiary be initially measuredat fair value. The gain or loss on the deconsolidation of the subsidiary ismeasured using the fair value of any noncontrolling equity investment ratherthan the carrying amount of that retained investment.

 

·Entities provide sufficient disclosures that clearlyidentify and distinguish between the interests of the parent and the interestsof the noncontrolling owners.

 

Togetherthese statements are not currently expected to have a significant impact on theentity’s consolidated financial statements. A significant impact may however berealized on any future acquisition(s) by this Company. The amounts of suchimpact can not be currently determined and will depend on the nature and termsof such future acquisition(s), if any.

 

Critical Accounting Policies

 

The preparation of financial statements inconformity with U.S. generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenues andexpenses during the reported periods.

 

Accounting for Goodwill

 

We evaluate the recoverability and measure thepossible impairment of goodwill under SFAS 142, The impairment test is atwo-step process that begins with the estimation of the fair value of thereporting unit. The first step screens for potential impairment and the secondstep measures the amount of the impairment, if any.  Management’s estimate of fair value considerspublicly available information regarding our market capitalization as well as (i) publiclyavailable information regarding comparable publicly-traded companies in theclinical laboratory testing industry, (ii) the financial projections andfuture prospects of our business, including its growth opportunities and likelyoperational improvements, and (iii) comparable sales prices, if available.As part of the first step to assess potential impairment, management comparesthe estimate of fair value to book value on a consolidated net assetsbasis.  If the book value of theconsolidated net assets is greater than the estimate of fair value, we thenproceed to the second step to measure the impairment, if any.  The second step compares the implied fairvalue of goodwill with its carrying value

 

The implied fair value is determined by allocatingthe fair value of the reporting unit to all of the assets and liabilities ofthat unit as if the reporting unit had been acquired in a business combinationand the fair value of the reporting unit was the purchase price paid to acquirethe reporting unit.  The excess of thefair value of the reporting unit over the amounts assigned to its assets andliabilities is the implied fair value of goodwill.  If the carrying amount of the goodwill isgreater than its implied fair value, an impairment loss will be recognized inthat period.

 

Accounting for Intangible and Other Long-LivedAssets

 

We evaluate the possible impairment of ourlong-lived assets, including intangible assets. We review the recoverability ofour long-lived assets when events or changes in circumstances occur thatindicate that the carrying value of the asset may not be recoverable.  Evaluation of possible impairment is based onour ability to recover the asset from the expected future pretax cash flows(undiscounted and without interest charges) of the related operations. If theexpected undiscounted pretax cash flows are less than the carrying amount ofsuch asset, an impairment loss is recognized for the difference between theestimated fair value and carrying amount of the asset.

 

Accounting for Revenue

 

Service revenues are principally generatedfrom laboratory testing services including chemical diagnostic tests such asblood analysis, urine analysis and genetic testing among others. Net servicerevenues are recognized at the time the testing services are performed and arereported at their estimated net realizable amounts. These estimated netrealizable amounts from patients, third party payors and others for servicesrendered, are accrued on an estimated basis in the period the related servicesare rendered and adjusted in subsequent periods based upon an analysis of theCompany’s collection experience from each category of payor group as well asprospectively determined contractual adjustments and discounts with third partypayors. Differences between these adjustments and any subsequent revisions areincluded in the statement of operations in which the revisions are made and aredisclosed, if material. Applying this methodology and aggregating itscollection experience from all payor groups, the Company has not been requiredto record an adjustment related to revenue recorded in prior periods that wasmaterial in nature.

 

Accounting for Contractual Credits andDoubtful Accounts

 

An allowance for contractual credits anddiscounts is estimated by payor group and determined based upon a review of thereimbursement policies and subsequent collections from the different types ofpayors. The Company has not been required to record an adjustment in asubsequent period related to revenue recorded in a prior period that wasmaterial in nature.

 

Accounting for Employment Benefit Plan

 

The Company sponsors a 401(k) Profit-SharingPlan [the “Plan”].  Employees becomeeligible for participation after attaining the age of eighteen and completing oneyear of service.  Participants may electto contribute up to ten percent of their compensation, as defined in the PlanAdoption Agreement, to a maximum allowed by the Internal Revenue Service.  The Company may choose to make a matchingcontribution to the plan for each participant who has elected to maketax-deferred contributions for the plan year, at a percentage determined eachyear by the Company. The Company elected to make a matching contribution whichamounted to $457,544 for 2008, $359,177 for 2007, and $225,971 for 2006. TheEmployer contribution will be fully vested after the third year of service.

 

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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 “safeharbor” provisions of the Private Securities Litigation Reform Act of 1995.Such statements involve known and unknown risks and uncertainties that maycause our actual results in future periods to be materially different from anyfuture performance suggested herein.

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires us to make estimates and assumptions that affect the reported amountsof revenues and expenses during the reporting period. While many aspects of ourbusiness are subject to complex federal, state and local regulations, theaccounting for our business is generally straightforward.  Our revenues are primarily comprised of ahigh volume of relatively low dollar transactions, and about 42% of all ourcosts consist of employee compensation and benefits.  Revenues are recognized at the time the servicesare performed 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 services are rendered andadjusted in future periods as final settlements are determined.  These estimates are reviewed and adjusted, ifwarranted, by senior management on a monthly basis.  We believe that our estimates and assumptionsare correct; however, several factors could cause actual results to differmaterially from those currently anticipated due to a number of factors inaddition to those discussed under “ Risk Factors” as well as elsewhere hereinincluding:

 

our failure to integratenewly acquired businesses (if any) and the costs related to such integration.

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

adverse results frominvestigations of clinical laboratories by the government, which may includesignificant monetary damages and/or exclusion from the Medicare and Medicaidprograms.

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

changes in federal, state,local and third party payor regulations or policies (or in the interpretationof current regulations) affecting governmental and third-party reimbursementfor clinical laboratory testing (such as the decrease in Medicare reimbursementfor Flow Cytometry testing at the beginning of calendar year 2005 describedabove under Cautionary Statements).

failure to comply with theFederal Occupational Safety and Health Administration requirements and therecently passed Needlestick Safety and Prevention Act.

failure to comply with HIPAA,which could result in significant fines as well as substantial criminalpenalties.

changes in payor mix.

failure to maintain our dayssales outstanding levels.

increased competition,including price competition.

our ability to attract andretain experienced and qualified personnel.

adverselitigation results.

liabilitiesthat result from our inability to comply with new corporate governancerequirements.

failureto comply with the Sarbanes-Oxley Act of 2002.

 

Item 7A. - Quantitative and QualitativeDisclosures about Market Risk

 

We do not invest in or trade marketrisk sensitive instruments. We also do not have any foreign operations orforeign sales so that our exposure to foreign currency exchange rate risk isnon-existent.

 

We do have exposure to bothrising and falling interest rates. At October 31, 2008, advances ofapproximately $18,831,000 under our Loan Agreement with PNC Bank were subjectto interest charges at the Bank’s then prime rate of 4.0 %.

 

We estimate that our monthlycash interest expense at October 31, 2008 was approximately $177,000 andthat a one percentage point increase or decrease in short-term rates wouldincrease or decrease our monthly interest expense by approximately $16,000.

 

See Note 5  to theConsolidated Financial Statements contained herein.

 

Item 8. - Financial Statements andSupplementary Data

 

Financial Statements areannexed hereto

 

Item 9. - Changes in and Disagreements withAccountants on Accounting and Financial Disclosure

 

None

 

Item9A. - Controls and Procedures

 

An evaluation was carried out under the supervision and with theparticipation of our management, including our principal executive officer andprincipal financial officer, of the effectiveness of the design and operationof the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and15d-15(e) under the Exchange Act as of the end of the period covered bythis report. Based upon that evaluation, our principal executive officer andprincipal financial officer concluded that those disclosure controls andprocedures were effective to ensure that information required to be disclosedby the Company in the reports that it files or submits under the Exchange Actis recorded, processed, summarized and reported, within the time periodsspecified in the Securities and Exchange Commission’s rules and forms.

 

**Management’sReport on Internal Control over Financial Reporting**

 

The management of Bio-Reference Laboratories, Inc. (the “Company”),including its Chief Executive Officer and Chief Financial Officer, isresponsible for establishing and maintaining adequate internal control overfinancial reporting as defined in Rules 13a-15(f) and 15d-15(f) underthe Securities Exchange Act of 1934. The Company’s internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with accountingprinciples generally accepted in the United States of America. Internal controlover financial reporting includes policies and procedures that:

 

·              pertainto the maintenance of records that, in reasonable detail accurately and fairlyreflect the transactions and dispositions of the assets of the Company;

 

·              providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with accounting principlesgenerally accepted in the United States of America, and that receipts andexpenditures of the Company are being made only in accordance withauthorization of management and directors of the Company; and

 

·              providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of assets that could have a material effect onthe consolidated financial statements.

 

Management assessed the effectiveness of the Company’s internal controlover financial reporting as of October 31, 2008. Management based thisassessment on criteria for effective internal control over financial reportingdescribed in “Internal Control — Integrated

 

16

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Framework”issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). Management’s assessment included an evaluation of the design of theCompany’s internal control over financial reporting and testing of theoperating effectiveness of its internal control over financial reporting.

 

Based on this assessment, management has determined that the Company’sinternal control over financial reporting as of October 31, 2008 is effective.Because of its inherent limitations, internal control over financial reportingmay not prevent or detect misstatements. MSPC, Certified Public Accountants andAdvisors, a Professional Corporation, an independent registered publicaccounting firm, has audited our internal control over financial reporting andhas expressed an unqualified opinion on the effectiveness of internal controlover financial reporting as of October 31, 2008.

 

Item9B. -  Other Information

 

None.

 

17

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**PART III**

 

Item 10.- Directors, Executive Officers and Corporate Governance

 

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.              |       | 57      |       | Chairman  of the Board, President, Chief Executive Officer and Director         |       |
|                                |       |    |       |                                                                            |       |
| Howard  Dubinett                    |       | 57      |       | Executive  Vice President, Chief Operating Officer and Director                 |       |
|                                |       |    |       |                                                                            |       |
| Sam  Singer                         |       | 65      |       | Vice  President, Chief Financial Officer, Chief Accounting Officer and Director |       |
|                                |       |    |       |                                                                            |       |
| Joseph  Benincasa(a)(c)(e)          |       | 59      |       | Director                                                                        |       |
|                                |       |    |       |                                                                            |       |
| Harry  Elias(a)(c)(e)               |       | 78      |       | Director                                                                        |       |
|                                |       |    |       |                                                                            |       |
| Gary  Lederman, Esq. (b)(c)(e) |       | 74      |       | Director                                                                        |       |
|                                |       |    |       |                                                                            |       |
| John  Roglieri, M.D. (a)(d)(e)      |       | 69      |       | Director                                                                        |       |

 

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| (a) |   | Member  of the Audit Committee          |
|-----|--------|-----------------------------------------|
| (b) |   | Chairman  of the Audit Committee        |
| (I) |   | Member  of the Compensation Committee   |
| (d) |   | Chairman  of the Compensation Committee |
| (e) |   | Member  of Nominating Committee         |

 

The Audit Committee iscomprised of the four non-employee members of the Board of Directors, GaryLederman (Chairman), Joseph Benincasa, John Roglieri and Harry Elias. The Boardof Directors deems each such individual as “independent” as defined by the rules ofthe National Association of Securities Dealers. The Audit Committee met fourtimes during fiscal year 2008. The Audit Committee confers with the Company’sauditors and reviews, evaluates and advises the Board of Directors concerningthe adequacy of the Company’s accounting systems, its financial reportingpractices, the maintenance of its books and records and its internal controls.In addition, the Audit Committee reviews the scope of the audit of the Company’sfinancial statements and the results thereof. The Board of Directors hasdetermined that Gary Lederman is qualified to serve as the Company’s “auditcommittee financial expert” as defined in Regulation S-K promulgated by theSEC.

 

The Compensation Committee is comprised of four non-employee members ofthe Board of Directors, John Roglieri (Chairman), Joseph Benincasa, Harry Eliasand Gary Lederman. The Compensation Committee met once during fiscal year 2008.The Compensation Committee reviews salaries, cash bonuses and compensationplans for the Company’s executive officers and eligible employees and makesrecommendations concerning same to the Board of Directors.

 

The Company does not have an Executive Committee. Officers are electedby and hold office at the discretion of the Board of Directors.

 

                The Nominating Committee iscomprised of the four non-employee members of the Board of Directors, HarryElias, Joseph Benincasa, Gary Lederman and John Roglieri. Pursuant to itscharter, the Nominating Committee’s role is to establish criteria for theselection of directors; to identify individuals qualified to be directors; toevaluate director candidates proposed by stockholders; to recommend individualsto fill vacancies on the Board and to recommend nominees for director at eachannual stockholder meeting. The Nominating Committee may consider nominees fordirector of the Company submitted in writing c/o the Committee at the Company’sexecutive offices, whether by executive officer of the Company; currentdirectors of the Company, search firms (if any) engaged by the Committee, and,in the circumstances provided below, shall consider nominees for directorproposed by a stockholder. Information with respect to the proposed nomineemust be provided in writing by the stockholder addressed to the Committee atthe Company’s executive offices, and received not less than 90 nor more than120 days prior to the anniversary date of the prior year’s annual meeting,provided that if the current year’s annual meeting is not scheduled to be heldwithin 30 days of the anniversary date of the prior year’s annual meeting,notice from a stockholder shall be considered timely if it is received notlater than the tenth day following the date on which the notice of the annualmeeting was mailed or the date on which public disclosure of the date of theannual meeting was made, whichever occurs first. The information shall includethe name of the nominee, and such information with respect to the nominee aswould be required under the rules and regulations of the Securities andExchange Commission to be included in the Company’s Proxy Statement if theproposed nominee were to be included therein. In addition, the stockholder’snotice shall also include the class and number of shares the stockholder owns,a description of all arrangements and understandings between the stockholderand the proposed nominee, a representation that the stockholder intends toappear in person or by proxy at the meeting to nominate the person named in itsnotice, a representation as to whether the stockholder intends to deliver aproxy statement to or solicit proxies from shareholders of the Company andinformation with respect to the stockholder as would be required under the rules andregulations of the Securities and Exchange Commission to be included in theCompany’s Proxy Statement.

 

The Nominating Committee generally identifies potential candidates fordirector by seeking referrals from the Company’s management, members of theBoard of Directors and their various business contacts. Candidates areevaluated based upon factors such as independence, knowledge, judgment, integrity,character, leadership, skills, education, experience, financial literacy,standing in the community and ability to foster a diversity of backgrounds andviews and to complement the Board’s existing strengths. There are nodifferences in the manner in which the Committee will evaluate nominees fordirector based on whether the nominee is recommended by a stockholder.

 

**Code of Ethics**

 

The Company has adopted a Code of Ethics that applies to its executiveofficers and to key financial and accounting personnel. The Company will, upona stockholder’s written request to Investor Relations, c/o the Company, furnisha paper copy of the Code of Ethics.

 

The following is a brief account of the business experience of eachdirector and executive officer of the Company.

 

Marc D. Grodman, M.D. founded the Company in December 1981 and hasbeen its Chairman of the Board, President, Chief Executive Officer and aDirector since its formation. Dr. Grodman is an Assistant Professor ofClinical Medicine at Columbia University’s College of Physicians and Surgeonsand Assistant Attending Physician at Presbyterian Hospital, New York City. From1980 to 1983, Dr. Grodman attended the Kennedy School of Government atHarvard University and was a Primary Care Clinical Fellow at MassachusettsGeneral Hospital. From 1982 to 1984, he was a medical consultant to the MetalTrades Department of the AFL-CIO. Dr. Grodman received a B.A. degree fromthe University of Pennsylvania in 1973 and an M.D. degree from ColumbiaUniversity’s College of Physicians and Surgeons in 1977.  Except for his part time duties as AssistantProfessor of Clinical Medicine and Assistant Attending Physician at ColumbiaUniversity and Presbyterian Hospital, Dr. Grodman devotes all of hisworking time to the business of the Company.

 

18

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Since January 2005, Dr. Grodman has been a member of the Boardof Directors, and since April 2008, Chairman of the American ClinicalLaboratory Association, an industry organization comprised of the largest andmost significant commercial clinical laboratories in the United States. OtherBoard members include the chief executive officers of Quest Diagnostics andLaboratory Corporation of America.

 

Howard Dubinett has been the Executive Vice-President and ChiefOperating Officer of the Company since its formation in 1981. He became aDirector of the Company in April 1986. Mr. Dubinett attended RutgersUniversity. Mr. Dubinett devotes all of his working time to the businessof the Company.

 

Sam Singer has been theCompany’s Vice President and Chief Financial Officer since October 1987and a Director since November 1989. He is responsible for all of the Company’s financial activities. Mr. Singerwas the Controller for Sycomm Systems Corporation, a data processing andmanagement consulting company, from 1981 to 1987, prior to joining theCompany.  He received a B.A. degree fromStrayer University and an M.B.A. from Rutgers University.  Mr. Singer devotes all of his workingtime to the business of the Company.

 

Joseph Benincasa became aDirector of the Company in June 2005. Mr. Benincasa currently servesas the Executive Director of The Actors’ Fund of America, a position he hasheld since 1989. The Actors’ Fund is the leading national, non-profit humanservices organization providing comprehensive social and health care services,employment, training and housing support to the entertainment profession. It isheadquartered in New York City with regional offices in Chicago and LosAngeles. He is a director of St. Peter’s University Medical Center and alsosits on the board of directors of Broadway Cares/Equity Fights AIDS; theNational Theatre Workshop of the Handicapped; Career Transition for Dancers;the Times Square Alliance; the New York Society of Association Executives andthe Somerset Patriots, a minor league baseball team. Mr. Benincasa holds aB.A. degree from St. Joseph’s University and an M. Ed. Degree from RutgersUniversity. He also attended Fordham University Graduate School of Business.

 

Harry Elias became a Director of the Company in March 2004. Mr. Eliascommenced his employment in sales and marketing with JVC Company of America (“JVC”)in 1967, subsequently being appointed as JVC’s Senior Vice President of Salesand Marketing in 1983 and as Executive Vice President of Sales and Marketing in1990. In 1995, Mr. Elias was named as JVC’s Chief Operating Officer, aposition he occupied until April 2003 when he resigned his positions uponhis appointment as JVC’s “Honorable Chairman.” JVC, a distributor of audio andvideo products headquartered in Wayne, New Jersey is the wholly owned UnitedStates subsidiary of Victor Company of Japan, a manufacturer of audio and videoproducts headquartered in Japan. In January 2005, after retiring from JVC,Mr. Elias was appointed Chairman of the Board of and commenced to serve asa consultant to AKAI USA, the sole distributor in the United States ofelectronic products produced by AKAI, a Chinese manufacturer. Mr. Eliasretired from AKAI in 2007 and currently is self-employed as a BusinessConsultant.

 

Gary Lederman, Esq. became a Director of the Company in May 1997.He received his B.A. degree from Brooklyn College in 1954 and his J.D. degreefrom NYU Law School in 1957.  He wasmanager of Locals 370, 491 and 662 of the U.F.C.W. International Union from1961 to 1985. He is retired from the unions and has been a lecturer atQueensboro Community College in the field of insurance. He served on aninstitutional review board for RTL, a pharmaceutical drug testing laboratoryuntil his retirement in February 2007.

 

John Roglieri, M.D. became aDirector of the Company in September 1995. He is an Assistant Professor of Clinical Medicine at Columbia University’sCollege of Physicians and Surgeons and an Assistant Attending Physician atPresbyterian Hospital, New York City.  Dr. Roglierireceived a B.S. degree in Chemical Engineering and a B.A. degree in AppliedSciences from Lehigh University in 1960, an M.D. degree from Harvard MedicalSchool in 1966, and a Masters degree from Columbia University’s School ofBusiness in 1978.  From 1969 until 1971,he was a Senior Assistant Surgeon in the U.S. Public Health Service inWashington, D.C..  From 1971 until 1973he was a Clinical and Research Fellow at Massachusetts General Hospital.  From 1973 until 1975, he was Director of theRobert Wood Johnson Clinical Scholars program at Columbia University.  In 1975 he was appointed Vice-President, AmbulatoryServices at Presbyterian 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 Director ofthe Employee Health Service at Presbyterian Hospital. From 1992 through 1999, Dr. Roglieriwas the Corporate Medical Director of NYLCare, a managed care subsidiary of NewYork Life Insurance Company (“New York Life”). Dr. Roglieri was chiefmedical officer of Physician WebLink, a national physician practice managementcompany, from 1999 to 2000. Since 2001, he has been a Medical Director for NewYork Life in Manhattan. He is a member of advisory boards to severalpharmaceutical companies, a member of the Editorial Advisory Board of thejournals Managed Care and Seminars in Medical Practice, and is a subject ofbiographical record in Who’s Who in America.

 

There are no family relationships betweenor among any directors or executive officers of Bio-Reference Laboratories. TheCompany’s Certificate of Incorporation provides for a staggered Board of Directorspursuant to which the Board is divided into three classes of directors and themembers of only one class are elected each year to serve a three-year term. Mr. Benincasa,Mr. Lederman and Dr. Roglieri are the Class III directors whoseterm expires in fiscal 2009. Dr. Grodman and Mr. Dubinett are the Class Idirectors whose term expires in fiscal 2010.

 

Key Personnel and Consultants

 

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

 

James Weisberger, M.D. (Age 53) joined the Company in September 2003as Vice President, Assistant Chief Medical Officer and Director ofHematopathology. He is currently employed as the Company’s Chief MedicalOfficer. Prior to joining the Company, he was Director of Hematopathology atIMPATH, Inc.  (1999-2003). He isboard certified in internal medicine, anatomic and clinical pathology, andhematopathology. He has a New York State Department of Health Certificate ofQualification as a Laboratory Director. He is a Clinical Assistant Professor ofPathology at New York Medical College, Valhalla, New York.  Prior to joining IMPATH,  he was an Assistant Professor of Medicine andPathology at New York Medical College (1995-1999).  He has a B.S. degree from Stanford University(1977); an M.S. degree from Stanford University (1978); and an M.D. degree fromthe University of Pennsylvania (1983).

 

Charles T. Todd, Jr.  (Age 57) is aSenior Vice President engaged in  Sales. Mr. Todd was the founder and CEO of GenCare Biomedical Research Corporation (“GenCare”),a specialty oncology laboratory that was purchased by the Company in 1995.  He attended Seton Hall University from wherehe received a B.S. degree in Finance in 1974.

 

Richard Faherty (Age 62) serves as the Company’sChief Information Officer and oversees the Company’s two informaticsoperations. Mr. Faherty provided custom programming and system analysisservices to GenCare from 1987 until its acquisition by the Company in 1995. Hebecame a consultant to the Company in 1995 in the information technology areaand an employee in 1999. Mr. Faherty is a graduate of the University ofNotre Dame (1968) and the Fordham Law School (1975).

 

John W. Littleton (Age 48) joined the Company in September 2002 as a VicePresident engaged in Sales.  Prior tojoining the Company, Mr.  Littleton was Vice President of Sales forSpecialty Laboratories and the Northeast Regional Vice President of Sales forQuest Diagnostics.  He received a B.A..degree from Seton Hall University in 1983.

 

John Bennett, M.D., Scientific Advisory BoardChairman, is Professor Emeritus at the University of Rochester Medical Center,Rochester, New York.  Dr.  Bennetthas long been recognized as an intellectual force in the treatment andunderstanding of leukemias, lymphomas and other cancer-related diseases.  He established the French-American-British(FAB) Leukemia Working Group and is one of the world’s leading authorities onMyelodysplasia.  He is founder andChairman of the MDS Foundation, as well as Editor of the Journal of LeukemiaResearch. Dr.  Bennett is currently Professor Emeritus and former Head ofthe Medical Oncology Unit at the University of Rochester Medical Center andformerly was a Professor of Oncology in Medicine, Pathology and LaboratoryMedicine at the University of Rochester Medical School.  For nearly four decades, Dr.  Bennetthas been honored by the medical community as an expert in the field of oncologyas evidenced by the numerous chairs he has held in prestigious societies andcommittees and his authorship of more than 400 publications in peer reviewjournals, the majority of which are in the area of hematologic

 

19

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malignancies. Dr. Bennett earned his B.A. from Harvard University and his M.D.from Boston University. He served his residency in medicine at Beth-IsraelHospital, Boston, Massachusetts and completed a fellowship in hematology atBoston City Hospital. He headed the Morphology and Cytochemistry Section ofthe Clinical Center at the National Institute of Health (“NIH”) before joiningthe faculty at the University of Rochester. Dr. Bennett serves the Companyin an advisory capacity as chairman of our Scientific Advisory Board.

 

Sherri Bale, Ph.D., FACMG joined the Company in September 2006,when BioReference Laboratories acquired the operating assets of GeneDx. Shereceived her M.S. and Ph.D. degrees from the University of Pittsburgh, and herpost-doctoral training in medical genetics at the NIH. She is an American Boardof Medical Genetics-Certified Ph.D. — Medical Geneticist and Founding Member ofthe American College of Medical Genetics. She founded GeneDx with Dr. JohnCompton, also a long-time NIH scientist, after 16 years at the NIH. For thepast eight years, she has served as President and Clinical Director of GeneDx,which specializes in developing and providing molecular diagnostic tests forrare hereditary disorders. She has authored more than 125 peer-reviewed papers,book chapters, and books in the field. She serves on numerous Boards of patientadvocacy and non-profit organizations, and is a member of the Faculty of theMetropolitan Medical Genetics Training Program of the National Human GenomeResearch Institute, NIH, in Bethesda, MD. She holds a second degree black beltin judo.

 

John Compton, Ph.D., (Age 60) serves as ScientificDirector and Co-President of GeneDx Inc., the operating assets of which wereacquired by BioReference Laboratories in September 2006. He has 25 yearsexperience in the development and application of molecular biologicaltechniques to answer questions about genetics and epidermal differentiation,and has authored more than 60 publications in the field. He holds B.S. degreesin Physics and Biology from MIT, received his Ph.D. from the University ofCalifornia, Berkeley in Biophysics, and did his post-doctoral training inprotein-DNA interactions at the Baylor College of Medicine. Following six yearsas an independent investigator at the Jackson Laboratory, he joined theLaboratory of Skin Biology in the NIAMS at the NIH in 1991 where he was StaffScientist in the Genetic Studies Section until 2000, when he and NIHcolleague Sherri Bale formed GeneDx to develop and provide molecular genetictesting in rare hereditary disorders. In 2003 they were jointly awarded theEntrepreneur of the Year award by the Technology Council of Maryland. John isalso in his eighth year as Mayor of the Town of Washington Grove, MD.

 

Compliance with Section 16(a) of the Exchange Act

 

Based solely on a review of Forms 3 and 4 and any amendments theretofurnished to the Company pursuant to Rule 16a-3(e) under theSecurities Exchange Act of 1934, or representations that no Forms 5 wererequired, we believe that with respect to fiscal 2008, our officers, directorsand beneficial owners of more than 10% of our equity timely complied with allapplicable Section 16(a) filing requirements.

 

Item 11 – Executive Compensation

 

The table below summarizes the total compensation paid or accrued by uswith respect to the years ended October 31, 2007 and 2008 to our threeexecutive officers and to our two other most highly compensated seniormanagement employees during the period. All of our group life, health,hospitalization or medical reimbursement plans, if any, as well as our 401(k) plan,do not discriminate in scope, terms or operation, in favor of any or ourofficers, senior management members or directors, and are generally availableto all salaried employees.

 

SUMMARY COMPENSATION TABLE

 
| ** **

**Name and  Principal Position** | ** ** | **Fiscal  Year (b)** | ** ** | **Salary  ($) (c)** | ** ** | **Bonus  ($)(d)  (1)** | ** ** | **Stock  Awards  ($)(e)** | ** ** | **Option  Awards  ($)(f)** | ** ** | **Non-Equity  Incentive Plan  Compensation  ($)(g)(2)** | ** ** | **Change in  Pension Value  and Nonqualified  Deferred  Compensation  Earnings ($)(h)** | ** ** | **All  Other  Compensation  ($)(i)(3)** | ** ** | **Total  ($)(j)** |    |
|--------------------------------------------------------|------------|---------------------------|------------|--------------------------|------------|------------------------|------------|---------------------------|------------|----------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|-------------------|---------|
| Marc D. Grodman  M.D.                                  |       | 2007                      |       | $                        | 852,000    |                   | -0-        |                      | -0-        |                       | -0-        |                                                         | $          | 85,200                                                                                                      |       | -0-                                     |       | $                 | 96,230  |   | $ | 1,033,430 |   |
| President and Chief Executive Officer                  |       | 2008                      |       | 910,877                  |       | -0-                    |       | -0-                       |       | -0-                        |       | -0-                                                          |       | -0-                                                                                                         |       | 101,424                                 |       | 1,012,301         |    |
| Howard Dubinett                                        |       | 2007                      |       | $                        | 323,350    |                   | -0-        |                      | -0-        |                       | -0-        |                                                         | $          | 32,335                                                                                                      |       | -0-                                     |       | $                 | 40,070  |   | $ | 395,755 |   |
| Executive Vice President and Chief Operating Officer   |       | 2008                      |       | 362,935                  |       | -0-                    |       | -0-                       |       | -0-                        |       | -0-                                                          |       | -0-                                                                                                         |       | 40,070                                  |       | 403,005           |    |
| Sam Singer                                             |       | 2007                      |       | $                        | 323,350    |                   | -0-        |                      | -0-        |                       | -0-        |                                                         | $          | 32,335                                                                                                      |       | -0-                                     |       | $                 | 39,822  |   | $ | 395,507 |   |
| Senior Vice President and Chief Financial Officer      |       | 2008                      |       | 362,935                  |       | -0-                    |       | -0-                       |       | -0-                        |       | -0-                                                          |       | -0-                                                                                                         |       | 39,739                                  |       | 402,674           |    |
| Richard Faherty                                        |       | 2007                      |       | $                        | 438,750    |                   | -0-        |                      | -0-        |                       | -0-        |                                                         | $          | 43,875                                                                                                      |       | -0-                                     |       | $                 | 167,187 |   | $ | 649,812 |   |
| Chief Information Officer                              |       | 2008                      |       | 486,540                  |       | -0-                    |       | -0-                       |       | -0-                        |       | -0-                                                          |       | -0-                                                                                                         |       | 139,962                                 |       | 626,502           |    |
| Charles T. Todd, Jr.                                   |       | 2007                      |       | $                        | 385,500    |                   | -0-        |                      | -0-        |                       | -0-        |                                                         | $          | 38,550                                                                                                      |       | -0-                                     |       | $                 | 10,184  |   | $ | 434,234 |   |
| Senior Vice President – Sales                     |       | 2008                      |       | 505,237                  |       | -0-                    |       | -0-                       |       | -0-                        |       | -0-                                                          |       | -0-                                                                                                         |       | 13,116                                  |       | 518,353           |    |

 

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(1) UnderSEC disclosure rules, the term “bonus” does not include awards that areperformance based. As a result of this definition, payments under our 2007Incentive Bonus Plan for Senior Management are not considered “bonuses” and arereported under the column captioned “Non-Equity Incentive Plan Compensation”.

(2) The2007 Senior Management Incentive Bonus Plan adopted by the CompensationCommittee provided for bonuses as a percentage of salary to be paid todesignated members of Senior Management (twelve in total) to the extent theCompany’s Total Operating Income equaled certain designated percentages ofTotal Net Revenues. The amounts in column (g) reflect the cash awards tothe named officers under the 2007 Senior Management Incentive Bonus Plan. Nobonuses were earned under the Plan with respect to fiscal 2008.

(3) Theamounts in column (i) All Other Compensation are detailed below.

 

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| **Name**          | ** ** | **Personal Use of Company  Leased Automobile** | ** ** | **Personal Use of  Company Airplane** | ** ** | **Life Insurance  Premium (a)** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-------------------|------------|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------|------------|-----------|------------|-----------|------------|
|              |       |                                                               |       |                                                 |       |                                      |       |      |       |      |       |
| Fiscal Year  2007 |       |                                                               |       |                                                 |       |                                      |       |      |       |      |       |
| Marc D. Grodman   |       | $                                                                  | 20,900     |                                                 | $          | 5,330                                     |       | $         | 70,000     |      | $          | -0- |   | $ | 96,230 |   |
| Howard Dubinett   |       | 15,070                                                             |       | -0-                                                  |       | 25,000                                    |       | -0-       |       | 40,070    |       |
| Sam Singer        |       | 14,822                                                             |       | -0-                                                  |       | 25,000                                    |       | -0-       |       | 39,822    |       |
| Richard Faherty   |       | 28,109                                                             |       | 1,673                                                |       | -0-                                       |       | 137,408   | (b)        | 167,190   |       |
| Charles Todd Jr.  |       | 9,385                                                              |       | 799                                                  |       | -0-                                       |       | -0-       |       | 10,184    |       |
|                   |            |                                                                    |            |                                                      |            |                                           |            |           |            |           |            |  |  |  |  |  |

 
| **Name**          | ** ** | **Personal Use of Company  Leased Automobile** | ** ** | **Personal Use of  Company Airplane** | ** ** | **Life Insurance  Premium (a)** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-------------------|------------|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------|------------|-----------|------------|-----------|------------|
|              |       |                                                               |       |                                                 |       |                                      |       |      |       |      |       |
| Fiscal Year  2008 |       |                                                               |       |                                                 |       |                                      |       |      |       |      |       |
| Marc D. Grodman   |       | $                                                                  | 23,020     |                                                 | $          | 8,404                                     |       | $         | 70,000     |      | $          | -0- |   | $ | 101,424 |   |
| Howard Dubinett   |       | 15,070                                                             |       | -0-                                                  |       | 25,000                                    |       | -0-       |       | 40,070    |       |
| Sam Singer        |       | 14,739                                                             |       | -0-                                                  |       | 25,000                                    |       | -0-       |       | 39,739    |       |
| Richard Faherty   |       | 28,021                                                             |       | -0-                                                  |       | -0-                                       |       | 111,941   | (b)        | 139,962   |       |
| Charles Todd Jr.  |       | 9,937                                                              |       | 3,179                                                |       | -0-                                       |       | -0-       |       | 13,116    |       |
|                   |            |                                                                    |            |                                                      |            |                                           |            |           |            |           |            |  |  |  |  |  |

 

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(a) See“Split Dollar Life Insurance” herein

(b) Mr. Fahertyrents an airplane to the Company (when the Company’s owned airplane isunavailable) for corporate flights. Such rentals totaled  $71,108 in fiscal 2008 and $55,965 in fiscal2007. In addition, a separate corporation of which Mr. Faherty is themajority shareholder provided networking, data reporting and programmingservices to the Company in fiscal 2008 and fiscal 2007 for which it received$40,833 and $81,713 in compensation respectively.

 

**EmploymentAgreements with Named Officers**

 

Dr. Grodmanserves as our President and Chief Executive Officer pursuant to a seven-yearemployment agreement which expires on October 31, 2011. Dr. Grodmanhas the right to elect to cancel the employment agreement effective at the endof any calendar month commencing October 31, 2008 on not less than 90 daysprior written notice, subject to a six month non-competition restriction. Theemployment agreement is automatically renewable for additional two year periodssubject to the right of either party to elect not to renew at least six monthsprior thereto. The employment agreement provides Dr. Grodman with minimumannual base compensation of $750,000 subject to annual percentage increases tothe extent of annual percentage increases in the Consumer Price Index. Dr. Grodman’sminimum annual base compensation for fiscal 2009 as determined by theCompensation Committee is $965,180. The Compensation Committee can but is notrequired to increase Dr. Grodman’s compensation at the end of any fiscalyear based upon his and the Company’s performance. The employment agreementalso provides Dr. Grodman with business use of an automobile leased by theCompany and participation in any fringe benefit and bonus plans available tothe Company’s employees to the extent determined by the Compensation Committee.The employment agreement contains provisions governing in the event of Dr. Grodman’spartial or total disability and provides for termination for cause or in theevent of Dr. Grodman’s death. Dr. Grodman has the right to terminatethe employment agreement in the event of a material change in his duties andresponsibilities, the relocation of the Company’s principal executive officesfrom Elmwood Park, New Jersey to a location more than fifty miles distant or amaterial breach of the employment agreement by the Company (including areduction in Dr. Grodman’s benefits under the agreement). In the event ofa Change in Control of the Company, Dr. Grodman can elect to terminate theagreement. In that event, he will be entitled to be paid a lump sum SeverancePayment equal to 2.99 times the average of his annual compensation paid by theCompany for the five calendar years preceding the earlier of the calendar yearin which the Change of Control occurred or the calendar year of the Date ofTermination, subject to the provisions of Section 409-A of the InternalRevenue Code. See “Split-Dollar Life Insurance” herein as to the EndorsementSplit-Dollar Life Insurance Agreement between the Company and Dr. Grodman.

 

Mr. Dubinettserves as Executive Vice President and Chief Operating Officer pursuant to anemployment agreement which has been extended through October 31,2009.  Mr. Dubinett’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 at the discretion of the CompensationCommittee. Mr. Dubinett’s minimum annual base compensation for fiscal 2009as determined by the Compensation Committee is $381,425. The agreement providesfor (i) the leasing of an automobile for his use; (ii) participationin fringe benefit, bonus, pension, profit sharing, and similar plans maintainedfor the Company’s employees; (iii) disability benefits; (iv) certaintermination benefits; and (v) in the event of termination due to a Changein Control of the Company, a Severance Payment equal to 2.99 times Mr. Dubinett’saverage annual compensation during the preceding five years, subject to theprovisions of Section 409-A of the Internal Revenue Code. See “SplitDollar Life Insurance” herein as to the Endorsement Split Dollar Life InsuranceAgreement between the Company and Mr. Dubinett.

 

Mr. Singerserves as Senior Vice President and Chief Financial Officer pursuant to anemployment agreement which has been extended through October 31, 2009, Mr. Singer’sminimum annual compensation under the extended agreement is equal to his annualcompensation in fiscal 2002 and is subject to increases based on increases inthe Consumer Price Index as well as to increases at the discretion of theCompensation Committee. Mr. Singer’s minimum annual base compensation forfiscal 2009 as determined by the Compensation Committee is $381,425. Theagreement provides for (i) the leasing of an automobile for his use; (ii) participationin fringe benefit, bonus, pension, profit sharing, and similar plans maintainedfor the Company’s employees; (iii) disability benefits; (iv) certaintermination benefits; and (v) in the event of termination due to a Change

 

21

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inControl of the Company, a Severance Payment equal to 2.99 times Mr. Singer’saverage annual compensation during the preceding five years, subject to theprovisions of Section 409-A of the Internal Revenue Code. See “Split-DollarLife Insurance” herein as to the Endorsement Split-Dollar Life InsuranceAgreement between the Company and Mr. Singer.

 

Mr. Fahertyserves as Chief Information Officer and Director of Information Servicespursuant to an employment agreement currently due to expire on October 31,2011. Mr. Faherty’s initial Base Compensation of $400,000 in fiscal 2005is subject to increases based upon management’s evaluation of his and theCompany’s performance and is also subject to increases based on increases inthe Consumer Price Index. The agreement provides for (i) the leasing of anautomobile for Mr. Faherty’s use; (ii) participation in fringebenefit and bonus plans available to the Company’s employees; (iii) disabilitybenefits; (iv) certain termination benefits; and (v) in the event oftermination due to a Change in Control of the Company, a Severance Paymentequal to 2.99 times Mr. Faherty’s average annual compensation during thepreceding five years, subject to the provisions of Section 409-A of theInternal Revenue Code.

 

Mr. Toddserves as a Senior Vice President in Sales pursuant to an Employment Agreementcurrently due to expire on October 31, 2011. Mr. Todd’s initial BaseCompensation of $350,000 in fiscal 2005 is subject to increases based uponmanagement’s evaluation of his and the Company’s performance and is alsosubject to increases based on increases in the Consumer Price Index. Theagreement provides for (i) the leasing of an automobile for Mr. Todd’suse; (ii) participation in fringe benefits and bonus plans available tothe Company’s employees; (iii) disability benefits; (iv) certaintermination benefits; and (v) in the event of termination due to a Changein Control of the Company, a Severance Payment equal to 2.99 times Mr. Todd’saverage annual compensation during the preceding five years, subject to theprovisions of Section 409-A of the Internal Revenue Code.

 

**PotentialPayments Upon Termination or Change in Control as of October 31, 2008**

 

Thefollowing table sets out the payments that could be paid to each of our threeexecutive officers and to our two other most highly compensated seniormanagement employees upon termination of employment due to death, disability,for Good Reason or a Change in Control, in each case occurring as of October 31,2007.

 
| **Employee**                   | ** ** | ** **        | ** ** | ** **              | ** ** | ** **   | ** ** | ** **                         | ** ** |
|--------------------------------|------------|-------------------|------------|-------------------------|------------|--------------|------------|------------------------------------|------------|
| **Fiscal Year 2008** | ** ** | **Disability(a)** | ** ** | **Good Reason(b)** | ** ** | **Death(c)** | ** ** | **Change in Control(d)** | ** ** |
| Marc D. Grodman M.D.           |       | $                 | 1,366,300  |                    | $          | 2,732,600    |       | $                                  | 7,861,374  |   | $ | 2,253,250 |   |
| Howard Dubinett                |       | 362,900           |       | 362,900                 |       | 1,334,550    |       | 876,152                            |       |
| Sam Singer                     |       | 362,900           |       | 362,900                 |       | 768,295      |       | 877,175                            |       |
| Richard Faherty                |       | 486,500           |       | 1,459,600               |       | 243,300      |       | 1,170,738                          |       |
| Charles Todd, Jr.         |       | 505,200           |       | 1,515,700               |       | 252,618      |       | 973,093                            |       |
|                                |            |                   |            |                         |            |              |            |                                    |            |  |  |  |  |

 

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(a) Dr. Grodman’semployment agreement entitles him to monthly compensation at his then currentBase Compensation for 18 months in the event of his Total Disability. Theemployment agreement of each of the other employees listed in the tableentitles the employee to monthly compensation at his then current BaseCompensation for twelve months in the event of his Total Disability.

(b) “GoodReason” entitling the employee to voluntarily terminate his employmentagreement includes assignment of duties inconsistent with his current duties,reduction of his Base Compensation, relocation of the Company’s principalexecutive offices to a location more than 50 miles from the current locationand other breaches by the Company of the employment agreement. In the event ofhis voluntary termination for “Good Reason”, each of the employees listed inthe table is entitled to be paid his monthly Base Compensation until completionof his current Employment Period which is as follows: Dr. Grodman — until October 31,2011; Messrs. Dubinett and Singer – until October 31, 2009; and Messrs. Fahertyand Todd — until October 31, 2011.

(c) UnderDr. Grodman’s employment agreement, his employment terminates in the eventof his death and his beneficiaries would be entitled to the death proceeds ofthe insurance policy owned by the Company on his life after deducting theCompany’s “Interest in the Policy”. In the event of Mr. Dubinett’s deathor Mr. Singer’s death while employed by the Company, the decedent’sbeneficiaries would be entitled to the death proceeds of the insurance policyowned by the Company on his life after deducting the Company’s “Interest in thePolicy” plus additional payments equal to six months of his Base Compensationin effect at the time of his death. See “Split-Dollar Life Insurance” herein.In the event of Mr. Faherty’s death or Mr. Todd’s death whileemployed by the Company, the decedent’s beneficiaries would be entitled toadditional payments equal to six months of his Base Compensation at the time ofhis death.

(d) Inthe event of a termination of employment after a “Change in Control” of theCompany, the employee is entitled to receive a lump sum Severance Payment equalto 2.99 times the average of his annual compensation paid or payable by theCompany in connection with his employment and included in his gross income ascompensation income for the five calendar years preceding the calendar year inwhich the Change in Control occurred, subject to the provisions of Section 409-Aof the Internal Revenue Code

 

**Split-Dollar****Life Insurance**

 

Pursuantto the terms of their 1997 employment agreements, the Company had establishedsplit-dollar life insurance programs for each of its three Executive Officers.As a result of the passage of the Sarbanes Oxley Act of 2002 (signed into lawon July 30, 2002), these three programs were modified. Pursuant to themodification, each of the three Executive Officers assigned ownership of hispolicies to the Company and new policies were issued to replace the priorpolicies with annual premiums under the new policies ($70,000 under Dr. Grodman’spolicy and $25,000 each under Messrs. Dubinett’s and Singer’s policies)being equal to the premiums paid under the replaced policies. The Company hasnow executed new “Endorsement Split-Dollar Life Insurance Agreements” with eachof its three Executive Officers. Pursuant to the new agreements, the Companyhas agreed to continue to pay the annual premium on the policy on each officer’slife during the period of his full-time employment by the Company. The Companyis the sole owner of the policy and of its net cash surrender value, and in theevent of the officer’s death while serving as a full-time employee of theCompany, the Company will be entitled to receive that amount of the deathproceeds equal to its interest in the policy (the aggregate amount of premiumspaid by the Company with respect to the policy less the amount of any loans, ifany, from the Insurer to the Company against the cash value or policy proceeds,and less the aggregate amount of any premiums paid by the officer to theCompany in reimbursement of premiums paid by the Company) and the balance ofthe death proceeds will be paid to the officer’s designated beneficiaries. Thepremiums paid by the Company on the current policies and the prior policiesaggregated approximately $1,542,000 and $1,422 ,000 at October 31, 2008and October 31, 2007, respectively. At those dates, the net cash surrendervalue of the three current policies aggregated approximately $1,225,000 and$1,054,000, respectively and is recorded on the books of the Company at thesevalues.

 

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**Stock Options**

 

Employee Stock Option Plans

 

###### The 1989 Plan

######  

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 Internal Revenue Code of 1986 (“the Code”), or options which do not soqualify (“NQOs”).

 

Underthe 1989 Plan, the exercise price of an option designated as an ISO could notbe less than the fair market value of the Common Stock on the date the optionwas granted.  However, in the event anoption designated as an ISO was granted to a 10% shareholder (as defined in the1989 Plan) such exercise price was required to be at least 110% of such fairmarket value.  Exercise prices of NQOscould be less than such fair market value. The aggregate fair market value of shares subject to options granted toa participant which are designated as ISOs which first become exercisable inany calendar year could not exceed $100,000. All options under the 1989 Planwere required to be granted before the Plan’s July 1999 Termination Dateso that no further options can be granted under the 1989 Plan. At October 31,2008, there were no outstanding ISOs under the 1989 Plan.

 

**The 2000Plan**

 

OnAugust 25, 2000, the Board of Directors adopted the 2000 EmployeeIncentive Stock Option Plan (the “2000 Plan”) reserving an aggregate 800,000shares of Bio-Reference Common Stock for issuance upon exercise of ISOs whichmay be granted under the 2000 Plan. Stockholders ratified the adoption of the 2000 Plan at our December 14,2000 Annual Meeting of Stockholders. During fiscal 2008, no options weregranted under the 2000 Plan. During fiscal 2008, ISOs issued under the 2000Plan to purchase an aggregate 4,500 shares at exercise prices ranging from$5.94 to $8.40 per share were exercised and as a result, at October 31,2008, there were outstanding ISOs under the 2000 Plan exercisable to purchasean aggregate 157,000 shares at exercise prices ranging from $5.52 to $15.334per share.

 

The2000 Plan authorizes the grant of options which qualify for ISO treatment underSection 422 of the Code, to purchase up to a maximum aggregate 800,000shares of the Company’s Common Stock. Options may only be granted under the 2000Plan to employees of the Company and its subsidiaries (including officers anddirectors who are also employees).

 

The2000 Plan is administered by the Board of Directors. The Board has thediscretion to determine the eligible employees to whom, and the price (not lessthan the fair market value on the date of grant) at which options will begranted; the periods during which each option is exercisable; and the number ofshares subject to each option. The Board has the authority to interpret the2000 Plan and to establish and amend rules and regulations relatingthereto.

 

The2000 Plan provides that the exercise price of an option granted thereundershall not be less than the fair market value of the Common Stock on the datethe option is granted. However, in the event an option is granted under the2000 Plan to a holder of 10% or more of the Company’s outstanding Common Stock,the exercise price must be at least 110% of such fair market value. Under the2000 Plan, options must be granted before the August 24, 2010 TerminationDate. No option may have a term longer than ten years (limited to five years inthe case of an option granted to a 10% or greater stockholder of the Company).The aggregate fair market value of the Company’s Common Stock with respect towhich options are exercisable for the first time by a grantee under the 2000Plan during any calendar year cannot exceed $100,000. Options granted under the2000 Plan are non-transferable and must be exercised by an optionee, if at all,while employed by the Company or a subsidiary or within three months aftertermination of such optionee’s employment due to retirement, or within one yearof such termination if due to disability or death. The Board 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 2000 Plan provided that such loan or obligation cannot exceedfifty percent (50%) of the exercise price of such option.

 

**The 2003 Plan**

 

OnJune 3, 2003, the Board of Directors adopted the 2003 Employee IncentiveStock Option Plan (the “2003 Plan”) reserving an aggregate 800,000 shares ofBio-Reference Common Stock for issuance upon exercise of  ISOs which may be granted under the 2003Plan. Stockholders ratified the adoption of the 2003 Plan at our July 31,2003 Annual Meeting of Stockholders. During fiscal 2008, ISOs were grantedunder the 2003 Plan exercisable to purchase 20,000 shares at an exercise priceof $34.99 per share. In fiscal 2008, ISOs issued under the 2003 Plan topurchase 29,313 shares at exercise prices ranging from $12.22 to $21.46 pershare were exercised and ISOs granted under the 2003 Plan exercisable topurchase 7,145 shares were canceled due to terminations of employment. As aresult, at October 31, 2008, there were outstanding ISOs under the 2003Plan exercisable to purchase an aggregate 244,280 shares at exercise pricesranging from $12.22 to $34.99 per share.

 

The2003 Plan authorizes the grant of options which qualify for ISO treatment underSection 422 of the Code to purchase up to a minimum aggregate 800,000shares of the Company’s Common Stock. Options may only be granted under the 2003 Plan to employees of theCompany and its subsidiaries (including those officers and directors who arealso employees).

 

The2003 Plan is administered by the Board of Directors.  The Board has the discretion to determine theeligible employees to whom, and the prices (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 has the authority tointerpret the 2003 Plan and to establish and amend rules and regulationsrelating thereto.

 

The2003 Plan provides that the exercise price of an option granted thereundershall not be less than the fair market value of the Common Stock on the datethe option is granted.  However, in theevent an option is granted under the 2003 Plan to a holder of 10% or more ofthe Company’s outstanding Common Stock, the exercise price must be at least110% of such fair market value.

 

                Under the 2003 Plan, optionsmust be granted before the June 2, 2013 Termination Date.  No option may have a term longer than tenyears (limited to five years in the case of an option granted to a 10% orgreater stockholder of the Company).  Theaggregate fair market value of the Company’s Common Stock with respect to whichoptions are exercisable for the first time by a grantee under all of theCompany’s Stock Option Plans during any calendar year cannot exceed$100,000.  Options granted under the 2003Plan are non-transferable and must be exercised by an optionee, if at all,while employed by the Company or a subsidiary or within three months aftertermination of such optionee’s employment due to retirement, or within one yearof such termination if due to disability or death.  The Board may, in its sole discretion, causethe Company to lend money to or guaranty any obligation of an employee for thepurpose of enabling such employee to exercise an option granted under the 2003Plan provided that such loan or obligation cannot exceed fifty percent (50%) ofthe exercise price of such option.

 

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**Non-QualifiedOptions (NQOs) and Warrants**

 

AtOctober 31, 2007, there were outstanding NQOs owned by one member of theScientific Advisory Board exercisable to purchase an aggregate 15,000 shares atan exercise price of $7.94 per share. These NQOs expired unexercised in fiscal2008.

 

SeeNote 11 of Notes to the Consolidated Financial Statements.

 

**OptionGrants to Our Three Named Executive Officers (and the Two Other Named MostHighly Compensated Senior Management Employees) in Last Fiscal Year**

 

Nooptions to purchase shares of our Common Stock were granted to any of our threeNamed Executive Officers or the two other named most highly compensated seniormanagement employees in fiscal 2008.

 

**OptionExercises and Stock Vested**

 

AtOctober 31, 2007 and at October 31, 2008, there were no outstandingoptions held by our three executive officers, the two other named most highlycompensated senior management employees or any of our directors.

 

DuringFiscal 2008 no options were exercised by any member of the Board of Directors.

 

**DIRECTOR COMPENSATION**

 

Duringfiscal 2008, each director who was not a Company employee was compensated forhis services as a director with a quarterly fee of $13,750. In addition, GaryLederman as chairman of the Audit Committee and John Roglieri M.D. as chairmanof the Compensation Committee was each compensated for serving as a CommitteeChairman with an additional quarterly fee of $2,750. No director’s fees werepaid to our employee directors.

 

Thefollowing table sets forth the compensation paid to our directors in fiscal2008.

 
| **Director**                   | ** ** | **Director’s  Committee** | ** ** | ** **             | ** ** |
|--------------------------------|------------|--------------------------------|------------|------------------------|------------|
| **Fiscal Year 2008** | ** ** | **Fees**                       | ** ** | **Chairman Fees** | ** ** | **Other** | ** ** | **Total** | ** ** |
| Joseph Benincasa               |       | $                              | 55,000     |                   | -0-        |   | -0- |   | $ | 55,000 |   |
| Harry Elias                    |       | 55,000                         |       | -0-                    |       | $ | 527 | (a) | 55,527 |   |
| Gary Lederman (b)              |       | 55,000                         |       | $                      | 11,000     | (b) | -0- |   | 66,000 |   |
| John Roglieri M.D. (c)         |       | 55,000                         |       | 11,000                 | (c)        | -0- |   | 66,000 |   |
|                                |            |                                |            |                        |            |  |  |  |  |  |  |  |  |

 

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(a) Forpersonal use of Company airplane

(b) Chairmanof the Audit Committee

(c) Chairmanof the Compensation Committee

 

**Compensation Discussion andAnalysis**

 

**Background**

 

Through fiscal 2001, the Board of Directors, including the Company’sthree executive officers, were responsible for reviewing the compensation paidto the Company’s executive officers, provided that none of the Company’s executiveofficers could vote with respect to his own compensation package. In fiscal2002, the Company established a Compensation Committee consisting of threenon-employee directors, Morton L. Topfer (Chairman), Gary Lederman and JohnRoglieri. Mr. Topfer resigned as a director and as a member of theCompensation Committee in February 2004. In March 2004, Dr. Roglieribecame the Chairman of the Compensation Committee and Mr. Elias waselected as a member of the Committee. Mr. Benincasa was elected as amember of the Committee in June 2005.

 

In May 1997, the Company executed an employment agreement with Dr. Grodmanwhich expired on October 31, 2004. Effective November 1, 2004, the Company executed a new seven yearemployment agreement with Dr. Grodman, the terms of which are describedabove. See “Employment Agreements with Named Officers.”

 

In May 1997, the Company also executed employment agreements with Messrs. Dubinettand Singer (each expiring on October 31, 2002). During fiscal 2002, theCompensation Committee authorized extensions of both Messrs. Dubinett andSinger’s contracts for two additional years, with the Company having the optionto extend each agreement for two consecutive one-year periods in addition. Inconsideration for Messrs. Dubinett and Singer executing the extensionagreements, the Company agreed that the base compensation during each extensionyear would not be less than the total cash compensation paid to such individualin fiscal 2002. The Company’s option to extend Mr. Dubinett and Mr. Singer’semployment agreements has been further extended through fiscal 2009.

 

**Executive Compensation Philosophy**

 

In view of the fact that our three named executive officers ownsubstantial equity interests in the Company, our compensation program for them focusesprimarily on base salary, subject to annual increase based upon a review of theexecutive’s and the Company’s performance. In addition, to further incentivizeour executive officers as well as certain other members of senior management,in 2005, we established a Senior Management Incentive Bonus Plan designed toassist in the Company’s profitability. Bonuses under the Plan are earned andpaid only to the extent the Company’s Total Operating Income equaled certaindesignated percentages of Total Net Revenues. Plan criteria were met withrespect to fiscal 2005 and 2007 so that bonuses were earned and paid, but nobonuses were earned or paid under the Plan with respect to fiscal 2006 orfiscal 2008 as the Plan’s targeted performances were not achieved.

 

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**Rationale for Current Employment Agreements with the Three ExecutiveOfficers**

 

Duringthe summer of calendar year 2004 with the knowledge that Dr. Grodman’sseven year employment agreement was due to expire in October 2004, theCompensation Committee commenced negotiations with Dr. Grodman for theterms of a new employment agreement. In the course of its negotiations, theCommittee took into account among other factors as a barometer of Dr. Grodman’sperformance as the Company’s chief executive officer, the substantial increasesince 1997 in the Company’s net revenues, operating income and the market priceof the Common Stock. Another factor taken into account by the Committee was thecompensation being paid to the chief executive officers of a peer group of nineother publicly owned clinical testing laboratories including the two majorcompanies in the industry, Quest Diagnostics, Inc. and LaboratoryCorporation of America Holdings. The terms of Dr. Grodman’s “split-dollar”insurance arrangement with the Company and the fact that the proposed newemployment agreement did not provide Dr. Grodman with additional equitycompensation was also taken into account. After discussion, each of the threemembers of the Compensation Committee at the time (Dr. Roglieri, Mr. Eliasand Mr. Lederman) concluded that the terms of the proposed new employmentagreement were fair to and in the best interests of the Company and itsstockholders and that the proposed compensation thereunder was not excessive.

 

TheCompensation Committee has determined that the base salaries paid with respectto fiscal 2008, and the terms of the extension agreements with Messrs. Dubinettand Singer, were reasonable in relationship to the services performed, theresponsibilities assumed and the results obtained, and were in the bestinterests of the Company. In connection with Dr. Grodman’s compensation,the Compensation Committee considered the Company’s increase in net revenues,patients serviced, working capital and shareholders’ equity in fiscal 2008compared with the corresponding period in fiscal 2007. Furthermore, thecompensation paid to Messrs. Grodman, Dubinett and Singer for fiscal 2008comports with the Compensation Committee’s perception of base compensationlevels of principal executives employed by other companies, both public andprivate.

 

**Benefitsand Perquisites**

 

Ourpolicy is to provide health benefits as well as access to our 401(K) Planto which we contribute a maximum of $500 per employee each year, to all of ouremployees including our three executive officers.

 

Welease automobiles for their use but amounts reflecting their personal use arereported as income to them subject to tax. Similarly, personal use of theCompany airplane by any of our executive officers is reported as income tothem, subject to tax. See Footnote (3) to the “Summary Compensation Table”.

 

**Changein Control Benefits**

 

Ouremployment agreements with our three executive officers provide for substantialSeverance Payments to them in the event of a change in control of the Company.This provision provides an additional level of financial security for our threeexecutive officers. These executives could well be asked to evaluate atransaction purportedly expected to maximize shareholder value while resultingin the elimination of their jobs. The Severance Payment provision (2.99 timesthe annual average of the preceding five years of compensation) could help tominimize the distraction caused by concerns over personal financial security inthe context of a proposed change in control.

 

**StockOption Grant Practices**

 

TheCompany grants stock options at an exercise price at least equal to the fairmarket value on the date of the grant. Due to the substantial stock ownershipposition of our three executive officers, no stock options have been granted tothem (or restricted stock awarded to them) in the last three years.

 

**PolicyRegarding the One Million Dollar Deduction Limitation**

 

Section 162(m) ofthe Internal Revenue Code generally disallows a tax deduction to publiccorporations for compensation in excess of $1,000,000 paid for any fiscal yearto a corporation’s chief executive officer and to the four other most highlycompensated executive officers in office as of the end of the fiscal year. Thestatute exempts qualifying performance-based compensation from the deductionlimit if certain requirements are met. However, shareholder interests may attimes be best served by not restricting the Compensation Committee’s discretionand flexibility in developing compensation programs, even though the programsmay result in non-deductible compensation expenses. Accordingly, theCompensation Committee may from time to time approve elements of compensationfor certain officers that are not fully deductible, although no such elementshave been approved to date.

 

**Compensation Committee Interlocks and Insider Participation**

 

During fiscal 2008, the members of the Company’s Compensation Committeewere:

John Roglieri M.D. – Chairman

Joseph Benincasa

Harry Elias

Gary Lederman

 

No member of the Compensation Committee was an officer or employee ofthe Company in fiscal 2008 or was formerly an officer of the Company.

 

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**Compensation Committee Report**

 

The members of the Company’s Compensation Committee hereby state;

 

(A)      We have reviewed and discussed theCompensation Discussion and Analysis contained in this Annual Report on Form 10-Kfor the year ended October 31, 2008 with the Company’s Management, and

 

(B)        Based on such review and discussions, we haverecommended to the Company’s Board of Directors that the CompensationDiscussion and Analysis be included in the Company’s Annual Report on Form 10-Kfor the year ended October 31, 2008

 
|   |   | COMPENSATION  COMMITTEE       |
|--------|--------|-------------------------------|
|   |   |                          |
|   | By     | John  Roglieri M.D., Chairman |
|   |   | Joseph  Benincasa             |
|   |   | Harry  Elias                  |
|   |   | Gary  Lederman                |

 

Item 12. - Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters

 

The following table sets forth information as of January 4,2009 with respect to the ownership of Common Stock by (i) each personknown to us to be the beneficial owner of more than 5% of our outstandingCommon Stock, (ii) each of our directors, (iii) each of our executiveofficers, and (iv) all directors and executive officers as a group.

 
| **Name and Address of** | ** ** | ** **                                | ** ** | ** **     | ** ** |
|----------------------------------------|------------|-------------------------------------------|------------|----------------|------------|
| **Beneficial Owner**              | ** ** | ** **                                | ** ** | ** **     | ** ** |
| **Directors and**                 | ** ** | **Shares of Common Stock** | ** ** | **Percentage** | ** ** |
| **Executive Officers***           | ** ** | **Beneficially Owned(1)**            | ** ** | **Ownership**  | ** ** |
|                                   |       |                                      |       |           |       |
| Marc D. Grodman(2)                     |       | 1,503,104                                 |       | 11             | %          |
| Howard Dubinett(3)                     |       | 310,872                                   |       | 2              | %          |
| Sam Singer(4)                          |       | 132,416                                   |       | 1              | %          |
| Joseph Benincasa                       |       | -0-                                       |       | 0              | %          |
| Harry Elias                            |       | -0-                                       |       | 0              | %          |
| Gary Lederman(5)                       |       | 27,200                                    |       |           | **         |
| John Roglieri(6)                       |       | 5,000                                     |       |           | **         |
| Executive Officers                     |       | 1,978,592                                 |       | 14             | %          |
| and Directors as a group               |       |                                      |       |           |       |
| (seven persons)(2)(3)(4)(5)(6)         |       |                                      |       |           |       |
| Other Greater than 5%                  |       |                                      |       |           |       |
| Beneficial Owner                       |       |                                      |       |           |       |
|                                   |       |                                      |       |           |       |
| Arbor Capital Management, LLC(7)       |       | 732,900                                   |       | 5              | %          |
| 120 South Sixth Street                 |       |                                      |       |           |       |
| Minneapolis, MN 55402                  |       |                                      |       |           |       |

 

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*                 The address of all of the Company’s directorsand executive officers is c/o the Company, 481 Edward H. Ross Drive, ElmwoodPark, New Jersey 07407.

 

**          Less than one (1%) percent.

 

(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 1,276,437 shares owned directly. Alsoincludes 173,467 shares owned directly by Dr. Grodman’s wife, Pam Grodman,and 53,200 shares owned by their children. Dr. Grodman disclaimsbeneficial ownership of these 226,667 shares.

 

On October 12, 2006, Dr. Grodman established a Rule 10b-5-1Sales Plan (the “Sales Plan”) with Bear Stearns & Co., Inc. (“BearStearns”) to facilitate sales of a variable number of Dr. Grodman’s sharesof BRLI Common Stock (up to 200,000 shares) in variable pre-paid forwardtransactions (“Forward Transactions”) at a minimum per share sale price asspecified in the Sales Plan. In connection with the contemplated ForwardTransactions, Dr. Grodman pledged 200,000 shares of his BRLI Common Stockto secure his obligation to deliver a maximum aggregate 200,000 shares ofCommon Stock to Bear Stearns on the final settlement dates (approximately 23-25months after each sale). The Sales Plan was terminated on December 21,2006 at which date an aggregate 175,936 shares had been sold pursuant to theForward Transactions. As prepayment for the pledge of these shares, BearStearns paid Dr. Grodman approximately $3,950,000 or approximately $22.46per share. The number of shares that Dr. Grodman will be obligated todeliver on the final settlement dates will vary based upon the market prices ofthe Common Stock on such settlement dates. Dr. Grodman will benefit fromany excess in the market prices of the Common Stock at the final settlementdates to the extent such prices exceed approximately $25.30 up to approximately$30.38 per share, by being able to deliver fewer shares. Until the finalsettlement dates, Dr. Grodman is deemed the beneficial owner of thepledged shares.

 

Based on the closing price for BRLI Common Stock on NASDAQ on November 18,2008, the settlement date with respect to the first 66,666 shares of theaggregate 175,936 shares sold, Dr. Grodman transferred 66,666 of thepledged shares to Bear Stearns, now a division of J.P. Morgan, for which he hadreceived a prepayment of $1,497,343. The net effect to Dr. Grodman is thaton the initial settlement date, he sold 66,666 shares at a price of $22.46 pershare.

 

Based on the closing price for BRLI Common Stock on NASDAQ on December 18,2008, the settlement date with respect to the second 66,666 shares of theaggregate 175,936 shares sold, Dr. Grodman was obliged to deliver only63,976 of the pledged shares to Bear Stearns for which he had received aprepayment of $1,497,272. The net effect to Dr. Grodman is that on thesecond settlement date, he sold 63,976 shares at a price of $23.40 per share.

 

(3)          Includes 310,872 shares owned directly. In lieu of an outright sale, on October 15,2007, Howard Dubinett entered into a pre-paid variable price forward salescontract (“Forward Contract”) with UBS Securities LLC (“UBS”). Pursuant to theForward Contract, Mr. Dubinett pledged 89,047 shares of his BRLI CommonStock to secure his obligation to deliver a maximum 89,047 shares of BRLICommon Stock to

 

26

----

 

UBS on October 19, 2009 (the “Settlement Date”). As prepayment forthe pledge of these shares, UBS agreed to pay Mr. Dubinett $2,572,474 orapproximately $28.89 per share representing 87.9% of the proceeds from the saleof 89,047 shares on October 16, 2007. The number of shares that Mr. Dubinettis required to deliver on the Settlement Date varies based upon the price ofthe Common Stock on the Settlement Date. Mr. Dubinett will benefit fromany excess in the price of the Common Stock on the Settlement Date between$32.87 per share up to a maximum $39.44 per share by being able to deliverfewer shares. Until the Settlement Date, Mr. Dubinett retains the votingrights to the 89,047 pledged shares and is deemed the beneficial owner of suchshares.

 

(4)          Includes 122,016 shares owned directly, and10,400 shares owned by children who share Mr. Singer’s household. Mr. Singerdisclaims beneficial ownership of these 10,400 shares.

 

(5)          Includes 27,200 shares owned directly.

 

(6)          Includes 5,000 shares owned directly.

 

(7)          Arbor Capital Management, LLC (“Arbor”) in itscapacity as an investment advisor may be deemed the beneficial owner of these732,900 shares which are owned by investment advisory clients. In its Schedule13G filing dated February 5, 2008 filed with the Securities and ExchangeCommission, Arbor stated that to the best of its knowledge, these 732,900shares were acquired in the ordinary course of business; were not acquired forthe purpose of and do not have the effect of changing or influencing thecontrol of the Company; and were not acquired in connection with or as aparticipant in any transaction having such purpose or effect.

 

**EquityCompensation Plan Information**

 

Thefollowing table provides information as of October 31, 2008 regardingshares of Common Stock that may be issued pursuant to the Company’s equitycompensation plans:

 
| ** **                                             | ** ** | **(a)**                                                                                                | ** ** | **(b)**                                                                                             | ** ** | **(c)  Number of Shares Remaining Available  for Future Issuances Under Equity** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **Number of Shares Issuable upon  Exercise of Outstanding Options** | ** ** | **Weighted-Average Exercise Price  per Share of Outstanding Options** | ** ** | **Compensation Plans (Excluding Shares)  Reflected in Column (a))**                        | ** ** |
|                                                   |       |                                                                                                   |       |                                                                                                |       |                                                                                                                     |       |
| Equity Compensation Plans Approved by Stockholders     |       | 383,780                                                                                                | (1)        | $                                                                                                   | 12.98      |                                                                                                                     | 383,760    | (2) |
|                                                   |       |                                                                                                   |       |                                                                                                |       |                                                                                                                     |       |
| Equity Compensation Plans Not Approved by Stockholders |       | -0-                                                                                                    |       | $                                                                                                   | -0-        |                                                                                                                     | -0-        |   |
| Totals                                                 |       | 383,780                                                                                                |       | $                                                                                                   | 12.98      |                                                                                                                     | 383,760    |   |

 

----

(1) Reflectsshares issuable upon exercise of outstanding ISOs granted pursuant to theCompany’s  2000 and 2003 Employee StockOption Plans.

(2) Reflectsshares reserved for issuance upon the grant of ISOs which may be grantedpursuant to the Company’s 2000 and 2003 Employee Incentive Stock Option Plans.

 

Item 13. – Certain Relationships and Related Transactions, andDirector Independence

 

Nomaterial transactions occurred between the Company and related parties otherthan as reported elsewhere herein during fiscal 2008.

 

**DirectorIndependence**

 

TheCompany’s “independent” directors as independence is defined by Rule 4200(a)(15)of The NASDAQ Stock Market Rules are as follows:

 

JosephBenincasa

HarryElias

GaryLederman

JohnRoglieri M.D.

 

Theyalso comprise all of the members of the Audit Committee, the CompensationCommittee and the Nominating Committee.

 

Item 14. -  PrincipalAccountant Fees and Services

 

The firm of MSPC,  CertifiedPublic Accountants and Advisors, A Professional Corporation (“MSPC”) auditedour accounts and the accounts of our subsidiaries for the fiscal years ended October 31,2008 and 2007. Moore Stephens and its predecessor firm have been our auditorssince 1988.

 

(1)          Audit Fees

 

MSPC billed us approximately $235,120 for professional services renderedin connection with the audit of our annual financial statements for the fiscalyear ended October 31, 2008 and the review of the financial statementsincluded in our quarterly reports on Form 10-Q for such fiscal yearcompared to approximately $232,300 in billings for such services for the fiscalyear ended October 31, 2007. In addition, MSPC billed us approximately$17,500 in fiscal 2008 for its audit of our 401(k) Plan for calendar year2007 as compared to approximately $17,500 of such fees in fiscal 2007 withrespect to calendar year 2006.

 

(2)           Audit-Related Fees

 

MSPC billed us approximately $15,750 for due diligence fees incurred inrelation to acquisitions during fiscal 2008 and approximately $97,750 forSarbanes-Oxley (“SOX”) related audit fees.

 

27

----

 

(3)           Tax Fees

 

MSPC billed us approximately $72,500 for tax services for fiscal 2008and approximately $46,900 for tax services for fiscal 2007.

 

(4)           All Other Fees

 

No fees were billed to us by MSPC with respect to fiscal 2008 or fiscal2007 other than for services described in Item 14 (1), (2) and (3) herein.

 

(5)          Pre-Approval Policies and Procedures

 

The engagement of MSPC to render the above audit and tax services wasapproved by our audit committee prior to the engagement.

 

28

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**PART IV**

 
| Item 15. – | Exhibits and Financial Statement Schedules                                                                      |                  |
|-----------------|-----------------------------------------------------------------------------------------------------------------|-----------------------|
|            |                                                                                                            |                  |
| (a)1.           | Financial Statements                                                                                            |                  |
|            |                                                                                                            |                  |
|            | The following financial statements of the Company are included in Part II,  Item 8                         |                  |
|            |                                                                                                            |                  |
| ** **      | ** **                                                                                                      | **Page to Page** |
|            |                                                                                                            |                  |
|            | Report of Independent Registered Public Accounting  Firm                                                        | 32                    |
|            |                                                                                                            |                  |
|            | Consolidated  Balance Sheets - October 31, 2008 and 2007                                                   | 33 - 34               |
|            |                                                                                                            |                  |
|            | Consolidated  Statements of Operations- Years ended October 31, 2008, 2007 and 2006                        | 35                    |
|            |                                                                                                            |                  |
|            | Consolidated  Statements of Shareholders’ Equity Years ended October 31, 2008, 2007,  and 2006        | 36                    |
|            |                                                                                                            |                  |
|            | Consolidated  Statements of Cash Flows - Years ended October 31, 2008, 2007 and 2006                       | 37 - 38               |
|            |                                                                                                            |                  |
|            | Notes  to Consolidated Financial Statements-                                                                    | 39- 50                |
|            |                                                                                                            |                  |
| 2.              | Financial Statements Schedule                                                                                   |                  |
|            |                                                                                                            |                  |
|            | Schedule  II – Valuation and Qualifying Accounts for the Years ended October 31,  2008, 2007 and 2006 | 52                    |
|            |                                                                                                            |                  |
| 3.              | Exhibits                                                                                                        | After 53              |

 
| ** **           | ** ** | ** **                                                                                                                                   | ** ** | **Incorporated by** |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|
| **Exhibit No.** | ** ** | **Item**                                                                                                                                     | ** ** | **Reference to**    |
|                 |       |                                                                                                                                         |       |                |
| 3.1*                 |       | Amended and Restated Certificate of Incorporation dated November 15,  1989                                                              |       | (A)                 |
|                 |       |                                                                                                                                         |       |                |
| 3.1.1*               |       | Amendment to Certificate of Incorporation dated October 4, 1991  (authorizing one-for-10 reverse stock split)                           |       | (B)                 |
|                 |       |                                                                                                                                         |       |                |
| 3.1.2*               |       | Amendment to Certificate of Incorporation dated August 23, 1993  (authorizing one-for-three reverse stock split)                        |       | (C)                 |
|                 |       |                                                                                                                                         |       |                |
| 3.1.3*               |       | Amendment to Certificate of Incorporation dated March 23, 1998  (creating Series A Senior Preferred Stock)                         |       | (F)                 |
|                 |       |                                                                                                                                         |       |                |
| 3.1.4*               |       | Amendment to Certificate of Incorporation dated March 31, 1998  (creating Series A Junior Participating Preferred Stock)           |       | (F)                 |
|                 |       |                                                                                                                                         |       |                |
| 3.1.5*               |       | Amendment to Certificate of Incorporation dated September 22,  2003 (increasing authorized shares of Common Stock to 35,000,000 shares) |       | (J)                 |
|                 |       |                                                                                                                                         |       |                |
| 3.2*                 |       | By-laws                                                                                                                                      |       | (D)                 |
|                 |       |                                                                                                                                         |       |                |
| 3.2.1*               |       | Amendments to Article III, Sections 2 and 4 of the By-laws  adopted June 1, 2005                                                   |       | (L)                 |
|                 |       |                                                                                                                                         |       |                |
| 4.1*                 |       | Form of Common Stock Certificate, $.01 par value                                                                                        |       | (M)                 |
|                 |       |                                                                                                                                         |       |                |
| 10.1*                |       | Lease Agreement for Elmwood Park, New Jersey Premises, expiring in  February, 2004                                                           |       | (F)                 |
|                 |       |                                                                                                                                         |       |                |
| 10.1.1*              |       | Fifth Amendment dated as of July 16, 2004 to Lease for Elmwood  Park, New Jersey Premises                                               |       | (M)                 |
|                 |       |                                                                                                                                         |       |                |
| 10.1.2*              |       | Sixth Amendment dated as of October 27, 2004 to Lease for Elmwood  Park, New Jersey Premises                                            |       | (M)                 |
|                 |       |                                                                                                                                         |       |                |
| 10.2*                |       | Employment Agreement between the Company and Marc Grodman expiring in  October 2011                                                     |       | (K)                 |
|                 |       |                                                                                                                                         |       |                |
| 10.3*                |       | Employment Agreement between the Company and Howard Dubinett as in  effect at October 31, 2001                                          |       | (F)                 |
|                 |       |                                                                                                                                         |       |                |
| 10.3.1*              |       | Extension to Employment Agreement between the Company and Howard  Dubinett effective November 1, 2002                                   |       | (I)                 |
|                 |       |                                                                                                                                         |       |                |
| 10.3.2*              |       | Extension to Employment Agreement between the Company and Howard  Dubinett effective November 1, 2004.                                  |       | (M)                 |
|                 |       |                                                                                                                                         |       |                |
| 10.3.3*              |       | Amendment No. 3 to Employment Agreement between the Company and  Howard Dubinett dated December 18, 2007.                          |       | (P)                 |
|                 |       |                                                                                                                                         |       |                |
| 10.4*                |       | Employment Agreement between the Company and Sam Singer as in effect  at October 31, 2001                                               |       | (F)                 |
|                 |       |                                                                                                                                         |       |                |
| 10.4.1*              |       | Extension to Employment Agreement between the Company and Sam Singer  effective November 1, 2002                                        |       | (I)                 |

 

29

----

 
| 10.4.2*  |   | Extension to Employment Agreement between the Company and Sam Singer  effective November 1, 2004                                                              |   | (M)    |
|----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|     |   |                                                                                                                                                               |   |   |
| 10.4.3*  |   | Amendment No. 3 to Employment Agreement between the Company and  Sam Singer dated December 18, 2007.                                                     |   | (P)    |
|     |   |                                                                                                                                                               |   |   |
| 10.5*    |   | Employment Agreement between the Company and Charles T. Todd, Jr.  effective November 1, 2005.                                                           |   | (N)    |
|     |   |                                                                                                                                                               |   |   |
| 10.6*    |   | Employment Agreement between the Company and Scott Fein effective  October 31, 2005.                                                                          |   | (N)    |
|     |   |                                                                                                                                                               |   |   |
| 10.7*    |   | Employment Agreement between the Company and Richard L. Faherty  effective November 1, 2005.                                                                  |   | (N)    |
|     |   |                                                                                                                                                               |   |   |
| 10.8*    |   | The Company’s 1989 Stock Option Plan                                                                                                                          |   | (B)    |
|     |   |                                                                                                                                                               |   |   |
| 10.8.1*  |   | The Company’s 2000 Employee Incentive Stock Option Plan.                                                                                                      |   | (G)    |
|     |   |                                                                                                                                                               |   |   |
| 10.8.2*  |   | The Company’s 2003 Employee Incentive Stock Option Plan.                                                                                                      |   | (J)    |
|     |   |                                                                                                                                                               |   |   |
| 10.9     |   | Terms of the Company’s 2008 Senior Management Incentive Bonus Plan.                                                                                           |   |   |
|     |   |                                                                                                                                                               |   |   |
| 10.13*   |   | Amended and Restated Loan and Security Agreement as of  September 30, 2004 between the Company and PNC Bank, National Association.                            |   | (M)    |
|     |   |                                                                                                                                                               |   |   |
| 10.13.1* |   | Fourth Amendment as of October 31, 2006 to Loan and Security  Agreement as of September 30, 2004 between the Company and PNC Bank,  National Association |   | (O)    |
|     |   |                                                                                                                                                               |   |   |
| 10.13.2* |   | Fifth Amendment as of October 31, 2007 to Loan and Security  Agreement as of September 30, 2004 between the Company and PNC Bank,  National Association  |   | (P)    |
|     |   |                                                                                                                                                               |   |   |
| 10.13.3  |   | Sixth Amendment as of May 12, 2008 to Loan and Security Agreement  as of September 30, 2004 between the Company and PNC Bank, National Association       |   |   |
|     |   |                                                                                                                                                               |   |   |
| 21       |   | Subsidiaries of the Company                                                                                                                                        |   |   |

 

The following are the Company’stwo wholly-owned subsidiaries:

 
| ** **                         | ** ** | ** **                 | ** ** | **Name under which it   Conducts or** | ** ** |
|------------------------------------|------------|----------------------------|------------|---------------------------------------|------------|
| ** **                         | ** ** | **State of Incorporation** | ** ** | **Conducted Business**                | ** ** |
| CareEvolve.com, Inc.          |       | New  Jersey                |       | CareEvolve                            |       |
| BRLI  No. 2 Acquisition Corp. |       | New  Jersey                |       | GeneDx                                |       |

###  

| 23.1   | Consent of Independent Registered Public Accounting Firm                          |
|--------|-----------------------------------------------------------------------------------|
|   |                                                                              |
| 31.1   | Certification of Chief Executive Officer                                          |
|   |                                                                              |
| 31.2   | Certification of Chief Financial Officer                                          |
|   |                                                                              |
| 32.1   | Certification pursuant to 18 U.S.C. Section 1350 of Chief  Executive Officer |
|   |                                                                              |
| 32.2   | Certification pursuant to 18 U.S.C. section 1350 of Chief Financial  Officer      |

 

----

The exhibits designated above with an asterisk (*) have previously 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 reference to exhibit filed with the Company’s  Registration Statement on Form S-1 (File No. 33-31360).            |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|
| (B) |   | Incorporated by reference to exhibit filed with the Company’s annual  report on Form 10KSB for the year ended October 31, 1992.   |
| (C) |   | Incorporated by reference to exhibit filed with the Company’s  Registration Statement on Form SB-2 (File No. 33-68678).           |
| (D) |   | Incorporated by reference to exhibit filed with the Company’s  Registration Statement on Form S-18 (File No. 33-5048-NY).         |
| (F) |   | Incorporated by reference to exhibit filed with the Company’s annual  report on Form 10-K for the year ended October 31, 1999.    |
| (G) |   | Incorporated by reference to exhibit filed with the Company’s annual  report on Form 10-K for the year ended October 31, 2000.    |
| (H) |   | Incorporated by reference to exhibit filed with the Company’s annual  report on Form 10-K for the year ended October 31, 2001.    |
| (I) |   | Incorporated by reference to exhibit filed with the Company’s annual  report on Form 10-K for the year ended October 31, 2002     |
| (J) |   | Incorporated by reference to exhibit filed with the Company’s  Registration Statement on Form S-8 (File No.  333-111578).         |
| (K) |   | Incorporated by reference to exhibit filed with the Company’s current  report on Form 8-K (for December 6, 2004).                 |
| (L) |   | Incorporated by reference to exhibit filed with the Company’s  quarterly report on Form 10-Q for the quarter ended April 30, 2005 |
| (M) |   | Incorporated by reference to exhibit filed with the Company’s annual  report on Form 10-K for the year ended October 31, 2004.    |
| (N) |   | Incorporated by reference to exhibit filed with the Company’s annual  report on Form 10-K for the year ended October 31, 2005.    |
| (O) |   | Incorporated by reference to exhibit filed with the Company’s Annual  report on Form 10-K for the year ended October 31, 2006.    |
| (P) |   | Incorporated by reference to exhibit filed with the Company’s Annual  report on Form 10-K for the year ended October 31, 2007.    |

 

30

----

 

SIGNATURES

 

Inaccordance 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 9, 2009 |
|                                      |                      |        |  |

 

In accordance with theExchange Act, this report has been signed below by the following persons onbehalf 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 9, 2009                     |
|                                     |
| /S/ Howard Dubinett                      |   |
| Howard Dubinett                          |
| Executive Vice President,                |
| Chief Operating Officer and Director     |
| January 9, 2009                     |
|                                     |
| /S/ Sam Singer                           |   |   |
| Sam Singer                               |   |
| Vice President, Chief Financial Officer, |   |
| Chief Accounting Officer and Director    |   |
| January 9, 2009                     |   |
|                                     |   |
| /S/ Joseph Benincasa                     |   |   |
| Joseph Benincasa                         |   |
| Director                                 |   |
| January 9, 2009                     |   |
|                                     |   |
| /S/ Harry Elias                          |   |   |
| Harry Elias                              |   |
| Director                                 |   |
| January 9, 2009                     |   |
|                                     |   |
| /S/ Gary Lederman                        |   |   |
| Gary Lederman                            |   |
| Director                                 |   |
| January 9, 2009                     |   |
|                                     |   |
| /S/ John Roglieri                        |   |   |
| John Roglieri                            |   |
| Director                                 |   |
| January 9, 2009                     |   |
|                                          |        |  |  |

 

31

----

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

** **

Tothe Board of Directors and Shareholders

Bio-Reference Laboratories, Inc.

Elmwood Park, New Jersey

 

Wehave audited the accompanying consolidated balance sheets of Bio-ReferenceLaboratories, Inc. and its subsidiaries as of October 31, 2008 and2007, and the related consolidated statements of operations, shareholders’equity, and cash flows for each of the three fiscal years in the three-yearperiod ended October 31, 2008.  Wealso have audited Bio-Reference Laboratories, Inc. and its subsidiaries internalcontrol over financial reporting as of October 31, 2008, based on criteriaestablished in *Internal Control - IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (“COSO”). Bio-Reference Laboratories Inc.’s management is responsible for theseconsolidated financial statements, for maintaining effective internal controlover financial reporting, and for its assessment of the effectiveness ofinternal control over financial reporting included in the accompanying *Management’s Report on Internal Control over Financial Reporting*.  Our responsibility is to express an opinionon these consolidated financial statements and an opinion on the company’sinternal control over financial reporting based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement and whether effective internal control over financialreporting was maintained in all material respects.  Our audits of the consolidated financialstatements included examining, on a test basis, evidence supporting the amountsand disclosures in the consolidated financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall consolidated financial statement presentation.  Our audit of internal control over financialreporting included obtaining an understanding of internal control overfinancial reporting, assessing the risk that a material weakness exists, andtesting and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk.  Ouraudits also included performing such other procedures as we considerednecessary in the circumstances.  Webelieve that our audits provide a reasonable basis for our opinions.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that *(a) *pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; *(b) *provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordancewith authorizations of management and directors of the company; and *(c) *provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the company’s assets that could have a material effect on thefinancial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position ofBio-Reference Laboratories, Inc. and its subsidiaries as of October 31,2008 and 2007, and the consolidated results of their operations and their cashflows for each of the fiscal years in the three-year period ended October 31,2008, in conformity with accounting principles generally accepted in the UnitedStates of America.  Also in our opinion,Bio-Reference Laboratories Inc. and its subsidiaries maintained, in allmaterial respects, effective internal control over financial reporting as of October 31,2008, based on criteria established in *InternalControl - Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (“COSO”).

 

 
| ** **            | **MSPC**                                   |
|-----------------------|--------------------------------------------|
|                  | Certified Public Accountants and Advisors, |
|                  | A Professional Corporation                 |
|                  |                                       |
| Cranford,  New Jersey |                                       |
| January 5,  2009 |                                       |

 

32

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

**CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                           | ** ** | **October 31,** | ** ** | **October 31,** | ** ** |
|--------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                           | ** ** | **2008**             | ** ** | **2007**             | ** ** |
|                                 |       |                 |       |                 |       |
| CURRENT ASSETS:                      |       |                 |       |                 |       |
| Cash and Cash Equivalents            |       | $                    | 12,696     |                 | $          | 11,897 |   |
| Accounts Receivable - Net            |       | 93,718               |       | 86,018               |       |
| Inventory                            |       | 3,731                |       | 3,120                |       |
| Other Current Assets                 |       | 1,771                |       | 1,443                |       |
| Deferred Tax Assets                  |       | 7,635                |       | 6,019                |       |
| TOTAL CURRENT ASSETS                 |       | 119,551              |       | 108,497              |       |
|                                 |       |                 |       |                 |       |
| PROPERTY AND EQUIPMENT - AT COST     |       | 41,748               |       | 33,791               |       |
| LESS:  Accumulated Depreciation |       | 17,291               |       | 13,266               |       |
| PROPERTY AND EQUIPMENT - NET         |       | 24,457               |       | 20,525               |       |
|                                 |       |                 |       |                 |       |
| OTHER ASSETS:                        |       |                 |       |                 |       |
| Deposits                             |       | 525                  |       | 516                  |       |
| Goodwill - Net                       |       | 19,072               |       | 16,681               |       |
| Intangible Assets - Net              |       | 5,574                |       | 6,550                |       |
| Other Assets                         |       | 1,224                |       | 1,054                |       |
| Deferred Tax Assets                  |       | 1,566                |       | 751                  |       |
|                                 |       |                 |       |                 |       |
| TOTAL OTHER ASSETS                   |       | 27,961               |       | 25,552               |       |
|                                 |       |                 |       |                 |       |
| TOTAL ASSETS                         |       | $                    | 171,969    |                 | $          | 154,574 |   |

 

The Accompanying Notes are an Integral Part ofThese Consolidated Financial Statements.

 

33

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

**CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                                                                                | ** ** | **October 31,** | ** ** | **October 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                                | ** ** | **2008**             | ** ** | **2007**             | ** ** |
|                                                                                                                                                                                      |       |                 |       |                 |       |
| CURRENT LIABILITIES:                                                                                                                                                                      |       |                 |       |                 |       |
| Accounts Payable                                                                                                                                                                          |       | $                    | 25,801     |                 | $          | 24,576 |   |
| Accrued Salaries and Commissions Payable                                                                                                                                                  |       | 5,590                |       | 5,214                |       |
| Accrued Taxes and Expenses                                                                                                                                                                |       | 7,315                |       | 3,583                |       |
| Revolving Note Payable - Bank                                                                                                                                                             |       | 18,831               |       | 23,252               |       |
| Current Maturities of Long-Term Debt                                                                                                                                                      |       | 1,175                |       | 1,154                |       |
| Capital Lease Obligations - Short-Term  Portion                                                                                                                                           |       | 2,278                |       | 1,971                |       |
| TOTAL CURRENT LIABILITIES                                                                                                                                                                 |       | 60,990               |       | 59,750               |       |
|                                                                                                                                                                                      |       |                 |       |                 |       |
| LONG-TERM LIABILITIES:                                                                                                                                                                    |       |                 |       |                 |       |
| Capital Lease Obligations - Long-Term  Portion                                                                                                                                            |       | 3,052                |       | 2,509                |       |
| Long Term Debt - Net of Current Portion                                                                                                                                                   |       | 5,729                |       | 6,766                |       |
| Deferred Tax Liabilities                                                                                                                                                                  |       | 658                  |       | 282                  |       |
|                                                                                                                                                                                      |       |                 |       |                 |       |
| TOTAL LONG-TERM LIABILITIES                                                                                                                                                               |       | 9,439                |       | 9,557                |       |
|                                                                                                                                                                                      |       |                 |       |                 |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                             |       | —               |       | —               |       |
|                                                                                                                                                                                      |       |                 |       |                 |       |
| SHAREHOLDERS’ EQUITY:                                                                                                                                                                |       |                 |       |                 |       |
| Preferred Stock $.10 Par Value; Authorized  1,666,667 shares, including 3,000 shares of Series A Junior Preferred  Stock                                                             |       | —               |       | —               |       |
| None Issued                                                                                                                                                                               |       |                 |       |                 |       |
| Common Stock, $.01 Par Value; Authorized  35,000,000 shares: Issued  and  Outstanding 13,776,795 and 13,748,634 at October 31, 2008 and at  October 31, 2007, respectively |       | 138                  |       | 138                  |       |
|                                                                                                                                                                                      |       |                 |       |                 |       |
| Additional Paid-In Capital                                                                                                                                                                |       | 42,085               |       | 41,435               |       |
|                                                                                                                                                                                      |       |                 |       |                 |       |
| Retained Earnings                                                                                                                                                                         |       | 59,317               |       | 43,700               |       |
| Totals                                                                                                                                                                                    |       | 101,540              |       | 85,273               |       |
| Deferred Compensation                                                                                                                                                                     |       | —               |       | (6                   | )          |
|                                                                                                                                                                                      |       |                 |       |                 |       |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                                                                           |       | 101,540              |       | 85,267               |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                           |       | $                    | 171,969    |                 | $          | 154,574 |   |

 

The Accompanying Notes are an Integral Part ofThese Consolidated Financial Statements.

 

34

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

**CONSOLIDATED STATEMENTS OF OPERATIONS**

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

 
| ** **                                | ** ** | **Years Ended** | ** ** |
|-------------------------------------------|------------|----------------------|------------|
| ** **                                | ** ** | **October 31,** | ** ** |
| ** **                                | ** ** | **2008**             | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                      |       |                 |       |   |   |   |   |
| NET REVENUES:                             |       | $                    | 301,071    |   | $ | 250,431 |   | $ | 193,134 |   |
|                                      |       |                 |       |   |   |   |   |
| COST OF SERVICES:                         |       |                 |       |   |   |   |   |
| Depreciation and Amortization             |       | 5,962                |       | 4,394 |   | 3,427 |   |
| Employee Related Expenses                 |       | 71,545               |       | 57,800 |   | 46,064 |   |
| Reagents and Lab Supplies                 |       | 46,258               |       | 36,887 |   | 26,637 |   |
| Other Cost of Services                    |       | 30,066               |       | 24,948 |   | 19,951 |   |
|                                      |       |                 |       |   |   |   |   |
| TOTAL COST OF SERVICES                    |       | 153,831              |       | 124,029 |   | 96,079 |   |
|                                      |       |                 |       |   |   |   |   |
| GROSS PROFIT ON REVENUES                  |       | 147,240              |       | 126,402 |   | 97,055 |   |
|                                      |       |                 |       |   |   |   |   |
| General and Administrative Expenses:      |       |                 |       |   |   |   |   |
|                                      |       |                 |       |   |   |   |   |
| Depreciation and Amortization             |       | 2,424                |       | 2,437 |   | 1,640 |   |
| Other General and Administrative Expenses |       | 75,946               |       | 64,053 |   | 50,550 |   |
| Bad Debt Expense                          |       | 40,313               |       | 34,855 |   | 26,884 |   |
|                                      |       |                 |       |   |   |   |   |
| TOTAL GENERAL AND ADMIN. EXPENSES         |       | 118,683              |       | 101,345 |   | 79,074 |   |
|                                      |       |                 |       |   |   |   |   |
| OPERATING INCOME                          |       | 28,557               |       | 25,057 |   | 17,981 |   |
|                                      |       |                 |       |   |   |   |   |
| OTHER (INCOME) EXPENSES:                  |       |                 |       |   |   |   |   |
|                                      |       |                 |       |   |   |   |   |
| Interest Expense                          |       | 2,135                |       | 2,410 |   | 1,412 |   |
| Interest Income                           |       | (269                 | )          | (260 | ) | (173 | ) |
|                                      |       |                 |       |   |   |   |   |
| TOTAL OTHER EXPENSES - NET                |       | 1,866                |       | 2,150 |   | 1,239 |   |
|                                      |       |                 |       |   |   |   |   |
| INCOME BEFORE INCOME TAXES                |       | 26,691               |       | 22,907 |   | 16,742 |   |
|                                      |       |                 |       |   |   |   |   |
| Provision for Income Taxes                |       | 11,074               |       | 8,950 |   | 5,451 |   |
|                                      |       |                 |       |   |   |   |   |
| NET INCOME                                |       | $                    | 15,617     |   | $ | 13,957 |   | $ | 11,291 |   |
|                                      |       |                 |       |   |   |   |   |
| NET INCOME PER SHARE - BASIC:             |       | $                    | 1.13       |   | $ | 1.02 |   | $ | 0.86 |   |
|                                      |       |                 |       |   |   |   |   |
| NET INCOME PER SHARE - DILUTED:           |       | $                    | 1.12       |   | $ | 1.01 |   | $ | 0.85 |   |

 

The Accompanying Notes are anIntegral Part of These Consolidated Financial Statements.

 

35

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

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

**[Dollars In Thousands Except Number of Shares]**

 
| ** **                               | ** ** | **Series A**                    | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **   | ** ** | ** **                        | ** ** | ** **       | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|--------------|------------|-----------------------------------|------------|------------------|------------|
| ** **                               | ** ** | **Senior Preferred Stock** | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Retained**   | ** ** | **Deferred** | ** ** | **Total Shareholders’** | ** ** |
| ** **                               | ** ** | **Shares**                           | ** ** | **Amount**            | ** ** | **Shares**  | ** ** | **Amount**     | ** ** | **Capital**  | ** ** | **Earnings**                      | ** ** | **Compensation** | ** ** | **Equity** | ** ** |
|                                     |       |                                 |       |                  |       |        |       |           |       |         |       |                              |       |             |       |   |   |
| Balance on October 31, 2005         |       | —                               |       | —                |       | 12,981,367  |       | $              | 130        |         | $          | 32,348                            |       | $                | 18,452     |   | $ | (215 | ) | $ | 50,715 |   |
|                                     |       |                                 |       |                  |       |        |       |           |       |         |       |                              |       |             |       |   |   |
| Amortization of Deferred Compensation    |       |                                 |       |                  |       |        |       |           |       |         |       |                              |       | 114              |       | 114 |   |
| Stock Based Compensation                 |       |                                 |       |                  |       | 15,500      |       | —         |       | 39           |       |                              |       |             |       | 39 |   |
| Exercise of Options - Employees          |       |                                 |       |                  |       | 291,500     |       | 4              |       | 1,378        |       | —                            |       |             |       | 1,382 |   |
| Exercise of Options - Board of Directors |       |                                 |       |                  |       | 16,000      |       | —         |       | 50           |       |                              |       |             |       | 50 |   |
| Exercise of Options - Advisory Board     |       |                                 |       |                  |       | 17,500      |       | —         |       | 188          |       |                              |       |             |       | 188 |   |
| Stock Issued for Acquisition             |       |                                 |       |                  |       | 230,947     |       | 2              |       | 4,998        |       |                              |       |             |       | 5,000 |   |
| Net Income                               |       |                                 |       |                  |       |        |       |           |       |         |       | 11,291                            |       |             |       | 11,291 |   |
|                                     |       |                                 |       |                  |       |        |       |           |       |         |       |                              |       |             |       |   |   |
| Balance on October 31, 2006         |       | —                               |       | —                |       | 13,552,814  |       | $              | 136        |         | $          | 39,001                            |       | $                | 29,743     |   | $ | (101 | ) | $ | 68,779 |   |
|                                     |       |                                 |       |                  |       |        |       |           |       |         |       |                              |       |             |       |   |   |
| Amortization of Deferred Compensation    |       |                                 |       |                  |       |        |       |           |       |         |       |                              |       | 95               |       | 95 |   |
| Exercise of Options - Employees          |       |                                 |       |                  |       | 150,820     |       | 2              |       | 1,841        |       |                              |       |             |       | 1,843 |   |
| Exercise of Options - Board of Directors |       |                                 |       |                  |       | 20,000      |       | —         |       | 136          |       |                              |       |             |       | 136 |   |
| Exercise of Options - Advisory Board     |       |                                 |       |                  |       | 25,000      |       | —         |       | 228          |       |                              |       |             |       | 228 |   |
|                                     |       |                                 |       |                  |       |        |       |           |       |         |       |                              |       |             |       |   |   |
| Tax Effect - Non-Qualified Options       |       |                                 |       |                  |       |        |       |           |       | 229          |       |                              |       |             |       | 229 |   |
| Net Income                               |       |                                 |       |                  |       |        |       |           |       |         |       | 13,957                            |       |             |       | 13,957 |   |
|                                     |       |                                 |       |                  |       |        |       |           |       |         |       |                              |       |             |       |   |   |
| Balance on October 31, 2007         |       |                                 |       |                  |       | 13,748,634  |       | $              | 138        |         | $          | 41,435                            |       | $                | 43,700     |   | $ | (6 | ) | $ | 85,267 |   |
|                                     |       |                                 |       |                  |       |        |       |           |       |         |       |                              |       |             |       |   |   |
| Amortization of Deferred Compensation    |       |                                 |       |                  |       |        |       |           |       |         |       |                              |       | 6                |       | 6 |   |
| Exercise of Options - Employees          |       |                                 |       |                  |       | 33,813      |       | —         |       | 542          |       |                              |       |             |       | 542 |   |
| Stock Based Compensation                 |       |                                 |       |                  |       | 2,500       |       | —         |       | 86           |       |                              |       |             |       | 86 |   |
| Stock Issued for Acquisition             |       |                                 |       |                  |       | 11,548      |       | —         |       | 474          |       |                              |       |             |       |   |   |
| Common Stock Repurchased and Cancelled   |       |                                 |       |                  |       | (19,700     | )          | —         |       | (452         | )          |                              |       |             |       | (452 | ) |
| Net Income                               |       |                                 |       |                  |       |        |       |           |       |         |       | 15,617                            |       |             |       | 15,617 |   |
|                                     |       |                                 |       |                  |       |        |       |           |       |         |       |                              |       |             |       |   |   |
| Balance on October 31, 2008         |       |                                 |       |                  |       | 13,776,795  |       | $              | 138        |         | $          | 42,085                            |       | $                | 59,317     |   | $ | 0 |   | $ | 101,540 |   |

 

TheAccompanying Notes are an Integral Part of These Consolidated FinancialStatements.

 

36

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

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**[Dollars In Thousands]**

 
| ** **                                           | ** ** | **Years Ended October 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                 |       |                                       |       |   |   |   |   |
| OPERATING ACTIVITIES:                                |       |                                       |       |   |   |   |   |
| Net Income                                           |       | $                                          | 15,617     |   | $ | 13,957 |   | $ | 11,291 |   |
| Adjustments to Reconcile Net Income to               |       |                                       |       |   |   |   |   |
| Cash Provided by Operating Activities:               |       |                                       |       |   |   |   |   |
| Depreciation and Amortization                        |       | 8,386                                      |       | 6,831 |   | 5,067 |   |
| Amortization of Deferred Compensation                |       | 6                                          |       | 95 |   | 114 |   |
| Deferred Income Taxes (Benefit)                      |       | (2,055                                     | )          | (1,790 | ) | (1,841 | ) |
| (Gain) Loss on Disposal of Property and  Equipment   |       | 321                                        |       | 12 |   | (85 | ) |
| Stock - Based Compensation Expense                   |       | 86                                         |       | — |   | 39 |   |
| Change in Assets and Liabilities:                    |       |                                       |       |   |   |   |   |
| (Increase) Decrease in:                              |       |                                       |       |   |   |   |   |
| Accounts Receivable                                  |       | (11,700                                    | )          | (22,649 | ) | (11,967 | ) |
| Provision for Bad Doubtful Accounts                  |       | 4,000                                      |       | 4,409 |   | (741 | ) |
| Inventory                                            |       | (611                                       | )          | (961 | ) | (820 | ) |
| Other Current Assets                                 |       | (328                                       | )          | (245 | ) | (283 | ) |
| Other Assets                                         |       | (170                                       | )          | (120 | ) | (175 | ) |
| Deposits                                             |       | (9                                         | )          | 130 |   | (196 | ) |
| Increase (Decrease) in:                              |       |                                       |       |   |   |   |   |
| Accounts Payable and Accrued Liabilities             |       | 5,333                                      |       | 6,228 |   | 4,797 |   |
|                                                 |       |                                       |       |   |   |   |   |
| NET CASH - OPERATING ACTIVITIES                      |       | 18,876                                     |       | 5,897 |   | 5,200 |   |
|                                                 |       |                                       |       |   |   |   |   |
| INVESTING ACTIVITIES:                                |       |                                       |       |   |   |   |   |
| Business Acquisitions Related Costs                  |       | (1,917                                     | )          | — |   | (1,951 | ) |
| Acquisition of Equipment and Leasehold  Improvements |       | (7,824                                     | )          | (7,745 | ) | (2,859 | ) |
| Proceeds from Sale of Equipment                      |       | —                                     |       | — |   | 134 |   |
| Acquisition of Intangible Assets                     |       | (160                                       | )          | (29 | ) | — |   |
|                                                 |       |                                       |       |   |   |   |   |
| NET CASH - INVESTING ACTIVITIES                      |       | (9,901                                     | )          | (7,774 | ) | (4,676 | ) |
|                                                 |       |                                       |       |   |   |   |   |
| FINANCING ACTIVITIES:                                |       |                                       |       |   |   |   |   |
| Payments of Long-Term Debt                           |       | (1,016                                     | )          | (1,200 | ) | (1,061 | ) |
| Payments of Capital Lease Obligations                |       | (2,829                                     | )          | (2,743 | ) | (2,240 | ) |
| Increase (Decrease) in Revolving Line of  Credit     |       | (4,421                                     | )          | 6,556 |   | 5,808 |   |
| Proceeds from Exercise of Options                    |       | 542                                        |       | 2,207 |   | 1,620 |   |
| Common Stock Repurchased                             |       | (452                                       | )          | — |   | — |   |
|                                                 |       |                                       |       |   |   |   |   |
| NET CASH - FINANCING ACTIVITIES                      |       | (8,176                                     | )          | 4,820 |   | 4,127 |   |
|                                                 |       |                                       |       |   |   |   |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS            |       | 799                                        |       | 2,943 |   | 4,651 |   |
|                                                 |       |                                       |       |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF  PERIODS   |       | $                                          | 11,897     |   | $ | 8,954 |   | $ | 4,303 |   |
|                                                 |       |                                       |       |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIODS          |       | $                                          | 12,696     |   | $ | 11,897 |   | $ | 8,954 |   |
|                                                 |       |                                       |       |   |   |   |   |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION:  |       |                                       |       |   |   |   |   |
| Cash paid during the period for:                     |       |                                       |       |   |   |   |   |
| Interest                                             |       | $                                          | 2,120      |   | $ | 2,415 |   | $ | 1,386 |   |
| Income Taxes                                         |       | $                                          | 10,646     |   | $ | 11,082 |   | $ | 7,173 |   |

 

TheAccompanying Notes are an Integral Part of These Consolidated FinancialStatements

 

37

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

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

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

 

**Supplemental Schedule of Non-Cash Investing and FinancingActivities:**

 

During the fiscal year ended October 31, 2008and October 31, 2007 the genetics laboratory “GeneDx” achieved certainoperating targets, entitling the prior owners to receive $1,917 in cash and anadditional 11,548 shares of our Common Stock valued at $250 and $250respectively.  Also, an additional $224of contingent consideration has been recorded as of October 31, 2008.    As of October 31, 2008 and October 31,2007 these amounts have been recorded as an increase to Goodwill.  See note [18] for additional information.

 

During fiscal 2008, 2007 and 2006, the Companywrote-off approximately $2,560, $2,541 and $546 of property which were fullydepreciated.

 

During fiscal 2008, 2007 and 2006 the Companywrote-off approximately $2,333, $-0-, $200 of intangible assets that were fullyamortized.

 

During fiscal 2008, 2007, and 2006, the Companyincurred capital lease obligations totaling approximately $3,679, $2,241, and$1,082 in connection with the acquisition of property and equipment.

 

During the twelve month period ended October 31,2008, October 31, 2007 and October 31, 2006 the Company recorded thetax effect on the exercise of non-qualified stock options. The tax benefitapproximated $-0-, $229, and $-0- and was recorded as an increase to Paid-InCapital and the Deferred Tax Asset.

 

During the twelve month period ended October 31,2008, October 31, 2007 and October 31, 2006 the Company financed thepurchase of equipment through a term note of approximately $-0 , $4,100 and$-0-.

 

In October 2006, the Company issued 230,947shares of its unregistered common stock valued at $5,000, incurred debt of$5,000 and assumed liabilities of $375 in connection with the acquisition ofGeneDx.

 

In October 2006, the Company assumed liabilitiesof $455 in connection with the acquisition of Diagnostic Pathology Services, Inc.

 

 [See Notes 9, 11 and 18 for additionalnon-cash transactions]

 

TheAccompanying Notes are an Integral Part of These Consolidated FinancialStatements

 

38

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

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**[Dollars In Thousands Except Share Data or UnlessOtherwise Indicated]**

 

***[1] Organization and Business***

 

Bio-Reference Laboratories, Inc.[“Bio-Reference” or the “Company”] was incorporated on December 24,1981.  Bio-Reference is principally engagedin providing clinical laboratory testing services, primarily to customers inthe greater New York metropolitan area as well as to customers in a number ofother states.  Bio-Reference offers acomprehensive list of chemical diagnostic tests including blood and urineanalysis, blood chemistry, hematology services, serology, radioimmuno analysis,toxicology (including drug screening), pap smears, tissue pathology (biopsies)and other tissue analysis.  It operatestwo clinical laboratories, one in Elmwood Park, New Jersey and one in ValleyCottage, New York, and an andrology laboratory in New York City, a cytogeneticstesting laboratory located in Milford, MA, a pathology laboratory inPoughkeepsie, NY, a pathology laboratory in Clarksburg, MD and a geneticslaboratory in Gaithersburg, MD. Bio-Reference markets its laboratory testing services directly tophysicians, geneticists, hospitals, clinics, correctional and other healthfacilities.

 

The Company’s clinicallaboratory testing business currently represents its one reportable businesssegment. The clinical laboratory testing business accounts for over 93% ofconsolidated assets, net revenues and net income in each of the three yearsended October 31, 2008 All other operating segments include the Company’snon-clinical laboratory testing businesses and consist of our clinicalknowledge management service through our PSIMedica business unit, a web-basedconnectivity portal solution for laboratories and physicians through itsCareEvolve subsidiary. Segment information is not presented since it is notreported to or used by the chief operating decision maker at the operatingsegment level.

 

*** [2]Summary of Significant Accounting Policies***

 

Principles of Consolidation -The consolidated financial statements include the accounts of the Company andits wholly-owned subsidiaries.  Allsignificant intercompany accounts and transactions have been eliminated.

 

Cash and Cash Equivalents -Cash equivalents are comprised of certain highly liquid investments with amaturity of three months or less when purchased.  The Company had $12,696 and $11,897 in cashequivalents at October 31, 2008 and 2007, respectively.

 

Inventory - Inventory isstated at the lower of cost [on a first-in, first-out basis] or market.  Inventory consists primarily of purchasedlaboratory supplies, which is used in our various testing laboratories.

 

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

 

The statements of operationsreflect depreciation expense related to property and equipment of $7,249,$5,635 and $4,456 for the years ended October 31, 2008, 2007 and 2006,respectively.

 

On sale or retirement, theasset cost and related accumulated depreciation or amortization are removedfrom the accounts, and any related gain or loss is reflected in general andadministrative expenses.  Repairs andmaintenance are charged to expense when incurred.

 

Goodwill - Effective November 1,2001, the Company evaluates the recoverability and measures the possibleimpairment of its goodwill under SFAS 142, “Goodwill and Other IntangibleAssets.”  The impairment test is atwo-step process that begins with the estimation of the fair value of thereporting unit. The first step screens for potential impairment and the secondstep measures the amount of the impairment, if any.  Management’s estimate of fair value considerspublicly available information regarding the market capitalization of theCompany as well as (i) publicly available information regarding comparablepublicly-traded companies in the clinical laboratory testing industry, (ii) thefinancial projections and future prospects of the Company’s business, includingits growth opportunities and likely operational improvements, and (iii) comparablesales prices, if available. As part of the first step to assess potentialimpairment, management compares the estimate of fair value for the Company tothe book value of the Company’s consolidated net assets.  If the book value of the consolidated netassets is greater than the estimate of fair value, the Company would thenproceed to the second step to measure the impairment, if any.  The second step compares the implied fairvalue of goodwill with its carrying value

 

The implied fair value isdetermined by allocating the fair value of the reporting unit to all of theassets and liabilities of that unit as if the reporting unit had been acquiredin a business combination and the fair value of the reporting unit was thepurchase price paid to acquire the reporting unit.  The excess of the fair value of the reportingunit over the amounts assigned to its assets and liabilities is the impliedfair value of goodwill.  If the carryingamount of the goodwill is greater than its implied fair value, an impairmentloss will be recognized in that period. No impairment loss was recognized in the years ended October 31,2008, 2007 and 2006.

 

The balance sheet reflectsprior Goodwill accumulated amortization of $2,401 as of October 31, 2008and 2007, respectively.

 

Other Intangible Assets -Intangible assets are amortized using the straight-line method.  The estimated useful life of costscapitalized is evaluated for each specific project when completed, at whichtime such costs begin to be amortized. The statements of operations reflectamortization expense related to intangible assets of $1,137, $1,196, and $611for the years ended October 31, 2008, 2007 and 2006, respectively.  The balance sheet reflects accumulatedamortization of $3,820, and $5,015 as of October 31, 2008, and 2007,respectively. During the 2008 fiscal year, the Company wrote off approximately$2,333 of capitalized costs related to covenants not to compete and employmentagreements which were fully amortized. During the 2006 fiscal year, the Companywrote off approximately $200 of capitalized costs related to covenants not tocompete and employment agreements which were fully amortized.

 

Net Service Revenue - Servicerevenues are principally generated from laboratory testing services includingchemical diagnostic tests such as blood analysis, urine analysis and genetictesting among others. Net service revenues are recognized at the time thetesting services are performed and are reported at their estimated netrealizable amounts. Net realizable amounts from patients, third party payorsand others for services rendered, are accrued on an estimated basis in theperiod the related services are rendered, and are adjusted in subsequentperiods based upon an analysis of the Company’s collection experience from eachcategory of payor group as well as prospectively determined contractualadjustments and discounts with third party payors. Differences between theseadjustments and any subsequent revisions are included in the statement ofoperations in which the revisions are made and are disclosed, if material.Applying this methodology and aggregating its collection experience from allpayor groups, the Company has not been required to record an adjustment relatedto revenue recorded in prior periods that was material in nature. Revenues onthe statements of operations are net of the following amounts for allowancesand discounts.

 
| ** **                                  | ** ** | **October 31** | ** ** |
|---------------------------------------------|------------|---------------------|------------|
| ** **                                  | ** ** | **2008**            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                        |       |                |       |   |   |   |   |
| Gross Revenues                              |       | $                   | 1,039,030  |   | $ | 779,953 |   | $ | 522,117 |   |
|                                        |       |                |       |   |   |   |   |
| Contractual Adjustments and Discounts:      |       |                |       |   |   |   |   |
| Medicare/Medicaid Portion                   |       | 199,543             |       | 152,275 |   | 119,505 |   |
| Other                                       |       | 538,416             |       | 377,247 |   | 209,478 |   |
| Total Contractual Adjustments and Discounts |       | 737,959             |       | 529,522 |   | 328,983 |   |
|                                        |       |                |       |   |   |   |   |
| Net Revenues                                |       | 301,071             |       | $ | 250,431 |   | $ | 193,134 |   |
|                                             |            |                     |            |  |  |  |  |  |  |  |

 

39

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BIO-REFERENCE LABORATORIES,INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS, Sheet #3

[Dollars In Thousands Except Share Data or Unless Otherwise Indicated]

 

***[2] Summary of SignificantAccounting Policies [Continued]***

 

Contractual Credits and Provisionfor Doubtful Accounts - An allowance for contractual credits and discounts isestimated by payor group and determined based upon a review of thereimbursement policies and subsequent collections from the different types ofpayors. The Company has not been required to record an adjustment in asubsequent period related to revenue recorded in a prior period, that wasmaterial in nature. Agings of accounts receivable are monitored by billingpersonnel and follow-up activities are conducted as necessary. Bad debt expenseis recorded within selling, general and administrative expenses as a percentageof sales considered necessary to maintain an allowance for doubtful accounts atan appropriate level, based on the Company’s experience with its accounts receivable.The Company writes off receivables against the allowance for doubtful accountswhen they are deemed to be uncollectible. For client billing, accounts arewritten off when all reasonable collection efforts prove to be unsuccessful.Patient accounts are written off after the normal billing cycle has occurred,which may include transfer to a third party collection agency. Third partyaccounts are written off when they exceed the payer’s timely filing limits.Accounts Receivable on the balance sheets are net of the following amounts forcontractual credits and doubtful accounts.

 
| ** **                    | ** ** | **October 31** | ** ** |
|-------------------------------|------------|---------------------|------------|
| ** **                    | ** ** | **2008**            | ** ** | **2007** | ** ** |
|                          |       |                |       |   |   |
| Contractual Credits/Discounts |       | $                   | 78,042     |   | $ | 79,257 |   |
| Doubtful Accounts             |       | 15,643              |       | 11,643 |   |
|                          |       |                |       |   |   |
| Total Allowance               |       | $                   | 93,685     |   | $ | 90,900 |   |

 

Current Income Taxes – TheCompany recognizes interest and penalties on settlement of tax liabilities inits income from operations.  For the fiscal years 2006 through 2008, nomaterial amounts for interest and penalties have been recorded.

 

Deferred Income Taxes -Deferred income tax assets and liabilities are computed annually fordifferences between the financial statement and tax bases of assets andliabilities that will result in taxable or deductible amounts in the futurebased on enacted tax laws and rates applicable to the periods in which thedifferences are expected to affect taxable income.

 

Earnings Per Share - Basicearnings per share [“EPS”] reflects the amount of income [loss] attributable toeach share of common stock based on average common shares outstanding duringthe period.  Diluted EPS reflects BasicEPS while giving effect to all potential dilutive common shares that wereoutstanding during the period, such as common shares that could result from theexercise or conversion of securities into common stock.  The computation of Diluted EPS is calculatedby using the treasury stock method, which assumes that any proceeds obtainedfrom the exercise of such dilutive securities would be used to purchase commonstock at the average market price of the common stock during the period.  This reduces the gross number of dilutiveshares by the number of shares purchasable from the proceeds of the securitiesassumed to be exercised.  Securitieswhose conversion would have an anti-dilutive effect on EPS are not assumedconverted.  Securities that couldpotentially dilute earnings in the future are disclosed in Note 10.

 

Use of Estimates - Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

Recoverability and Impairmentof Intangible Assets and Other Long-Lived Assets - Effective November 1,2002, the Company evaluates the possible impairment of its long-lived assets,including intangible assets (which are amortized pursuant to the provisions ofSFAS 142), under SFAS No. 144, “Accounting for Impairment or Disposal ofLong-Lived Assets” (“SFAS 144”). The Company reviews the recoverability of itslong-lived assets when events or changes in circumstances occur that indicatethat the carrying value of the asset may not be recoverable.  Evaluation of possible impairment is based onthe Company’s ability to recover the asset from the expected future pretax cashflows (undiscounted and without interest charges) of the related operations. Ifthe expected undiscounted pretax cash flows are less than the carrying amountof such asset, an impairment loss is recognized for the difference between theestimated fair value and carrying amount of the asset. The Company’s adoptionof SFAS 144 did not result in any impairment loss being recorded.  No impairment loss was recognized in thefiscal years ended October 31, 2008, 2007 and 2006.

 

Stock Options Issued toEmployees –Effective November 1, 2005, the Company adopted the fair valuemethod of recording stock-based compensation, as defined in SFAS No. 123(R) “Share-BasedPayment”, under the modified prospective transition method for stock optionsawarded to employees after the date of adoption and for previously issued stockoptions that were not vested as of November 1, 2005 which were issuedunder the Company’s three stock based employee compensation plans. Under themodified prospective transition method, the Company is required to recognize compensationexpense for options granted commencing November 1, 2005 and thereafter.Additionally, the fair value of existing unvested awards at the date ofadoption is recorded in compensation expense over the remaining requisiteservice period.

 

Prior to November 1,2005, the Company applied Accounting Principles Board Opinion (APB) No. 25“Accounting for Stock Issued to Employees” and related interpretations inaccounting for stock options and other stock-based compensation. APB No. 25required the use of the intrinsic value method, which measured compensationcost as the excess, if any, of the quoted market price of the stock at themeasurement date over the amount an employee must pay to acquire the stock.

 

***Advertising Costs -***Advertising costs are expensed whenincurred.  Advertising costs amounted toapproximately $1,092, $627 and $745 for the years ended October 31, 2008,2007 and 2006, respectively.

 

***Reclassifications -*** Certain prior year amounts may have beenreclassified to conform with the current year presentation.

 

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

 
| ** **                                    | ** ** | **October 31** | ** ** |
|-----------------------------------------------|------------|---------------------|------------|
| ** **                                    | ** ** | **2008**            | ** ** | **2007** | ** ** |
|                                          |       |                |       |   |   |
| Medical Equipment                             |       | $                   | 16,993     |   | $ | 12,461 |   |
| Leasehold Improvements                        |       | 7,294               |       | 6,194 |   |
| Furniture, Fixtures and Office Equipment      |       | 7,003               |       | 5,856 |   |
| Automobiles and Aircraft                      |       | 10,458              |       | 9,280 |   |
|                                          |       |                |       |   |   |
| Sub Totals                                    |       | 41,748              |       | 33,791 |   |
| Less Accumulated Depreciation                 |       | 17,291              |       | 13,266 |   |
|                                          |       |                |       |   |   |
| Totals – Net of Accumulated Depreciation |       | $                   | 24,457     |   | $ | 20,525 |   |

 

40

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BIO-REFERENCE LABORATORIES,INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS, Sheet #3

[Dollars In Thousands Except Share Data or Unless Otherwise Indicated]

 

*** [4] Intangible Assets***

 

Intangible assets are summarized as follows:

 
| October 31, 2008     |       |                         |       |       |       |             |       |                             |       |
|---------------------------|------------|------------------------------|------------|------------|------------|------------------|------------|----------------------------------|------------|
|                      |       |                         |       |       |       |             |       |                             |       |
| ** **                | ** ** | **Weighted-Average**         | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | **Net of Accumulated** | ** ** |
| **Intangible Asset** | ** ** | **Amortization Period** | ** ** | **Cost**   | ** ** | **Amortization** | ** ** | **Amortization**                 | ** ** |
|                      |       |                         |       |       |       |             |       |                             |       |
| Customer Lists            |       | 20                           |       | 4,873      |       | 1,941            |       | 2,932                            |       |
| Covenants Not-to-Compete  |       | 5                            |       | 4,205      |       | 1,768            |       | 2,437                            |       |
| Patents                   |       | 17                           |       | 316        |       | 111              |       | 205                              |       |
|                      |       |                         |       |       |       |             |       |                             |       |
| **Totals**                |       |                         |       | $          | 9,394      |             | $          | 3,820                            |       | $ | 5,574 |   |
| ** **                |       |                         |       |       |       |             |       |                             |       |
| October 31, 2007     |       |                         |       |       |       |             |       |                             |       |
|                      |       |                         |       |       |       |             |       |                             |       |
| ** **                | ** ** | **Weighted-Average**         | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | **Net of Accumulated** | ** ** |
| **Intangible Asset** | ** ** | **Amortization Period** | ** ** | **Cost**   | ** ** | **Amortization** | ** ** | **Amortization**                 | ** ** |
|                      |       |                         |       |       |       |             |       |                             |       |
| Customer Lists            |       | 20                           |       | 5,045      |       | 1,828            |       | 3,217                            |       |
| Covenants Not-to-Compete  |       | 5                            |       | 4,205      |       | 927              |       | 3,278                            |       |
| Patents                   |       | 17                           |       | 156        |       | 101              |       | 55                               |       |
|                      |       |                         |       |       |       |             |       |                             |       |
| **Totals**                |       |                         |       | $          | 9,406      |             | $          | 2,856                            |       | $ | 6,550 |   |

 

The estimated amortization expense related to intangible assets for eachof the five succeeding fiscal years and thereafter as of October 31, 2008is as follows:

 
| **October 31,** | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|
| 2009                 |       | $          | 1,121      |   |
| 2010                 |       | 1,094      |       |
| 2011                 |       | 984        |       |
| 2012                 |       | 215        |       |
| 2013                 |       | 206        |       |
| Thereafter           |       | 1,954      |       |
|                 |       |       |       |
| **Total**            |       | $          | 5,574      |   |

 

*** [5] Revolving Note Payable - Bank***

 

InMay 2008, the Company entered into an amended revolving note payable loanagreement with PNC Bank, N.A. (“the bank”).  The maximum amount of thecredit line available to the Company pursuant to the loan agreement is thelesser of (i) $40,000 or (ii) 50% of the Company’s qualified accountsreceivable [as defined in the agreement].  The amendment to the Loan andSecurity Agreement provides for interest on advances to be subject to the bank’sprime rate or the Eurodollar rate of interest plus, in certain instances, anadditional interest percentage.  The additional interest percentagecharges on Eurodollar borrowings range from 1% to 4% and are determined basedupon certain financial ratios achieved by the Company.  At October 31,2008, the Company had elected to have all of the total advances outstanding tobe subject to the bank’s prime rate of interest of 4.0%.  The credit line is collateralized by substantiallyall of the Company’s assets. The line of credit is available through October 2012and may be extended for annual periods by mutual consent, thereafter.  Theterms of this agreement contain, among other provisions, requirements formaintaining defined levels of capital expenditures, fixed charge coverage, andthe prohibition of the payment by the Company of cash dividends. As of October 31,2008, the Company was utilizing $18,831 of the available credit under thisrevolving note payable loan agreement.

 

Effectiveas of October 31, 2007, we executed a fifth amendment to the loanagreement formalizing the repayment terms of a $5 million term loan from PNCBank used by our wholly-owned subsidiary, BRLI No. 2 Acquisition Corp. tofund the $5 million acquisition Cash Payment in connection with the purchase ofthe operating assets of GeneDx. The term loan is evidenced by a securedpromissory note payable over a six year term in equal monthly principalpayments of $69, plus interest at an annual rate of 6.85%.  The Balance onthis note as of October 31, 2008 was approximately $3,333.

 

InJanuary 2007, the Company issued a ten year term note of $4,100 for thefinancing of equipment.  The note is payable in equal monthly installmentsof $47 including principal and interest, with payment commencing on March 1,2007 at an effective interest rate of 6.63% per annum.  The balance onthis note as of October 31, 2008 was approximately $3,564.

 

41

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BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3

[Dollars In Thousands Except Share Data or Unless Otherwise Indicated]

 

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

 

During fiscal 2006, the company borrowed $5,000 at 6.85% for a 6 yearterm and approximately an additional $20 at 4.75% for 5 year term. Anadditional $4,100 was borrowed in fiscal 2007. At October 31, 2008 the principal long term debt balanceoutstanding under the borrowings was $5,729. The current maturity of short termdebt balance was $1,175.

 

Principal repayment for each of the five succeeding fiscal years andthereafter as of October 31, 2008 is as follows:

 
| **Year Ended**  | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|
| **October 31,** | ** ** | ** ** | ** ** |
| 2009                 |       | $          | 1,175      |   |
| 2010                 |       | 1,194      |       |
| 2011                 |       | 1,217      |       |
| 2012                 |       | 1,243      |       |
| 2013                 |       | 437        |       |
| Thereafter           |       | 1,638      |       |
|                 |       |       |       |
| Totals               |       | $          | 6,904      |   |

 

*** [7] Related Party Transactions***

 

In March 2001, the Company entered into a joint marketing agreement[the “agreement”] with General Prescription Programs, Inc. [“GPP”].  Provisions of the agreement provide that GPPwill assist the Company in marketing its PSIMedica programs to variouscustomers.  In addition, GPP will provideongoing data and data support to the PSIMedica program development.  The term of the agreement is for a five yearperiod commencing on October 2001. In exchange for obtaining GPP marketing and technical services, theCompany issued GPP 220,000 shares of its common stock with a fair value ofapproximately $248 which is being amortized over the five year term of theagreement. For the years ended October 31, 2008, 2007 and 2006, theCompany recorded an expense of $-0-, $-0- and $50, respectively.  The Chairman of the Board of GPP is thebrother of the Company’s Chief Executive Officer.

 

See Item 11 – “Executive Compensation” as to rentals paid by the Companyto Richard Faherty, one of the Company’s five most highly compensated seniormanagement employees for use of Mr. Faherty’s airplane in fiscal 2008 andfiscal 2007 (when the Company’s owned airplane was unavailable) and for paymentsfor networking, data reporting and programming services provided to the Companyin such years by a separate corporation of which Mr. Faherty is themajority shareholder. Such aircraft rentals totaled $71,108 in fiscal 2008 and$55,965 in fiscal 2007 and networking, data reporting and programming servicesprovided to the Company in fiscal 2008 and in fiscal 2007 totaled $40,833 and$81,713 in compensation respectively.

 

*** [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** | ** ** |
|---------------------------------------------------------|------------|---------------------|------------|
| ** **                                              | ** ** | **2008**            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                    |       |                |       |   |   |   |   |
| U.S. Federal Statutory Rate                             |       | 35                  | %          | 35 | % | 34.0 | % |
| State and Local Taxes, Net of U.S. Federal  Tax Benefit |       | 8.46                | %          | 7.90 | % | 8.0 | % |
| Permanent differences and Other                         |       | (1.97               | )%         | (3.83 | )% | (9.44 | )% |
|                                                    |       |                |       |   |   |   |   |
| Actual Rate                                             |       | 41.49               | %          | 39.07 | % | 32.56 | % |

 

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

 
| ** **                       | ** ** | **October 31** | ** ** |
|----------------------------------|------------|---------------------|------------|
| ** **                       | ** ** | **2008**            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                             |       |                |       |   |   |   |   |
| Current:                         |       |                |       |   |   |   |   |
| Federal                          |       | $                   | 9,657      |   | $ | 8,191 |   | $ | 5,578 |   |
| State & Local           |       | 3,472               |       | 2,778 |   | 1,714 |   |
|                             |       |                |       |   |   |   |   |
| Deferred:                        |       |                |       |   |   |   |   |
| Federal                          |       | (1,315              | )          | (1,611 | ) | (1,406 | ) |
| State and Local                  |       | (740                | )          | (408 | ) | (435 | ) |
|                             |       |                |       |   |   |   |   |
| Total Provision for Income Taxes |       | $                   | 11,074     |   | $ | 8,950 |   | $ | 5,451 |   |

 

At October 31, 2008 and 2007, the Company had a net deferred taxasset [liability] of approximately $8,543 and $6,488, respectively.  The deferred taxes primarily relate to timingdifferences associated with the deductibility of depreciation, bad debts andcertain accrued expenses and deferred costs. For fiscal years ended in 2008 andin 2007, the Company had no net operating loss carry-forwards available toreduce current year taxable income.

 

42

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BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3

[Dollars In Thousands Except Share Data or Unless Otherwise Indicated]

 

***[8] Income Taxes - Continued***

 
| ** **                               | ** ** | **October 31,** | ** ** |
|------------------------------------------|------------|----------------------|------------|
| ** **                               | ** ** | **2008**             | ** ** | **2007** | ** ** |
|                                     |       |                 |       |   |   |
| Deferred Tax Asset:                      |       |                 |       |   |   |
| Bad Debt Allowance                       |       | $                    | 6,727      |   | $ | 5,006 |   |
| Property & Equipment            |       | 1,566                |       | 1,099 |   |
| Accrued Expenses                         |       | 908                  |       | 665 |   |
|                                     |       |                 |       |   |   |
|                                     |       | 9,201                |       | 6,770 |   |
|                                     |       |                 |       |   |   |
| Deferred Tax Liability:                  |       |                 |       |   |   |
| Property & Equipment            |       | (658                 | )          | (282 | ) |
|                                     |       |                 |       |   |   |
|                                     |       | (658                 | )          | (282 | ) |
|                                     |       |                 |       |   |   |
| Deferred Tax Asset [Liability] - Net     |       | $                    | 8,543      |   | $ | 6,488 |   |
|                                     |       |                 |       |   |   |
| Current Deferred Tax Asset - Net         |       | $                    | 7,635      |   | $ | 6,019 |   |
| Long Term Deferred Tax Asset - Net       |       | 1,566                |       | 751 |   |
| Long Term Deferred Tax [Liability] - Net |       | (658                 | )          | (282 | ) |
|                                     |       |                 |       |   |   |
| Deferred Tax Asset – Net            |       | $                    | 8,543      |   | $ | 6,488 |   |

 

During fiscal yearended October 31, 2008 the Company recorded a net deferred tax benefit of$2,055.  This reflects a net benefit ofapproximately $1,720 in allowance for bad debts, $91 in property and equipmentand other intangibles, and $244 in certain accrued expenses. Althoughrealization is not assured and dependent upon things such as generatingsufficient taxable income in future periods, management, through sufficientpositive evidence,  believes it is morelikely than not that all of the deferred tax asset will be realized. The amountof the deferred tax asset considered realizable, however, could be reduced inthe near term if estimates of future taxable income or changes in the accruedexpenses during the future periods are reduced.

 

At October 31, 2008, fiscal 2005 through 2008 are subject toexamination by US federal and state tax authorities.  Through the issuanceof these financial statements the outcome of these examinations has not beendetermined.

 

***[9] Capital Transactions***

 

***[A] Preferred Stock and Common Stock-*** The Company isauthorized to issue an aggregate of 1,666,667 shares of preferred stock, $.10par value.  At October 31, 2003,there were 604,078 shares of Series A Senior preferred stock issued andoutstanding.  The Series A Seniorpreferred stock is convertible into an aggregate 604,078 shares of common stockon or before May 1, 2007 at a conversion price of $.75 per share and hasthe same voting rights [one vote per share], dividend rights and liquidationrights as each share of common stock. In July 2004, the Series ASenior preferred stock shareholders (the Company’s Chief Executive Officer andhis wife) converted 604,078 shares of preferred stock into an equal number ofcommon shares of the Company. The Company received approximately $453 inproceeds upon conversion.

 

In July 2003, the stockholders approved an increase in the numberof authorized shares of common stock from 18,333,333 shares to 35,000,000shares.

 

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

 

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 share ofJunior Preferred Stock will have 10,000 votes, voting together with the CommonStock.

 

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 occur,including the acquisition by an individual or entity and their associates of25% or more of the outstanding shares of Common Stock.  The Shareholder Rights Plan was designed toprotect the Company and its shareholders from coercive, unfair and inadequatetakeover bids and practices.  The Planwas 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. The Rights Plan expired in March 2008.

 

The Company implemented a stock repurchase program to repurchase up to500,000 shares of its common stock in the over-the-counter market on or before October 31,2004 provided (1) all such repurchases and bids to repurchase effective onany given day shall be made only through a single broker or dealer on that day (2) anysuch repurchases on a given day shall not be the opening transaction recordedto the consolidated transaction reporting system and no repurchases shall bemade during the last half hour before the scheduled close of trading (3) thehighest price paid to repurchase any shares shall not exceed the higher of thehighest independent bid or the last independent reported sale price and (4) themaximum number of shares that can be repurchased on a given day (excludingblock repurchases) shall not exceed 25% of the average daily trading volumereported for the four calendar weeks preceding the week in which the repurchaseis made. Common Stock acquired by the Company under the repurchase program areto be retired and canceled. In fiscal 2004 and 2003, the Company repurchased30,000 and 229,300 shares of the Company’s common stock at a cost of $350 and $1,070,respectively.

 

On June 1, 2005, the Board of Directors authorized the repurchaseof up to 500,000 shares of the Company’s common stock over the period of endingOctober 31, 2007.  As of October 31, 2007, no shares wererepurchased under this plan.

 

On July 14, 2008 the Board of Directors authorized a repurchase ofup to 1,000,000 shares of the Company’s common stock over the period ending October 31,2010.  As of October 31, 2008 thecompany repurchased 19,700 shares at a cost of $452.  The shares were canceled upon repurchase.

 

43

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BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3

[Dollars In Thousands Except Share Data or Unless Otherwise Indicated]

 

***[B] Equity Transactions for Services –*** For the fiscal years ended in 2008 and 2007,the company issued 2,500 and -0- shares of the Company’s common stock foremployment or consulting services [See Note 11 for common stock options issuedfor employee and consulting services].

 

***[10] Earnings Per Share***

 

The computation of basic and diluted net earnings per common share is asfollows [in thousands, except per share data rounded]:

 
| ** **                                          | ** ** | **For Years Ended October 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                          | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                |       |                                                |       |   |   |   |   |
| Income Available to Common Stockholders             |       | $                                                   | 15,617     |   | $ | 13,957 |   | $ | 11,291 |   |
| Weighted Average Common Shares Outstanding          |       | 13,776                                              |       | 13,655 |   | 13,101 |   |
|                                                |       |                                                |       |   |   |   |   |
| Effect of Dilutive Securities:                      |       |                                                |       |   |   |   |   |
| Warrants/Options                                    |       | 191                                                 |       | 216 |   | 227 |   |
|                                                |       |                                                |       |   |   |   |   |
| Weighted Average Diluted Common Shares  Outstanding |       | 13,967                                              |       | 13,871 |   | 13,328 |   |
|                                                |       |                                                |       |   |   |   |   |
| Net Income Per Share - Basic                        |       | $                                                   | 1.13       |   | $ | 1.02 |   | $ | 0.86 |   |
| Net Income Per Share - Diluted                      |       | $                                                   | 1.12       |   | $ | 1.01 |   | $ | 0.85 |   |

 

For the year ended October 31, 2008options to purchase 2,500 shares of the Company’s common stock at an exerciseprice of $34.99 per share were not included in the computation of dilutedEPS.  For the year ended October 31,2006, outstanding options to purchase 7,000 shares of Company common stock atexercise price of  $21.46 per share werenot included in the computation of diluted EPS. The exercise price of these options and warrants was greater than theaverage market price of the common shares and were considered anti-dilutive.

 

***[11] Stock Options and Warrants***

 

***[A] Employee Incentive Stock Options-*** In June 2003,the Board of Directors adopted, and in July 2003, the stockholdersapproved, 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 there under 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 grantedunder the 2003 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 2003 Plan, options mustbe granted before the June 2, 2013 Termination Date.  No option may have a term longer than tenyears (limited to five years in the case of an option granted to a 10% orgreater stockholder of the Company).  Theaggregate fair market value of the Company’s Common Stock with respect to whichoptions are exercisable for the first time by a grantee under all of theCompany’s Stock Option 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 aftertermination of such optionee’s employment due to retirement, or within one yearof such termination if due to disability or death.  The Board (or a Stock Option Committee, ifdesignated), may, in its sole discretion, cause the Company to lend money to orguaranty any obligation of an employee for the purpose of enabling suchemployee to exercise an option granted under the 2003 Plan provided that suchloan or obligation cannot exceed fifty percent (50%) of the exercise price ofsuch option. In fiscal year ended October 31, 2008, 2007 and 2006, 20,000,-0- and -0- options were granted under the Plan, respectively. A total of29,313, 83,220 and 56,500 incentive stock options issued under the 2003 Planwere exercised in fiscal years ended in October 31, 2008, 2007 and 2006,respectively.  A total of 7,145, 14,000and -0- options were cancelled in fiscal years ended October 31, 2008,2007 and 2006.

 

In August 2000, the Company adopted, and on December 15, 2000,the stockholders approved, the 2000 Employee Incentive Stock Option Plan [“2000Plan”]. The 2000 Plan provides for the granting of incentive stock options topurchase an aggregate of 800,000 shares of the Company’s common stock at aprice not less than 100% of the fair market value per share of the common stockat the date of grant.  However, in theevent an option is granted under the 2000 Plan to a holder of 10% or more ofthe Company’s outstanding common stock, the exercise price must be at least110% of fair market value at the date of grant. Employees of the Company or its subsidiary, as determined, are eligiblefor the 2000 Plan.  The term of theoptions shall not exceed ten years from the date of grant.  In fiscal 2000, 200,000 options were grantedunder the 2000 Plan which vests in four equal annual installments commencing January 31,2002 contingent on the Company realizing targeted net revenue levels.  In fiscal years ended October 31, 2008,2007 and 2006, no options were granted under the Plan, respectively. A total of4,500, 66,600 and 245,500 incentive stock options issued under the 2000 Planwere exercised in fiscal year ended in October 31, 2008, 2007 and 2006,respectively. A total of -0-, 2,000, and -0- options were cancelled in fiscalyear ended October 31, 2008, 2007 and 2006, respectively.  Options issued under the 2000 Plan must begranted before the August 2010 termination date.

 

In November 1989, the shareholders approved and the Company adoptedthe 1989 Employee Stock Option Plan [“1989 Plan”] which provides for thegranting of options to acquire 666,667 shares of common stock.  Under the terms of this stock option plan,incentive stock options to purchase shares of the Company’s common stock aregranted at a price not less than the fair market value of the common stock atthe date of grant.  A total of -0-,1,000, and 5,000 incentive stock options issued under the 1989 Plan wereexercised in fiscal years ended October 31, 2008, 2007 and 2006 respectively.  Additionally, no options were canceled infiscal years ended in October 2008, 2007 and 2006 respectively.  All options under the 1989 Plan were requiredto be granted before the Plan’s July 1999’s 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:

 

44

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BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,

[Dollars In Thousands Except Share Data or Unless Otherwise Indicated]

 

*** [11] Stock Options and Warrants - Continued***

 
| ** **                                                       | ** ** | **2003 Plan**                 | ** ** |
|------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                       | ** ** | **Shares Under Options** | ** ** | **Weighted Average  Exercise Price Per Share** | ** ** |
|                                                             |       | **[In Thousands]**            |       |   |   |
| Outstanding and Eligible for Exercise at  October 31, 2005* |       | 414                                |       | $ | 16.47 |   |
| Granted                                                          |       | —                             |       | — |   |
| Expired                                                          |       | —                             |       | — |   |
| Exercised                                                        |       | (56                                | )          | 15.21 |   |
| Outstanding and Eligible for Exercise at  October 31, 2006  |       | 358                                |       | $ | 16.47 |   |
| Granted                                                          |       | —                             |       | — |   |
| Expired                                                          |       | (14                                | )          | 16.61 |   |
| Exercised                                                        |       | (83                                | )          | 15.32 |   |
| Outstanding and Eligible for Exercise at  October 31, 2007  |       | 261                                |       | $ | 17.10 |   |
| Granted                                                          |       | 20                                 |       | $ | 34.99 |   |
| Expired                                                          |       | (7                                 | )          | 18.11 |   |
| Exercised                                                        |       | (30                                | )          | 17.48 |   |
| Outstanding and Eligible for Exercise at  October 31, 2008* |       | 244                                |       | $ | 15.63 |   |

 

----

*Eligible forexercise at October 31, 2005 were 398 at a weighted average exercise priceper share of $16.64

*Eligible forexercise at October 31, 2008 were 227 at a weighted average exercise priceper share of $17.22

 
| ** **                                                      | ** ** | **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, 2005 |       | 476                            |       | $                                                          | 5.40       |   | 6 |   | $ | .72 |   |
| Granted                                                         |       | —                         |       | —                                                     |       | — |   | — |   |
| Expired                                                         |       | —                         |       | —                                                     |       | — |   | — |   |
| Exercised                                                       |       | (246                           | )          | 2.32                                                       |       | (5 | ) | .72 |   |
| Outstanding and Eligible for Exercise at  October 31, 2006 |       | 230                            |       | $                                                          | 8.69       |   | 1 |   | $ | .72 |   |
| Granted                                                         |       | —                         |       | —                                                     |       | — |   | — |   |
| Expired                                                         |       | (2                             | )          | 5.72                                                       |       | — |   | — |   |
| Exercised                                                       |       | (67                            | )          | 8.52                                                       |       | (1 | ) | .72 |   |
| Outstanding and Eligible for Exercise at  October 31, 2007 |       | 161                            |       | $                                                          | 8.79       |   | — |   | — |   |
| Granted                                                         |       | —                         |       | —                                                     |       | — |   | — |   |
| Expired                                                         |       | —                         |       | —                                                     |       | — |   | — |   |
| Exercised                                                       |       | (4                             | )          | 6.76                                                       |       | — |   | — |   |
| Outstanding and Eligible for Exercise at  October 31, 2008 |       | 157                            |       | $                                                          | 8.85       |   | — |   | — |   |

 
| ** **                         | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted Average** | ** ** | **Exercisable** | ** ** |
|------------------------------------|------------|-----------------|------------|------------|------------|------------|------------|---------------------------|------------|-----------------|------------|
| ** **                         | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | **Shares**                | ** ** | **Remaining**   | ** ** | **Exercise** | ** ** | **Shares** | ** ** | **Exercise** | ** ** |
| **Exercise Price Range** | ** ** | **Outstanding** | ** ** | **Life**   | ** ** | **Price**  | ** ** | **Outstanding**           | ** ** | **Price**       | ** ** |
| $4.21000                           |       | to              |       | $5.70000   |       | Per Share  |       | 18                        |       | 5.58            |       | 5.52 |   | 18 |   | 5.52 |   |
| $5.94000                           |       | to              |       | $6.82000   |       | Per Share  |       | 60                        |       | 4.84            |       | 6.82 |   | 60 |   | 6.82 |   |
| $7.19000                           |       | to              |       | $8.40000   |       | Per Share  |       | 44                        |       | 5.68            |       | 8.13 |   | 44 |   | 8.13 |   |
| $12.09000                          |       | to              |       | $14.50000  |       | Per Share  |       | 18                        |       | 6.60            |       | 13.32 |   | 18 |   | 13.32 |   |
| $14.51000                          |       | to              |       | $15.61000  |       | Per Share  |       | 115                       |       | 7.31            |       | 15.59 |   | 98 |   | 15.59 |   |
| $17.75000                          |       | to              |       | $21.46000  |       | Per Share  |       | 146                       |       | 8.00            |       | 18.25 |   | 146 |   | 18.25 |   |
|                               |       |            |       |       |       |       |       |                      |       |            |       |   |   |   |   |   |   |
|                               |       |            |       |       |       |       |       | 401                       |       |            |       |   |   | 384 |   |   |   |

 

45

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BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,

[Dollars In Thousands Except Share Data or Unless Otherwise Indicated]

 

*** [11] Stock Options and Warrants***

 

The weighted average grant date fair valueof incentive stock options under the 2003 plan granted during the years ended October 31,2008, 2007 and 2006  was $16.06, $-0-,and $-0- per share, respectively.  Theseoptions have weighted average remaining contractual lives of approximately 8years.

 

Compensation cost recognized for the yearended October 31, 2008 was $40, with a related tax benefit of $-0-

 

***[B] Non-Incentive Stock Options andWarrants -***Non-incentive stock options and warrants may be granted to employees ornon-employees at fair market value or at a price less than fair market value ofthe common stock at the date of grant. The following is a summary of transactions:

 
| ** **                                                       | ** ** | **Non Incentive Stock Options & Warrants** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **Shares Under Options**                                      | ** ** | **Weighted Average  Exercise Price Per Share** | ** ** |
|                                                             |       | **[In Thousands]**                                                 |       |   |   |
| Outstanding and Eligible for Exercise at  October 31, 2005* |       | 94                                                                      |       | $ | 7.72 |   |
| Granted                                                          |       | —                                                                  |       | — |   |
| Expired                                                          |       | —                                                                  |       | — |   |
| Exercised                                                        |       | (34                                                                     | )          | 7.15 |   |
| Outstanding and Eligible for Exercise at  October 31, 2006  |       | 60                                                                      |       | $ | 8.04 |   |
| Granted                                                          |       | —                                                                  |       | — |   |
| Expired                                                          |       | —                                                                  |       | — |   |
| Exercised                                                        |       | (45                                                                     | )          | 8.07 |   |
| Outstanding and Eligible for Exercise at  October 31, 2007  |       | 15                                                                      |       | $ | 7.94 |   |
| Granted                                                          |       | —                                                                  |       | — |   |
| Expired                                                          |       | 15                                                                      |       | 7.94 |   |
| Exercised                                                        |       | —                                                                  |       | — |   |
| Outstanding and Eligible for Exercise at  October 31, 2008  |       | —                                                                  |       | — |   |

 

----

*Eligible for exercise at October 31, 2005 were 89 at a weightedaverage exercise price of $7.38

 

***[12] Employment Contracts andConsulting Agreements***

 

During fiscal 2003, the Companyestablished a Scientific Advisory Board [the “Board”] and entered intoconsulting agreements with members of the Board.  The terms of the agreements range from threeyears and two months to four years and three months.

 

The Company has multiple employmentcontracts with its key executives with expiration dates ranging from October 31,2009 through October 31, 2013. At October 31, 2008, 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** | ** ** |
|---------------------|------------|-----------------------------------------|------------|-------------------------|------------|
| 2009                |       | $                                       | 3,883      |                    | 93         |   |
| 2010                |       | 3,568                                   |       | —                  |       |
| 2011                |       | 3,069                                   |       | —                  |       |
| 2012                |       | 1,469                                   |       | —                  |       |
| 2013                |       | 540                                     |       | —                  |       |
| Thereafter          |       | —                                  |       | —                  |       |
|                |       |                                    |       |                    |       |
| Total               |       | $                                       | 12,529     |                    | 93         |   |

 

Some of these agreements provide bonusesand commissions based on a percentage of collected revenues ranging from 1% to10% on accounts referred by or serviced by the employee or consultant.

 

In addition to the above, the Company hasentered into seven at – will employment and consulting agreements whichtogether with prior at – will agreements provide for annual aggregate minimumcommitments of approximately $16,150 which have no termination dates.

 

In accordance with Section 402 of theSarbanes-Oxley Act of 2002 [the “Act”], companies are prohibited from makingfuture loans to officers and directors and also prohibited are any extension ofcredit after the date of the acts enactment. While the Company had entered intoand 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. In January 2004, the Company adopted a new“split-dollar” life insurance program under which the Company will be the soleowner of the policies (including the cash values of the policies) and will paythe premiums on the policies. Prior to termination of his employment, theexecutive will have the right to name the beneficiary of the death benefit butwill have no access to any policy cash value. The new “split-dollar” insuranceprogram was adopted in consideration of the executives transferring back theownership of the insurance policies under the original “split-dollar” programof the Company and their reimbursement to the Company of those amounts, if any,by which the premiums paid, exceed the net cash surrender values of thepolicies.

 

***[13] Capitalized Lease Obligations***

 

The Company leases various assets under capital leases expiring infiscal 2012 as follows:

 
| ** **                               | ** ** | **October 31** | ** ** |
|------------------------------------------|------------|---------------------|------------|
| ** **                               | ** ** | **2008**            | ** ** | **2007** | ** ** |
| Medical Equipment                        |       | $                   | 4,391      |   | $ | 4,054 |   |
| Furniture, Fixtures and Office Equipment |       | 1,294               |       | 1,425 |   |
| Automobiles                              |       | 6,376               |       | 5,035 |   |
|                                     |       |                |       |   |   |
| Totals                                   |       | 12,061              |       | 10,514 |   |
| Less: Accumulated Depreciation           |       | 7,164               |       | 6,612 |   |
|                                     |       |                |       |   |   |
| Net                                      |       | $                   | 4,897      |   | $ | 3,902 |   |

 

46

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BIO-REFERENCE LABORATORIES,INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS,

[Dollars In Thousands ExceptShare Data or Unless Otherwise Indicated]

 

***[13] Capitalized Lease Obligations -Continued***

 

Depreciation expense on assets under capital leases was approximately$1,515, $1,427, and $1,451 for the years ended October 31, 2008, 2007 and2006, respectively.

 

Aggregate future minimum rentals under capital leases are:

 
| **October 31,**                    | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------|------------|
| 2009                                    |       | $          | 2,469      |   |
| 2010                                    |       | 1,807      |       |
| 2011                                    |       | 1,051      |       |
| 2012                                    |       | 405        |       |
| 2013                                    |       | —     |       |
| Thereafter                              |       | —     |       |
|                                    |       |       |       |
| Total                                   |       | 5,732      |       |
|                                    |       |       |       |
| Less Interest:                          |       | 402        |       |
|                                    |       |       |       |
| Present Value of Minimum Lease Payments |       | $          | 5,330      |   |

 

*** [14] Commitments and Contingencies***

 

The Company leases various office and laboratory facilities andequipment under operating leases expiring from 2008 to 2013.  Several of these leases contain renewaloptions for one to five year periods.

 

Total expense for property and equipment rental for the years ended October 31,2008, 2007 and 2006 was $5,940 $5,376 and $4,134, respectively.  There were no contingent rental amounts duethrough October 31, 2008.

 

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

 
| **October 31,** | ** ** | **Property** | ** ** | **Equipment** | ** ** |
|----------------------|------------|--------------|------------|---------------|------------|
|                 |       |         |       |          |       |
| 2009                 |       | $            | 2,034      |          | $          | 259 |   |
| 2010                 |       | 293          |       | 162           |       |
| 2011                 |       | 7            |       | 55            |       |
| 2012                 |       | —       |       | 14            |       |
| 2013                 |       | —       |       | 5             |       |
| Thereafter           |       | —       |       | —        |       |
|                 |       |         |       |          |       |
| Totals               |       | 2,334        |       | $             | 495        |   |
|                      |            |              |            |               |            |  |  |

 

The Company has entered into several purchase agreements for reagentsupplies through October, 2013.  Minimumpurchase commitments as of October 31, 2008 are as follows:

 
| **October 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|------------|------------|
|                 |       |       |       |       |       |
| 2009                 |       | 17,042     |       |       |       |
| 2010                 |       | 15,153     |       |       |       |
| 2011                 |       | 9,432      |       |       |       |
| 2012                 |       | 6,446      |       |       |       |
| 2013                 |       | 1,618      |       |       |       |
| Thereafter           |       | —     |       |       |       |
|                 |       |       |       |       |       |
| Totals               |       | 49,691     |       |       |       |

 

Reagent supplies expensed under purchase agreements amount to $13,164,$4,136 and $2,241 for the years ended October 31, 2008, 2007 and 2006, respectively.

 

*** [15] Litigation***

 

In the normal course of business, theCompany is exposed to a number of asserted and unasserted potentialclaims.  In the opinion of management,the resolution of these matters will not have a material adverse effect on theCompany’s financial position or results of operations.

 

***[16] Insurance***

 

The Company maintains professionalliability insurance of $3,000 in the aggregate, with a per occurrence limit of$1,000 .  In addition, the Company maintains excess commercial insuranceof $5,000 per occurrence and $5,000 in aggregate.  The Company believes,but cannot assure, that its insurance coverage is adequate for its currentbusiness needs.  A determination of Company liability for uninsured orunderinsured acts or omissions could have a material adverse affect on theCompany’s operations.

 

47

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BIO-REFERENCE LABORATORIES,INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS,

[Dollars In Thousands Except Share Data or Unless Otherwise Indicated]

*** ***

*** [17] Significant Risks and Uncertainties***

 

***[A] Concentrations of Credit Risk -Cash -*** At October 31,2008 and 2007, the Company had approximately $9,850 and $9,969 , respectively,in cash and certificate of deposit balances at financial institutions whichwere in excess of the federally insured limits.

 

*** [B] Concentration of Credit Risk - AccountsReceivable -***Credit risk with respect to accounts receivable is generally diversified due tothe large number of patients comprising the client base.  The Company does have significant receivablebalances with government payors and various insurance carriers.  Generally, the Company does not requirecollateral or other security to support customer receivables, however, theCompany continually monitors and evaluates its client acceptance and collectionprocedures to minimize potential credit risks associated with its accountsreceivable and establishes an allowance for uncollectible accounts and as aconsequence, believes that its accounts receivable credit risk exposure beyondsuch allowance is not material to 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***

 

In October 2006, the Company completed its acquisition of certainassets of GeneDx, Inc. (GeneDx), a Gaithersburg, Maryland gene-basedtesting laboratory.  In connection withthis acquisition the Registrant issued 230,947 shares of its unregisteredcommon stock (the “Stock”) to GeneDx. GeneDx was a private company beneficiallyowned by two individuals who were unaffiliated with the Registrant at the timeof the purchase. In addition to the Stock, the purchase price included a $5million Cash Payment and the assumption by the Registrant of certainliabilities. The Sellers may also receive an upside Contingent Payment, not toexceed $7 million, dependent upon future performance of GeneDx operations. The230,947 shares were valued for purposes of the purchase at $21.65 per share,the average closing price for the common stock on NASDAQ on the ten tradingdays immediately preceding the August 29, 2006 signing of the purchaseagreement. The acquisition resulted in goodwill of $4,360 being recorded.

 

During the recently completed fiscal year ended October 31, 2008and October 31, 2007 the genetics laboratory “GeneDx” achieved certainoperating targets, entitling the prior owners to receive $1,917 in cash and anadditional 11,548 shares of our Common Stock valued at $250 for each of theserespective fiscal years.  Based on FAS141 requirements of valuing the contingent consideration at the time when thecontingency has been resolved, the Company in fiscal 2008 recognized anadditional contingent consideration cost of $224 for the value of shares issuedto the prior owners of GeneDx.  Thisconsists of $140 recognized for fiscal 2007 and $84 recognized for fiscal2008.  Fiscal 2007 financial statementshave not been restated for the $140 adjustment due to immateriality of theamount involved.  As of October 31,2008 and October 31, 2007 both of these amounts have been recorded as anincrease to Goodwill and Additional Paid-In Capital.  In addition, the Company reclassified certainintangible assets previously reported as Costs Related to Acquisitions toGoodwill in accordance with promulgated accounting principles.

 

In October 2006, the Company also completed its acquisition ofcertain assets of Diagnostic Pathology Services, Inc., a Clarksburg,Maryland laboratory for the sum of $1,500 plus the assumption of certainliabilities. The acquisition resulted in goodwill of $785 being recorded.

 

*** [19] Fair Value of Financial Instruments***

 

For certain financial instruments, including cash and cash equivalents,trade receivables, trade payables, and short-term debt, it was estimated 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, itwas not practicable to estimate the fair value of amounts due from relatedparties [See also Note 7].

 

***[20] Health Insurance Plan***

 

The Company has a limited self-funded health insurance plan for itsemployees under which the Company pays the initial $150 of covered medicalexpenses per person each year.  The Company has a contract with aninsurance carrier for any excess up to a maximum of $2,000 per person and$4,642 in the aggregate.  Health insurance premium expense for the yearsended October 31, 2008, 2007 and 2006 amounted to approximately $1,836,$1,302 and $1,122, respectively.  Uninsured employee medical expensesincurred by the Company amounted to approximately $8,238, $6,893 and $4,202 forthe years ended October 31, 2008, 2007 and 2006, respectively. During fiscal years ended October 31, 2008, 2007 and 2006, employeecontributions of $1,906, $1,401 and $1,129 offset, the above health plan costs.

 

*** [21] Employee Benefit Plan (Dollars Not InThousands)***

 

The Company sponsors a 401(k) Profit-Sharing Plan [the “Plan”]. Employees become eligible for participation after attaining the age of eighteenand completing one year of service.  Participants may elect to contributeup to ten percent of their compensation, as defined in the Plan, to a maximumallowed by the Internal Revenue Service.  The Company may choose to make amatching contribution to the plan for each participant who has elected to maketax-deferred contributions for the plan year, at a percentage determined eachyear by the Company. The Company elected to make a matching contribution whichamounted to $457,544 for 2008, $359,177 for 2007, and $225,971 for 2006. These amounts were charged to the Statement of Operations. The Employercontribution will be fully vested after the third year of service.

 

***[22] New Authoritative AccountingPronouncements***

 

In May 2008, the FASB issued two new Financial Accounting StandardsNo. 162 “The Hierarchy of Generally Accepted Accounting Principles” and No. 163“Accounting for Financial Guarantee Insurance Contracts–an interpretation ofFASB Statement No. 60”.  FAS #162 identifies the sources ofaccounting principles and the framework for selecting the principles to be usedin the preparation of financial statements of nongovernmental entities that arepresented in conformity with generally accepted accounting principles (GAAP) inthe United States (the GAAP hierarchy).  This Statement is effective 60days following the SEC’s approval of the Public Company Accounting OversightBoard amendments to AU Section 411, The Meaning of Present Fairly inConformity With Generally Accepted Accounting Principles.  This statementis not expected to have a material impact on the reporting of our results ofoperations. FAS #163 is primarily geared towards financial guarantee insurancecontracts by insurance enterprises.  It is not expected to have anymaterial effect on the reporting of our results of operations.

 

In March 2008 the FASB issued Financial Accounting Standards No. 161,“Disclosures about Derivative Instruments and Hedging Activities—an amendmentof FASB Statement No. 133.  This statement is effective for allinterim periods beginning November 15, 2008.  This Statement changesthe disclosure requirements for derivative instruments and hedgingactivities.  This statement is not expected to have a material impact onthe reporting of our results of operations. 

 

48

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BIO-REFERENCE LABORATORIES,INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS,

[Dollars In Thousands ExceptShare Data or Unless Otherwise Indicated]

 

***[22] New Authoritative AccountingPronouncements  - Continued***

 

InDecember 2007 the FASB issued FAS  141(R) “Business Combinations”and FAS 160 “Noncontrolling Interests in Consolidated Financial Statements” Thesestatements are effective for fiscal years, and interim periods within thosefiscal years in the case of FAS 160, beginning on or after December 15,2008. Earlier adoption is prohibited. Together these statements revise theaccounting rules with respect to accounting for business combinations.

 

Specifically,the objective of FAS 141(R) is to improve the relevance, representationalfaithfulness and comparability of the information that the reporting entityprovides in its financial reports about a business combination and its effects.This statement thus establishes principles and requirements for how theacquirer:

 

· Recognizes and measures in its financial statementsthe identifiable assets acquired, the liabilities assumed, and anynoncontrolling interest in the acquiree

 

· Recognizes and measures the goodwill acquired in thebusiness combination or a gain from a bargain purchase

 

· Determines what information to disclose to enableusers of the financial statements to evaluate the nature and financial effectsof the business combination.

 

Theobjective of FAS 160 is to improve the relevance, comparability, andtransparency of the financial information that a reporting entity provides inits consolidated financial statements by establishing accounting and reportingstandards that require:

 

· The ownership interests in subsidiaries held byparties other than the parent be clearly identified, labeled, and presented inthe consolidated statement of financial position within equity, but separatefrom the parent’s equity.

 

· The amount of consolidated net income attributableto the parent and to the noncontrolling interest be clearly identified andpresented on the face of the consolidated statement of income.

 

· Changes in a parent’s ownership interest while theparent retains its controlling financial interest in its subsidiary beaccounted for consistently. A parent’s ownership interest in a subsidiarychanges if the parent purchases additional ownership interests in itssubsidiary or if the parent sells some of its ownership interests in itssubsidiary. It also changes if the subsidiary reacquires some of its ownershipinterests or the subsidiary issues additional ownership interests. All of thosetransactions are economically similar, and this Statement requires that they beaccounted for similarly, as equity transactions.

 

· When a subsidiary is deconsolidated, any retainednoncontrolling equity investment in the former subsidiary be initially measuredat fair value. The gain or loss on the deconsolidation of the subsidiary ismeasured using the fair value of any noncontrolling equity investment ratherthan the carrying amount of that retained investment.

 

· Entities provide sufficient disclosures that clearlyidentify and distinguish between the interests of the parent and the interestsof the noncontrolling owners.

 

Togetherthese statements are not currently expected to have a significant impact on theentity’s consolidated financial statements. A significant impact may however berealized on any future acquisition(s) by this Company. The amounts of suchimpact can not be currently determined and will depend on the nature and termsof such future acquisition(s), if any.

 

*** [23] Selected Quarterly Financial Data[Unaudited]***

 
| ** **                                                              | ** ** | **Three Month Ended** | ** ** | **Fiscal  Year** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------|------------|------------------|------------|
| ** **                                                              | ** ** | **1/31/08**                     | ** ** | **4/30/08**      | ** ** | **7/31/08** | ** ** | **10/31/08** | ** ** | **2008** | ** ** |
|                                                                    |       |                            |       |             |       |   |   |   |   |   |   |
| Net Revenues                                                            |       | $                               | 66,879     |             | $          | 75,180 |   | $ | 77,776 |   | $ | 81,236 |   | $ | 301,071 |   |
| Gross Profit                                                            |       | $                               | 31,651     |             | $          | 36,182 |   | $ | 38,606 |   | $ | 40,801 |   | $ | 147,240 |   |
| Net Income                                                              |       | $                               | 2,208      |             | $          | 3,427 |   | $ | 4,737 |   | $ | 5,245 |   | $ | 15,617 |   |
| Net Income Per Common Share:                                            |       |                            |       |             |       |   |   |   |   |   |   |
|                                                                    |       |                            |       |             |       |   |   |   |   |   |   |
| Basic                                                                   |       | $                               | .16        |             | $          | .25 |   | $ | .34 |   | $ | .39 |   | $ | 1.13 |   |
| Diluted                                                                 |       | $                               | .16        |             | $          | .25 |   | $ | .34 |   | $ | .38 |   | $ | 1.12 |   |
|                                                                    |       |                            |       |             |       |   |   |   |   |   |   |
| Weighted Average Common Shares Outstanding –  Basic [in thousands] |       | 13,765                          |       | 13,783           |       | 13,778 |   | 13,777 |   | 13,776 |   |
|                                                                    |       |                            |       |             |       |   |   |   |   |   |   |
| Weighted Average Common Shares Outstanding  - Diluted [in thousands]    |       | 14,000                          |       | 13,985           |       | 13,961 |   | 13,967 |   | 13,967 |   |

 

49

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BIO-REFERENCE LABORATORIES,INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS,

[DollarsIn Thousands Except Share Data or Unless Otherwise Indicated]

 

***[23] Selected Quarterly FinancialData [Unaudited]***  - Continued

 
| ** **                                                              | ** ** | **Three Month Ended** | ** ** | **Fiscal  Year** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------|------------|------------------|------------|
| ** **                                                              | ** ** | **1/31/07**                     | ** ** | **4/30/07**      | ** ** | **7/31/07** | ** ** | **10/31/07** | ** ** | **2007** | ** ** |
|                                                                    |       |                            |       |             |       |   |   |   |   |   |   |
| Net Revenues                                                            |       | $                               | 53,722     |             | $          | 60,953 |   | $ | 65,961 |   | $ | 69,795 |   | $ | 250,431 |   |
| Gross Profit                                                            |       | $                               | 26,193     |             | $          | 30,524 |   | $ | 33,494 |   | $ | 36,191 |   | $ | 126,402 |   |
| Net Income                                                              |       | $                               | 1,966      |             | $          | 3,158 |   | $ | 4,189 |   | $ | 4,644 |   | $ | 13,957 |   |
| Net Income Per Common Share:                                            |       |                            |       |             |       |   |   |   |   |   |   |
|                                                                    |       |                            |       |             |       |   |   |   |   |   |   |
| Basic                                                                   |       | $                               | .14        |             | $          | .23 |   | $ | .31 |   | $ | .34 |   | $ | 1.02 |   |
| Diluted                                                                 |       | $                               | .14        |             | $          | .23 |   | $ | .30 |   | $ | .33 |   | $ | 1.01 |   |
|                                                                    |       |                            |       |             |       |   |   |   |   |   |   |
| Weighted Average Common Shares Outstanding –  Basic [in thousands] |       | 13,583                          |       | 13,634           |       | 13,682 |   | 13,723 |   | 13,656 |   |
|                                                                    |       |                            |       |             |       |   |   |   |   |   |   |
| Weighted Average Common Shares Outstanding  - Diluted [in thousands]    |       | 13,839                          |       | 13,884           |       | 13,921 |   | 13,973 |   | 13,871 |   |
|                                                                    |       |                            |       |             |       |   |   |   |   |   |   |
| ** **                                                              | ** ** | **Three Month Ended** | ** ** | **Fiscal  Year** | ** ** |
| ** **                                                              | ** ** | **1/31/06**                     | ** ** | **4/30/06**      | ** ** | **7/31/06** | ** ** | **10/31/06** | ** ** | **2006** | ** ** |
|                                                                    |       |                            |       |             |       |   |   |   |   |   |   |
| Net Revenues                                                            |       | $                               | 42,918     |             | $          | 47,189 |   | $ | 49,026 |   | $ | 54,001 |   | $ | 193,134 |   |
| Gross Profit                                                            |       | $                               | 20,334     |             | $          | 23,788 |   | $ | 24,343 |   | $ | 28,590 |   | $ | 97,055 |   |
| Net Income                                                              |       | $                               | 1,153      |             | $          | 2,749 |   | $ | 3,678 |   | $ | 3,711 |   | $ | 11,291 |   |
| Net Income Per Common Share:                                            |       |                            |       |             |       |   |   |   |   |   |   |
|                                                                    |       |                            |       |             |       |   |   |   |   |   |   |
| Basic                                                                   |       | $                               | .09        |             | $          | .21 |   | $ | .28 |   | $ | .28 |   | $ | .86 |   |
| Diluted                                                                 |       | $                               | .09        |             | $          | .20 |   | $ | .27 |   | $ | .27 |   | $ | .85 |   |
|                                                                    |       |                            |       |             |       |   |   |   |   |   |   |
| Weighted Average Common Shares Outstanding –  Basic [in thousands] |       | 12,992                          |       | 13,027           |       | 13,056 |   | 13,327 |   | 13,101 |   |
|                                                                    |       |                            |       |             |       |   |   |   |   |   |   |
| Weighted Average Common Shares Outstanding  - Diluted [in thousands]    |       | 13,407                          |       | 13,428           |       | 13,512 |   | 13,607 |   | 13,328 |   |

 

50

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**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

To the Board of Directors and Shareholders of

Bio-Reference Laboratories, Inc.

Elmwood Park, New Jersey

 

Our report on our audit of the basicconsolidated financial statements of Bio-Reference Laboratories, Inc. andits subsidiaries appears on page 32. That audit was conducted for the purpose of forming an opinion on theconsolidated basic financial statements taken as a whole.  The supplemental schedule II is presented forpurposes of complying with the Securities and Exchange Commission’s Rules andRegulations under the Securities Exchange Act of 1934 and is not otherwise arequired part of the basic consolidated financial statements.  Such information has been subjected to theauditing procedures applied in the audit of the basic consolidated financial  statements, and in our opinion, is fairlystated in all material respects in relation to the basic consolidated financialstatements taken as a whole.

 

 
|                 | **MSPC**                                   |
|----------------------|--------------------------------------------|
|                 | Certified Public Accountants and Advisors, |
|                 | A Professional Corporation                 |
|                 |                                       |
|                 |                                       |
| Cranford, New Jersey |                                       |
| January 5, 2009 |                                       |

 

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

**SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THEYEARS ENDED OCTOBER 31, 2008, 2007 AND 2006**

**[In Thousands]**

 
| **(a)**                          | ** ** | **(b)**                   | ** ** | **(c)**             | ** ** | **(d)**                     | ** ** | **(e)**                   | ** ** |
|----------------------------------|------------|---------------------------|------------|---------------------|------------|-----------------------------|------------|---------------------------|------------|
| ** **                       | ** ** | **Balance at**       | ** ** | **Charged to** | ** ** | **Deductions Charged** | ** ** | **Balance at**       | ** ** |
| ** **                       | ** ** | **the Beginning**    | ** ** | **Cost and**   | ** ** | **to Valuation**       | ** ** | **the End**          | ** ** |
| **Description**                  | ** ** | **of a Period** | ** ** | **Expenses**        | ** ** | **Allowance Accounts** | ** ** | **of a Period** | ** ** |
|                             |       |                      |       |                |       |                        |       |                      |       |
| Year Ended October 31, 2008 |       |                      |       |                |       |                        |       |                      |       |
| Allowance for Doubtful Accounts  |       | 11,643                    |       | 40,313              |       | (36,313                     | )          | 15,643                    |       |
| Contractual Credits/Discounts    |       | 79,257                    |       | 737,959             |       | (739,174                    | )          | 78,042                    |       |
|                             |       |                      |       |                |       |                        |       |                      |       |
| ***Total Allowance***            |       | 90,900                    |       | 778,272             |       | (775,487                    | )          | 93,685                    |       |
|                             |       |                      |       |                |       |                        |       |                      |       |
| Year Ended October 31, 2007 |       |                      |       |                |       |                        |       |                      |       |
| Allowance for Doubtful Accounts  |       | 7,234                     |       | 34,855              |       | (30,446                     | )          | 11,643                    |       |
| Contractual Credits/Discounts    |       | 49,394                    |       | 529,522             |       | (499,659                    | )          | 79,257                    |       |
|                             |       |                      |       |                |       |                        |       |                      |       |
| ***Total Allowance***            |       | 56,628                    |       | 564,377             |       | (530,105                    | )          | 90,900                    |       |
|                             |       |                      |       |                |       |                        |       |                      |       |
| Year Ended October 31, 2006 |       |                      |       |                |       |                        |       |                      |       |
| Allowance for Doubtful Accounts  |       | 7,975                     |       | 26,884              |       | (27,625                     | )          | 7,234                     |       |
| Contractual Credits/Discounts    |       | 40,945                    |       | 328,983             |       | (320,534                    | )          | 49,394                    |       |
|                             |       |                      |       |                |       |                        |       |                      |       |
| ***Total Allowance***            |       | 48,920                    |       | 355,867             |       | (348,159                    | )          | 56,628                    |       |

 

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

 

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