**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C.  20549**

 

**FORM 10-K**

 

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

 

**For the fiscal year ended October 31, 2004**

 

**Commission file number 0-15266**

 

**BIO-REFERENCE LABORATORIES, INC.**

**481 Edward H. Ross Drive, Elmwood Park, NewJersey 07407**

**201-791-2600**

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

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.   Yes  ý   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 or in anyamendment to this Form 10-K.   o

 

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

 

As of the last day of the quarter ended April 30, 2004, theaggregate market value of the voting stock of Bio-Reference Laboratories, Inc.(consisting of Common Stock, $.01 par value and Series A Preferred Stock, $.10par value) held by non-affiliates of the registrant was approximately$114,400,000 based upon the last sale price for the Common Stock on said dateas reported on the NASDAQ National Market System. On January 7, 2005,there were 12,668,439 shares of Common Stock and no shares of Series APreferred Stock issued and outstanding

 

 

----

 

**PART I**

 

Item. 1.Business

 

Overview

 

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

 

We currently process over 2.5 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 addition to our clinical testing operations, we operate a clinicalknowledge management service through our PSIMedica business unit.  This system uses customer data fromlaboratory results, pharmaceutical data, claims data and other data sources toprovide administrative and clinical decision support systems which enable ourcustomers to provide quality and efficient healthcare to their populations.

 

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

 

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

 

The Clinical Laboratory Testing Market in the United States

 

We believe that the U.S. market for clinical laboratory testinggenerates approximately $40 billion in annual revenue.  Nearly all laboratory tests are performed byone of three types of laboratories: hospital laboratories, physician officelaboratories or independent clinical laboratories. We believe approximately 54%of the clinical laboratory tests done in the United States were performed in ahospital laboratory, approximately 32% performed by an independent clinicallaboratory and the balance in a physician office or other laboratory.

 

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

 

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

 

•                                          Agingof the population of the United States;

•                                          Awarenessby patients of the value of laboratory tests;

•                                          Decreasein the cost of tests;

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

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

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

 

2

----

 

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

•                                          Employersponsored wellness programs;

•                                          Researchand development in genomics.

 

Business Strategy

 

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

 

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

 

We believe that our large marketing staff and strong infrastructurewithin our designated area can be leveraged to bring new technologies tophysicians and healthcare providers. Over the past year, our volume of testingin the area of molecular diagnostics has increased.  We believe that laboratory data has greatvalue in managing the healthcare of a population, but can only be properlyutilized when combined with medical claims and pharmacy data. Our medicalinformation unit, PSIMedica, seeks to combine laboratory data with these otherdata elements in order to provide information analytics that will help toimprove the quality and efficiency of healthcare. We seek to continue our stronggrowth not only through our marketing organization, new technologies andsuperior service, but by providing value added analytics in conjunction withlaboratory results.

 

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

 

•                                          Capitalizeon our position within the clinical market:

•                                          Leadin the providing of medical information:

•                                          Providethe highest quality service:

•                                          Pursuestrategic growth opportunities.

 

Services

 

The clinical laboratory testing business consists of routine testingand esoteric testing. Routine testing generates approximately 65% and esoterictesting generates approximately 35% of our net revenues. The net revenuegenerated by our PSIMedica business unit and our CareEvolve subsidiary has beenminimal to date.

 

Routine Testing

 

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

 

•                                          BloodCell Counts;

•                                          Cholesterollevels;

•                                          HIV-relatedtests;

•                                          PapSmears;

•                                          Pregnancy;

•                                          SubstanceAbuse

•                                          Urinalysis;

 

3

----

 

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

 

We operate 24 hours a day, 365 days a year. We perform and report mostroutine tests within 24 hours. Tests results are delivered via driver orelectronically.

 

Esoteric Tests

 

We also perform esoteric tests that require sophisticated equipment andmaterials, highly skilled personnel, professional attention and are orderedless frequently than routine tests. These tests are generally priced higherthan routine tests. Esoteric tests are usually in these medical fields:

 

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

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

•                                          Immunology(the study of the immune system)

•                                          Microbiology(the study of microscopic forms of life)

•                                          Oncology(the study of abnormal cell growth)

•                                          Serology(the study of body fluids)

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

 

Medical Information

 

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

 

Other Products

 

CareEvolve, our wholly owned subsidiary, is a physician-basedconnectivity portal.  This systemprovides a complex, sophisticated system for ordering laboratory services anddelivering laboratory results.  Thesystem is designed to be physician-centric and to provide a highly flexible,scalable, comprehensive desktop solution for physicians to manage theirday-to-day practice and personal needs, as well as to handle their clinicallaboratory ordering and reporting.  Thisproduct has been designed to work as a platform with plug and play capabilitythat can easily be used by other laboratories that also need a web-basedsolution for their physician customers. We executed a Strategic MarketingAgreement (the “SMA”) in December 2001 with Roche Diagnostics (“Roche”) tooperate a Joint Venture for the sale and distribution of the CareEvolveServices to laboratories throughout the country. Under the terms of the SMA,Roche provided funding to pay certain of the costs and expenses of operatingCareEvolve and agreed to cause its sales personnel to exercise reasonableefforts to market and sell the CareEvolve Services. In return, Roche wasentitled to a 50% share in any net after-tax

 

4

----

 

income generated by CareEvolve, and was granted an option to purchaseup to a 50% equity interest in CareEvolve and certain other rights. In December 2004,we executed an Addendum to the SMA with Roche. Pursuant to the Addendum, Roche’srights to share in CareEvolve’s net after-tax income and to purchase up to a50% equity interest in CareEvolve were canceled. Roche did retain a right offirst refusal to purchase CareEvolve in the event we were willing to acceptsuch a purchase offer from a third party. Although we retain the rights tomarket the CareEvolve Services in all markets including the laboratory market,Roche is the sole Diagnostic Company (manufacturer of diagnostic equipment andsupplies) granted the right to market the CareEvolve Services to laboratories.As a result of the execution of the Addendum, we took a one-time charge tofiscal 2004 earnings of approximately $400,000 to reflect the revised change interms of our relationship with Roche. The charge is associated with one-timetechnology development expenses which had been assessed to CareEvolve and arenow our responsibility. CareEvolve’s monthly revenues now exceed its expenses.

 

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 2004, 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, 2002, 2003,and 2004.

 
| ** **             | ** ** | **Years Ended October 31,** | ** ** |
|------------------------|------------|----------------------------------|------------|
| ** **             | ** ** | **2002**                         | ** ** | **2003** | ** ** | **2004** | ** ** |
| Direct Patient Billing |       | 9                                | %          | 7 | % | 7 | % |
| Commercial Insurance   |       | 37                               | %          | 43 | % | 48 | % |
| Professional Billing   |       | 26                               | %          | 20 | % | 17 | % |
| Medicare               |       | 25                               | %          | 27 | % | 25 | % |
| Medicaid               |       | 3                                | %          | 3 | % | 3 | % |
|                   |       | 100                              | %          | 100 | % | 100 | % |

 

Clients

 

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

 

Employers, Governmental Agencies

 

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

 

Sales and Marketing

 

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

 

Client Service Coordinators

 

We utilize the services of full and part-time client servicecoordinators at our Elmwood Park facility, all of whom are trained in medicaland laboratory terminology. This staff is used as an interface with physiciansand nurses and augments the client support provided by our sales force.

 

5

----

 

They also report highly abnormal and life threatening results to theordering physician immediately via telephone in order to provide speedy medicalresolution to any patient problem.

 

Logistical Support

 

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

 

Strategic Growth Opportunities

 

In addition to increasingour core business through internal growth and pursuing our strategy of seekingopportunities with bulk purchasers of laboratory services through our PSIMedicabusiness unit, we intend to target growth opportunities both inside and outsideof our core laboratory business.

 

•                                          SelectiveAcquisitions: The clinical laboratory industry is still highly fragmented.Historically, acquisition has been one method that has fueled our growth. In February 2004,we acquired certain assets of a Long Island City, New York testing laboratoryfor $495,000 plus certain additional payments and transferred the operations toour Elmwood Park, New Jersey facility. In July 2004, we acquired certainassets of a cancer cytogenetics testing laboratory in Milford, Massachusettsfor a purchase price of $2,485,000 plus certain additional payments. Weretained the supervisory staff at this laboratory and continue to operate thelaboratory at its leased premises in Milford, Massachusetts. We intend tocontinue to look for acquisitions that can be integrated into our existingprocessing facilities without maintaining duplicate facilities or which willprovide us with entry into new product or geographic areas. This strategy, ifsuccessfully implemented, will enable us to reduce costs and gain economies ofscale from the elimination of redundant facilities and equipment and thereduction of personnel.

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

•                                          MedicalInformation: Our medical information unit, PSIMedica, seeks to combine laboratorydata with these other data elements so as to improve the quality and efficiencyof healthcare.

 

Billing

 

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

 

Our bad debt expense is the result of issues that are not credit-relatedas is the case in most industries. It is due in most part to missing orincorrect billing information on our requisitions; this occurs because wedepend on the healthcare provider to supply us with the information. We performthe tests and report the test results as requested on the requisitionregardless of whether the demographic information is correct or even missingaltogether. We then attempt to obtain any missing information and correct thebilling information received from the healthcare provider. This adds to thecomplexity, slows the invoicing process, and generally increases the aging ofour accounts receivable. When all issues are not resolved in a timely manner,the item is written-off to bad debt expense. Other items such as pricingdifferences and payor disputes also complicate billing. Adjustments toreceivables as a result of these types of matters are accounted for as revenueadjustments and are not written-off to Bad Debt Expense.

 

6

----

 

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:

 

•                                          Fewerlayers of staff

•                                          Amore responsive business atmosphere

•                                          Customizedservice

 

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

 

Quality Assurance

 

Medical testing is essentially a process of communication and datatransfer. In order to provide accurate and precise information to thephysician, it is essential that we maintain a well structured and vigorousquality assurance program. Our goal is to continually improve this process. Wehold the required Federal and State licenses necessary to permit our operationof a clinical laboratory at our facilities in New Jersey, New York andMassachussetts. We submit to vigorous proficiency tests (or surveys) in alltests that we perform. We are also subject to unannounced inspections from thevarious 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.  Depending on the test, two or three levels ofQuality Control materials are run in each analytical assay to assure precisionand accuracy.  Patient populationstatistics are evaluated each day. Highly abnormal samples are repeated to assure their accuracy.

 

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

 

Regulation of Clinical Laboratory Operations

 

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

 

Waste management is subject to Federal and state regulations governingthe transportation and disposal of medical waste including bodily fluids.  Federal regulations require licensure ofinterstate transporters of medical waste. In New Jersey, we are subject to the Comprehensive

 

7

----

 

Medical Waste Management Act, (“CMWMA”), which requires us to registeras a generator of special medical waste. CMWMA mandates the sterilization of certain medical waste and a trackingsystem to insure disposal at an approved facility.  All of our medical waste is disposed of by alicensed 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.

 

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.Next year marks the second year of a five-year freeze (through 2008) onLaboratory fee updates, as required by the Medicare Modernization Act of 2003.A number of proposals for legislation or regulation are under discussion whichcould have the effect of substantially reducing Medicare reimbursements toclinical laboratories through reduction of the present allowable percentage orthrough other means.  In addition, thestructure and nature of Medicare reimbursement for laboratory services is alsounder discussion and we are unable to predict the outcome of these discussions.Depending upon the nature of congressional and/or regulatory action, if any,which is taken and the content of legislation, if any, which is adopted, wecould experience a significant decrease in revenues from Medicare and Medicaid,which could have a material adverse effect on us.

 

See “Cautionary Statements — Potential Healthcare Reform IncludingDecreasing Reimbursement Rates” as to the potential negative effect on ourbusiness of the decrease in Medicare reimbursement rates for Flow Cytometrytesting which went into effect on January 1, 2005.

 

CLIA-88

 

CLIA-88 extended Federal licensing requirements to all clinicallaboratories (regardless of the location, size or type of laboratory),including those operated by physicians in their offices, based on thecomplexity of the tests they perform. The legislation also substantially increased regulation of cytologyscreening, most notably by requiring the Secretary of Health and Human Services,(“HHS,”) to implement regulations placing a limit on the number of slides thata cytotechnologist may review in a twenty-four hour period.  CLIA-88 also established a more stringentproficiency testing program for laboratories and increased the range andseverity of sanctions for violating Federal licensing requirements.  A number of these provisions, 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

 

8

----

 

laboratories that are found not to meet CLIA-88 requirements.  The quality standard regulations establishvarying levels of regulatory scrutiny depending upon the complexity of testingperformed.  Under these regulations, alaboratory that performs only one or more of seventy eight routine “waived”tests may apply for a waiver from most requirements of CLIA-88.  We believe that most tests performed byphysician office laboratories will fall into either the “waived” or the “moderatelycomplex” category.  The latter categoryapplies to simple or automated tests and generally permits existing personnelin physicians’ offices to continue to perform testing under the implementationof systems that insure the integrity and accurate reporting of results,establishment of quality control systems, proficiency testing by approvedagencies, and biannual inspection.  Ourtesting is often much more complex and as a result, we are subject to fullcompliance with CLIA-88. The quality standard and enforcement procedure regulationsbecame effective on September 1, 1992, most personnel, quality control andproficiency testing requirements have been implemented; the remainder will bephased in over a number of years.  Ourlaboratory completed its first CLIA inspection under CLIA-88 guidelines andreceived its certificate of compliance effective February 7, 1996.

 

Compliance Program

 

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

 

Confidentiality of Health Information

 

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

 

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

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

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

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

 

These regulations establish a “minimum” and would default to morestringent state laws. Therefore, we are required to comply with both sets ofstandards. Laboratories were required to submit a compliance plan to HHS 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.

 

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.

 

9

----

 

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 the aggregate.We believe that our present insurance coverage is sufficient to cover currentlyestimated exposures, but we cannot assure that we will not incur liabilities inexcess of the policy limits.  Inaddition, although we believe that we will be able to continue to obtainadequate insurance coverage, we cannot assure that we will be able to do so atacceptable costs.

 

Employees

 

At October 31, 2004, we had 819 full-time and 337 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.

 

Special Note Regarding Forward-Looking Statements

 

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

 

Cautionary Statements

 

In addition to the other information in this Annual Report on Form10-K, the following factors should be considered carefully in evaluating us.See also “Special Note Regarding Forward-Looking Statements.”

 

Risks Associated with Growth:

 

Overthe last several years, we have experienced substantial growth and haveexpanded our operational capabilities. In February 2004, we acquiredcertain assets of a Long Island City, New York testing laboratory for $495,000plus certain additional payments and transferred the operations to our ElmwoodPark, New Jersey facility. In July 2004, we acquired certain assets of acancer cytogenetics testing laboratory in Milford, Massachusetts for a purchaseprice of $2,485,000 plus certain additional payments. We retained thesupervisory staff at this laboratory and continue to operate the laboratory atits leased premises in Milford, Massachusetts. We intend to develop further andexpand both our core laboratory business and other products. This growth and expansionhas placed, and will continue to place, a significant strain on our resources.We cannot assure that we will be able to successfully manage a continuation ofthe rate of growth similar to that which we have experienced in the past,should it occur.

 

Fluctuations in Operating Results:

 

Our quarterly and annual operating results can be affected by a 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,

 

10

----

 

cost of logistic and delivery systems, changes in product mix,retention and expansion of our marketing staff, timing of payments fromgovernmental agencies and third-party payors and the effect of adverse weatherconditions. We rely principally upon our internal logistic group for pick-upand delivery of specimens. However, as we shift our product mix we have begunto rely on Federal Express, UPS and other such providers for this service. Anydisruption in this service, as occurred on September 11, 2001 when theNational Airspace System (“NAS”) was shut down for a week, could have amaterial adverse effect on our operating results. As a result of these factors,our operating results may continue to fluctuate in the future.

 

Uncertainties Related to Government Regulation and Enforcement

 

We are a provider of healthcare services. As such, we are subject toextensive and rapidly changing federal, state and local laws and regulationsgoverning licensure, billing practices, financial relationships, referrals,conduct of operations, purchase of existing businesses and other aspects of ourbusiness. We cannot predict the timing or impact of any changes in these lawsand regulations or their interpretations by regulatory bodies, and we cannotassure that these changes will not have a material adverse effect on us.

 

Current federal laws governing federal healthcare programs, as well assome state laws, regulate certain aspects of the relationship betweenhealthcare providers, including us, and their referral sources. The FederalAnti-Kickback Law and the Stark Law generally prohibit providers and othersfrom soliciting, offering, receiving or paying, directly or indirectly, anymonies in return for either making a referral for a service or item orpurchasing, ordering or leasing a service or item, and prohibits 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 and various State and local laws. We are alsosubject to federal and state laws relating to the handling and disposal ofmedical waste and radioactive materials, as well as the safety and health oflaboratory employees. Although we seek to structure our practices to complywith these laws and regulations, no assurances can be given regardingcompliance in any given situation. The possible sanctions for failure to complywith these laws and regulations may include the denial to conduct business,significant fines and criminal penalties. Any significant fine or criminalpenalty could have a material adverse effect on our financial condition. Anyexclusion or suspension from participation in a CMS program, any loss oflicensure or accreditation or the inability to obtain the required licensewould have a material adverse effect on our business.

 

Uncertainties Related to Third-Party Payors

 

We typically bill third party payors such as Medicare, Medicaid,Governmental programs and private insurers for our services. Such third partypayors are constantly negotiating prices with the goal 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. As iscommon 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.

 

11

----

 

Potential Healthcare Reform Including Decreasing Reimbursement Rates

 

The public and the federal government continue to focus attention onreforming the healthcare system in the United States. Several legislativeproposals have been introduced in Congress and state legislatures in recentyears that would effect major reforms of the healthcare systems. In addition,CMS has made a number of proposals regarding the payment and coverage oflaboratory 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.

 

EffectiveJanuary 1, 2005, there were changes made to Medicare reimbursements forsome of the pathology or esoteric, billing codes. Although some of the changesrepresented increases in reimbursement, some represented decreases,particularly in the area of Flow Cytometry, a critical test utilized in thediagnosis and monitoring of lymphoma and leukemias. While Flow Cytometry hasbeen a high growth area for us, so are other areas which, in fact, saw anincrease in reimbursement rates under the new schedule. It is difficult to seewhat the net effect of these changes will be in fiscal 2005. If we only takeinto account the decreases in Flow Cytometry reimbursement rates, we estimatethat if these changes to reimbursement rates solely in the Flow Cytometry areahad been in effect for all of fiscal 2004, the effect would have been areduction in net revenues of less than 2% and a reduction in pre-tax income ofsomewhat less than 20%. It should be recognized that this type of proformaretrospective analysis, keeping all other variables constant except for thedecrease in Flow Cytometry reimbursement rates, may not be realistic. In anyevent, we are working with other members of the laboratory industry inattempting to mitigate these reductions as we believe Medicare in calculatingthe revised reimbursement rates for Flow Cytometry, significantlyunderestimated the laboratory costs in performing these tests. No assurancescan be given that we will be successful in obtaining an increase in theseparticular reimbursement rates.

 

Insurance

 

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

 

Uncertainties Related to Accounts Receivable

 

All of our services are rendered on a list fee for services. We thereforeassume the financial risk related to collection of these receivables such as:

 

•                  Delays attendantto reimbursement by third party payors

•                  Difficulties ingathering complete and accurate billing information

•                  Inability tocollect accounts

•                  Long collectioncycles

 

There have been times whenour accounts receivable have increased at a greater rate than revenue growthand, therefore, has adversely affected our cash from operations. We have takensteps to implement systems and processing changes intended to improve billingprocedures and related collection results. We believe that we have madeprogress by reorganizing our accounts receivable and billing functions and thatour allowance for doubtful accounts is adequate. However, we cannot assure thatour ongoing assessment of accounts receivable will not result in the need foradditional provisions. Such additional provisions, if implemented, could have amaterial adverse effect on our operating results.

 

Competition

 

We operate in a businesswhich is characterized by intense competition. Our major competitors in the NewYork metropolitan area, Quest Diagnostics and Laboratory Corporation of

 

12

----

 

America,are large national laboratories which possess greater name recognition, largercustomer bases and significantly greater financial resources and employsubstantially more personnel than we do. Many of our competitors have longestablished relationships. We cannot give assurances that we will be able tocompete successfully with such entities in the future. Our ability to attractand retain sales representatives and management may also affect our ability tocompete in this marketplace.

 

Dependence on Bank Financing

 

InOctober 2004, we entered into an Amended and Restated Loan and SecurityAgreement (the “Loan Agreement”) with PNC Bank, National Association (“PNC Bank”)as Lender. Pursuant to the Loan Agreement, our credit facility from PNC Bankwas extended to October 31, 2007 and the maximum permitted amount of ourcredit line (not to exceed 50% of our “eligible receivables” as defined in theLoan Agreement) was increased from $25,000 to $30,000. The Loan Agreement alsoprovides us with an “Acquisition Subline” under the maximum $30,000 creditfacility of up to $10,000 which can be repaid in 36 equal monthly installmentsthereafter. Interest on advances under this credit facility are subject to PNCBank’s prime rate or the Eurodollar rate of interest plus, in certaininstances, an additional interest percentage.

 

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 officerThe unavailability of Dr. Grodman, whetheras a result of his death, disability or otherwise, could have a materialadverse effect upon our business.

 

Possible Volatility of Stock Price

 

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

 

Factors In Place To Discourage Takeover Attempts

 

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

 

Item 2 - Properties

 

Our executive offices and New Jersey processing facility occupyapproximately 122,500 square feet of leased space in two one-story brickbuildings at 481-487 Edward H. Ross Drive, Elmwood Park, New Jersey.  We are currently paying approximately $74,000in total in monthly rentals for these facilities.  The leases for the majority of thesefacilities expire in February 2009. Our New York processing facilityoccupies approximately 11,000 square feet of leased space in a two-story brickbuilding at 140 Route 303, Valley Cottage, New York.  The lease for this facility, which expires inApril 2005, provides for a monthly rental of $10,366. Our cancercytogenetics testing facility occupies approximately 6,900 square feet ofleased space in a three story brick

 

13

----

 

building at 25 Birch Street, Milford, Massachusetts. The lease for thisfacility, which expires in December 2007, provides for a monthly rental ofapproximately $8,000. Our testing equipment maintained at each of ourprocessing and testing facilities is in good condition and in workingorder.  We believe that these facilities,as presently equipped, have the capacity to generate up to approximately$350,000,000 in net revenues based on the type of testing now being performedby us.  We maintain fire, theft andliability insurance coverage for our facilities in what we believe are adequateamounts.  We also lease 57 additionalrelatively small draw stations throughout the New York metropolitan area tocollect specimens from physician-referred patients for testing at ourprocessing facilities.

 

Item 3 - Legal Proceedings

 

At October 31, 2004 and at the date of this Report, we were notinvolved 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 during thefourth quarter of fiscal 2004

 

**PART II**

 

Item 5.             Marketfor Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchasesof Equity

 

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

 

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

 
| ** **       | ** ** | **Bid Prices** | ** ** |
|------------------|------------|----------------|------------|
| **Fiscal  Year** | ** ** | **High**       | ** ** | **Low** | ** ** |
| ** **       | ** ** | ** **     | ** ** | ** ** | ** ** |
| **2003**         | ** ** | ** **     | ** ** | ** ** | ** ** |
| First Quarter    |       | $              | 7.28       |   | $ | 5.54 |   |
| Second Quarter   |       | 6.19           |       | 4.11 |   |
| Third Quarter    |       | 7.16           |       | 4.70 |   |
| Fourth Quarter   |       | 17.60          |       | 6.84 |   |
|             |       |           |       |   |   |
| **2004**         |       |           |       |   |   |
| First Quarter    |       | $              | 21.88      |   | $ | 12.62 |   |
| Second Quarter   |       | 21.45          |       | 13.09 |   |
| Third Quarter    |       | 15.46          |       | 10.76 |   |
| Fourth Quarter   |       | 14.87          |       | 11.23 |   |

 

On January 7, 2005 the last sale price for the Common Stock onNASDAQ was $14.32 per share.

 

AtOctober 31, 2004, the number of record owners of the Common Stock was 371.Such number of record owners was determined from our shareholder records anddoes not include beneficial owners whose shares are held in nominee accountswith brokers, dealers, banks and clearing agencies.

 

14

----

 

Dividends

 

We have not paid any dividends on our Common Stock since our inceptionand, do not contemplate or anticipate paying any dividends in the foreseeablefuture. Furthermore, our loan agreement with PNC Bank prohibits us from payingany cash dividends or making any cash distributions with respect to shares ofour Common Stock.

 

Recent Sales of Unregistered Securities

 

During fiscal year 2004, we issued an aggregate 604,078 shares of ourCommon Stock to our President and Chief Executive Officer, Marc Grodman and hiswife, Pam Grodman, upon their conversion of an aggregate 604,078 shares ofSeries A Senior Preferred Stock and payment of the $.75 per share conversionprice. A restrictive legend was placed on each of the Common Stock certificatesissued upon the conversion and stop transfer instructions were issued againstthe shares. The conversion was effected in reliance upon the exemption from theregistration requirements of the Securities Act of 1933 provided by Section 4(2)of the Act on the basis that the transaction did not involve a public offering.See Item 13 herein.

 

Equity Compensation Plan Information

 

The information required under this item is disclosed in item 12 ofthis Annual Report on Form 10-K and is incorporated herein by reference.

 

Issuer Purchases of Equity Securities

 

On March 6, 2003, we announced adoption of a stock repurchaseprogram pursuant to which we would repurchase up to 500,000 shares of ourCommon Stock from time to time at prevailing market prices in theover-the-counter market. Through July 31, 2004, we had repurchased anaggregate 259,700 shares pursuant to the repurchase program. No repurchaseswere made in the fourth quarter of fiscal year 2004, at the end of which, theprogram terminated.

 

Item 6.             SelectedFinancial Data

 
| ** **                                 | ** ** | **[In thousands, except per share data]** | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                 | ** ** | **Years ended  October 31,**         | ** ** |
| ** **                                 | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| **Operating  Data:**                       |       |                                      |       |   |   |   |   |   |   |   |   |
| Net Revenues                               |       | $                                         | 136,184    |   | $ | 109,034 |   | $ | 96,631 |   | $ | 80,622 |   | $ | 66,460 |   |
| Cost of Services                           |       | $                                         | 68,201     |   | $ | 56,216 |   | $ | 51,706 |   | $ | 44,265 |   | $ | 37,174 |   |
| Gross Profit                               |       | $                                         | 67,983     |   | $ | 52,818 |   | $ | 44,925 |   | $ | 36,357 |   | $ | 29,286 |   |
| General and Administrative Expenses        |       | $                                         | 55,163     |   | $ | 43,533 |   | $ | 38,853 |   | $ | 32,750 |   | $ | 27,654 |   |
| Income from Operations                     |       | $                                         | 12,820     |   | $ | 9,285 |   | $ | 6,072 |   | $ | 3,607 |   | $ | 1,632 |   |
| Other Expenses - Net                       |       | $                                         | 634        |   | $ | 681 |   | $ | 849 |   | $ | 1,660 |   | $ | 1,568 |   |
| Provision for Income Tax Expense [Benefit] |       | $                                         | 3,670      |   | $ | 2,064 |   | $ | 301 |   | $ | (414 | ) | $ | (42 | ) |
| Net Income                                 |       | $                                         | 8,516      |   | $ | 6,540 |   | $ | 4,922 |   | $ | 2,361 |   | $ | 105 |   |
| Net Income Per Common Share                |       | $                                         | .71        |   | $ | .57 |   | $ | .43 |   | $ | .24 |   | $ | .01 |   |
| Net Income Per Share - Diluted             |       | $                                         | .67        |   | $ | .51 |   | $ | .39 |   | $ | .21 |   | $ | .01 |   |
| Cash Dividends Per Common Share            |       | $                                         | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
|                                       |       |                                      |       |   |   |   |   |   |   |   |   |
| **Balance  Sheet Data:**                   |       |                                      |       |   |   |   |   |   |   |   |   |
| Total Assets                               |       | $                                         | 72,151     |   | $ | 53,219 |   | $ | 47,442 |   | $ | 44,006 |   | $ | 38,349 |   |
| Total Long-Term Liabilities                |       | $                                         | 4,520      |   | $ | 2,833 |   | $ | 1,519 |   | $ | 1,158 |   | $ | 2,378 |   |
| Total Liabilities                          |       | $                                         | 31,478     |   | $ | 23,261 |   | $ | 23,235 |   | $ | 25,532 |   | $ | 25,287 |   |
| Working Capital                            |       | $                                         | 23,815     |   | $ | 18,302 |   | $ | 12,651 |   | $ | 7,257 |   | $ | 2,820 |   |
| Shareholders’ Equity                  |       | $                                         | 40,673     |   | $ | 29,958 |   | $ | 24,207 |   | $ | 18,474 |   | $ | 13,061 |   |

 

15

----

 

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

 

**Note Regarding Forward-Looking Statements**

 

**This Annual Report on Form 10-K containshistorical information as well as forward-looking statements. Statementslooking forward in time are included in this Annual Report pursuant to the “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.**

 

OVERVIEW

 

We are a regional clinical laboratory with focused market testingcapabilities. As a regional laboratory, we service the New York metropolitanarea, and currently do business in most New York State counties, as well as inmost of New Jersey and some parts of Pennsylvania and Connecticut. As aregional laboratory, we primarily offer laboratory services to physicianoffices in these areas with an infrastructure that includes a comprehensive logisticaldepartment, extensive phlebotomy services and phlebotomy draw stationsscattered around our geographic area. We have also developed expertise incertain focused testing areas with specific emphasis in cancer pathology anddiagnostics as well as molecular diagnostics. These services are marketed as abusiness unit, called GenPath, which services customers outside of routinephysician office testing.  We havedeveloped certain specialized markets, such as in the areas of correctionalhealth, substance abuse testing, fertility testing and molecular diagnostics.Testing in these areas also may be supported outside of physician offices.

 

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

 

Our PSIMedica business unit is a Clinical Knowledge Management (“CKM”)System that uses data derived from various disparate sources to provide bothadministrative and clinical analysis of a population. The source data consistsof enrollment (demographic) data, claims data, pharmacy data, laboratoryresults data, and any other data that may be available. The system usessophisticated algorithms to cleanse and configure the data so that analysis canbe comprehensive and meaningful. The data is maintained on multiple levels ofanalysis enabling review of data from the global level to the granular transactionaldetail.  The system includes a base setof queries that provide basic functionality and allows on-line real-time ad hocquery capability enabling the user to customize analysis to the best needs ofthe organization using the system. In addition to the basic queries provided bythe system, PSIMedica Quality Indicators (“PQI”) provide comprehensive, diseasestate oriented queries that disclose the quality and efficiency of the care andservice. These indicators have been designed to provide the customer withstandards and outcome predictors based on a medical standards basis.  We are using PSIMedica to market value-addedclinical laboratory services to bulk purchasers of clinical laboratorysolutions, as well as marketing our PSIMedica programs to businesses such asHealth Plans, Integrated Delivery Networks, Disease Management Companies,Insurers, Clinical Trial Companies and other healthcare providers that mostbenefit from the ability of the system to combine both clinical andadministrative analysis.

 

CareEvolve, our wholly owned subsidiary, is a physician-basedconnectivity portal.  This systemprovides a complex, sophisticated system for ordering laboratory services anddelivering laboratory results.  Thesystem is designed to be physician-centric and to provide a highly

 

16

----

 

flexible, scalable, comprehensive desktop solution for physicians tomanage their day-to-day practice and personal needs, as well as to handle theirclinical laboratory ordering and reporting. This product has been designed to work as a platform with plug and playcapability that can easily be used by other laboratories that also need aweb-based solution for their physician customers. This product has beendesigned to work as a platform with plug and play capability that can easily beused by other laboratories that also need a web-based solution for theirphysician customers. We executed a Strategic Marketing Agreement (the “SMA”) inDecember 2001 with Roche Diagnostics (“Roche”) to operate a Joint Venturefor the sale and distribution of the CareEvolve Services to laboratoriesthroughout the country. Under the terms of the SMA, Roche provided funding topay certain of the costs and expenses of operating CareEvolve and agreed to causeits sales personnel to exercise reasonable efforts to market and sell theCareEvolve Services. In return, Roche was entitled to a 50% share in any netafter-tax income generated by CareEvolve, and was granted an option to purchaseup to a 50% equity interest in CareEvolve and certain other rights. In December 2004,we executed an Addendum to the SMA with Roche. Pursuant to the Addendum, Roche’srights to share in CareEvolve’s net after-tax income and to purchase up to a50% equity interest in CareEvolve were canceled. Roche did retain a right offirst refusal to purchase CareEvolve in the event we were willing to acceptsuch a purchase offer from a third party. Although we retain the rights tomarket the CareEvolve Services in all markets including the laboratory market,Roche is the sole Diagnostic Company (manufacturer of diagnostic equipment andsupplies) granted the right to market the CareEvolve Services to laboratories.As a result of the execution of the Addendum, we took a one-time charge to fiscal2004 earnings of approximately $400,000 to reflect the revised change in termsof our relationship with Roche. The charge is associated with one-timetechnology development expenses which had been assessed to CareEvolve and arenow our responsibility. CareEvolve’s monthly revenues now exceed its expenses.

 

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

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires us to makeestimates and assumptions that affect the reported amounts of revenues andexpenses during the reporting period. While many aspects of our business aresubject to complex federal, state and local regulations, the accounting for ourbusiness is generally straightforward. Our revenues are primarily comprised of a high volume of relatively lowdollar transactions, and about 57% of all our costs consist of employeecompensation and benefits.  Revenues arerecognized at the time the services are performed and are reported at theestimated net realizable amounts from patients, third-party payors and othersfor services rendered including prospectively determined adjustments underreimbursement agreements with third-party payors.  These adjustments are accrued on an estimatedbasis in the period the services are rendered and adjusted in future periods asfinal settlements are determined.  Theseestimates are reviewed and adjusted, if warranted, by senior management on amonthly basis.  We believe that ourestimates and assumptions are correct; however, several factors could causeactual results to differ materially from those currently anticipated due to anumber of factors in addition to those discussed under “Cautionary Statements”as well as elsewhere herein including:

 

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

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

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

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

•                                          changesin federal, state, local and third party payor regulations or policies (or inthe interpretation of current regulations) affecting governmental andthird-party reimbursement for clinical laboratory testing (such as the decreasein Medicare

 

17

----

 

reimbursement for Flow Cytometry testingdescribed above under Cautionary Statements).

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

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

•                                          changesin payor mix.

•                                          failureto maintain our days sales outstanding levels.

•                                          increasedcompetition, including price competition.

•                                          ourability to attract and retain experienced and qualified personnel.

•                                          adverselitigation results.

 

We utilize diluted earnings per share (“EPS”) on pre-tax income as aperformance indicator rather than the traditional EPS calculation on anafter-tax basis.  This pre-tax EPS takesout the nuance of tax differences caused by large net operating losscarryforwards which create benefits (which we used in the past) and tax expense(which we expect in the future).  Thetable below shows our pre-tax EPS on a diluted quarterly and annual basis forfiscal years 2002 and 2003.

 
| ** ** | ** ** | **Quarter Ended** | ** ** | ** ** | ** ** |
|------------|------------|-------------------|------------|------------|------------|
| ** ** | ** ** | **1/31**          | ** ** | **4/30**   | ** ** | **7/31** | ** ** | **10/31** | ** ** | **Fiscal Year** | ** ** |
|       |       |              |       |       |       |   |   |   |   |   |   |
| FY 2003    |       | .04               |       | .13        |       | .24 |   | .26 |   | .67 |   |
|       |       |              |       |       |       |   |   |   |   |   |   |
| FY 2004    |       | $                 | .11        |       | $          | .26 |   | $ | .29 |   | .$28 |   | $ | .96 |   |
|            |            |                   |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

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

 

Fiscal Year 2004 Compared to 2003

 

NET REVENUES:

 

Net Revenues for the year ended October 31, 2004 were $136,184 ascompared to $109,034 for the year ended October 31, 2003; this representsa 25% increase in net revenues. This increase is due to a 19% increase inpatients serviced and a 5% increase in net revenue per patient. Our laboratoryoperations had net revenues of $135,435 in fiscal 2004.

 

The number of patients serviced during the year ended October 31,2004 was 2,522 which was 19% greater when compared to the prior fiscalyear.  Net revenue per patient for theyear ended October 31, 2004 was $53.71 compared to net revenue per patientfor the year ended October 31, 2003 of $51.41, an increase of $2.30 or 5%as a result of increases in esoteric testing.

 

COST OF SALES:

 

Cost of Sales for the year ended October 31, 2004 was $68,201 ascompared to $56,216 for the year ended October 31, 2003, an increase of21%.  This increase is related to theincrease in net revenues of 25%.

 

GROSS PROFITS:

 

Gross profits on net revenues increased to $67,983 for the year ended October 31,2004 from $52,818 for the year ended October 31, 2003; an increase of$15,165 (29%), primarily attributable to the increase in net revenues and thedecrease in direct costs relative to the increase in net revenue. Gross profitmargins in the laboratory increased to 50% from 48%, primarily due to theincrease in net revenues and efficiencies in direct operating expenses.

 

18

----

 

GENERAL AND ADMINISTRATIVE EXPENSES:

 

General and administrative expenses for the yearended October 31, 2004 were $55,163 as compared to $43,533 for the yearended October 31, 2003, an increase of $11,630 or 27%. This is 2% greaterthan the increase in net revenues and is attributable to several factors. Baddebt expense increased to 13% of net revenues as compared to 12% for the twelvemonth period ended October 31, 2003. This increase in bad debt is partlyattributable to an increase in our third party billing and our acquisition ofnew payors in new geographical regions resulting from the expansion of ourOncology and esoteric testing services. Marketing expenses as a percent of netrevenues increased from 9% in fiscal year 2003 to 10% in fiscal year 2004, a resultof our continued emphasis on sales and marketing in the area of Oncology andesoteric testing. In addition, we took a one time charge against earnings ofapproximately $400,000 that came about because of changes in an Addendum weexecuted to our Strategic Marketing Alliance with Roche Diagnostic Corporation.

 

INTEREST EXPENSE:

 

Interest expense decreased from $704 during theyear ended October 31, 2003 to $667 during the year ended October 31,2004; a decrease of $37. This decrease is due to a decline in the variableinterest rates associated with our line of credit. Management believes thatthis trend may not continue in the future due to the continued use of ourrevolving line of credit to fund our expansion and growth and the increase ininterest rates that may continue to occur during fiscal year 2005.

 

NET INCOME:

 

We realized net income of $8,516 for the twelve month period ended October 31,2004 as compared to $6,540 for the twelve month period ended October 31,2003, an increase of 30%.

 

Pre-tax income for the period ended October 31, 2004 was $12,186,as compared to $8,604 for the period ended October 31, 2003, an increaseof $3,582 (42%) and was caused primarily by a decrease in expenses in relationto an increase in net revenues.  Theprovision for income taxes increased from $2,064 for the period ended October 31,2003, to $3,670 for the current twelve month period. This increase wasanticipated due to the full utilization of Federal and State net operating losscarry-forwards during the third quarter of fiscal 2003. However, it wasmitigated by other tax considerations.

 

Fiscal Year 2003 Compared to Fiscal Year 2002

 

NET REVENUES:

 

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

 

The number of patients serviced during the year ended October 31,2003 was 2,115 which was 9% greater when compared to the prior fiscalyear.  This increase is attributable tosix new sales representatives and our ongoing marketing efforts during thecurrent fiscal year. Net revenue per patient for the year ended October 31,2003 was $51.41 compared to net revenue per patient for the year ended October 31,2002 of $49.63, an increase of $1.78 or 4% as a result of increases inesoteric testing.

 

COST OF SALES:

 

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

 

19

----

 

GROSS PROFITS:

 

Gross profits on net revenues increased to $52,818 for the year ended October 31,2003 from $44,925 for the year ended October 31, 2002; an increase of$7,893 (18%), primarily attributable to the increase in net revenues and thedecrease in direct costs relative to the increase in net revenue. Gross profitmargins in the laboratory increased to 48% from 46%, primarily due to theincrease in net revenues and efficiencies in direct operating expenses.

 

GENERAL AND ADMINISTRATIVE EXPENSES:

 

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

 

INTEREST EXPENSE:

 

Interest expense decreased from $889 during the year ended October 31,2002 to $704 during the year ended October 31, 2003; a decrease of $185.This decrease is due to a decline in the variable interest rates and a declinein the outstanding balance with the PNC line of credit utilized by the Company.Management believed that this trend would not continue in the future due to thecontinued use of our revolving line of credit to fund our expansion and growthand the expectation that interest rates might increase during fiscal year 2004.

 

NET INCOME:

 

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

 

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

 

Liquidity and Capital Resources (In thousands)

 

**For the Fiscal Year Ended October 31,2004**

 

Our working capital at October 31, 2004 was approximately $23,815as compared to approximately $18,302 at October 31, 2003, an increase of$5,513. Our cash position increased by approximately $2,715 during the currentperiod. We increased our short term borrowing by approximately $1,615 andrepaid approximately $1,717 in existing debt and increased our long term debtby approximately $2,546. We had current liabilities of approximately $26,958 atOctober 31, 2004. We generated approximately $5,026 in cash fromoperations, a decrease of approximately $567 as compared to the year ended October 31,2003.

 

Accounts receivable, net of allowance for doubtful accounts, totaledapproximately $40,952 at October 31, 2004, an increase of approximately$8,039 from October 31, 2003, or 24%. This increase was primarilyattributable to increased revenue.  Cashcollected over the twelve month period ended October 31, 2004 increased20% over the prior twelve month period.

 

Credit risk with respect to accounts receivable is generallydiversified due to the large number of patients comprising the client base. Wehave significant receivable balances with government payors and variousinsurance carriers. Generally, we do not require collateral or other securityto support customer receivables, however, we continually monitor and evaluateour client acceptance

 

20

----

 

and collection procedures to minimize potential credit risks associatedwith our accounts receivable. While we maintain what we believe to be an adequateallowance for doubtful accounts, there can be no assurance that our ongoingreview of accounts receivable will not result in the need for additionalreserves. Such additional reserves could have a material impact on ourfinancial position and results of operations.

 

In October 2004, the Company entered into an amended revolvingnote payable loan agreement with a bank. The maximum amount of the credit line available to the Company is thelesser of (i) $30,000 or (ii) 50% of the Company’s qualified accountsreceivable [as defined in the agreement]. The amended loan agreement providesfor an “acquisition subline” of up to $10,000 which can be repaid in 36 equalmonthly installments. Under the amendment to the Loan and Security Agreement,interest on advances will be subject to the bank’s prime rate or Eurodollarrate of interest plus, in certain instances, an additional interestpercentage.  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, 2004, the Company hadelected to have $6,000 of the total advances outstanding converted into aEurodollar rate loan with an interest rate of 3.16% at October 31,2004.  The remaining outstanding advancesduring that period were subject to the prime rate of interest.  At October 31, 2004, advances of $4,333were subject to interest at the prime rate. As of October 31, 2004 and 2003, the bank’s prime rate of interestwas 4.75% and 4.00%, respectively.  Thecredit line is collateralized by substantially all of the Company’s assets. Theline of credit is available through October 2007 and may be extended forannual periods by mutual consent, thereafter. The terms of this agreement contain, among other provisions,requirements for maintaining defined levels of capital expenditures, fixedcharge coverage, insurance coverage, and the prohibition of the payment by theCompany of cash dividends.  As of October 31,2004, the Company utilized $12,879 and had $17,121 of available unused creditunder this revolving note payable agreement.

 

The weighted average interest rate on short-term borrowings outstandingas of October 31, 2004 and 2003 was approximately 3.92% and 2.85%,respectively.

 

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

 

**TabularDisclosure of Contractual Obligations**

**PaymentsDue By Period**

**(Dollars in thousands)**

 
| ** **                                                       | ** ** | **Total** | ** ** | **FY  2005** | ** ** | **FY  2006** | ** ** | **FY  2007** | ** ** | **FY  2008** | ** ** | **FY 2009  and  thereafter** | ** ** |
|------------------------------------------------------------------|------------|-----------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|------------------------------|------------|
|                                                             |       |      |       |         |       |         |       |         |       |         |       |                         |       |
| Long-Term Debt                                                   |       | $         | 2,334      |         | $          | 1,273        |       | $            | 1,061      |         | $          | -0                           | -          | $ | -0 | - | $ | -0 | - |
|                                                             |       |      |       |         |       |         |       |         |       |         |       |                         |       |
| Capital Leases                                                   |       | $         | 5,521      |         | $          | 1,525        |       | $            | 1,485      |         | $          | 1,382                        |       | $ | 925 |   | $ | 204 |   |
|                                                             |       |      |       |         |       |         |       |         |       |         |       |                         |       |
| Operating Leases                                                 |       | $         | 5,655      |         | $          | 1,422        |       | $            | 1,180      |         | $          | 1,114                        |       | $ | 900 |   | $ | 1,039 |   |
|                                                             |       |      |       |         |       |         |       |         |       |         |       |                         |       |
| Purchase Obligations                                             |       | $         | 6,104      |         | $          | 2,714        |       | $            | 1,877      |         | $          | 1,381                        |       | $ | 106 |   | $ | 26 |   |
|                                                             |       |      |       |         |       |         |       |         |       |         |       |                         |       |
| Long-Term Liabilities under Employment and  Consultant Contracts |       | $         | 8,037      |         | $          | 2,338        |       | $            | 1,831      |         | $          | 868                          |       | $ | 750 |   | $ | 2,250 |   |
|                                                             |       |      |       |         |       |         |       |         |       |         |       |                         |       |   |   |   |   |   |   |
| Total                                                            |       | $         | 27,651     |         | $          | 9,272        |       | $            | 7,434      |         | $          | 4,745                        |       | $ | 2,681 |   | $ | 3,519 |   |

 

21

----

 

Our cash balances at October 31, 2004 totaled approximately $6,681as compared to approximately $3,966 at October 31, 2003.  We believe that our cash position, theanticipated cash generated from future operations,  and the availability of our credit line withPNC Bank, will meet our anticipated cash needs in fiscal 2005.

 

We do not have any off-balance sheet items.

 

Impact of Inflation

 

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

 

New Authoritative Pronouncements

 

InNovember 2004, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 151, “Inventory Costs — an amendment to ARB No. 43.” This statementprovides guidance to clarify the accounting for abnormal amounts of idlefacility expense, freight handling costs, and wasted material (spoilage), amongother production costs. Provisions of ARB No. 43 stated that under somecircumstances, items such as idle facility expense, excessive spoilage andother costs “may” be so abnormal as to require treatment as current periodcharges. This statement requires that those items be recognized as currentperiod charges regardless of whether they meet the criterion of so abnormal. Inaddition, SFAS 151 requires that allocation of fixed production overheads tothe costs of conversion be based on the normal capacity of the productionoverheads to the costs of conversion be based on the normal capacity of theproduction facilities. Adoption of the Statement is not expected to have amaterial impact on the financial statements of the Company.

 

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

 

In November 2004, the FASB issued SFAS No. 153, “Exchanges ofNonmonetary Assets — an amendment to APB No. 29.” This Statement amends OpinionNo. 29 to eliminate the exception for nonmonetary exchanges of similarproductive assets and replaces it with a general exception for exchanges ofnonmonetary assets that do not have commercial substance. A nonmonetaryexchange has commercial substance if the future cash flows of the entityexpected to change significantly as a result of the exchange. Adoption of thisstatement is not expected to have a material impact on the financial statementsof the Company.

 

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

 

In April 2003, the FASB issued SFAS No. 149, “Amendment ofStatement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”),which amends and clarifies financial accounting and reporting for derivativeinstruments, including certain derivative instruments

 

22

----

 

embedded in other contracts, and for hedging activities under SFAS 133.SFAS 149 is effective for contracts entered into or modified after June 30,2003, and for hedging relationships designated after June 30, 2003. Theadoption of SFAS 149, effective July 1, 2003, did not have a materialimpact on the Company’s results of operations or financial position.

 

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

 

With the exception of the adoption of SFAS 123(R), the Company expects that the adoption of the new statements will not havea significant impact on its consolidated financial statements.

 

Item 7A Quantitative and Qualitative Disclosures about Market Risk

 

We do not invest in or trade market risk sensitive instruments. We alsodo not have any foreign operations or foreign sales so that our exposure toforeign currency exchange rate risk is non-existent.

 

We do have exposure to both rising and falling interest rates. At October 31,2004, advances of approximately $4,333 under our Loan Agreement with PNC Bankwere subject to interest charges at the Bank’s then prime rate of 4.75 %. Inaddition, we elected to have the remaining $6,000 of advances outstanding atsaid date converted into a Eurodollar rate loan with a variable interest rateof 3.16%

 

We estimate that our monthly cash interest expense at October 31,2004 was approximately $55 thousand and that a one percentage point increase ordecrease in short-term rates would increase or decrease our monthly interestexpense by approximately $8 thousand.

 

See Note 5 to the Consolidated Financial Statements contained herein.

 

Item 8. - Financial Statements and Supplementary Data

 

Financial Statements are annexed hereto

 

Item 9. - Changes in and Disagreements with Accountants onAccounting and Financial Disclosure

 

None

 

Item 9A. Controls and Procedures

 

An evaluation was performed under the supervision, and with theparticipation of our management, including our Chief Executive Officer and ourChief Financial Officer, of the effectiveness of the design and operation ofour disclosure controls and procedures as of October 31, 2004. Based onthat evaluation, our Chief Executive Officer and our Chief Financial Officerconcluded that our disclosure controls and procedures provide management withtimely notice of material information that is required to be disclosed inperiodic reports filed with the Securities and Exchange Commission. We alsoreviewed our internal controls, and there have been no significant changes inour internal controls, or in other factors that could significantly affect ourinternal controls, subsequent to the date of our previous evaluation.

 

Item 9B. Other Information

 

None.

 

23

----

 

**PART III**

 

Item 10.-   Directorsand Executive Officers of the Registrant

 

The following table sets forth certaininformation with respect to each of the directors and executive officers of theCompany.

 
| **Name**                      | ** ** | **Age** | ** ** | **Position**                                                                    |
|-------------------------------|------------|---------|------------|---------------------------------------------------------------------------------|
|                          |       |    |       |                                                                            |
| Marc D. Grodman, M.D.         |       | 53      |       | Chairman of the Board, President, Chief Executive Officer and  Director         |
|                          |       |    |       |                                                                            |
| Howard Dubinett               |       | 53      |       | Executive Vice President, Chief Operating Officer and Director                  |
|                          |       |    |       |                                                                            |
| Sam Singer                    |       | 61      |       | Vice President, Chief Financial Officer, Chief Accounting Officer and  Director |
|                          |       |    |       |                                                                            |
| Harry Elias(a)(c)(e)          |       | 74      |       | Director                                                                        |
|                          |       |    |       |                                                                            |
| Gary Lederman, Esq. (b)(c)(e) |       | 70      |       | Director                                                                        |
|                          |       |    |       |                                                                            |
| John Roglieri, M.D. (a)(d)(e) |       | 65      |       | Director                                                                        |

 

----

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

 

The Audit Committee iscomprised of the three non-employee members of the Board of Directors, GaryLederman (Chairman), John Roglieri and Harry Elias. The Board of Directorsdeems each such individual as “independent” as defined by the rules of theNational Association of Securities Dealers. The Audit Committee met four timesduring fiscal year 2004. 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 Item 401 (h) of Regulation S-Kpromulgated by the SEC.

 

The Compensation Committee is comprised ofthree non-employee members of the Board of Directors, John Roglieri (Chairman),Harry Elias and Gary Lederman. The Compensation Committee met once duringfiscal year 2004. The Compensation Committee reviews salaries, cash bonuses andcompensation plans for the Company’s executive officers and eligible employeesand makes recommendations concerning same to the Board of Directors.

 

The Company does not have anExecutive Committee. Officers are elected by and hold office at the discretionof the Board of Directors.

 

The Nominating Committee is comprised ofthe three non-employee members of the Board of Directors, Harry Elias, GaryLederman and John Roglieri. Pursuant to its charter, the Nominating Committee’srole is to establish criteria for the selection of directors; to identifyindividuals

 

24

----

 

qualified to be directors; to evaluate directorcandidates proposed by stockholders; to recommend individuals to fill vacancieson the Board and to recommend nominees for director at each annual stockholdermeeting.

 

**Code of Ethics**

 

The Company has adopted aCode of Ethics that applies to its executive officers and to key financial andaccounting personnel. The Company will, upon a stockholder’s written request toInvestor Relations, c/o the Company, furnish a paper copy of the Code ofEthics.

 

The following is a brief account of thebusiness experience of each director including each nominee for director of theCompany.

 

Marc D. Grodman, M.D.founded the Company in December 1981 and has been its Chairman of theBoard, President, Chief Executive Officer and a Director since its formation.Dr. Grodman is an Assistant Professor of Clinical Medicine at ColumbiaUniversity’s College of Physicians and Surgeons and Assistant AttendingPhysician at Presbyterian Hospital, New York City. From 1980 to 1983, Dr.Grodman attended the Kennedy School of Government at Harvard University and wasa Primary Care Clinical Fellow at Massachusetts General Hospital. From 1982 to1984, he was a medical consultant to the Metal Trades Department of theAFL-CIO. Dr. Grodman received a B.A. degree from the University of Pennsylvaniain 1973 and an M.D. degree from Columbia University College of Physicians andSurgeons in 1977.  Except for his parttime duties as Assistant Professor of Clinical Medicine and Assistant AttendingPhysician at Columbia University and Presbyterian Hospital, Dr. Grodman devotesall of his working time to the business of the Company.

 

Howard Dubinett has been theExecutive Vice-President and Chief Operating Officer of the Company since itsformation in 1981. He became a Director of the Company in April 1986. Mr.Dubinett attended Rutgers University. Mr. Dubinett devotes all of his workingtime to the business of 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.Singer was 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 working time tothe business of the Company.

 

Harry Elias became aDirector of the Company in March 2004. Mr. Elias commenced his employmentin sales and marketing with JVC Company of America (“JVC”) in 1967,subsequently being appointed as JVC’s Senior Vice President of Sales andMarketing in 1983 and as Executive Vice President of Sales and Marketing in1990. In 1995, Mr. Elias was named as JVC’s Chief Operating Officer, a positionhe occupied until April 2003 when he resigned his positions upon hisappointment 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 as aconsultant to AKAI USA, the sole distributor in the United States of electronicproducts produced by AKAI, a Japanese manufacturer.

 

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

 

25

----

 

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. Roglieri received a B.S. degree in Chemical Engineering and a B.A.degree in Applied Sciences from Lehigh University in 1960, an M.D. degree fromHarvard Medical School in 1966, and a Master’s degree from Columbia UniversitySchool of Business in 1978.  From 1969until 1971, he was a Senior Assistant Surgeon in the U.S. Public Health Servicein Washington.  From 1971 until 1973 hewas 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,Ambulatory Services at Presbyterian Hospital, a position which he held until1980.  Since 1980, he has maintained aprivate practice of internal medicine at Columbia-Presbyterian MedicalCenter.  From 1988 until 1992, he wasalso Director of the Employee Health Service at Presbyterian Hospital. From1992 through 1999, Dr. Roglieri was the Corporate Medical Director of NYLCare,a managed care subsidiary of New York Life. Dr. Roglieri was chief medicalofficer of Physician WebLink, a national physician practice management company,from 1999 to 2000. Since 2001, he has been Medical Director for New York LifeInsurance Company in Manhattan. He is a member of advisory boards to several pharmaceuticalcompanies, a member of the Editorial Advisory Board of the journals ManagedCare and Seminars in Medical Practice, and is a subject of biographical recordin 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 ofDirectors pursuant to which the Board is divided into three classes ofdirectors and the members of only one class or one-third of the Board areelected each year to serve a three-year term.

 

Key Personnel and Consultants

 

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

 

James Weisberger, M.D. (Age 49) 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 is boardcertified 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 53) is the Senior Vice President of Sales and Marketing.  Mr. Todd was the founder and CEO of GenCare Biomedical Research Corporation,a specialty oncology laboratory that was purchased by the Company in 1995.  He attended Seton Hall University andreceived a B.S. in Finance in 1974.

 

John W.  Littleton (Age 43) joined the Company in September 2002as the Vice President of Sales.  Prior tojoining the Company, Mr.  Littleton wasVice President of Sales for Specialty Laboratories and the Northeast RegionalVice President of Sales for Quest Diagnostics. He received a B.A.. degree from Seton Hall University in 1983.

 

John Bennett, M.D., (Age 71)Scientific Advisory Board Chairman, Professor Emeritus, University of RochesterMedical Center, Rochester, New York. Dr.  Bennett has long beenrecognized as an intellectual force in the treatment and understanding ofleukemias, 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 and

 

26

----

 

Chairmanof the MDS Foundation, as well as Editor of the Journal of Leukemia Research.Dr.  Bennett is currently ProfessorEmeritus and former Head of the Medical Oncology Unit at the University ofRochester Medical Center and formerly was a Professor of Oncology in Medicine,Pathology and Laboratory Medicine at the University of Rochester MedicalSchool.  For nearly four decades,Dr.  Bennett has been honored by themedical community as an expert in the field of oncology as evidenced by thenumerous chairs he has held in prestigious societies and committees and over400 publications in peer review journals, the majority of which are in the areaof hematologic malignancies.  Dr. Bennettearned his B.A. from Harvard University and his M.D. from BostonUniversity.  He served his residency inmedicine at Beth-Israel Hospital, Boston, Massachusetts and completed afellowship in hematology at Boston City Hospital. He headed the Morphology andCytochemistry Section of the Clinical Center at NIH before joining thefaculty at the University of Rochester. Dr. Bennett serves the Company in anadvisory capacity as chairman of our Scientific Advisory Board.

 

Compliance with Section 16(a) of the Exchange Act

 

Based solely on a review of Forms 3 and 4 and any amendments theretofurnished to the Company pursuant to Rule 16a-3(e) under the SecuritiesExchange Act of 1934, or representations that no Forms 5 were required, webelieve that with respect to fiscal 2004, our officers, directors andbeneficial owners of more than 10% of our equity timely complied with allapplicable Section 16(a) filing requirements.

 

Item 11. - Executive Compensation

 

The following table sets forth information concerning the compensationpaid or accrued by us during the year ended October 31, 2004 to our ChiefExecutive Officer and our other executive officers who were serving as ourexecutive officers at October 31, 2004. All of our group life, health,hospitalization or medical reimbursement plans, if any, do not discriminate inscope, terms or operation, in favor of the executive officers or directors andare generally available to all salaried employees.

 

SUMMARY COMPENSATION TABLE

 
| ** **                       | ** ** | ** **                        | ** ** | **Annual Compensation** | ** ** | **Long-Term  Compensation** | ** ** |
|----------------------------------|------------|-----------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Name  and Principal Position** | ** ** | **Year  Ended  October 31,** | ** ** | **Salary**              | ** ** | **Bonus**                   | ** ** | **Other  Annual  Compen-  sation(a)** | ** ** | **Restricted  Stock  Awards** | ** ** | **Options  (SARs)** | ** ** | **LTIP  Pay-  outs** | ** ** | **All  Other  Compen-  sation** | ** ** |
|                             |       |                              |       |                    |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Marc D. Grodman M.D.             |       | 2004                              |       | $                       | 554,625    |                        | $          | 125,000 |   | $ | -0 | - | -0 | - | -0 | - | $ | -0 | - | $ | -0 | - |
| President and Chief              |       | 2003                              |       | $                       | 499,750    |                        | $          | 154,750 |   | $ | -0 | - | -0 | - | -0 | - | $ | -0 | - | $ | -0 | - |
| Executive Officer                |       | 2002                              |       | $                       | 470,000    |                        | $          | 125,000 |   | $ | -0 | - | -0 | - | 4,000 |   | $ | -0 | - | $ | -0 | - |
|                             |       |                              |       |                    |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Howard Dubinett                  |       | 2004                              |       | $                       | 272,200    |                        | $          | 60,000 |   | $ | -0 | - | -0 | - | -0 | - | $ | -0 | - | $ | -0 | - |
| Executive Vice                   |       | 2003                              |       | $                       | 240,000    |                        | $          | 21,800 |   | $ | -0 | - | -0 | - | -0 | - | $ | -0 | - | $ | -0 | - |
| President and Chief              |       | 2002                              |       | $                       | 191,700    |                        | $          | 60,000 |   | $ | -0 | - | -0 | - | 4,000 |   | $ | -0 | - | $ | -0 | - |
| Operating Officer                |       |                              |       |                    |       |                        |       |   |   |   |   |   |   |   |   |   |   |
|                             |       |                              |       |                    |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Sam Singer                       |       |                              |       |                    |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Vice President and               |       | 2004                              |       | $                       | 259,004    |                        | $          | 60,000 |   | $ | -0 | - | -0 | - | -0 | - | $ | -0 | - | $ | -0 | - |
| Chief Financial and              |       | 2003                              |       | $                       | 240,000    |                        | $          | 9,600 |   | $ | -0 | - | -0 | - | -0 | - | $ | -0 | - | $ | -0 | - |
| Accounting Officer               |       | 2002                              |       | $                       | 180,300    |                        | $          | 60,000 |   | $ | -0 | - | -0 | - | 4,000 |   | $ | -0 | - | $ | -0 | - |

 

----

(a)See “Split-Dollar Life Insurance” herein concerning our payment of lifeinsurance premiums pursuant to “split-dollar” life insurance programs for ourthree executive officers.

 

Employment Agreements with Executive Officers 

 

Dr. Grodman serves as our President and Chief Executive Officerpursuant to a seven-year

 

27

----

 

employment agreement which expires on October 31, 2011. Dr.Grodman has the right to elect to cancel the employment agreement effective atthe end of any calendar month commencing October 31, 2008 on not less than90 days prior written notice, subject to a six month non-competitionrestriction. The employment agreement is automatically renewable for additionaltwo year periods subject to the right of either party to elect not to renew atleast six months prior thereto. The employment agreement provides Dr. Grodmanwith minimum annual base compensation of $750,000 subject to annual percentageincreases to the extent of annual percentage increases in the Consumer PriceIndex. The Compensation Committee can but is not required to increase Dr.Grodman’s compensation at the end of any fiscal year based upon his and theCompany’s performance. The employment agreement also provides Dr. Grodman withbusiness use of an automobile leased by the Company and participation in anyfringe benefit and bonus plans available to the Company’s employees to theextent determined by the Compensation Committee. The employment agreementcontains provisions governing in the event of Dr. Grodman’s partial or totaldisability and provides for termination for cause or in the event of Dr.Grodman’s death. Dr. Grodman has the right to terminate the employmentagreement in the event of a material change in his duties and responsibilities,the relocation of the Company’s principal executive offices from Elmwood Park,New Jersey to a location more than fifty miles distant or a material breach ofthe employment agreement by the Company (including a reduction in Dr. Grodman’sbenefits under the agreement). In the event of a Change in Control of theCompany, Dr. Grodman can elect to terminate the agreement. In that event, hewill be entitled to be paid a lump sum Severance Payment equal to 2.99 timesthe average of his annual compensation paid by the Company for the fivecalendar years preceding the earlier of the calendar year in which the Changeof Control occurred or the calendar year of the Date of Termination. See “Split-DollarLife Insurance” herein as to the Endorsement Split-Dollar Life Insurance Agreementbetween the Company and Dr. Grodman.

 

Mr. Dubinett serves as Executive Vice President and Chief OperatingOfficer pursuant to an employment agreement which was extended in fiscal 2004for two additional years beyond its October 31, 2004 terminationdate.  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 (including bonuses) at the discretion ofthe Compensation Committee.  Theagreement provides (i) typical health insurance coverage; (ii) the leasing ofan automobile for his use; (iii) participation in fringe benefit, bonus,pension, profit sharing, and similar plans maintained for the Company’semployees; (iv) disability benefits; (v) certain termination benefits; and (vi)in the event of termination due to a Change in Control of the Company, aSeverance Payment equal to 2.99 times Mr. Dubinett’s average annualcompensation during the preceding five years. The Company has the option to extend the extension period of theemployment agreement on the same terms and conditions through October 31,2007.  See “Split Dollar Life Insurance”herein as to the Endorsement Split Dollar Life Insurance Agreement between theCompany and Mr. Dubinett.

 

Mr. Singer serves as Vice President and Chief Financial Officerpursuant to an employment agreement which was extended in fiscal 2004 for twoadditional years beyond its October 31, 2004 termination date. 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 (including bonuses) at the discretionof the Compensation Committee. The agreement provides (i) typical healthinsurance coverage; (ii) the leasing of an automobile for his use; (iii)participation in fringe benefit, bonus, pension, profit sharing, and similarplans maintained for the Company’s employees; (iv) disability benefits; (v)certain termination benefits; and (vi) in the event of termination due to aChange in Control of the Company, a Severance Payment equal to 2.99 times Mr.Singer’s average annual compensation during the preceding five years. TheCompany has the option to extend the employment agreement on the same terms andconditions through October 31, 2007. See “Split-Dollar Life Insurance”herein as to the Endorsement Split-Dollar Life Insurance Agreement between theCompany and Mr. Singer.

 

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

 

Pursuant to the terms of their 1997 employment agreements, the Companyhad

 

28

----

 

established split-dollar life insurance programs for each of its threeExecutive Officers. As a result of the passage of the Sarbanes Oxley Act of2002 (signed into law on July 30, 2002), these three programs weremodified. Pursuant to the modification, each of the three Executive Officersassigned ownership of his policies to the Company and new policies were issuedto replace the prior policies with annual premiums under the new policies($70,000 under Dr. Grodman’s policy and $25,000 each under Messrs. Dubinett’sand Singer’s policies) being equal to the premiums paid under the replacedpolicies. The Company has now executed new “Endorsement Split-Dollar LifeInsurance Agreements” with each of its three Executive Officers. Pursuant tothe new agreements, the Company has agreed to continue to pay the annualpremium on the policy on each officer’s life during the period of his full-timeemployment by the Company. The Company is the sole owner of the policy and ofits net cash surrender value, and in the event of the officer’s death whileserving as a full-time employee of the Company, the Company will be entitled toreceive that amount of the death proceeds equal to its interest in the policy(the aggregate amount of premiums paid by the Company with respect to thepolicy less the amount of any loans, if any, from the Insurer to the Companyagainst the cash value or policy proceeds, and less the aggregate amount of anypremiums paid by the officer to the Company in reimbursement of premiums paidby the Company) and the balance of the death proceeds will be paid to theofficer’s designated beneficiaries. The premiums paid by the Company on thecurrent policies and the prior policies aggregated approximately $1,044 at October 31,2004. At that date, the net cash surrender value of the three current policiesaggregated approximately $1,044.

 

**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”).

 

Under the 1989 Plan, theexercise price of an option designated as an ISO could not be less than thefair market value of the Common Stock on the date the option was granted.  However, in the event an option designated asan ISO was granted to a 10% shareholder (as defined in the 1989 Plan) suchexercise price was required to be at least 110% of such fair market value.  Exercise prices of NQOs could be less thansuch fair market value.  The aggregatefair market value of shares subject to options granted to a participant whichare designated as ISOs which first become exercisable in any calendar yearcould not exceed $100,000. All options under the 1989 Plan were required to be grantedbefore the Plan’s July 1999 Termination Date so that no further optionscan be granted under the 1989 Plan.

 

AtOctober 31, 2003, there were outstanding ISOs issued under the 1989 Planheld by five employees and exercisable to purchase an aggregate 257,668 sharesat an exercise price of $.71875 per share. During fiscal 2004, two employeesexercised ISOs under the 1989 Plan and purchased an aggregate 205,000 shares.As a result, at October 31, 2004, there were outstanding ISOs under the1989 Plan exercisable to purchase an aggregate 52,668 shares at an exerciseprice of $.71875 per share.

 

**The 2000 Plan**

 

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. At October 31, 2003, there were outstandingISOs issued under the 2000 Plan

 

29

----

 

exercisableto purchase an aggregate 705,000 shares at exercise prices ranging from $1.688to $9.66 per share. During fiscal 2004, ISOs were granted under the 2000 Planto ten employees exercisable to purchase an aggregate 50,000 shares at exerciseprices ranging from $13.70 to $15.34 per share, and 46 employees exercised ISOsissued under the 2000 Plan and purchased an aggregate 215,088 shares atexercise prices ranging from $1.125 to $8.40 per share. As a result, at October 31,2004, there were outstanding ISOs under the 2000 Plan exercisable to purchasean aggregate 539,912 shares at exercise prices ranging from $1.688 to $15.34per share.

 

The 2000 Plan authorizes thegrant of options which qualify for ISO treatment under Section 422 of theCode, to purchase up to a maximum aggregate 800,000 shares of the Company’sCommon Stock. Options may only be granted under the 2000 Plan to employees ofthe Company and its subsidiaries (including officers and directors who are alsoemployees).

 

The 2000 Plan will beadministered by the Board of Directors or by a Stock Option Committeedesignated by the Board of Directors. The Board or the Stock Option Committee,as the case may be, has the discretion to determine the eligible employees towhom, and the price (not less than the fair market value on the date of grant)at which options will be granted; the periods during which each option isexercisable; and the number of shares subject to each option. The Board or theStock Option Committee has the authority to interpret the 2000 Plan and toestablish and amend rules and regulations relating thereto.

 

The 2000 Plan provides thatthe exercise price of an option granted thereunder shall not be less than thefair market value of the Common Stock on the date the option is granted.However, in the event an option is granted under the 2000 Plan to a holder of10% or more of the Company’s outstanding Common Stock, the exercise price mustbe at least 110% of such fair market value. Under the 2000 Plan, options mustbe granted before the August 24, 2010 Termination Date. No option may havea term longer than ten years (limited to five years in the case of an optiongranted to a 10% or greater stockholder of the Company). The aggregate fairmarket value of the Company’s Common Stock with respect to which options areexercisable for the first time by a grantee under the 2000 Plan during anycalendar year cannot exceed $100,000. Options granted under the 2000 Plan arenon-transferable and must be exercised by an optionee, if at all, whileemployed by the Company or a subsidiary or within three months aftertermination of such optionee’s employment due to retirement, or within one yearof such termination if due to disability or death. The Board or the StockOption Committee, as the case may be, may, in its sole discretion, cause theCompany to lend money to or guaranty any obligation of an employee for thepurpose of enabling such employee to exercise an option granted under the 2000Plan provided that such loan or obligation cannot exceed fifty percent (50%) ofthe exercise price of such option.

 

**The 2003 Plan**

 

On June 3, 2003, the Boardof Directors adopted the 2003 Employee Incentive Stock Option Plan (the “2003Plan”) reserving an aggregate 800,000 shares of Bio-Reference Common Stock forissuance upon exercise of ISOs which may be granted under the 2003 Plan.Stockholders ratified the adoption of the 2003 Plan at our July 31, 2003Annual Meeting of Stockholders. At October 31,2003, no ISOs had been granted pursuant to the 2003 Plan. During fiscal 2004,ISOs were granted under the 2003 Plan to 40 employees exercisable to purchasean aggregate 104,000 shares at exercise prices ranging from $12.22 to $21.46per share and one employee exercised her ISOs and purchased 2,000 shares. As aresult, at October 31, 2004, there were outstanding ISOs under the 2003Plan exercisable to purchase an aggregate 102,000 shares at exercise pricesranging from $12.22 to $21.46 per share.

 

The 2003 Plan authorizes the grant of options which qualify for ISOtreatment under Section 422 of the Code to purchase up to a minimumaggregate 800,000 shares of the Company’s Common Stock.  Options may only be granted under the 2003Plan to employees of the Company and its subsidiaries (including those officersand directors who are also employees).

 

30

----

 

The 2003 Plan will beadministered by the Board of Directors or by a Stock Option Committeedesignated by the Board of Directors. The Board or the Stock Option Committee, as the case may be, has thediscretion to determine the eligible employees to whom, and the prices (notless than 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 Boardor the Stock Option Committee has the authority to interpret the 2003 Plan andto establish and amend rules and regulations relating thereto.

 

The 2003 Plan provides thatthe exercise price of an option granted thereunder shall not be less than thefair market value of the Common 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, 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 or the Stock Option Committee, asthe case may be, may, in its sole discretion, cause the Company to lend moneyto or guaranty 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.

 

Non-Qualified Options (NQOs) and Warrants

 

At October 31, 2003, there were outstanding NQOs and Warrantsowned by employees, directors, consultants including members of the ScientificAdvisory Board and a software provider exercisable to purchase an aggregate533,750 shares at exercise prices ranging from $1.00 to $7.94 per share. Duringfiscal 2004, NQOs exercisable to purchase 15,000 shares at an exercise price of$13.70 per share were granted to a member of the Scientific Advisory Board;NQOs exercisable to purchase 12,000 shares were canceled and NQOs exercisableto purchase 210,750 shares were exercised by 17 individuals. As a result, at October 31,2004, there were outstanding NQOs and Warrants owned by employees, directors,consultants including members of the Scientific Advisory Board and a softwareprovider exercisable to purchase an aggregate 326,000 shares at exercise pricesranging from $1.19 to $13.70 per share.

 

See Note 11 of Notes to the Consolidated Financial Statements.

 

**Option Grants to Our Three Named Executive Officers in Last Fiscal Year**

 

No options to purchase shares of our Common Stock were granted to anyof our three Named Executive Officers in fiscal 2004.

 

**Aggregated Option Exercises by Our Three Named Executive Officers inLast Fiscal Year And Fiscal Year-End Option Values**

 
| **Name**        | ** ** | **Shares of Common  Stock Acquired  Upon Option Exercise  in Fiscal 2004** | ** ** | **Value  Realized** | ** ** | **Shares of Common Stock  Underlying Unexercised  Options at 2004  Fiscal Year End (b)** | ** ** | **Value of Unexercised  In-The-Money  Options at 2004  Fiscal Year-End (c)** | ** ** |
|-----------------|------------|----------------------------------------------------------------------------|------------|---------------------|------------|------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| Marc D. Grodman |       | —                                                                     |       | —              |       | 4,000                                                                                    |       | $                                                                            | 29,080     |   |
| Howard Dubinett |       | 200,000                                                                    |       | $                   | 2,578,250  | (a)                                                                                      | 13,334     |                                                                         | 178,025    |   |
|            |       | —                                                                     |       | —              |       | 4,000                                                                                    |       | 29,080                                                                       |       |
| Sam Singer      |       | —                                                                     |       | —              |       | 4,000                                                                                    |       | 29,080                                                                       |       |
|                 |            |                                                                            |            |                     |            |                                                                                          |            |                                                                              |            |  |  |

 

31

----

 

----

(a)Based upon the difference between the last sale price for the Common Stock onNASDAQ on March 22, 2004 (the date of exercise) and the exercise price.

(b)All of these options are currently exercisable.

(c)Based upon the difference between the last sales price for the Common Stock onNASDAQ on Friday, October 29, 2004 and the exercise price.

 

**Directors’ Compensation**

 

Directors who are not our employees were each paid a $6,250 per quarterdirector’s fee during the first half of fiscal year 2004 which increased to$10,000 per quarter for the second half of fiscal 2004.

 

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

 

The following table setsforth information as of October 31, 2004 with respect to the ownership ofCommon Stock by (i) each person known to us to be the beneficial owner of morethan 5% of our outstanding Common Stock, (ii) each of our directors, (iii) eachof our executive officers, and (iv) all directors and executive officers as agroup.  The percentages have beencalculated on the basis of treating as outstanding for a particular holder, allshares of Common Stock outstanding on said date owned by such holder and allshares of Common Stock issuable to such holder in the event of exercise orconversion of outstanding options, warrants and convertible securities owned bysuch holder at said date which are exercisable or convertible within 60 days ofsuch date.

 
| **Name  and Address of  Beneficial Owner  Directors and  Executive Officers*** | ** ** | **Shares of Common Stock  Beneficially Owned(1)** | ** ** | **Percentage  Ownership** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------|------------|
|                                                                           |       |                                              |       |                      |       |
| Marc D. Grodman(2)                                                             |       | 1,657,846                                         |       | 13                        | %          |
| Howard Dubinett(3)                                                             |       | 481,001                                           |       | 4                         | %          |
| Sam Singer(4)                                                                  |       | 315,667                                           |       | 2                         | %          |
| Harry Elias                                                                    |       | -0                                                | -          | 0                         | %          |
| Gary Lederman(5)                                                               |       | 27,200                                            |       |                      | **         |
| John Roglieri(6)                                                               |       | 52,000                                            |       |                      | **         |
| Executive Officers and Directors as a group                                    |       | 2,533,714                                         |       | 20                        | %          |
|                                                                           |       |                                              |       |                      |       |
| (six persons)(2)(3)(4)(5)(6)                                                   |       |                                              |       |                      |       |

 

----

| *                                         The  address of all of the Company’s directors and executive officers is c/o the  Company, 481 Edward H. Ross Drive, Elmwood Park, New Jersey 07407. |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                        |   |   |
| **                                                                                                                                                                                                                                                                                                                                                                                                          |   | Less  than one (1%) percent. |
|                                                                                                                                                                                                                                                                                                                                                                                                        |   |   |
| (1)                                                                                                                                                                                                                                                                                                                                                                                                         |   | Except as otherwise noted, each holder named in the table has sole  voting and investment power with respect to all shares of Common Stock shown  as beneficially owned. |
|                                                                                                                                                                                                                                                                                                                                                                                                        |   |   |
| (2)                                                                                                                                                                                                                                                                                                                                                                                                         |   | Includes 1,429,779 shares owned directly and 4,000 shares issuable  upon exercise of options. Also includes 176,067 shares owned directly by Dr.  Grodman’s wife, Pam Grodman, and 48,000 shares owned by their minor children.  Dr. Grodman disclaims beneficial ownership of these 224,067 shares. |

 

32

----

 
| (3)    |   | Includes 463,667 shares owned directly and 17,334 shares issuable  upon exercise of options. In lieu of an outright sale, on March 30, 2004,  Mr. Dubinett entered into a pre-paid variable forward sales contract (“Forward  Contract”) with Bear Stearns Bank plc (“Bear Stearns”). Pursuant to the  Forward Contract, Mr. Dubinett pledged 100,000 of his shares of Common Stock  to secure his obligation to deliver a maximum 100,000 shares of Common Stock  to Bear Stearns on March 30, 2006 (the “Settlement Date”). Mr. Dubinett  received a prepayment of $1,297,680 from Bear Stearns for his pledge of the  100,000 shares. On the Settlement Date, Mr. Dubinett will be obligated to  deliver a variable number of shares to Bear Stearns based on the price of the  Common Stock on the Settlement Date, up to a maximum 100,000 shares. Mr.  Dubinett will benefit from any excess in the price of the Common Stock on the  Settlement Date to the extent it exceeds $16.07 per share up to a maximum  $21.69 per share by being able to deliver fewer shares. Until the Settlement  Date, Mr. Dubinett is deemed the beneficial owner of the pledged shares. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (4)    |   | Includes 305,667 shares owned directly, 4,000 shares issuable upon  exercise of options and 6,000 shares owned by children who share Mr. Singer’s  household. Mr. Singer disclaims beneficial ownership of these 6,000 shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (5)    |   | Includes 15,200 shares owned directly and 12,000 shares issuable upon  exercise of options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (6)    |   | Includes 40,000 shares owned directly and 12,000 shares issuable upon  exercise of options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

**Equity Compensation Plan Information**

 

Thefollowing table provides information as of October 31, 2004 regardingshares of Common Stock that may be issued pursuant to the Company’s equitycompensation plans:

 
| ** **                                               | ** ** | **(a)  Number of Shares  Issuable upon Exercise  of Outstanding  Options and Warrants** | ** ** | **(b)  Weighted-Average  Exercise Price per  Share of Outstanding  Options and Warrants** | ** ** | **(c)  Number of Shares  Remaining Available for  Future Issuances Under  Equity Compensation Plans  (Excluding Shares  Reflected in Column (a))** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                     |       |                                                                                    |       |                                                                                      |       |                                                                                                                                               |       |
| Equity Compensation  Plans Approved  by Stockholders     |       | 694,580                                                                                 | (1)        | $                                                                                         | 6.44       |                                                                                                                                               | 696,000    | (2) |
|                                                     |       |                                                                                    |       |                                                                                      |       |                                                                                                                                               |       |
| Equity Compensation  Plans Not Approved  by Stockholders |       | 326,000                                                                                 | (3)        | $                                                                                         | 3.16       |                                                                                                                                               | -0         | - |
|                                                     |       |                                                                                    |       |                                                                                      |       |                                                                                                                                               |       |
| Totals                                                   |       | 1,020,580                                                                               |       | $                                                                                         | 5.39       |                                                                                                                                               | 696,000    |   |

 

----

(1) Reflects shares issuable upon exercise of outstanding ISOs grantedpursuant to the Company’s 1989, 2000 and 2003 Employee Stock Option Plans.

 

(2) Reflects shares reserved for issuance upon the grant of ISOs whichmay be granted pursuant to the Company’s 2000 and 2003 Employee Incentive StockOption Plans.

 

(3) Includes 200,000 shares issuable upon exercise of Warrants held bya software provider; 70,000 shares issuable upon exercise of NQOs held bymembers of the Company’s Scientific

 

33

----

 

Advisory Board; 36,000 shares issuable upon exercise of NQOs held byfive directors; and 20,000 shares issuable upon exercise of NQOs held by aconsultant. The Warrants and the NQOs held by the software provider, themembers of the Scientific Advisory Committee and the consultant were issuedpursuant to individual contracts with each recipient.

 

Item 13. - Certain Relationships and Related Transactions

 

OnApril 20, 1993, in order to facilitate the Company’s 1993 public offering,Dr. Grodman canceled his pro-rata option and all other outstanding options andwarrants to purchase shares of Common Stock held by Dr. Grodman, his wife andan affiliated entity (the “Grodman Group”) exercisable to purchase an aggregate604,078 shares of Common Stock at prices ranging from $1.4438 to $1.50 or anaverage price of $1.47 per share. The pro-rata option permitted the GrodmanGroup to purchase a proportionate number of shares of Common Stock orsecurities convertible into shares of Common Stock sold or issued by theCompany so as to continue to maintain an approximately 19.6% beneficialownership in the Common Stock on a fully diluted basis. In consideration forthe cancellation, the Company issued 604,078 shares of a new class of seniorpreferred stock, $.10 par value per share (“Senior Preferred Stock”) to theGrodman Group.  Each share of SeniorPreferred Stock had the same voting rights (one vote per share), dividendrights and liquidation rights as each share of Common Stock and for a period often years after issuance, was convertible into one share of Common Stock uponpayment of a conversion price of $1.50 per share.  The 604,078 shares of Senior Preferred Stockwere issued to the Grodman Group on August 23, 1993. On May 13, 1997pursuant to a recapitalization, the Senior Preferred Stock was retired inexchange for a new class of Series A Senior Preferred Stock issued to theGrodman Group. The new Series A Senior Preferred Stock was convertible into anaggregate 604,078 shares of Common Stock on or before May 1, 2007 at aconversion price of $.75 per share and had the same voting rights (one vote pershare), dividend rights and liquidation rights as each share of Common Stock OnJuly 23, 2004, Dr. and Mrs. Grodman paid the $453,059 aggregate conversionprice and converted their 604,078 shares of Series A Senior Preferred Stockinto 604,078 shares of Common Stock.

 

Item 14          PrincipalAccountant Fees and Services

 

The firm of Moore Stephens, P.C. (“Moore Stephens”) certified publicaccountants, audited our accounts and the accounts of our subsidiaries for thefiscal years ended October 31, 2004 and 2003. Moore Stephens and itspredecessor firm have been our auditors since 1988.

 

(1)          Audit Fees

 

Moore Stephens billed us $125,595 for professional services rendered inconnection with the audit of our annual financial statements for the fiscalyear ended October 31, 2004 and the review of the financial statementsincluded in our quarterly reports on Form 10-Q for such fiscal year compared to$124,485 in billings for such services for the fiscal year ended October 31,2003. In addition, Moore Stephens billed us $7,600 in fiscal 2004 for its auditof our 401(k) Plan for calendar year 2003 as compared to $9,360 of such fees infiscal 2003 with respect to calendar year 2002.

 

(2)          Audit-Related Fees

 

Moore Stephens did not render any services related to the performanceof the audit or review of our financial statements for fiscal 2004 or 2003other than the services reported in Item 14 (1) herein.

 

(3)          Tax Fees

 

Moore Stephens billed us approximately $39,000 for tax services forfiscal 2004 and approximately $29,000 for tax services for fiscal 2003. Thefees were billed for tax return preparation.

 

34

----

 

(4)                                  AllOther Fees

 

No fees were billed to us by Moore Stephens with respect to fiscal 2004or fiscal 2003 other than for services described in Item 14 (1) and (3) herein.

 

(5)          Pre-Approval Policies and Procedures

 

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

 

35

----

 

**PART IV**

 

Item 15.                                                    Exhibits,Financial Statement Schedules and Reports on Form 8-K

 
| (a)1.  |   | Financial Statements                                                                                     |   |   |   |   |
|--------|--------|----------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
|   |   |                                                                                                     |   |   |   |   |
|   |   | The following financial statements of the Company are included in  Part II, Item 7                       |   |   |   |   |
|   |   |                                                                                                     |   |   |   |   |
|   |   | Report of Independent Registered Public  Accounting Firm                                                 |   |   |   |   |
|   |   |                                                                                                     |   |   |   |   |
|   |   | Consolidated Balance Sheets - October 31, 2004 and 2003                                             |   |   |   |   |
|   |   |                                                                                                     |   |   |   |   |
|   |   | Consolidated Statements of Operations-  Years ended October 31, 2004, 2003 and 2002                 |   |   |   |   |
|   |   |                                                                                                     |   |   |   |   |
|   |   | Consolidated Statements of Shareholders’  Equity  Years ended October 31, 2004, 2003, and 2002 |   |   |   |   |
|   |   |                                                                                                     |   |   |   |   |
|   |   | Consolidated Statements of Cash Flows -  Years ended October 31, 2004, 2003 and 2002                |   |   |   |   |
|   |   |                                                                                                     |   |   |   |   |
|   |   | Notes to Consolidated Financial Statements-                                                              |   |   |   |   |
|   |   |                                                                                                     |   |   |   |   |
| 2.     |   | Financial Statements Schedule                                                                            |   |   |   |   |
|   |   |                                                                                                     |   |   |   |   |
|   |   | Schedule II -                                                                                       |   |   |   |   |
|   |   |                                                                                                     |   |   |   |   |
|   |   | Years ended October 31, 2004, 2003 and  2002                                                        |   |   |   |   |
|   |   |                                                                                                     |   |   |   |   |
| 3.     |   | Exhibits                                                                                                 |   |   |   |   |

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

 

36

----

 
| 10.1*   |   | Lease Agreement for Elmwood Park, New Jersey Premises, expiring in  February, 2004                                                                                                       |   | (F)    |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|    |   |                                                                                                                                                                                     |   |   |
| 10.1.1  |   | Fifth Amendment dated as of July 16, 2004 to Lease for Elmwood  Park, New Jersey Premises                                                                                           |   |   |
|    |   |                                                                                                                                                                                     |   |   |
| 10.1.2  |   | Sixth Amendment dated as of October 27, 2004 to Lease for  Elmwood Park, New Jersey Premises                                                                                        |   |   |
|    |   |                                                                                                                                                                                     |   |   |
| 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.                                                                              |   |   |
|    |   |                                                                                                                                                                                     |   |   |
| 10.4*   |   | Employment Agreement between the Company and Sam Singer as in effect  at October 31, 2001                                                                                           |   | (F)    |
|    |   |                                                                                                                                                                                     |   |   |
| 10.4.1* |   | Extension to Employment Agreement between the Company and Sam Singer  effective November 1, 2002                                                                                    |   | (I)    |
|    |   |                                                                                                                                                                                     |   |   |
| 10.4.2  |   | Extension to Employment Agreement between the Company and Sam Singer  effective November 1, 2004                                                                                    |   |   |
|    |   |                                                                                                                                                                                     |   |   |
| 10.5*   |   | The Company’s 1989 Stock Option Plan                                                                                                                                                |   | (B)    |
|    |   |                                                                                                                                                                                     |   |   |
| 10.5.1* |   | The Company’s 2000 Employee Incentive Stock Option Plan.                                                                                                                            |   | (G)    |
|    |   |                                                                                                                                                                                     |   |   |
| 10.5.2* |   | The Company’s 2003 Employee Incentive Stock Option Plan.                                                                                                                            |   | (J)    |
|    |   |                                                                                                                                                                                     |   |   |
| 10.7*   |   | Rights Agreement dated as of March 31, 1998 including Exhibits  thereto between the Company and American Stock Transfer & Trust Company  as Rights Agent                        |   | (E)    |
|    |   |                                                                                                                                                                                     |   |   |
| 10.11*  |   | Stock Purchase Agreement dated May 14, 2001, between the Company on  the one hand and CastleTop Investments, L.P. (an affiliate of Morton L.  Topfer) and Morton L. Topfer on the other  |   | (H)    |
|    |   |                                                                                                                                                                                     |   |   |
| 10.12*  |   | Strategic Marketing Alliance Agreement dated as of December 31,  2001 between the Company and CareEvolve.com, Inc. on the one hand and Roche  Diagnostics Corporation on the other. |   | (H)    |
|    |   |                                                                                                                                                                                     |   |   |
| 10.12.1 |   | Addendum dated as of December 27, 2004 between the Company and  CareEvolve.com, Inc. on the one hand and Roche Diagnostics Corporation on the  other.                               |   |   |
|    |   |                                                                                                                                                                                     |   |   |
| 10.13   |   | Amended and Restated Loan and Security Agreement as of September 30,  2004 between the Company and PNC Bank, National Association.                                                  |   |   |
|    |   |                                                                                                                                                                                     |   |   |
| 21      |   | Subsidiaries of the Company                                                                                                                                                              |   |   |

 

37

----

 

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

 
| ** **           | ** ** | **State of Incorporation** | ** ** | **Name under which it  Conducts or  Conducted Business** | ** ** |
|----------------------|------------|----------------------------|------------|----------------------------------------------------------|------------|
|                 |       |                       |       |                                                     |       |
| Medilabs, Inc.       |       | New York                   |       | Medilabs                                                 |       |
| CareEvolve.com, Inc. |       | New Jersey                 |       | CareEvolve                                               |       |

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

 

----

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

 
| (A)    |   | Incorporated by 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).            |
| (E)    |   | Incorporated by reference to exhibit filed with the Company’s report  on Form 8-A dated March 31, 1998.                         |
| (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).               |
|   |   |                                                                                                                                      |
| (b)    |   | **Reports on Form 8-K**                                                                                                                   |

 

On October 12, 2004, we filed acurrent report on Form 8-K reporting our execution on October 5, 2004 (asof September 30, 2004) of an Amended and Restated Loan and SecurityAgreement with PNC Bank, National Association.

 

On December 10, 2004, we filed a current report on Form 8-K,reporting our execution of a seven year Employment Agreement commencingNovember1, 2004 with our President and Chief Executive Officer, Marc Grodman.

 

38

----

 

SIGNATURES

 

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

 
| BIO-REFERENCE LABORATORIES, INC.                                                                                                                                                |                |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------|
|                                                                                                                                                                            |                |
|                                                                                                                                                                            |                |
| By:                                                                                                                                                                             | /S/ Marc D. Grodman |   |   |
| Marc D. Grodman                                                                                                                                                                 |                |
| Chairman of the Board, President,                                                                                                                                               |                |
| Chief Executive Officer and Director                                                                                                                                            |                |
| Dated: January12, 2005                                                                                                                                                          |                |
|                                                                                                                                                                            |                |
| In accordance with the Exchange Act, this report has been signed  below by the following persons on behalf of the registrant and in the  capacities and on the dates indicated. |
|                                                                                                                                                                            |                |
| /S/ Marc D. Grodman                                                                                                                                                             |                |   |
| Marc D. Grodman                                                                                                                                                                 |                |
| Chairman of the Board, President,                                                                                                                                               |                |
| Chief Executive Officer and Director                                                                                                                                            |                |
| January 12, 2005                                                                                                                                                           |                |
|                                                                                                                                                                            |                |
| /S/ Howard Dubinett                                                                                                                                                             |                |   |
| Howard Dubinett                                                                                                                                                                 |                |
| Executive Vice President,                                                                                                                                                       |                |
| Chief Operating Officer and Director                                                                                                                                            |                |
| January 12, 2005                                                                                                                                                           |                |
|                                                                                                                                                                            |                |
| /S/ Sam Singer                                                                                                                                                                  |                |   |
| Sam Singer                                                                                                                                                                      |                |
| Vice President, Chief Financial Officer,                                                                                                                                        |                |
| Chief Accounting Officer and Director                                                                                                                                           |                |
| January 12, 2005                                                                                                                                                           |                |
|                                                                                                                                                                            |                |
| /S/ Harry Elias                                                                                                                                                                 |                |   |
| Harry Elias                                                                                                                                                                     |                |
| Director                                                                                                                                                                        |                |
| January 12, 2005                                                                                                                                                           |                |
|                                                                                                                                                                            |                |
| /S/ Gary Lederman                                                                                                                                                               |                |   |
| Gary Lederman                                                                                                                                                                   |                |
| Director                                                                                                                                                                        |                |
| January 12, 2005                                                                                                                                                           |                |
|                                                                                                                                                                            |                |
| /S/ John Roglieri                                                                                                                                                               |                |   |
| John Roglieri                                                                                                                                                                   |                |
| Director                                                                                                                                                                        |                |
| January 12, 2005                                                                                                                                                           |                |

 

39

----

 

 

**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

To the Board of Directors and Shareholders ofBio-Reference Laboratories, Inc.Elmwood Park, New Jersey

 

 

We have audited theaccompanying consolidated balance sheets of Bio-Reference Laboratories, Inc.and its subsidiary as of October 31, 2004 and 2003, and the relatedconsolidated statements of operations, shareholders’ equity, and cash flows foreach of the three fiscal years in the period ended October 31, 2004.  These consolidated financial statements arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements 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 audit to obtainreasonable assurance about whether the consolidated financial statements arefree of material misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall consolidated financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Bio-ReferenceLaboratories, Inc. and its subsidiary as of October 31, 2004 and 2003, and theconsolidated results of their operations and their cash flows for each of thethree fiscal years in the period ended October 31, 2004, in conformity withaccounting principles generally accepted in the United States of America.

 

 

MOORESTEPHENS, P. C.

CertifiedPublic Accountants.

 

Cranford, New Jersey

December 17, 2004

 

40

----

 

**BIO-REFERENCELABORATORIES, INC. AND SUBSIDIARY**

 

**CONSOLIDATEDBALANCE SHEET****S**

**[DollarsIn Thousands, Except Per Share Data]**

 
| ** **                                  | ** ** | **October 31,** | ** ** |
|---------------------------------------------|------------|-----------------|------------|
| ** **                                  | ** ** | **2004**        | ** ** | **2003** | ** ** |
| ***Assets:***                               |       |            |       |   |   |
| **Current Assets:**                         |       |            |       |   |   |
| Cash and Cash Equivalents                   |       | $               | 6,681      |   | $ | 3,966 |   |
| Accounts Receivable - Net                   |       | 40,952          |       | 32,913 |   |
| Inventory                                   |       | 1,277           |       | 1,088 |   |
| Other Current Assets                        |       | 834             |       | 763 |   |
| Deferred Tax Asset                          |       | 1,029           |       | — |   |
|                                        |       |            |       |   |   |
| **Total Current Assets**                    |       | 50,773          |       | 38,730 |   |
|                                        |       |            |       |   |   |
| **Property and Equipment - At Cost**        |       | 13,501          |       | 7,485 |   |
|                                        |       |            |       |   |   |
| **Less:**** **Accumulated Depreciation |       | 4,225           |       | 2,722 |   |
|                                        |       |            |       |   |   |
| **Property and Equipment - Net**            |       | 9,276           |       | 4,763 |   |
|                                        |       |            |       |   |   |
| **Other Assets:**                           |       |            |       |   |   |
| Deposits                                    |       | 426             |       | 314 |   |
| Goodwill - Net                              |       | 8,190           |       | 5,843 |   |
| Intangible Assets - Net                     |       | 2,438           |       | 2,299 |   |
| Other Assets                                |       | 1,048           |       | 1,270 |   |
|                                        |       |            |       |   |   |
| **Total Other Assets**                      |       | 12,102          |       | 9,726 |   |
|                                        |       |            |       |   |   |
| **Total Assets**                            |       | $               | 72,151     |   | $ | 53,219 |   |

 

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

 

41

----

 

**BIO-REFERENCELABORATORIES, INC. AND SUBSIDIARY**

 

**CONSOLIDATEDBALANCE SHEETS**

**[DollarsIn Thousands, Except Per Share Data]**

 
| ** **                                                                                                                                                                 | ** ** | **October 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|
| ** **                                                                                                                                                                 | ** ** | **2004**        | ** ** | **2003** | ** ** |
| ***Liabilities and Shareholders’ Equity:***                                                                                                                           |       |            |       |   |   |
| **Current Liabilities:**                                                                                                                                                   |       |            |       |   |   |
| Accounts Payable                                                                                                                                                           |       | $               | 10,801     |   | $ | 7,900 |   |
| Accrued Salaries and Commissions                                                                                                                                           |       | 2,139           |       | 1,719 |   |
| Accrued Taxes and Expenses                                                                                                                                                 |       | 1,081           |       | 1,158 |   |
| Revolving Note Payable - Bank                                                                                                                                              |       | 10,333          |       | 8,718 |   |
| Current Maturities of Long-Term Debt                                                                                                                                       |       | 1,273           |       | — |   |
| Capitalized Lease Obligation - Short-Term  Portion                                                                                                                         |       | 1,331           |       | 933 |   |
|                                                                                                                                                                       |       |            |       |   |   |
| **Total Current Liabilities**                                                                                                                                              |       | 26,958          |       | 20,428 |   |
|                                                                                                                                                                       |       |            |       |   |   |
| **Long-Term Liabilities:**                                                                                                                                                 |       |            |       |   |   |
| Capitalized Lease Obligations - Long-Term  Portion                                                                                                                         |       | 3,092           |       | 2,127 |   |
| Long-Term Debt—Net of Current Portion                                                                                                                                 |       | 1,061           |       | — |   |
| Other Long-Term Liabilities                                                                                                                                                |       | 25              |       | 75 |   |
| Deferred Tax Liabilities                                                                                                                                                   |       | 342             |       | 631 |   |
|                                                                                                                                                                       |       |            |       |   |   |
| **Total Long-Term Liabilities**                                                                                                                                            |       | 4,520           |       | 2,833 |   |
|                                                                                                                                                                       |       |            |       |   |   |
| **Commitments and Contingencies**                                                                                                                                          |       | —          |       | — |   |
|                                                                                                                                                                       |       |            |       |   |   |
| **Shareholders’ Equity:**                                                                                                                                             |       |            |       |   |   |
| Preferred Stock, Par Value $.10 Per Share, Authorized  1,059,589 Shares; None Issued                                                                                       |       | —          |       | — |   |
|                                                                                                                                                                       |       |            |       |   |   |
| Series A - Senior Preferred Stock, Par  Value $.10 Per Share, Authorized, Issued and Outstanding; None and 604,078 Shares  at October 31, 2004 and 2003, respectively      |       | —          |       | 60 |   |
|                                                                                                                                                                       |       |            |       |   |   |
| Series A - Junior Participating Preferred  Stock, Par Value $.10 Per Share, Authorized 3,000 Shares; None Issued                                                           |       | —          |       | — |   |
|                                                                                                                                                                       |       |            |       |   |   |
| Common Stock, Par Value $.01 Per Share,  Authorized 35,000,000 Shares; Issued and Outstanding 12,657,939 and 11,451,023  Shares at October 31, 2004 and 2003, Respectively |       | 127             |       | 115 |   |
|                                                                                                                                                                       |       |            |       |   |   |
| Additional Paid-in Capital                                                                                                                                                 |       | 30,099          |       | 27,907 |   |
|                                                                                                                                                                       |       |            |       |   |   |
| Retained Earnings                                                                                                                                                          |       | 10,831          |       | 2,315 |   |
|                                                                                                                                                                       |       |            |       |   |   |
| Totals                                                                                                                                                                     |       | 41,057          |       | 30,397 |   |
| Deferred Compensation                                                                                                                                                      |       | (384            | )          | (439 | ) |
|                                                                                                                                                                       |       |            |       |   |   |
| **Total Shareholders’ Equity**                                                                                                                                        |       | 40,673          |       | 29,958 |   |
|                                                                                                                                                                       |       |            |       |   |   |
| **Total Liabilities and Shareholders’ Equity**                                                                                                                        |       | $               | 72,151     |   | $ | 53,219 |   |

 

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

 

42

----

 

**BIO-REFERENCELABORATORIES, INC. AND SUBSIDIARY**

** **

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**[DollarsIn Thousands, Except Per Share Data]**

 
| ** **                                    | ** ** | **Years ended  October 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|
| ** **                                    | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                          |       |                         |       |   |   |   |   |
| **Net Revenues**                              |       | $                            | 136,184    |   | $ | 109,034 |   | $ | 96,631 |   |
|                                          |       |                         |       |   |   |   |   |
| **Cost of Services:**                         |       |                         |       |   |   |   |   |
| Depreciation and Amortization                 |       | 1,764                        |       | 1,032 |   | 650 |   |
| Employee Related Expenses                     |       | 30,818                       |       | 26,562 |   | 23,669 |   |
| Reagents and Laboratory Supplies              |       | 20,523                       |       | 16,843 |   | 15,418 |   |
| Other Cost of Services                        |       | 15,096                       |       | 11,779 |   | 11,969 |   |
|                                          |       |                         |       |   |   |   |   |
| **Total Cost of Services**                    |       | 68,201                       |       | 56,216 |   | 51,706 |   |
|                                          |       |                         |       |   |   |   |   |
| **Gross Profit**                              |       | 67,983                       |       | 52,818 |   | 44,925 |   |
|                                          |       |                         |       |   |   |   |   |
| **General and Administrative Expenses:**      |       |                         |       |   |   |   |   |
| Depreciation and Amortization                 |       | 838                          |       | 689 |   | 899 |   |
| General and Administrative Expenses           |       | 36,819                       |       | 30,038 |   | 25,613 |   |
| Provision for Doubtful Accounts               |       | 17,506                       |       | 12,806 |   | 12,341 |   |
|                                          |       |                         |       |   |   |   |   |
| **Total General and Administrative Expenses** |       | 55,163                       |       | 43,533 |   | 38,853 |   |
|                                          |       |                         |       |   |   |   |   |
| **Income from Operations**                    |       | 12,820                       |       | 9,285 |   | 6,072 |   |
|                                          |       |                         |       |   |   |   |   |
| **Other [Income] Expense:**                   |       |                         |       |   |   |   |   |
| Interest Expense                              |       | 667                          |       | 704 |   | 889 |   |
| Interest Income                               |       | (33                          | )          | (23 | ) | (40 | ) |
|                                          |       |                         |       |   |   |   |   |
| **Total Other Expense - Net**                 |       | 634                          |       | 681 |   | 849 |   |
|                                          |       |                         |       |   |   |   |   |
| **Income Before Income Taxes**                |       | 12,186                       |       | 8,604 |   | 5,223 |   |
|                                          |       |                         |       |   |   |   |   |
| **Provision for Income Tax Expense**          |       | 3,670                        |       | 2,064 |   | 301 |   |
|                                          |       |                         |       |   |   |   |   |
| **Net Income**                                |       | $                            | 8,516      |   | $ | 6,540 |   | $ | 4,922 |   |
|                                          |       |                         |       |   |   |   |   |
| **Net Income Per Common Share - Basic**       |       | $                            | .71        |   | $ | .57 |   | $ | .43 |   |
|                                          |       |                         |       |   |   |   |   |
| **Net Income Per Common Share - Diluted**     |       | $                            | .67        |   | $ | .51 |   | $ | .39 |   |

 

TheAccompanying Notes are an Integral Part of These Consolidated FinancialStatements.

 

43

----

 

**BIO-REFERENCELABORATORIES, INC. AND SUBSIDIARY**

 

**CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’****EQUITY**

**[DollarsIn Thousands]**

 
| ** **                                     | ** ** | **Series A  Senior Preferred Stock** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  [Deficit]** | ** ** | **Deferred  Compensation** | ** ** | **Total  Shareholders’  Equity** | ** ** |
|------------------------------------------------|------------|--------------------------------------|------------|-------------------|------------|----------------------------------|------------|----------------------------|------------|----------------------------|------------|---------------------------------------|------------|
| ** **                                     | ** ** | ** **                           | ** ** | ** **        | ** ** | ** **                       | ** ** |
| ** **                                     | ** ** | **Shares**                           | ** ** | **Amount**        | ** ** | **Shares**                       | ** ** | **Amount**                 | ** ** | ** **                 | ** ** | ** **                            | ** ** |
|                                           |       |                                 |       |              |       |                             |       |                       |       |                       |       |                                  |       |   |   |   |   |
| **Balance  – October 31, 2001**           |       | 604,078                              |       | $                 | 60         |                             | 11,010,646 |                       | $          | 110                        |       | $                                     | 28,101     |   | $ | (9,147 | ) | $ | (651 | ) | $ | 18,473 |   |
|                                           |       |                                 |       |              |       |                             |       |                       |       |                       |       |                                  |       |   |   |   |   |
| Amortization of  Deferred Compensation         |       | —                               |       | —            |       | —                           |       | —                     |       | —                     |       | —                                |       | 293 |   | 293 |   |
| Reclassification  of Warrants                  |       | —                               |       | —            |       | —                           |       | —                     |       | (70                        | )          | —                                |       | 70 |   | — |   |
| Exercise of  Options - Employees               |       | —                               |       | —            |       | 532,937                          |       | 5                          |       | 449                        |       | —                                |       | — |   | 454 |   |
| Exercise of  Options - Consultants             |       | —                               |       | —            |       | 45,000                           |       | 1                          |       | 64                         |       | —                                |       | — |   | 65 |   |
| Net Income                                     |       | —                               |       | —            |       | —                           |       | —                     |       | —                     |       | 4,922                                 |       | — |   | 4,922 |   |
|                                           |       |                                 |       |              |       |                             |       |                       |       |                       |       |                                  |       |   |   |   |   |
| **Balance  - October 31, 2002**                |       | 604,078                              |       | 60                |       | 11,588,583                       |       | 116                        |       | 28,544                     |       | (4,225                                | )          | (288 | ) | 24,207 |   |
|                                           |       |                                 |       |              |       |                             |       |                       |       |                       |       |                                  |       |   |   |   |   |
| Amortization of  Deferred Compensation         |       | —                               |       | —            |       | —                           |       | —                     |       | —                     |       | —                                |       | 140 |   | 140 |   |
| Shares Issued for  Compensation                |       | —                               |       | —            |       | 10,000                           |       | —                     |       | 15                         |       | —                                |       | — |   | 15 |   |
| Exercise of  Options - Employees               |       | —                               |       | —            |       | 82,140                           |       | 1                          |       | 125                        |       | —                                |       | — |   | 126 |   |
| Warrants Issued  to Advisory Board             |       | —                               |       | —            |       | —                           |       | —                     |       | 291                        |       | —                                |       | (291 | ) | — |   |
| Common Stock  Repurchased and Retired          |       | —                               |       | —            |       | (229,700                         | )          | (2                         | )          | (1,068                     | )          | —                                |       | — |   | (1,070 | ) |
| Net Income                                     |       | —                               |       | —            |       | —                           |       | —                     |       | —                     |       | 6,540                                 |       | — |   | 6,540 |   |
|                                           |       |                                 |       |              |       |                             |       |                       |       |                       |       |                                  |       |   |   |   |   |
| **Balance  - October 31, 2003**                |       | 604,078                              |       | 60                |       | 11,451,023                       |       | 115                        |       | 27,907                     |       | 2,315                                 |       | (439 | ) | 29,958 |   |
|                                           |       |                                 |       |              |       |                             |       |                       |       |                       |       |                                  |       |   |   |   |   |
| Warrants Issued  to Advisory Board             |       | —                               |       | —            |       | —                           |       | —                     |       | 137                        |       | —                                |       | (137 | ) | — |   |
| Amortization of  Deferred Compensation         |       | —                               |       | —            |       | —                           |       | —                     |       | —                     |       | —                                |       | 192 |   | 192 |   |
| Common Stock  Repurchased and Retired          |       | —                               |       | —            |       | (30,000                          | )          | —                     |       | (350                       | )          | —                                |       | — |   | (350 | ) |
| Exercise of Stock  Options                     |       | —                               |       | —            |       | 632,838                          |       | 6                          |       | 1,898                      |       | —                                |       | — |   | 1,904 |   |
| Conversion of  Preferred Stock to Common Stock |       | (604,078                             | )          | (60               | )          | 604,078                          |       | 6                          |       | 507                        |       | —                                |       | — |   | 453 |   |
| Net Income                                     |       | —                               |       | —            |       | —                           |       | —                     |       | —                     |       | 8,516                                 |       | — |   | 8,516 |   |
| **Balance  – October 31, 2004**           |       | —                               |       | $                 | —     |                             | 12,657,939 |                       | $          | 127                        |       | $                                     | 30,099     |   | $ | 10,831 |   | $ | 384 |   | $ | 40,673 |   |

 

The Accompanying Notes are an Integral Partof These Consolidated Financial Statements.

 

44

----

 

**BIO-REFERENCELABORATORIES, INC. AND SUBSIDIARY**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**[DollarsIn Thousands]**

 
| ** **                                                                                    | ** ** | **Years ended  October 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                    | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Operating Activities:**                                                                     |       |                         |       |   |   |   |   |
| Net Income                                                                                    |       | $                            | 8,516      |   | $ | 6,540 |   | $ | 4,922 |   |
| Adjustments to Reconcile Net Income to Net  Cash Provided by [Used for] Operating Activities: |       |                         |       |   |   |   |   |
| Depreciation and Amortization                                                                 |       | 2,602                        |       | 1,722 |   | 1,549 |   |
| Amortization of Deferred Compensation                                                         |       | 192                          |       | 140 |   | 293 |   |
| Provision for Doubtful Accounts                                                               |       | 17,506                       |       | 12,806 |   | 12,341 |   |
| Deferred Income Tax (Benefit)/Expense                                                         |       | (1,318                       | )          | 939 |   | 262 |   |
| Stock Issued for Compensation                                                                 |       | —                       |       | 15 |   | — |   |
|                                                                                          |       |                         |       |   |   |   |   |
| Changes in Assets and Liabilities                                                             |       |                         |       |   |   |   |   |
| [Net of Effects from Acquisitions]:                                                           |       |                         |       |   |   |   |   |
| [Increase] Decrease in:                                                                       |       |                         |       |   |   |   |   |
| Accounts Receivable                                                                           |       | (25,330                      | )          | (17,020 | ) | (13,753 | ) |
| Inventory                                                                                     |       | (189                         | )          | (7 | ) | (95 | ) |
| Other Current Assets                                                                          |       | (71                          | )          | 113 |   | (441 | ) |
| Other Assets                                                                                  |       | 222                          |       | (203 | ) | (107 | ) |
| Deposits                                                                                      |       | (112                         | )          | (21 | ) | (33 | ) |
|                                                                                          |       |                         |       |   |   |   |   |
| Increase [Decrease] in:                                                                       |       |                         |       |   |   |   |   |
| Accounts Payable, Accrued Taxes and  Expenses                                                 |       | 3,008                        |       | 569 |   | (256 | ) |
|                                                                                          |       |                         |       |   |   |   |   |
| Total Adjustments                                                                             |       | (3,490                       | )          | (947 | ) | (240 | ) |
|                                                                                          |       |                         |       |   |   |   |   |
| **Net Cash - Operating Activities - Forward**                                                 |       | 5,026                        |       | 5,593 |   | 4,682 |   |
|                                                                                          |       |                         |       |   |   |   |   |
| **Investing Activities:**                                                                     |       |                         |       |   |   |   |   |
| Business Acquisitions                                                                         |       | (3,146                       | )          | — |   | — |   |
| Acquisition of Property and Equipment                                                         |       | (3,541                       | )          | (1,105 | ) | (433 | ) |
| Capitalized Software Development Costs                                                        |       | —                       |       | — |   | (210 | ) |
| Repayment of Related Party Receivable                                                         |       | —                       |       | — |   | 9 |   |
| Capitalized Loan Fees                                                                         |       | (75                          | )          | — |   | 9 |   |
|                                                                                          |       |                         |       |   |   |   |   |
| **Net Cash - Investing Activities - Forward**                                                 |       | (6,762                       | )          | (1,105 | ) | (634 | ) |
|                                                                                          |       |                         |       |   |   |   |   |
| **Financing Activities:**                                                                     |       |                         |       |   |   |   |   |
| Proceeds from Long-Term Debt                                                                  |       | 2,546                        |       | — |   | — |   |
| Payments of Long-Term Debt                                                                    |       | (212                         | )          | (400 | ) | (1,060 | ) |
| Payments of Capital Lease Obligations                                                         |       | (1,505                       | )          | (753 | ) | (384 | ) |
| Increase [Decrease] in Revolving Line of  Credit                                              |       | 1,615                        |       | (1,828 | ) | (2,075 | ) |
| Proceeds from the Exercise of Stock Options                                                   |       | 1,904                        |       | 126 |   | 519 |   |
| Conversion of Preferred Stock                                                                 |       | 453                          |       | — |   | — |   |
| Common Stock Repurchased                                                                      |       | (350                         | )          | (1,070 | ) | — |   |
|                                                                                          |       |                         |       |   |   |   |   |
| **Net Cash - Financing Activities - Forward**                                                 |       | $                            | 4,451      |   | $ | (3,925 | ) | $ | (3,000 | ) |

 

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

 

45

----

 
| ** **                                              | ** ** | **Years ended  October 31,** | ** ** |
|---------------------------------------------------------|------------|------------------------------|------------|
| ** **                                              | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                    |       |                         |       |   |   |   |   |
| **Net Cash - Operating Activities - Forwarded**         |       | $                            | 5,026      |   | $ | 5,593 |   | $ | 4,682 |   |
|                                                    |       |                         |       |   |   |   |   |
| **Net Cash - Investing Activities - Forwarded**         |       | (6,762                       | )          | (1,105 | ) | (634 | ) |
|                                                    |       |                         |       |   |   |   |   |
| **Net Cash - Financing Activities - Forwarded**         |       | 4,451                        |       | (3,925 | ) | (3,000 | ) |
|                                                    |       |                         |       |   |   |   |   |
| **Net Increase in Cash and Cash Equivalents**           |       | 2,715                        |       | 563 |   | 1,048 |   |
|                                                    |       |                         |       |   |   |   |   |
| **Cash and Cash Equivalents - Beginning of  Years**     |       | 3,966                        |       | 3,403 |   | 2,355 |   |
|                                                    |       |                         |       |   |   |   |   |
| **Cash and Cash Equivalents - End of Years**            |       | $                            | 6,681      |   | $ | 3,966 |   | $ | 3,403 |   |
|                                                    |       |                         |       |   |   |   |   |
| **Supplemental Disclosures of Cash Flow  Information:** |       |                         |       |   |   |   |   |
| Cash paid during the years for:                         |       |                         |       |   |   |   |   |
| Interest                                                |       | $                            | 646        |   | $ | 723 |   | $ | 926 |   |
| Income Taxes                                            |       | $                            | 4,590      |   | $ | 326 |   | $ | 274 |   |

 

**SupplementalSchedule of Non-Cash Investing and Financing Activities:**

 

In fiscal 2004 and 2003, the Company issued 15,000 and 70,000 commonstock options valued at $137 and $291 to members of its Scientific AdvisoryBoard as deferred compensation.

 

During fiscal 2004, 2003 and 2002, the Company wrote-off approximately$617, $310 and $1,340 of furniture and equipment which were fully depreciated.

 

Approximately $428 and $467 of capitalized costs related to covenantsnot-to-compete and employment agreements, which were fully amortized, werewritten off in fiscal 2004 and 2002, respectively.

 

During fiscal 2004, 2003 and 2002, the Company incurred capital leaseobligations totaling approximately $2,869, $1,807 and $1,476 in connection withthe acquisition of property and equipment.

 

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

 

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

 

46

----

 

**BIO-REFERENCELABORATORIES, INC. AND SUBSIDIARY**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**[DollarsIn Thousands Except Per Share Data or Unless Otherwise Indicated]**

 

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

 

Bio-Reference Laboratories,Inc. [“Bio-Reference” or the “Company”] was incorporated on December 24,1981.  Bio-Reference is principally 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.  Bio-Reference markets its clinical laboratorytesting services directly to physicians, hospitals, clinics, correctional andother health facilities.

 

In July 2004, the Companyacquired certain operating assets of Cancer Genetics, Inc. (CGI), a cancercytogenetics testing laboratory located in Milford, MA. The Company retainedthe supervisory staff and continues to operate the laboratory at its leasedfacility in Milford, MA. (See Note 18).

 

***[2] Summary of Significant AccountingPolicies***

 

***Principles of Consolidation -***The consolidated financial statements include the accounts of the Company andits wholly-owned subsidiary.  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 $4,282 and $1,447 in cashequivalents at October 31, 2004 and 2003, respectively.

 

***Inventory -***Inventory is stated at the lower of cost [on a first-in, first-out basis] ormarket.  Inventory consists primarily ofpurchased laboratory supplies.

 

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

 

The statements of operationsreflect depreciation expense related to property and equipment of $2,034,$1,153 and $705 for the years ended October 31, 2004, 2003 and 2002,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 income.  Repairs and maintenance are charged toexpense when incurred.

 

***Goodwill -***Effective November 1, 2001, the Company evaluates the recoverability and measuresthe possible impairment of its goodwill under SFAS 142, “Goodwill and OtherIntangible Assets.”  The impairment testis a two-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

 

47

----

 

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)comparable sales prices, if available. As part of the first step to assesspotential impairment, management compares the estimate of fair value for theCompany to the 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, 2004,2003 and 2002.

 

The balance sheet reflectsaccumulated amortization of $2,401 and $2,401 as of October 31, 2004 and 2003,respectively.

 

***Other Intangible Assets -***Intangible assets are amortized using the straight-line method.  The statements of operations reflectamortization expense related to intangible assets of $568, $569, and $631 for theyears ended October 31, 2004, 2003 and 2002, respectively.  The balance sheet reflects accumulatedamortization of $2,794, and $2,654 as of October 31, 2004, and 2003,respectively.

 

***Internal Use Software Costs -***The Company accounts for internal use software costs in accordance withStatement of Position 98-1 [“SOP 98-1”], “Accounting for the Costs of ComputerSoftware Developed or Obtained for Internal Use.”  Per SOP 98-1, the Company has capitalizedcertain internal use software and web site development costs totalingapproximately $210 during the year ended October 31, 2002.  No costs were capitalized during fiscal 2004and 2003.  The estimated useful life ofcosts capitalized is evaluated for each specific project when completed, atwhich time such costs begin to be amortized.

 

***Net Service Revenue -***Service revenues are principally generated from clinical laboratory testingservices including chemical diagnostic tests such as blood and urine analysis,among others.  Net service revenues arerecognized at the time the testing services are performed and are reported atthe estimated net realizable amounts from patients, third-party payors andothers for services rendered including prospectively determined adjustmentsunder reimbursement agreements with third-party payors.  These adjustments are accrued on an estimatedbasis in the period the related services are rendered and adjusted in futureperiods as final settlements are determined. The Company has a subsidiary that provides non-clinical laboratoryservices.  Revenues generated from theseservices are not material for each of the years presented.  Net service revenues on the statements ofoperations are as follows:

 
| ** **                                  | ** ** | **Years ended  October 31,** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|
| ** **                                  | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                        |       |                         |       |   |   |   |   |
| Gross Revenues                              |       | $                            | 341,180    |   | $ | 269,676 |   | $ | 232,772 |   |
|                                        |       |                         |       |   |   |   |   |
| Contractual Adjustments and Discounts:      |       |                         |       |   |   |   |   |
| Medicare/Medicaid Portion                   |       | 92,753                       |       | 78,148 |   | 65,401 |   |
| Other                                       |       | 112,243                      |       | 82,494 |   | 70,740 |   |
| Total Contractual Adjustments and Discounts |       | 204,996                      |       | 160,642 |   | 136,141 |   |
| ***Net Revenues***                          |       | $                            | 136,184    |   | $ | 109,034 |   | $ | 96,631 |   |
|                                             |            |                              |            |  |  |  |  |  |  |  |  |

 

48

----

 

***Contractual Credits and Provision forDoubtful Accounts -*** An allowance for contractualcredits is determined based upon a review of the reimbursement policies andsubsequent collections for the different types of payors.  An allowance for doubtful accounts isdetermined based upon a percentage of total receivables.  The aggregate allowance, which is shown netagainst accounts receivable, was $38,102 and $29,185 as of October 31, 2004 and2003, respectively.

 

As of October 31, 2004 and2003, accounts receivable is reported net of an allowance for doubtful accountswhich is comprised of the following items:

 
| ** **                    | ** ** | **October 31,** | ** ** |
|-------------------------------|------------|-----------------|------------|
| ** **                    | ** ** | **2004**        | ** ** | **2003** | ** ** |
|                          |       |            |       |   |   |
| Contractual Credits/Discounts |       | $               | 31,067     |   | $ | 24,026 |   |
| Doubtful Accounts             |       | 7,035           |       | 5,159 |   |
|                          |       |            |       |   |   |
| ***Total Allowance***         |       | $               | 38,102     |   | $ | 29,185 |   |

 

***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.

 

Valuation allowances areestablished when necessary to reduce deferred tax assets to the amount expectedto be realized.

 

***Earnings Per Share -***Basic earnings per share [“EPS”] reflects the amount of income [loss]attributable to each share of common stock based on average common sharesoutstanding during the period.  DilutedEPS reflects Basic EPS while giving effect to all potential dilutive commonshares that were outstanding during the period, such as common shares thatcould result from the exercise or conversion of securities into commonstock.  The computation of Diluted EPS iscalculated by using the treasury stock method, which assumes that any proceedsobtained from the exercise of such dilutive securities would be used topurchase common stock at the average market price of the common stock duringthe period.  This reduces the grossnumber of dilutive shares by the number of shares purchasable from the proceedsof the securities assumed to be exercised. Securities whose conversion would have an anti-dilutive effect on EPSare not assumed converted.  Securitiesthat could potentially dilute earnings in the future are disclosed in Note 10.

 

***Use of Estimates -***The preparation 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 Impairment of IntangibleAssets and Other Long-Lived Assets -*** EffectiveNovember 1, 2002, the Company evaluates the possible impairment of itslong-lived assets, including intangible assets (which are amortized pursuant tothe provisions of SFAS 142), under SFAS No. 144, “Accounting for Impairment orDisposal of Long-Lived Assets” (“SFAS 144”). The Company reviews therecoverability of its long-lived assets when events or changes in circumstancesoccur that indicate that the carrying value of the asset may not berecoverable.  Evaluation of possibleimpairment is based on the Company’s ability to recover the asset from theexpected future pretax cash flows (undiscounted and without interest charges)of the related operations. If the expected undiscounted pretax cash flows areless than the carrying amount of such asset, an impairment loss is recognizedfor the difference between the estimated fair value and carrying amount of theasset. The Company’s adoption of SFAS 144 did not result in any impairment lossbeing recorded.  No impairment loss wasrecognized in the fiscal years ended October 31, 2004, 2003 and 2002.

 

49

----

 

***Stock Options Issued to Employees -***The Company adopted Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation,” for financial note disclosure purposes andcontinues to apply the intrinsic value method of Accounting Principles Board [“APB”]Opinion No. 25, “Accounting for Stock Issued to Employees,” for financialreporting purposes.

 

***Advertising Costs -***Advertisingcosts are expensed when incurred. Advertising costs amounted to approximately $272, $188 and $105 for theyears ended October 31, 2004, 2003 and 2002, respectively.

 

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

 

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

 
| ** **                                     | ** ** | **October 31,** | ** ** |
|------------------------------------------------|------------|-----------------|------------|
| ** **                                     | ** ** | **2004**        | ** ** | **2003** | ** ** |
|                                           |       |            |       |   |   |
| Medical Equipment                              |       | $               | 5,980      |   | $ | 4,119 |   |
| Leasehold Improvements                         |       | 3,313           |       | 1,728 |   |
| Furniture, Fixtures and Office Equipment       |       | 1,873           |       | 994 |   |
| Automobiles                                    |       | 2,335           |       | 644 |   |
|                                           |       |            |       |   |   |
| Totals                                         |       | 13,501          |       | 7,485 |   |
| Less: Accumulated Depreciation                 |       | 4,225           |       | 2,722 |   |
|                                           |       |            |       |   |   |
| ***Totals - Net of Accumulated Depreciation*** |       | $               | 9,276      |   | $ | 4,763 |   |

*** ***

***[4] Intangible Assets***

 

Intangible assets aresummarized as follows:

 

October 31,2004:

 
| **Intangible  Asset**         | ** ** | **Weighted-Average  Amortization Period** | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net of Accumulated  Amortization** | ** ** |
|-------------------------------|------------|-------------------------------------------|------------|----------|------------|-------------------------------|------------|--------------------------------------|------------|
|                          |       |                                      |       |     |       |                          |       |                                 |       |
| Software Costs                |       | 5                                         |       | $        | 1,535      |                          | $          | 943                                  |       | $ | 592 |   |
| Customer Lists                |       | 20                                        |       | 1,697    |       | 860                           |       | 837                                  |       |
| Covenants Not-to-Compete      |       | 2                                         |       | 5        |       | 1                             |       | 4                                    |       |
| Employment Agreement          |       | 7                                         |       | 825      |       | 661                           |       | 164                                  |       |
| Costs Related to Acquisitions |       | 19                                        |       | 1,015    |       | 260                           |       | 755                                  |       |
| Patent                        |       | 17                                        |       | 156      |       | 70                            |       | 86                                   |       |
|                          |       |                                      |       |     |       |                          |       |                                 |       |
| ***Totals***                  |       | 11                                        |       | $        | 5,233      |                          | $          | 2,795                                |       | $ | 2,438 |   |

 

October 31,2003:

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

 

50

----

 

The estimated amortizationexpense related to intangible assets for each of the five succeeding fiscal yearsand thereafter as of October 31, 2004 is as follows:

 
| **Year  Ended  October 31,** | ** ** | ** ** | ** ** | ** ** |
|------------------------------|------------|------------|------------|------------|
| 2005                         |       | $          | 619        |       |
| 2006                         |       | 476        |       |
| 2007                         |       | 223        |       |
| 2008                         |       | 150        |       |
| 2009                         |       | 130        |       |
| Thereafter                   |       | 840        |       |
|                         |       |       |       |
| ***Total***                  |       | $          | 2,438      |       |

 

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

 

In October 2004, the Companyentered into an amended revolving note payable loan agreement with a bank.  The maximum amount of the credit lineavailable to the Company is the lesser of (i) $30,000 or (ii) 50% of the Company’squalified accounts receivable [as defined in the agreement]. The amended loanagreement provides for an “acquisition subline” of up to $10,000 which can berepaid in 36 equal monthly installments. The amendment to the Loan and SecurityAgreement provides for interest on advances to be subject to the bank’s primerate or Eurodollar rate of interest plus, in certain instances, an additionalinterest percentage.  The additionalinterest percentage charges on Eurodollar borrowings range from 1% to 4% andare determined based upon certain financial ratios achieved by theCompany.  At October 31, 2004, theCompany had elected to have $6,000 of the total advances outstanding convertedinto a Eurodollar rate loan with a variable interest rate of 3.16% at October31, 2004.  The remaining outstandingadvances during that period were subject to the bank’s prime rate ofinterest.  At October 31, 2004, advancesof $4,333 were subject to interest at the prime rate.  As of October 31, 2004 and 2003, the bank’sprime rate of interest was 4.75% and 4.00%, respectively.  The credit line is collateralized bysubstantially all of the Company’s assets. The line of credit is availablethrough October 2007 and may be extended for annual periods by mutual consent,thereafter.  The terms of this agreementcontain, among other provisions, requirements for maintaining defined levels ofcapital expenditures, fixed charge coverage, insurance coverage and theprohibition of the payment by the Company of cash dividends. As of October 31,2004, the Company utilized $12,879 (including $2,546 utilized under the “acquisitionsubline”) and had $17,121 of available unused credit under this revolving notepayable loan agreement.

 

The weighted average interestrate on short-term borrowings outstanding as of October 31, 2004 and 2003 wasapproximately 3.92% and 2.85%, respectively.

 

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

 

In connection with the CGIacquisition, the Company borrowed $2,546 under the “acquisition subline”available under the revolving note payable agreement (See notes 5 and 18).Principal and interest are due in 26 equal installments of $113 through August2006. At October 31, 2004 the Company had a principal balance of $2,334outstanding. Interest is charged at the bank’s prime rate of interest plus 1%per annum. At October 31, 2004 the principal balance outstanding under theborrowing was subject to interest at 5.75% per annum.

 

51

----

 

Principal repayment for each ofthe five succeeding fiscal years and thereafter as of October 31, 2004 is asfollows:

 
| **Year  Ended  October 31,** | ** ** | ** ** | ** ** |
|------------------------------|------------|------------|------------|
| 2005                         |       | $          | 1,273      |   |
| 2006                         |       | 1,061      |       |
|                         |       | 2,334      |       |
|                              |            |            |            |  |

 

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

 

In March 2001, the Companyentered into a joint marketing agreement [the “agreement”] with GeneralPrescription Programs, Inc. [“GPP”]. Provisions of the agreement provide that GPP will assist the Company inmarketing its PSIMedica programs to various customers.  In addition, GPP will provide ongoing dataand data support to the PSIMedica program development.  The term of the agreement is for a five yearperiod commencing on October 2001.  Inexchange for obtaining GPP marketing and technical services, the Company issuedGPP 220,000 shares of its common stock with a fair value of approximately $248 whichis being amortized over the five year term of the agreement. For the yearsended October 31, 2004, 2003 and 2002, the Company recorded an expense of $50 ,$50 and $50, respectively.  The Chairmanof the Board of GPP is the brother of the Company’s Chief Executive Officer.See Note 9A as to the conversion by the Company’s Chief Executive Officer andhis wife of shares of Series A Senior preferred Stock during fiscal 2004.

 

***[8] Income Taxes***

 

The reconciliation of incometax from continuing operations computed at the U.S. federal statutory tax rateto the Company’s effective income tax rate is as follows:

 
| ** **                                                            | ** ** | **October 31,** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------|------------|
| ** **                                                            | ** ** | **2004**        | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                  |       |            |       |   |   |   |   |
| U.S. Federal Statutory Rate                                           |       | 34.0            | %          | 34.0 | % | 34.0 | % |
| State and Local Income Taxes, Net of U.S. Federal  Income Tax Benefit |       | 6.0             | %          | 6.0 | % | 6.0 | % |
| Permanent Differences and Other                                       |       | (10.0           | )%         | 13 | % | — | % |
| Utilization of Net Operating Loss  Carryforwards                      |       | —          | %          | (18.0 | )% | (18.0 | )% |
| Change in Valuation Allowance                                         |       | —          | %          | (11.0 | )% | (16.0 | )% |
|                                                                  |       |            |       |   |   |   |   |
| ***Actual Rate***                                                     |       | 30.0            | %          | 24.0 | % | 6.0 | % |

 

The provision [benefit] forincome taxes shown in the consolidated statements of operations consist of thefollowing:

 
| ** **                                       | ** ** | **October 31,** | ** ** |
|--------------------------------------------------|------------|-----------------|------------|
| ** **                                       | ** ** | **2004**        | ** ** | **2003** | ** ** | **2002** | ** ** |
| Current:                                         |       |            |       |   |   |   |   |
| Federal                                          |       | $               | 3,562      |   | $ | 543 |   | $ | — |   |
| State and Local                                  |       | 1,426           |       | 582 |   | 39 |   |
|                                             |       |            |       |   |   |   |   |
| Deferred:                                        |       |            |       |   |   |   |   |
| Federal                                          |       | (1,120          | )          | 798 |   | 222 |   |
| State and Local                                  |       | (198            | )          | 141 |   | 40 |   |
|                                             |       |            |       |   |   |   |   |
| ***Total Provision [Benefit] for Income Taxes*** |       | $               | 3,670      |   | $ | 2,064 |   | $ | 301 |   |

 

52

----

 

At October 31, 2004 and 2003,the Company had a net deferred tax asset [liability] of approximately $687 and$(631) , respectively.  The deferredtaxes primarily relate to timing differences associated with the deductibilityof depreciation, bad debts and certain accrued expenses and deferred costs. Forfiscal 2004, the Company had no net operating loss carryforwards available toreduce current year taxable income. For fiscal 2003, the Company utilizedapproximately $4,378 (federal) and $2,682 (state) of net operating losscarryforwards to reduce current year taxable income.

 
| ** **                                     | ** ** | **October 31,** | ** ** |
|------------------------------------------------|------------|-----------------|------------|
| ** **                                     | ** ** | **2004**        | ** ** | **2003** | ** ** |
| Deferred Tax Asset:                            |       |            |       |   |   |
| Bad Debt Allowance                             |       | $               | 2,814      |   | $ | 2,064 |   |
| Accrued Expenses                               |       | 329             |       | 277 |   |
|                                           |       |            |       |   |   |
|                                           |       | 3,143           |       | 2,341 |   |
| Deferred Tax Liability:                        |       |            |       |   |   |
| Deferred Costs                                 |       | (2,114          | )          | (2,563 | ) |
| Property and Equipment                         |       | (342            | )          | (409 | ) |
|                                           |       |            |       |   |   |
|                                           |       | (2,456          | )          | (2,972 | ) |
|                                           |       |            |       |   |   |
| ***Deferred Tax Asset [Liability]– Net*** |       | $               | 687        |   | $ | (631 | ) |
|                                           |       |            |       |   |   |
| ***As Follows:***                              |       |            |       |   |   |
|                                           |       |            |       |   |   |
| Net Current Deferred Tax Asset                 |       | $               | 1,029      |   | $ | — |   |
| Net Long-Term Deferred Tax Liability           |       | (342            | )          | (631 | ) |
|                                           |       |            |       |   |   |
| **Deferred Tax Asset [Liability] - Net**       |       | $               | 687        |   | $ | (631 | ) |

 

***[9] Capital Transactions***

 

***[A] Preferred Stock and Common Stock -***The Company is authorized to issue an aggregate of 1,666,667 shares ofpreferred stock, $.10 par value.  AtOctober 31, 2003, there were 604,078 shares of Series A Senior preferred stockissued and outstanding.  The Series ASenior preferred stock is convertible into an aggregate 604,078 shares ofcommon stock on or before May 1, 2007 at a conversion price of $.75 per shareand has the same voting rights [one vote per share], dividend rights andliquidation rights 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 stockholdersapproved an increase in the number of authorized shares of common stock from18,333,333 shares to 35,000,000 shares.

 

Holders of the Company’s CommonStock are entitled to one vote per share on matters submitted for shareholdervote.  Holders are also entitled toreceive dividends ratably, if declared. In the event of dissolution or liquidation, holders are entitled toshare ratably in all assets remaining after payment of liabilities.

 

53

----

 

On March 31, 1998, the Company’sBoard of Directors adopted a Shareholder Rights Plan and declared a dividenddistribution of one Right for each outstanding share of Common Stock and eachoutstanding share of Series A Senior Preferred Stock.  Each Right entitles the registered holder topurchase one one-ten-thousandth of a share of Series A Junior Participating PreferredStock [the “Junior Preferred Stock”] from the Company at a price of $4.00.  Because of the nature of the dividend,liquidation and voting rights of the Junior Preferred Stock, the value of eachone-ten-thousandth of a share of Junior Preferred Stock is intended toapproximate the value of one share of Common Stock.  Junior Preferred Stock purchasable uponexercise of the Rights will not be redeemable. Each outstanding share of Junior Preferred Stock will be entitled to aminimum preferential quarterly dividend of $.05 per share and will be entitledto an aggregate dividend of 10,000 times the dividend declared per share ofCommon Stock.  In the event ofliquidation, the holders of the Junior Preferred Stock will be entitled to aminimum preferential liquidation payment of $10 per share and will be entitledto an aggregate payment of 10,000 times the payment made per share of CommonStock.  Each share of Junior PreferredStock will have 10,000 votes, voting together with the Common Stock.

 

In the event of any merger,consolidation or other transaction in which the Common Stock is exchanged, eachshare of Junior Preferred Stock will be entitled to receive 10,000 times theamount received per share of Common Stock. The Rights are protected by customary anti-dilution provisions.  The Rights are not exercisable unless any oneof certain triggering events occur including the acquisition by an individualor entity and their associates of 25% or more of the outstanding shares ofCommon Stock.  The Shareholder RightsPlan is designed to protect the Company and its shareholders from coercive,unfair and inadequate takeover bids and practices.  The Plan is designed to strengthen the Boardof Directors’ ability to deter a person or group from attempting to gain controlof the Company without offering a fair price and equal treatment to allshareholders.

 

TheCompany implemented a stock repurchase program to repurchase up to 500,000shares of its common stock in the over-the-counter market on or before October31, 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) any such repurchases on a given day shall not be the opening transactionrecorded to the consolidated transaction reporting system and no repurchasesshall be made during the last half hour before the scheduled close of trading(3) the highest price paid to repurchase any shares shall not exceed the higherof the highest independent bid or the last independent reported sale price and(4) the maximum number of shares that can be repurchased on a given day(excluding block repurchases) shall not exceed 25% of the average daily tradingvolume reported for the four calendar weeks preceding the week in which therepurchase is made. Common Stock acquired by the Company under the repurchaseprogram are to be retired and canceled. In fiscal 2004 and 2003, the Companyrepurchased 30,000 and 229,300 shares of the Company’s common stock at a costof $350 and $1,070, respectively.

 

***[B] Equity Transactions for Services -***For the year ended October 31, 2003, the Company issued 10,000 shares of commonstock for employment services having a value of $15.  In fiscal 2004 and 2002, no shares of theCompany’s common stock were issued for employment or consulting services [SeeNote 11 for common stock options issued for employee and consulting services].

 

***[10] Income Per Share***

 

The computation of basic anddiluted net income per common share was as follows [in thousands, except pershare data]:

 

54

----

 
| ** **                                          | ** ** | **For the years ended October 31,** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                          | ** ** | **2004**                            | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                |       |                                |       |   |   |   |   |
| Income Available to Common Stockholders             |       | $                                   | 8,516      |   | $ | 6,540 |   | $ | 4,922 |   |
| Weighted Average Common Shares Outstanding          |       | 12,078                              |       | 11,489 |   | 11,378 |   |
|                                                |       |                                |       |   |   |   |   |
| Effect of Dilutive Securities:                      |       |                                |       |   |   |   |   |
| Convertible Preferred Stock                         |       | —                              |       | 542 |   | 545 |   |
| Warrants/Options                                    |       | 637                                 |       | 767 |   | 857 |   |
|                                                |       |                                |       |   |   |   |   |
| Weighted Average Diluted Common Shares  Outstanding |       | 12,715                              |       | 12,798 |   | 12,780 |   |
|                                                |       |                                |       |   |   |   |   |
| Net Income Per Share - Basic                        |       | $                                   | .71        |   | $ | .57 |   | $ | .43 |   |
| Net Income Per Share - Diluted                      |       | $                                   | .67        |   | $ | .51 |   | $ | .39 |   |

 

For the year ended October 31,2004, outstanding options to purchase 77,000 shares of company common stock atexercise price of $14.96 were not included in the computation of diluted EPS.For the year ended October 31, 2003, outstanding options to purchase 177,000shares of Company common stock at exercise prices ranging from $7.79 to $11.67per share were not included in the computation of diluted EPS.  For the year ended October 31, 2002,outstanding options to purchase 25,000 shares and 50,000 shares of the Company’scommon stock at an exercise price of $7.97 and $7.79 per share were notincluded in the computation of diluted EPS. The exercise price of these optionsand warrants was greater than the average market price of the common shares andthey are considered anti-dilutive.  Thesesecurities could potentially dilute EPS in the future.

 

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

 

***[A] Employee Incentive Stock Options -***In June 2003, the Board of Directors adopted, and in July 2003, thestockholders approved, the 2003 Employee Incentive Stock Option Plan [the “2003Plan”].  The 2003 Plan authorizes thegrant of incentive stock options to purchase up to a maximum aggregate 800,000shares of Company common stock. The 2003 Plan provides that the exercise priceof an option granted thereunder shall not be less than the fair market value ofthe Common 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

 

55

----

 

the exercise price of suchoption. During fiscal 2004, the Company issued 104,000 incentive stock optionsunder the 2003 Plan and options to purchase 2,000 shares of common stock wereexercised.

 

In August 2000, the Companyadopted, and on December 15, 2000, the stockholders approved, the 2000 EmployeeIncentive Stock Option Plan [“2000 Plan”]. 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 vest in four equal annual installments commencingJanuary 31, 2002 contingent on the Company realizing targeted net revenuelevels.  In fiscal 2004, 2003 and 2002,50,000, 281,000 and 241,000 options were granted under the Plan. A total of215,088, 15,000 and 10,000 incentive stock options issued under the 2000 Planwere exercised in fiscal 2004, 2003 and 2002, respectively. A total of 57,000options were cancelled in fiscal 2003. Options issued under the 2000 Plan must be granted before the August2010 termination date.

 

In November 1989, theshareholders approved and the Company adopted the 1989 Employee Stock OptionPlan [“1989 Plan”] which provides for the granting of options to acquire666,667 shares of common stock.  Underthe terms of this stock option plan, incentive stock options to purchase sharesof the Company’s common stock are granted at a price not less than the fairmarket value of the common stock at the date of grant.  A total of 205,000, 5,000 and275,337incentive stock options issued under the 1989 Plan were exercised infiscal 2004, 2003 and 2002. Additionally, 11,667 options were canceled in fiscal 2003.  All options under the 1989 Plan were requiredto be granted before the Plan’s July 1999 termination date so that no furtheroptions can be granted under the 1989 Plan.

 

These stock options areexercisable up to ten years from the date of grant.  The following is a summary of EmployeeIncentive Stock Option Plan transactions:

 
| ** **                                                     | ** ** | **2003 Plan**             | ** ** |
|----------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                     | ** ** | **Shares Under  Options** | ** ** | **Weighted Average  Exercise Price  Per Share** | ** ** |
| ** **                                                     | ** ** | **[In Thousands]**        | ** ** | ** ** | ** ** |
| Outstanding and Eligible for Exercise at  October 31, 2003     |       | —                    |       | $ | — |   |
|                                                           |       |                      |       |   |   |
| Granted                                                        |       | 104                       |       | 14.24 |   |
| Expired                                                        |       | —                    |       | — |   |
| Exercised                                                      |       | (2                        | )          | 12.09 |   |
|                                                           |       |                      |       |   |   |
| **Outstanding and Eligible for Exercise at  October 31, 2004** |       | 102                       |       | 14.29 |   |
|                                                                |            |                           |            |  |  |  |

 

56

----

 
| ** **                                                           | ** ** | **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, 2001 |       | 265                       |       | $                                               | 1.21       |   | 549 |   | $ | .73 |   |
|                                                                 |       |                      |       |                                            |       |   |   |   |   |
| Granted                                                              |       | 241                       |       | 7.07                                            |       | — |   | — |   |
| Expired                                                              |       | —                    |       | —                                          |       | — |   | — |   |
| Exercised                                                            |       | (10                       | )          | 1.68                                            |       | (275 | ) | .72 |   |
|                                                                 |       |                      |       |                                            |       |   |   |   |   |
| Outstanding at October 31, 2002                                      |       | 496                       |       | 4.27                                            |       | 274 |   | .72 |   |
|                                                                 |       |                      |       |                                            |       |   |   |   |   |
| Granted                                                              |       | 281                       |       | 6.34                                            |       | — |   | — |   |
| Cancelled/Expired                                                    |       | (57                       | )          | 7.16                                            |       | (11 | ) | .72 |   |
| Exercised                                                            |       | (15                       | )          | 1.13                                            |       | (5 | ) | .72 |   |
|                                                                 |       |                      |       |                                            |       |   |   |   |   |
| Outstanding at October 31, 2003                                      |       | 705                       |       | $                                               | 4.93       |   | 258 |   | $ | .72 |   |
|                                                                 |       |                      |       |                                            |       |   |   |   |   |
| Granted                                                              |       | 50                        |       | 14.68                                           |       | — |   | — |   |
| Expired                                                              |       | —                    |       | —                                          |       | — |   | — |   |
| Exercised                                                            |       | (215                      | )          | 6.20                                            |       | (205 | ) | .72 |   |
|                                                                 |       |                      |       |                                            |       |   |   |   |   |
| Outstanding at October 31, 2004                                      |       | 540                       |       | 5.51                                            |       | 53 |   | .72 |   |
|                                                                 |       |                      |       |                                            |       |   |   |   |   |
| **Eligible for Exercise at October 31, 2004**                        |       | 480                       |       | $                                               | 5.90       |   | 53 |   | $ | .72 |   |

 

57

----

 
| ** **                 | ** ** | **Options Outstanding**             | ** ** | **Options Exercisable**          | ** ** |
|----------------------------|------------|-------------------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **Weighted Average**                | ** ** | **Number of  Options**           | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| **Exercise  Price Range**  | ** ** | **Number of  Shares Under  Option** | ** ** | **Remaining  Contractual  Life** | ** ** | **Exercise Price  Per Share** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **[In Thousands]**                  | ** ** | **[In Years]**                   | ** ** | ** ** | ** ** | **[In Thousands]** | ** ** | ** ** | ** ** |
|                       |       |                                |       |                             |       |   |   |   |   |   |   |
| $.71875 Per Share          |       | 53                                  |       | 2.58                             |       | $ | .72 |   | 53 |   | $ | .72 |   |
| $1.688 Per Share           |       | 215                                 |       | 5.83                             |       | $ | 1.69 |   | 165 |   | $ | 1.69 |   |
| $4.21 to $5.70 Per Share   |       | 65                                  |       | 8.51                             |       | $ | 5.24 |   | 65 |   | $ | 5.24 |   |
| $5.94 to $6.82 Per Share   |       | 100                                 |       | 7.37                             |       | $ | 6.78 |   | 100 |   | $ | 6.78 |   |
| $7.19 to $8.40 Per Share   |       | 108                                 |       | 8.34                             |       | $ | 7.78 |   | 108 |   | $ | 7.78 |   |
| $9.66 to $11.67 Per Share  |       | 2                                   |       | 8.83                             |       | $ | 9.66 |   | 2 |   | $ | 9.66 |   |
| $12.09 to $14.50 per share |       | 75                                  |       | 9.54                             |       | $ | 12.77 |   | 65 |   | $ | 12.63 |   |
| $15.34 per share           |       | 66                                  |       | 9.17                             |       | $ | 15.34 |   | 66 |   | $ | 15.34 |   |
| $17.75 to $21.46 per share |       |                                | 11         |                             | 9.30       |   | $ | 20.11 |   |   | 11 |   | $ | 20.11 |   |
|                       |       |                                |       |                             |       |   |   |   |   |   |   |   |   |
|                       |       |                                | 695        |                             |       |   |   |   |   | 635 |   |   |   |

 

The weighted average grant datefair value of incentive stock options under the 2003 and 2000 Plan grantedduring the year ended October 31, 2004, 2003 and 2002 was $14.68, $6.34 and$7.07 per share, respectively.  Theseoptions have weighted average remaining contractual lives of approximately 8years.

 

The Company accounts for thesestock-based compensation awards to employees under the intrinsic value methodin accordance with Accounting Principles Board Opinion No. 25 “Accounting forStock Issued to Employees.”  Nocompensation cost was recognized for stock-based employee compensation awardsfor the years ended October 31, 2004, 2003 and 2002.

 

***[B] Non-Incentive Stock Options and Warrants-*** Non-incentive stock options and warrants may begranted to employees or non-employees at fair market value or at a price lessthan fair market value of the common stock at the date of grant.  The following is a summary of transactions:

 
| ** **                                                 | ** ** | **Shares Under  Options  and Warrants** | ** ** | **Weighted  Average  Exercise Price  Per Share** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                 | ** ** | **[In Thousands]**                      | ** ** | ** **                                       | ** ** |
|                                                       |       |                                    |       |                                             |       |
| Outstanding and Eligible for Exercise at  October 31, 2001 |       | 890                                     |       |                                             | $          | 1.34 |   |
|                                                       |       |                                    |       |                                             |       |
| Granted                                                    |       | 65                                      |       | 6.19                                             |       |
| Expired                                                    |       | (105                                    | )          | .63                                              |       |
| Exercised                                                  |       |                                    | (292       | )                                                |       |   | 1.01 |   |
|                                                       |       |                                    |       |                                             |       |   |   |   |
| Outstanding and Eligible for Exercise at  October 31, 2002 |       |                                    | 558        |                                             | 2.21       |   |
|                                                       |       |                                    |       |                                             |       |   |
| Granted                                                    |       |                                    | 70         |                                             | 7.60       |   |
| Cancelled/Expired                                          |       |                                    | (32        | )                                                | 1.77       |   |
| Exercised                                                  |       |                                    | (62        | )                                                |       |   | 1.69 |   |
|                                                       |       |                                    |       |                                             |       |   |   |   |
| Outstanding at October 31, 2003                            |       |                                    | 534        |                                             |       | $ | 2.98 |   |
|                                                       |       |                                    |       |                                             |       |   |
| Granted                                                    |       |                                    | 15         |                                             | 13.10      |   |
| Cancelled/Expired                                          |       |                                    | (12        | )                                                | 4.36       |   |
| Exercised                                                  |       |                                    | (211       | )                                                |       |   | 3.10 |   |
|                                                       |       |                                    |       |                                             |       |   |   |   |
| Outstanding at October 31, 2004                            |       |                                    | 326        |                                             |       | $ | 3.80 |   |
|                                                       |       |                                    |       |                                             |       |   |   |   |
| **Eligible for Exercise at October 31, 2004**              |       |                                    | 316        |                                             |       | $ | 3.54 |   |
|                                                            |            |                                         |            |                                                  |            |  |  |  |  |  |

 

58

----

 

***[B] Non-Incentive Stock Options and Warrants[Continued] –*** In fiscal 2004, the Company granted15,000 options to purchase common stock to an advisory board member with anexercise price of $13.70. A total of 5,000 options vested immediately with theremaining 10,000 to vest over a two year period. The fair value of $134 hasbeen recorded as deferred compensation and is being expensed over the term ofthe related service agreement. During fiscal 2003, the Company granted 70,000options to purchase common stock to members of a newly formed scientificadvisory board.  The exercise prices ofthese options ranged from $6.98 to $7.94 per share. The fair value of eachoption granted was estimated on the date of grant using the Black-Scholesoption pricing model.  The fair value ofthose options granted in fiscal 2003 was approximately $291 and has beenaccounted for as deferred compensation ti be expensed over the terms of theagreements.

 

During the year ended October31, 2002, the Company issued options to purchase 65,000 shares of the Company’scommon stock at prices ranging from $3.60 to $7.97 in connection withemployment agreements and employee incentives. Included in the options issued in fiscal 2002 were options issued todirectors of the Company to purchase 24,000 shares of common stock at a priceof $6.80 per share.

 

The Company accounts for theseoptions under the intrinsic value method in accordance with AccountingPrinciples Board Opinion No. 25 “Accounting for Stock Issued to Employees.” Nocompensation cost was recognized against income for employee non-incentivestock options and warrants for the years ended October 31, 2004 and 2002

 
| ** **                | ** ** | **Options and Warrants Outstanding**                         | ** ** | **Options and Warrants Exercisable**      | ** ** |
|---------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Exercise  Price Range** | ** ** | **Weighted  Number of  Shares Under  Options and  Warrants** | ** ** | **Average  Remaining  Contractual  Life** | ** ** | **Weighted Average  Exercise Price  Per Share** | ** ** | **Number of  Shares Under  Options and  Warrants** | ** ** | **Weighted  Average  Exercise Price  Per Share** | ** ** |
| ** **                | ** ** | **[In Thousands]**                                           | ** ** | **[In Years]**                            | ** ** | ** ** | ** ** | **[In Thousands]** | ** ** | ** ** | ** ** |
|                      |       |                                                         |       |                                      |       |   |   |   |   |   |   |
| $1.19 Per Share           |       | 20                                                           |       | 1.08                                      |       | $ | 1.19 |   | 20 |   | $ | 1.19 |   |
| $2.00 Per Share           |       | 200                                                          |       | 1.25                                      |       | $ | 2.00 |   | 200 |   | $ | 2.00 |   |
| $3.14 Per Share           |       | 16                                                           |       | 1.67                                      |       | $ | 3.14 |   | 16 |   | $ | 3.14 |   |
| $6.80 Per Share           |       | 20                                                           |       | 2.25                                      |       | $ | 6.80 |   | 20 |   | $ | 6.80 |   |
| $6.98 to $7.94 Per Share  |       | 55                                                           |       | 2.33                                      |       | $ | 6.23 |   | 55 |   | $ | 6.23 |   |
| $13.70 Per Share          |       | 15                                                           |       | 3.17                                      |       | $ | 13.70 |   | 5 |   | $ | 13.70 |   |
|                      |       | 326                                                          |       |                                      |       |   |   | 316 |   |   |   |

 

These options have weightedaverage remaining contractual lives of approximately 2 years.  The weighted average grant date fair value ofnon-incentive stock options granted during the years ended October 31,2004, 2003 and 2002 were $8.94, $4.16 and $6.19 per share, respectively.

 

59

----

 

***[A] and [B] Pro Forma -***The Company issued employee stock options through stock-based employeecompensation plans and also issued employee non-incentive stock options.  The Company accounts for these options underthe measurement principles of APB Opinion No. 25, “Accounting for Stock Issuedto Employees,” and related interpretations. No stock-based employee compensation cost is reflected in net income, asall options granted under these plans as well as employee non-incentive stockoptions have an exercise price equal to the fair market value of the underlyingcommon stock on the date of grant.  Thefollowing table illustrates the effect on net income and earnings per share ifthe Company had applied the fair value recognition provisions of FASB StatementNo. 123 to stock-based employee compensation.

 
| ** **                                                                                                   | ** ** | **Year ended October 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                   | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net Income [Loss]:                                                                                           |       |                       |       |   |   |   |   |
| As Reported                                                                                                  |       | $                          | 8,516      |   | $ | 6,540 |   | $ | 4,922 |   |
|                                                                                                         |       |                       |       |   |   |   |   |
| Deduct: Stock Based Employee Compensation  Expense Determined Under the Fair Value Based Method - Net of Tax |       | (1,310                     | )          | (1,453 | ) | (1,841 | ) |
|                                                                                                         |       |                       |       |   |   |   |   |
| Pro Forma - Net Income                                                                                       |       | $                          | 7,206      |   | $ | 5,087 |   | $ | 3,081 |   |
|                                                                                                         |       |                       |       |   |   |   |   |
| Basic Earnings Per Share:                                                                                    |       |                       |       |   |   |   |   |
| As Reported                                                                                                  |       | $                          | .71        |   | $ | .57 |   | $ | .43 |   |
| Pro Forma                                                                                                    |       | $                          | .60        |   | $ | .44 |   | $ | .27 |   |
|                                                                                                         |       |                       |       |   |   |   |   |
| Diluted Earnings Per Share:                                                                                  |       |                       |       |   |   |   |   |
| As Reported                                                                                                  |       | $                          | .67        |   | $ | .51 |   | $ | .39 |   |
| Pro Forma                                                                                                    |       | $                          | .57        |   | $ | .40 |   | $ | .24 |   |

 

The fair value used in the proforma data was estimated by using the Black-Scholes option-pricing model whichtook into account as of the grant date, the exercise price and the expectedlife of the option, the current price of the underlying stock and its expectedvolatility, expected dividends on the stock and the risk-free interest rate forthe expected term of the option.  Thefollowing is the average of the data used for the following items.

 
| **Year  Ended**  | ** ** | **Risk-Free  Interest Rate** | ** ** | **Expected Life** | ** ** | **Expected  Volatility** | ** ** | **Expected  Dividends** | ** ** |
|------------------|------------|------------------------------|------------|-------------------|------------|--------------------------|------------|-------------------------|------------|
|             |       |                         |       |              |       |                     |       |                    |       |
| October 31, 2004 |       | 4.0                          | %          | 4 Years           |       | 115.21                   | %          | None                    |       |
| October 31, 2003 |       | 5.0                          | %          | 7 Years           |       | 87.91                    | %          | None                    |       |
| October 31, 2002 |       | 5.0                          | %          | 6 Years           |       | 113.40                   | %          | None                    |       |

 

***[12] Employment Contracts and ConsultingAgreements***

 

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.

 

60

----

 

The Company has also enteredinto various employment contracts and consulting agreements for periods rangingfrom one to seven years. In January 2004, the Employment Agreement of the ChiefFinancial Officer/Vice President and Chief Operating Officer/Executive VicePresident were extended for two additional years beyond their October 31, 2004termination date. Minimum annual compensation under these extended agreementsis equal to Fiscal 2002 Annual Compensation , subject to increases in theConsumer Price Index as well as to stage increases as defined in the Agreement.Subsequent to October 31, 2004, the Company entered into a new EmploymentAgreement with its Chief Executive Officer, President which expires on October31, 2007. (See Note 23).  At October 31,2004, the approximate aggregate minimum commitment under these employmentcontracts and agreements, excluding commissions or consumer price indexincreases, is as follows:

 
| **October  31,** | ** ** | **Employees and Consultants** | ** ** | **Advisory Board** | ** ** |
|------------------|------------|-------------------------------|------------|--------------------|------------|
|             |       |                          |       |               |       |
| 2005             |       | $                             | 2,218      |               | $          | 70 |   |
| 2006             |       | 1,736                         |       | 70                 |       |
| 2007             |       | 843                           |       | 25                 |       |
| 2008             |       | 750                           |       | —             |       |
| 2009             |       | 750                           |       | —             |       |
| Thereafter       |       | 1,500                         |       | 165                |       |
|             |       |                          |       |               |       |
| ***Total***      |       | $                             | 7,797      |               | $          | 165 |   |

 

The Company entered into anemployment agreement which included a provision for a $250 bonus to be paidover a seven-year period.  At October 31,2003, the Company had a long-term liability of $75 and $50 current liabilityrelated to the remaining bonus amount due the employee.  The balance due at October 31, 2004 will bepaid as follows:

 
| 2005         |         | $            | 50           |   |
|--------------|--------------|--------------|--------------|--------|
| 2006         |         | 25           |         |
| *** *** | *** *** | *** *** | *** *** |
| ***Total***  |         | $            | 75           |   |

 

Some of these agreementsprovide bonuses and commissions based on a percentage of collected revenuesranging from 1% to 10% on accounts referred by or serviced by the employee orconsultant.

 

In addition to the above, theCompany has entered into twenty employment agreements which provide for annualaggregate minimum commitments of approximately $5,711 which have no terminationdates.

 

In accordance with Section 402of the Sarbanes-Oxley Act of 2002 [the “Act”], companies are prohibited frommaking future loans to officers and directors and also prohibited are anyextension of credit after the date of the acts enactment. While the Company hadentered into and funded “split-dollar” life insurance agreements of severalofficer/directors of the Company before passage of the Act, future premiumscould be deemed an extension of credit. Until further clarification of the issue, the Company suspended payingany additional future premiums. In January 2004, the Company adopted a new “split-dollar”life insurance program under which the Company will be the sole owner of thepolicies (including the cash values of the policies) and will pay the premiumson the policies. Prior to termination

 

61

----

 

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 variousassets under capital leases expiring in fiscal 2009 as follows:

 
| ** **                               | ** ** | **October 31,** | ** ** |
|------------------------------------------|------------|-----------------|------------|
| ** **                               | ** ** | **2004**        | ** ** | **2003** | ** ** |
|                                     |       |            |       |   |   |
| Medical Equipment                        |       | $               | 3,786      |   | $ | 3,482 |   |
| Furniture, Fixtures and Office Equipment |       | 1,315           |       | 221 |   |
| Automobiles                              |       | 2,292           |       | 638 |   |
|                                     |       |            |       |   |   |
| Totals                                   |       | 7,393           |       | 4,341 |   |
| Less: Accumulated Depreciation           |       | 1,998           |       | 1,634 |   |
|                                     |       |            |       |   |   |
| ***Net***                                |       | $               | 5,395      |   | $ | 2,707 |   |

 

Depreciation expense on assetsunder capital leases was approximately $364, $325, and $448 for the years endedOctober 31, 2004, 2003 and 2002, respectively.

 

Aggregate future minimumrentals under capital leases are:

 
| **Years  ended  October 31,**                 | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|
| 2005                                          |       | $          | 1,525      |       |
| 2006                                          |       | 1,485      |       |
| 2007                                          |       | 1,382      |       |
| 2008                                          |       | 925        |       |
| 2009                                          |       | 204        |       |
| Thereafter                                    |       | —     |       |
| Total                                         |       | 5,521      |       |
| Less: Interest                                |       | 1,098      |       |
| ***Present Value of Minimum Lease Payments*** |       | $          | 4,423      |       |
|                                               |            |            |            |            |  |  |

 

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

 

The Company leases variousoffice and laboratory facilities and equipment under operating leases expiringfrom 2005 to 2010.  Several of theseleases contain renewal options for one to five year periods.

 

Total expense for property andequipment rental for the years ended October 31, 2004, 2003 and 2002 was$3,709, $3,180 and $3,218, respectively. There were no contingent rental amounts due through October 31, 2004.

 

62

----

 

Aggregate future minimum rentalpayments on noncancelable operating leases [exclusive of several month to monthleases] are as follows:

 
| ** **   | ** ** | **Property** | ** ** | **Equipment** | ** ** |
|--------------|------------|--------------|------------|---------------|------------|
| October 31,  |       |         |       |          |       |
| 2005         |       | 1,117        |       | 305           |       |
| 2006         |       | 975          |       | 205           |       |
| 2007         |       | 975          |       | 139           |       |
| 2008         |       | 888          |       | 12            |       |
| 2009         |       | $            | 880        |          | $          | 12 |   |
| Thereafter   |       | 147          |       | —        |       |
|         |       |         |       |          |       |
| ***Totals*** |       | $            | 4,982      |          | $          | 673 |   |

 

The Company has entered intoseveral purchase agreements for reagent supplies through March 2009.

 

Minimum purchase commitments asof October 31, 2004 are as follows:

 
| 2005       |   | $      | 2,714  |   |
|------------|--------|--------|--------|--------|
| 2006       |   | 1,877  |   |
| 2007       |   | 1,381  |   |
| 2008       |   | 106    |   |
| 2009       |   | 26     |   |
| Thereafter |   | — |   |
|       |   | $      | 6,104  |   |

 

Reagentsupplies expense under purchase agreements amount to $1,777, $673 and $609 forthe years ended October 31, 2004, 2003 and 2002, respectively.

 

In December 2001, one of theCompany’s wholly owned subsidiary [CareEvolve] entered into a five yearstrategic marketing alliance agreement with Roche Diagnostic Corporation [“RDC”].  RDC is engaged in the business ofmanufacturing, marketing and selling medical diagnostic equipment and medicalsupplies to various hospitals and health care providers.  The terms of the agreement provide that RDCwill provide managerial and sales support to CareEvolve in an effort to furtherexpand the sale of CareEvolve services. The Company, including CareEvolve, shall hire marketing and managementpersonnel to provide increased selling and marketing efforts.  RDC will initially fund CareEvolve the sum of$1,000 which will be used to fund operations and expenses of CareEvolve.  Only those expenses approved by a SteeringCommittee will be authorized to be paid with the proceeds of the $1,000.  During the term of the agreement, CareEvolvewill pay to RDC and Bio-Reference 50% of the net after-tax income generatedeach quarter.  In addition, the agreementgrants RDC an option to purchase an equity interest in CareEvolve from theCompany equal to 50% of the ownership in CareEvolve. During fiscal 2004, theCompany and RDC were involved in negotiations to amend the agreement and inDecember 2004 such amendment was completed. The Company took a one-time chargeof approximately $400 against fiscal 2004 earnings associated with additionalexpenses incurred as a result of the amendment. (See Note 23).

 

63

----

 

***[15] Litigation***

 

Inthe normal course of business, the Company is exposed to a number of assertedand unasserted potential claims.  In theopinion of management, the resolution of these matters will not have a materialadverse effect on the Company’s financial position or results of operations.

 

***[16] Insurance***

 

The Company maintainsprofessional liability insurance of $3,000 in the aggregate, with a peroccurrence limit of $1,000 .  Inaddition, the Company maintains excess commercial insurance of $5,000 peroccurrence and $5,000 in aggregate.  TheCompany believes, but cannot assure, that its insurance coverage is adequatefor its current business needs.  Adetermination of Company liability for uninsured or underinsured acts oromissions could have a material adverse affect on the Company’s operations.

 

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

 

***[A] Concentrations of Credit Risk - Cash -***At October 31, 2004 and 2003, the Company had approximately $1,885 and $2,923 ,respectively, in cash and certificate of deposit balances at financialinstitutions which were in excess of the federally insured limits.

 

***[B] Concentration of Credit Risk - AccountsReceivable -*** Credit risk with respect to accountsreceivable is generally diversified due to the large number of patientscomprising the client base.  The Companydoes have significant receivable balances with government payors and variousinsurance carriers.  Generally, theCompany does not require collateral or other security to support customerreceivables, however, the Company continually monitors and evaluates its clientacceptance and collection procedures to minimize potential credit risksassociated with its accounts receivable and establishes an allowance foruncollectible accounts and as a consequence, believes that its accountsreceivable credit risk exposure beyond such allowance is not material to the financialstatements.

 

A number of proposals forlegislation continue to be under discussion which could substantially reduceMedicare and Medicaid reimbursements to clinical laboratories.  Depending upon the nature of regulatoryaction, and the content of legislation, the Company could experience asignificant decrease in revenues from Medicare and Medicaid, which could have amaterial adverse effect on the Company. The Company is unable to predict, however, the extent to which suchactions will be taken.

 

***[18] Acquisitions***

 

In February 2004, the Companyacquired certain assets and liabilities of Metropolitan Diagnostic, Inc. (“MDI”)for $500. In connection with the acquisition, the Company received a three yearnon-compete agreement with the former owners of MDI. The purchase price wasprincipally allocated to a customer list.

 

In July 2004, the Companyentered into an agreement to purchase certain operating assets of CGI for thesum of $2,485. The operations of CGI are included in the Company results of operationscommencing August 1, 2004. In connection with the acquisition, the Companyentered into employment agreements with key management personnel. In addition,the Company obtained a three year “non-competition/non-solicitation agreement”with the former owners of CGI. The acquisition resulted in goodwill of $2,347being recorded.

 

These acquisitions were notmaterial to the financial position or operations of the Company.

 

64

----

 

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

 

For certain financialinstruments, including cash and cash equivalents, trade receivables, tradepayables, and short-term debt, it was estimated that the carrying amountapproximated fair value for the majority of these items because of their shortmaturities.  The fair value of theCompany’s long-term debt is estimated based on the quoted market prices forsimilar issues or by discounting expected cash flows at the rates currentlyoffered to the Company for debt of the same remaining maturities.

 

Due to the non-interest bearingnature and unspecified payment terms, it was not practicable to estimate thefair value of amounts due from related parties [See also Note 7].

 

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

 

The Company has a limited self-fundedhealth insurance plan for its employees under which the Company pays theinitial $125 of covered medical expenses per person each year.  The Company has a contract with an insurancecarrier for any excess up to a maximum of $1,900 per person and $2,000 in theaggregate.  Health insurance premiumexpense for the years ended October 31, 2004, 2003 and 2002 amounted toapproximately $622 , $385 and $383 , respectively.  Uninsured employee medical expenses incurredby the Company amounted to approximately $3,283 , $2,515 and $2,348 for theyears ended October 31, 2004, 2003 and 2002, respectively.  During fiscal 2004, 2003 and 2002, employeecontributions of $821, $603 and $437 offset, the above health plan costs.

 

***[21] Employee Benefit Plan***

 

TheCompany sponsors the Bio-Reference Laboratories, Inc. 401(k) Profit-SharingPlan [the “Plan”].  Employees becomeeligible for participation after attaining the age of eighteen and completingone year of service.  Participants mayelect to contribute up to ten percent of their compensation, as defined in thePlan Adoption Agreement, to a maximum allowed by the Internal RevenueService.  The Company may choose to makea matching 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.  For the plan yearsbeginning January 1, 2004, 2003 and 2002, the Company elected to make amatching contribution of 3% of salary not to exceed 250 dollars per participantwhich amounted to $78, $71 and $65, respectively which were charged tooperations.  The employer contributionwill be fully vested after the fifth year of service.

 

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

 

In November 2004, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 151, “InventoryCosts – an amendment to ARB No. 43.” This statement provides guidance toclarify the accounting for abnormal amounts of idle facility expense,freighthandling costs, and wasted material (spoilage), among other production costs.Provisions of ARB No. 43 stated that under some circumstances, items such asidle facility expense, excessive spoilage and other costs “may” be so abnormalas to require treatment as current period charges. This statement requires thatthose items be recognized as current period charges regardless of whether theymeet the criterion of so abnormal. In addition, SFAS 151 requires thatallocation of fixed production overheads to the costs of conversion be based onthe normal capacity of the production overheads to the costs of conversion bebased on the normal capacity of the production facilities. Adoption of theStatement is not expected to have a material impact on the financial statementsof the Company.

 

In November 2004, the FASBissued SFAS No. 152 “Accounting for Real Estate Time-Sharing Transactions – Anamendment of SFAS No. 66 and 67. This Statement amends SFAS No. 66. “Accountingfor Sales of Real Estate, to reference the financial accounting and reportingguidance for real estate time-sharing transactions that is provided in AICPAStatement of Position (SOP) 04-2, Accounting for Real Estate Time-SharingTransactions. This Statement also amends SFAS No. 67, “Accounting for Costs andInitial Rental Operations of Real Estate Projects,” to state the guidance for(a) incidental costs and (b) costs incurred to sell real estate projects doesnot apply to real estate time-sharing transactions. The accounting for thoseoperations and costs is subject to guidance in SOP 04-2. Effective for financialstatements with fiscal years beginning after June 15, 2005.

 

65

----

 

Adoption of this Statement isnot expected to have a material impact on the financial statements of theCompany.

 

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

 

In December 2004, the FASBissued SFAS No. 123 (Revised  2004). “Share-BasedPayment.” The statement requires that the compensation cost relating toshare-based payment transactions be recognized in financial statements. Thatcost will be measured based on the fair value of the equity or liabilityinstrument issued. The statement covers a wide range of share-basedcompensation arrangements including share options, restricted share plans, performance-basedawards, share appreciation rights, and employee share purchase plans. Thecompany will be required to adopt SFAS 123 ( R ) as of August 1, 2005. Theadoption may have a material impact on the consolidated financial statements ofthe Company.

 

***[23] Subsequent Event***

 

In November 2004, the Companyentered into a seven-year employment agreement with its Chief ExecutiveOfficer/President which expires in October 31, 2011. The term of the agreementprovides for minimum annual base compensation of $750,000 subject to annualpercentage increases based on the increases in the Consumer Price Index andother benefits as defined in the agreement.

 

In December 2004, the Companyand Roche amended its Strategic Marketing Alliance Agreement whereby certain termsof the original agreement were canceled, including among other things, Roche’sobligation to fund operations and expenses of CareEvolve and the Company’sobligation to provide Roche with revenue and equity sharing as defined in theoriginal Agreement.

 

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

 
| ** **                                                          | ** ** | **Three months ended** | ** ** | **Fiscal  Year 2004** | ** ** |
|---------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **1/31/04**            | ** ** | **4/30/04**           | ** ** | **7/31/04** | ** ** | **10/31/04** | ** ** | ** ** |
|                                                                |       |                   |       |                  |       |   |   |   |   |   |   |
| Net Revenues                                                        |       | $                      | 28,950     |                  | $          | 33,647 |   | $ | 35,843 |   | $ | 37,744 |   | $ | 136,184 |   |
| Gross Profit                                                        |       | $                      | 13,905     |                  | $          | 16,549 |   | $ | 18,272 |   | $ | 19,257 |   | $ | 67,983 |   |
| Net Income                                                          |       | $                      | 919        |                  | $          | 1,959 |   | $ | 2,325 |   | $ | 3,313 |   | $ | 8,516 |   |
| Net Income Per Common Share:                                        |       |                   |       |                  |       |   |   |   |   |   |   |
| Basic                                                               |       | $                      | .08        |                  | $          | .16 |   | $ | .19 |   | $ | .26 |   | $ | .71 |   |
| Diluted                                                             |       | $                      | .07        |                  | $          | .15 |   | $ | .18 |   | $ | .25 |   | $ | .67 |   |
| Weighted Average Common Shares Outstanding  - Basic [in thousands]  |       | 11,523                 |       | 11,920                |       | 12,227 |   | 12,640 |   | 12,078 |   |
|                                                                |       |                   |       |                  |       |   |   |   |   |   |   |
| Weighted Average Common Shares Outstanding  -Diluted [in thousands] |       | 13,124                 |       | 13,188                |       | 12,863 |   | 13,252 |   | 12,715 |   |
|                                                                     |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

66

----

 
| ** **                                                           | ** ** | **Three months ended** | ** ** | **Fiscal  Year 2003** | ** ** |
|----------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                           | ** ** | **1/31/03**            | ** ** | **4/30/03**           | ** ** | **7/31/03** | ** ** | **10/31/03** | ** ** | ** ** |
|                                                                 |       |                   |       |                  |       |   |   |   |   |   |   |
| Net Revenues                                                         |       | $                      | 23,759     |                  | $          | 25,951 |   | $ | 28,920 |   | $ | 30,404 |   | $ | 109,034 |   |
|                                                                 |       |                   |       |                  |       |   |   |   |   |   |   |
| Gross Profit                                                         |       | $                      | 10,572     |                  | $          | 12,241 |   | $ | 14,578 |   | $ | 15,427 |   | $ | 52,818 |   |
| Net Income                                                           |       | $                      | 470        |                  | $          | 1,523 |   | $ | 2,301 |   | $ | 2,246 |   | $ | 6,540 |   |
| Net Income Per Common Share:                                         |       |                   |       |                  |       |   |   |   |   |   |   |
| Basic                                                                |       | $                      | .04        |                  | $          | .13 |   | $ | .20 |   | $ | .20 |   | $ | .57 |   |
| Diluted                                                              |       | $                      | .04        |                  | $          | .12 |   | $ | .18 |   | $ | .17 |   | $ | .51 |   |
|                                                                 |       |                   |       |                  |       |   |   |   |   |   |   |
| Weighted Average Common Shares Outstanding  - Basic [in thousands]   |       | 11,595                 |       | 11,487                |       | 11,423 |   | 11,451 |   | 11,489 |   |
|                                                                 |       |                   |       |                  |       |   |   |   |   |   |   |
| Weighted Average Common Shares Outstanding  - Diluted [in thousands] |       | 12,899                 |       | 12,665                |       | 12,709 |   | 13,044 |   | 12,798 |   |

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

 

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

 

67

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

To the Board of Directors and Shareholders ofBio-Reference Laboratories, Inc.Elmwood Park, New Jersey

 

 

Our report on our audit of thebasic financial statements of Bio-Reference Laboratories, Inc. and itssubsidiary appears on page 40.  Thataudit was conducted for the purpose of forming an opinion on the basicfinancial statements taken as a whole. The supplemental schedule II is presented for purposes of complying withthe Securities and Exchange Commissions Rules and Regulations under the SecuritiesExchange Act of 1934 and is not otherwise a required part of the basicfinancial statements.  Such informationhas been subjected to the auditing procedures applied in the audit of the basicfinancial  statements, and in ouropinion, is fairly stated in all material respects in relation to the basicfinancial statements taken as a whole.

 

 

MOORESTEPHENS, P. C.

CertifiedPublic Accountants.

 

Cranford, New Jersey

December 17, 2004

 

68

----

 

**BIO-REFERENCELABORATORIES, INC. AND SUBSIDIARY**

 

**SCHEDULE II****- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARSENDED OCTOBER 31, 2004, 2003 AND 2002.**

**[InThousands]**

 
| **(a)**                         | ** ** | **(b)**                              | ** ** | **(c)**                            | ** ** | **(d)**                                | ** ** | **(e)**                        | ** ** |
|---------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|----------------------------------------|------------|--------------------------------|------------|
| **Description**                 | ** ** | **Balance at  Beginning  of Period** | ** ** | **Charged to  Cost and  Expenses** | ** ** | **Deductions  To Valuation  Accounts** | ** ** | **Balance  at End  of Period** | ** ** |
|                            |       |                                 |       |                               |       |                                   |       |                           |       |
| Year Ended October 31, 2004     |       |                                 |       |                               |       |                                   |       |                           |       |
| Allowance for Doubtful Accounts |       | $                                    | 5,159      |                               | $          | 17,506                                 |       | $                              | (15,630    | ) | $ | 7,035 |   |
| Contractual Credits/Discounts   |       | 24,026                               |       | 204,996                            |       | (197,955                               | )          | 31,067                         |       |
|                            |       |                                 |       |                               |       |                                   |       |                           |       |
| ***Total Allowance***           |       | $                                    | 29,185     |                               | $          | 222,502                                |       | $                              | (213,585   | ) | $ | 38,102 |   |
|                            |       |                                 |       |                               |       |                                   |       |                           |       |
| Year Ended October 31, 2003     |       |                                 |       |                               |       |                                   |       |                           |       |
| Allowance for Doubtful Accounts |       | $                                    | 7,035      |                               | $          | 12,806                                 |       | $                              | (14,682    | ) | $ | 5,159 |   |
| Contractual Credits/Discounts   |       | 23,010                               |       | 160,642                            |       | (159,626                               | )          | 24,026                         |       |
|                            |       |                                 |       |                               |       |                                   |       |                           |       |
| ***Total Allowance***           |       | $                                    | 30,045     |                               | $          | 173,448                                |       | $                              | (174,308   | ) | $ | 29,185 |   |
|                            |       |                                 |       |                               |       |                                   |       |                           |       |
| Year Ended October 31, 2002     |       |                                 |       |                               |       |                                   |       |                           |       |
| Allowance for Doubtful Accounts |       | $                                    | 4,973      |                               | $          | 12,341                                 |       | $                              | (10,279    | ) | $ | 7,035 |   |
| Contractual Credits/Discounts   |       | 26,405                               |       | 136,141                            |       | (139,536                               | )          | 23,010                         |       |
|                            |       |                                 |       |                               |       |                                   |       |                           |       |
| ***Total Allowance***           |       | $                                    | 31,378     |                               | $          | 148,482                                |       | $                              | (149,815   | ) | $ | 30,045 |   |
|                                 |            |                                      |            |                                    |            |                                        |            |                                |            |  |  |  |  |  |  |

 

69

----