10-K 1 a08-1780_110k.htm 10-K

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended October 31, 2007

 

Commission file number 0-15266

 

BIO-REFERENCE LABORATORIES, INC.

 

New Jersey

 

22-2405059

(State of incorporation)

 

(I.R.S. Employer

 

 

Identification No.)

 

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

(Address of principal executive offices)

 

Registrant’s telephone number 201-791-2600

 

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

 

Securities registered pursuant to Section 12(g) of the Act:

 

Name of Exchange on Which Registered

Common Stock, $.01 par value

 

NASDAQ Global Market

 

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

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

Non-Accelerated filer o

 

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

 

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

 

The aggregate market value of the voting stock of Bio-Reference Laboratories, Inc. (consisting of Common Stock), $.01 par value held by non-affiliates of the registrant was approximately $311,000,000 based upon the last sale price for the Common Stock on  April 30, 2007, the last trading date of the registrant’s most recently completed second quarter, as reported on the NASDAQ Global Market System.

 

On January 4, 2008, there were 13,775,140 shares of Common Stock issued and outstanding

 



 

PART I

 

Item. 1. - Business

 

Overview

 

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

 

We currently process nearly 3.7 million requisitions each year. A requisition form accompanies a patient specimen. It indicates the tests to be performed and the party to be invoiced for the tests. Our clients include doctors, employers, clinics and governmental units. We have a network of over 50 patient service centers for collection of patient specimens.

 

In 2006 we acquired GeneDx, a diagnostic genetic testing laboratory providing services to national and international customers. GeneDx specializes in testing for rare and complex genetic conditions through the use of DNA sequencing. In 2007 we introduced the first commercially available genome-wide oligonucleotide microarray analysis testing useful for the diagnosis of, among other conditions, developmental disorders, which has significantly grown the business. The success and growth of GeneDx can be attributed to both the unique nature of our testing and the highly experienced clinicians and researchers who run the business.

 

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

 

We also operate a web-based connectivity portal solution for laboratories and physicians through our CareEvolve subsidiary. We use this portal ourselves to provide laboratory ordering and results to our physician customers.  We are also marketing this connectivity solution to other laboratories throughout the country.

 

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

 

The Clinical Laboratory Testing Market in the United States

 

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

 

During the last few years, the economic fundamentals of the industry have been improving. In the cost containment era of the 1990s, the industry was negatively impacted by the rapid growth of managed care, stringent government regulation and investigations into fraud and abuse. These factors  led to revenue and profit declines and industry consolidations, especially among commercial clinical laboratories. As a result, fewer but larger clinical laboratories have emerged with greater economies of scale, more effective compliance with government billing regulation and other laws and a better approach to pricing their services. These changes resulted in improved profitability.  In addition, new and emerging technologies continue to provide greater testing opportunities for clinical laboratories.

 

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

 

Aging of the population of the United States;

Awareness by patients of the value of laboratory tests;

Decrease in the cost of tests;

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

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

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

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

Employer sponsored wellness programs;

Research and development in genomics.

 

Business Strategy

 

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

 

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

 

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

 

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

 

Capitalize on our position within the clinical market

Lead in the providing of medical information

Provide the highest quality service

Pursue strategic growth opportunities

 

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Services

 

The clinical laboratory testing business consists of routine testing and esoteric testing. Routine testing generates approximately 55% and esoteric testing generates approximately 45% of our net revenues. The net revenue generated by our PSIMedica business unit and our CareEvolve subsidiaries have been minimal to date.

 

Routine Testing

 

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

 

Blood Cell Counts

Cholesterol levels

HIV-related tests

Pap Smears

Pregnancy

Substance Abuse

Urinalysis

 

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

 

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

 

Esoteric Tests

 

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

 

Endocrinology (the study of glands and their hormone secretions)

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

Immunology (the study of the immune system)

Microbiology (the study of microscopic forms of life)

Oncology (the study of abnormal cell growth)

Serology (the study of body fluids)

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

 

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

 

Medical Information

 

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

 

Other Products

 

CareEvolve, our wholly owned subsidiary, is a physician-based connectivity portal.  This system provides a complex, sophisticated system for ordering laboratory services and delivering laboratory results.  The system is designed to be physician-centric and to provide a highly flexible, scalable, comprehensive desktop solution for physicians to manage their day-to-day practice and personal needs, as well as to handle their clinical laboratory ordering and reporting.  This product has been designed to work as a platform with plug and play capability that can easily be used by other laboratories that also need a web-based solution for their physician customers.

 

Payors and Clients

 

We provide laboratory services to a range of healthcare providers.  “payor” is the party who pays for the tests while the “client” is the party that refers the tests to us. We may consider an organization that has a contract with us, such as a clinic or governmental agency, both a payor and a client. Some states, such as New York and New Jersey, prohibit us from billing physician clients. During fiscal year 2007, no single client accounted for more than 10% of our net revenues.

 

The following table reflects the current estimates of the breakdown of net revenue by payor for the twelve  months ended October 31, 2005, 2006, and 2007.

 

 

 

Years Ended October 31,

 

 

 

2005

 

2006

 

2007

 

 

 

 

 

 

 

 

 

Direct Patient Billing

 

6

%

4

%

3

%

Commercial Insurance

 

46

%

44

%

46

%

Professional Billing

 

18

%

24

%

25

%

Medicare

 

26

%

26

%

24

%

Medicaid

 

4

%

2

%

2

%

 

 

100

%

100

%

100

%

 

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Clients

 

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

 

Employers, Governmental Agencies

 

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

 

Sales and Marketing

 

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

 

Client Service Coordinators

 

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

 

Logistical Support

 

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

 

Strategic Growth Opportunities

 

Over the last several years, we have experienced substantial growth and have expanded our operational capabilities. In September 2006, we acquired certain assets and liabilities of two Maryland laboratories, a pathology laboratory and a genetics laboratory for $1,500,000 and $10,000,000, respectively. The genetics laboratory purchase agreement contains certain operational targets, which, if achieved in the next years following the closing, could result in an increase in the purchase price from $10,000,000 to a maximum $17,000,000. During the recently completed fiscal year ended October 31, 2007 the genetics laboratory achieved certain of the targets, entitling the prior owners to receive $1,917,000 in cash and an additional 11,548 shares of our Common Stock. These amounts have been accrued and are reflected in our current year financials. We retained the staffs of these laboratories and continue to operate at the same locations. We intend to develop further and expand both our core laboratory business and other products. This growth and expansion has placed, and will continue to place, a significant strain on our resources. We cannot assure that we will be able to successfully manage a continuation of the rate of growth similar to that which we have experienced in the past, should such growth occur.

 

Billing

 

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

 

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

 

Competition

 

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

 

Fewer layers of staff

A more responsive business atmosphere

Customized service

 

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

 

Quality Assurance

 

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

 

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

 

Our Quality Assurance Committee, headed by a Quality Assurance Coordinator and composed of supervisors from all departments, meets daily to assess and evaluate the laboratory’s quality.  Based on the information received from the Committee, recommendations are made to correct conditions which have led to errors.  Management, department supervisors and members of the Committee continually monitor the laboratory’s quality.

 

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

 

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

 

Special Note Regarding Forward-Looking Statements

 

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

 

Item 1A. Risk Factors

 

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

 

Regulation of Clinical Laboratory Operations

 

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

 

Waste management is subject to Federal and state regulations governing the transportation and disposal of medical waste including bodily fluids.  Federal regulations require licensure of interstate transporters of medical waste. In New Jersey, we are subject to the Comprehensive Medical Waste Management Act, (“CMWMA”), which requires us to register as a generator of special medical waste. All of our medical waste is disposed of by a licensed interstate hauler.  The hauler provides a manifest of the disposition of the waste products as well as a certificate of incineration which is retained by us. These records are audited by the State of New Jersey on a yearly basis. We are also subject to Federal requirements. The Federal Hazardous materials transportation law, 49 U.S.C. 5101 et seq., and the Hazardous Materials Regulations (HMR), 49 CFR parts 171-180. The Federal government has classified hazardous medical waste as hazardous materials for the purpose of regulation. These regulations preempt State regulation which must be “substantively the same,” “the non-Federal requirement must conform “in every significant respect to the Federal requirement. Editorial and other similar de minimis changes are permitted.” 49 CFR 107.202(d). The amendments to provisions in 49 U.S.C., 5125 reaffirmed the need to achieve greater uniformity and to promote the public health, welfare, and safety at all levels, Federal standards for regulating the transportation of hazardous materials in intrastate, interstate, and foreign commerce are necessary and desirable. We believe we are in compliance with all Federal and State medical waste regulations.

 

Regulation of Reimbursement for Laboratory Services

 

Containment of health-care costs, including reimbursement for clinical laboratory services, has been a focus of ongoing governmental activity.  Omnibus budget reconciliation legislation, designed to “reconcile” existing laws with reductions and reimbursements required by enactment of a Congressional budget can adversely affect clinical laboratories by reducing Medicare reimbursement for laboratory services. For most of the tests performed for Medicare beneficiaries or Medicaid recipients, laboratories are required to bill Medicare or Medicaid directly, and to accept Medicare or Medicaid reimbursement as payment in full.

 

The current administration, Congress and various Federal agencies have examined the rapid growth of Federal expenditures for clinical laboratory services, and the use by the major clinical laboratories of dual fee schedules (“client” fees charged to physicians, hospitals, institutions and companies with whom a laboratory deals on a bulk basis and which involve relatively low administrative costs, and “patient” fees charged to individual patients and third party payors, including Medicare, who generally require separate bills or claims for each patient encounter and which involve relatively high administrative costs).  The permitted Medicare reimbursement rate for clinical laboratory services has been reduced by the Federal government in a number of instances over the past several years to a present level equal to 74% of the national median of laboratory charges. Next year marks the fourth year of a five-year freeze (through 2008) on Laboratory fee updates, as required by the Medicare Modernization Act of 2003. A number of proposals for legislation or regulation are under discussion which could have the effect of substantially reducing Medicare reimbursements to clinical laboratories through reduction of the present allowable percentage or through other means.  In addition, the structure and nature of Medicare reimbursement for laboratory services is also under discussion and we are unable to predict the outcome of these discussions. Depending upon the nature of congressional and/or regulatory action, if any, which is taken and the content of legislation, if any, which is adopted, we could experience a significant decrease in revenues from Medicare and Medicaid, which could have a material adverse effect on us.

 

CLIA-88

 

CLIA-88 extended Federal licensing requirements to all clinical laboratories (regardless of the location, size or type of laboratory), including those operated by physicians in their offices, based on the complexity of the tests they perform.  The legislation also substantially increased regulation of cytology screening, most notably by requiring the Secretary of Health and Human Services, (“HHS”) to implement regulations placing a limit on the number of slides that a cytotechnologist may review in a twenty-four hour period.  CLIA-88 also established a more stringent proficiency testing program for laboratories and increased the range and severity of sanctions for violating Federal licensing requirements.  A number of these provisions, including those that imposed stricter cytology standards and increased proficiency testing, have been implemented by regulations applicable only to laboratories subject to Medicare certification. On February 28, 1992, HHS published three sets of regulations implementing CLIA-88, including  quality standard regulations establishing Federal quality standards for all clinical laboratories; application and user fee regulations applicable to most laboratories in the United States which became effective on March 30 1993; and enforcement procedure regulations applicable to laboratories that are found not to meet CLIA-88 requirements.  The quality standard regulations establish varying levels of regulatory scrutiny depending upon the complexity of testing performed.  Under these regulations, a laboratory that performs only one or more of seventy eight  routine “waived” tests may apply for a waiver from most requirements of CLIA-88.  We believe that most tests performed by physician office laboratories will fall into either the “waived” or the “moderately complex” category.  The latter category applies to simple or automated tests and generally permits existing personnel in physicians’ offices to continue to perform testing under the implementation of systems that insure the integrity and accurate reporting of results, establishment of quality control systems, proficiency testing by approved agencies, and biannual inspection.  Our testing is often much more complex and as a result, we are subject to full compliance with CLIA-88. The quality standard and enforcement procedure regulations became effective on September 1, 1992, most personnel, quality control and proficiency testing requirements have been implemented; the remainder will be phased in over a number of years.  Our laboratory completed its first CLIA inspection under CLIA-88 guidelines and received its certificate of compliance effective February 7, 1996. It has been reinspected since on a bi-annual basis and found to be in compliance.

 

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Compliance Program

 

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

 

Confidentiality of Health Information

 

Pursuant to the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), on December 28, 2000, the Secretary of HHS issued final regulations that would establish comprehensive federal standards with respect to the use and disclosure of protected health information by a health plan, healthcare provider or healthcare data clearinghouse. The regulations establish a regulatory framework on various subject matter, including:

 

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

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

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

Administrative, technical and physical safeguards required for that use or for disclosure of protected health data.

 

These regulations establish a “minimum” and would default to more stringent state laws. Therefore, we are required to comply with both sets of standards. Laboratories were required to submit a compliance plan to HHS by October 16, 2003.  We filed our application for a one year extension for compliance with the Transaction Data Set Regulations and filed our compliance plan during the extension period in accordance with the model form provided by HHS. HIPAA provides for significant fines as well as substantial criminal penalties for violations of the Act.

 

Fraud and Abuse Regulations

 

Medicare and Medicaid anti-kickback laws prohibit clinical laboratories from making payments or furnishing other benefits to influence the referral of tests billed to federal programs. Federal enforcement agencies (including both the Federal Bureau of Investigation and the Office of the Inspector General) liberally interpret and aggressively enforce statutory fraud and abuse provisions of these anti-kickback statutes. According to public statements made by the Department of Justice, healthcare fraud has become one of  its highest priorities. Many of the anti-fraud statutes are vague or indefinite and have not been interpreted in the courts.  We believe we operate lawfully within these statutes; however, we cannot predict if some of our practices may be interpreted as violating these statutes and regulations.

 

Insurance

 

We maintain professional liability insurance of $1,000,000 per occurrence, $3,000,000 in the aggregate. In addition, we maintain excess commercial 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 currently estimated exposures, but we cannot assure that we will not incur liabilities in excess of the policy limits.  In addition, although we believe that we will be able to continue to obtain adequate insurance coverage, we cannot assure that we will be able to do so at acceptable costs.

 

Employees

 

At October 31, 2007, we had 1,243 full-time and 405 part-time employees serving in executive positions, as technicians and technologists (including physicians, pathologists and PhDs), in marketing and as drivers and in bookkeeping, clerical and administrative positions. None of our employees are represented by a labor union. We regard relations with our employees as satisfactory.

 

Risks Associated with Growth:

 

Over the last several years, we have experienced substantial growth and have expanded our operational capabilities. In September 2006, we acquired certain assets and liabilities of two Maryland laboratories, a pathology laboratory and a genetics laboratory for $1,500,000 and $10,000,000, respectively. The genetics laboratory purchase agreement contains certain operational targets, which, if achieved in the next four years could result in an increase in the purchase price from $10,000,000 to a maximum $17,000,000. During the recently completed fiscal year ended October 31, 2007 the genetics laboratory achieved certain of the targets, entitling the prior owners to receive $1,917,000 in cash and an additional 11,548 shares of our Common Stock. These amounts have been accrued and are reflected in our current year financials. We retained the staffs of these laboratories and continue to operate at the same locations. We intend to develop further and expand both our core laboratory business and other products. This growth and expansion has placed, and will continue to place, a significant strain on our resources. We cannot assure that we will be able to successfully manage a continuation of the rate of growth similar to that which we have experienced in the past, should such growth occur.

 

Fluctuations in Operating Results:

 

Our quarterly and annual operating results can be affected by a wide variety of factors, many of which are outside of our control and which have in the past and could in the future materially and adversely affect our operating results. These factors include the quantities and timing of specimens received, pricing pressures, reimbursement changes, availability and cost of diagnostic supplies, cost of logistic and delivery systems, changes in product mix, retention and expansion of our marketing staff, timing of payments from governmental agencies and third-party payors and the effect of adverse weather conditions. We rely principally upon our internal logistic group for pick-up and delivery of specimens. However, as we shift our product mix we have begun to rely on Federal Express, UPS and other such providers for this service. Any disruption in this service, as occurred on September 11, 2001 when the National Airspace System (“NAS”) was shut down for a week, could have a material adverse effect on our operating results. As a result of these factors, our operating results may continue to fluctuate in the future.

 

Uncertainties Related to Government Regulation and Enforcement

 

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

 

Current federal laws governing federal healthcare programs, as well as some state laws, regulate certain aspects of the relationship between healthcare providers, including us, and their referral sources. The Federal Anti-Kickback Law and the Stark Law generally prohibit providers and others from soliciting, offering, receiving or paying, directly or indirectly, any monies in return for either making a referral for a service or item or purchasing, ordering or leasing a service or item, and prohibits physicians from making such referrals to entities in which they have an investment interest or with which they have a compensation arrangement. Exceptions to these laws are limited. Violations are punishable by disallowance of claims, civil monetary or criminal penalties and or exclusion from Medicare. Government authorities (both federal and state) have become more aggressive in examining laboratory billing practices, and in seeking repayments and even penalties based on how the services were billed, regardless of whether the carriers had furnished clear guidance.

 

6



 

In addition, our laboratory operations are required to be licensed or certified under CLIA-88, CMS (Medicare) and various State and local laws. We are also subject to federal and state laws relating to the handling and disposal of medical waste and radioactive materials, as well as the safety and health of laboratory employees. Although we seek to structure our practices to comply with these laws and regulations, no assurances can be given regarding compliance in any given situation. The possible sanctions for failure to comply with these laws and regulations may include the denial to conduct business, significant fines and criminal penalties. Any significant fine or criminal penalty could have a material adverse effect on our financial condition. Any exclusion or suspension from participation in a CMS program, any loss of licensure or accreditation or the inability to obtain the required license would have a material adverse effect on our business.

 

Uncertainties Related to Third-Party Payors

 

We typically bill third party payors such as Medicare, Medicaid, Governmental programs and private insurers for our services. Such third party payors are constantly negotiating prices with the goal of lowering their costs, which may result in lower profit margins for us. Reimbursement rates have been established for most, but not every service. We cannot collect from third party payors for services that these payors have not approved for reimbursement. As is common with all laboratories, there is a certain amount of variability with respect to reimbursement among third party payors. Furthermore, third party payors have, on occasion ceased reimbursements when certain tests are ordered for patients with certain diagnoses while maintaining reimbursement when those tests are ordered for other diagnoses deemed appropriate by the carrier. In addition, Medicare or Medicaid may retroactively audit its payments to us and may determine that certain payments must be returned.

 

Potential Healthcare Reform Including Decreasing Reimbursement Rates

 

The public and the federal government continue to focus attention on reforming the healthcare system in the United States. At the beginning of calendar year 2005, CMS announced significant cuts to Medicare reimbursement rates for flow cytometry testing. We benefited from a partial  restoration of the former reimbursement rates in fiscal 2007. Furthermore, several legislative proposals have been introduced in Congress and state legislatures in recent years that would effect major reforms of the healthcare systems. In addition, CMS has made a number of proposals regarding the payment and coverage of laboratory services including the development of national coverage policies. Because of the uncertainties in regard to the nature, timing and extent of any such reimbursement changes, audits and reform initiatives, we are unable to predict the effect of these changes on us.

 

Insurance

 

Although we believe that our present insurance coverage is sufficient to cover currently estimated exposures, we cannot assure that we will not incur liabilities in excess of the policy limits.  In addition, although we believe that we will be able to continue to obtain adequate insurance coverage, we cannot assure that we will be able to do so at acceptable cost.

 

Uncertainties Related to Accounts Receivable

 

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

 

Delays attendant to reimbursement by third party payors

Difficulties in gathering complete and accurate billing information

Inability to collect accounts

Long collection cycles

 

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

 

Competition

 

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

 

Dependence on Bank Financing

 

Effective as of October 31, 2006, we executed a fourth amendment to our Loan Agreement with PNC Bank formalizing the repayment terms of the $5 million term loan from PNC Bank used by our wholly-owned BRLI No. 2 Acquisition Corp. subsidiary to fund the $5 million acquisition cash payment in connection with its purchase of the operating assets of GeneDx. The term loan is evidenced by a secured promissory note payable over a six year term in equal monthly principal payments of $69,444.44 plus interest at 6.85% per annum.


 

In October 2007, we entered into an amended revolving note payable loan agreement with PNC Bank.  The maximum amount of the credit line available to the Company is the lesser of (i) $30,000,000 or (ii) 50% of the Company’s qualified accounts receivable [as defined in the agreement].  The amendment to the Loan and Security Agreement provides for interest on advances to be subject to the bank’s prime rate or Eurodollar rate of interest plus, in certain instances, an additional interest percentage.  The additional interest percentage charges on Eurodollar borrowings range from 1% to 4% and are determined based upon certain financial ratios achieved by the Company.  At October 31, 2007, the Company had elected to have $20,000,000 of the total advances outstanding converted into a Eurodollar rate loan with a variable interest rate of 6.33% at October 31, 2007.  The remaining outstanding advances during that period were subject to the bank’s prime rate of interest.  At October 31, 2007, advances of $3,252,000 were subject to interest at the prime rate.  As of October 31, 2007 and 2006, the bank’s prime rate of interest was 7.75% and 8.25%, respectively.  The credit line is collateralized by substantially all of the Company’s assets. The line of credit is available through October 2008 and may be extended for annual periods by mutual consent, thereafter.  The terms of this agreement contain, among other provisions, requirements for maintaining defined levels of capital expenditures, fixed charge coverage, insurance coverage and the prohibition of the payment by the Company of cash dividends. As of October 31, 2007, the Company utilized $23,252,000 and had $6,748,000 of available unused credit under this revolving note payable loan agreement.

 

Dependence on our Chief Executive Officer

 

Our success is substantially dependent on the efforts and abilities of Marc D.  Grodman, M.D., our founder, president and chief executive officer. The unavailability of Dr. Grodman, whether as a result of his death, disability or otherwise, could have a material adverse effect upon our business.

 

Possible Volatility of Stock Price

 

There is a history of volatility in the market price for shares of companies in the healthcare marketplace. Factors such as fluctuations in our quarterly revenues and operating results, announcements of new innovations or services by us or our competitors, changes in third party payment

 

7



 

policies and government regulations may have a material effect on the market price of our Common Stock. In addition, any announcement of a material pending legal action could have a negative impact on the market price of our Common Stock regardless of the outcome of any such matter.

 

Factors In Place To Discourage Takeover Attempts

 

The substantial percentage ownership of our outstanding Common Stock by our executive officers and directors; our charter provision providing for a staggered board of directors so that only one-third of the board is elected each year to serve a three year term; our Rights Plan which was adopted to discourage hostile acquisitions of control of the Company; and the requirement that the holders of not less than 80% of our outstanding Common Stock must approve any merger, consolidation, asset sale or acquisition of the Company not approved by the board may discourage attempts by third parties to tender for or otherwise obtain control of the Company, even if such an attempt might be deemed beneficial to the Company and its shareholders. See Item 11 – “Employment Agreements with Executive Officers” and “Severance Payments for Other Employees” as to employment agreements signed by the Company which provide for substantial Severance Payments upon termination of employment in the event of a Change in Control of the Company. These Severance Payment provisions may also discourage attempts by third parties to tender for or otherwise obtain control of the Company.

 

Item 2. - Properties

 

We operate through a regional network of laboratories. The table below summarizes certain information as to our principal facilities as of October 31, 2007.

 

Location

 

Purpose

 

Type of
Occupance

Clarksburg, MD

 

Pathology Laboratory

 

Leased

Elmwood Park, NJ

 

Main Laboratory

 

Leased

Elmwood Park, NJ

 

Corporate Headquarters

 

Leased

Gaithersburg, MD

 

Genetics Laboratory

 

Leased

Milford, MA

 

Oncology Laboratory

 

Leased

Poughkeepsie, NY

 

Pathology Laboratory

 

Leased

 

We believe that each of these facilities as presently equipped has the production capacity for its currently foreseeable level of operations. We also lease additional relatively small draw stations throughout the New York metropolitan area to collect specimens from physician-referred patients for testing at our processing facilities.

 

Item 3. - Legal Proceedings

 

At October 31, 2007 and at the date of this Report, we were not involved in any material legal proceedings.

 

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

 

No matter was submitted to a vote of our security holders during the fourth quarter of fiscal 2007.

 

8



 

PART II

 

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

 

Our Common Stock is listed for trading on The NASDAQ Global Market System 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 on the NASDAQ National Market System was approved.

 

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

 

 

 

Bid Prices

 

Fiscal Year

 

High

 

Low

 

2006

 

 

 

 

 

First Quarter

 

$

19.14

 

$

15.98

 

Second Quarter

 

18.97

 

16.03

 

Third Quarter

 

23.51

 

17.89

 

Fourth Quarter

 

24.59

 

19.98

 

 

 

 

 

 

 

2007

 

 

 

 

 

First Quarter

 

$

25.56

 

$

21.96

 

Second Quarter

 

26.95

 

23.49

 

Third Quarter

 

28.41

 

24.66

 

Fourth Quarter

 

35.10

 

26.09

 

 

On January 9, 2008 the last sale price for the Common Stock on NASDAQ was $29.49 per share.

 

At October 31, 2007, the number of record owners of the Common Stock was 356. Such number of record owners was determined from our shareholder records and does not include beneficial owners whose shares are held in nominee accounts with brokers, dealers, banks and clearing agencies.

 

Dividends

 

We have not paid any dividends on our Common Stock since our inception and, do not contemplate or anticipate paying any dividends in the foreseeable future. Furthermore, our loan agreement with PNC Bank prohibits us from paying any cash dividends or making any cash distributions with respect to shares of our Common Stock.

 

Recent Sales of Unregistered Securities

 

On September 26, 2006 we issued 230,947 shares of our Common Stock in connection with the acquisition of the operating assets of GeneDx. These shares were valued for the purpose of this acquisition at $21.65 per share, the average closing price for the Common Stock on NASDAQ on the ten trading days immediately preceding the August 29, 2006 signing of the purchase agreement. An additional 11,548 shares of our Common Stock were issued to the prior owners of GeneDx in December 2007, as a result of GeneDx achieving certain operating results during the first measuring period following the closing of the acquisition.

 

A restrictive legend was placed on the certificates for the 230,947 shares and the 11,548 shares and stop transfer instructions were issued against the shares. The sellers represented that they were acquiring the stock for investment and not with a view to distribution. The shares were issued in reliance upon the exemption from the registration requirements of the Securities Act of 1933 in accordance with Section 4(2) of the Act on the basis that the transaction did not involve  a public offering.

 

Equity Compensation Plan Information

 

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

 

Issuer Purchases of Equity Securities

 

On June 1, 2005, the Board of Directors authorized the repurchase of up to 500,000 shares of our common stock from time to time at prevailing market prices in the over-the-counter market over the period ending October 31, 2007. As of October 31, 2007, no shares had been repurchased under this plan.

 

Item 6. -  Selected Financial Data

 

 

 

[In thousands, except per share data]

 

 

 

Years ended

 

 

 

October 31,

 

 

 

2007

 

2006

 

2005

 

2004

 

2003

 

Operating Data:

 

 

 

 

 

 

 

 

 

 

 

Net Revenues

 

$

250,431

 

$

193,134

 

$

163,896

 

$

136,184

 

$

109,034

 

Cost of Services

 

$

124,029

 

$

96,079

 

$

83,352

 

$

68,201

 

$

56,216

 

Gross Profit

 

$

126,402

 

$

97,055

 

$

80,544

 

$

67,983

 

$

52,818

 

General and Administrative Expenses

 

$

101,345

 

$

79,074

 

$

67,937

 

$

55,163

 

$

43,533

 

Income from Operations

 

$

25,057

 

$

17,981

 

$

12,607

 

$

12,820

 

$

9,285

 

Other Expenses - Net

 

$

2,150

 

$

1,239

 

$

1,118

 

$

634

 

$

681

 

Provision for Income Tax Expense

 

$

8,950

 

$

5,451

 

$

3,868

 

$

3,670

 

$

2,064

 

Net Income

 

$

13,957

 

$

11,291

 

$

7,621

 

$

8,516

 

$

6,540

 

Net Income Per Common Share

 

$

1.02

 

$

86

 

$

.60

 

$

.71

 

$

.57

 

Net Income Per Share - Diluted

 

$

1.01

 

$

.85

 

$

.58

 

$

.67

 

$

.51

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

154,574

 

$

120,473

 

$

88,373

 

$

72,151

 

$

53,219

 

Total Long-Term Liabilities

 

$

9,557

 

$

7,112

 

$

4,934

 

$

4,520

 

$

2,833

 

Total Liabilities

 

$

69,307

 

$

51,694

 

$

37,658

 

$

31,478

 

$

23,261

 

Working Capital

 

$

48,747

 

$

39,493

 

$

30,515

 

$

23,815

 

$

18,302

 

Shareholders’ Equity

 

$

85,267

 

$

68,779

 

$

50,715

 

$

40,673

 

$

29,958

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

Net Cash – Operating Activities

 

$

8,064

 

$

5,200

 

$

2,899

 

$

5,026

 

$

5,593

 

Net Cash – Investing Activities

 

$

(9,941

)

$

(4,676

)

$

(4,990

)

$

(6,762

)

$

(1,105

)

Net Cash – Financing Activities

 

$

4,820

 

$

4,127

 

$

287

 

$

4,451

 

$

(3,925

)

 

9



 

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

 

OVERVIEW

 

We are a clinical laboratory located in northeastern New Jersey. Our regional footprint lies within the New York City metropolitan area and the surrounding areas of New Jersey and southern New York State as well eastern Pennsylvania and some areas of western Connecticut; under certain circumstances, we provide services further into New York State, Pennsylvania, Delaware and Maryland. As a regional provider, we are a full-service laboratory that primarily services physician office practices; our drivers pick up samples and deliver reports and supplies, we provide sophisticated technical support, phlebotomy services or patient service centers where appropriate, and electronic communication services in many cases. We have also developed a national reputation for our expertise in certain focused areas of clinical testing. GenPath, our cancer and oncology laboratory, is one of the premier hematopathology laboratories in the country. Physicians outside of our regional footprint send samples to our laboratory in order to take advantage of the expertise that we are able to provide in blood-based cancer pathology and associated diagnostics. Our correctional healthcare services are used throughout the country at prisons and jails. The focused markets we serve on a national basis outside of our regional footprint do not require many of the logistical and other ancillary support services required within the region. Even within our regional footprint, we provide the same services that we provide on a national basis as well as some regional focused diagnostic services, such as histology and pathology support services, substance abuse testing, fertility testing, hemostasis testing, women’s health testing, and molecular diagnostics that are unavailable from many of the smaller regional competitors; testing in some of these areas may be provided outside of physician offices.

 

Over the last few years, there have been fundamental changes in the laboratory services industry. In the 1990s, the industry was negatively impacted by the growth of managed care, increased government regulation, and investigations into fraud and abuse. These factors led to revenue and profit declines and industry consolidations, especially among commercial laboratories. There are currently only three publicly-traded full service laboratories operating in the U.S. While that means that the two national mega-laboratories and BioReference Laboratories are the only remaining publicly traded commercial laboratories, there are numerous hospital outreach programs and smaller reference laboratories that compete for the commercial clinical laboratory business scattered throughout the country. Clinical laboratories have had to improve efficiency, leverage economies of scale, comply with government regulations and other laws and develop more profitable approaches to pricing. Moreover, there has been a proliferation of technology advancements in clinical diagnostics over the last decade that has created significant opportunities for new testing and growth.

 

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

 

During the fourth quarter of fiscal 2006, the Company acquired the operating assets of GeneDx, a leading DNA sequencing laboratory.  As molecular testing in general becomes a more significant element in the diagnostic testing industry, the Company believes that genetic testing will become an essential diagnostic tool of the future.  GeneDx was started by two geneticists from the NIH in 2000.  Over the next six years, based on the reputation and expertise of the founders and the outstanding team they built around themselves, along with a very focused and dedicated understanding of the science of genetics, GeneDx became known as one of the premier genetic testing laboratories for the diagnosis of rare genetic diseases.  The Company believed that the promise of genetic testing is in the diagnosis of the genetic variants of common diseases.  It is the Company’s intention to leverage the expertise and reputation of GeneDx in order to take a leadership role in the expanding area of genetic testing.  The Company is seeking cutting edge methods of testing that will be commercially viable diagnostic tools for the advancement of genetic testing. During the past year, GeneDx introduced GenomeDx, a new test based on CGH Array technology, a high-speed, chip-based technology, that has allowed GeneDx to move to the forefront of an emerging technology platform. The Company is already expanding the menu of tests offered and employing marketing techniques that were extremely successful in building GenPath, our oncology laboratory.  In addition to scientists and technicians to manage testing, GeneDx employs several genetic counselors to help patients and referring physicians and geneticists understand the meaning of the test results.  Prior to the acquisition, GeneDx ‘s revenues and profits were increasing  at an accelerating  rate. This increase has continued through fiscal 2007.

 

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

 

We have also created our PSIMedica business unit which has developed a Clinical Knowledge Management (CKM) System that takes data from enrollment, claims, pharmacy, laboratory results and any other available electronic source to provide both administrative and clinical analysis of a population. The system uses proprietary algorithms to cleanse and configure the data and transfer the resulting information into a healthcare data repository. Using advanced cube technology methodologies, the data can be analyzed from a myriad of views and from highly granular transactional detail to global trended overview. Events such as the Katrina disaster in Louisiana two summers ago and general pressures from the government have made development of an electronic medical record system and Pay-for Performance reimbursement priority goals in the healthcare industry. A large portion of an individual’s medical record consists of laboratory data and a key performance indicator in any Pay-for-Performance initiative is laboratory result data. Our CKM system is a mature, full functioning solution that will allow us to play a role in these important national initiatives.

 

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

 

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

 

Fiscal Year 2007 Compared to 2006

 

NET REVENUES:

 

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

 

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

 

10



 

COST OF SERVICES:

 

Cost of Services for the year ended October 31, 2007 was $124,029 as compared to $96,079 for the year ended October 31, 2006, an increase of 29%. This increase is related to the increase in net revenues of 30%. However, reagent, laboratory and medical supplies increased at a year over year rate of 38% reflecting a significant increase in the more expensive tests that we offer from payers who reimburse at lower rates than our traditional business trends. This is in a large part the result of changes in managed care contracts in the New York Metropolitan area that enabled the Company to grow substantially in revenues.

 

GROSS PROFIT:

 

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

 

GENERAL AND ADMINISTRATIVE EXPENSES:

 

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

 

INTEREST EXPENSE:

 

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

 

NET INCOME:

 

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

 

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

 

Fiscal Year 2006 Compared to 2005

 

NET REVENUES:

 

Net Revenues for the year ended October 31, 2006 were $193,134 as compared to $163,896 for the year ended October 31, 2005; this represents an 18% increase in net revenues. This increase is due to an 8% increase in patients serviced and a 10% increase in net revenue per patient. Our laboratory operations had net revenues of $192,136, in fiscal 2006.

 

The number of patients serviced during the year ended October 31, 2006 was 3,082, which was 8% greater when compared to the prior fiscal year.  Net revenue per patient for the year ended October 31, 2006 was $61.95 compared to net revenue per patient for the year ended October 31, 2005 of $56.48, an increase of $5.47, or 10% as a result of increases in esoteric testing.

 

COST OF SERVICES:

 

Cost of Services for the year ended October 31, 2006 was $96,079 as compared to $83,352 for the year ended October 31, 2005, an increase of 15%. This increase is related to the increase in net revenues of 18%. However, reagent, laboratory and medical supplies increased at a year over year rate of only 8%.

 

GROSS PROFIT:

 

Gross profit on net revenues increased to $97,055 for the year ended October 31, 2006 from $80,544 for the year ended October 31, 2005; an increase of $16,511 (20%), primarily attributable to the increase in net revenues. Gross profit margins increased to 50% from 49%, primarily due to the decrease in direct operating expenses.

 

GENERAL AND ADMINISTRATIVE EXPENSES:

 

General and administrative expenses for the year ended October 31, 2006 were $79,074 as compared to $67,937 for the year ended October 31, 2005, an increase of $11,137 or 16%. This increase is related to the increase in net revenues of 18%. Marketing expenses as a percent of net revenues decreased from 10% in the period ended October 31, 2005 to 9% in the period ended October 31, 2006.

 

INTEREST EXPENSE:

 

Interest expense increased from $1,226 during the year ended October 31, 2005 to $1,412 during the year ended October 31, 2006; an increase of $186. This increase is due to an increase in the variable interest rates associated with and the increased utilization of our line of credit. Management believes that this trend may continue in the future due to the continued use of our revolving line of credit to fund our growth and the increase in interest rates that may continue to occur during fiscal year 2007.

 

NET INCOME:

 

We realized net income of $11,291 for the twelve month period ended October 31, 2006 as compared to $7,621 for the twelve month period ended October 31, 2005, an increase of 48%.

 

Pre-tax income for the period ended October 31, 2006 was $16,742, as compared to $11,489 for the period ended October 31, 2005, an increase of $5,253 (46%) and was caused primarily by a decrease in expenses in relation to an increase in net revenues.  The provision for income taxes increased from $3,868 for the period ended October 31, 2005, to $5,451 for the current twelve month period.

 

Liquidity and Capital Resources (In thousands except for the $5 million term loan and its repayment terms)

 

For the Fiscal Year Ended October 31, 2007

 

11



 

Our working capital at October 31, 2007 was approximately $48,747 as compared to approximately $39,493 at October 31, 2006, an increase of $9,254. Our cash position increased by approximately $2,943 during the current period. We increased our short term borrowing by approximately $6,556 and repaid approximately $3,900 in existing debt. We had current liabilities of approximately $59,750 at October 31, 2007. We generated approximately $6,000 in cash from operations, an increase of approximately $800 as compared to the year ended October 31, 2006.

 

Accounts receivable, net of allowance for doubtful accounts, totaled approximately $86,018 at October 31, 2006, an increase of approximately $18,240 from October 31, 2006, or 27%. This increase was primarily attributable to increased revenue.  Cash collected over the twelve month period ended October 31, 2007 increased 30% over the prior twelve month period.

 

Net service revenues on the statements of operations are as follows:

 

 

 

Years Ended
October 31

 

 

 

2007

 

2006

 

2005

 

Gross Revenues

 

779,953

 

522,117

 

430,162

 

Contr. Adjustments and Discounts

 

529,806

 

328,983

 

266,266

 

Net Revenues

 

250,431

 

193,134

 

163,896

 

Percent of Contractual Adjustments and Discounts To Gross Revenues

 

67.9

%

63.0

%

61.9

%

 

The table above illustrates the relationship between contractual adjustments and gross revenues for the fiscal years 2005, 2006, and 2007. Between 2006 and 2007, contractual adjustments increased approximately 490 basis points. The most significant factor in this increase was the increase in market share caused by the acquisition of contracts with low reimbursement third party payors.

 

Credit risk with respect to accounts receivable is generally diversified due to the large number of patients comprising our client base.  We have significant receivable balances with government payors and various insurance carriers.  Generally, we do not require collateral or other security to support customer receivables. However, we continually monitor and evaluate our client acceptance and collection procedures to minimize potential credit risks associated with our accounts receivable and to establish an allowance for uncollectible accounts. As a consequence, we believe that our accounts receivable credit risk exposure beyond such allowance is not material to the financial statements.

 

A number of proposals for legislation continue to be under discussion which could substantially reduce Medicare and Medicaid reimbursements to clinical laboratories.  Depending upon the nature of regulatory action, and the content of legislation, we could experience a significant decrease in revenues from Medicare and Medicaid, which could have a material adverse effect on us. We are unable to predict, however, the extent to which such actions will be taken.

 

LABORATORY GROSS RECEIVABLES BY PAYOR GROUP

 

FY 2007

 

 

 

30 Days

 

%

 

60 Days

 

%

 

90 Days

 

%

 

>90 Days

 

%

 

Total

 

%

 

Self Pay

 

2,621

 

19

 

1,818

 

13

 

1,548

 

11

 

7,952

 

57

 

13,939

 

8

 

Medicare

 

14,197

 

47

 

4,091

 

13

 

2,293

 

8

 

9,943

 

33

 

30,524

 

17

 

Medicaid

 

3,379

 

24

 

2,486

 

17

 

2,374

 

17

 

6,139

 

43

 

14,378

 

8

 

Prof. Billing

 

9,128

 

60

 

2,466

 

16

 

558

 

4

 

3,188

 

21

 

15,340

 

9

 

Comm. Ins

 

42,431

 

42

 

14,582

 

14

 

11,236

 

11

 

34,488

 

33

 

102,737

 

58

 

Total

 

71,756

 

41

 

25,443

 

14

 

18,009

 

10

 

61,710

 

35

 

176,918

 

100

 

 

FY 2006

 

 

 

30 Days

 

%

 

60 Days

 

%

 

90 Days

 

%

 

>90 Days

 

%

 

Total

 

%

 

Self Pay

 

1,267

 

9

 

1,295

 

10

 

1,236

 

9

 

9,578

 

72

 

13,376

 

11

 

Medicare

 

11,618

 

39

 

3,277

 

11

 

1,568

 

5

 

13,110

 

44

 

29,573

 

25

 

Medicaid

 

2,270

 

29

 

1,433

 

18

 

1,018

 

13

 

3,239

 

41

 

7,960

 

7

 

Prof. Billing

 

6,773

 

62

 

1,398

 

15

 

289

 

3

 

2,268

 

21

 

10,928

 

9

 

Comm. Ins

 

23,824

 

42

 

9,626

 

17

 

6,484

 

11

 

16,998

 

30

 

56,932

 

48

 

Total

 

45,752

 

39

 

17,229

 

14

 

10,595

 

9

 

45,193

 

38

 

118,769

 

100

 

 

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

 

Differences between fee schedules and reimbursement rates.

Incomplete or inaccurate billing information as provided by the doctor.

Disparity in coverage and information requirements.

Disputes with payors.

Internal and external compliance policies and procedures.

 

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

 

Days Sales Outstanding (“DSO”) for fiscal years 2006 and 2007 were 120 and 115, respectively, a decrease of approximately 4%. These changes are exaggerated by our primary marketplace, the physician office marketplace. However, when you compare our DSO lag to our collectible net revenues as reported on our financial statements for the periods in question, it varies between 98% to 102%, depending on the period.

 

Overall, the components of A/R as shown above for the two years under review have not varied much year over year. The percent of A/R over 90 days has decreased to 35% as of October 31, 2007 As compared to 38% as of October 31, 2006.

 

In October 2007, the Company entered into an amended revolving note payable loan agreement with a bank.  The maximum amount of the credit line available to the Company is the lesser of (i) $30,000 or (ii) 50% of the Company’s qualified accounts receivable [as defined in the agreement].  The amendment to the Loan and Security Agreement provides for interest on advances to be subject to the bank’s prime rate or Eurodollar rate of interest plus, in certain instances, an additional interest percentage.  The additional interest percentage charges on Eurodollar borrowings range from 1% to 4% and are determined based upon certain financial ratios achieved by the Company.  At October 31, 2007, the Company had elected to have $20,000 of the total advances outstanding converted into a Eurodollar rate loan with a variable interest rate of 6.33% at October 31, 2007.  The remaining

 

12



 

outstanding advances during that period were subject to the bank’s prime rate of interest.  At October 31, 2007, advances of $3,252 were subject to interest at the prime rate.  As of October 31, 2007 and 2006, the bank’s prime rate of interest was 7.75% and 8.25%, respectively.  The credit line is collateralized by substantially all of the Company’s assets. The line of credit is available through October 2008 and may be extended for annual periods by mutual consent, thereafter.  The terms of this agreement contain, among other provisions, requirements for maintaining defined levels of capital expenditures, fixed charge coverage, insurance coverage and the prohibition of the payment by the Company of cash dividends. As of October 31, 2007, the Company utilized $23,252 and had $6,748 of available unused credit under this revolving note payable loan agreement.

 

Effective as of October 31, 2006, we executed a fourth amendment to the Loan Agreement formalizing the repayment terms of the $5 million term loan from PNC Bank used by our wholly-owned BRLI No. 2 Acquisition Corp. subsidiary to fund the $5 million acquisition cash payment in connection with its purchase of the operating assets of GENEDX, Inc. The term loan is evidenced by a secured promissory note payable over a six year term in equal monthly principal payments of $69,444.44, plus interest at an annual rate of 6.85%.  The note had a balance of $4,028 as of October 31, 2007.

 

The weighted average interest rate on short-term borrowings outstanding as of October 31, 2007 and 2006 was approximately 7.39% and 6.87%, respectively.

 

Effective as of October 31, 2006, we executed a fourth amendment to the loan agreement formalizing the repayment terms of the $5 million term loan from PNC Bank used by our wholly-owned BRLI No. 2 Acquisition Corp. subsidiary to fund the $5 million acquisition Cash Payment in connection with its purchase of the operating assets of GeneDx. The term loan is evidenced by a secured promissory note payable over a six year term in equal monthly principal payments of $69,444.44, plus interest at an annual rate of 6.85%.

 

Pursuant to this agreement the Company will have a payment due to the prior owners of GeneDx if certain financial goals are achieved of a maximum $1,917,000 in cash and 11,548 of BRLI’s common stock. This transaction has been accrued on the Company’s financials for fiscal year 2006. The Company has the funds to make this payment.

 

The weighted average interest rate on short-term borrowings outstanding as of October 31, 2007 and 2006 was approximately 7.39% and 6.87%, respectively.

 

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

 

Tabular Disclosure of Contractual Obligations
Payments Due By Period

(Dollars in thousands)

 

 

 

Total

 

FY 2008

 

FY2009

 

FY 2010

 

FY 2011

 

FY 2012
and thereafter

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt

 

$

7,920

 

$

1,155

 

$

1,176

 

$

1,195

 

$

1,217

 

$

3,177

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Leases

 

$

4,917

 

$

2,266

 

$

1,617

 

$

785

 

$

249

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Leases

 

$

3,290

 

$

2,404

 

$

491

 

$

386

 

$

8

 

$

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase Obligations

 

$

34,941

 

$

9,631

 

$

9,228

 

$

8,421

 

$

5,110

 

$

2,551

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Liabilities under Employment and Consultant Contracts

 

$

8,895

 

$

2,165

 

$

2,630

 

$

1,850

 

$

1,500

 

$

750

 

Total

 

$

59,963

 

$

17,621

 

$

15,142

 

$

12,637

 

$

8,084

 

$

6,479

 

 

Our cash balances at October 31, 2007 totaled approximately $11,897 as compared to approximately $8,954 at October 31, 2006.  We believe that our cash position, the anticipated cash generated from future operations,  and the  availability of our credit line with PNC Bank, will meet our anticipated cash needs in fiscal 2008.

 

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

 

In June 2006 FASB issued Interpretation No. 48 (FIN 48) “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. This interpretation is effective for fiscal years beginning after December 15, 2006.

 

This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

 

FIN 48 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In September 2006 FASB issued SFAS No. 157 “Fair Value Measurements”.  This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.

 

This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This statement is not expected to have a material impact on the Company’s consolidated financial statements.

 

13



 

In September 2006 FASB issued SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”.  This statement mandates certain changes in financial reporting for companies with defined benefit pension plans.  Since this company does not currently maintain a defined benefit pension plan – this statement is not currently expected to have a material impact on the Company’s consolidated financial statements.

 

In February 2007 FASB issued FAS 159 “The Fair Value Option for Financial Assets and Financial Liabilities”.  The statement is effective as of the beginning of each reporting entity’s first fiscal year that begins after November 15, 2007.  This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the Board’s long-term measurement objectives for accounting for financial instruments.  Most of the provisions of this Statement apply only to entities that elect the fair value option. However, the amendment to FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities.  This statement is not currently expected to have a material impact on the Company’s consolidated financial statements.

 

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

 

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

 

·Recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree

 

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

 

·Determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

 

The objective of FAS 160 is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require:

 

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

 

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

 

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

 

·When a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of any noncontrolling equity investment rather than the carrying amount of that retained investment.

 

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

 

Together these statements are not currently expected to have a significant impact on the entity consolidated financial statements.  A significant impact may however be realized on any future acquisition(s) by this company.  The amounts of such impact can not be currently determined and will depend on the nature and terms of such future acquisition(s), if any.

 

Also, in November and December 2007 SEC issued two Staff Accounting Bulletins SAB 109 and SAB 110 respectively.

SAB 109 expresses the views of the staff regarding written loan commitments that are accounted for at fair value through earnings under generally accepted accounting principles.  SAB 110 expresses the views of the staff regarding the use of a “simplified” method, as discussed in SAB No. 107 (“SAB 107”), in developing an estimate of expected term of “plain vanilla” share options in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004).  Together these SABs are not expected to have a significant impact on the entity consolidated financial statements.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods.

 

Accounting for Goodwill

 

We evaluate the recoverability and measure the possible impairment of goodwill under SFAS 142, The impairment test is a two-step process that begins with the estimation of the fair value of the reporting unit. The first step screens for potential impairment and the second step measures the amount of the impairment, if any.  Management’s estimate of fair value considers publicly available information regarding our market capitalization as well as (i) publicly available information regarding comparable publicly-traded companies in the clinical laboratory testing industry, (ii) the financial projections and future prospects of our business, including its growth opportunities and likely operational improvements, and (iii) comparable sales prices, if available. As part of the first step to assess potential impairment, management compares the estimate of fair value to book value on a consolidated net assets basis.  If the book value of the consolidated net assets is greater than the estimate of fair value, we then proceed to the second step to measure the impairment, if any.  The second step compares the implied fair value of goodwill with its carrying value

 

The implied fair value is determined by allocating the fair value of the reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.  The

 

14



 

excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.  If the carrying amount of the goodwill is greater than its implied fair value, an impairment loss will be recognized in that period.

 

Accounting for Intangible and Other Long-Lived Assets

 

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

 

Accounting for Revenue

 

Service revenues are principally generated from laboratory testing services including chemical diagnostic tests such as blood analysis, urine analysis and genetic testing among others. Net service revenues are recognized at the time the testing services are performed and are reported at their estimated net realizable amounts. These estimated net realizable amounts from patients, third party payors and others for services rendered, are accrued on an estimated basis in the period the related services are rendered and adjusted in subsequent periods based upon an analysis of the Company’s collection experience from each category of payor group as well as prospectively determined contractual adjustments and discounts with third party payors. Differences between these adjustments and any subsequent revisions are included in the statement of operations in which the revisions are made and are disclosed, if material. Applying this methodology and aggregating its collection experience from all payor groups, the Company has not been required to record an adjustment related to revenue recorded in prior periods that was material in nature.

 

Accounting for Contractual Credits and Doubtful Accounts

 

An allowance for contractual credits and discounts is estimated by payor group and determined based upon a review of the reimbursement policies and subsequent collections from the different types of payors. The Company has not been required to record an adjustment in a subsequent period related to revenue recorded in a prior period, that was material in nature.

 

Accounting for Employment Benefit Plan

 

The Company sponsors a 401(k) Profit-Sharing Plan [the “Plan”].  Employees become eligible for participation after attaining the age of eighteen and completing one year of service.  Participants may elect to contribute up to ten percent of their compensation, as defined in the Plan Adoption Agreement, to a maximum allowed by the Internal Revenue Service.  The Company may choose to make a matching contribution to the plan for each participant who has elected to make tax-deferred contributions for the plan year, at a percentage determined each year by the Company. The Company elected to make a matching contribution which amounted to $359,177 for 2007, $225,971 for 2006 and $182,739 for 2005. The Employer contribution will be fully vested after the third year of service.

 

Accounting for Income Taxes

 

We account for income taxes utilizing the asset and liability method. Under this method deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for tax loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Future tax benefits, such as net operating loss carryforwards, are recognized to the extent that realization of such benefits is more likely than not.

 

Forward Looking Statements

 

This Annual Report on Form 10-K contains historical information as well as forward-looking statements. Statements looking forward in time are included in this Annual Report pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to be materially different from any future performance suggested herein.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. While many aspects of our business are subject to complex federal, state and local regulations, the accounting for our business is generally straightforward.  Our revenues are primarily comprised of a high volume of relatively low dollar transactions, and about 42% of all our costs consist of employee compensation and benefits.  Revenues are recognized at the time the services are performed and are reported at the estimated net realizable amounts from patients, third-party payors and others for services rendered including prospectively determined adjustments under reimbursement agreements with third-party payors.  These adjustments are accrued on an estimated basis in the period the services are rendered and adjusted in future periods as final settlements are determined.  These estimates are reviewed and adjusted, if warranted, by senior management on a monthly basis.  We believe that our estimates and assumptions are correct; however, several factors could cause actual results to differ materially from those currently anticipated due to a number of factors in addition to those discussed under “Risk Factors” as well as elsewhere herein including:

 

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

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

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

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

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

failure to comply with the Federal Occupational Safety and Health Administration requirements and the recently passed Needlestick Safety and Prevention Act.

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

changes in payor mix.

failure to maintain our days sales outstanding levels.

increased competition, including price competition.

our ability to attract and retain experienced and qualified personnel.

adverse litigation results.

liabilities that result from our inability to comply with new corporate governance requirements.

failure to comply with the Sarbanes-Oxley Act of 2002.

 

15



 

Item 7A. - Quantitative and Qualitative Disclosures about Market Risk

 

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

 

We do have exposure to both rising and falling interest rates. At October 31, 2007, advances of approximately $3,252,000 under our Loan Agreement with PNC Bank were subject to interest charges at the Bank’s then prime rate of 7.75 %. In addition, we elected to have the remaining $20,000,000 of advances outstanding at said date converted into a Eurodollar rate loan with a variable interest rate of 6.33%.

 

We estimate that our monthly cash interest expense at October 31, 2007 was approximately $174,000 and that a one percentage point increase or decrease in short-term rates would increase or decrease our monthly interest expense by approximately $20,000.

 

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 on Accounting and Financial Disclosure

 

None

 

Item 9A. -  Controls and Procedures

 

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

 

Management’s Report on Internal Control over Financial Reporting

 

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

 

·pertain to the maintenance of records that, in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 

·provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and

 

·provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.

 

Management assessed the effectiveness of the Company’s internal control over financial reporting as of October 31, 2007. Management based this assessment on criteria for effective internal control over financial reporting described in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operating effectiveness of its internal control over financial reporting.

 

Based on this assessment, management has determined that the Company’s internal control over financial reporting as of October 31, 2007 is effective. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of October 31, 2007 has been audited by Moore Stephens, P.C., an independent registered public accounting firm, as stated in their report attached to this filing, which expresses unqualified opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting as of October 31, 2007.

 

Item 9B. -  Other Information

 

None.

 

16



 

PART III

 

Item 10.- Directors, Executive Officers and Corporate Governance

 

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

 

Name

 

Age

 

Position

 

 

 

 

 

Marc D. Grodman, M.D.

 

56

 

Chairman of the Board, President, Chief Executive Officer and Director

 

 

 

 

 

Howard Dubinett

 

56

 

Executive Vice President, Chief Operating Officer and Director

 

 

 

 

 

Sam Singer

 

64

 

Vice President, Chief Financial Officer, Chief Accounting Officer and Director

 

 

 

 

 

Joseph Benincasa(a)(c)(e)

 

58

 

Director

 

 

 

 

 

Harry Elias(a)(c)(e)

 

77

 

Director

 

 

 

 

 

Gary Lederman, Esq. (b)(c)(e)

 

73

 

Director

 

 

 

 

 

John Roglieri, M.D. (a)(d)(e)

 

68

 

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 is comprised of the four non-employee members of the Board of Directors, Gary Lederman (Chairman), Joseph Benincasa, John Roglieri and Harry Elias. The Board of Directors deems each such individual as “independent” as defined by the rules of the National Association of Securities Dealers. The Audit Committee met four times during fiscal year 2007. The Audit Committee confers with the Company’s auditors and reviews, evaluates and advises the Board of Directors concerning the adequacy of the Company’s accounting systems, its financial reporting practices, 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’s financial statements and the results thereof. The Board of Directors has determined that Gary Lederman is qualified to serve as the Company’s “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K promulgated by the SEC.

 

The Compensation Committee is comprised of four non-employee members of the Board of Directors, John Roglieri (Chairman), Joseph Benincasa, Harry Elias and Gary Lederman. The Compensation Committee met once during fiscal year 2007. The Compensation Committee reviews salaries, cash bonuses and compensation plans for the Company’s executive officers and eligible employees and makes recommendations concerning same to the Board of Directors.

 

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

 

                The Nominating Committee is comprised of the four non-employee members of the Board of Directors, Harry Elias, Joseph Benincasa, Gary Lederman and John Roglieri. Pursuant to its charter, the Nominating Committee’s role is to establish criteria for the selection of directors; to identify individuals qualified to be directors; to evaluate director candidates proposed by stockholders; to recommend individuals to fill vacancies on the Board and to recommend nominees for director at each annual stockholder meeting. The Nominating Committee may consider nominees for director of the Company submitted in writing c/o the Committee at the Company’s executive offices, whether by executive officer of the Company; current directors of the Company, search firms (if any) engaged by the Committee, and, in the circumstances provided below, shall consider nominees for director proposed by a stockholder. Information with respect to the proposed nominee must be provided in writing by the stockholder addressed to the Committee at the Company’s executive offices, and received not less than 90 nor more than 120 days prior to the anniversary date of the prior year’s annual meeting, provided that if the current year’s annual meeting is not scheduled to be held within 30 days of the anniversary date of the prior year’s annual meeting, notice from a stockholder shall be considered timely if it is received not later than the tenth day following the date on which the notice of the annual meeting was mailed or the date on which public disclosure of the date of the annual meeting was made, whichever occurs first. The information shall include the name of the nominee, and such information with respect to the nominee as would be required under the rules and regulations of the Securities and Exchange Commission to be included in the Company’s Proxy Statement if the proposed nominee were to be included therein. In addition, the stockholder’s notice shall also include the class and number of shares the stockholder owns, a description of all arrangements and understandings between the stockholder and the proposed nominee, a representation that the stockholder intends to appear in person or by proxy at the meeting to nominate the person named in its notice, a representation as to whether the stockholder intends to deliver a proxy statement to or solicit proxies from shareholders of the Company and information with respect to the stockholder as would be required under the rules and regulations of the Securities and Exchange Commission to be included in the Company’s Proxy Statement.

 

                The Nominating Committee generally identifies potential candidates for director by seeking referrals from the Company’s management, members of the Board of Directors and their various business contacts. Candidates are evaluated based upon factors such as independence, knowledge, judgment, integrity, character, leadership, skills, education, experience, financial literacy, standing in the community and ability to foster a diversity of backgrounds and views and to complement the Board’s existing strengths. There are no differences in the manner in which the Committee will evaluate nominees for director based on whether the nominee is recommended by a stockholder.

 

Code of Ethics

 

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

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

 

Marc D. Grodman, M.D. founded the Company in December 1981 and has been its Chairman of the Board, President, Chief Executive Officer and a Director since its formation. Dr. Grodman is an Assistant Professor of Clinical Medicine at Columbia University’s College of Physicians and Surgeons and Assistant Attending Physician at Presbyterian Hospital, New York City. From 1980 to 1983, Dr. Grodman attended the Kennedy School of Government at Harvard University and was a Primary Care Clinical Fellow at Massachusetts General Hospital. From 1982 to 1984, he was a medical consultant to the Metal Trades Department of the AFL-CIO. Dr. Grodman received a B.A. degree from the University of Pennsylvania in 1973 and an M.D. degree from Columbia University’s College of Physicians and Surgeons in 1977.  Except for his part time duties as Assistant Professor of Clinical Medicine and Assistant Attending Physician at Columbia University and Presbyterian Hospital, Dr. Grodman devotes all of his working time to the business of the Company.

 

17



 

Since January 2005, Dr. Grodman has been a member of the Board of Directors of the American Clinical Laboratory Association, an industry organization comprised of the largest and most significant commercial clinical laboratories in the United States. Other Board members include the chief executive officers of Quest Diagnostics and Laboratory Corporation of America.

 

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

 

Sam Singer has been the Company’s Vice President and Chief Financial Officer since October 1987 and 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 and management consulting company, from 1981 to 1987, prior to joining the Company.  He received a B.A. degree from Strayer University and an M.B.A. from Rutgers University.  Mr. Singer devotes all of his working time to the business of the Company.

 

Joseph Benincasa became a Director of the Company in June 2005. Mr. Benincasa currently serves as the Executive Director of The Actors’ Fund of America, a position he has held since 1989. The Actors’ Fund is the leading national, non-profit human services organization providing comprehensive social and health care services, employment, training and housing support to the entertainment profession. It is headquartered in New York City with regional offices in Chicago and Los Angeles. Mr. Benincasa also sits on the Board of Directors of The Greater New York Blood Program where he previously served as Director of Public Education and Public Relations. He is a director of St. Peter’s University Medical Center and also sits on the board of directors of Broadway Cares/Equity Fights AIDS; the National Theatre Workshop of the Handicapped; Career Transition for Dancers; the Times Square Alliance; the New York Society of Association Executives and the Somerset Patriots, a minor league baseball team. Mr. Benincasa holds a B.A. degree from St. Joseph’s University and an M. Ed. Degree from Rutgers University. He also attended Fordham University Graduate School of Business.

 

Harry Elias became a Director of the Company in March 2004. Mr. Elias commenced his employment in sales and marketing with JVC Company of America (“JVC”) in 1967, subsequently being appointed as JVC’s Senior Vice President of Sales and Marketing in 1983 and as Executive Vice President of Sales and Marketing in 1990. In 1995, Mr. Elias was named as JVC’s Chief Operating Officer, a position he occupied until April 2003 when he resigned his positions upon his appointment as JVC’s “Honorable Chairman.” JVC, a distributor of audio and video products headquartered in Wayne, New Jersey is the wholly owned United States subsidiary of Victor Company of Japan, a manufacturer of audio and video products headquartered in Japan. In January 2005, after retiring from JVC, Mr. Elias was appointed Chairman of the Board of and commenced to serve as a consultant to AKAI USA, the sole distributor in the United States of electronic products produced by AKAI, a Chinese manufacturer.

 

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

 

John Roglieri, M.D. became a Director of the Company in September 1995.  He is an Assistant Professor of Clinical Medicine at Columbia University’s College of Physicians and Surgeons and an Assistant Attending Physician at Presbyterian 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 from Harvard Medical School in 1966, and a Masters degree from Columbia University’s School of Business in 1978.  From 1969 until 1971, he was a Senior Assistant Surgeon in the U.S. Public Health Service in Washington.  From 1971 until 1973 he was a Clinical and Research Fellow at Massachusetts General Hospital.  From 1973 until 1975, he was Director of the Robert 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 until 1980.  Since 1980, he has maintained a private practice of internal medicine at Columbia-Presbyterian Medical Center.  From 1988 until 1992, he was also Director of the Employee Health Service at Presbyterian Hospital. From 1992 through 1999, Dr. Roglieri was the Corporate Medical Director of NYLCare, a managed care subsidiary of New York Life Insurance Company (“New York Life”). Dr. Roglieri was chief medical officer of Physician WebLink, a national physician practice management company, from 1999 to 2000. Since 2001, he has been Medical Director for New York Life in Manhattan. He is a member of advisory boards to several pharmaceutical companies, a member of the Editorial Advisory Board of the journals Managed Care and Seminars in Medical Practice, and is a subject of biographical record in Who’s Who in America.

 

There are no family relationships between or among any directors or executive officers of Bio-Reference Laboratories. The Company’s Certificate of Incorporation provides for a staggered Board of Directors pursuant to which the Board is divided into three classes of directors and the members of only one class are elected each year to serve a three-year term. Mr. Singer and Mr. Elias are the Class II directors whose term expires in fiscal 2008. Mr. Benincasa, Mr. Lederman and Dr. Roglieri are the Class III directors whose term expires in fiscal 2009. Dr. Grodman and Mr. Dubinett are the Class I directors whose term expires in fiscal 2010.

 

Key Personnel and Consultants

 

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

 

James Weisberger, M.D. (Age 51) joined the Company in September 2003 as Vice President, Assistant Chief Medical Officer and Director of Hematopathology. He is currently employed as the Company’s Chief Medical Officer. Prior to joining the Company, he was Director of Hematopathology at IMPATH, Inc.  (1999-2003). He is board certified in internal medicine, anatomic and clinical pathology, and hematopathology. He has a New York State Department of Health Certificate of Qualification as a Laboratory Director. He is a Clinical Assistant Professor of Pathology at New York Medical College, Valhalla, New York.  Prior to joining IMPATH,  he was an Assistant Professor of Medicine and Pathology 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 from the University of Pennsylvania (1983).

 

Charles T.  Todd, Jr.  (Age 55) is a Senior Vice President engaged in  Sales. 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 from where he received a B.S. degree in Finance in 1974.

 

Richard Faherty (Age 61) serves as the Company’s Chief Information Officer as well as the chief executive officer of its two informatics operations. Mr. Faherty provided custom programming and system analysis services to a cancer testing laboratory from 1987 until its acquisition by the Company in 1995. He became a consultant to the Company in 1995 in the information technology area and an employee in 1999. Mr. Faherty is a graduate of the University of Notre Dame (1968) and the Fordham Law School (1975).

 

John W.  Littleton (Age 45) joined the Company in September 2002 as a Vice President engaged in Sales.  Prior to joining the Company, Mr.  Littleton was Vice President of Sales for Specialty Laboratories and the Northeast Regional Vice President of Sales for Quest Diagnostics.  He received a B.A.. degree from Seton Hall University in 1983.

 

John Bennett, M.D., (Age 73) Scientific Advisory Board Chairman, is Professor Emeritus at the University of Rochester Medical Center, Rochester, New York.  Dr.  Bennett has long been recognized as an intellectual force in the treatment and understanding of leukemias, lymphomas and other cancer-related diseases.  He established the French-American-British (FAB) Leukemia Working Group and is one of the world’s leading authorities on Myelodysplasia.  He is founder and Chairman of the MDS Foundation, as well as Editor of the Journal of Leukemia Research. Dr.  Bennett is currently Professor Emeritus and former Head of the Medical Oncology Unit at the University of Rochester Medical Center and formerly was a Professor of Oncology in Medicine, Pathology and Laboratory Medicine at the University of Rochester Medical School.  For nearly four decades,

 

18



 

Dr.  Bennett has been honored by the medical community as an expert in the field of oncology as evidenced by the numerous chairs he has held in prestigious societies and committees and his authorship of more than 400 publications in peer review journals, the majority of which are in the area of hematologic malignancies.  Dr. Bennett earned his B.A. from Harvard University and his M.D. from Boston University. He served his residency in medicine at Beth-Israel Hospital, Boston, Massachusetts and completed a fellowship in hematology at Boston City Hospital. He headed the Morphology and Cytochemistry Section of the Clinical Center at the National Institute of Health (“NIH”) before joining the faculty at the University of Rochester. Dr. Bennett serves the Company in an advisory capacity as chairman of our Scientific Advisory Board.

 

Sherri Bale, Ph.D., FACMG (Age 51) joined the Company in September 2006, when BioReference Laboratories acquired the operating assets of GeneDx. She received her M.S. and Ph.D. degrees from the University of Pittsburgh, and her post-doctoral training in medical genetics at the NIH. She is an ABMG Board-Certified Ph.D. - Medical Geneticist and Founding Member of the American College of Medical Genetics. She founded GeneDx with Dr. John Compton, also a long-time NIH scientist, after 16 years at the NIH. For the past six years, she has served as President and Clinical Director of GeneDx, which specializes in developing and providing molecular diagnostics tests for rare hereditary disorders. She has authored more than 100 peer-reviewed papers, book chapters, and books in the field. She serves on numerous Boards of patient advocacy and non-profit organizations, and is a member of the Faculty of the Metropolitan Medical Genetics Training Program of the NHGRI, NIH, in Bethesda, MD. She holds a second degree black belt in judo.

 

John Compton, Ph.D., (Age 58) serves as Scientific Director and Co-President of GeneDx Inc., the operating assets of which were acquired by BioReference Laboratories in September 2006. He has 25 years experience in the development and application of molecular biological techniques to answer questions about genetics and epidermal differentiation, and has authored more than 60 publications in the field. He holds B.S. degrees in Physics and Biology from MIT, received his Ph.D. from the University of California, Berkeley in Biophysics, and did his post-doctoral training in protein-DNA interactions at the Baylor College of Medicine. Following six years as an independent investigator at the Jackson Laboratory, he joined the Laboratory of Skin Biology in the NIAMS at the NIH in 1991 where he was Staff Scientist in the Genetic Studies Section until 2000, when he and NIH colleague Sherri Bale formed GeneDx to develop and provide molecular genetic testing in rare hereditary disorders. In 2003 they were jointly awarded the Entrepreneur of the Year award by the Technology Council of Maryland. John is also in his eighth year as Mayor of the Town of Washington Grove, MD.

 

Compliance with Section 16(a) of the Exchange Act

 

Based solely on a review of Forms 3 and 4 and any amendments thereto furnished to the Company pursuant to Rule 16a-3(e) under the Securities Exchange Act of 1934, or representations that no Forms 5 were required, we believe that with respect to fiscal 2007, our officers, directors and beneficial owners of more than 10% of our equity timely complied with all applicable Section 16(a) filing requirements.

 

Item 11 – Executive Compensation

 

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

 

SUMMARY COMPENSATION TABLE

 

Name and 
Principal Position

 

Fiscal
Year
(b)

 

Salary
($ )(c)

 

Bonus
($ )(d)(1)

 

Stock
Awards
($ )(e)

 

Option
Awards
($ )(f)

 

Non-Equity
Incentive Plan
Compensation
($ )(g)(2)

 

Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings ($ )(h)

 

All
Other
Compensation
($ )(i)(3)

 

Total
($ )(i)

 

Marc D. Grodman M.D.
President and Chief Executive Officer

 

2007

 

$

852,000

 

-0-

 

-0-

 

-0-

 

$

85,200

 

-0-

 

$

96,230

 

$

1,033,430

 

Howard Dubinett
Executive Vice President and Chief Operating Officer

 

2007

 

$

323,350

 

-0-

 

-0-

 

-0-

 

$

32,335

 

-0-

 

$

40,070

 

$

395,755

 

Sam Singer Senior
Vice President and Chief Financial Officer

 

2007

 

$

323,350

 

-0-

 

-0-

 

-0-

 

$

32,335

 

-0-

 

$

39,822

 

$

395,507

 

Richard Faherty
Chief Information Officer

 

2007

 

$

438,750

 

-0-

 

-0-

 

-0-

 

$

43,875

 

-0-

 

$

167,187

 

$

649,812

 

Charles T. Todd, Jr.
Senior Vice President — Sales

 

2007

 

$

385,500

 

-0-

 

-0-

 

-0-

 

$

38,550

 

-0-

 

$

10,184`

 

$

434,234

 

 


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

(2) The 2007 Senior Management Incentive Bonus Plan adopted by the Compensation Committee provided for bonuses as a percentage of salary to be paid to designated members of Senior Management (twelve in total) to the extent the Company’s Total Operating Income equaled certain designated percentages of Total Net Revenues. The amounts in column (g) reflect the cash awards to the named officers under the 2007 Senior Management Incentive Bonus Plan.

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

 

19



 

 

 

Personal Use of

 

 

 

 

 

 

 

 

 

 

 

Company Leased

 

Personal Use of

 

Life Insurance

 

 

 

 

 

Name

 

Automobile

 

Company Airplane

 

Premium (a)

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Marc D. Grodman

 

$

20,900

 

$

5,330

 

$

70,000

 

-0-

 

$

96,230

 

Howard Dubinett

 

15,070

 

-0-

 

25,000

 

-0-

 

40,070

 

Sam Singer

 

14,822

 

-0-

 

25,000

 

-0-

 

39,822

 

Richard Faherty

 

28,109

 

1,673

 

-0-

 

$

137,408

(b)

167,190

 

Charles Todd Jr.

 

9,385

 

799

 

-0-

 

-0-

 

10,184

 

 


(a) See “Split Dollar Life Insurance” herein

(b) Mr. Faherty rents an airplane to the Company (when the Company’s owned airplane is unavailable) for corporate flights. Such rentals totaled  $55,965 in fiscal 2007. In addition, a separate corporation of which Mr. Faherty is the majority shareholder provided networking, data reporting and programming services to the Company in fiscal 2007 for which it received $81,713 in compensation.

 

Employment Agreements with Named Officers

 

Dr. Grodman serves as our President and Chief Executive Officer pursuant to a seven-year employment agreement which expires on October 31, 2011. Dr. Grodman has the right to elect to cancel the employment agreement effective at the end of any calendar month commencing October 31, 2008 on not less than 90 days prior written notice, subject to a six month non-competition restriction. The employment agreement is automatically renewable for additional two year periods subject to the right of either party to elect not to renew at least six months prior thereto. The employment agreement provides Dr. Grodman with minimum annual base compensation of $750,000 subject to annual percentage increases to the extent of annual percentage increases in the Consumer Price Index. 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 the Company’s performance. The employment agreement also provides Dr. Grodman with business use of an automobile leased by the Company and participation in any fringe benefit and bonus plans available to the Company’s employees to the extent determined by the Compensation Committee. The employment agreement contains provisions governing in the event of Dr. Grodman’s partial or total disability and provides for termination for cause or in the event of Dr. Grodman’s death. Dr. Grodman has the right to terminate the employment agreement 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 of the employment agreement by the Company (including a reduction in Dr. Grodman’s benefits under the agreement). In the event of a Change in Control of the Company, Dr. Grodman can elect to terminate the agreement. In that event, he will be entitled to be paid a lump sum Severance Payment equal to 2.99 times the average of his annual compensation paid by the Company for the five calendar years preceding the earlier of the calendar year in which the Change of Control occurred or the calendar year of the Date of Termination. See “Split-Dollar Life Insurance” herein as to the Endorsement Split-Dollar Life Insurance Agreement between the Company and Dr. Grodman.

 

Mr. Dubinett serves as Executive Vice President and Chief Operating Officer pursuant to an employment agreement which has been extended through October 31, 2009.  Mr. Dubinett’s minimum annual compensation under the extended agreement is equal to his annual compensation in fiscal 2002 and is subject to increases based on increases in the Consumer Price Index as well as to increases at the discretion of the Compensation Committee. Mr. Dubinett’s minimum annual base compensation for fiscal 2008 as determined by the Compensation Committee is $355,000. The agreement provides for (i) the leasing of an automobile for his use; (ii) participation in fringe benefit, bonus, pension, profit sharing, and similar plans maintained for the Company’s employees; (iii) disability benefits; (iv) certain termination benefits; and (v) in the event of termination due to a Change in Control of the Company, a Severance Payment equal to 2.99 times Mr. Dubinett’s average annual compensation during the preceding five years. See “Split Dollar Life Insurance” herein as to the Endorsement Split Dollar Life Insurance Agreement between the Company and Mr. Dubinett.

 

Mr. Singer serves as Senior Vice President and Chief Financial Officer pursuant to an employment agreement which has been extended through October 31, 2009, Mr. Singer’s minimum annual compensation under the extended agreement is equal to his annual compensation in fiscal 2002 and is subject to increases based on increases in the Consumer Price Index as well as to increases at the discretion of the Compensation Committee. Mr. Singer’s minimum annual base compensation for fiscal 2008 as determined by the Compensation Committee is $355,000. The agreement provides for (i) the leasing of an automobile for his use; (ii) participation in fringe benefit, bonus, pension, profit sharing, and similar plans maintained for the Company’s employees; (iii) disability benefits; (iv) certain termination benefits; and (v) in the event of termination due to a Change in Control of the Company, a Severance Payment equal to 2.99 times Mr. Singer’s average annual compensation during the preceding five years. See “Split-Dollar Life Insurance” herein as to the Endorsement Split-Dollar Life Insurance Agreement between the Company and Mr. Singer.

 

Mr. Faherty serves as Chief Information Officer and Director of Information Services pursuant to an employment agreement currently due to expire on October 31, 2011. Mr. Faherty’s initial Base Compensation of $400,000 in fiscal 2005 is subject to increases based upon management’s evaluation of his and the Company’s performance and is also subject to increases based on increases in the Consumer Price Index. The agreement provides for (i) the leasing of an automobile for Mr. Faherty’s use; (ii) participation in fringe benefit and bonus plans available to the Company’s employees; (iii) disability benefits; (iv) certain termination benefits; and (v) in the event of termination due to a Change in Control of the Company, a Severance Payment equal to 2.99 times Mr. Faherty’s average annual compensation during the preceding five years.

 

Mr. Todd serves as a Senior Vice President in Sales pursuant to an Employment Agreement currently due to expire on October 31, 2011. Mr. Todd’s initial Base Compensation of $350,000 in fiscal 2005 is subject to increases based upon management’s evaluation of his and the Company’s performance and is also subject to increases based on increases in the Consumer Price Index. The agreement provides for (i) the leasing of an automobile for Mr. Todd’s use; (ii) participation in fringe benefits and bonus plans available to the Company’s employees; (iii) disability benefits; (iv) certain termination benefits; and (v) in the event of termination due to a Change in Control of the Company, a Severance Payment equal to 2.99 times Mr. Todd’s average annual compensation during the preceding five years.

 

Potential Payments Upon Termination or Change in Control as of October 31, 2007

 

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

 

20



 

 

Employee

 

Disability(a)

 

Good Reason(b)

 

Death(c)

 

Change in Control(d)

 

 

 

 

 

 

 

 

 

 

 

Marc D. Grodman M.D.

 

$

1,278,000

 

$

3,408,000

 

$

7,683,012

 

$

2,129,398

 

Howard Dubinett

 

323,350

 

646,700

 

1,415,733

 

816,934

 

Sam Singer

 

323,350

 

646,700

 

341,591

 

810,719

 

Richard Faherty

 

438,750

 

1,755,000

 

219,375

 

960,042

 

Charles Todd, Jr.

 

385,500

 

1,542,000

 

192,750

 

915,478

 

 


(a) Dr. Grodman’s employment agreement entitles him to monthly compensation at his then current Base Compensation for 18 months in the event of his Total Disability. The employment agreement of each of the other employees listed in the table entitles the employee to monthly compensation at his then current Base Compensation for twelve months in the event of his Total Disability.

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

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

(d) In the event of a termination of employment after a “Change in Control” of the Company, the employee is entitled to receive a lump sum Severance Payment equal to 2.99 times the average of his annual compensation paid or payable by the Company in connection with his employment and included in his gross income as compensation income for the five calendar years preceding the calendar year in which the Change in Control occurred.

 

Split-Dollar Life Insurance

 

Pursuant to the terms of their 1997 employment agreements, the Company had established split-dollar life insurance programs for each of its three Executive Officers. As a result of the passage of the Sarbanes Oxley Act of 2002 (signed into law on July 30, 2002), these three programs were modified. Pursuant to the modification, each of the three Executive Officers assigned ownership of his policies to the Company and new policies were issued to 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’s and Singer’s policies) being equal to the premiums paid under the replaced policies. The Company has now executed new “Endorsement Split-Dollar Life Insurance Agreements” with each of its three Executive Officers. Pursuant to the new agreements, the Company has agreed to continue to pay the annual premium on the policy on each officer’s life during the period of his full-time employment by the Company. The Company is the sole owner of the policy and of its net cash surrender value, and in the event of the officer’s death while serving as a full-time employee of the Company, the Company will be entitled to receive 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 the policy less the amount of any loans, if any, from the Insurer to the Company against the cash value or policy proceeds, and less the aggregate amount of any premiums paid by the officer to the Company in reimbursement of premiums paid by the Company) and the balance of the death proceeds will be paid to the officer’s designated beneficiaries. The premiums paid by the Company on the current policies and the prior policies aggregated approximately $1,422 ,000 and $1,304,000  at October 31, 2007 and October 31, 2006, respectively. At that date, the net cash surrender value of the three current policies aggregated approximately $1,054,000 and $934,000, respectively and is recorded on the books of the Company at these values.

 

Stock Options

 

Employee Stock Option Plans

 

The 1989 Plan

 

In July 1989, the Company’s Board of Directors adopted the 1989 Employees Stock Option Plan (the “1989 Plan”) which was approved by shareholders in November 1989.  The 1989 Plan provided for the grant of options to purchase up to 666,667 shares of Common Stock.  Under the terms of the 1989 Plan, options granted thereunder could be designated as options which qualify for incentive stock option treatment (“ISOs”) under Section 422 of the Internal Revenue Code of 1986 (“the Code”), or options which do not so qualify (“NQOs”).

 

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

 

During fiscal 2007, one employee exercised ISOs under the 1989 Plan and purchased an aggregate 1,000 shares at an exercise price of $.71875 per share. As a result, at October 31, 2007, there were no outstanding ISOs under the 1989 Plan.

 

The 2000 Plan

 

On August 25, 2000, the Board of Directors adopted the 2000 Employee Incentive Stock Option Plan (the “2000 Plan”) reserving an aggregate 800,000 shares of Bio-Reference Common Stock for issuance upon exercise of ISOs which may be granted under the 2000 Plan.  Stockholders ratified the adoption of the 2000 Plan at our December 14, 2000 Annual Meeting of Stockholders. During fiscal 2007, no ISOs were granted under the 2000 Plan. During fiscal 2007, ISOs issued under the 2000 Plan to purchase an aggregate 66,600 shares at exercise prices ranging from $5.52 to $15.34 per share were excercised and ISOs granted under the 2000 Plan exercisable to purchase 2,000 shares were canceled due to a termination of employment. As a result, at October 31, 2007, there were outstanding ISOs under the 2000 Plan exercisable to purchase an aggregate 161,500 shares at exercise prices ranging from $5.52 to $15.34 per share.

 

21



 

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

 

The 2000 Plan is administered by the Board of Directors. The Board has the discretion to determine the eligible employees to whom, 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 is exercisable; and the number of shares subject to each option. The Board has the authority to interpret the 2000 Plan and to establish and amend rules and regulations relating thereto.

 

The 2000 Plan provides that the exercise price of an option granted thereunder shall not be less than the fair 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 of 10% or more of the Company’s outstanding Common Stock, the exercise price must be at least 110% of such fair market value. Under the 2000 Plan, options must be granted before the August 24, 2010 Termination Date. No option may have a term longer than ten years (limited to five years in the case of an option granted to a 10% or greater stockholder of the Company). The aggregate fair market value of the Company’s Common Stock with respect to which options are exercisable for the first time by a grantee under the 2000 Plan during any calendar year cannot exceed $100,000. Options granted under the 2000 Plan are non-transferable and must be exercised by an optionee, if at all, while employed by the Company or a subsidiary or within three months after termination of such optionee’s employment due to retirement, or within one year of such termination if due to disability or death. The Board may, in its sole discretion, cause the Company to lend money to or guaranty any obligation of an employee for the purpose of enabling such employee to exercise an option granted under the 2000 Plan provided that such loan or obligation cannot exceed fifty percent (50%) of the exercise price of such option.

 

The 2003 Plan

 

On June 3, 2003, the Board of Directors adopted the 2003 Employee Incentive Stock Option Plan (the “2003 Plan”) reserving an aggregate 800,000 shares of Bio-Reference Common Stock for issuance upon exercise of  ISOs which may be granted under the 2003 Plan. Stockholders ratified the adoption of the 2003 Plan at our July 31, 2003 Annual Meeting of Stockholders. During fiscal 2007, no ISOs were granted under the 2003 Plan. In fiscal 2007 ISOs issued under the 2003 Plan to purchase an aggregate 83,220 shares at exercise prices ranging from $12.15 to $21.46 per share were exercised and ISOs granted under the 2003 Plan exercisable to purchase 14,000 shares were canceled due to terminations of employment. As a result, at October 31, 2007, there were outstanding ISOs under the 2003 Plan exercisable to purchase an aggregate 260,738 shares at exercise prices ranging from $12.22 to $21.46 per share.

 

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

 

The 2003 Plan is administered by the Board of Directors.  The Board has the discretion to determine the eligible employees to whom, and the prices (not less than the fair market value on the date of grant) at which options will be granted; the periods during which each option is exercisable; and the number of shares subject to each option.  The Board has the authority to interpret the 2003 Plan and to establish and amend rules and regulations relating thereto.

 

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

 

Under the 2003 Plan, options must be granted before the June 2, 2013 Termination Date.  No option may have a term longer than ten years (limited to five years in the case of an option granted to a 10% or greater stockholder of the Company).  The aggregate fair market value of the Company’s Common Stock with respect to which options are exercisable for the first time by a grantee under all of the Company’s Stock Option Plans during any calendar year cannot exceed $100,000.  Options granted under the 2003 Plan 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 after termination of such optionee’s employment due to retirement, or within one year of such termination if due to disability or death.  The Board may, in its sole discretion, cause the Company to lend money to or guaranty any obligation of an employee for the purpose of enabling such employee to exercise an option granted under the 2003 Plan provided that such loan or obligation cannot exceed fifty percent (50%) of the exercise price of such option.

 

Non-Qualified Options (NQOs) and Warrants

 

At October 31, 2006, there were outstanding NQOs owned by directors and members of the Scientific Advisory Board exercisable to purchase an aggregate 60,000 shares at exercise prices ranging from $6.80 to $13.70 per share. During fiscal 2007, NQOs exercisable to purchase 45,000 shares were exercised by eight individuals. As a result, at October 31, 2007, there were outstanding NQOs owned by one member of the Scientific Advisory Board exercisable to purchase an aggregate 15,000 shares at an exercise price of $7.94 per share.

 

See Note 11 of Notes to the Consolidated Financial Statements.

 

Option Grants to Our Three Named Executive Officers (and the Two Other Named Most Highly Compensated Senior Management Employees)  in Last Fiscal Year

 

No options to purchase shares of our Common Stock were granted to any of our three Named Executive Officers or the two other named most highly compensated senior management employees in fiscal 2007.

 

Option Exercises and Stock Vested

 

During fiscal 2007, the following options were exercised by our three named executive officers and two of our non-employee directors. No options were exercised during the period by our two other named most highly compensated senior management employees. At October 31, 2007, these were no outstanding options held by our three executive officers, the two other named most highly compensated senior management employees or any of our directors.

 

22



 

OPTION EXERCISES IN FISCAL 2007

 

 

 

Number of Shares

 

Value Realized

 

 

 

Acquired on Exercise

 

on Exercise

 

Name

 

(No.)

 

($)  (b)

 

 

 

 

 

 

 

Marc D. Grodman M.D.

 

4,000 shs

 

$

64,400

 

Howard Dubinett

 

4,000 shs

 

$

64,400

 

Sam Singer

 

4,000 shs

 

$

64,400

 

Gary Lederman (a)

 

4,000 shs

 

$

63,080

 

John Roglieri M.D. (a)

 

4,000 shs

 

$

68,080

 

 


(a) Non-employee director

(b) Based upon the difference between the market price for shares of Bio-Reference Common Stock on the date of exercise and the option exercise price.

 

DIRECTOR COMPENSATION

 

During fiscal 2007, each director who was not a Company employee was compensated for his services as a director with a quarterly fee of $13,750. In addition, Gary Lederman as chairman of the Audit Committee and John Roglieri M.D. as chairman of the Compensation Committee was each compensated for serving as a Committee Chairman with an additional quarterly fee of $2,750. No director’s fees were paid to our employee directors.

 

The following table sets forth the compensation paid to our directors in fiscal 2007.

 

 

 

Director’s Committee

 

 

 

Director

 

Fees

 

Chairman Fees

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

Joseph Benincasa

 

$

55,000

 

-0-

 

-0-

 

$

55,000

 

Harry Elias

 

55,000

 

-0-

 

$

1,840

(a)

56,840

 

Gary Lederman (b)

 

55,000

 

$

11,000

(b)

-0-

 

66,000

 

John Roglieri M.D. (c)

 

55,000

 

11,000

(c)

-0-

 

66,000

 

 


(a) For personal use of Company airplane

(b) Chairman of the Audit Committee

(c) Chairman of the Compensation Committee

 

See “Option Exercises in Fiscal 2007” as to option exercises by Messrs. Lederman and Roglieri.

 

Compensation Discussion and Analysis

 

Background

 

Through fiscal 2001, the Board of Directors, including the Company’s three executive officers, were responsible for reviewing the compensation paid to the Company’s executive officers, provided that none of the Company’s executive officers could vote with respect to his own compensation package. In fiscal 2002, the Company established a Compensation Committee consisting of three non-employee directors, Morton L. Topfer (Chairman), Gary Lederman and John Roglieri. Mr. Topfer resigned as a director and as a member of the Compensation Committee in February 2004. In March 2004, Dr. Roglieri became the Chairman of the Compensation Committee and Mr. Elias was elected as a member of the Committee. Mr. Benincasa was elected as a member of the Committee in June 2005.

 

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

 

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

 

Executive Compensation Philosophy

 

In view of the fact that our three named executive officers own substantial equity interests in the Company, our compensation program for them focuses primarily on base salary, subject to annual increase based upon a review of the executive’s and the Company’s performance. In addition, to further incentivize our executive officers as well as certain other members of senior management, in 2005, we established a Senior Management Incentive Bonus Plan designed to assist in the Company’s profitability. Bonuses under the Plan are earned and paid only to the extent the Company’s Total Operating Income equaled certain designated percentages of Total Net Revenues. Plan criteria were met with respect to fiscal 2005 and 2007 so that bonuses were earned and paid, but no bonuses were earned or paid under the Plan with respect to fiscal 2006 as the Plan’s targeted performances were not achieved.

 

Rationale for Current Employment Agreements with the Three Executive Officers

 

During the summer of calendar year 2004 with the knowledge that Dr. Grodman’s seven year employment agreement was due to expire in October 2004, the Compensation Committee commenced negotiations with Dr. Grodman for the terms of a new employment agreement. In the course of its negotiations, the Committee took into account among other factors as a barometer of Dr. Grodman’s performance as the Company’s chief executive officer, the substantial increase since 1997 in the Company’s net revenues, operating income and the market price of the Common Stock. Another factor taken into account by the Committee was the compensation being paid to the chief executive officers of a peer group of nine other

 

23



 

publicly owned clinical testing laboratories including the two major companies in the industry, Quest Diagnostics, Inc. and Laboratory Corporation of America Holdings. The terms of Dr. Grodman’s “split-dollar” insurance arrangement with the Company and the fact that the proposed new employment agreement did not provide Dr. Grodman with additional equity compensation was also taken into account. After discussion, each of the three members of the Compensation Committee at the time (Dr. Roglieri, Mr. Elias and Mr. Lederman) concluded that the terms of the proposed new employment agreement were fair to and in the best interests of the Company and its stockholders and that the proposed compensation thereunder was not excessive.

 

The Compensation Committee has determined that the base salaries paid with respect to fiscal 2007, and the terms of the extension agreements with Messrs. Dubinett and Singer, were reasonable in relationship to the services performed, the responsibilities assumed and the results obtained, and were in the best interests of the Company. In connection with Dr. Grodman’s compensation, the Compensation Committee considered the Company’s increase in net revenues, patients serviced, working capital and shareholders’ equity in fiscal 2007 compared with the corresponding period in fiscal 2006. Furthermore, the compensation paid to Messrs. Grodman, Dubinett and Singer for fiscal 2007 comports with the Compensation Committee’s perception of base compensation levels of principal executives employed by other companies, both public and private.

 

Benefits and Perquisites

 

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

 

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

 

Change in Control Benefits

 

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

 

Stock Option Grant Practices

 

The Company grants stock options at an exercise price at least equal to the fair market value on the date of the grant. Due to the substantial stock ownership position of our three executive officers, no stock options have been granted to them (or restricted stock awarded to them) in the last three years.

 

Policy Regarding the One Million Dollar Deduction Limitation

 

Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public corporations for compensation in excess of $1,000,000 paid for any fiscal year to a corporation’s chief executive officer and to the four other most highly compensated executive officers in office as of the end of the fiscal year. The statute exempts qualifying performance-based compensation from the deduction limit if certain requirements are met. However, shareholder interests may at times be best served by not restricting the Compensation Committee’s discretion and flexibility in developing compensation programs, even though the programs may result in non-deductible compensation expenses. Accordingly, the Compensation Committee may from time to time approve elements of compensation for certain officers that are not fully deductible, although no such elements have been approved to date.

 

Compensation Committee Interlocks and Insider Participation

 

During fiscal 2007, the members of the Company’s Compensation Committee were:

John Roglieri M.D. – Chairman

Joseph Benincasa

Harry Elias

Gary Lederman

 

No member of the Compensation Committee was an officer or employee of the Company in fiscal 2007 or was formerly an officer of the Company.

 

Compensation Committee Report

 

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

 

(A)          We have reviewed and discussed the Compensation Discussion and Analysis contained in this Annual Report on Form 10-K for the year ended October 31, 2007 with the Company’s Management, and

 

(B)           Based on such review and discussions, we have recommended to the Company’s Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K for the year ended October 31, 2007

 

 

 

COMPENSATION COMMITTEE

 

 

 

 

By

John Roglieri M.D., Chairman

 

 

Joseph Benincasa

 

 

Harry Elias

 

 

Gary Lederman

 

 

 

 

24



 

Item 12. - Security Ownership of Certain Beneficial Owners and Management and Related

Stockholder Matters

 

The following table sets forth information as of January 4, 2008 with respect to the ownership of Common Stock by (i) each person known to us to be the beneficial owner of more than 5% of our outstanding Common Stock, (ii) each of our directors, (iii) each of our executive officers, and (iv) all directors and executive officers as a group.

 

Name and Address of

 

 

 

 

 

Beneficial Owner

 

 

 

 

 

Directors and

 

Shares of Common Stock

 

Percentage

 

Executive Officers*

 

Beneficially Owned(1)

 

Ownership

 

 

 

 

 

 

 

Marc D. Grodman(2)

 

1,643,746

 

11.9

%

Howard Dubinett(3)

 

310,872

 

2.3

%

Sam Singer(4)

 

229,867

 

1.7

%

Joseph Benincasa

 

-0-

 

0

%

Harry Elias

 

-0-

 

0

%

Gary Lederman(5)

 

27,200

 

 

**

John Roglieri(6)

 

35,000

 

 

**

Executive Officers

 

2,246,685

 

16.3

%

and Directors as a group

 

 

 

 

 

(seven persons)(2)(3)(4)(5)(6)

 

 

 

 

 

Other Greater than 5%

 

 

 

 

 

Beneficial Owner

 

 

 

 

 

 

 

 

 

 

 

Paradigm Capital Management(7)

 

805,800

 

5.9

%

Nine Elk Street

 

 

 

 

 

Albany, NY 12207

 

 

 

 

 

 


*              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 1,417,079 shares owned directly. Also includes 173,467 shares owned directly by Dr. Grodman’s wife, Pam Grodman, and 53,200 shares owned by their children. Dr. Grodman disclaims beneficial ownership of these 226,667 shares.

 

On October 12, 2006, Dr. Grodman established a Rule 10b-5-1 Sales Plan (the “Sales Plan”) with Bear Stearns & Co., Inc. (“Bear Stearns”) to facilitate sales of a variable number of Dr. Grodman’s shares of BRLI Common Stock (up to 200,000 shares) in variable pre-paid forward transactions (“Forward Transactions”) at a minimum per share sale price as specified in the Sales Plan. In connection with the contemplated Forward Transactions, Dr. Grodman pledged 200,000 shares of his BRLI Common Stock to secure his obligation to deliver a maximum aggregate 200,000 shares of Common Stock to Bear Stearns on the final settlement dates (approximately 23-25 months after each sale). The Sales Plan was terminated on December 21, 2006 at which date an aggregate 175,936 shares had been sold pursuant to the Forward Transactions. As prepayment for the pledge of these shares, Bear Stearns has agreed to pay Dr. Grodman approximately $3,949,000 or approximately $22.45 per share. The number of shares that Dr. Grodman will be obligated to deliver on the final settlement dates will vary based upon the market prices of the Common Stock on such settlement dates. Dr. Grodman will benefit from any excess in the market prices of the Common Stock at the final settlement dates to the extent such prices exceed approximately $25.30 up to approximately $30.38 per share, by being able to deliver fewer shares. Until the final settlement dates, Dr. Grodman is deemed the beneficial owner of the pledged shares.

 

(3)           Includes 310,872 shares owned directly. In lieu of an outright sale, on October 15, 2007, Howard Dubinett entered into a pre-paid variable price forward sales contract (“Forward Contract”) with UBS Securities LLC (“UBS”). Pursuant to the Forward Contract, Mr. Dubinett pledged 89,047 shares of his BRLI Common Stock to secure his obligation to deliver a maximum 89,047 shares of BRLI Common Stock to UBS on October 19, 2009 (the “Settlement Date”). As prepayment for the pledge of these shares, UBS agreed to pay Mr. Dubinett $2,572,474 or approximately $28.89 per share representing 87.9% of the proceeds from the sale of 89,047 shares on October 16, 2007. The number of shares that Mr. Dubinett is required to deliver on the Settlement Date varies based upon the price of the Common Stock on the Settlement Date. Mr. Dubinett will benefit from any excess in the price of the Common Stock on the Settlement Date between $32.87 per share up to a maximum $39.44 per share by being able to deliver fewer shares. Until the Settlement Date, Mr. Dubinett retains the voting rights to the 89,047 pledged shares and is deemed the beneficial owner of such shares.

 

(4)           Includes 219,067 shares owned directly, and 10,800 shares owned by children who share Mr. Singer’s household. Mr. Singer disclaims beneficial ownership of these 10,800 shares.

 

(5)           Includes 27,200 shares owned directly.

 

(6)           Includes35,000 shares owned directly.

 

(7)           Paradigm Capital Management, Inc. (“Paradigm”) in its capacity as an investment advisor may be deemed the beneficial owner of these 805,800 shares which are owned by investment advisory clients. In its Schedule 13G filing dated February 14, 2006 filed with the Securities and Exchange Commission, Paradigm stated that to the best of its knowledge, these 805,800 shares were acquired in the ordinary course of business; were not acquired for the purpose of and do not have the effect of changing or influencing the control of the Company; and were not acquired in connection with or as a participant in any transaction having such purpose or effect.

 

25



 

Equity Compensation Plan Information

 

The following table provides information as of October 31, 2007 regarding shares of Common Stock that may be issued pursuant to the Company’s equity compensation plans:

 

 

 

(a)
Number of Shares
Issuable upon Exercise
of Outstanding
Options

 

(b)
Weighted-Average
Exercise Price per
Share of Outstanding
Options

 

(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 

 

422,238

(1)

$

13.92

 

386,260

(2)

Equity Compensation Plans Not Approved by Stockholders 

 

15,000

(3)

$

7.94

 

-0-

 

Totals

 

437,238

 

$

13.71

 

386,260

 

 


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

 

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

 

(3) Issuable upon exercise of NQOs held by one member of the Company’s Scientific Advisory Board

 

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

 

No material transactions occurred between the Company and related parties other than as reported elsewhere herein during fiscal 2007.

 

Director Independence

 

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

 

                Joseph Benincasa

                Harry Elias

                Gary Lederman

                John Roglieri M.D.

 

They also comprise all of the members of the Audit Committee, the Compensation Committee and the Nominating Committee.

 

Item 14. - Principal Accountant Fees and Services

 

The firm of Moore Stephens, P.C. (“Moore Stephens”) certified public accountants, audited our accounts and the accounts of our subsidiaries for the fiscal years ended October 31, 2007 and 2006. Moore Stephens and its predecessor firm have been our auditors since 1988.

 

(1)           Audit Fees

 

Moore Stephens billed us approximately $232,300 for professional services rendered in connection with the audit of our annual financial statements for the fiscal year ended October 31, 2007 and the review of the financial statements included in our quarterly reports on Form 10-Q for such fiscal year compared to approximately $150,800 in billings for such services for the fiscal year ended October 31, 2006. In addition, Moore Stephens billed us approximately $17,500 in fiscal 2006 for its audit of our 401(k) Plan for calendar year 2006 as compared to approximately $9,500 of such fees in fiscal 2006 with respect to calendar year 2005.

 

(2)           Audit-Related Fees

 

Moore Stephens billed us approximately $9,400 for due diligence fees incurred in relation to acquisitions during fiscal 2006 and approximately $121,100 for Sarbanes-Oxley (“SOX”) related audit fees.

 

(3)           Tax Fees

 

Moore Stephens billed us approximately $46,900 for tax services for fiscal 2007 and approximately $44,600 for tax services for fiscal 2006. The fees were billed for tax return preparation.

 

(4)           All Other Fees

 

No fees were billed to us by Moore Stephens with respect to fiscal 2007 or fiscal 2006 other than for services described in Item 14 (1), (2) and (3) herein.

 

(5)           Pre-Approval Policies and Procedures

 

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

 

26



 

PART IV

 

Item 15. – Exhibits and Financial Statement Schedules

 

(a)1.

Financial Statements

 

 

 

 

 

 

 

The following financial statements of the Company are included in Part II, Item 8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

 

 

 

 

 

 

Consolidated Balance Sheets - October 31, 2007 and 2006

 

 

 

 

 

 

 

Consolidated Statements of Operations- Years ended October 31, 2007, 2006 and 2005

 

 

 

 

 

 

 

Consolidated Statements of Shareholders’ Equity Years ended October 31, 2007, 2006, and 2005

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows - Years ended October 31, 2007, 2006 and 2005

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements-

 

 

 

 

 

 

2.

Financial Statements Schedule

 

 

 

 

 

 

 

Schedule II-

 

 

 

 

 

 

 

Years ended October 31, 2007, 2006 and 2005

 

 

 

 

 

 

3.

Exhibits

 

 

 

 

Exhibit No.

 

Item Reference to

 

Incorporated by

3.1*

 

Amended and Restated Certificate of Incorporation dated November 15, 1989

 

(A)

 

 

 

 

 

3.1.1*

 

Amendment to Certificate of Incorporation dated October 4, 1991 (authorizing one-for-10 reverse stock split)

 

(B)

 

 

 

 

 

3.1.2*

 

Amendment to Certificate of Incorporation dated August 23, 1993 (authorizing one-for-three reverse stock split)

 

(C)

 

 

 

 

 

3.1.3*

 

Amendment to Certificate of Incorporation dated March 23, 1998 (creating Series A Senior Preferred Stock)

 

(F)

 

 

 

 

 

3.1.4*

 

Amendment to Certificate of Incorporation dated March 31, 1998 (creating Series A Junior Participating Preferred Stock)

 

(F)

 

 

 

 

 

3.1.5*

 

Amendment to Certificate of Incorporation dated September 22, 2003 (increasing authorized shares of Common Stock to 35,000,000 shares)

 

(J)

 

 

 

 

 

3.2*

 

By-laws

 

(D)

 

 

 

 

 

3.2.1*

 

Amendments to Article III, Sections 2 and 4 of the By-laws adopted June 1, 2005

 

(L)

 

 

 

 

 

4.1*

 

Form of Common Stock Certificate, $.01 par value

 

(M)

10.1*

 

Lease Agreement for Elmwood Park, New Jersey Premises, expiring in February, 2004

 

(F)

 

 

 

 

 

10.1.1*

 

Fifth Amendment dated as of July 16, 2004 to Lease for Elmwood Park, New Jersey Premises

 

(M)

 

 

 

 

 

10.1.2*

 

Sixth Amendment dated as of October 27, 2004 to Lease for Elmwood Park, New Jersey Premises

 

(M)

 

 

 

 

 

10.2*

 

Employment Agreement between the Company and Marc Grodman expiring in October 2011

 

(K)

 

 

 

 

 

10.3*

 

Employment Agreement between the Company and Howard Dubinett as in effect at October 31, 2001

 

(F)

 

 

 

 

 

10.3.1*

 

Extension to Employment Agreement between the Company and Howard Dubinett effective November 1, 2002

 

(I)

 

 

 

 

 

10.3.2*

 

Extension to Employment Agreement between the Company and Howard Dubinett effective November 1, 2004.

 

(M)

 

 

 

 

 

10.3.3

 

Amendment No. 3 to Employment Agreement between the Company and Howard Dubinett dated December 18, 2007.

 

 

 

 

 

 

 

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)

 

27



 

10.4.2*

 

Extension to Employment Agreement between the Company and Sam Singer effective November 1, 2004

 

(M)

 

 

 

 

 

10.5*

 

Employment Agreement between the Company and Charles T. Todd, Jr. effective November 1, 2005.

 

(N)

 

 

 

 

 

10.4.3

 

Amendment No. 3 to Employment Agreement between the Company and Sam Singer dated December 18, 2007.

 

 

 

 

 

 

 

10.6*

 

Employment Agreement between the Company and Scott Fein effective October 31, 2005.

 

(N)

 

 

 

 

 

10.7*

 

Employment Agreement between the Company and Richard L. Faherty effective November 1, 2005.

 

(N)

 

 

 

 

 

10.8*

 

The Company’s 1989 Stock Option Plan

 

(B)

 

 

 

 

 

10.8.1*

 

The Company’s 2000 Employee Incentive Stock Option Plan.

 

(G)

 

 

 

 

 

10.8.2*

 

The Company’s 2003 Employee Incentive Stock Option Plan.

 

(J)

 

 

 

 

 

10.9

 

Terms of the Company’s 2007 Senior Management Incentive Bonus Plan.

 

 

 

 

 

 

 

10.10* 

 

Rights Agreement dated as of March 31, 1998 including Exhibits thereto between the Company and American Stock  Transfer & Trust Company as Rights Agent

 

(E)

 

 

 

 

 

10.12*

 

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. (terminated in the fourth quarter of fiscal 2005).

 

(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. (terminated in the fourth quarter of fiscal 2005).

 

(M)

 

 

 

 

 

10.13*

 

Amended and Restated Loan and Security Agreement as of September 30, 2004 between the Company and PNC Bank, National Association.

 

(M)

 

 

 

 

 

10.13.1*

 

Fourth Amendment as of October 31, 2006 to Loan and Security Agreement as of September 30, 2004 between the Company and PNC Bank, National Association

 

(O)

 

 

 

 

 

10.13.2

 

Fifth Amendment as of October 31, 2007 to Loan and Security Agreement as of September 30, 2004 between the Company and PNC Bank, National Association

 

 

 

 

 

 

 

21

 

Subsidiaries of the Company

 

 

 

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

 

 

 

State of Incorporation

 

Name under which it
Conducts or
Conducted Business

 

 

 

 

 

CareEvolve.com, Inc.

 

New Jersey

 

CareEvolve

BRLI No. 2 Acquisition Corp.

 

New Jersey

 

GeneDx

 

23.1         Consent of Independent Registered Public Accounting Firm

 

31.1         Certification of Chief Executive Officer

 

31.2         Certification of Chief Financial Officer

 

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

 

32.2         Certification pursuant to 18 U.S.C. section 1350 of Chief Financial Officer

 


The exhibits designated above with an asterisk (*) have previously been filed with the Commission and, pursuant to 17 C.F.R. Secs. 201.24 and 240.12b-32, are incorporated by reference to the documents as indicated below.

 

28



 

(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).

(L)           Incorporated by reference to exhibit filed with the Company’s quarterly report on Form 10-Q for the quarter ended April 30, 2005

(M)         Incorporated by reference to exhibit filed with the Company’s annual report on Form 10-K for the year ended October 31, 2004.

(N)          Incorporated by reference to exhibit filed with the Company’s annual report on Form 10-K for the year ended October 31, 2005.

(O)          Incorporated by refrence to exhibit filed with the Company’s Annual report on Form 10-K for the year ended October 31, 2006.

 

29



 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant 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:

January10, 2008

 

 

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 10, 2008

 

 

 

/S/ Howard Dubinett

 

 

Howard Dubinett

 

Executive Vice President,
Chief Operating Officer and Director

 

January 10, 2008

 

 

 

/S/ Sam Singer

 

 

Sam Singer

 

Vice President, Chief Financial Officer,
Chief Accounting Officer and Director

 

January 10, 2008

 

 

 

/S/ Joseph Benincasa

 

 

Joseph Benincasa

 

Director

 

January 10, 2008

 

 

 

/S/ Harry Elias

 

 

Harry Elias

 

Director

 

January 10, 2008

 

 

 

/S/ Gary Lederman

 

 

Gary Lederman

 

Director

 

January 10, 2008

 

 

 

/S/ John Roglieri

 

 

John Roglieri

 

Director

 

January 10, 2008

 

 

30



 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

 

Bio Reference Laboratories, Inc.

 

Elmwood Park, New Jersey

 

We have audited the accompanying consolidated balance sheets of Bio Reference Laboratories, Inc. and its subsidiaries as of October 31, 2007 and 2006, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three fiscal years in the period ended October 31, 2007.  We also have audited Bio Reference Laboratories, Inc. internal control over financial reporting as of October 31, 2007, based on criteria established in” Internal Control— Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Bio Reference Laboratories, Inc.’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements, an opinion on management’s assessment, and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such procedures as we considered necessary in the circumstances.  We believe that our audits provide a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bio Reference Laboratories, Inc. as of October 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended October 31, 2007, in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, management’s assessment that Bio Reference Laboratories, Inc.  maintained, in all material respects, effective internal control over financial reporting as of October 31, 2007, based on criteria established in “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

MOORE STEPHENS, P.C.

 

Certified Public Accountants

 

Cranford, New Jersey

 

January 4, 2008

 

31

 



 

 

BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

[Dollars In Thousands, Except Per Share Data]

 

 

 

October 31,

 

October 31,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and Cash Equivalents

 

$

11,897

 

$

8,954

 

Accounts Receivable - Net

 

86,018

 

67,778

 

Inventory

 

3,120

 

2,159

 

Other Current Assets

 

1,443

 

1,198

 

Deferred Tax Assets

 

6,019

 

3,986

 

TOTAL CURRENT ASSETS

 

108,497

 

84,075

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT - AT COST

 

33,791

 

22,246

 

LESS: Accumulated Depreciation

 

13,266

 

10,162

 

PROPERTYAND EQUIPMENT - NET

 

20,525

 

12,084

 

 

 

 

 

 

 

OTHER ASSETS:

 

 

 

 

 

Deposits

 

516

 

646

 

Goodwill - Net

 

16,681

 

14,514

 

Intangible Assets - Net

 

6,550

 

7,719

 

Other Assets

 

1,054

 

934

 

Deferred Tax Assets

 

751

 

501

 

 

 

 

 

 

 

TOTAL OTHER ASSETS

 

25,552

 

24,314

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

154,574

 

$

120,473

 

 

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

 

 

32

 



 

 

BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

[Dollars In Thousands, Except Per Share Data]

 

 

 

October 31

 

October 31

 

 

 

2007

 

2006

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts Payable

 

$

24,576

 

$

18,692

 

Accrued Salaries and Commissions Payable

 

5,214

 

4,029