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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) |X|ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended ---------------- October 31, 1999 OR |_|TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from --------------- to Commission file number 0-15266 ------BIO-REFERENCE LABORATORIES, INC. -------------------------------(Exact name of registrant as specified in its charter) New Jersey ---------(State or other jurisdiction of incorporation or organization) 22-2405059 ---------(I.R.S. Employer Identification No.) 481 Edward H. Ross Drive, Elmwood Park, New Jersey -------------------------------------------------(Address of principal executive offices) Issuer's telephone number, including area code ------------ 07407 ----(Zip Code) 201-791-2600 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on which Title of Class -------------None registered ------------------------None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value ---------------------------(Title of Class) 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 . 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 issuer'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. [ ] On January 21, 2000, 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 Issuer was approximately $ 18,354,000 based upon the last sales price for such Common Stock on said date in the over-the-counter market as reported by the NASDAQ Small Cap System. On such date, there were 8,100,920 shares of Common Stock of the Issuer outstanding. PART I Item. 1 - Business -----------------Bio-Reference Laboratories, Inc., "Bio-Reference" or the "Company," operates a clinical laboratory servicing the greater New York metropolitan area. Bio-Reference offers a comprehensive list of chemical diagnostic tests including blood and urine analysis, blood chemistry, hematology services, serology, radioimmuno analysis, toxicology (including drug screening), pap smears, tissue pathology (biopsies) and other tissue analyses. Bio-Reference holds the required Federal and state licenses necessary to permit its operation of its processing facilities in New Jersey and New York State and to permit its servicing of its clients in Connecticut, Florida, Louisiana, Maryland, New Jersey, New York, Pennsylvania, Texas and Virginia. Bio-Reference markets its services directly to physicians, hospitals, clinics, and other health facilities. Subsequent to the close of fiscal 1998, the Company commenced the expansion of its business from an almost exclusively transaction processing operation (i.e. clinical laboratory testing) into health information and connectivity areas by seeking to expand its business base through utilization of its physician network and marketing staff. During fiscal 1999, the Company entered into the e-health marketplace through the opening of its own drug screen website, "DRUGSCREENLAB.com" and subsequently acquired an Internet website "DoctorNY.com" serving the New York metropolitan area and hosting a number of existing physician websites. To date, virtually all of the Company's revenues have been derived from its clinical laboratory testing. The United States market for clinical laboratory testing is estimated to generate approximately $30 billion in annual revenues. - 50% of these revenues are generated by hospital laboratories - 50% of these revenues are generated by independent laboratories and physician office laboratories. Bio-Reference was incorporated under the laws of the State of New Jersey in December 1981 under the name "Med-Mobile, Inc." Its initial primary business was to provide mobile medical examinations. This business was discontinued in June 1989. Since February 1987, the Company's primary business has been the operation of a clinical laboratory located in northern New Jersey servicing the greater New York metropolitan area. The Company expanded its laboratory services through the March 1988 acquisition of Cytology and Pathology Associates, Inc. and relocated all of its laboratory operations to its facility in Elmwood Park, New Jersey. The Company changed its name to Bio-Reference Laboratories, Inc. in November 1989. Bio-Reference has expanded its laboratory testing capabilities and its customer base through internal growth as well as through the completion of a series of acquisitions of the businesses of other testing laboratories. The Company's executive offices are located at 481 Edward H. Ross Drive, Elmwood Park, New Jersey 07407. Its telephone number is (201) 791-2600. Developments Since the Beginning of Fiscal 1999 On November 23, 1998, the Company's outstanding publicly owned Class A Redeemable Warrants and Class B Redeemable Warrants expired by their terms. In June 1999, the Company acquired a software license enabling the grouping of medical claims data analysis and has proceeded to develop its own proprietary algorithms and enhancements to the licensed software so as to include laboratory and prescription data. The Company is currently negotiating with two ERISA funds which cover more than 60,000 lives for access to certain of their claims information in order to conduct beta site testing of its analytical tools and programs. In the event such beta site testing is successful, the Company anticipates offering such software tools and programs to customers. In June 1999, in connection with the release of its second quarter operating results, Bio-Reference announced the write-off of an approximate $900,000 balance of unamortized goodwill related to its 1997 purchase of Smith Kline Beecham's end stage renal dialysis business and the increase in the allowance of approximately $2,000,000 for accounts receivable, all of which were attributable to renal dialysis testing. 2 In June 1999, the Company announced the signing of a letter of intent with General Prescription Programs, Inc., a prescription benefit manager ("GPP") and others, to form a new company called PsiMedica, to provide population health management and medical claims processing services to third- party payors of health related claims and benefits. The new company, which will be principally funded by Bio-Reference, is expected to obtain a license to market medical management services to GPP customers representing approximately one million lives. The license will also provide the new company with access to GPP's claims information and analytical software. The Company believes that through the analytical process of interrelating laboratory, prescription and medical claims data, it can provide critical strategies and solutions to promote population health management primarily to ERISA funds and other payors.No assurances can be given that the Company will be able to successfully market these strategies and solutions. In September 1999, Bio-Reference announced the opening of its Internet drug screen website, "DRUGSCREENLAB.COM" to provide drug-related medical technical information for both professionals and non-professionals. The site established to answer questions or concerns about drug testing procedures services rendered by Bio-Reference as well as about drug testing laws requirements. and was and and In November 1999, the New York State Department of Corrections renewed its contract with Bio-Reference's wholly-owned Medilabs subsidiary retaining Medilabs to perform all laboratory testing for the Department's seventy correctional institutions in the state encompassing over 70,000 prisoners from maximum security prisons to rehabilitation centers. Bio-Reference estimates that revenues from this contract will aggregate approximately $6.3 million in fiscal year 2000, an increase of more than 10% over fiscal year 1999. On December 2, 1999, the Company acquired the WEB Business of Medical Marketing Group, Inc. ("MMGI") including its Internet website "DoctorNY.com" as well as certain website-based agreements and arrangements with MMGI's physician clients in the New York metropolitan area for an aggregate 140,000 shares of Bio-Reference's authorized but unissued common stock. MMGI also agreed during the period that its Advertising Consulting Agreement with the Company (hereinafter described) is in effect, to market Internet -oriented services to healthcare and healthcare related businesses for linking to and participation in the WEB Business conducted by the Company. The Company has agreed to pay a commission to MMGI equal to 15% of the recurring Internet access and website fees received by the Company from additional customers produced by MMGI through its sales efforts but solely with respect to those customers produced after production of the 1,000th additional customer. The "DoctorNY.com" website, with its associated domain sites and existing physician websites, includes website development capabilities for subscribing physicians as well as a search engine allowing consumers to locate physicians by region, credentials, specialty or other parameters. The Company plans to further develop the physician services offered by the system to enhance physician-patient and physician-payor electronic communications on a secure basis (i.e., preserving confidentiality), including communicating laboratory results, e-mail prescriptions, refills, payor verification and eligibility, etc. The offering of physician CME credits through the system is also contemplated. The Company intends to market these services to its existing physician network as well as to other individual physicians and groups of physicians. Pursuant to non-competition agreements executed in connection with the acquisition, the Company issued an additional 20,000 shares of Bio-Reference's authorized but unissued common stock to MMGI, an additional 40,000 of such shares to MMGI's principal stockholder and chief executive officer, and paid $10,000 to a former MMGI executive officer. The Company also executed a one-year Advertising Consulting Agreement (renewable by the Company for a maximum of three additional one- year terms), pursuant to which MMGI agreed to render advertising consulting, advisory and public relations services for the WEB Business operated by Bio-Reference, on a project by project basis. For such services, MMGI will be paid a minimum consulting fee of $40,000 in the Initial Year and of $50,000 in any subsequent year, the minimum consulting fee to be credited against a Consulting Fee calculated based upon mutually agreed rates with respect to each project performed under the Advertising Consulting Agreement. As an additional inducement to MMGI to market Internet oriented services to healthcare and healthcare related businesses for linkage to and participation in the WEB Business conducted by the Company, the Company granted an option to MMGI exercisable to purchase a maximum 100,000 shares of Bio-Reference's authorized but unissued common stock at an exercise price 3 of $3.00 per share (equal to the last reported per share sales price for Bio-Reference common stock on The Nasdaq Stock Market on December 1, 1999, the day immediately preceding the acquisition). The option is only exercisable with respect to those shares as to which it becomes "vested," from the date of vesting until one year after completion of the term of the Advertising Consulting Agreement. The option becomes vested as to each 25,000 shares upon delivery by MMGI of 500 additional customers for the WEB Business conducted by the Company. On December 14, 1999, the Company acquired the Health Food Business of Right Body Foods, inc. ("RBF"), a manufacturer of starch free, low carbohydrate, low caloric food products distributed in Long Island, New York, through health professionals, dieticians, nutritionists and physicians. The acquisition was effected through a newly formed, wholly-owned Company subsidiary. The Health Food Business was acquired for an aggregate 180,000 shares of Bio-Reference's authorized but unissued common stock. The Company intends to attempt to expand the market for the Health Food Business products through its current physician accounts utilizing its existing sales force and distribution network. The Company also executed an employment agreement with RBF's chief executive officer, employing her through October 31, 2004 to perform executive and marketing duties in connection with the establishment, supervision of manufacturing and marketing of products for the Health Food Business. Pursuant to the employment agreement, the executive will be paid a minimum annual salary of $150,000 and commissions equal to varying percentages (from 5% to 1%) of net cash receipts of the Health Food Business in each fiscal year to the extent such net cash receipts exceed $1,000,000 in such fiscal year. The commissions earned will be credited against a guaranteed $50,000 commission bonus (effective only for the first year). The executive is also being paid a $100,000 signing bonus in 24 monthly installments. The executive was issued an additional 20,000 shares of Bio-Reference's authorized but unissued common stock in consideration of her executing a non-competition agreement. At November 1, 1998, the Company was being represented by counsel in connection with various reviews being conducted by the Company's Medicare carrier. One review involved overpayments that occur in the normal course of business. The Company believes the overpayments will be determined to approximate $150,000, of which approximately $75,000 has already been remitted by the Company to Medicare. Counsel representing the Company in this matter advised at such time that he could not offer any opinion or projection as to whether the anticipated liability will be resolved at $150,000 or whether it will be increased. Counsel further advised that based upon his review of documents, many of the claims that Medicare thought were duplicate payments were not in fact duplicates, but rather were properly billed. Counsel also advised that in view of the complexity of this issue, he believed the final overpayment would be an amount negotiated between the Company and Medicare. During fiscal 1999, there was no change in the status of this matter. At October 31, 1999, the Company had reserved the sum of $150,000 on its October 31, 1999 financial statements as the estimated liability in connection therewith. In January 2000, the Company commenced negotiations with New Jersey Medicaid regarding a claim (the "Claim") made by the State in December 1999 that with respect to certain clinical laboratory tests for which reimbursements were made by the State to the Company, although such tests were authorized by the physician, the underlying laboratory test requisitions did not bear the actual signature of the physician ordering the test. The Company believes that it has been in compliance with all requirements regarding bills submitted for payment by New Jersey Medicaid and requires actual physician signatures before it bills New Jersey Medicaid. However, in order to dispose of the issue, the Company entered into an oral agreement with New Jersey Medicaid in January 2000 to settle the Claim for approximately $227,000. The Company has accrued the estimated settlement of $227,000 on its October 31, 1999 financial statements. The settlement is subject to the parties' execution of a written agreement setting forth its terms and to the approval of the Director of the Division of Medical Assistance. Approval of the settlement is being recommended to the Director. New Jersey Medicaid is the only payor with which the Company conducts business that requires a physician signature on each laboratory requisition. In the fiscal year ended October 31, 1999, New Jersey Medicaid accounted for approximately 3% of the Company's total net revenues. 4 CLINICAL LABORATORY OPERATIONS -----------------------------The Clinical Laboratory Industry -------------------------------The United States market for clinical laboratory testing is estimated to generate approximately $30 billion in annual revenues. - 50% of these revenues are generated by hospital laboratories - 50% of these revenues are generated by independent laboratories and physician office laboratories. History ------Bio-Reference was incorporated in December 1981 to provide mobile medical examination services but discontinued that business in June 1989. Bio-Reference commenced clinical laboratory operations in 1987 with the belief that a strong business opportunity existed for a medium-sized clinical laboratory that produced high quality test results in a timely manner to practicing physicians. The current competition may be primarily categorized in two groups: - businesses that are national in scope performing millions of tests per month but impersonal in nature - smaller laboratories that attempt to compete in terms of quality and service but are limited in resources and scope of capabilities. Consequently, management believed that there existed a definite place for a medium-sized commercial laboratory in the greater New York metropolitan area. The Company did not realize income from operations from the time it commenced clinical laboratory operations in 1987 until fiscal 1994. The Company realized net income in each of the succeeding years until fiscal 1999. During fiscal 1999, the Company had a loss of approximately $4,900,000 which included a write-down of approximately $2.9 million for an impaired asset of $900,000 and its associated additional reserve of $2,000,000 for accounts receivable attributable to the Company's end stage renal dialysis business acquired from Smith Kline Beecham. In 1988, the Company consolidated and relocated all of its laboratory operations into a 35,000 sq. ft. space in Elmwood Park, New Jersey, approximately 10 miles from mid-town Manhattan. The new location was carefully chosen to offer easy access to the greater New York metropolitan area. This move afforded the Company an excellent geographical location to expand into newer markets in southern New York State, including Westchester, Rockland and Nassau Counties, southern and western New Jersey and southern Connecticut. Bio-Reference proceeded to develop esoteric testing, while maintaining its routine tests. It was found that by emphasizing the more difficult esoteric tests, routine tests also increased, particularly profile testing in chemistry and hematology. The Company hopes to continue its growth by aggressive marketing, entry into additional markets, primarily in the greater New York metropolitan area through acquisitions and the development of specialty niche markets to complement its routine business. Over the years, the Company has expanded its specialty testing services to include: - anatomic pathology (biopsies and pap smears) - cellular immunology (principally geared to the AIDS testing market) - male infertility - tumor markers Operations ---------The efficiency of a medical laboratory depends on three items: - Quantity of tests - Selection of tests performed - Ability to automate the process 5 It is axiomatic that the initial fixed costs of testing a small number of patients are high. Such costs include: - cost of maintaining highly sophisticated equipment - cost of a full support facility - marketing - logistical - billing - other administrative costs As the patient volume increases, automated tests become progressively expensive as the fixed costs are already in place, making the laboratory cost efficient. less more Most medical laboratory tests can be divided into three principal categories: - those that are highly automated and computer driven, - those that are semi-automated requiring the use of sophisticated equipment, - those that are subjective and basically manually determined. The Company considers itself a highly automated and computer driven laboratory. The Company's couriers pick up patient specimens from physician offices, nursing homes and hospitals in the metropolitan New York area and test results are generally delivered back to the physician within 24 hours. Larger volume clients receive test results by way of printers placed in their offices, thereby accelerating test reporting. Bio-Reference furnishes its physician clients with periodic newsletters detailing: - advances in laboratory medicine - new tests - clinical commentaries - aboratory interpretation of test results. In addition, the Company clients listing: - provides an annual Test Compendium to all physician all tests offered normal ranges correct collection of samples patient preparation up to date billing information The Company utilizes the services of eighteen full-time Client Service Coordinators, all of whom are fully trained in medical and laboratory terminology. This staff is used as an interface with physicians and nurses and augments the client support provided by the Company's sales staff. Highly abnormal and life threatening results are immediately telephoned to the physician in order to provide speedy medical resolution of any patient problem. Sales and Marketing ------------------The Company presently employs 47 full and part-time sales and marketing personnel. The sales and marketing department works closely with the Technical Director to: - plan new tests - pricing - general client support. All sales and marketing personnel operate in a dual capacity; both in selling and as client support representatives. This ensures that all salespersons are intimately involved with the client, not only in selling, but in servicing the account that they sell. Bio-Reference believes that this is unique in the industry and is extremely helpful in client retention, providing a strong link between the physician and the Company's staff. Quality Assurance ----------------Medical testing is essentially one of communication and data transfer. In order to provide accurate and precise information to the physician, it is essential to maintain a well structured and vigorous quality assurance program. Bio-Reference holds the required Federal and state licenses necessary to permit its operation of a clinical laboratory at both its New Jersey and New York facilities and to permit the servicing of its clients in Connecticut, Florida, Louisiana, Maryland, New Jersey, New York, 6 Pennsylvania and Virginia. To fully maintain these licenses, the laboratory must submit to vigorous sets of proficiency tests, or surveys, in all test procedures which are performed. Such proficiency tests or surveys may be performed as many as four to five times a year, depending upon the procedure, and results in hundreds of proficiency tests throughout the year. In addition, the Company performs thousands of quality control and quality assurance tests per year. The Company is also subjected to unannounced inspections by inspectors from some of the jurisdictions noted above who review past records, operating manuals, quality assurance records and safety regulations. In October 1998, the Company was notified that it had been re-accredited by the College of American Pathologists "CAP" in its Elmwood Park, New Jersey and Park Avenue, New York facilities. In September 1998, the Company was notified that it had been re-accredited in its Valley Cottage, New York facility. This accreditation by CAP, a peer review organization, involves an intensive review by numerous experts in their specific fields, who review technical, quality assurance, health and safety and computer documentation in order to bestow accreditation, which is one of the most prestigious approvals available to clinical laboratories. The Company's Quality Assurance Committee, headed by a Quality Assurance Coordinator and composed of supervisors from all departments, meets daily to assess and evaluate the laboratory's quality. Based on the information received from the committee, recommendations are made to correct conditions which have led to errors. Management, department supervisors and members of the assurance committee continually monitor the laboratory's quality. Depending on the test, two or three sets of Quality Control materials are run in each analytical assay to assure precision and accuracy. Patient population statistics are evaluated each day. Highly abnormal samples are repeated to assure their accuracy. It is the Company's position that all of these procedures are necessary, not only in assuring a quality product, but also in maintaining Federal and state licensing. The Company believes these high standards of quality are an important factor in what management regards as an excellent rate of client retention. Revenue Recognition and Business Strategy ----------------------------------------Although the laboratory's clients are primarily physicians, it is usually the individual patient, his or her commercial insurance carrier, or a governmental agency such as Medicare or Medicaid that pays the laboratory charges. These third parties pay health care providers according to allowable costs or a predetermined contractual rate rather than according to the provider's established rates; the difference between what is paid and what is billed is the contractual allowance. Therefore, the Company has adopted the practice of reducing its revenues by these allowances or contractual adjustments. Over the past years there has been an increase in the number of patients that are covered by managed care health plans. These plans will often negotiate with a limited number of clinical laboratories at discounted rates. Some of these managed care health plans will contract with only a single laboratory and pay for services on a capitation basis (meaning one price per enrollee, regardless of how much laboratory work is performed). The effect of managed care health plans to the laboratory industry equates to lower reimbursement rates for laboratory services. If the laboratory is not a provider of services to the managed care health plan, it will not be reimbursed for providing the service and overall patient volume may be reduced. Therefore, this change has reduced the potential market for a clinical laboratory's services if it is not a provider to a particular managed care health plan. In addition, Medicare as well as an increasing number of commercial programs are requiring physicians to document the medical necessity when ordering specific laboratory tests. Since the laboratory has a responsibility to test a specimen when it first arrives in the laboratory, it may not be able to wait until all applicable information is provided and there is a possibility that a test can be performed and results provided before appropriate medical necessity is documented. In these cases, the laboratory may not receive reimbursement for the tests.(See "Developments Since the Beginning of Fiscal 1999" as to the status of a review concerning overpayments being conducted by the Company's Medicare carrier) and a recent settlement of a claim against the Company asserted by New Jersey Medicaid. 7 The following table reflects the Company's breakdown of revenue by payor for the 12 months ended October 31, 1997, 1998 and 1999. Years Ended October 31, 1997 1998 1999 ---- ---- ---Direct Patient Billing........... Commercial Insurance............. Professional Billing............. Medicare......................... Medicaid......................... -------- ---100% 100% 100% Competition ----------- 17% 31% 23% 25% 4% 16% 30% 28% 22% 4% 14% 27% 34% 22% 3% Bio-Reference's competition derives primarily from other laboratories located in the New York metropolitan area. On a national basis, approximately 30% of this market is made up of the two largest national laboratories: - Quest Clinical Laboratory, formerly a Division of Corning, Inc. - Laboratory Corporation of America, Inc. Although the Company is significantly smaller than the national laboratories and has modest financial resources, management believes it can compete successfully because it has; - fewer layers of staff - a more responsive business atmosphere - customized service. The Company believes its response to medical consultation is faster and more personalized than in the national laboratories. Client service staff only deal with basic technical questions and those that have medical or scientific significance are referred directly to other senior scientists and staff. Government Regulation --------------------Laboratory operations require licensure in each jurisdiction in which they operate. Bio-Reference holds the required Federal and state licenses necessary to permit its operation of a clinical laboratory at both its New Jersey and New York facilities and to permit its servicing of its clients in those states where it presently operates. Laboratory technicians and technologists must also qualify under state regulations in order to be employed by the laboratory. All of these licensing and certification programs set standards in areas such as quality control, record keeping and personnel qualifications, including, in varying measures from state to state, educational experience and licensure for various levels of personnel responsible for testing. Compliance with these standards is by periodic inspections by the appropriate Federal, state or local agency. In addition, licensing and certification entail proficiency testing which involves actual testing of specimens that have been specifically prepared by the regulatory authority or designated agencies for testing by the laboratory. There can be no assurance the laboratory will maintain all necessary licenses and in the event the laboratory loses its license in a particular jurisdiction, it will be required to cease all activities in such jurisdiction. There also cannot be any assurance the Company will obtain the licenses required in a proposed jurisdiction of operation. The Company is also 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, the Company is subject to the Comprehensive Medical Waste Management Act, "CMWMA," which requires the Company to register as a generator of special medical waste. CMWMA mandates the sterilization of certain medical waste and provides a tracking system to insure disposal in an approved facility. All of the Company's 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 the Company. These records are audited by the State of New Jersey on a yearly basis. 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 reimbursement required by enactment of a Congressional budget can adversely affect clinical laboratories by reducing Medicare reimbursement for laboratory 8 services. Although in the past, legislation has been enacted which reduced the permitted Medicare reimbursement for clinical laboratory services from previously authorized levels, none of the reductions enacted to date has had a material adverse effect on the Company. For many of the tests performed for Medicare beneficiaries or Medicaid recipients, laboratories are required to bill Medicare or Medicaid directly, and to accept Medicare or Medicaid reimbursement as payment in full. The Clinton Administration, Congress and various Federal agencies have examined the rapid growth of Federal expenditures for clinical laboratory services, and the use by the major clinical laboratories (including the Company) of dual fee schedules ("client" fees charged to physicians, hospitals, institutions and companies with whom a laboratory deals on a bulk basis and which involve relatively low administrative costs, and "patient" fees charged to individual patients and third party payors, including Medicare, who generally require separate bills or claims for each patient encounter and which involve relatively high administrative costs). The permitted Medicare reimbursement rate for clinical laboratory services has been reduced by the Federal government in a number of instances over the past several years to a present level equal to 74% of the national median of laboratory charges. A number of proposals for legislation or regulation are under discussion which could have the effect of substantially reducing Medicare reimbursements to clinical laboratories through reduction of the present allowable percentage or through other means. In addition, the structure and nature of Medicare reimbursement for laboratory services is also under discussion and management is unable to predict the outcome of these discussions or its effect on the Company. 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, the Company could experience a significant decrease in revenues from Medicare and Medicaid, which could have a material adverse effect on the Company. The Company is unable to predict, however, the extent to which any such actions will be taken. Federal and state health care and related regulations are subject to constant change. The Company cannot now predict what changes may be enacted which may affect its business or the manner in which its business would be affected by such changes. Two legislative changes have occurred which portend significant changes in the clinical laboratory market. Two Omnibus Budget Reconciliation Acts have severely restricted physician referrals of Medicare covered services to clinical laboratories in which the referring physician or his immediate family has a financial relationship. The Clinical Laboratory Improvement Amendments of 1988, "CLIA-88," acted to strengthen Federal control of medical laboratories by regulating stricter quality assurance practices, licensing requirements and staff qualifications. 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 adopted under the Clinical Laboratory Improvement Act of 1967, "CLIA-67." On February 28, 1992, HHS published three sets of regulations implementing CLIA-88, including quality standard regulations establishing Federal quality standard for all clinical laboratories; application and user fee regulations applicable to most laboratories in the United States which became effective on March 30 1993; and enforcement procedure regulations applicable to laboratories that are found not to meet CLIA- 88 requirements. The quality standard regulations establish varying levels of regulatory scrutiny depending upon the complexity of testing performed. Under these regulations, a laboratory that performs only one or more of eight routine "waived" tests may apply for a waiver from most requirements of CLIA-88. The Company believes that most tests performed by physician office laboratories will fall into either the "waived" or the "moderately complex" category. The latter category applies to simple or automated tests and generally permits existing personnel in physicians' offices to continue to perform testing under the implementation of systems that insure the integrity and accurate reporting of results, establishment of quality control systems, proficiency testing by approved agencies, and biannual inspection. The quality standard and enforcement procedure regulations became effective on September 1, 1992, although certain personnel, quality control and proficiency testing requirements will 9 be phased-in over a number of years. The laboratory has completed its first CLIA inspection under CLIA-88 guidelines and received its certificate of compliance effective February 7, 1996. In October 1998, the Company was notified that it had been re-accredited by the College of American Pathologists "CAP" in its Elmwood Park, New Jersey and Park Avenue, New York facilities. In September 1998, the Company was notified that it had been re-accredited in its Valley Cottage, New York facility. This accreditation by CAP, a peer review organization, involves an intensive review by numerous experts in their specific field, who review technical, quality assurance, health and safety and computer documentation in order to bestow accreditation, which is one of the most prestigious approvals available to clinical laboratories. 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. Bio-Reference Laboratories has written and implemented a compliance program adhering to the standards set forth in the Model Compliance Program. Insurance --------The Company maintains professional liability insurance of $1,000,000 per occurrence, $3,000,000 in the aggregate. In addition, the Company maintains excess commercial insurance of $2,000,000 per occurrence. A determination of Company liability for uninsured or underinsured acts or omissions would have a material adverse effect on the Company's operations. Employees --------At December 31, 1999, the Company had 378 full-time employees and 368 part-time employees. This includes: - three executive officers - Vice President of Technical Operations - Marketing Vice-President, - 74 full-time and 41 part-time technicians, and/or technologists (including physicians, pathologists and Ph.D.'s) - 260 full and part-time semi-technical employees - 46 full and part-time marketing representatives - 194 full and part-time clerical employees - 107 full and part-time drivers. None of the Company's employees are represented by a labor union. The Company regards relations with its employees as satisfactory. Item 2 - Properties ------------------The Company's executive offices and New Jersey processing facility occupy approximately 56,000 square feet of leased space in two one-story brick facilities at 481-487 Edward H. Ross Drive, Elmwood Park, New Jersey. The lease for these facilities, which expires in February 2004, provides for a monthly rental of $31,391. Bio-Reference's New York processing facility occupies approximately 11,000 square feet of leased space in a two-story brick facility at 140 Route 303, Valley Cottage, New York. The lease for this facility, which expires in April 2002, provides for a monthly rental of $12,177. The Company's testing equipment maintained at both of its processing facilities are in good condition and in working order. Management believes that these facilities, as presently equipped, have the capacity to generate up to approximately $75,000,000 in annual revenues based on the type of testing now being performed by the Company. The Company maintains fire, theft and liability insurance coverage for this facility in what it believes are adequate amounts. The Company also leases 55 additional relatively small draw stations throughout the New York metropolitan area to collect specimens from physician-referred patients for testing at both of its processing facilities. Item 3 - Legal Proceedings -------------------------In July 1996, the Company purchased certain assets and rights including the Customer List related to the Renal Dialysis Testing Business conducted by SmithKline Beecham Clinical Laboratories, Inc. ("SBCL"), from SBCL, for $1,800,000 including a $1,200,000 down payment pursuant to an Asset 10 Sale/Purchase Agreement (the "Asset Agreement"). In the Asset Agreement, SBCL represented and warranted that its Renal Dialysis Testing Business was servicing at least 60 active accounts, was conducting testing for not less than 4,600 active dialysis patients and was generating at least $3,600,00 in net revenues on an annual basis. The parties also executed a Non-Competition Agreement (the "Non- Competition Agreement") pursuant to which SBCL agreed to cease performing all renal dialysis clinical laboratory testing services for a three year period (after conclusion of a limited Transition Period). After completion of the acquisition, the Company's management determined that SBCL's representations and warranties concerning the Renal Dialysis Testing Business were materially false and that the Company might only realize approximately $1,000,000 in annual net revenues from the acquired business. Management also determined that SBCL had fraudulently concealed that its Renal Dialysis Testing Business had suffered certain material adverse changes and that SBCL had breached the Non- Competition Agreement by continuing to perform renal dialysis testing on the transferred accounts after the Transition Period despite its assurances that it had ceased all such testing. Based upon SBCL's alleged breaches of the Asset Agreement and the Non-Competition Agreement, the Company did not pay any portion of the $600,000 balance of the purchase price (which was due in 24 consecutive monthly installments of $25,000 commencing January 1, 1997). As a result of the foregoing, the Company filed a lawsuit against SBCL in December 1996. The lawsuit, filed in the United States District Court for the District of New Jersey, alleged that SBCL materially and repeatedly breached its obligations and its representations and warranties made in the Asset Agreement and the Non-Competition Agreement and claimed unspecified amounts of compensatory and punitive damages and related costs. In response to the Company's lawsuit, SBCL asserted counterclaims for the $600,000 unpaid portion of the purchase price. During fiscal 1998, agreement was reached between the Company and SBCL to settle and compromise all aspects of the lawsuit including the SBCL counterclaims. Pursuant to the agreement, the Company released SBCL from any claims pursuant to the Asset Agreement and the Non-Competition Agreement and SBCL released the Company from any claims pursuant to such agreements including the Company's obligation to pay the $600,000 balance of the purchase price. The settlement was subject to the consent of the Company's principal lending bank which consent was received in January 1999. Item 4 - Submission of Matters to a Vote of Security Holders -----------------------------------------------------------The Company's Annual Meeting of Stockholders was held on October 21, 1999. At the meeting, the following two individuals were elected by the following vote to serve as Class II directors, each for a term of three years and until his successor is duly elected and qualified. For --- Withheld -------- Sam Singer 6,362,497 152,972 Frank DeVito 6,362,497 152,972 The other directors of the Company whose term continued are as follows: Marc D. Grodman Class I director Howard Dubinett Class I director John Roglieri Class III director Gary Lederman Class III director 11 PART II PRICE RANGE OF SECURITIES ------------------------Item 5. --------- Market for Common Stock and Related Shareholder Matters ------------------------------------------------------- The Company's Common Stock was traded on the National Association of Securities Dealers Automated Quotation ("NASDAQ") Small Cap System through July 13, 1992 after which it was delisted from trading on NASDAQ due to the Company's failure to maintain shareholders' equity of at least $1,000,000. Commencing July 14, 1992, the Common Stock was quoted in the over-the-counter market on the NASD OTC Bulletin Board. As a result of the improvement in the Company's financial condition based upon its November 1993 public offering, the Common Stock was readmitted for trading on the NASDAQ Small Cap System under the symbol "BRLI" on November 24, 1993. The following table sets forth the range of high and low bid prices for the Common Stock for the periods indicated, as derived from reports furnished by NASDAQ. Such quotations represent prices between dealers, do not include mark-ups, mark-downs or commissions and may not necessarily represent actual transactions. Fiscal Year ----------High ---- Bid Prices ---------Low --- 1998 First Quarter Second Quarter Third Quarter Fourth Quarter 1999 First Quarter Second Quarter Third Quarter Fourth Quarter At December 31, 1999 the closing NASDAQ was $3.75 per share. $1.65625 1.75 2.00 1.25 $1.875 $1.5625 $1.03125 $1.0625 sales $1.25 1.25 1.15625 .875 $ .96875 .75 .4375 .78125 price for the Common Stock on At December 31, 1999 the number of record holders of the Common Stock was 630. Such number of record owners was determined from the Company's shareholder records and does not include beneficial owners whose shares are held in nominee accounts with brokers, dealers, banks and clearing agencies. Dividends The Company has not paid any dividends upon its Common Stock since its inception and, does not contemplate or anticipate paying any dividends in the foreseeable future. Furthermore, the Company's loan agreement with PNC Bank prohibits the Company from paying dividends or making any distributions with respect to any shares of its stock without the prior written consent of the Bank. 12 Item 6. Selected Financial Data [In thousands, except per share data] Y e a r s e n d e d -------------------------------------------O c t o b e r 3 1, -------------------------------------------1 9 9 9 1 9 9 8 1 9 9 7 1 9 9 6 1 9 9 5 ------- ------- ------- ------- ------Operating Data: Net Revenues $ 53,856 $ Cost of Services $ 30,850 $ Gross Profit $ 23,006 $ General and Administrative Expenses$ 26,432 $ Income [Loss] from Operations $ (3,426)$ Non-Recurring Gain on Sale of Intangible Assets $ -- $ Other Expenses - Net $ 1,185 $ Provision for Income Tax Expense [Benefit] $ 367 $ Net income [Loss] $ (4,978)$ Net [Loss] Income Per Common Share $ (.68)$ Cash Dividends Per Common Share $ -- $ Balance Sheet Data: Total Assets Total Long-Term Liabilities Total Liabilities Working Capital Stockholders' Equity [Deficit] 46,554 25,058 21,496 20,231 1,065 $38,660 $19,339 $19,321 $17,436 $ 1,885 $ $ $ $ $ 334 $ 2,026 $ 841 $ 850 $ (38)$ 597 .08 -- (139)$ $ 3,200 $ $ .48 $ $ -- $ $ 32,318 $ 40,778 $29,095 $ 2,681 $ 3,708 $ 921 $ 20,948 $ 24,555 $13,570 $ 3,452 $ 8,364 $ 9,415 $ 11,369 $ 16,223 $15,525 35,126 18,136 16,989 15,793 1,196 $ $ $ $ $ 31,521 15,036 16,485 14,702 1,783 -- $ 552 $ -332 52 $ 592 $ .10 $ -- $ 49 1,402 .23 -- $ 28,231 $ 24,201 $ 1,533 $ 843 $ 16,128 $ 12,945 $ 4,072 $ 4,552 $ 12,103 $ 11,256 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, the Company could experience a significant decrease in revenues from Medicare and Medicaid, which could have material adverse effect on the Company. The Company is unable to predict, however, the extent to which such actions will be taken. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ----------------------------------------------------------------------Note Regarding 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 the Company's actual results in future periods to be materially different from any future performance suggested herein. OVERVIEW -------Bio-Reference has expanded its laboratory testing capabilities and its customer base through internal growth as well as through the completion of a series of acquisitions of the businesses of other testing laboratories. In April 1998, the Company acquired the assets and certain liabilities of Medilabs, Inc. ("MLI") for a purchase price of $4,000,000 cash plus a promissory note of $1,500,000, payable without interest, in three semi-annual installments commencing April of 1999. Also in April, the Company entered into a note agreement to borrow the $4,000,000 to fund this acquisition. The note is in accordance with the Company's revolving loan agreement with the same lending bank. The operations of MLI are included in the Company's operations commencing April 9, 1998. MLI incurred a net loss of approximately $120,000 for the seven month period ended October 31, 1998 and had net income of approximately $880,000 for the twelve month period ended October 31, 1999. 13 In December of 1999, the Company entered into agreements to acquire the businesses of two companies. One company is involved in website designs and the other company is involved in the manufacturing of health care foods. Results of Operations Net Income ---------The Company's net income (loss) for the years ended October 31, 1999 and 1998 was $(4,978,448) and $596,583, respectively. The main reasons for the $5,575,031 decrease in net income is the write-down of approximately $2,900,000 for impaired assets including the additional allowance for accounts receivable relating to the Company's end stage renal dialysis business acquired from SmithKline Beecham of approximately $2,000,000 and an increase in general and administrative expenses of approximately $2,000,000 in fiscal 1999. . In addition, net revenue per patient decreased 8% during the current twelve month period ended October 31, 1999, as compared to the twelve month period ended October 31, 1998. Gross profit margins decreased from 46% for the twelve month period ended October 31, 1998 to 43% for the twelve month period ended October 31, 1999. Based upon anticipated increases in patient volume, anticipated increased testing to be performed, reimbursement rate improvements, and anticipated decreases in operating costs, the bulk of the effects of which are expected to be realized in the second half of fiscal 2000, the Company projects net income for fiscal 2000. Net Revenues -----------Net revenues for the year ended October 31, 1999 were $53,856,414 as compared to $46,553,730 for the year ended October 31, 1998; this represents a 16% increase in net revenues. MLI had net revenues of $13,706,743 or 25% of the Company's net revenues for the fiscal year. The Company acquired MLI in April of 1998, for the seven month period ended October 31, 1998, MLI had net revenues of $7,773,570 or 17% of the Company's net revenue for the twelve month period ended October 31, 1998. The number of patients serviced during the fiscal year ended October 31, 1999 was 1,235,514 which was 25% greater when compared to the prior fiscal year. MLI accounted for 35% of the patient count for the year ended October 31, 1999. Net revenue per patient for the year ended October 31, 1998 was $47.29 compared to net revenue per patient for the year ended October 31, 1999 of $43.59; a reduction of $3.70 or 8%. This decrease is due to the inclusion of a full twelve months of MLI's revenues with its associated lower revenue per patient in fiscal year 1999. MLI's net revenue per patient was $31.71 for the twelve month period ended October 31, 1999 compared to net revenue per patient of $33.04 in fiscal year 1998. The Company expects an increase in net revenues in fiscal year 2000 due to a number of factors: internal growth, an estimated increase in the contract with the New York State Department of Corrections, Medicare reimbursement for tests previously not covered, an increase in Medicare reimbursement for other selected tests, as well as new marketing initiatives in newer testing areas, such as drugs of abuse testing, and complimentary and alternative medicine. In addition, the Company has identified three new business initiatives (See Below), all of which seek to leverage off existing capabilities the Company possesses. The Company anticipates increasing its revenues in its next fiscal year through internal growth and development of new marketing initiatives in laboratory testing services outside the traditional physician market. In November 1999, the contract to provide laboratory testing by the New York State Department of Corrections for inmates in its facilities was renewed. This contract is valued at approximately $6,300,000 for fiscal year 2000, an estimated increase of approximately 10% from fiscal year 1999. The Company is seeking to market its services to other correctional institutions. In June 1999, the Company announced the signing of a letter of intent with General Prescription Programs, Inc., a prescription benefit manager ("GPP") and others, to form a new company, called PSIMedica, which will provide population health management and medical claims processing services to third-party payors of health related claims and benefits. The new company, principally funded by BRLI, is expected to obtain a license to market medical management services to GPP customers representing approximately one million lives. The license will also provide the new company with access to GPP's claims information and analytical software. The Company believes, through the analytical process of interrelating laboratory, prescription and medical claims data, it can provide critical strategies and solutions to promote population health management primarily to ERISA funds and other payors. No 14 assurances can be given that the Company these strategies and solutions. will be able to successfully market In 1999, the Company licensed software to allow for the grouping of the analysis of medical claims data and has proceeded to develop its own proprietary algorithms and enhancements to the licensed software so as to include laboratory and prescription data. The Company is currently negotiating with two ERISA funds which total over 60,000 lives as beta sites for its analytical tools and programs. The Company expects to seek customers for its services by mid fiscal year 2000. In December 1999, the Company announced the acquisition of DoctorNY.com (www.doctorny.com), a health portal which, with its associated domain sites and existing physician websites, includes website development capabilities for health care providers, together with a search engine which allows consumers to locate physicians by region, credentials, specialty or other parameters. The Company announced the consumer view represented by DoctorNY.com was part of its entry into the e-health marketplace. The Company plans to further develop the physician services offered by the system to enhance physician- patient and physician-payor electronic communications on a secure basis (i.e., preserving confidentiality), including communicating laboratory results, e-mail prescriptions, refills, payor verification and eligibility, etc. The offering of physician CME credits through the system is also contemplated. The Company intends to market these services to its existing physician network as well as to other individual physicians and groups of physicians. In December 1999, the Company acquired Right Body Foods, Inc., a manufacturer and distributor of freshly prepared, starch free, low-calorie, low carbohydrate, food products, located in Syosset, New York. Its products are sold through health professionals, dieticians, nutritionists and physicians. The Company expects to use its marketing staff and physician network to increase the distribution of these products. COST OF SERVICES: ----------------Cost of sales increased from $25,058,008 for the year ended October 31, 1998 to $30,850,357 for the year ended October 31, 1999, an increase of $5,792,329 or 19%. This increase is primarily the result of the MLI acquisition. MLI's direct operating costs were $9,347,850 for the twelve month period ended October 31, 1999, as compared to $5,639,627 for the seven month period ended October 31, 1998, an increase of $3,708,223. The optimum consolidation of laboratory operations has not been completed and will marginally impact the Company's cost structure until, at least, the second quarter of fiscal year 2000 when the automated laboratory upgrade and expansion is expected to be completed. While the automated laboratory will have a marginal impact on cost structure, the reduction of the Company's dependence on reference laboratories is expected to have a more favorable impact during the second half of fiscal 2000. GROSS PROFITS: ------------Gross profit on net revenues increased from $21,495,722 for the year ended October 31, 1998 to $23,006,077 for the year ended October 31, 1999; an increase of $1,510,355 primarily attributable to the increase in revenues. Gross profit margins decreased from 46% for the year ended October 31, 1998 to 43% for the year ended October 31, 1999. Management believes that the Company's gross profit margin will increase in fiscal 2000, due to increased revenues from internal growth, Medicare reimbursement for tests not previously covered, increases in reimbursement rates from Medicare on certain tests, the completion of the automated chemistry laboratory and decrease in direct operating expenses. The decrease in gross profit margins in fiscal 1999 is primarily attributable to the lower net revenues per patient, the increase in direct costs associated with MLI and the duplication of direct costs that had not been eliminated as of October 31, 1999 by an optimum consolidation of laboratory operations. The Company has invested a large amount of time and money during fiscal 1999 to increase its processing capacity. Management believes, that its capacity once the automated chemistry laboratory is completed, for approximately $250,000, will be more than adequate to handle the projected increase in patient volume. -----------------------------------------------------------------------------Note Regarding 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 the Company's actual results in future periods to be materially different from any future performance herein. 15 suggested GENERAL AND ADMINISTRATIVE EXPENSES: ----------------------------------General and administrative expenses for the year ended October 31, 1999 were $26,431,909 as compared to $20,430,757 for the year ended October 31, 1998, an increase of approximately $6,000,000 or 29%. Approximately 48% of this increase is the impairment charge of approximately $2,900,000 associated with the Company's end stage renal dialysis business acquired from SmithKline Beecham. In addition, occupancy expenses, telephone, data processing and marketing expenses increased approximately $1,900,000 over the prior twelve month period. The Company recorded a $227,000 expense associated with a New Jersey Medicaid overpayment claim. Management believes that general and administrative expenses in 2000 will increase but not at a higher percentage than the projected increase in revenues. INTEREST EXPENSE: ---------------Interest expense increased from $1,280,737 for the year ended October 31, 1998 to $1,465,765 for the year ended October 31, 1999, resulting from the Company's continuing use of its revolving line of credit with PNC Bank. Fiscal Year 1998 Compared to Fiscal Year 1997 Net Income ---------The Company's net income for the years ended October 31, 1998 and 1997 was $596,583 and $3,199,915, respectively. The main reasons for the $2,600,000 decrease in net income is the reduction in nonrecurring gain of approximately $1,700,000. The nonrecurring gain represents the gain in the sale of certain assets of the Company's GenCare Division. The reduction in income from operations resulted from a reduced gross profit percentage of approximately 4% and an increase in general and administrative expenses. Net Revenues -----------On September 30, 1997, the Company completed the sale of certain assets of its GenCare Division ("GenCare") to an unrelated third party. GenCare provided largely cancer diagnostic testing services with relatively high revenues per patient. The 1997 financial statements included eleven months of revenues attributable to the GenCare division or $2,116,523. There were no revenues realized by the GenCare Division in 1998. Net revenues for the year ended October 31, 1998 were $46,553,730 as compared to $38,660,184 for the year ended October 31, 1997; this represents a 20% increase in net revenues. The Company acquired MLI in April of 1998. Since this acquisition, for the seven month period ended October 31, 1998, MLI had net revenues of $7,773,570 or 17% of the Company's net revenues for the year. There were no revenues from MLI in fiscal 1997. MLI provides routine laboratory services to physician offices, clinics, nursing homes and correctional institutions, associated with lower revenues per patient. The number of patients serviced during the year ended October 31, 1998 was 984,432 which was 35% greater when compared to the prior fiscal year. MLI accounted for 24% of the patient count for the year ended October 31, 1998. Net revenue per patient for the year ended October 31, 1997 was $53.08 compared to net revenue per patient for the year ended October 31, 1998 of $47.29; a reduction of $5.79 or 11%. MLI's net revenue per patient was $33.04 for the seven month period ended October 31, 1998. The Company anticipated increasing its revenues in its next fiscal year through internal growth and development of new marketing initiatives in laboratory testing services outside the traditional physician market. In April 1998, the Company acquired MLI and was awarded, as of November, 1998, a contract to provide laboratory testing by the New York State Department of Corrections for inmates in its -----------------------------------------------------------------------------Note Regarding 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 the Company's actual results in future periods to be materially different from any future performance herein. 16 suggested facilities. The Company is seeking to market its services to other correctional institutions. In addition, the Company is attempting to expand its marketing efforts in the drug testing market and has hired new marketing representatives to specialize in this initiative. COST OF SERVICES: ---------------Cost of sales increased from $19,339,274 for the year ended October 31, 1997 to $25,058,008 for the year ended October 31, 1998, an increase of $5,718,734 or 30%. This increase is the result of the MLI acquisition. MLI's direct operating costs were $5,639,627 for the seven month period ended October 31, 1998. The optimum consolidation of laboratory operations has not been completed and will impact the Company's cost structure until completed. GROSS PROFITS: ------------Gross profit on net revenues increased from $19,320,910 for the year ended October 31, 1997 to $21,495,722 for the year ended October 31, 1998; an increase of $2,174,812, primarily attributable to the increase in revenues. Gross profit margins decreased from 50% for the year ended October 31, 1997 to 46% for the year ended October 31, 1998. This decrease in gross profit margins is primarily attributable to the lower net revenues per patient, the increase in direct costs associated with MLI and the duplication of direct costs that had not been eliminated as of October 31, 1998 by an optimum consolidation of laboratory operations. GENERAL AND ADMINISTRATIVE EXPENSES: ----------------------------------General and administrative expenses for the year ended October 31, 1998 were $20,430,757 as compared to $17,435,879 for the year ended October 31, 1997, an increase of approximately $3,000,000 or 16%. Most of this increase was due to the incurring of additional costs related to the MLI acquisition (approximately $1,858,000). In addition, bad debt increased by 11%, or approximately $793,000 over the prior comparable period and was caused primarily by an increase in the self-pay patients of Bio- Reference Laboratories resulting from legislation passed in New Jersey which prohibited physician billing for diagnostic laboratory services. Self pay patients have an historical higher bad debt rate than that of physician billing. INTEREST EXPENSE: ---------------Interest expense increased from $1,124,432 for the year ended October 31, 1997 to $1,280,737 for the year ended October 31, 1998, resulting from the Company's increase in asset based borrowing of approximately $4,400,000 and acquisition debt of $4,000,000 offset by payments on existing debt of $1,000,000. Liquidity and Capital Resources ------------------------------For the Fiscal Year Ended October 31, 1999 -----------------------------------------The Company's working capital at October 31, 1999 was approximately $3,700,000 as compared to approximately $8,400,000 at October 31, 1998, a decrease of $4,700,000. This change is primarily the result of a decrease in accounts receivable of approximately $2,000,000, an increase in accounts payable and accrued expenses of approximately $600,000 and the utilization of cash to decrease long term debt of approximately $2,200,000. The Company reduced its debt through the utilization of its restricted certificates of deposit. This allowed the Company to realize a cost savings on the spread between the interest earned on these certificates of deposit and the interest expense on the monies borrowed. During the year ended October 31, 1999, the Company generated approximately $1,800,000 in cash from operations, an increase of approximately $5,000,000 as compared to the year ended October 31 1998. Each operating unit of clinical laboratory testing services generated cash flow during the period ended -----------------------------------------------------------------------------Note Regarding 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 the Company's actual results in future periods to be materially different from any future performance suggested herein. 17 October 31, 1999. MLI, the Company's most recent laboratory acquisition generated approximately $600,000 in cash from operating activities and Bio-Reference generated approximately $7,000,000. Corporate activities (General and Administrative Expenses) utilized approximately $6,000,000 in cash during the twelve month period ended October 31, 1999. The Company expects cash flow from operations to continue to improve during fiscal 2000. Overall, Management anticipates being able to generate cash from operations in fiscal 2000 as a result of a projected increased gross profit resulting from increased revenues and a projected decrease in operating costs. Management believes operating costs will be lower due to cost savings generated by the automated laboratory and cost reductions generated by doing certain large volume laboratory tests in-house rather than referring them to another laboratory. Credit risk with respect to accounts receivable is generally diversified due to the large number of patients comprising the client base. The Company does have significant receivable balances with government payors and various insurance carriers. Generally, the Company does not require collateral or other security to support customer receivables, however, the Company continually monitors and evaluates its client acceptance and collection procedures to minimize potential credit risks associated with its accounts receivable. The Company establishes and maintains an allowance for uncollectible accounts based upon collection history and anticipated collection, and as a consequence, believes that its 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, the Company could experience a significant decrease in revenues from Medicare and Medicaid, which could have a material adverse effect on the Company. Medicare has announced that it will more than double the reimbursement rate for Pap tests (from $7.15 to $14.60) and reimburse for PSA tests starting January 1, 2000. The Company is unable to predict, however, the extent to which other such actions will be taken. (See "Developments Since the Beginning of Fiscal 1999" as to the status of a review concerning overpayments being conducted by the Company's Medicare carrier and New Jersey Medicaid). In January 2000, the Company commenced negotiations with New Jersey Medicaid regarding a claim (the "Claim") made by the State in December 1999 that with respect to certain clinical laboratory tests for which reimbursements were made by the State to the Company, although such tests were authorized by the physician, the underlying laboratory test requisitions did not bear the actual signature of the physician ordering the test. The Company believes it has been compliant with all requirements regarding claims submitted for payment by New Jersey Medicaid and in fact require actual physician signatures before it bills New Jersey Medicaid. However, the Company and New Jersey Medicaid have entered into an oral agreement in January 2000 to a settlement of approximately $227,000 to cover the claim and the Company has accrued this settlement amount in its October 31, 1999 financial statements. The settlement is subject to the parties' execution of a written agreement setting forth its terms and to the approval of the Director of the Division of Medical Assistance. Approval of the settlement is being recommended to the Director. New Jersey Medicaid is the only payor the Company does business with that requires an actual physician signature on every laboratory requisition. In the fiscal year ending October 31, 1999, New Jersey Medicaid represented approximately 3% of the Company's total net revenues. In April 1998, the Company amended its revolving loan agreement with PNC Bank. The maximum amount of the credit line available to the Company is the lesser of (1) $14,000,000 or (ii) 50% of the Company's qualified accounts receivable [as defined in the agreement] plus 1% of any face amount of the certificates of deposit, if any, pledged as collateral for this loan minus the amount of any portion of the outstanding principal balance of the term loan which is deemed to be collateralized by the certificates of deposit. Interest on advances which are collateralized by certificates of deposit will be at 2% above the certificate of deposit interest rate. Interest on other advances will be at prime plus 1.25%. The credit line -----------------------------------------------------------------------------Note Regarding 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 the Company's actual results in future periods to be materially different from any future performance suggested herein. 18 is collateralized by substantially all of the Company's assets and the assignment of a $4,000,000 insurance policy on the life of the president of the Company. The line of credit is available through March 2001 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 and net worth, various financial ratios and insurance coverage. As of October 31, 1998, the Company was in compliance with the covenant provisions of this agreement and was utilizing $12,000,000 of this credit facility. As of October 31, 1999, the Company was in default of certain covenants, however, the Company subsequently received waivers for these defaults on January 20, 2000. As of October 31, 1999, the Company was utilizing $8,700,905 of this credit facility. The Company generated approximately $5,000,000 of positive cash flow from operating and investing activities for the year ended October 31, 1999, which was applied toward payments totaling approximately $5,800,000 to reduce short and long term debt and capital lease obligations. The Company intends to expand its laboratory operations through acquisitions and aggressive marketing while also diversifying into related medical fields through acquisitions. These acquisitions may involve cash, notes, common stock, and/or combinations thereof The Company has various employment and consulting agreements of up to seven years with commitments totaling approximately $5,700,000 [See Notes 10 and 12] and operating leases with commitments totaling approximately $4,500,000 (of which approximately $1,5600,000 and $1,600,000 are due during fiscal 2000) [See Note 12]. The Company's cash balances at October 31, 1999 totaled approximately $2,100,000 as compared to $2,800,000 at October 31, 1998. The Company believes that its cash position, the anticipated cash generated from future operations, the availability of its credit line with PNC Bank, the utilization of certificates of deposits maturing during the second quarter of fiscal year 2000 and the interest due thereupon, will meet its future cash needs. For the Fiscal Year Ended October 31, 1998 Working capital at October 31, 1998 was approximately $8,400,000 as compared to approximately $9,400,000 at October 31, 1997, a decrease of $1,100,000 during the twelve month period. In fiscal year 1998, the Company utilized $3,227,601 in cash for operating activities. This use of cash for operating activities resulted in an increase in accounts receivable of approximately $7,200,000 offset by the increase in accrued expenses and payables of approximately $2,600,000. The Company utilized $4,237,998 of cash for investing activities during fiscal year 1998. This consisted primarily of $4,000,000 of cash paid for Medilabs. Impact of Inflation ------------------To date, inflation has not had a material effect on the Company's operations. New Authoritative Pronouncements -------------------------------The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of Effective Date of FASB Statements No. 133." The Statement defers for one year the effective date of FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." The rule now will apply to all fiscal quarters of all fiscal years beginning after June 15, 2000. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other -----------------------------------------------------------------------------Note Regarding 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 the Company's actual results in future periods to be materially different from any future performance suggested herein. 19 comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The adoption of SFAS No. 137 is not expected to have a material impact on the Company's consolidated results of operation, financial position or cash flows. Item 7A. Quantitative and Qualitative Disclosure About Market Risk --------------------------------------------------------Not applicable. 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 20 PART III Item 10.- Directors and Executive Officers of the Registrant -------------------------------------------------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.............48 Executive Officer and Director Chairman of the Board, President, Chief Howard Dubinett..................48 Officer and Director Executive Vice President, Chief Operating Sam Singer.......................57 Chief Accounting Officer and Director Vice President, Chief Financial Officer, Frank DeVito.....................77 Director John Roglieri, M.D...............60 Director Gary Lederman, Esq...............65 Director 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 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 College of Physicians and Surgeons in 1977. Except for approximately 20 hours per month spent as Assistant Professor of Clinical Medicine and Assistant Attending Physician at Columbia University and Presbyterian Hospital and rendering medical services to the Uniformed Firefighters Association of New York City, Dr. Grodman devotes all of his working time to the business of the Company. Howard Dubinett has been the Executive Vice-President and Chief Operating Officer of the Company since its formation. He became a Director of the Company in April 1986. Prior to joining the Company, Mr. Dubinett was general manager of Union Prescription Service, Inc., a company which administered prescription drug plans. 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 financial activities of the Company. Prior to joining the Company, he was Controller for Sycomm Systems Corporation, a data processing and management consulting company, from 1981 to 1987. He received a B.A. degree from Strayer College and an M.B.A. from Rutgers University. Mr. Singer devotes all of his working time to the business of the Company. Frank DeVito became a Director of the Company in April 1986. Since 1970, Mr. DeVito has been Vice President of the New Jersey State AFL-CIO and from 1960 until December 1985 was President of AFL-CIO United Food and Commercial Workers, Local 1245. From 1981 through December 1985 Mr. DeVito was also President of United Food and Commercial Workers District Council of Metropolitan New York and Northern New Jersey, which was comprised of 35 local unions with approximately 150,000 members. 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. 21 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 Master's degree from Columbia University 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. Since 1992, he has been Corporate Medical Director of NYLCare, a managed care subsidiary of New York Life. He is a member of advisory boards to several pharmaceutical companies, a member of the Editorial Advisory Board of the journal Managed Care and a biographee of Who's Who in America. Gary Lederman, Esq. became a director of the Company in May 1997. He received his B.A. from Brooklyn College in 1954 and his J.D. 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. There are no family relationships between or among any directors or executive officers of the Company. The Company's Certificate of Incorporation provides for a staggered Board of Directors (the "Board") pursuant to which the Board is divided into three classes of directors and the members of only one class or one-third of the Board) are elected each year to serve a three-year term. Officers are elected by and hold office at the discretion of the Board of Directors. Key Personnel and Consultants ----------------------------The following key personnel and consultants make significant contributions to the Company's operations. Robert Rush, Ph.D (Age 59) has been employed by the Company since July 1993 as Vice President of Technical Operations. From 1989 to 1993, Dr. Rush was a Technical Director for National Health Laboratories, Inc., a national clinical laboratory. From 1988 to 1989 he was the Technical Director of Maryland Medical Laboratory and from 1975 to 1988 he was the Technical Director of Smith-Kline Beecham Clinical Laboratories, another national clinical testing laboratory, in Atlanta, Georgia. Dr. Rush also worked for the Technicon Instruments Corporation, a Tarrytown, New York manufacturer of laboratory equipment, from 1969 to 1972, as a Section Head in Clinical Chemistry. Dr. Rush is a registered Clinical Laboratory Director in the states of New Jersey, New York and Connecticut. He is board certified by the American Board of Clinical Chemistry. Dr. Rush received a B.A. degree in Chemistry from Hunter College in 1962 and M.S. and Ph.D. degrees in Biochemistry in 1964 and 1966 from Pennsylvania State University. Benita Ponda, M.D. (Age 54) has been employed by the Company since February, 1994 as Medical Director. She is certified by the American Board of Pathology in Clinical Pathology and Anatomical Pathology with a special qualification in Cytopathology. She holds a New York State Department of Health Certificate of Qualification for Laboratory Director. Dr. Ponda's professional appointments include Chief of Cytopathology and Associate Pathologist at New York Methodist Hospital, Brooklyn, New York (January 1992 to February, 1994); Associate Pathologist at Flushing Hospital and Medical Center, Flushing, New York (1981 to 1991) and Director of Laboratory at St. Mary's Hospital for Children (1985 - to date). She received M.B.B.S. degree (equivalent to M.D. in U.S.A.) from Bombay University, Bombay, India in 1970. Ayad Mudarris, Ph.D. (Age 48) has been employed by the Company since February 1996 as an Assistant Director of Technical Operation and Director of Toxicology. Dr. Mudarris has been a consultant to the Company since October 1994. From 1992 to 1994, Dr. Mudarris was a Technical Director for National Health Laboratories, a national clinical laboratory located in Cranford, New Jersey. From 1988 to 1992 he was Vice President and Director of Columbia Biomedical Laboratory, A SAMHSA (NIDA) certified forensic drug testing laboratory in Columbia, South Carolina, and from 1987 to 1988 as Scientific and Managing Director of Keystone Laboratory, a toxicology laboratory in Asheville, North Carolina. Dr. Mudarris is a registered Clinical Laboratory Director in the State of New 22 York. He is certified by the American Board of Bioanalysis as a Clinical Laboratory Director and by the National Registry of Clinical chemistry as a Clinical chemist. He received his B.S. degree in Pharmacy from Damascus University in 1975 and M.S. degree in Medical Technology from Long Island University in 1980 and Ph.D. degree in Biochemistry from the University of Arkansas for Medical Sciences in 1986. 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, the Company believes that with respect to fiscal 1999, its officers, directors and beneficial owners of more than 10% of its equity timely complied with all applicable Section 16(a) filing requirements. Item 11. - Executive Compensation ---------------------The following table sets forth information concerning the compensation paid or accrued by the Company during the year ended on October 31, 1999 to its Chief Executive Officer and its other executive officers who were serving as executive officers of the Company on October 31, 1999. All of the Company's group life, health, hospitalization or medical reimbursement plans, if any, do not discriminate in scope, terms or operation, in favor of the executive officers or directors of the Company and are generally available to all salaried employees. SUMMARY COMPENSATION TABLE Long-Term --------Annual Compensation ------------------- Compensation ------------ Other All Year Annual Restricted LTIP Other Ended Compen- Stock Options PayCompenName and Principal Position October 31, Salary Bonus sation Awards(1) (SARs) outs sation --------------------------------------------------------------------------------------------------Marc D. Grodman M.D. President and Chief Executive Officer 1999 $306,557 $125,000 $-0-0-01998 $305,653 $125,000 $-0-0-01997 $265,697 $90,000 $-0300,000 300,000(2) $-0- $-0$-0- $-0$-0- $-0- Howard Dubinett Executive Vice President and Chief Operating Officer 1999 1998 1997 $160,004 $157,622 $148,417 $60,000 $57,750 $43,000 $-0$-0$-0- -0-0-0-0240,000 213,334 $-0- $-0$-0- $-0$-0- $-0- Sam Singer Vice President and Chief Financial and Accounting Officer 1999 1998 1997 $158,002 $156,333 $147,455 $60,000 $57,750 $43,000 $-0$-0$-0- -0-0-0-0200,000 116,667 $-0- $-0$-0- $-0$-0- $-0- (1) In connection with their acceptance of the terms of new employment agreements, the Company's board of directors on May 13, 1997 authorized the issuance to Dr. Grodman, Mr. Dubinett and Mr. Singer of 300,000, 240,000 and 200,000 shares of Common Stock respectively. The shares are forfeitable in part in various amounts if the employee's employment is terminated "for cause" or at his option "without good reason" prior to May 1, 2000. See "Employment Agreements with Executive Officers" herein. (2) Does not include 604,078 shares of Common Stock issuable upon conversion of 604,078 shares of Senior Preferred Stock owned by Dr. Grodman, his wife and a corporation controlled by her (collectively the "Grodman Group"). On May 13, 1997 pursuant to a recapitalization, the previously outstanding Senior Preferred Stock owned by the Grodman Group convertible into an aggregate 604,078 shares of Common Stock on or before April 20, 2003 at a conversion price of $1.50 per share was retired in exchange for a new class of Senior Preferred Stock convertible into an aggregate 604,078 shares of Common Stock on or before May 1, 2007 at a conversion price of $.75 per share. See Item 13 herein. Employment Agreements with Executive Officers --------------------------------------------On May 13, 1997, Dr. Grodman agreed to the terms of a new employment agreement pursuant to which he will serve as president and chief executive officer devoting at least 90% of his working time to the business of the Company. The agreement provides (I) for a seven-year term commencing November 1, 1997; (ii) a minimum annual Base Compensation consisting of salary and bonus in the aggregate amount of $395,000 subject to increases based on increases in the Consumer Price Index as well as increases at the discretion of the board of directors; (iii) typical health insurance coverage and an initial $2,000,000 face amount of "split dollar" life insurance insuring Dr. Grodman's life and payable to his estate (excluding benefits required to be paid to the Company pursuant to the split dollar plan) with $2,000,000 of additional coverage to be applied for, which was obtained during fiscal 1999; (iv) the 23 leasing of an automobile for his use; (v) participation in fringe benefit, bonus, pension, profit sharing, and similar plans maintained for the Company's employees; (vi) disability benefits; (vii) certain termination benefits; and (viii) in the event of termination due to a change in control of the Company, a severance payment equal to 2.99 times Dr. Grodman's average annual compensation during the preceding five years. In consideration for Dr. Grodman's acceptance of the terms of the employment agreement, the board of directors authorized the issuance to Dr. Grodman of (a) 300,000 shares of the Company's Common Stock, partially subject to forfeiture, (b) five-year incentive stock options ("ISOs") exercisable to purchase 100,000 shares of Common Stock at $.790625 per share, and (C) ten-year non-qualified stock options ("NQOs") exercisable to purchase 200,000 shares of Common Stock at $.71875 per share. The ISOs are only exercisable while Dr. Grodman is employed by the Company. The NQOs expire if Dr. Grodman's employment agreement is terminated by the Company "For Cause" or at his option, "Without Good Reason." See "Employee Incentive Stock Option Plan." The 300,000 shares of Common Stock issued to Dr. in part on the following basis if his employment Company "For Cause" or at Dr. Grodman's option "Without Good Reason." Grodman are forfeitable agreement is terminated by the If Termination "For Cause" or "Without Good Reason" Occurs During the Following Number of Shares Periods Forfeited ------------------------------------------------May 1, 1997 through April 30, 1998 May 1, 1998 through April 30, 1999 May 1, 1999 through April 30, 2000 225,000 shs. 150,000 shs. 75,000 shs. Also on May 13, 1997, Mr. Dubinett agreed to the terms of a new employment agreement pursuant to which he will serve as executive vice president and chief operating officer of the Company. The agreement provides (I) for a five and one-half year term commencing May 1, 1997; (ii) a minimum annual Base Compensation commencing November 1, 1997 consisting of salary and bonus in the aggregate amount of $220,000 subject to increases based on increases in the Consumer Price Index as well as increases at the discretion of the board of directors; (iii) typical health insurance coverage and $500,000 face amount of "split dollar" life insurance insuring Mr. Dubinett's life and payable to his estate (excluding benefits required to be paid to the Company pursuant to the split dollar plan)which amount was increased to $1,000,000 during fiscal 1999; (iv) the leasing of an automobile for his use; (v) participation in fringe benefit, bonus, pension, profit sharing, and similar plans maintained for the Company's employees; (vi) disability benefits; (vii) certain termination benefits; and (viii) 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. In consideration for Mr. Dubinett's acceptance of the terms of the employment agreement, the board of directors authorized the issuance to Mr. Dubinett of (a) 240,000 shares of the Company's Common Stock, partially subject to forfeiture and (b) ten-year ISOs exercisable to purchase 60,000 shares of Common Stock at $.71875 per share. The ISOs are only exercisable while Mr. Dubinett is employed by the Company. The 240,000 shares of Common Stock issued to Mr. Dubinett. are forfeitable in part on the following basis if his employment agreement is terminated by the Company "For Cause" or at Mr. Dubinett's option "Without Good Reason." 24 If Termination "For Cause" or "Without Good Reason" Occurs During the Following Number of Shares Periods Forfeited -----------------------------------------------------May 1, 1997 through April 30, 1998 May 1, 1998 through April 30, 1999 May 1, 1999 through April 30, 2000 180,000 shs. 120,000 shs. 60,000 shs. Also on May 13, 1997, Mr. Singer agreed to the terms of a new employment agreement pursuant to which he will serve as vice president and chief financial officer of the Company. The agreement provides (I) for a five and one-half year term commencing May 1, 1997; (ii) a minimum annual Base Compensation commencing November 1, 1997 consisting of salary and bonus in the aggregate amount of $220,000 subject to increases based on increases in the Consumer Price Index as well as increases at the discretion of the board of directors; (iii) typical health insurance coverage and $400,000 face amount of "split dollar" life insurance insuring Mr. Singer's life and payable to his estate (excluding benefits required to be paid to the Company pursuant to the split dollar plan) which amount was increased to $800,000 in November 1999; (iv) the leasing of an automobile for his use; (v) participation in fringe benefit, bonus, pension, profit sharing, and similar plans maintained for the Company's employees; (vi) disability benefits; (vii) certain termination benefits; and (viii) 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. In consideration for Mr. Singer's acceptance of the terms of the employment agreement, the board of directors authorized the issuance to Mr. Singer of (a) 200,000 shares of the Company's Common Stock, partially subject to forfeiture and (b) ten-year ISOs exercisable to purchase 50,000 shares of Common Stock at $.71875 per share. The ISOs are only exercisable while Mr. Singer is employed by the Company. The 200,000 shares of Common Stock issued to Mr. Singer are forfeitable in part on the following basis if his employment agreement is terminated by the Company "For Cause" or at Mr. Singer's option "Without Good Reason." If Termination "For Cause" or "Without Good Reason" Occurs During the Following Number of Shares Periods Forfeited -------------------------------------- -------------------May 1, 1997 through April 30, 1998 May 1, 1998 through April 30, 1999 May 1, 1999 through April 30, 2000 150,000 shs. 100,000 shs. 50,000 shs. Employee Stock Option 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 provides 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 may be designated as options which qualify for incentive stock option treatment ("ISOs") under Section 422 of the Code, or options which do not so qualify ("NQOs"). The 1989 Plan also grants the Board or a Stock Option Committee designated by the Board, the discretion to grant stock appreciation rights ("SARs") in connection with, or independent of, any grant of options under the 1989 Plan. SARs give the holder the right to receive from the Company upon exercise an amount equal to the excess of the aggregate fair market value on the date of exercise of the number of shares of Common Stock as to which SARs are being exercised over the aggregate exercise price for those shares payable either in cash or Common Stock in the discretion of the Board or the Stock Option Committee. 25 The 1989 Plan is administered by the Board or by a Stock Option Committee designated by the Board of Directors. The Board or the Stock Option Committee, as the case may be, has the discretion to determine the eligible employees to whom, and the times and the price at which, options will be granted; whether such options shall be ISOs or NQOs; the periods during which options will be exercisable; and the number of shares subject to each option. The Board or Committee shall have full authority to interpret the 1989 Plan and to establish and amend rules and regulations relating thereto. Under the 1989 Plan, the exercise price of an option designated as an ISO 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 designated as an ISO is granted to a 10% shareholder (as defined in the 1989 Plan) such exercise price shall be at least 110% of such fair market value. Exercise prices of NQOs options may 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 may not exceed $100,000. As described above, on May 13, 1997, the Board of Directors granted five-year ISOs under the Plan to Dr. Grodman, exercisable to purchase 100,000 shares of the Company's Common Stock at an exercise price of $.790625 per share (equal to 110% of the last sale price for the Common Stock on NASDAQ on May 12, 1997). The board also granted ten-year ISOs under the Plan to Mr. Dubinett and Mr. Singer exercisable to purchase 60,000 shares and 50,000 shares of Common Stock respectively at an exercise price of $.71875 per share (equal to the last sale price for the Common Stock on NASDAQ on May 12, 1997). In addition, the board granted ten-year NQOs to Dr. Grodman, exercisable to purchase 200,000 shares of Common Stock at an exercise price of $.71875 per share. At the same May 3, 1997 directors' meeting, in order to improve employee morale, the board canceled all other outstanding ISOs exercisable to purchase an aggregate 448,710 shares of Common Stock at exercise prices ranging from $1.3434 to $3.00 per share, and granted new ten-year ISOs under the Plan to 23 employees exercisable to purchase an aggregate 448,710 shares of Common Stock at an exercise price of $.71875 per share. Included in this grant were ISOs issued to Mr. Dubinett and Mr. Singer exercisable to purchase 153,334 shares and 116,667 shares respectively. (These ISOs replaced ISOs previously granted to said two individuals to purchase 153,334 shares and 116,667 shares respectively at exercise prices ranging from $1.3125 to $1.50 per share.) Also on May 13, 1997, the Board of Directors granted five-year NQOs to 31 employees, exercisable to purchase an aggregate 136,100 shares of Common Stock at $.71875 per share but only while the optionee was employed by the Company. On May 13, 1997, the board also issued five-year warrants to each of its three outside directors, exercisable to purchase 10,000 shares (30,000 in the aggregate) of Common Stock at an exercise price of $.71875 per share, but only while serving as a director. At the same time, the board reduced the exercise price on warrants held by one outside director, John Roglieri, exercisable to purchase 23,334 shares ranging from $3.00 per share to $3.75 per share to $.71875 per share and issued five-year warrants to another outside director, Gary Lederman, exercisable to purchase 5,200 shares at $.71875 per share. No stock options were granted during fiscal 1998. On January 19, 1999, the Board of Directors granted five-year NQOs to 15 employees exercisable to purchase an aggregate 286,000 shares of Common Stock at an exercise price of $1.00 per share (the last sale price for the Common Stock on NASDAQ on the trading day immediately preceding the meeting) but only while the optionee was employed by the Company. On June 30, 1999, the Board ratified the grant of five-year NQOs to three employees, exercisable to purchase an aggregate 150,000 shares of Common Stock at prices ranging from $.594 to $.719 per share but only while the optionee was employed by the Company. The option prices were based on the market prices for the Common Stock on the respective dates when employment commenced for each of the three employees. See Note 9 of Notes to the Consolidated Financial Statements. The following table sets forth certain information concerning unexercised options for each of the executive officers named in the "Summary Compensation Table." No options were exercised by any of such individuals in fiscal 1999. 26 1999 Fiscal Year-End Option Values ---------------------------------Number of Unexercised Options At 1999 Fiscal Year-End In-The-Money Name Exercisable -------------Unexercisable ------------Marc D. Grodman 200,000 100,000 -0Howard Dubinett Sam Singer 213,334 166,667 Value of Unexercised Options at 10/31/99 ------------------- $ -017,813 $ 50,000 -0-0- $ $ 53,333 41,667 Directors' Compensation ----------------------Directors who are not employees of the Company are also paid a $1,000 per quarter director's fee. Item 12. - Security Ownership of Certain Beneficial Owners and Management -------------------------------------------------------------The following table sets forth information as of January 21, 1999 with respect to the ownership of Common Stock by (I) each person known by the Company to be the beneficial owner of more than 5% of its outstanding Common Stock, (ii) each director of the Company, (iii) each executive officer of the Company, and (iv) all directors and executive officers as a group. The percentages have been calculated on the basis of treating as outstanding for a particular holder, all shares of Common Stock outstanding on said date owned by such holders and all shares of Common Stock issuable to such holder in the event of exercise or conversion of outstanding options, warrants and convertible securities owned by such holder at said date which are exercisable or convertible within 60 days of such date. Shares of Name and Address of Beneficial Owner ---------------- Common Stock Beneficially Owned(1) --------------------- Directors and Executive Officers* Marc D. Grodman(2)...........................1,673,845 Howard Dubinett (3)............................477,001 Sam Singer(4)..................................377,667 Frank DeVito(5)................................ 10,202 John Roglieri(6)............................... 31,667 Gary Lederman (7).............................. 25,200 Executive Officers and directors.............2,595,582 as a group (six persons)(2)(3)(4)(5)(6)(7) Percentage Ownership --------18.6% 5.7% 4.6% 27.5% * The address of all of the Company's directors and ex ecutive officers is c/o the Company, 481 Edward H. Ross Drive, Elmwood Par k, New Jersey 07407. 27 (1) Except 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 608,100 shares owned directly by Dr. Grodman, 549,678 shares issuable upon conversion of Senior Preferred Stock and 300,000 shares issuable upon exercise of options. Also includes 121,667 shares owned directly and 54,400 shares issuable upon conversion of Senior Preferred Stock held by Dr. Grodman's wife, Pam Grodman, and a Company controlled by her and 40,000 shares owned by their minor children. Dr. Grodman disclaims beneficial ownership of these 236,067 shares. (3) Includes 263,667shares exercise of options. owned directly, and 213,334 shares issuable upon (4) Includes 211,000 shares owned directly, exercise of options. and 166,667 shares issuable upon (5) Includes 202 shares exercise of warrants. owned (6) Includes 1,667 shares exercise of warrants. (7) directly owned and 10,000 shares issuable upon directly and 30,000 shares issuable upon Includes 25,200 shares owned directly. Item 13. - Certain Relationships and Related Transactions ----------------------------------------------In July 1989, the Company discontinued the operation of its Med-Mobile Division. At such time, Dr. Grodman, as the Associated Physician, was indebted to the Company in the amount of $235,354 in connection with the operation of this division. Pursuant to an October 1, 1989 Settlement Agreement, Dr. Grodman issued a $235,354 promissory note to the Company bearing interest at 10% per annum and payable at the rate of $50,000 per annum in payment of this indebtedness. On April 30, 1992, the Board of Directors amended this agreement, in consideration for Dr. Grodman's personal guarantee of the Company's $2,500,000 financing arrangement with Towers Financial Corporation, suspending all rental and interest charges for periods subsequent to November 1, 1991. As of October 31, 1999, $138,518 in outstanding principal, interest and van rentals was due from Dr. Grodman. On April 20, 1993, in order to facilitate the Company's 1993 proposed public offering, Dr. Grodman canceled his pro-rata option contained in his employment contract and all other outstanding options and warrants to purchase shares of Common Stock held by Dr. Grodman, his wife and an affiliated entity (the "Grodman Group") exercisable to purchase an aggregate 604,078 shares of Common Stock at prices ranging from $1.4438 to $1.50 or an average price of $1.47 per share, in consideration for the issuance to the Grodman Group of 604,078 shares of a new class of senior preferred stock, $.10 par value per share ("Senior Preferred Stock"). Each share of Senior Preferred Stock had the same voting rights (one vote per share), dividend rights and liquidation rights as each share of Common Stock and for a period of 10 years after issuance, was convertible into one share of Common Stock upon payment of a conversion price of $1.50 per share. The 604,078 shares of Senior Preferred Stock were issued to the Grodman Group on August 23, 1993. On May 13, 1997 pursuant to a recapitalization, the Senior Preferred was retired in exchange for a new class of Senior Preferred Stock issued to the Grodman Group. The new Senior Preferred Stock is convertible into an aggregate 604,078 shares of Common Stock on or before May 1, 2007 at a conversion price of $.75 per share and has the same voting rights (one vote per share), dividend rights and liquidation rights as each share of Common Stock. 28 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 10-KSB -----------------------------------------------------------------1. Financial Statements The following financial statements of the Company are included in Part II, Item 7 Page to Page -----------Report of Independent Certified Public Accountants F-1 Balance Sheet - October 31, 1999 and 1998 F-2..F-3 Statement of OperationsYears ended October 31, 1999, 1998 and 1997 F-4 Statement of Shareholders' Equity Years ended October 31, 1999, 1998 and 1997 F-5 Statement of Cash Flows Years ended October 31, 1999, 1998 and 1997 F-6..F-7 Notes to Financial Statements- F-8..F-23 Schedule II Years ended October 31, 1999, 1998 and 1997 2. F-24.F-25 Reports on Form 8-K No reports on Form 8-K have been filed 31, 1999. 3. Exhibits Exhibit No. during the Quarter ended Item October Incorporated by Reference to 3.1* Amended and Restated Certificate of Incorporation dated November 15, 1989 (A) 3.1.1* Amendment to Certificate of Incorporation dated October 4, 1991 (authorizing one-for-10 reverse stock split) (B) 3.1.2* Amendment to Certificate of Incorporation dated August 23, 1993 (authorizing one-for-three reverse stock split) (C) 3.1.3 Amendment to Certificate of Incorporation dated March 23, 1998 (creating Series A Senior Preferred Stock) 3.1.4 Amendment to Certificate of Incorporation dated March 31, 1998 (creating Series A Junior Participating Preferred Stock) 3.2* By-laws (D) 4.1* Form of Common Stock Certificate, $.01 par value (C) 10.1 Lease Agreement for Elmwood Park, New Jersey Premises, as in effect at October 31, 1999 10.2 Employment Agreement between the Company and Marc Grodman as in effect at December 31, 1999 29 10.3 Employment Agreement between the Company and Howard Dubinett as in effect at December 31, 1999 10.4 Employment Agreement between the Company and Sam Singer as in effect at December 31, 1999 10.5* The Company's 1989 Stock Option Plan (B) 10.6* Acquisition Agreement made as of April 9, 1998 for the acquisition by the Company of all of the outstanding capital stock of Medilabs, Inc. (E) 10.7* Rights Agreement dated as of March 31, 1998 including Exhibits thereto between the Company and American Stock Transfer & Trust Company as Rights Agent (F) 10.8 Asset Sale/Purchase Agreement made as of December 2, 1999 for the acquisition by the Company of the WEB Business of the Medical Marketing Group, Inc. 10.9 Asset/Sale Purchase Agreement made as of December 14, 1999 for the acquisition by the Company's wholly-owned BRLI No. 1 Acquisition Corp. subsidiary of the Health Ford Business of Right Body Foods, Inc. 10.10 Employment Agreement between the Company and Rebecca Klafter, chief executive officer of Right Body Foods, Inc., dated December 14, 1999 21 Subsidiaries of the Company The following are the Company's two wholly-owned subsidiaries: Name under which it Name ---- State of Incorporation ---------------------- Medilabs, Inc. BRLI No. 1 Acquisition Corp. New York New Jersey Conducts Business ----------------Medilabs Right Body Foods 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. (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 report on Form 10KSB for the year ended October 31, 1992. Company's annual (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 Form 8-K for April 22, 1998. Company's report on (F) Incorporated by reference to exhibit filed with the Form 8-A dated March 31, 1998. Company's report on 30 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:January 31, 2000 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 31, 2000 /S/ Howard Dubinett -----------------------Howard Dubinett Executive Vice President, Chief Operating Officer and Director January 31, 2000 /S/ Sam Singer -----------------------Sam Singer Vice President, Chief Financial Officer, Chief Accounting Officer and Director January 31, 2000 /S/ Frank DeVito -----------------------Frank DeVito Director January 31, 2000 /S/ John Roglieri -----------------------John Roglieri Director January 31, 2000 /S/ Gary Lederman -----------------------Gary Lederman Director January 31, 2000 31 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of Bio-Reference Laboratories, Inc. Elmwood Park, New Jersey We have audited the accompanying consolidated balance sheets of Bio-Reference Laboratories, Inc. and its subsidiary as of October 31, 1999 and 1998, 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, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. 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. We believe that our audits provide a reasonable basis for our opinion. 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. and its subsidiary as of October 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended October 31, 1999, in conformity with generally accepted accounting principles. MOORE STEPHENS, P. C. Certified Public Accountants. Cranford, New Jersey January 7, 2000 [Except for Note 22B as to which the date is January 26, 2000 and Note 22C as to which the date is January 19, 2000] F-1 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY -----------------------------------------------------------------------------CONSOLIDATED BALANCE SHEETS -----------------------------------------------------------------------------October 31, ----------1 9 9 9 1 9 9 8 ------------Assets: Current Assets: Cash and Cash Equivalents Accounts Receivable - Net Inventory Certificates of Deposit - Restricted Other Current Assets Deferred Tax Asset ---------------------- 2,128,474 18,615,496 572,279 -404,124 -- $ 2,784,147 20,749,696 587,101 3,646,250 1,100,867 344,000 21,720,373 29,212,061 41,740 3,466,574 1,152,599 550,554 41,740 3,263,101 429,993 508,630 Totals - At Cost Less: Accumulated Depreciation ---------------------- 5,211,467 3,039,128 4,243,464 2,022,928 Property and Equipment - Net ---------------------- 2,172,339 2,220,536 -138,518 278,619 5,396,863 1,764,740 846,546 33,750 187,118 303,354 5,746,601 2,507,149 567,769 8,425,286 9,345,741 $ 32,317,998 $40,778,338 Total Current Assets ---------------------Property and Equipment: Automobiles Medical Equipment Leasehold Improvements Furniture and Fixtures ---------------------- Other: Certificate of Deposit - Restricted Due from Related Party Deposits Goodwill Intangible Assets Other Assets ---------------------Total Other ------------ ----------- Total Assets ============ =========== The Accompanying Statements. F-2 Notes are an Integral $ Part of These Consolidated Financial BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY -----------------------------------------------------------------------------CONSOLIDATED BALANCE SHEETS ------------------------------------------------------------------------------ October 31, ----------1 9 9 9 ------- 1 9 9 8 ------- Liabilities and Shareholders' Equity: Current Liabilities: Accounts Payable Accrued Salaries and Commissions Accrued Expenses Current Maturities of Long-Term Debt [Net of Discount] Notes Payable - Banks $ 5,540,787 1,349,175 849,463 1,215,671 8,700,905 $ 4,379,961 1,367,785 625,814 2,071,058 12,000,000 308,251 304,098 229,232 173,962 18,268,350 20,847,812 2,000,000 680,538 3,306,617 400,975 2,680,538 3,707,592 Capitalized Lease Obligation - Short-Term Portion Taxes Payable ---------------------Total Current Liabilities ---------------------Long-Term Liabilities: Long-Term Debt Less Current Maturities Capitalized Lease Obligations - Long-Term Portion ---------------------Total Long-Term Liabilities ---------------------Commitments and Contingencies ---------------------- -- Shareholders' Equity: Preferred Stock, Par Value $.10 Per Share, Authorized 1,062,589 Shares; None Issued -- Series A - Senior Preferred Stock, Par Value $.10 Per Share, Authorized, Issued and Outstanding 604,078 Shares 60,408 Series A - Junior Participating Preferred Stock, Par Value $.10 Per Share, Authorized 3,000 Shares; None Issued Common Stock, Par Value $.01 Per Share, Authorized 18,333,333 Shares; Issued and Outstanding 7,700,777 and 7,212,910 Shares at October 31, 1999 and 1998, Respectively -- -60,408 -- -- 77,008 72,129 Additional Paid-in Capital 23,294,673 Accumulated [Deficit] ---------------------- (11,613,433) (6,634,985) Totals Deferred Compensation ---------------------- 11,818,656 (449,546) 16,495,567 (272,633) Total Shareholders' Equity ---------------------- 11,369,110 16,222,934 $ 32,317,998 $40,778,338 Total Liabilities and Shareholders' Equity ============ =========== The Accompanying Statements. Notes are an Integral Part of These Consolidated Financial 22,998,015 F-3 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY -----------------------------------------------------------------------------CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------------------------------------------------ Y e a r s e n d e d ----------------------------------------O c t o b e r 3 1, ----------------------------------------1 9 9 9 1 9 9 8 1 9 9 7 ------------------- Net Revenues ------------ $ 53,856,414 $ 46,553,730 856,668 14,096,914 6,974,857 8,921,898 704,293 11,675,839 5,567,394 7,110,482 390,953 8,595,078 4,777,325 5,575,918 30,850,337 25,058,008 19,339,274 23,006,077 21,495,722 19,320,910 974,529 15,677,788 6,855,221 2,924,371 935,370 13,410,446 6,084,941 -- 798,365 11,346,007 5,291,507 -- Total General and Administrative Expenses -------------------------------- 26,431,909 20,430,757 17,435,879 [Loss] Income from Operations -------------------------------- (3,425,832) 1,064,965 1,885,031 333,900 2,025,689 ------------ Cost of Services: Depreciation and Amortization Employee Related Expenses Reagents and Laboratory Supplies Other Cost of Services -------------------------------Total Cost of Services ----------------------- ---------- Gross Profit ------------ ---------- ------------ $38,660,184 ----------- General and Administrative Expenses: Depreciation and Amortization Other General and Administrative Expenses Provision for Doubtful Accounts Expenses of Impaired Assets -------------------------------- Non-Recurring Gain on Sale of Intangible Assets -------------------------------Other [Income] Expense: Interest Expense Interest Income Other Income ----------------------- ---------- Total Other Expense - Net ----------------------- ---------- -- 1,465,765 (265,069) (15,380) [Loss] Income Before Income Taxes Provision for Income Tax Expense [Benefit] -------------------------------Net [Loss] Income ============ ============ ========== Net [Loss] Income Per Share ============ ============ ========== Net [Loss] Income Per Share - Assuming Dilution ============ ============ ========== 1,280,737 (440,155) -- 1,124,432 (274,887) -- 1,185,316 840,582 849,545 (4,611,148) 558,283 3,061,175 367,300 (38,300) $ 596,583 $ $ .08 $ $ (4,978,448) (.68) (.68) $ .07 (138,740) $3,199,915 $ $ .48 .43 The Accompanying Statements. F-4 Notes are an Integral Part of These Consolidated Financial BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY -----------------------------------------------------------------------------CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY -----------------------------------------------------------------------------Series A Additional Total Senior Preferred Stock Common Stock Paid-in Accumulated Deferred Shareholders' Shares Amount Shares Amount Capital [Deficit]Compensation Equity Balance - October 31, 1996 604,078 $60,408 6,300,280 $63,003 $22,433,297 $(10,431,483) $ (22,217) $12,103,008 Shares Issued for Deferred Compensation -- -- 815,000 8,150 337,919 -- (346,069) -- Warrants Issued for Deferred Compensation -- -- -- -- 13,423 -- (13,423) -- Shares Issued in Connection with an Acquisition Agreement -- -- 54,096 541 127,320 -- -- 127,861 Shares Released from Escrow -- -- -- -- 55,201 -- -- 55,201 Amortization of Deferred Compensation -- -- -- -- -- -- 38,658 38,658 3,199,915 -- 3,199,915 Net Income for the Year -------- --------------Balance - October 31, 1997 ------- -------------- ------------ --------- 604,078 60,408 7,169,376 71,694 ------------ 22,967,160 (7,231,568) (343,051) 15,524,643 Amortization of Deferred Compensation -- -- -- -- -- -- 70,418 70,418 Shares Issued on Exercise of Warrants -- -- 43,534 435 30,855 -- -- 31,290 596,583 -- 596,583 Net Income for the Year -------- --------------Balance - October 31, 1998 ------- -------------- ------------ --------- 604,078 60,408 7,212,910 72,129 ------------ 22,998,015 (6,634,985) (272,633) Shares Issued in Lieu of Compensation -- -- 25,000 250 25,688 -- Shares Issued for Deferred Compensation -- -- 490,000 4,900 270,970 -- Escrow Shares Cancelled -- -- (27,133) (271) -- -- -- Amortization of Deferred Compensation -- -- -- -- -- 98,957 -- 25,938 (275,870) 98,957 604,078 $60,408 7,700,777 $77,008 $23,294,673 $(11,613,433) $(449,546) $11,369,110 ======= =========== ============ ========= =========== F-5 Consolidated Financial -- (271) Balance - October 31, 1999 ======== ======= ========= Part of These (4,978,448) -- ------- Notes are an Integral ------------ -- Net [Loss] for the Year -------- --------------- The Accompanying Statements. -------------- ------------ --------- 16,222,934 (4,978,448) BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY -----------------------------------------------------------------------------CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------------------------------------------------ Y e a r s e n d e d O c t o b e r 3 1, 1 9 9 9 1 9 9 8 ------------- 1 9 9 7 ------- Operating Activities: Net [Loss] Income -------------------------------Adjustments to Reconcile Net [Loss] Income to Net Cash Provided by [Used for] Operating Activities: Depreciation and Amortization Amortization of Deferred Compensation Amortization of Deferred Interest Amortization Reversal Due to Legal Settlement Expenses of Impaired Assets Provision for Doubtful Accounts Other Nonrecurring Gain on Sale of Intangible Assets Deferred Income Taxes Changes in Assets and Liabilities [Net of Effects from Acquisitions]: [Increase] Decrease in: Accounts Receivable Other Assets Inventory Other Current Assets $ (4,978,448) 1,831,197 98,957 92,000 -2,924,371 6,855,221 25,667 -344,000 (6,721,021) (278,777) 14,822 696,743 Increase [Decrease] in: Accounts Payable and Accrued Expenses Taxes Payable -------------------------------Total Adjustments ----------------------- Investing Activities: Acquisition of Property and Equipment Purchase of Certificate of Deposit - Restricted Maturities of Certificate of Deposit - Restricted Cash Paid for Medilabs, Inc. Acquisition Cash Acquired During Acquisition Reduction [Additions] of Deposits Repayment of Related Party Receivable Payment for Acquisition of Intangible Assets Proceeds from Sale of Intangible Assets -------------------------------Net Cash - Investing Activities - Forward F-6 596,583 $3,199,915 1,639,663 70,418 53,667 (56,859) -6,084,941 -(333,900) (86,000) 1,189,318 38,658 ---5,291,507 -(2,025,689) (258,000) (10,990,642) (120,866) 117,625 636,478 (7,509,627) (105,866) (59,493) 142,504 740,865 130,136 (642,123) (196,586) (210,861) 136,030 6,754,181 (3,824,184) (3,371,519) ---------- Net Cash - Operating Activities - Forward -------------------------------- The Accompanying Statements. $ Notes are an Integral Part of These $ 1,775,733 (3,227,601) (171,604) (392,102) -3,680,000 --24,735 48,600 --- (194,558) (3,680,000) 3,680,000 (4,000,000) 86,412 (3,985) 27,000 (152,867) -- (143,613) (3,680,000) 3,680,000 --6,907 20,800 (44,375) 4,600,000 3,361,233 Consolidated $ (4,237,998) Financial $4,439,719 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY -----------------------------------------------------------------------------CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------------------------------------------------ Y e a r s e n d e d O c t o b e r 3 1, 1 9 9 9 1 9 9 8 ------------- 1 9 9 7 ------- Net Cash - Operating Activities - Forwarded -------------------------------- $ 1,775,733 $ (3,227,601) 3,361,233 (4,237,998) $4,439,719 -(2,254,004) (239,540) -(3,299,095) --- 4,000,000 (1,001,368) (178,954) (1,339) 4,386,292 852,000 31,290 -(739,895) (216,448) (234,390) (2,317,031) --- (5,792,639) 8,087,921 (3,507,764) (655,673) 622,322 760,351 Net Cash - Investing Activities - Forwarded -------------------------------Financing Activities: Proceeds from Long-Term Debt Payments of Long-Term Debt Payments of Capital Lease Obligations Payments of Subordinated Notes Payable [Decrease] Increase in Revolving Line of Credit Decrease in Restricted Cash Proceeds from Exercise of Warrants -------------------------------Net Cash - Financing Activities -------------------------------Net [Decrease] Increase in Cash and Cash Equivalents Cash and Cash Equivalents - Beginning of Years -------------------------------Cash and Cash Equivalents - End of Years ============ ============ ========== 2,784,147 $ 2,128,474 Supplemental Disclosures of Cash Flow Information: Cash paid during the years for: Interest $ 1,437,602 Income Taxes $ 33,736 2,161,825 $ $ $ 2,784,147 1,179,533 120,407 Supplemental Schedule of Non-Cash Investing and Financing Activities: During 1997, the Company incurred four capital lease obligations totaling $252,279 in connection with the acquisition of medical equipment. In fiscal 1997, the Company issued debt in the amount of $108,000 in connection with the acquisition of a customer list related to a 1994 agreement. During 1998, the Company incurred two capital lease obligations $93,143 in connection with the acquisition of medical equipment. During 1999, the Company incurred seven capital lease $598,122 in connection with the acquisition of medical improvements. totaling obligations totaling equipment and leasehold In May 1999, the Company recorded $625,000 in intangible expenses related to an employment agreement. assets and accrued [See Notes 7, 13, 16 and 22] for additional non-cash transactions] The Accompanying Statements. F-7 Notes are an Integral Part of These Consolidated $ (171,604) Financial 1,401,474 $2,161,825 $1,118,540 $ 44,136 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------ [1] Organization and Business Bio-Reference Laboratories, Inc. was incorporated on December 21, 1981 to initially engage in the business of developing and marketing on-site medical screening examinations. Since February 1987, its emphasis has been in clinical laboratory operations, principally servicing the greater New York metropolitan area and providing specialty services throughout the United States. Bio-Reference Laboratories, Inc. and its wholly-owned subsidiary [the "Company"] markets its clinical laboratory testing services directly to physicians, hospitals, clinics, and other health facilities. [2] Summary of Significant Accounting Policies Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated. The operations of GenCare Biomedical Research Corporation are included in operations from January 1, 1995 through September 30, 1997 [See Note 20]. The operations of Medilabs, Inc. are included in operations commencing April 9, 1998 [See Note 16]. Revenue Recognition - Revenues are recognized at the time the services are performed. Revenues on the statements of operations are as follows: Y e a r s e n d e d ---------------------------------O c t o b e r 3 1, ---------------------------------1 9 9 9 1 9 9 8 1 9 9 7 ------------------Gross Revenues ------------ ------------ ----------Contractual Adjustments and Discounts: Medicare/Medicaid Portion Other ------------ ------------ ---------Total Contractual Adjustments and Discounts ------------ ------------ ---------Net Revenues ------------ $125,958,897 $102,351,588 $80,462,096 38,779,145 33,323,338 72,102,483 33,064,535 22,733,323 55,797,858 23,090,659 18,711,253 41,801,912 $ 53,856,414 $ 46,553,730 $38,660,184 ============ ============ =========== Contractual Credits and Provision for Doubtful Accounts - An allowance for contractual credits is determined based upon a review of the reimbursement policies and subsequent collections for the different types of receivables. An allowance for doubtful accounts is determined based upon a percentage of total receivables. The aggregate allowance, which is shown net against accounts receivable, was $15,312,935, $13,494,475 and $8,564,436 as of October 31, 1999, 1998 and 1997, respectively. Inventory - Inventory is stated at the lower of cost [on a first-in, basis] or market. Inventory consists primarily of clinical supplies. first-out Stock Options Issued to Employees - The Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," for financial note disclosure purposes and continues to apply the intrinsic value method of Accounting Principles Board ["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees," for financial reporting purposes. Deferred Income Taxes - Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. F-8 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2 ------------------------------------------------------------------------------ [2] Summary of Significant Accounting Policies [Continued] Deferred Income Taxes [Continued] - Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Net and and the Income Per Share - Basic EPS is based on average common shares outstanding diluted EPS includes the effects of potential common stock, such as, options warrants, if dilutive. Securities that could potentially dilute earnings in future are listed in Notes 9 and 22. Impairment - Certain long-term assets of the Company including goodwill are reviewed at least annually as to whether their carrying value has become impaired, pursuant to guidance established in Statement of Financial Accounting Standards ["SFAS"] No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Management considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations [undiscounted and without interest charges]. If impairment is deemed to exist, the assets will be written down to fair value. Management also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. During the year ended October 31, 1999, an impairment of $2,924,371 was recorded in connection with assets acquired for the hemo-dialysis business. The breakdown of this expense was an increase in the allowance for related accounts receivable of approximately $2,000,000 and the write down of goodwill of approximately $900,000 as a result of management's intent to no longer pursue the hemo-dialysis business. Accordingly, the Company has made revisions to future endeavors in this area. Property and Equipment - Property and equipment are carried at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the respective assets which range from 2 to 15 years. Leasehold improvements are amortized over the life of the lease, which is approximately five years. The statements of operations reflect depreciation expense related to property and equipment of $1,038,421, $820,226 and $419,462 for the years ended October 31, 1999, 1998 and 1997, respectively. On sale or retirement, the asset cost and related accumulated depreciation or amortization are removed from the accounts, and any related gain or loss is reflected in income. Repairs and maintenance are charged to expense when incurred. Use of Estimates - 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 reporting period. Actual results could differ from those estimates. Goodwill - Goodwill represents the excess of the cost of companies acquired over the fair value of their net assets at dates of acquisition and is being amortized on the straight-line method over 20 years. The statements of operations reflect amortization expense related to goodwill for the years ended October 31, 1999, 1998 and 1997 of $349,738, $254,022 and $203,490, respectively. The balance sheet reflects accumulated amortization of $1,597,767 and $1,248,029 as of October 31, 1999 and 1998, respectively. Intangible Assets - Intangible assets are amortized using the straight-line method. The statements of operations reflect amortization expense related to intangible assets of $443,038, $565,415 and $566,366 for the years ended October 31, 1999, 1998 and 1997, respectively. The balance sheet reflects accumulated amortization of $2,271,436 and $2,173,034 as of October 31, 1999 and 1998, respectively. F-9 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3 -----------------------------------------------------------------------------[2] Summary of Significant Accounting Policies [Continued] Intangible Assets [Continued] - A summary is as follows: Accumulated Net of Accumulated Amortization Amortization October 31, October 31, Intangible Asset Life in Years Cost 1 9 9 9 ------------------------------------Customer Lists Covenants Not-to-Compete Employment Agreement Costs Related to Acquisitions Patent ----------- ----------- 20 3 - 7.5 5 - 7 $ 1,449,202 1,020,000 1,025,000 1 - 20 17 ----------- Totals ------ Customer Lists Covenants Not-to-Compete Employment Agreement Costs Related to Acquisitions Patent ----------- ----------Totals ------ 385,969 156,005 $ 4,036,176 =========== Accumulated Net of Accumulated Amortization Amortization October 31, October 31, Intangible Asset Life in Years ---------------------------20 3 - 7.5 5 $ 578,736 977,574 444,643 870,466 42,426 580,357 140,543 130,948 $ 1,764,740 =========== 1 9 9 8 ------- $ 2,469,202 $ 1,200,000 400,000 1 - 20 454,976 17 156,005 ----------- $ 245,426 25,057 $ 2,271,436 =========== Cost ---- 1 9 9 9 ------- 1 9 9 8 ------- 620,143 965,279 366,669 $ 1,849,059 234,721 33,331 205,260 15,683 249,716 140,322 $ 4,680,183 $ 2,173,034 =========== =========== $ 2,507,149 =========== Advertising Costs -Advertising costs are expensed when incurred. Advertising costs amounted to approximately $548,000, $819,000 and, $467,000 and for the years ended October 31, 1999, 1998 and 1997, respectively. Cash and Cash Equivalents - Cash equivalents are comprised of certain highly liquid investments with a maturity of three months or less when purchased. The Company had $1,113,418 and $1,843,186 in cash equivalents at October 31, 1999 and 1998, respectively. [3] Note Payables - Banks In April 1998, the Company amended its revolving loan agreement with PNC Bank. The maximum amount of the credit line available to the Company is the lesser of (i) $14,000,000 or (ii) 50% of the Company's qualified accounts receivable [as defined in the agreement] plus the face amount of any certificates of deposit pledged as collateral for this loan minus the amount of the outstanding principal balance of any term loans with the same bank. Interest on advances which are collateralized by certificates of deposit will be at 2% above the certificate of deposit interest rate. Interest on other advances will be at prime plus 1.25%. The certificate of deposit interest rate was 5% through March 25, 1999. The credit line is collateralized by substantially all of the Company's assets and the assignment of a $4,000,000 life insurance policy on the president of the Company. The line of credit is available through March 2001 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 and net worth, various financial ratios and insurance coverage. As of October 31, 1999 and 1998, the Company was in default of certain covenants, however, the Company subsequently received bank waivers for these defaults [See Note 22B]. As of October 31, 1998, the Company utilized $12,000,000 of this credit facility. As of October 31, 1999, the Company utilized $8,700,905 of this credit facility. Prime rate at October 31, 1999 and 1998 was 8.25% and 8.0%, respectively. The weighted average interest rate on short-term borrowings October 31, 1999 and 1998 was 9.22% and 8.75%, respectively. F-10 outstanding as of BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4 ------------------------------------------------------------------------------ [4] Long-Term Debt October 31, ----------1 9 9 9 1 9 9 8 ------------[A] Note Payable to LTC Service and Holdings, Inc. Due April 2000. Interest imputed at 11.6%, unsecured. $ [B] Notes Payable to PNC Bank. Due April 2002. Interest at prime plus 2% for the unsecured portion and prime plus 1.6% for the secured portion. 415,671 $ 1,323,667 2,800,000 3,600,000 Note Payable to PNC Bank. Due October 1999. Interest at prime plus 1.00%. -- 86,424 Notes Payable to PNC Bank. Due July 2000. Interest at prime plus 1.00% and certificate of deposit rate plus 2%. -- 315,259 -- 52,325 Other ---------- ----------Totals Less: Current Maturities ---------- ----------- 3,215,671 1,215,671 Long-Term Debt -------------- 5,377,675 2,071,058 $2,000,000 $ 3,306,617 ========== =========== [A] On April 9, 1998, the Company acquired the assets and certain liabilities of Medilabs, Inc. from LTC Service and Holdings, Inc. The purchase price consisted of $4,000,000 cash plus a $1,500,000 promissory note payable without interest in three semi-annual installments commencing April 1999. Interest was imputed at a rate of 11.6% on this note. [B] In April 1998, the Company entered into an agreement to borrow $4,000,000 from PNC Bank. The note is payable in forty-seven principal installments of $66,667 commencing May 1, 1998 and one final balloon payment. The unsecured portion of $2,000,000 bears interest at an annual rate of 10.25% to 10.5%. The secured portion of $2,000,000 bears interest at an annual rate of 9.85% to 10.10%. This note is in accordance with the provisions of the Company's revolving loan agreement [See Note 3] with the same lender. Maturities follows: of debt at October 2000 2001 2002 2003 2004 ----------Total ----- 31, 1999 in each of the next five years are as $ 1,215,671 800,000 1,200,000 --$ 3,215,671 =========== [5] Related Party Transactions On October 1, 1989, an unsecured promissory note was received from Dr. Marc Grodman ["Dr. Grodman"], president of the Company, in exchange for a receivable in the amount of $235,354. As of October 31, 1999 and 1998, $138,518 and $187,118 was remaining on the note. This note is non-interest bearing and has no fixed terms. F-11 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5 -----------------------------------------------------------------------------[6] Income Taxes The reconciliation of income tax from continuing operations computed at the U.S. federal statutory tax rate to the Company's effective income tax rate is as follows: October 31, ----------------------------1 9 9 9 1 9 9 8 1 9 9 7 ------------------U.S. Federal Statutory Rate State and Local Income Taxes, Net of U.S. Federal Income Tax Benefit Other Utilization of Net Operating Loss Carryforwards Change in Valuation Allowance ----------------Actual Rate ----------- (34.0)% 34.0 % 34.0% -- % -- % -- % 42.0 % 9.0 % (11.1)% (38.8)% --% 10.0% (7.5)% (41.0)% -- % 8.0 % ====== The provision for income taxes shown operations consist of the following: October 31, ------------------------------------1 9 9 9 1 9 9 8 1 9 9 7 ------------------Current: Federal $ State and Local Deferred: Federal State and Local ------------------- in the (6.9)% ====== consolidated -23,300 $ 272,000[1] 72,000[1] 16,200 31,500 (4.5)% ======= statements $ (68,000) (18,000) of 79,947 39,313 (204,000) (54,000) ---------- Total Provision for Income Taxes -------------------------------- $ 367,300 ========== $ (38,300) $ (138,740) ========== ========== [1] Increase in deferred tax valuation allowance. For the year ended October 31, 1998, the Company utilized approximately $500,000 of net operating loss carryforwards which resulted in a tax benefit for federal and state purposes of approximately $200,000. For the year ended October 31, 1997, the Company utilized approximately $3,600,000 of net operating loss carryforwards which resulted in a tax benefit for federal and state purposes of approximately $1,450,000. At October 31, 1999, the Company had net operating loss carryforwards of approximately $9,345,000 for federal income tax purposes, which expire in years 2006 through 2014. In addition, the Company had net operating losses for state purposes. The Company operates in several states, however, most of its business is conducted in the New Jersey and New York area. The following summarizes the operating loss carryforwards by year of expiration: Federal New Jersey Expiration Date 2000 2006 2007 2008 2009 2014 ---------Total ----F-12 ----------- New York Amount Amount Amount $ -825,000 1,255,000 2,375,000 390,000 4,500,000 ---------- $ 2,375,000 ----4,500,000 $ -383,000 1,253,000 2,373,000 -4,500,000 $9,345,000 ========== $ 6,875,000 =========== $8,509,000 ========== BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6 -----------------------------------------------------------------------------[6] Income Taxes [Continued] At October 31, 1998, the Company had a deferred tax asset of approximately $2,000,000 and a valuation allowance of approximately $1,656,000 related to the asset, a decrease of $286,000 since October 31, 1997. The deferred tax asset primarily relates to net operating loss carryforwards. At October 31, 1999, the Company had a deferred tax asset of approximately $4,000,000 and a valuation allowance of approximately $4,000,000 related to the asset, an increase of $2,344,000 since October 31, 1998. The deferred tax asset primarily relates to net operating loss carryforwards. [7] Capital Transactions [A] Preferred Stock and Common Stock - The Company is authorized to issue an aggregate of 1,669,667 shares of preferred stock, $.10 par value. On April 20, 1993, in order to facilitate the Company's 1993 proposed public offering, Dr. Grodman canceled his pro-rata option contained in his employment contract and all other outstanding options and warrants to purchase shares of Common Stock held by Dr. Grodman, his wife and an affiliated entity (the "Grodman Group") exercisable to purchase an aggregate 604,078 shares of Common Stock at prices ranging from $1.4438 to $1.50 or an average price of $1.47 per share, in consideration for the issuance to the Grodman Group of 604,078 shares of a new class of senior preferred stock, $.10 par value per share ("Senior Preferred Stock"). Each share of Senior Preferred Stock had the same voting rights (one vote per share), dividend rights and liquidation rights as each share of Common Stock and for a period of 10 years after issuance, was convertible into one share of Common Stock upon payment of a conversion price of $1.50 per share. The 604,078 shares of Senior Preferred Stock were issued to the Grodman Group on August 23, 1993. On May 13, 1997, pursuant to a recapitalization, the Senior Preferred Stock was retired in exchange for a new class of Series A Senior Preferred Stock issued to the Grodman Group. The new Series A Senior Preferred Stock is convertible into an aggregate 604,078 shares of Common Stock on or before May 1, 2007 at a conversion price of $.75 per share and has the same voting rights [one vote per share], dividend rights and liquidation rights as each share of Common Stock. Holders of the Company's Common Stock are entitled to one vote per share on matters submitted for shareholder vote. Holders are also entitled to receive dividends ratably, if declared. In the event of dissolution or liquidation, holders are entitled to share ratably in all assets remaining after payment of liabilities. On March 31, 1998, the Company's Board of Directors adopted a Shareholder Rights Plan and declared a dividend distribution of one Right for each outstanding share of Common Stock and each outstanding share of Series A Senior Preferred Stock. Each Right entitles the registered holder to purchase one oneten-thousandth of a share of Series A Junior Participating Preferred Stock [the "Junior Preferred Stock"] from the Company at a price of $4.00. Because of the nature of the dividend, liquidation and voting rights of the Junior Preferred Stock, the value of each one-ten-thousandth of a share of Junior Preferred Stock is intended to approximate the value of one share of Common Stock. Junior Preferred Stock purchasable upon exercise of the Rights will not be redeemable. Each outstanding share of Junior Preferred Stock will be entitled to a minimum preferential quarterly dividend of $.05 per share and will be entitled to an aggregate dividend of 10,000 times the dividend declared per share of Common Stock. In the event of liquidation, the holders of the Junior Preferred Stock will be entitled to a minimum preferential liquidation payment of $10,000 per share and will be entitled to an aggregate payment of 10,000 times the payment made per share of Common Stock. Each share of Junior Preferred Stock will have 10,000 votes, voting together with the Common Stock and the Series A Senior Preferred Stock. In the event of any merger, consolidation or other transaction in which the Common Stock is exchanged, each share of Junior Preferred Stock will be entitled to receive 10,000 times the amount received per share of Common Stock. The Rights are protected by customary anti-dilution provisions. The Rights are not exercisable unless any one of certain triggering events occur including the acquisition by an individual or entity and their associates of 25% or more of the outstanding shares of Common Stock. The Shareholder Rights Plan is designed to protect the Company and its shareholders from coercive, unfair and inadequate takeover bids and practices. The Plan is designed to strengthen the Board of Directors' ability to deter a person or group from attempting to gain control of the Company without offering a fair price and equal treatment to all shareholders. F-13 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7 ------------------------------------------------------------------------------ [7] Capital Transactions [Continued] [B] Equity Transactions for Services - In May 1997, the Company issued 815,000 shares of common stock and warrants to purchase 58,534 shares of the Company's common stock at a price of $.71875 in connection with employment and consulting agreements and a two year extension on a loan agreement. Included in the 815,000 shares issued were 740,000 shares to three officers of the Company. The shares are forfeitable in part in various amounts if the employee's employment is terminated "for cause" or at his option "without good reason" prior to May 1, 2000. In fiscal 1999, the Company issued 515,000 shares of common stock and options to purchase 436,000 shares of the Company's common stock at prices ranging between $.594 and $.719 in connection with employment and consulting agreements. [8] Income Per Share For the Year Ended October 31, 1999 ------------------------------------Per Share Income Shares Amount Basic EPS: [Loss] Income Available to Common Stockholders $(4,978,448) Effect of Dilutive Securities: Convertible Preferred Stock Warrants/Options ----------- ---------Diluted EPS: [Loss] Income Available to Common Stockholders Plus Assumed Conversions ----------- ------------------ --- $(4,978,448) 7,357,235 $ (.68) $ (.68) --- 7,357,235 Incentive stock options to purchase 612,041 shares of common stock and non-incentive stock options and warrants to purchase 954,100 shares of common stock were outstanding at October 31, 1999 but were not included in the computation of diluted EPS because they were antidilutive. These securities could potentially dilute earnings per share in the future. For the Year Ended October 31, 1998 -------------------------------------Per Share Income Shares Amount Basic EPS: Income Available to Common Stockholders $ Effect of Dilutive Securities: Convertible Preferred Stock Warrants/Options -------------------Diluted EPS: Income Available to Common Stockholders Plus Assumed Conversions $ ----------------------------- 596,583 7,196,299 --- 278,137 492,568 596,583 7,967,004 $ $ .08 .07 Warrants and options to purchase 5,448,339 shares of common stock at $3.00 to $6.75 per share were outstanding at October 31, 1998 but were not included in the computation of diluted EPS because the exercise price of these items was greater than the average market price of the common shares. These securities could potentially dilute earnings per share in the future. Warrants to purchase 5,253,339 shares of common stock expired in November 1998. F-14 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8 -----------------------------------------------------------------------------[8] Income Per Share [Continued] For the Year Ended October 31, 1997 -----------------------------------Per Share Income Shares Amount Basic EPS: Income Available to Common Stockholders Effect of Dilutive Securities: Convertible Preferred Stock Warrants/Options ------------------Diluted EPS: Income Available to Common Stockholders Plus Assumed Conversions ------------------- ----------- $3,199,915 6,685,155 --- 244,108 450,650 $3,199,915 7,379,913 $ .48 $ .43 Warrants and options to purchase 5,651,673 shares of common stock at $1.50 to $6.75 per share were outstanding at October 31, 1997 but were not included in the computation of diluted EPS because the exercise price of these items was greater than the average market price of the common shares. These securities could potentially dilute earnings per share in the future. [9] Stock Options and Warrants [A] Employment Incentive Stock Options - In November 1989, the shareholders approved and the Company adopted the 1989 Employee Stock Option Plan ["1989 Plan"] which provides for the granting of 666,667 shares of common stock. Under the terms of its stock option plans, incentive stock options to purchase shares of the Company's common stock are granted at a price not less than the fair market value of the common stock at the date of grant. These stock options are exercisable up to ten years from the date of grant. At October 31, 1999 and 1998, there were 12,291 shares reserved for future grants under the plan. No stock appreciation rights have been granted. In May 1997, the Company's board of directors approved the cancellation of all of the outstanding employee incentive stock options for new options at an exercise price of $.71875 which reflected fair market value. Following is a summary of transactions: Weighted Average Shares Under Exercise Price Options Per Share Outstanding at October 31, 1996 Granted During the Year Expired During the Year Exercised During the Year -------------Outstanding and Eligible for Exercise at October 31, 1997 -----------------Granted During the Year Expired During the Year Exercised During the Year -------------Outstanding and Eligible for Exercise at October 31, 1998 ----------------Granted During the Year Expired During the Year Exercised During the Year -------------Outstanding and Eligible for Exercise at October 31, 1999 -----------------F-15 482,044 210,000 (34,334) -- $ 657,710 .73 -(3,334) (8,334) -.72 .72 646,042 .73 -(34,001) -- 612,041 ======= .72 .76 .72 -- -.72 -- $ .73 ====== BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9 ------------------------------------------------------------------------------ [9] Stock Options and Warrants [Continued] Outstanding and Exercisable Options ----------------------------------Weighted Average Number of Remaining Weighted Average Shares Under Contractual Exercise Price Exercise Price Range Option ------------------------$.71875 to $.790625 Per Share 612,041 Life ---- Per Share --------- 8 Years The weighted average grant date fair value of options ended October 31, 1997 was $.2486 per share. granted $ .73 during the year The Company accounts for these stock-based compensation awards to employees under the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees." Total compensation cost recognized against income for stock-based employee compensation awards was $-0- for the years ended October 31, 1999, 1998 and 1997. [B] Non Incentive Stock Options and Warrants - Non-incentive stock options and warrants may be granted to employees or non-employees at fair market value or at a price less than fair market value of the common stock at the date of grant. The following is a summary of transactions: Weighted Shares Under Average Options Exercise Price and Warrants Per Share -------------------Outstanding and Eligible for Exercise at October 31, 1996 ----------------Granted During the Year Expired During the Year Exercised During the Year --------------Outstanding and Eligible for Exercise at October 31, 1997 -----------------Granted During the Year Expired During the Year Exercised During the Year --------------Outstanding and Eligible for Exercise at October 31, 1998 ------------------Granted During the Year Expired During the Year Exercised During the Year --------------Outstanding and Eligible for Exercise at October 31, 1999 ------------------- F-16 6,022,380 $ 4.63 381,300 (584,871) -- 5,818,809 .72 1.45 -- 4.71 -(206,668) (35,200) 5,576,941 4.73 436,000 (5,058,841) -- 954,100 ========== -5.00 .72 .87 5.03 -- $ 1.37 ====== BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10 -----------------------------------------------------------------------------[9] Stock Options and Warrants [Continued] During the year ended October 31, 1997, 35,200 shares under warrants were granted to three non- employees and 23,334 shares under warrants were canceled for new warrants at a price of $.71875 which represents fair market value at the time of grant. The fair value of each warrant granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: a weighted average risk-free interest rate of 6%, a weighted average expected life of 1 year based on Company expectations and the required minimum two year holding period, and a weighted average expected volatility of 84.09%. Dividends are not expected to be available to shareholders during the expected life of the warrants. The fair value of these options issued in May of 1997 of $13,423 [$.2486 per share] has been accounted for as deferred compensation for the year ended October 31, 1997 and is being expensed over the term of the agreements. Total compensation expense recognized against income for this deferred compensation was $2,848, $2,848 and $2,254, respectively, for the years ended October 31, 1999, 1998 and 1997. During the years ended October 31, 1999 and 1997, 436,000 and 346,100 shares, respectively, under options were granted to employees. The Company accounts for these options under the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees." Total compensation cost recognized against income for employee nonincentive stock option and warrants was $-0- for the years ended October 31, 1999, 1998 and 1997. Outstanding and Exercisable Options and Warrants -----------------------------------------------Weighted Number of Average Shares Under Remaining Weighted Average Options and Contractual Exercise Price Exercise Price Range Warrants --------------------------Options - $.594 to $.719 Per Share Options - $1.00 Per Share Options - $3.00 Per Share Options - $4.125 Per Share ---------- Life ---- Per Share --------- 498,100 5 Years 286,000 4 Years 20,000 1 Year 150,000 Expires 4/00 $ .69 $ 1.00 $ 3.00 $ 4.125 954,100 These options have weighted average remaining The weighted average grant date fair value of ended October 31, 1997 was $.2486 per share. fair value of options granted during the year per share. contractual lives of three years. options granted during the year The weighted average grant date ended October 31, 1999 was $.3485 [A] and [B] Pro Forma - Had compensation cost been determined on the basis of fair value pursuant to SFAS No. 123, for the 612,041 shares under employee incentive stock options and the 436,000 and 346,100 shares under employee nonincentive stock options and warrants for the years ended October 31, 1999, 1998 and 1997, net income and earnings per share would have been as follows: 1 9 9 9 1 9 9 8 ------------Net [Loss] Income: As Reported =========== =========== Pro Forma =========== =========== 1 9 9 7 ------$(4,978,448) $ ========== $(5,130,411) $ ========== Basic [Loss] Earnings Per Share: As Reported $ ========== =========== ========== Pro Forma $ ========== =========== ========== Diluted [Loss] Earnings Per Share: As Reported $ ========== =========== ========== Pro Forma $ ========== =========== ========== 596,583 $3,199,915 596,583 $2,950,000 (.68) $ .08 $ .48 (.70) $ .08 $ .44 (.68) $ .07 $ .43 (.70) $ .07 $ .40 F-17 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11 ------------------------------------------------------------------------------ [9] Stock Options and Warrants [Continued] [B] Non Incentive Stock Options and Warrants [Continued] The fair value used in the pro forma data was estimated by using an option pricing model which took into account as of the grant date, the exercise price and the expected life of the option, the current price of the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the expected term of the option. The following is the average of the data used for the following items. Risk-Free Year Ended October 31, 1997 October 31, 1999 Interest Rate Expected Expected Life 6% 6% 1 Year 1 Year Expected Volatility 84.09% 97.89% -104.28% Dividends None None [10] Employment Contracts and Consulting Agreements The Company has entered into various employment contracts and consulting agreements for periods ranging from one to seven years. At October 31, 1999, the aggregate minimum commitment under these contracts and agreements, excluding commissions or consumer price index increases, was approximately as follows: October 31, 2000 2001 2002 2003 2004 Thereafter ----------- $ 1,526,000 1,345,000 1,174,000 710,000 683,000 277,000 Total ----- $ 5,715,000 =========== Some of these agreements provide bonuses and commissions based on a percentage of collected revenues ranging from 1% to 10% on accounts referred by or serviced by the employee or consultant. In addition to the above, eight employment agreements which provide for annual aggregate minimum commitments of approximately $630,000 have no termination dates. The Company pays premiums on life insurance policies for three key officers. In the event that any of these officers leave the Company, they are required to pay the Company back for premiums paid on their policies. In the event of death, the benefit paid to the beneficiary is reduced by the amount of premiums paid on behalf of the individual by the Company. At October 31, 1999 and 1998, $695,726 and $567,769 is included in other assets which represents the amount of premiums paid to date. At October 31, 1999 and 1998, cash surrender values on these policies were in excess of amounts receivable. F-18 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12 -----------------------------------------------------------------------------[11] Capitalized Lease Obligations The Company follows: leases various assets under capital leases expiring in 2004 as October 31, ----------1 9 9 9 1 9 9 8 ------------Medical Equipment Furniture and Fixtures ----------------- $1,325,238 $1,168,027 -11,565 Totals Less: Accumulated Depreciation ----------------- 1,325,238 385,032 Net --- $ 940,206 ========= 1,179,592 461,259 $ 718,333 ========== Depreciation expense on assets under capital leases was $202,589, $198,280 and $83,853 for the years ended October 31, 1999, 1998 and 1997, respectively. Aggregate future minimum rentals under capital leases are: Years ended October 31, 2000 2001 2002 2003 2004 Thereafter ---------- $ Total Less: Interest ---------Present Value of Minimum Lease Payments --------------------------------------- 430,580 331,333 232,001 185,164 87,771 -- 1,266,849 278,060 $ 988,789 ========== [12] Commitments and Contingencies The Company leases various office and laboratory facilities and equipment under operating leases expiring from 1999 to 2006. Several of these leases contain renewal options for three to five year periods. Total expense for property and equipment rental for the years ended October 31, 1999, 1998 and 1997 was $2,848,225, $2,180,112 and $1,796,839, respectively. There were no contingent rental amounts due through October 31, 1999. Aggregate future minimum rental payments on noncancelable operating leases (exclusive of several month to month leases aggregating approximately $1,000,000 annually) are as follows: Property October 31, 2000 2001 2002 2003 2004 Thereafter ---------Totals -----F-19 Equipment $ 789,619 613,292 470,400 442,789 166,463 8,017 $ 770,065 556,647 325,690 230,479 121,171 -- ----------$2,490,580 ========== $ 2,004,052 =========== BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13 ------------------------------------------------------------------------------ [13] Litigation In the normal course of business, the Company is exposed to a number of asserted and unasserted potential claims. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations [See Note 22C]. The Company is being represented by counsel in connection with various reviews being conducted by the Company's Medicare carrier. One review involved overpayments that occur in the normal course of business. The Company believes the overpayment will be approximately $150,000, of which approximately $75,000 has been remitted to Medicare. Counsel representing the Company in this matter has advised that he cannot offer any opinion or projection at this time as to whether the anticipated liability will be resolved at $150,000 or whether it will be increased. Counsel has advised that based upon his review of documents, many of the claims that Medicare thought were duplicate payments were not in fact duplicates, but rather were properly billed. Counsel also advised that in view of the complexity of the issue, he believes the final overpayment will be an amount negotiated between the Company and Medicare. On December 30, 1996, the Company commenced a lawsuit against SmithKline Beecham Clinical Laboratories ["SBCL"] alleging that SBCL materially and repeatedly breached its obligations and its representations and warranties made in the Asset Agreement and the Non-Competition Agreement pursuant to which the Company purchased certain assets from SBCL and claims unspecified amounts of compensatory and punitive damages and related costs. As a result of its allegations against SBCL, the Company did not make any payments with respect to the $600,000 note payable. In October 1998, the Company and SBCL exchanged general releases for this lawsuit and no executory obligations were imposed upon the Company by the settlement agreement. Therefore, the Company cancelled the $600,000 note payable as well as the related goodwill of approximately $550,000. The settlement was subject to the consent of the Company's principal lending bank which consent was received in January 1999. In addition, management decided to no longer pursue the hemo-dialysis business and accordingly made revisions to its future business endeavors. Accordingly, the Company recorded an impairment of approximately $2,900,000 on related hemo-dialysis assets in fiscal 1999 of which $2,000,000 was for related accounts receivable and $900,000 was for goodwill [See Note 2]. [14] Insurance The Company maintains professional liability insurance of $3,000,000 in the aggregate, with a per occurrence limit of $1,000,000 . In addition, the Company maintains excess commercial insurance of $2,000,000 per occurrence. The Company believes, but cannot assure, that its insurance coverage is adequate for its current business needs. A determination of Company liability for uninsured or underinsured acts or omissions could have a material adverse affect on the Company's operations. [15] Significant Risks and Uncertainties [A] Concentrations of Credit Risk - Cash - At October 31, 1999, the Company had approximately $1,846,000 in cash and certificate of deposit balances at financial institutions which were in excess of the federally insured limits. At October 31, 1998, the Company had approximately $6,545,000 in cash and certificate of deposit balances at financial institutions which were in excess of the federally insured limits. Approximately $3,680,000 of this amount represented collateral for demand loans with the same financial institution. [See restricted certificates of deposit on consolidated balance sheet]. F-20 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14 ------------------------------------------------------------------------------ [15] Significant Risks and Uncertainties [Continued] [B] Concentration of Credit Risk - Accounts Receivable - Credit risk with respect to accounts receivable is generally diversified due to the large number of patients comprising the client base. The Company does have significant receivable balances with government payors and various insurance carriers. Generally, the Company does not require collateral or other security to support customer receivables, however, the Company continually monitors and evaluates its client acceptance and collection procedures to minimize potential credit risks associated with its accounts receivable and establishes an allowance for uncollectible accounts and as a consequence, believes that its 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, the Company could experience a significant decrease in revenues from Medicare and Medicaid, which could have a material adverse effect on the Company. The Company is unable to predict, however, the extent to which such actions will be taken. [16] Acquisitions On April 9, 1998, the Company acquired the assets and certain liabilities of Medilabs, Inc. ["MLI"] from LTC Service and Holdings, Inc. ["Holdings"], a wholly-owned subsidiary of Long-Term Care Services, Inc. ["LTC"]. The acquisition was effective April 9, 1998 for accounting purposes and is being accounted for under the purchase method. The operations of Medilabs, Inc. are included in the Company's results of operations commencing April 9, 1998. In connection with the acquisition of MLI, certain key employees signed employment agreements with the Company for an unspecified period which included a six month non-competition clause. In addition, LTC, Holdings, two affiliated corporations and an employee of LTC signed non-competition agreements. [17] Fair Value of Financial Instruments For certain financial instruments, including cash and cash equivalents, trade receivables, trade payables, and short-term debt, it was estimated that the carrying amount approximated fair value for the majority of these items because of their short maturities. The fair value of the Company's long-term debt is estimated based on the quoted market prices for similar issues or by discounting expected cash flows at the rates currently offered to the Company for debt of the same remaining maturities. O c t o b e r 3 1, ----------------------------------------1 9 9 9 1 9 9 8 -------------------- ------------------Carrying Fair Carrying Fair Amount Value Amount Value Long-Term Debt Capitalized Lease Obligations $2,000,000 $2,000,000 $ 680,538 $ 654,764 $3,306,617 $ 400,975 $3,306,617 $ 381,637 Due to the non-interest bearing nature and unspecified payment terms, it was not practicable to estimate the fair value of amounts due from related parties [See also Note 5]. [18] Health Insurance Plan The Company has a limited self-funded health insurance plan for its employees under which the Company pays the initial $50,000 of covered medical expenses per person per year. The Company has a contract with an insurance carrier for any excess. Health insurance expense for the years ended October 31, 1999, 1998 and 1997, totaled approximately $287,000, $279,000 and $232,000, respectively. F-21 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15 -----------------------------------------------------------------------------[19] Employee Benefit Plan The Company sponsors the Bio-Reference Laboratories, Inc. 401(k) Profit-Sharing 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. For the year ended October 31, 1999, 1998 and 1997, the Company elected not to make matching contributions to the plan. If the Company elects to match participant contributions in the future, the employer contribution will be fully vested after the fifth year of service. [20] Non-recurring Gain on Sale of Intangible Assets On September 30, 1997, the Company entered into an agreement to sell certain customer lists, its "GenCare" tradename and rights under two GenCare contracts to another laboratory for $4,600,000 in cash and $1,400,000 payable in four equal installments every six months beginning April 1, 1998, provided however that certain target revenues are reached. If target revenues are not reached amounts payable under the contract will be decreased up to a maximum of $700,000. The Company and certain of its officers entered into a noncompetion agreement with the purchaser as part of this agreement. The Company recorded a non-recurring gain of $2,025,689 and $333,900 during October 31, 1997 and 1998, respectively, related to this sale. The $700,000 in contingent receivables were included in the calculation of gain on this sale for the year ended October 31, 1998 when target revenues were reached. This receivable was collected in fiscal 1999. [21] New Authoritative Accounting Pronouncements The Financial Accounting Standards Board ["FASB"] issued Statement of Financial Accounting Standards ["SFAS"] No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of Effective Date of FASB Statements No. 133." The Statement defers for one year the effective date of FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." The rule now will apply to all fiscal quarters of all fiscal years beginning after June 15, 2000. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The adoption of SFAS No. 137 is not expected to have a material impact on the Company's consolidated results of operation, financial position or cash flows. [22] Subsequent Events [A] Asset Purchase Agreements - On December 2, 1999, the Company entered into an agreement to purchase certain assets utilized by a company that is engaged in selling Internet website design and other Internet-oriented services to medical professionals and other healthcare professionals. Bio-Reference Laboratories, Inc. delivered 140,000 shares of its common stock in payment for the web business along with 60,000 shares of its common stock in consideration for related non-competition agreements. The fair value of the 200,000 shares of common stock is approximately $200,000. The Company has also paid $10,000 to a former executive officer of the website company and executed a one year consulting agreement with the website company for $40,000 in the initial year and $50,000 in any subsequent year. The Company granted the website business an option to purchase a maximum of 100,000 shares of the Company's common stock exercisable at $3.00 per share with certain vesting restrictions. F-22 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #16 ------------------------------------------------------------------------------ [22] Subsequent Events [Continued] [A] Asset Purchase Agreements [Continued] - On December 14, 1999, the Company entered into an agreement to purchase certain assets utilized by a company that is engaged in the manufacture of certain health food products. The Company delivered 180,000 shares of its common stock in payment for the health food business along with 20,000 shares of its common stock in consideration for a related non- competition agreement. The Company entered into an employment agreement in connection with this purchase. The fair value of the 200,000 shares of common stock is approximately $200,000. The Company also entered in an employment agreement for an annual salary of $150,000 plus commissions and a signing bonus of $100,000 in 24 monthly installments. [B] Bank Waivers - On January 26, 2000, the Company obtained from PNC Bank a waiver for the Company's October 31, 1999 default on its tangible net worth, net worth and capital expenditure covenants. [C] NJ Medicaid Pending Settlement - In January 2000, the Company commenced negotiations with New Jersey Medicaid regarding a claim made against the Company by the State of New Jersey. The alleged claim was received by the Company on December 28, 1999. The claim alleged that the Company was reimbursed by the State for claims submitted which, although authorized by the physician, did not bear the physician's actual signature. The Company immediately disputed the claim. The Company believes it has been compliant with all requirements regarding claims submitted for payment by New Jersey Medicaid and in fact requires actual physician signatures before it bills New Jersey Medicaid. However, the Company and New Jersey Medicaid entered into a compromise agreement on January 19, 2000 to a full settlement for this claim in the amount of $227,000. The Company has accrued this settlement amount in its October 31, 1999 financials. The settlement is subject to the parties' execution of a written agreement setting forth its terms and to the approval of the Director of the Division of Medical Assistance. Approval of the settlement is being recommended to the Director. . . F-23 . . . . . . . . INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of Bio-Reference Laboratories, Inc. Elmwood Park, New Jersey Our report on our audit of the basic financial statements of Bio-Reference Laboratories, Inc. and its subsidiary appears on page F-1. That audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule II is presented for purposes of complying with the Securities and Exchange Commissions Rules and Regulations under the Securities Exchange Act of 1934 and is not otherwise a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements, and in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. MOORE STEPHENS, P. C. Certified Public Accountants. Cranford, New Jersey January 7, 2000 F-24 BIO-REFERENCE LABORATORIES, INC. AND SUBSIDIARY -----------------------------------------------------------------------------SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997. ------------------------------------------------------------------------------ (a) (b) (c) Balance at Charged to Deductions Balance Beginning Cost and To Valuation at End Description of Period Expenses ------------------- -------- (d) Accounts -------- (e) of Period --------- Year Ended October 31, 1999 Allowance for Doubtful Accounts and Contractual Credits $13,494,475 $85,674,430 $(83,855,970) $15,312,935 =========== =========== ============ =========== Year Ended October 31, 1998 Allowance for Doubtful Accounts and Contractual Credits $ 8,564,436 $72,137,649 $(67,207,610) $13,494,475 =========== =========== ============ =========== Year Ended October 31, 1997 Allowance for Doubtful Accounts and Contractual Credits $ 5,357,096 $47,593,419 $(44,386,079) $8,564,436 =========== =========== ============ ========== F-25 Exhibit 3.1.3 CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF BIO-REFERENCE LABORATORIES, INC. To: The Secretary of State State of New Jersey Pursuant to the provisions of Section 14A:7-2(2), Corporations, General, of the New Jersey Statutes, the undersigned corporation executes this certificate of amendment to its certificate of incorporation: 1. The name of the corporation (hereinafter called the "Corporation") is Bio-Reference Laboratories, Inc. 2. The following resolution has been duly adopted by the Board of Directors of the Corporation as required by Subsection 14A:7-2(3) of the New Jersey Business Corporation Act. RESOLVED, that pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of its Certificate of Incorporation, the Board of Directors hereby creates a series of Series A Preferred Stock, $.10 par value, of the Corporation, and hereby states the designation and amount thereof and fixes the relative rights, preferences and limitations thereof (in addition to the provisions set forth in the Certificate of Incorporation of the Corporation, which are applicable to the preferred stock of all classes and series) as follows, so that ARTICLE (3) of the Corporation's Certificate of Incorporation be, and it hereby is, amended by deleting the present Article (3)B(1) and by inserting therein the following new paragraph B(1) immediately following ARTICLE (3)(B), paragraph 7: "B(1). Series A Senior Preferred Stock. ------------------------------(a) Designation and Amount. An aggregate of ---------------------604,078 shares of Series A Preferred Stock, $.10 par value, of the Corporation are hereby constituted as a 1 series designated as "Series A Senior Preferred Stock" (the "Series A Senior Preferred Stock"). Such number of shares may be increased or decreased by resolution of the Board of Directors. (b) Vote. Except as may otherwise be required by law, this Certificate of Incorporation or the provisions of the resolution or resolutions as may be adopted by the Board of Directors pursuant to paragraph (B) of this Article THIRD, each holder of Series A Senior Preferred Stock shall have one vote in respect of each share of Series A Senior Preferred Stock held by such holder on each matter voted upon by the stockholders. The holders of shares of Series A Senior Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (c) Dividends. Holders of Series A Senior Preferred Stock shall be entitled to be paid dividends on a per share basis equal to dividends, if any paid on a per share basis to holders of Common Stock, at the time such dividends are paid with respect to the Common Stock. (d) Liquidation Rights. After distribution in full of any preferential amount (fixed in accordance with the provisions of paragraph (B) of this Article THIRD), if any, to be distributed to the holders of Preferred Stock in the event of voluntary or involuntary liquidation, distribution or sale or assets, dissolution or winding-up of this Corporation, the holders of the Series A Senior Preferred Stock together with the holders of the Common Stock shall be entitled to receive all the remaining assets of this Corporation, tangible and intangible, of whatever kind available for distribution to stockholders, ratably on a per share basis in proportion to the number of shares of the Series A Senior Preferred Stock and the Common Stock held by each. (e) Conversion Rights. From and after the Date of Issuance and prior to the close of business on May 1, 2007, each share of Series A Senior Preferred Stock shall be convertible, at the option of the holder, upon payment of the Conversion Price, into one share of Common Stock. The initial Conversion Price shall be $.75 per share. In the event of a stock dividend, combination, stock split or reverse stock split, the Conversion Price and the number of shares of Common Stock into which the Series A 2 Senior Preferred Stock may be converted shall be appropriately adjusted." 3. The foregoing resolution was duly adopted by the Board of Directors of the Corporation on May 17, 1997, pursuant to authority granted under Section 14A:7-2(2) of the New Jersey Business Corporation Act. 4. The Certificate of Incorporation of the Corporation is amended so that the designation and number of shares of the series of Preferred Stock acted upon in the foregoing resolution, and the relative rights, preferences and limitations of such series, are as stated in the resolution. IN WITNESS WHEREOF, Bio-Reference Laboratories, Inc. has caused this Certificate of Amendment to the Certificate of Incorporation to be duly executed this 25th day of March, 1998. BIO-REFERENCE LABORATORIES, INC. By /s/Marc D. Grodman ------------------Marc D. Grodman, President ATTEST: /s/Sam Singer Sam Singer, Secretary 3 Exhibit 3.1.4 CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION of BIO-REFERENCE LABORATORIES, INC. To: The Secretary of State State of New Jersey Pursuant to the provisions of Section 14A:7-2(2), Corporations, of the New Jersey statutes, the undersigned corporation certificate of amendment to its certificate of incorporation: General, executes this 1. The name of the corporation (hereinafter called the "Corporation") is Bio-Reference Laboratories, Inc. 2. The following resolution has been duly adopted by the Board of Directors of the Corporation as required by Subsection 14A:7-2(3) of the New Jersey Business Corporation Act. RESOLVED, that pursuant to the authority vested in the Board of Directors of the Corporation in accordance with the provisions of its Certificate of Incorporation, the Board of Directors hereby creates a series of Preferred Stock, $.10 par value, of the Corporation, and hereby states the designation and amount thereof and fixes the relative rights, preferences and limitations thereof (in addition to the provisions set forth in the Certificate of Incorporation of the Corporation, which are applicable to the preferred stock of all classes and series) as follows, so that ARTICLE (3) of the Corporation's Certificate of Incorporation be, and it hereby is, amended by inserting therein the following paragraph B(2) immediately following ARTICLE (3)(B), paragraph 7, paragraph B(1): B(2). Series A Junior Participating Preferred Stock. ---------------------------------------------Section 1. Designation and Amount. The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" and the number of shares constituting such series shall be 3,000. Section 2. Dividends and Distributions. (A) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares 1 of Series A Junior Participating Preferred Stock with respect to dividends, the holders of shares of Series A Junior Participating Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the 15th day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Junior Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $500 or (b) subject to the provision for adjustment hereinafter set forth, 10,000 times the aggregate per share amount of all cash dividends, and 10,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, par value $.01 per share, of the Corporation (the "Common Stock") since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Junior Participating Preferred Stock. In the event the Corporation shall at any time after March 31, 1998 (the "Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Junior Participating Preferred Stock as provided in paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $500 per share on the Series A Junior Participating Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior Participating Preferred Stock from the Dividend Payment Date next preceding the date of 2 Quarterly issue of such shares of Series A Junior Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Junior Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of Series A Junior Participating Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Junior Participating Preferred Stock shall entitle the holder thereof to 10,000 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein or by law, the holders of shares of Series A Junior Participating Preferred Stock, the holders of shares of Common Stock and the holders of Series A Senior Preferred Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (C) (i) If at any time dividends on any Series A Junior Participating Preferred Stock shall be in arrears in an amount 3 equal to six (6) quarterly dividends thereon, the occurrence of such contingency shall mark the beginning of a period (herein called a "default period") which shall extend until such time when all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all shares of Series A Junior Participating Preferred Stock then outstanding shall have been declared and paid or set apart for payment. During each default period, all holders of Preferred Stock (including holders of the Series A Junior Participating Preferred Stock) with dividends thereon, voting as a class, irrespective of series, shall have the right to elect two (2) Directors. (ii) During any default period, such voting right of the holders of Series A Junior Participating Preferred Stock may be exercised initially at a special meeting called pursuant to subparagraph (iii) of this Section 3(C) or at any annual meeting of stockholders, and thereafter at annual meetings of stockholders, provided that neither such voting right nor the right of the holders of any other series of Preferred Stock, if any, to increase, in certain cases, the authorized number of Directors shall be exercised unless the holders of ten percent (10%) in number of shares of Preferred Stock outstanding shall be present in person or by proxy. The absence of a quorum of the holders of Common Stock shall not affect the exercise by the holders of Preferred Stock of such voting right. At any meeting at which the holders of Preferred Stock shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect Directors to fill such vacancies, if any, in the Board of Directors as may then exist up to two (2) Directors. If the number which may be so elected at any special meeting does not amount to the required number, the holders of the Preferred Stock shall have the right to make such increase in the number of Directors as shall be necessary to permit the election by them of the required number. After the holders of the Preferred Stock shall have exercised their right to elect Directors in any default period and during the continuance of such period, the number of Directors shall not be increased or decreased except by vote of the holders of Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to or pari passu with the Series A Junior Participating Preferred Stock. (iii) Unless the holders of Preferred Stock shall, during an existing default period, have previously exercised their right to elect Directors, the Board of Directors may order, or any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding, irrespective of series, may request, the calling of special meeting of the holders of Preferred Stock, which meeting shall thereupon be called by the President, a Vice-President or the 4 Secretary of the Corporation. Notice of such meeting and of any annual meeting at which holders of Preferred Stock are entitled to vote pursuant to this paragraph (C) (iii) shall be given to each holder of record of Preferred Stock by mailing a copy of such notice to him at his last address as the same appears on the books of the Corporation. Such meeting shall be called for a time not earlier than 10 days and not later than 60 days after such order or request or in default of the calling of such meeting may be called on similar notice by any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding. Notwithstanding the provisions of this paragraph (C)(iii), no such special meeting shall be called during the period within 60 days immediately preceding the date fixed for the next annual meeting of the stockholders. (iv) In any default period, the holders of Common Stock, and other classes of stock of the Corporation if applicable, shall continue to be entitled to elect the whole number of Directors until the holders of Preferred Stock shall have exercised their right to elect two (2) Directors voting as a class, after the exercise of which right (x) the Directors so elected by the holders of Preferred Stock shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (y) any vacancy in the Board of Directors may (except as provided in paragraph (C)(ii) of this Section 3) be filled by vote of a majority of the remaining Directors theretofore elected by holders of the class of stock which elected the Director whose office shall have become vacant. References in this paragraph (C) to Directors elected by the holders of a particular class of stock shall include Directors elected by such Directors to fill vacancies as provided in clause (y) of the foregoing sentence. (v) Immediately upon the expiration of a default period, (x) the right of the holders of Preferred Stock as a class to elect Directors shall cease, (y) the term of any Directors elected by the holders of Preferred Stock as a class shall terminate, and (z) the number of Directors shall be such number as may be provided for in the certificate of incorporation or by-laws irrespective of any increase made pursuant to the provisions of paragraph (C)(ii) of this Section 3 (such number being subject, however, to change thereafter in any manner provided by law or in the certificate of incorporation or by-laws). Any vacancies in the Board of Directors effected by the provisions of clauses (y) and (z) in the preceding sentence may be filled by a majority of the remaining Directors. (D) Except as set forth herein, holders of Series A Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the 5 extent they are entitled to vote with herein) for taking any corporate action. holders of Common Stock as set forth Section 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Junior Participating Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Junior Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, except dividends paid ratably on the Series A Junior Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Junior Participating Preferred Stock; (iv) redeem or purchase or otherwise acquire for consideration any shares of Series A Junior Participating Preferred Stock, or any shares of stock ranking on a parity with the Series A Junior Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend 6 rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Junior Participating Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. Section 6. Liquidation, Dissolution or Winding Up. (A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Series A Junior Participating Preferred Stock shall have received $10,000 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series A Liquidation Preference"). Following the payment of the full amount of the Series A Liquidation Preference, no additional distributions shall be made to the holders of shares of Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series A Liquidation Preference by (ii) 10,000 (as appropriately adjusted as set forth in subparagraph C below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii), the "Adjustment Number"). Following the payment of the full amount of the Series A Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series A Junior Participating Preferred Stock and Common Stock, respectively, holders of Series A Junior Participating Preferred Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect 7 to such Preferred Stock and Common Stock, on a per share basis, respectively. (B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Series A Junior Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. (C) In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 10,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Junior Participating Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 8 Section 8. No Redemption. The shares of Series A Junior Participating Preferred Stock shall not be redeemable. Section 9. Ranking. The Series A Junior Participating Preferred Stock shall rank junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise. Section 10. Amendment. The Certificate of Incorporation of the Corporation shall not be further amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Junior Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of two-thirds of the outstanding shares of Series A Junior Participating Preferred Stock, voting separately as a class; it being understood that nothing in this Section 10 shall be deemed to restrict the Corporation from designating additional shares of Series A Junior Participating Preferred Stock if the Board of Directors determines that it is necessary to do so in order to achieve the purposes of the Rights Agreement, dated as of March 31, 1998 between the Corporation and American Stock Transfer & Trust Company. Section 11. Fractional Shares. Series A Junior Participating Preferred Stock may be issued in fractions of a share which shall entitled the holder, in proportion to such holders fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Junior Participating Preferred Stock. IN WITNESS WHEREOF, Bio-Reference Laboratories, Inc. has caused this Certificate of Amendment to the Certificate of Incorporation to be duly executed this day of March 31, 1998. BIO-REFERENCE LABORATORIES, INC. By /s/Marc D. Grodman ------------------Marc D. Grodman, President Attest: /s/Sam Singer Sam Singer, Secretary 9 Exhibit 10.1 FOURTH AMENDMENT TO LEASE THIS FOURTH AMENDMENT TO LEASE made as of this 9th day of October 1998, (hereinafter referred to as this "Amendment"), between ALFRED SANZARI ENTERPRISES, L.P., having an office c/o Alfred Sanzari Enterprises, Court Plaza North, 25 Main Street, 6th Floor, Hackensack, new Jersey 07601 (hereinafter referred to as "Landlord"), and BIO-REFERENCE LABORATORIES, INC., a New Jersey corporation, having an office at 481 Edward H. Ross Drive, Elmwood Park, New Jersey 07407 (hereinafter referred to as "Tenant"). W I T N E S S E T H: WHEREAS, Alfred Sanzari (Landlord's predecessor-in-interest), as landlord (hereinafter referred to as "Sanzari"), and Pharmadyne Laboratories, Inc. (Tenant's predecessor-in-interest), as tenant (hereinafter referred to as "Pharmadyne"), heretofore entered into a certain written Lease dated as of November 7, 1978, wherein and whereby Landlord leased to Tenant, and Tenant hired from Landlord, certain premises consisting of approximately thirty-one thousand five hundred twenty-seven (31,527) square feet (hereinafter sometimes referred to as the "Original Premises" or the "Premises"),in the building located at 481 Edward H. Ross Drive, in the Borough of Elmwood Park, county of Bergen and State of New Jersey (hereinafter referred to as the "Building"), as more particularly described therein, for a term which commenced on March 1, 1979, and was scheduled to expire on February 28, 1989, at the Basic Rent and additional rent, and upon the terms, covenants, conditions, provisions and agreements contained in said Lease; and WHEREAS, said Lease was modified by that certain First Amendment to Lease dated November 1, 1979, wherein and whereby, inter alia, Landlord and Tenant settled certain disputes; and WHEREAS, said Lease and the interest of Pharmadyne as tenant thereunder, was assigned to CL Laboratories of New Jersey, Inc. (hereinafter referred to as "CL"), pursuant to that certain Assignment and Assumption of Lease Agreement dated December 10, 1981; and WHEREAS, said Lease was further modified by that certain Agreement dated as of March 23, 1988, wherein and whereby, inter alia, the Lease and the interest of CL as tenant thereunder, was assigned to Med-Mobile, Inc. (hereinafter referred to as "Med- Mobile"), and the term of the Lease was extended for a further period of five (5) years, commencing on March 1 1989, and expiring on February 28, 1984; and WHEREAS, said Lease was further modified by that Certain Second Amendment to Lease dated as of March 23, 1988; and WHEREAS, said Lease was modified by that Third Amendment to lease dated January 31, 1992, wherein and whereby, inter alia, Landlord and Tenant settled certain defaults by Tenant under the Lease and discontinued litigation instituted by Landlord against Tenant in connection therewith; and WHEREAS, on or about November 15, 1989, Med-Mobile changed its name to Tenant; and WHEREAS, said Lease was further modified by that certain Third Amendment to Lease dated as of February 28, 1994, wherein and whereby, inter alia, the term of the Lease was extended for a further period of five (5) years, commencing on March 1, 1994, and expiring on February 28, 1999; and WHEREAS, said Lease, as so modified, and as the same may have been otherwise amended and/or modified, is hereinafter collectively referred to as the "Lease"; and 2 WHEREAS, Landlord and Tenant desire to further modify the Lease only in the respects hereinafter stated. NOW THEREFORE, in consideration of the premises demised by the Lease and the mutual covenants hereinafter contained and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto by these presents do covenant and agree as follows: 1. The recital clauses set forth above shall be deemed a part of this Amendment as though set forth verbatim and at length herein. 2. Except as otherwise expressly set forth herein, all capitalized terms in this Amendment shall have the meanings set forth for such terms in the Lease. 3. A. The "Term" of the Lease (as defined in Paragraph B of Schedule "C" attached to the Lease) shall be deemed to be further extended for a period of vive (5) years, commencing March 1, 1999, to and including February 28, 2004, inclusive, upon the terms, covenants, conditions, provisions and agreements contained in the Lease, as modified by this Amendment. B. Effective as of March 1, 1999, "Basic Rent" (as defined in Paragraph A of Schedule "C" attached to the Lease) shall be deemed to be the sum of Two Hundred Twenty Thousand Six Hundred Eighty-Nine and 00/100 ($220,689.00) Dollars per annum, payable in equal monthly installments of Eighteen Thousand Three Hundred Ninety and 75/100 ($18,390.75) Dollars each. 4. A. (1) Effective as of the date Landlord delivers possession of the "Additional Space" (as hereinafter defined) (hereinafter referred to as the "Additional Space Commencement Date"), Landlord hereby leases to Tenant, and Tenant hereby hires from Landlord, a portion of the building located at 487 Edward H. 3 Ross Drive, Borough of Elmwood Park, County of Bergen and State of New Jersey (hereinafter referred to as the "Adjacent Building"), consisting of approximately twenty-four thousand (24,000) square feet, as shown on the plan attached hereto and made a part hereof as Schedule "A-1" (hereinafter referred to as the "Additional Space"). (2) The "Demised Premises" (as defined in Article 1 of the Lease) shall be and be deemed to be: "(I) a portion of the Building, consisting of approximately thirty-one thousand five hundred twenty-seven (31, 527) square feet, as shown on Schedule "A" attached to the Lease; and (ii) a portion of the Adjacent Building, consisting of approximately twenty-four thousand (24,000) square feet, as shown on Schedule "A-1" attached hereto." B. Effective as of the Additional Space Commencement Date, the following shall be applicable solely with respect to the Additional space: (1) "Basic Rent" (as defined in Paragraph A of Schedule "C" attached to the Lease) shall be deemed to be the sum of One Hundred Fifty-Six Thousand and 00/100 ($156,000.00) Dollars per annum, payable in equal monthly installments of Thirteen Thousand and 00/100 ($13,000.00) Dollars each. (2) "Proportionate Share' (as defined in Paragraph E of Schedule "C" attached to the Lease) shall be deemed to be "twenty-five (25%)( percent/" (3) The number of parking spaces provided in Paragraph 4 of the Third Amendment to Lease dated as of February 28, 1994, shall be deemed to be "twenty (20)", a shown on the plan attached hereto and made a part hereof as Schedule "A-2." 4 (4) Wherever in the Lease reference is made to the "Building" or the "building," same shall be deemed to be the Adjacent Building. (C) (1) Tenant has examined and inspected the Additional Space and agrees to accept the same in the condition in which it exists on the Additional Space Commencement Date. Tenant hereby acknowledges and agrees that no materials whatsoever are to be furnished by Landlord and no work whatever is to be performed by Landlord in connection with said Additional Space or any part thereof. (2) (I) Tenant agrees, at Tenant's sole cost and expense, to perform all work in accordance with plans and specifications to be prepared by Tenant, at Tenant's sole cost and expense, and thereafter, delivered to Landlord for Landlord's approval, which approval shall not be unreasonably withheld (hereinafter referred to as "Tenant's Additional Space Work"). (ii) Tenant's Additional Space Work shall be performed in accordance with all applicable laws and in good and workmanlike manner, utilizing new and first-class materials. Tenant shall obtain and deliver to Landlord all "sign-offs" and approvals in connection therewith, including, without limitation, a certificate of occupance. (iii) (a) Tenant acknowledges and agrees that Landlord shall have the right to submit a bid for the performance of Tenant's Additional Space Work. (b) In the event Tenant selects Landlord to perform Tenant's Additional Space Work, Tenant agrees to pay Landlord, the total cost of Tenant's Additional Space work, as follows: (x) twenty-five (25%) percent shall be paid by Tenant to Landlord upon commencement of Tenant's Additional Space Work, as 5 additional rent, upon demand therefor; (y) twenty-five (25%) percent shall be paid by Tenant to Landlord upon completion of Tenant's Additional Space Work, as additional rent, upon demand therefor; and (z) fifty (50%) percent shall be paid by Tenant to Landlord, by increasing the Basic Rent reserved and covenanted to be paid by Tenant to Landlord under the Leae, as modified by this Amendment, by the annual amount required to fully amortize such amount over sixty (60) months, plus interest, at the rate of ten (10%) percent per annum, in which event, Landlord and Tenant shall execute and deliver to each other an agreement modifying the Lease (including this Amendment), setting forth the increased Basic Rent, but such increase shall nevertheless be effective even if such agreement is not executed and delivered. (iv) Tenant shall be required to utilize Landlord or the contractors designated by Landlord with respect to any work which involves penetrating or altering the exterior, facade, floor slab, roof or structure of the Building which Tenant desires to perform in connection with Tenant's Additional Space Work (or any other work in and to the Demised Premises), provided that the cost charged by Landlord or the contractor designated by Landlord is not greater than ten 910%) percent of the lowest bid received by Tenant in a competitive bid for the same scope of work. In the event the cost charged by Landlord or the contractor designated by Landlord is greater than ten (10%) percent of the lowest bid received by Tenant as aforesaid, then Tenant shall be entitled to retain its own contractors to perform which work, subject to the prior written approval of Landlord, which approval shall not be unreasonably withheld or delayed. (3) (I) Landlord shall be liable and responsible for the costs of compliance with any environmental laws [including, 6 without limitation, the Industrial Site Recovery Act, N.J.S.A. 13:1k-6 ET SEQ., and the regulations promulgated thereunder (hereinafter collectively referred to as "ISRA")] for spills or discharges of "hazardous substances" or "hazardous wastes" (as such terms are defined under such environmental laws) which occurred in or to the Additional Space prior to the Additional Space Term Commencement Date and which were not caused in whole or in part, by Tenant or its agents, servants, employees, contractors or representatives. (ii) Landlord shall indemnify and hold Tenant harmless from and against any and all claims and liabilities (including, but not limited to, reasonable attorneys' fees) which may be incurred by Tenant in connection with, or arising out of Landlord's obligations contained in (I) hereof. 5. Effective as of the date hereof: A. Article 40 of the Lease shall be deemed to be deleted, and the following inserted in its place: "40. RENEWAL OPTION: --------------A. Subject to the provisions set forth below, Tenant shall have the option to renew this Lease for an additional term of five (5) years (hereinafter referred to as the "Renewal Term"), which Renewal Term shall commence upon the expiration of the term of this Lease (hereinafter referred to as the "Initial Term"). All of the terms, covenants and conditions of this Lease shall govern the Renewal Term, except as otherwise specifically set forth hereinafter or if APPLICABLE thereto: (1) The Annual Basic Rent shall be the greater of: (I) the "Market Rent" (as defined in subsection (2) hereof); or (ii) the Basic Rent and additional rent which was in effect during the last year of the Initial Term. (2) "Market Rent" shall mean the fair market rent for the Premises for the Renewal Term, determined as of the date one 7 hundred eighty (180) days prior to the expiration of the Initial Term (hereinafter referred to as the "Determination Date"), based upon the rents generally in effect for comparable condition in Bergen County, New Jersey. Market Rent (for the purposes of determining the Basic Rent only during the commonly known as a "net" basis; that is, in computing Market Rent it shall be assumed that all real estate taxes and customary services are excluded from such Basic Rent. (3) Landlord shall notify Tenant (hereinafter referred to as "Landlord's Determination Notice") of Landlord's Determination Notice") of Landlord's determination of the Market Rent within sixty (60) days of the Determination Date. If Tenant disagrees with Landlord's determination, Tenant shall notify Landlord (hereinafter referred to as "Tenant's Notice of Disagreement") within thirty (30) days of receipt of Landlord's Determination Notice. Time shall be of the essence with respect to Tenant's Notice of Disagreement, and the failure of Tenant to give such notice within the time period set forth above shall conclusively be deemed an acceptance by Tenant of the Market Rent as determined by Landlord and a waiver by Tenant of any right to dispute such Market Rent. If Tenant timely gives its Tenant's Notice of disagreement, then the Market Rent shall be determined as follows: Landlord and Tenant shall, within thirty (30 days of the date on which Tenant's Notice of Disagreement was given, each appoint "Appraiser" (as hereinafter defined) for the purpose of determining the Market Rent. An "Appraiser" shall mean either: (1) a duly qualified impartial real estate appraiser who is a member of the American Institute of Real Estate Appraisers and who has at least ten (1) years experience in appraising the rental value of industrial/warehouse properties comparable to the Building and located in Northern New Jersey; or (ii) a New Jersey licensed real estate broker for a period in excess of ten (1) years and who has at least ten 91) years experience in leasing industrial/warehouse space in buildings comparable to the Building located in Northern New Jersey. In the event that the two 92) Appraisers so appointed fail to agree ass to the Market Rent within a period of thirty (3) days after the appointment of the second Appraiser, such two 92) Appraisers shall forthwith appoint a third Appraiser who shall make a determination in the manner hereinafter described within thirty 93) days thereafter. 8 If such two (2) Appraisers fail to agree upon such third Appraiser within ten (1) days following the last thirty 93) day period, such third Appraiser shall be appointed by the Bergen County Assignment Judge of the New Jersey Superior Court. Such two (2) Appraisers or the third Appraiser, as the case may be, shall proceed with all reasonable dispatch to determine the Market Rent. Within fifteen 915) days following the appointment of the third Appraiser, each party shall submit to the third Appraiser a written report setting forth its determination of the market Rent, together with such information on comparable rentals, or such other evidence as such party shall deem relevant. The third Appraiser shall, within thirty (30) days following the submission of such written reports render its decision by selecting the determination of Market Rent submitted by either the Appraiser selected by Landlord or the Appraise selected by Tenant which, in the judgement of the third Appraiser, most nearly reflects the Market Rent. It is expressly understood that such third Appraiser shall have no power or authority to select any Market Rent other than a Market Rent submitted by the Appraiser selected by Landlord or the Appraiser selected by Tenant, and the decision of such third Appraiser shall be final and binding upon the parties hereto. The decision of such Appraisers shall be final, and such decision shall be in writing and a copy shall be delivered simultaneously to Landlord and to Tenant. If such Appraisers fail to deliver their decision as set forth above prior to the commencement of the Renewal Term, Tenant shall pay Landlord the Basic Rent which was in effect as of the last day of the Initial Term, until such decision is so delivered. If the Market Rent as determined above is in excess of the actual rent paid, then Tenant, upon demand, shall pay to Landlord the difference between the actual rent paid and the Market Rent from the commencement of the Renewal Term. Landlord and Tenant shall each be responsible for and shall pay the fee of the Appraiser appointed by them respectively, and Landlord and Tenant shall share equally the fee of the third Appraiser. B. Tenant's option to renew, as provided in subparagraph A hereof, shall be conditioned upon and subject to each of the following: (1) Tenant shall notify Landlord in exercise of its option to renew at least more than 9 writing of its twelve (12) months but not fifteen (15) months prior to the expiration of the Initial Term; (2) At the time Landlord receives Tenant's notice as provided in subsection 91) hereof and at the commencement of the Renewal Term: (I) Tenant shall not be in default under the terms of provisions of this Lease; and (ii) Tenant shall not have subleased fifty (50%) percent or more of the Premises, exclusive of subleases to any parent, subsidiary or affiliate of Tenant; (3) Tenant shall have no further renewal option other than the option to renew this Lease for the one (1) Renewal set forth in subparagraph A hereof; Term as (4) This option to renew shall be deemed personal to Tenant and may not be assigned or transferred, except in connection with an assignment effectuated in accordance with the provisions of Article 12 hereof; and (5) Landlord shall have no obligation to do any work or perform any services for the Renewal Term with respect to the premises, which Tenant agrees to accept in its then "as is" condition)" B. The following paragraphs shall be deemed to be added to the Lease as Articles 41 through 44 thereof: "41. NO MONEY DAMAGES: If in this Lease it is provided that Landlord's consent or approval as to any matter will not be unreasonably withheld, and it is established by a court or body having final jurisdiction there over that Landlord has been unreasonable, then Landlord shall be deemed to have given its consent or approval and, in addition thereto, shall be liable to Tenant for money damages [excluding, however, consequential damages (e.g., lost profits or loss of business)] by reason of withholding its consent, if such court or body specifically determined that landlord has acted in bad faith or maliciously (the burden of which shall be Landlord's responsibility to prove that landlord has not acted in bad fair or maliciously), subject nevertheless to the provisions of Article 36 hereof." "42. HOLDING OVER: If Tenant retains -----------possession of the Premises or any part thereof, after the termination of the term by lapse of time or otherwise, without prior written approval of Landlord, Tenant shall pay 10 Landlord, two 92) times the monthly Basic Rent payable by Tenant during the last full month of the term, together with additional rent and other charges as provided herein, for the time Tenant thus remains in possession, and, in addition thereto, shall pay Landlord all damages, consequential as well as direct, sustained by reason of Tenant's retention of possession. If Tenant remains in possession of the Premises or any part thereof, after the termination of the term by lapse of time or otherwise, such holding over shall, at the election of Landlord expressed in a written notice to Tenant and not otherwise, constitute an extension of this lease on a month-to-month basis, at two (2) times the monthly Basic Rent payable by Tenant during the lat full month of the term, together with additional rent and other charges as provided herein. The provision of this Article do not exclude Landlord rights of re-entry or any other right hereunder." "43. RIGHT OF FIRST OFFER: -------------------A. So long as: (I) Tenant is not in default under this Lease; (ii) this Lease is in full force and effect; and (iii) Tenant and any parent, subsidiary or affiliate of Tenant is occupying the entire Premises for the purpose of conducting its business, then Landlord agrees that, in the event any space in Elmwood Corporate Park which is then owned by Landlord (hereinafter called the "Offer Space"), shall become "available for leasing" (as hereinafter define), at any time and from time to time after the commencement date of this Lease, before offering to lease such Offer Space to any third party, Landlord will first offer to Tenant in writing (such offer by Landlord to Tenant being hereinafter called "Landlord's Offer") the right to include such Offer Space within the Premises as of the date specified by Landlord in Landlord's Offer (hereinafter called the "Availability Date"). The Availability Date shall be the date that the Offer Space which is the subject of Landlord's offer is reasonably expected to become available for leasing. Landlord shall specify in Landlord's Offer, the terms and conditions upon which Landlord is willing to lease such Offer Space to Tenant (hereinafter collectively called "Landlord's Terms"), including, without limitation: (1) the Availability Date of such Offer Space; 11 (2) the amount of square footage contained in such Offer Space; (3) Tenant's Proportionate Share; (4) the amount of Basic Rent and additional rent; (5) the term of the leasing of such Offer Space which may be for period longer than the Term); (6) the location and configuration of such Offer Space; and (7) such other terms and conditions upon which Landlord is willing to lease the Offer Space to Tenant. B. Tenant shall have the right to accept Landlord's Offer with respect to such Offer Space within fifteen (15) days after Landlord's Offer. Time shall be of the essence with respect to Tenant's acceptance of Landlord's Offer. If Tenant does not duly and timely accept Landlord's Offer with respect to the Offer Space: (I) landlord shall be under no further obligation to Tenant with respect thereto, and Landlord may then lease the Offer Space contained in Landlord's Offer (or any part or parts thereof) to others, on such terms and conditions (including rent and additional rent) as Landlord then elects in its sole discretion. C. if Tenant duly and timely accepts Landlord's Offer, such Offer Space shall be added to the Premises on Landlord's Terms, and upon the following further terms and conditions, effective as of the Availability Date: (1) Landlord shall have no obligation to do any work or perform any services with respect to the Offer Space, which Tenant agrees to accept in its then "as is" condition; (2) the Premises shall be the space originally demised by this Lease, plus the Offer Space; and (3) any other changes which are required to reflect the addition of such Offer Space shall be appropriately made to this Lease. D. Except as expressly set forth hereinabove, the leasing of such Offer Space 12 shall be subject to and in accordance with all of the other terms, covenants and provisions of this Lease. E. Notwithstanding the foregoing, the Offer Space shall not be "available for leasing," if: (I) the Offer Space is subject to a right or option or a renewal right or option contained in any other lease entered into by Landlord prior to the date hereof; or (ii)) the Offers Space remains occupied by the tenant to whom the Offer Space is presently leased (whether by renewal or extension or otherwise), or is offered for re-letting to a subtenant or assignees of such present tenant; or (iii) if another party desires to lease more space in Elmwood Corporate Park than Tenant, which space includes the Offer space. F. The right of first offer set forth in this Article, is personal to Tenant named herein and may not be assigned or transferred. G. Upon request of Landlord, Tenant shall execute and deliver an agreement setting forth the terms and condition sunder which any such Offer Space is added to the premises; it being understood and agreed that such terms and conditions shall nevertheless be effective regardless if such agreement is not executed and delivered. H. Tenant acknowledges and agrees that landlord shall be obligated to make Landlord's Offer to Tenant only at such time as each Offer Space initially becomes "available for leasing;" it being understood and agreed by Tenant, the right of first offer contained herein is a one 91) time right only with respect to each Offer Space." "44. TENANT'S RIGHT OF SELF-HELP: --------------------------A. If Landlord fails to make any repairs or do any work required of Landlord solely with respect to the roof of the Building, in accordance with the provisions of this Leae, and any such failure continues for period of five 95) days after notice thereof is given by Tenant to Landlord, or, if such failure require more than ten (10) days to cure in the exercise of due diligence, unless Landlord commences to cure same within said ten (10) day period an d thereafter diligently prosecute the same to completion, then Tenant, in addition to such other rights and remedies as may be available to Tenant hereunder, may, but shall not be obligated to, make such repairs or perform such work in accordance 13 with the provision of this Lease, at Tenants sole cost and expense. B. In the event Tenant makes such repairs or performs such work, Tenant shall use only those contractors utilized by Landlord in the Building for such work unless such contractors are unwilling or unable to perform such work, in which event Tenant may utilize the services of any other qualified contractor which normally and regularly performs similar work in comparable building in the vicinity of the Building, and provided that: (I) any such contractor does not void or limit any warranty or guaranty procured by Landlord regarding the roof; (ii) such work is performed by Tenant in accordance with the provision of this Leae; and (iii)) Tenant indemnifies and holds Landlord harmless from and against any and all claims, damages and losses incurred by Landlord an/or any other tenant or occupant in the Building as a result of the making of such repairs or the performance of such work." C. The address "90 West Franklin Street, Hackensack, new Jersey, 07601" contained in Article 28 of the lease, shall be deemed to be deleted, and the address "c/o Alfred Sanzari Enterprises, P.O. Box 2187, South Hackensack, New Jersey 076062187, with a copy to Cole, Schotz, Meisel, Forman and Leonard, P.A., Court Plaza North, 25 Main Street, P.O. Box 800, Hackensack, New Jersey 07602-0800, Attention: Edward M. Schotz, Esq." inserted in its place. D. The following shall be deemed to be inserted after the third sentence in Article 12 of the Lease; "In the event Landlord withholds its consent to the subletting or assignment as provided herein, Landlord agrees that it will so notify Tenant in writing within the aforesaid ten (10) day period, specifying therein, in reasonable detail, the reason(s) for the withholding of such consent." 6. A. Tenant understands and agrees that: (I) the remises contiguous to the Original Premises, consisting of approximately 14 thirty-one thousand seven hundred forty-four (31,74) square feet (hereinafter referred to as the "Contiguous Space"), is currently leased to, and occupied by CTX Termination, inc. (hereinafter referred to as "CTX"); and (ii) CTX exercised its option to renew the term of its lease which now expires March 21, 2004 (hereinafter referred to as the "CTX Lease"). B. So long as (I) Tenant is not in default under the Lease, as modified by this Amendment; (ii) the Lease, as modified by this Amendment, is in full force and effect; and (iii) Tenant is occupying the entire Premises for the purpose of conducing its business, then, provided Tenant, at its sole cost and expense, secures the early termination of the CTX Lease, or CTX vacates the Contiguous Space or the CTX Lease is terminated prior to the expiration of the term thereof, landlord shall give Tenant the right to relocate from the Additional Space to the Contiguous Space, upon not less than six (6) months' prior written notice given at any time prior to February 29, 2000 (hereinafter referred to as the "Relocation Notice"). C. In the event Tenant duly and timely exercise the right to relocate as provided herein, the Contiguous Space shall be substituted for the Additional Space as of the effective date of such relocation, upon all of the terms, covenants, conditions, provisions and agreements contained in the Lease, as modified by this Amendment, except that: (1) "Basic Rent" (on a per square foot per annum basis) and additional rent shall be deemed to be the amounts then payable to Tenant to Landlord with respect to the Original Premises; 15 (2) "Proportionate Share" shall be deemed to be "one hundred (100%) percent"; (3) The number of parking spaces provided in Paragraph 4 of the Third Amendment to Lease dated as of February 28, 1994, shall be deemed to be "thirty-six (36)"; (4) The reference to "Adjacent Building" shall be deemed to be deleted; (5) At the time Landlord receives the Relocation Notice and upon the effective date of such relocation, Tenant shall not be in default under this Lease; (6) Tenant pays to Landlord, simultaneously with the Relocation Notice, a sum equal to four (4) months' Basic Rent and additional rent then payable by Tenant to landlord under the Lease, as modified by this Amendment, as consideration fro Tenant's exercise of its right to relocate to the Contiguous Space; (7) Tenant provides Landlord, simultaneously with the Relocation Notice, any documents which evidence the early termination of the CTX Lease, if applicable; and (8) Tenant shall be liable and responsible for restoring the Contiguous Space to the condition which existed as of the effective date of such relocation. D. In the event Tenant does not duly and timely exercise the right to relocate as provided herein, the provisions of this Paragraph shall be null and void and of no further force or effect and Tenant shall have no further right to relocate to the Contiguous Space. E. The right to relocate as provided herein, is personal to Tenant named herein and may not be assigned or transferred. 16 F. Upon request of Landlord, Tenant shall execute and deliver an agreement setting forth the terms and conditions under which the Contiguous Space is substituted for the Additional Space; it being understood and agreed that such terms and conditions shall nevertheless be effective regardless if such agreement is not executed and delivered. 7. Notwithstanding anything to the contrary contained herein, Landlord hereby approves the following work which may be performed by Tenant, at its sole cost and expense, subject nevertheless to all of the other terms, covenants, conditions, provisions and agreements of the Lease, as modified by this Amendment (including, without limitation, article 22 thereof): A. the conversion of approximately five thousand (5,000) square feet of warehouse space currently existing in the Original Premises as of the date hereof, to space to be utilized for production; and B. the conversion of approximately feet of warehouse space currently dat hereof, to office space. eleven thousand (11,000) square existing gin the Additional Space as of the 8. Tenant hereby affirms that security in the amount of One Hundred Two thousand four Hundred Sixty-Two and 72/100 ($102,462.72) Dollars has heretofore been deposited by Tenant to Landlord under the lease. 9. Tenant hereby represents and warrants to Landlord, that Tenant has not dealt with any real estate agent or broker in connection with this Amendment and/or the Additional Space, that this Amendment was not brought about or procured through the use or instrumentality of any agent or broker, and that all negotiations with respect to the term of this Amendment were conducted between 17 landlord, and Tenant. Tenant hereby covenants and agrees to indemnify and hold Landlord harmless from and against any and all claims for commissions and other compensation made by any agent or agents and/or any broker or brokers based on any dealings between Tenant and any agent or agents and/or broker or brokers, together with all costs and expenses incurred by Landlord in resisting such claim s(including, without limitation, attorney's fees and disbursements). 10. A. Except as expressly modified by this Amendment, the Lease and all the terms, covenants, conditions, provisions and agreements thereof, are hereby in all respects, ratified, confirmed and approved. B. Tenant hereby affirms that, as of the date hereof, no breach or default by Landlord has occurred, and that the Lease and all of its terms, covenants, conditions, provisions and agreements, except as modified by this Amendment, are in full force and effect, with no defenses or offsets thereto. C. Tenant hereby releases Landlord of and from all liabilities, claims controversies, causes of action an other matters of every nature which, through the date hereof, have or might have arisen out of or in any way in connection with the Lease and/or the Demised Premises. 11. This Amendment and the Lease contain the entire understanding between the parties with respect to the matters contained herein. No representations, warranties, covenants or agreements have been made concerning or affecting the subject matter of this amendment, except as are expressly contained herein. 12. This Amendment may not be changed orally, but only by an agreement in writing by the party against whom enforcement of any waiver, change, modification or discharge is sought. 18 13. This Amendment shall be binding upon, an enure to the benefit of the parties hereto, their respective legal representatives, successors, and, except as otherwise provided I the Lease, as modified by his amendment, their respective assigns. 14. The submission of this Amendment to Tenant shall not be construed as an offer, nor shall Tenant have any rights with respect hereto, unless and until Landlord shall execute a copy of this Amendment an unconditionally deliver the same to Tenant. 15. Tenant hereby represents and warrants to landlord that: (I) the execution, performance and delivery by Tenant of this Amendment does not violate any provisions of its Charter or By- Laws, and has been fully and validly authorized and approved by any required corporate action of Tenant; (ii) the obligations of Tenant under this Amendment are legal, valid, binding and enforceable against Tenant in accordance with its terms; and (iii)) the person executing this Amendment has the authority to so execute, perform and deliver this Amendment on behalf of Tenant. 16. Tenant hereby acknowledges and agrees that this Amendment is the result of extensive negotiations between the parties. This Amendment shall be construed without regard to any presumption or other rule requiring construction against the party causing this Amendment to be drafted or prepared. 17. A determination that any provision of this Amendment is void unenforceable or invalid shall not affect the enforceability of validity of any other provision, and any determination that the application of any provision of this Amendment to any person or to particular circumstance sis illegal or unenforceable shall not affect the enforceability or validity of such provision as it may apply to other person or circumstances. 19 18. This Amendment may be executed in one or more counterparts, each of which, when so executed and delivered, shall be deemed original, but all of which taken together shall constitute but one and the same instrument. 19. The validity, performance and enforcement of this Amendment shall be governed by and construed in accordance with the laws of the State of new Jersey. IN WITNESS WHEREOF, the parties hereto have respectively executed this Fourth Amendment to Lease as of the day and year first written above. Witness for Landlord: L.P. ALFRED SANZARI ENTERPRISES, By: Alfred Sanzari Enterprises, Inc., its General Partner By: ------------------------------Name: David Sanzari Title: President Attest for Tenant: INC. BIO-REFERENCE LABORATORIES, By: ---------------------------Name: -----------------------Title: Secretary ------------- By: 20 Name: Title: ------------- President Exhibit 10.2 EMPLOYMENT AGREEMENT This Employment Agreement dated as of the 1st day of November, 1997 between Bio-Reference Laboratories, Inc., a New Jersey corporation with its principal place of business at 481 Edward H. Ross Drive, Elmwood Park, New Jersey 07407 (the "Company") and Marc Grodman, residing at RD 1, P.O. Box 309, Califon, New Jersey 07830 (the "Employee"). W I T N E S S E T H : WHEREAS, the Company is primarily engaged in the operation of a clinical laboratory in northern New Jersey, and WHEREAS, the Company desires to avail itself of the Employee's knowledge and experience and to employ the Employee as its President and Chief Executive Officer on the terms and conditions hereinafter set forth, and WHEREAS, the Employee desires to be so employed by the Company on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties agree as follows: 1. Terms of Employment. The Company agrees to employ the Employee as its President and Chief Executive Officer, or in such other position of comparable status and responsibility as the Company may from time to time direct and/or desire, and the Employee agrees to accept such employment with the Company, for a term commencing as of November 1, 1997 (the "Commencement Date") and continuing until October 31, 2004 (the "Expiration Date"), unless sooner terminated as provided in this Agreement (the "Employment Period"). As used in this Agreement, the term "Employment Period" shall also include any periods for which this Agreement is renewed pursuant to Section 2 hereof. 2. Renewal. This Agreement shall be automatically renewable for additional three year periods; provided, that either the Company or the Employee may elect not to renew this Agreement upon written notice to the other party no less than three (3) months before the Expiration Date or any subsequent extension thereof pursuant to this Section 2. 3. Duties. -----(a) During the Employment Period, the Employee shall perform such duties and exercise such powers relating to the Company as are commensurate with the office of President and Chief Executive Officer and shall have such other duties and powers as the Board of Directors shall from time to time assign to him, including by way of example but not limitation, duties with respect to any of the Company's associated companies. As used in this Agreement, the term "Associated Companies" shall mean any company (i) of which not less than fifty (50%) percent of the equity is beneficially owned by the Company or (ii) any subsidiary of such company, if any. (b) During the Employment Period, the Employee shall devote at least 90% of his working time during normal business hours and his best efforts and ability to the business of the Company, shall faithfully and diligently perform the duties of his employment with the Company and shall do all reasonably in his power to promote, develop and extend the business of the Company. (c) During the Employment period, the Employee shall not, except as a representative of the Company or with the written consent of the Company, be directly or indirectly engaged, concerned or interested in the conduct of any other business competing or likely to compete with the Company; provided, that notwithstanding anything contained in this Agreement to the 2 contrary, the Employee shall not be precluded from devoting a reasonable amount of his time to: (i) serving with the prior written approval of the Company as a director or member of a committee of any organization involving no conflict of interest with the business of the Company; and (ii) managing his personal investments; provided, activities shall not materially interfere with the performance of his duties hereunder; and that such Employee's (iii) participating in such courses of instruction and rendering such services as shall be consistent with the maintenance of his skills as a medical doctor; and (iv) performance as an Assistant Professor of Clinical Medicine and assistant attending physician at Columbia University and at Presbyterian Hospital, respectively, or the performance of similar services at any similar institutions; and (v) rendering medical services to the Uniform Firefighters of New York City similar to the services presently rendered by the Employee pursuant to a contract presently in force. (d) The Employee shall be employed at the offices of the Company located in Elmwood Park, New Jersey; provided that the Employee acknowledges and agrees that the proper performance of these duties may make it necessary to spend reasonable periods of time in other parts of the country. 4. Compensation. (a) During the Employment Period, the Company shall pay the Employee as compensation for his services under this Agreement, a minimum annual Base Compensation consisting of salary and bonus in the aggregate amount of Three Hundred Ninety Five Thousand ($395,000) Dollars (the "Base Compensation"). The Base Compensation shall be payable in equal installments in accordance with the regular payroll procedures established by the Company. In October of each fiscal year during the Employment Period, the Company's Board of Directors will consider increasing the Employee's Compensation under this Agreement, based upon the performance of 3 the Company and of the Employee during the fiscal year then ending with such increase, if granted, taking effect as of the immediately following November 1. (b) The Company shall pay for (excluding the P.S. 58 costs) and maintain "Split Dollar" Life Insurance in the face amount of Four Million ($4,000,000) Dollars (including Two Million ($2,000,000) Dollars of such insurance which it presently maintains), insuring the life of the Employee. The proceeds of such insurance shall be payable to the estate of the Employee (excluding benefits required to be paid to the Company pursuant to the split dollar plan for the premiums paid). (c) The Company shall lease and insure, under the Company's policy, an automobile for the benefit of the Employee. The Company shall be responsible for maintenance, gasoline, repair and all other such costs but only to the extent such expenses relate to business use of the automobile. At the end of the lease term, or in the event of the termination of this Agreement for any reason, including non-renewal, the Employee shall have the following options: (i) surrender the automobile to the Company, (ii) assume the Company's lease payment obligation; or (iii) exercise the purchase option of the lease, if any. (d) The Company shall promptly pay or reimburse the Employee for all expenses incurred by the Employee in the performance of his duties under this Agreement. Such expenses shall be limited to the reasonable out-of-pocket expenses necessarily and actually incurred by the Employee in the performance of his duties; provided that (i) the expenses have been detailed on a form acceptable to the Company and submitted to the Company for review 4 and approval and (ii) appropriate supporting documentation is submitted together with the approved expense form. (e) The Employee shall be entitled to participate in any fringe benefit and bonus plans available to the Company's employees as in effect from time to time, to the extent that the Employee may be eligible to do so under the applicable provisions of the plans including but not limited to pension, profit sharing, stock option and similar plans and life and medical insurance plans or coverage maintained by the Company for senior personnel and/or all personnel. (f) The Employee shall be entitled to such vacation, personal time and holidays as he is eligible for under the Company's Employment and Personnel Policy as the same presently exists or may hereinafter be amended. (g) Notwithstanding the provisions of subparagraph (a) of this Section 4, the Employee shall also be entitled to a percentage increase in his Base Compensation as in effect on June 30 of each year that this Agreement is in effect, equal to the percentage increase in the Consumer Price Index - All Items for the New York metropolitan area (or any successor index) for such month of June as compared to such Consumer Price Index for the month of June in the immediately preceding year. Any such increase shall be effective on the immediately following November 1. No adjustments shall be made for decreases in such Index. 5. Issuances of Stock and Options. In further consideration -----------------------------for his employment, the Company agreed on May 13, 1997 to the following issuances of its Common Stock and options to the Employee. (a) Forfeitable Stock -- The Company has issued 300,000 shares of its Common Stock to the Employee subject to forefiture. 5 If the Employee's employment agreement is terminated by the Company "For Cause" or at the Employee's option, without "Good Reason" (but not due to a "Change in Control"), all as herein defined, the Employee will forfeit such shares on the following basis. If Termination "For Cause" or "Without Good Reason" Occurs during the Number of Shares Following Periods Forfeited --------------------------------May 1, 1997 through April 30, 1998 225,000 shs. May 1, 1998 through April 30, 1999 150,000 shs. May 1, 1999 through April 30, 2000 75,000 shs. (b) Stock Options -- The Company has issued five-year incentive stock options ("ISOs) to the Employee exercisable to purchase 100,000 shares of the Common Stock at $.790625 per share. These ISOs are subject to the terms and conditions of the Company's 1989 Employees' Stock Option Plan. In addition, the Company has issued ten-year non-qualified options ("NQOs") to the Employee exercisable to purchase 200,000 shares of its Common Stock at $.71875 per share. The NQOs to the extent not exercised shall terminate if this employment agreement is terminated by the Company "For Cause" or at the Employee's option without "Good Reason" (but not due to a "Change in Control"). 6. Disability. If during the Employment Period, the Employee shall incur a Total Disability then, subject to the earlier termination of this Agreement or the earlier termination of the disability, the Company shall compensate the Employee as provided in subparagraphs (a), (b), (c) and (d) of this Section 6. (a) For the month in which the Employee incurs the total disability, and for the following twelve (12) months of the disability, the Company shall compensate the Employee at a rate equal to his then current Base Compensation. 6 (b) For a period of three (3) months commencing upon the termination of the period described in subparagraph (a), the Company shall not pay Employee any portion of his Base Compensation and Employee shall be on an unpaid leave of absence. (c) If the Employee's disability shall terminate at any time prior to the expiration of the period described in subparagraph (b) of this Section 6, then the Employee shall return to full and active employment with the Company under the terms of this Agreement; provided that if he shall again become disabled within a period of three (3) months after such return, and such disability is related to his original disability, then the Employee shall be deemed to have been continuously disabled from the date he incurred his original disability. (d) Upon expiration of the three (3) month period described in subparagraph (b) of this Section 6, the employment of the Employee shall terminate, unless an additional leave of absence is granted by the Company, in which event the employment of the Employee shall terminate upon the expiration of the additional leave of absence. (e) In the event the Employee shall incur a Partial Disability then during the period of the Partial Disability, the Employee's Base Compensation shall be equitably adjusted according to the time that he is able to devote to the affairs of the Company. (f) In addition to the foregoing, the Employee shall be entitled to receive the amounts, if any, as may be payable to him by reason of his disability under policies of insurance maintained by the Company. (g) As used in this Agreement, the term "Total Disability" shall mean a disability such that, for physical or 7 mental reasons, the Employee is unable to perform any of his usual duties to the Company on a full-time basis. As used in this Agreement, the term "Partial Disability" shall mean a disability, other than a total disability, such that for physical or mental reasons, the Employee is unable to perform all of his usual duties to the Company on a full-time basis. 7. Termination. (a) Termination by Death. If the Employee dies during the Employment Period, the Company's obligations under this Agreement shall terminate six (6) months after the date of death and the Employee's estate shall be entitled to all arrearages of Base Compensation and expenses. In addition, the Employee's estate (or such other named beneficiary) shall be entitled to the amounts, if any, as may be payable to his estate or beneficiaries under policies of insurance maintained by the Company. (b) Termination for Cause. This Agreement and the Employee's employment with the Company may be terminated for Cause at any time in accordance with subparagraph (d) of this Section 7. In the event this Agreement is terminated for Cause, the Employee shall be entitled to all arrearages of Base Compensation and expenses through the Date of Termination but shall not be entitled to further compensation. As used in this Agreement, and without limitation, the term "Cause" shall mean: (i) an act or acts of dishonesty constituting criminal acts by the Employee resulting or intended to result directly or indirectly in gain to or personal enrichment of the Employee at the Company's expense; (ii) the commission of any crime involving fraud, or theft by the Employee against the Company; 8 embezzlement (iii) engaging in competition with the Company, including taking a management position with, or control of, a business engaged in the manufacture, sale or distribution of a class of products or service which constituted 15% or more of the sales or gross income of the Company and its associated companies during the fiscal year of the Company immediately preceding the termination of the Employee's employment. (c) Termination at the Option of the Employee. This Agreement and the Employee's employment with the Company may be terminated at any time, at the election of the Employee, for Good Reason in accordance with subparagraph (d) of this Section 7. In the event this Agreement is terminated for Good Reason, the Employee shall be paid during the remainder of the Employment Period (computed without giving effect to the earlier termination hereunder), his Base Compensation (other than due to Partial Disability) at the rate in effect as of the Date of Termination, and shall continue to be entitled to employee benefits as if he were still employed by the Company, until completion of such Employment Period (computed without giving effect to the earlier termination hereunder). As used in this Agreement, and without limitation, the term "Good Reason" shall mean: (i) the assignment to the Employee of duties inconsistent with the office of President and Chief Executive Officer of the Company or his then current office, the removal of the Employee from such office or substantial reduction in the nature or status of the Employee's then current responsibilities; (ii) the reduction of the Employee's then current Base (other than due to Partial Disability) ; Compensation (iii) the relocation of the Company's principal executive offices to a location more than fifty (50) miles from the Company's 9 current principal executive offices or the transfer of the Employee to a place other than the Company's principal executive offices (excepting required travel on the Company's business in a manner substantially similar to the Employee's then current business travel obligations); and (iv) the failure by the Company to continue to provide the Employee with benefits at least as favorable as those in which the Employee was then participating. (d) Notice of Termination. Any purported termination of the Employee's employment shall be communicated by a written notice of termination to the other party hereto and specify the Date of Termination (the "Notice of Termination"). Such notice shall indicate a specific terminated provision in this Agreement which is relied upon, recite the facts and circumstances claimed to provide the basis for such termination and specify the Date of Termination. As used in this Agreement, the term "Date of Termination" shall mean the date specified in the Notice of Termination, which date shall not be less than thirty (30) nor more than sixty (60) days from the date the Notice of Termination is given. If within thirty (30) days from the date the Notice of Termination is given, the party receiving such notice notifies the other party that a dispute exists concerning such termination, the Date of Termination shall be the date on which the dispute is finally resolved. The Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company will continue to pay the Employee his full Base Compensation in effect as of the date of the Notice of Termination and continue the Employee as a participant in all compensation, benefit and 10 insurance plans in which he was participating at such date, until the dispute is finally resolved. Amounts paid under this subparagraph (d) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 8. Change in Control. In the event of a Change in Control and, as a result of such Change in Control, the Employee is terminated without Cause or the Employee elects to terminate his employment for any reason as a result thereof, then the Employee shall receive the following benefits: (a) The Company shall pay to the Employee his full Base Compensation at the rate in effect at the time of the Notice of Termination through the Date of Termination. (b) In lieu of any further Base Compensation payments for periods subsequent to the Date of Termination, the Company shall pay to the Employee as severance pay not later than the fifth day following the Date of Termination, a lump sum payment (the "Severance Payment") equal to 2.99 times the average of the annual Compensation which was payable to the Employee by the Company and includible in the Employee's gross income for federal income tax purposes for the five (5) calendar years, or for the portion of such period during which the Employee was actually employed by the Company if the Employee has been employed by the Company for less than five (5) calendar years preceding the earlier of the calendar year in which a Change in Control occurred or the calendar year of the Date of Termination (the "Base Period"). Such average shall be determined in accordance with the provisions of Section 280G(d) of the Internal Revenue Code of 1986 as amended (the "Code"). As used in this Agreement, the term "Compensation" shall mean and include every type and form of compensation includible in the Employee's 11 gross income in respect of his employment by the Company including compensation income recognized as a result of the exercise of stock options or sale of the stock so acquired, except to the extent otherwise provided in Congressional or Joint Committee Reports or temporary or final regulations interpreting Section 280G(d) of the Code. (c) The Severance Payment shall be reduced by the amount of any other payment or the value of any benefit received or to be received by the Employee in connection with the termination of his employment or contingent upon a Change in Control (whether payable pursuant to the terms of this Agreement, any other plan, agreement or arrangement with the Company) unless (i) the Employee shall have effectively waived his receipt or enjoyment of such payment or benefit prior to the date of payment of the Severance Payment, (ii) in the opinion of tax counsel selected by the Company such other payment or benefit does not constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, or (iii) in the opinion of such tax counsel, the Severance Payment (in its full amount or as partially reduced, as the case may be) plus all other payments or benefits which constitute "parachute payments" within the meaning of Section 280G(b)(2) of the Code are reasonable compensation file services actually rendered, within the meaning of Section 280G(b)(4) of the Code, and such payments are deductible by the Company. The value of any non-cash benefit or any deferred cash payment shall be determined by the Company in accordance with the principles of Section 280G(d)(3) and (4) of the Code. (d) Except to the extent that Congressional or Joint Committee Reports or temporary or final regulations interpreting Section 280G of the Code specify that such payments would result, 12 under subsection (c) above, in a reduction in the Severance Payment: (i) The Company shall pay to the Employee, not later than the fifth day following the Date of Termination, a lump sum amount equal to the sum of (x) any bonus compensation which has been allocated or awarded for a fiscal year preceding the Date of Termination but has not yet been paid, and (y) a pro rata portion of any bonus compensation which the Employee has earned for the fiscal year in which the Date of Termination occurs determined by multiplying the Employee's prior years' bonus compensation by a fraction equal to the number of full calendar months in the fiscal year prior to the Date of Termination over twelve. (ii) The Company shall also pay all legal fees and expenses incurred by the Employee as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement). (e) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Employee and the Company in applying the terms of this Section 8, the aggregate "parachute payments" paid are in an amount that would result in any portion of such "parachute payments" not being deductible by the Company by reason of Section 280G of the Code, then the Employee shall have an obligation to pay the Company upon demand an amount equal to the sum of (i) the portion of the aggregate "parachute payments" paid that would not be deductible by reason of Section 280G of the Code and (ii) interest on the amount set forth in clause (i) of this sentence at the applicable Federal rate (as 13 defined in Section 1274(d) of the Code) from the date of receipt of such excess until the date of such payment. (f) As used in the Agreement, the term "Change in Control" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A issued under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as in effect as of the date hereof (regardless of whether or not a Proxy Statement is being filed pursuant to such Regulation at such time), or if Item 6(e) is no longer in effect, any subsequent regulation issued under the Exchange Act for a similar purpose, whether or not the Company is subject to such reporting requirements; provided, that without limitation, such a change in control shall be deemed to have occurred if: (i) any "person" other than the Employee is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two consecutive years (not including any period prior to the date of the Agreement), individuals who at the beginning of such period constitute the Board of Directors, and any new director, whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for elections was previously approved, cease for any reason to constitute a majority of the Board; or 14 (iii) the business of the Company is disposed of by the Company pursuant to a liquidation, sale of assets of the Company, or otherwise. 9. Confidential Information. The Employee acknowledges an obligation of confidentiality to the Company and shall not divulge, disclose or communicate any trade secret, private or confidential information or other proprietary knowledge of the Company or its associated companies obtained or acquired by him while so employed. This restriction shall apply after the termination of the Employee's employment without limit in point of time but shall cease to apply to information or knowledge which may come into the public domain or whose disclosure may be required by law or court order or pursuant to the written consent of the Corporation. 10. Return of Information. Upon termination of employment, the Employee agrees to not take with him and to deliver to the Company all records, notes, data, memoranda, models, equipment, blueprints, drawings, manuals, letters, reports and all other materials of a secret or confidential nature relating to the business of the Company which are in possession or control of the Employee. 11. General Provisions. (a) This Agreement contains the entire transaction between the parties, and there are no other representations, warranties, conditions or agreements relating to the subject matter of this Agreement. (b) The waiver by any party of any breach or default of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. (c) This Agreement may not be changed orally but only by an Agreement in writing duly executed on behalf of the party 15 against which enforcement of any waiver, change, modification, consent or discharge is sought. (d) This Agreement shall be binding upon and be enforceable against the Company and its successors and assigns. Insofar as the Employee is concerned, this Agreement is personal and cannot be assigned. (e) This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (f) This Agreement shall be construed pursuant to and in accordance with the laws of the State of New Jersey. (g) If any term or provision of this Agreement is held or deemed to be invalid or unenforceable, in whole or in part, by a court of competent jurisdiction, this Agreement shall be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement. (h) Any dispute, grievance or controversy arising under or in connection with this Agreement shall be referred to the Board of Directors of the Company and shall be dealt with by personal discussion, and if not satisfactorily resolved, shall be submitted to arbitration under the Rules of the American Arbitration Association in New York City. (i) Any consent of the Company required under this Agreement shall not be unreasonably withheld or delayed. 16 IN WITNESS WHEREOF, first above written. COMPANY: the parties have executed this Agreement on the date Bio-Reference Laboratories, Inc. By /s/Howard Dubinett Its Executive Vice President Duly Authorized EMPLOYEE: /s/Marc Grodman Marc Grodman 17 Exhibit 10.3 EMPLOYMENT AGREEMENT This Employment Agreement dated as of the 1st day of May, 1997 between Bio-Reference Laboratories, Inc., a New Jersey corporation with its principal place of business at 481 Edward H. Ross Drive, Elmwood Park, New Jersey 07407 (the "Company") and Howard Dubinett, residing at 195 Little Falls Road, Cedar Grove, New Jersey 07009 (the "Employee"). W I T N E S S E T H : WHEREAS, the Company is primarily engaged in the operation of a clinical laboratory in northern New Jersey, and WHEREAS, the Company desires to avail itself of the Employee's knowledge and experience and to employ the Employee as its Executive Vice President and Chief Operating Officer on the terms and conditions hereinafter set forth, and WHEREAS, the Employee desires to be so employed by the Company on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties agree as follows: 1. Terms of Employment. The Company agrees to employ the Employee as its Executive Vice President and Chief Operating Officer, or in such other position of comparable status and responsibility as the Company may from time to time direct and/or desire, and the Employee agrees to accept such employment with the Company, for a term commencing as of May 1, 1997 (the "Commencement Date") and continuing until October 31, 2002 (the "Expiration Date"), unless sooner terminated as provided in this Agreement (the "Employment Period"). As used in this Agreement, the term "Employment Period" shall also include any periods for which this Agreement is renewed pursuant to Section 2 hereof. 2. Renewal. This Agreement shall be automatically renewable for additional one year periods; provided, that either the Company or the Employee may elect not to renew this Agreement upon written notice to the other party no less than one (1) month before the Expiration Date or any subsequent extension thereof pursuant to this Section 2. 3. Duties. -----(a) During the Employment Period, the Employee shall perform such duties and exercise such powers relating to the Company as are commensurate with the office of Executive Vice President and Chief Operating Officer and shall have such other duties and powers as the Board of Directors shall from time to time assign to him, including by way of example but not limitation, duties with respect to any of the Company's associated companies. As used in this Agreement, the term "Associated Companies" shall mean any company (i) of which not less than fifty (50%) percent of the equity is beneficially owned by the Company or (ii) any subsidiary of such company, if any. (b) During the Employment Period, the Employee shall devote all of his working time during normal business hours and his best efforts and ability to the business of the Company, shall faithfully and diligently perform the duties of his employment with 2 the Company and shall do all reasonably in his power to promote, develop and extend the business of the Company. (c) During the Employment period, the Employee shall not, except as a representative of the Company or with the written consent of the Company, be directly or indirectly engaged, concerned or interested in the conduct of any other business competing or likely to compete with the Company; provided, that notwithstanding anything contained in this Agreement to the contrary, the Employee shall not be precluded from devoting a reasonable amount of his time to: (i) serving with the prior written approval of the Company as a director or member of a committee of any organization involving no conflict of interest with the business of the Company; and (ii) managing his personal investments; provided, activities shall not materially interfere with the performance of his duties hereunder. that such Employee's (d) The Employee shall be employed at the offices of the Company located in Elmwood Park, New Jersey; provided that the Employee acknowledges and agrees that the proper performance of these duties may make it necessary to spend reasonable periods of time in other parts of the country. 4. Compensation. (a) During the Employment Period, the Company shall pay the Employee as compensation for his services under this Agreement, a minimum Base Compensation at an annual rate of One Hundred Ninety One Thousand Four Hundred ($191,400) Dollars through October 31, 1997, and thereafter a minimum annual Base Compensation consisting 3 of salary and bonus in the aggregate amount of Two Hundred Twenty Thousand ($220,000) Dollars (the "Base Compensation"). The Base Compensation shall be payable in equal installments in accordance with the regular payroll procedures established by the Company. In October of each fiscal year during the Employment Period, the Company's Board of Directors will consider increasing the Employee's Compensation under this Agreement, based upon the performance of the Company and of the Employee during the fiscal year then ending with such increase, if granted, taking effect as of the immediately following November 1. (b) The Company shall pay for (excluding the P.S. 58 costs) and maintain "Split Dollar" Life Insurance in the face amount of Five Hundred Fifty Thousand ($550,000) Dollars, insuring the life of the Employee. The proceeds of such insurance shall be payable to the estate of the Employee (excluding benefits required to be paid to the Company pursuant to the split dollar plan for the premiums paid). Once such insurance is fully paid, the Company will apply for an additional aggregate Five Hundred Fifty Thousand ($550,000) Dollars of similar "Split Dollar" Life Insurance insuring the Employee's life and will maintain such additional insurance during his employment by the Company. (c) The Company shall lease and insure, under the Company's policy, an automobile for the benefit of the Employee. The Company shall be responsible for maintenance, gasoline, repair and all other such costs but only to the extent such expenses relate to business use of the automobile. At the end of the lease 4 term, or in the event of the termination of this Agreement for any reason, including non-renewal, the Employee shall have the following options: (i) surrender the automobile to the Company, (ii) assume the Company's lease payment obligation; or (iii) exercise the purchase option of the lease, if any. (d) The Company shall promptly pay or reimburse the Employee for all expenses incurred by the Employee in the performance of his duties under this Agreement. Such expenses shall be limited to the reasonable out-of-pocket expenses necessarily and actually incurred by the Employee in the performance of his duties; provided that (i) the expenses have been detailed on a form acceptable to the Company and submitted to the Company for review and approval and (ii) appropriate supporting documentation is submitted together with the approved expense form. (e) The Employee shall be entitled to participate in any fringe benefit and bonus plans available to the Company's employees as in effect from time to time, to the extent that the Employee may be eligible to do so under the applicable provisions of the plans including but not limited to pension, profit sharing, stock option and similar plans and life and medical insurance plans or coverage maintained by the Company for senior personnel and/or all personnel. (f) The Employee shall be entitled to such vacation, personal time and holidays as he is eligible for under the 5 Company's Employment and Personnel Policy as the same presently exists or may hereinafter be amended. (g) Notwithstanding the provisions of subparagraph (a) of this Section 4, the Employee shall also be entitled to a percentage increase in his Base Compensation as in effect on June 30 of each year that this Agreement is in effect, equal to the percentage increase in the Consumer Price Index - All Items for the New York metropolitan area (or any successor index) for such month of June as compared to such Consumer Price Index for the month of June in the immediately preceding year. Any such increase shall be effective on the immediately following November 1. No adjustments shall be made for decreases in such Index. 5. Issuances of Stock and Options. In further consideration -----------------------------for his employment, the Company agreed on May 13, 1997 to the following issuances of its Common Stock and options to the Employee. (a) Forfeitable Stock -- The Company has issued 240,000 shares of its Common Stock to the Employee subject to forfeiture. If the Employee's employment agreement is terminated by the Company "For Cause" or at the Employee's option, without "Good Reason" (but not due to a "Change in Control"), all as herein defined, the Employee will forfeit such shares on the following basis. If Termination "For Cause" or "Without Good Reason" Occurs during the Number of Shares Following Periods Forfeited May 1, 1997 through April 30, 1998 180,000 shs. May 1, 1998 through April 30, 1999 120,000 shs. May 1, 1999 through April 30, 2000 60,000 shs. 6 (b) Stock Options -- The Company has issued ten-year incentive stock options ("ISOs") to the Employee exercisable to purchase 60,000 shares of its Common Stock at $.71875 per share. These ISOs are subject to the terms and conditions of the Company's 1989 Employees' Stock Option Plan. 6. Disability. If during the Employment Period, the Employee shall incur a Total Disability then, subject to the earlier termination of this Agreement or the earlier termination of the disability, the Company shall compensate the Employee as provided in subparagraphs (a), (b), (c) and (d) of this Section 6. (a) For the month in which the Employee incurs the total disability, and for the following twelve (12) months of the disability, the Company shall compensate the Employee at a rate equal to his then current Base Compensation. (b) For a period of three (3) months commencing upon the termination of the period described in subparagraph (a), the Company shall not pay Employee any portion of his Base Compensation and Employee shall be on an unpaid leave of absence. (c) If the Employee's disability shall terminate at any time prior to the expiration of the period described in subparagraph (b) of this Section 6, then the Employee shall return to full and active employment with the Company under the terms of this Agreement; provided that if he shall again become disabled within a period of three (3) months after such return, and such disability is related to his original disability, then the Employee 7 shall be deemed to have been continuously disabled from the date he incurred his original disability. (d) Upon expiration of the three (3) month period described in subparagraph (b) of this Section 6, the employment of the Employee shall terminate, unless an additional leave of absence is granted by the Company, in which event the employment of the Employee shall terminate upon the expiration of the additional leave of absence. (e) In the event the Employee shall incur a Partial Disability then during the period of the Partial Disability, the Employee's Base Compensation shall be equitably adjusted according to the time that he is able to devote to the affairs of the Company. (f) In addition to the foregoing, the Employee shall be entitled to receive the amounts, if any, as may be payable to him by reason of his disability under policies of insurance maintained by the Company. (g) As used in this Agreement, the term "Total Disability" shall mean a disability such that, for physical or mental reasons, the Employee is unable to perform any of his usual duties to the Company on a full-time basis. As used in this Agreement, the term "Partial Disability" shall mean a disability, other than a total disability, such that for physical or mental reasons, the Employee is unable to perform all of his usual duties to the Company on a full-time basis. 7. Termination. 8 (a) Termination by Death. If the Employee dies during the Employment Period, the Company's obligations under this Agreement shall terminate six (6) months after the date of death and the Employee's estate shall be entitled to all arrearages of Base Compensation and expenses. In addition, the Employee's estate (or such other named beneficiary) shall be entitled to the amounts, if any, as may be payable to his estate or beneficiaries under policies of insurance maintained by the Company. (b) Termination for Cause. This Agreement and the Employee's employment with the Company may be terminated for Cause at any time in accordance with subparagraph (d) of this Section 7. In the event this Agreement is terminated for Cause, the Employee shall be entitled to all arrearages of Base Compensation and expenses through the Date of Termination but shall not be entitled to further compensation. As used in this Agreement, and without limitation, the term "Cause" shall mean: (i) an act or acts of dishonesty constituting criminal acts by the Employee resulting or intended to result directly or indirectly in gain to or personal enrichment of the Employee at the Company's expense; (ii) the commission of any crime involving fraud, embezzlement or theft by the Employee against the Company; (iii) engaging in competition with the Company, including taking a management position with, or control of, a business engaged in the manufacture, sale or distribution of a class of products or service which constituted 15% or more of the sales or 9 gross income of the Company and its associated companies during the fiscal year of the Company immediately preceding the termination of the Employee's employment. (c) Termination at the Option of the Employee. This Agreement and the Employee's employment with the Company may be terminated at any time, at the election of the Employee, for Good Reason in accordance with subparagraph (d) of this Section 7. In the event this Agreement is terminated for Good Reason, the Employee shall be paid during the remainder of the Employment Period (computed without giving effect to the earlier termination hereunder), his Base Compensation (other than due to Partial Disability) at the rate in effect as of the Date of Termination, and shall continue to be entitled to employee benefits as if he were still employed by the Company, until completion of such Employment Period (computed without giving effect to the earlier termination hereunder). As used in this Agreement, and without limitation, the term "Good Reason" shall mean: (i) the assignment to the Employee of duties inconsistent with the office of Executive Vice President and Chief Operating Officer of the Company or his then current office, the removal of the Employee from such office or substantial reduction in the nature or status of the Employee's then current responsibilities; (ii) the reduction of the Employee's then current Base Compensation (other than due to Partial Disability) ; (iii) the relocation of the Company's principal executive offices to a location more than fifty (50) miles from the Company's 10 current principal executive offices or the transfer of the Employee to a place other than the Company's principal executive offices (excepting required travel on the Company's business in a manner substantially similar to the Employee's then current business travel obligations); and (iv) the failure by the Company to continue to provide the Employee with benefits at least as favorable as those in which the Employee was then participating. (d) Notice of Termination. Any purported termination of the Employee's employment shall be communicated by a written notice of termination to the other party hereto and specify the Date of Termination (the "Notice of Termination"). Such notice shall indicate a specific terminated provision in this Agreement which is relied upon, recite the facts and circumstances claimed to provide the basis for such termination and specify the Date of Termination. As used in this Agreement, the term "Date of Termination" shall mean the date specified in the Notice of Termination, which date shall not be less than thirty (30) nor more than sixty (60) days from the date the Notice of Termination is given. If within thirty (30) days from the date the Notice of Termination is given, the party receiving such notice notifies the other party that a dispute exists concerning such termination, the Date of Termination shall be the date on which the dispute is finally resolved. The Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. 11 Notwithstanding the pendency of any such dispute, the Company will continue to pay the Employee his full Base Compensation in effect as of the date of the Notice of Termination and continue the Employee as a participant in all compensation, benefit and insurance plans in which he was participating at such date, until the dispute is finally resolved. Amounts paid under this subparagraph (d) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 8. Change in Control. In the event of a Change in Control and, as a result of such Change in Control, the Employee is terminated without Cause or the Employee elects to terminate his employment for any reason as a result thereof, then the Employee shall receive the following benefits: (a) The Company shall pay to the Employee his full Base Compensation at the rate in effect at the time of the Notice of Termination through the Date of Termination. (b) In lieu of any further Base Compensation payments for periods subsequent to the Date of Termination, the Company shall pay to the Employee as severance pay not later than the fifth day following the Date of Termination, a lump sum payment (the "Severance Payment") equal to 2.99 times the average of the annual Compensation which was payable to the Employee by the Company and includible in the Employee's gross income for federal income tax purposes for the five (5) calendar years, or for the portion of such period during which the Employee was actually employed by the 12 Company if the Employee has been employed by the Company for less than five (5) calendar years preceding the earlier of the calendar year in which a Change in Control occurred or the calendar year of the Date of Termination (the "Base Period"). Such average shall be determined in accordance with the provisions of Section 280G(d) of the Internal Revenue Code of 1986 as amended (the "Code"). As used in this Agreement, the term "Compensation" shall mean and include every type and form of compensation includible in the Employee's gross income in respect of his employment by the Company including compensation income recognized as a result of the exercise of stock options or sale of the stock so acquired, except to the extent otherwise provided in Congressional or Joint Committee Reports or temporary or final regulations interpreting Section 280G(d) of the Code. (c) The Severance Payment shall be reduced by the amount of any other payment or the value of any benefit received or to be received by the Employee in connection with the termination of his employment or contingent upon a Change in Control (whether payable pursuant to the terms of this Agreement, any other plan, agreement or arrangement with the Company) unless (i) the Employee shall have effectively waived his receipt or enjoyment of such payment or benefit prior to the date of payment of the Severance Payment, (ii) in the opinion of tax counsel selected by the Company such other payment or benefit does not constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, or (iii) in the opinion of such tax counsel, the Severance Payment (in its full 13 amount or as partially reduced, as the case may be) plus all other payments or benefits which constitute "parachute payments" within the meaning of Section 280G(b)(2) of the Code are reasonable compensation file services actually rendered, within the meaning of Section 280G(b)(4) of the Code, and such payments are deductible by the Company. The value of any non-cash benefit or any deferred cash payment shall be determined by the Company in accordance with the principles of Section 280G(d)(3) and (4) of the Code. (d) Except to the extent that Congressional or Joint Committee Reports or temporary or final regulations interpreting Section 280G of the Code specify that such payments would result, under subsection (c) above, in a reduction in the Severance Payment: (i) The Company shall pay to the Employee, not later than the fifth day following the Date of Termination, a lump sum amount equal to the sum of (x) any bonus compensation which has been allocated or awarded for a fiscal year preceding the Date of Termination but has not yet been paid, and (y) a pro rata portion of any bonus compensation which the Employee has earned for the fiscal year in which the Date of Termination occurs determined by multiplying the Employee's prior years' bonus compensation by a fraction equal to the number of full calendar months in the fiscal year prior to the Date of Termination over twelve. (ii) The Company shall also pay all legal fees and expenses incurred by the Employee as a result of such termination (including all such fees and expenses, if any, incurred in 14 contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement). (e) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Employee and the Company in applying the terms of this Section 8, the aggregate "parachute payments" paid are in an amount that would result in any portion of such "parachute payments" not being deductible by the Company by reason of Section 280G of the Code, then the Employee shall have an obligation to pay the Company upon demand an amount equal to the sum of (i) the portion of the aggregate "parachute payments" paid that would not be deductible by reason of Section 280G of the Code and (ii) interest on the amount set forth in clause (i) of this sentence at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of receipt of such excess until the date of such payment. (f) As used in the Agreement, the term "Change in Control" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A issued under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as in effect as of the date hereof (regardless of whether or not a Proxy Statement is being filed pursuant to such Regulation at such time), or if Item 6(e) is no longer in effect, any subsequent regulation issued under the Exchange Act for a similar purpose, whether or not the Company is subject to such reporting requirements; provided, that without 15 limitation, such a change in control shall be deemed to have occurred if: (i) any "person" other than the Employee is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two consecutive years (not including any period prior to the date of the Agreement), individuals who at the beginning of such period constitute the Board of Directors, and any new director, whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for elections was previously approved, cease for any reason to constitute a majority of the Board; or (iii) the business of the Company is disposed of by the Company pursuant to a liquidation, sale of assets of the Company, or otherwise. 9. Confidential Information. The Employee acknowledges an -----------------------obligation of confidentiality to the Company and shall not divulge, disclose or communicate any trade secret, private or confidential information or other proprietary knowledge of the Company or its associated companies obtained or acquired by him while so employed. This restriction shall apply after the termination of the 16 Employee's employment without limit in point of time but shall cease to apply to information or knowledge which may come into the public domain or whose disclosure may be required by law or court order or pursuant to the written consent of the Corporation. 10. Return of Information. Upon termination of employment, the Employee agrees to not take with him and to deliver to the Company all records, notes, data, memoranda, models, equipment, blueprints, drawings, manuals, letters, reports and all other materials of a secret or confidential nature relating to the business of the Company which are in possession or control of the Employee. 11. General Provisions. (a) This Agreement contains the entire transaction between the parties, and there are no other representations, warranties, conditions or agreements relating to the subject matter of this Agreement. (b) The waiver by any party of any breach or default of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. (c) This Agreement may not be changed orally but only by an Agreement in writing duly executed on behalf of the party against which enforcement of any waiver, change, modification, consent or discharge is sought. (d) This Agreement shall be binding upon and be enforceable against the Company and its successors and assigns. 17 Insofar as the Employee is concerned, this Agreement is personal and cannot be assigned. (e) This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (f) This Agreement shall be construed pursuant to and in accordance with the laws of the State of New Jersey. (g) If any term or provision of this Agreement is held or deemed to be invalid or unenforceable, in whole or in part, by a court of competent jurisdiction, this Agreement shall be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement. (h) Any dispute, grievance or controversy arising under or in connection with this Agreement shall be referred to the Board of Directors of the Company and shall be dealt with by personal discussion, and if not satisfactorily resolved, shall be submitted to arbitration under the Rules of the American Arbitration Association in New York City. (i) Any consent of the Company required under this Agreement shall not be unreasonably withheld or delayed. 18 IN WITNESS WHEREOF, first above written. COMPANY: the parties have executed this Agreement on the date Bio-Reference Laboratories, Inc. By /s/Marc D. Grodman President Duly Authorized EMPLOYEE: /s/Howard Dubinett Howard Dubinett 19 Exhibit 10.4 EMPLOYMENT AGREEMENT This Employment Agreement dated as of the 1st day of May, 1997 between Bio-Reference Laboratories, Inc., a New Jersey corporation with its principal place of business at 481 Edward H. Ross Drive, Elmwood Park, New Jersey 07407 (the "Company") and Sam Singer, residing at 10 Heritage Drive, Edison, New Jersey 08820 (the "Employee"). W I T N E S S E T H : WHEREAS, the Company is primarily engaged in the operation of a clinical laboratory in northern New Jersey, and WHEREAS, the Company desires to avail itself of the Employee's knowledge and experience and to employ the Employee as its Vice President and Chief Financial Officer on the terms and conditions hereinafter set forth, and WHEREAS, the Employee desires to be so employed by the Company on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties agree as follows: 1. Terms of Employment. The Company agrees to employ the Employee as its Vice President and Chief Financial Officer, or in such other position of comparable status and responsibility as the Company may from time to time direct and/or desire, and the Employee agrees to accept such employment with the Company, for a term commencing as of May 1, 1997 (the "Commencement Date") and continuing until October 31, 2002 (the "Expiration Date"), unless sooner terminated as provided in this Agreement (the "Employment Period"). As used in this Agreement, the term "Employment Period" shall also include any periods for which this Agreement is renewed pursuant to Section 2 hereof. 2. Renewal. This Agreement shall be automatically renewable for additional one year periods; provided, that either the Company or the Employee may elect not to renew this Agreement upon written notice to the other party no less than one (1) month before the Expiration Date or any subsequent extension thereof pursuant to this Section 2. 3. Duties. -----(a) During the Employment Period, the Employee shall perform such duties and exercise such powers relating to the Company as are commensurate with the office of Vice President and Chief Financial Officer and shall have such other duties and powers as the Board of Directors shall from time to time assign to him, including by way of example but not limitation, duties with respect to any of the Company's associated companies. As used in this Agreement, the term "Associated Companies" shall mean any company (i) of which not less than fifty (50%) percent of the equity is beneficially owned by the Company or (ii) any subsidiary of such company, if any. (b) During the Employment Period, the Employee shall devote all of his working time during normal business hours and his best efforts and ability to the business of the Company, shall faithfully and diligently perform the duties of his employment with 2 the Company and shall do all reasonably in his power to promote, develop and extend the business of the Company. (c) During the Employment period, the Employee shall not, except as a representative of the Company or with the written consent of the Company, be directly or indirectly engaged, concerned or interested in the conduct of any other business competing or likely to compete with the Company; provided, that notwithstanding anything contained in this Agreement to the contrary, the Employee shall not be precluded from devoting a reasonable amount of his time to: (i) serving with the prior written approval of the Company as a director or member of a committee of any organization involving no conflict of interest with the business of the Company; and (ii) managing his personal investments; provided, activities shall not materially interfere with the performance of his duties hereunder. that such Employee's (d) The Employee shall be employed at the offices of the Company located in Elmwood Park, New Jersey; provided that the Employee acknowledges and agrees that the proper performance of these duties may make it necessary to spend reasonable periods of time in other parts of the country. 3 4. Compensation. (a) During the Employment Period, the Company shall pay the Employee as compensation for his services under this Agreement, a minimum Base Compensation at an annual rate of One Hundred Ninety Thousand Five Hundred ($190,500) Dollars through October 31, 1997, and thereafter a minimum annual Base Compensation consisting of salary and bonus in the aggregate amount of Two Hundred Twenty Thousand ($220,000) Dollars (the "Base Compensation"). The Base Compensation shall be payable in equal installments in accordance with the regular payroll procedures established by the Company. In October of each fiscal year during the Employment Period, the Company's Board of Directors will consider increasing the Employee's Compensation under this Agreement, based upon the performance of the Company and of the Employee during the fiscal year then ending with such increase, if granted, taking effect as of the immediately following November 1. (b) The Company shall pay for (excluding the P.S. 58 costs) and maintain "Split Dollar" Life Insurance in the face amount of Four Hundred Thousand ($400,000) Dollars, insuring the life of the Employee. The proceeds of such insurance shall be payable to the estate of the Employee (excluding benefits required to be paid to the Company pursuant to the split dollar plan for the premiums paid). Once such insurance is fully paid, the Company will apply for an additional aggregate Four Hundred Thousand ($400,000) Dollars of similar "Split Dollar" Life Insurance 4 insuring the Employee's life and will maintain such additional insurance during his employment by the Company. (c) The Company shall lease and insure, under the Company's policy, an automobile for the benefit of the Employee. The Company shall be responsible for maintenance, gasoline, repair and all other such costs but only to the extent such expenses relate to business use of the automobile. At the end of the lease term, or in the event of the termination of this Agreement for any reason, including non-renewal, the Employee shall have the following options: (i) surrender the automobile to the Company, (ii) assume the Company's lease payment obligation; or (iii) exercise the purchase option of the lease, if any. (d) The Company shall promptly pay or reimburse the Employee for all expenses incurred by the Employee in the performance of his duties under this Agreement. Such expenses shall be limited to the reasonable out-of-pocket expenses necessarily and actually incurred by the Employee in the performance of his duties; provided that (i) the expenses have been detailed on a form acceptable to the Company and submitted to the Company for review and approval and (ii) appropriate supporting documentation is submitted together with the approved expense form. (e) The Employee shall be entitled to participate in any fringe benefit and bonus plans available to the Company's employees as in effect from time to time, to the extent that the Employee may be eligible to do so under the applicable provisions of the plans 5 including but not limited to pension, profit sharing, stock option and similar plans and life and medical insurance plans or coverage maintained by the Company for senior personnel and/or all personnel. (f) The Employee shall be entitled to such vacation, personal time and holidays as he is eligible for under the Company's Employment and Personnel Policy as the same presently exists or may hereinafter be amended. (g) Notwithstanding the provisions of subparagraph (a) of this Section 4, the Employee shall also be entitled to a percentage increase in his Base Compensation as in effect on June 30 of each year that this Agreement is in effect, equal to the percentage increase in the Consumer Price Index - All Items for the New York metropolitan area (or any successor index) for such month of June as compared to such Consumer Price Index for the month of June in the immediately preceding year. Any such increase shall be effective on the immediately following November 1. No adjustments shall be made for decreases in such Index. 5. Issuances of Stock and Options. In further consideration -----------------------------for his employment, the Company agreed on May 13, 1997 to the following issuances of its Common Stock and options to the Employee. (a) Forfeitable Stock -- The Company has issued 200,000 shares of its Common Stock to the Employee subject to forefiture. If the Employee's employment agreement is terminated by the Company "For Cause" or at the Employee's option, without "Good Reason" (but 6 not due to a "Change in Control"), all as herein defined, the Employee will forfeit such shares on the following basis. If Termination "For Cause" or "Without Good Reason" Occurs during the Number of Shares Following Periods Forfeited -----------------------------------May 1, 1997 through April 30, 1998 150,000 shs. May 1, 1998 through April 30, 1999 100,000 shs. May 1, 1999 through April 30, 2000 50,000 shs. (b) Stock Options -- The Company has issued ten-year incentive stock options ("ISOs")to the Employee exercisable to purchase 50,000 shares of its Common Stock at $.71875 per share. These ISOs are subject to the terms and conditions of the Company's 1989 Employees' Stock Option Plan. 6. Disability. If during the Employment Period, the Employee shall incur a Total Disability then, subject to the earlier termination of this Agreement or the earlier termination of the disability, the Company shall compensate the Employee as provided in subparagraphs (a), (b), (c) and (d) of this Section 6. (a) For the month in which the Employee incurs the total disability, and for the following twelve (12) months of the disability, the Company shall compensate the Employee at a rate equal to his then current Base Compensation. (b) For a period of three (3) months commencing upon the termination of the period described in subparagraph (a), the Company shall not pay Employee any portion of his Base Compensation and Employee shall be on an unpaid leave of absence. 7 (c) If the Employee's disability shall terminate at any time prior to the expiration of the period described in subparagraph (b) of this Section 6, then the Employee shall return to full and active employment with the Company under the terms of this Agreement; provided that if he shall again become disabled within a period of three (3) months after such return, and such disability is related to his original disability, then the Employee shall be deemed to have been continuously disabled from the date he incurred his original disability. (d) Upon expiration of the three (3) month period described in subparagraph (b) of this Section 6, the employment of the Employee shall terminate, unless an additional leave of absence is granted by the Company, in which event the employment of the Employee shall terminate upon the expiration of the additional leave of absence. (e) In the event the Employee shall incur a Partial Disability then during the period of the Partial Disability, the Employee's Base Compensation shall be equitably adjusted according to the time that he is able to devote to the affairs of the Company. (f) In addition to the foregoing, the Employee shall be entitled to receive the amounts, if any, as may be payable to him by reason of his disability under policies of insurance maintained by the Company. (g) As used in this Agreement, the term "Total Disability" shall mean a disability such that, for physical or 8 mental reasons, the Employee is unable to perform any of his usual duties to the Company on a full-time basis. As used in this Agreement, the term "Partial Disability" shall mean a disability, other than a total disability, such that for physical or mental reasons, the Employee is unable to perform all of his usual duties to the Company on a full-time basis. 7. Termination. (a) Termination by Death. If the Employee dies during the Employment Period, the Company's obligations under this Agreement shall terminate six (6) months after the date of death and the Employee's estate shall be entitled to all arrearages of Base Compensation and expenses. In addition, the Employee's estate (or such other named beneficiary) shall be entitled to the amounts, if any, as may be payable to his estate or beneficiaries under policies of insurance maintained by the Company. (b) Termination for Cause. This Agreement and the Employee's employment with the Company may be terminated for Cause at any time in accordance with subparagraph (d) of this Section 7. In the event this Agreement is terminated for Cause, the Employee shall be entitled to all arrearages of Base Compensation and expenses through the Date of Termination but shall not be entitled to further compensation. As used in this Agreement, and without limitation, the term "Cause" shall mean: (i) an act or acts of dishonesty constituting criminal acts by the Employee resulting or intended to result directly or 9 indirectly in gain to or personal enrichment of the Employee at the Company's expense; (ii) the commission of any crime involving fraud, embezzlement or theft by the Employee against the Company; (iii) engaging in competition with the Company, including taking a management position with, or control of, a business engaged in the manufacture, sale or distribution of a class of products or service which constituted 15% or more of the sales or gross income of the Company and its associated companies during the fiscal year of the Company immediately preceding the termination of the Employee's employment. (c) Termination at the Option of the Employee. This Agreement and the Employee's employment with the Company may be terminated at any time, at the election of the Employee, for Good Reason in accordance with subparagraph (d) of this Section 7. In the event this Agreement is terminated for Good Reason, the Employee shall be paid during the remainder of the Employment Period (computed without giving effect to the earlier termination hereunder), his Base Compensation (other than due to Partial Disability) at the rate in effect as of the Date of Termination, and shall continue to be entitled to employee benefits as if he were still employed by the Company, until completion of such Employment Period (computed without giving effect to the earlier termination hereunder). As used in this Agreement, and without limitation, the term "Good Reason" shall mean: 10 (i) the assignment to the Employee of duties inconsistent with the office of Vice President and Chief Financial Officer of the Company or his then current office, the removal of the Employee from such office or substantial reduction in the nature or status of the Employee's then current responsibilities; (ii) the reduction of the Employee's then current Base Compensation (other than due to Partial Disability) ; (iii) the relocation of the Company's principal executive offices to a location more than fifty (50) miles from the Company's current principal executive offices or the transfer of the Employee to a place other than the Company's principal executive offices (excepting required travel on the Company's business in a manner substantially similar to the Employee's then current business travel obligations); and (iv) the failure by the Company to continue to provide the Employee with benefits at least as favorable as those in which the Employee was then participating. (d) Notice of Termination. Any purported termination of the Employee's employment shall be communicated by a written notice of termination to the other party hereto and specify the Date of Termination (the "Notice of Termination"). Such notice shall indicate a specific terminated provision in this Agreement which is relied upon, recite the facts and circumstances claimed to provide the basis for such termination and specify the Date of Termination. As used in this Agreement, the term "Date of Termination" shall mean the date specified in the Notice of Termination, which date 11 shall not be less than thirty (30) nor more than sixty (60) days from the date the Notice of Termination is given. If within thirty (30) days from the date the Notice of Termination is given, the party receiving such notice notifies the other party that a dispute exists concerning such termination, the Date of Termination shall be the date on which the dispute is finally resolved. The Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company will continue to pay the Employee his full Base Compensation in effect as of the date of the Notice of Termination and continue the Employee as a participant in all compensation, benefit and insurance plans in which he was participating at such date, until the dispute is finally resolved. Amounts paid under this subparagraph (d) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 8. Change in Control. In the event of a Change in Control and, as a result of such Change in Control, the Employee is terminated without Cause or the Employee elects to terminate his employment for any reason as a result thereof, then the Employee shall receive the following benefits: (a) The Company shall pay to the Employee his full Base Compensation at the rate in effect at the time of the Notice of Termination through the Date of Termination. 12 (b) In lieu of any further Base Compensation payments for periods subsequent to the Date of Termination, the Company shall pay to the Employee as severance pay not later than the fifth day following the Date of Termination, a lump sum payment (the "Severance Payment") equal to 2.99 times the average of the annual Compensation which was payable to the Employee by the Company and includible in the Employee's gross income for federal income tax purposes for the five (5) calendar years, or for the portion of such period during which the Employee was actually employed by the Company if the Employee has been employed by the Company for less than five (5) calendar years preceding the earlier of the calendar year in which a Change in Control occurred or the calendar year of the Date of Termination (the "Base Period"). Such average shall be determined in accordance with the provisions of Section 280G(d) of the Internal Revenue Code of 1986 as amended (the "Code"). As used in this Agreement, the term "Compensation" shall mean and include every type and form of compensation includible in the Employee's gross income in respect of his employment by the Company including compensation income recognized as a result of the exercise of stock options or sale of the stock so acquired, except to the extent otherwise provided in Congressional or Joint Committee Reports or temporary or final regulations interpreting Section 280G(d) of the Code. (c) The Severance Payment shall be reduced by the amount of any other payment or the value of any benefit received or to be received by the Employee in connection with the termination of his 13 employment or contingent upon a Change in Control (whether payable pursuant to the terms of this Agreement, any other plan, agreement or arrangement with the Company) unless (i) the Employee shall have effectively waived his receipt or enjoyment of such payment or benefit prior to the date of payment of the Severance Payment, (ii) in the opinion of tax counsel selected by the Company such other payment or benefit does not constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, or (iii) in the opinion of such tax counsel, the Severance Payment (in its full amount or as partially reduced, as the case may be) plus all other payments or benefits which constitute "parachute payments" within the meaning of Section 280G(b)(2) of the Code are reasonable compensation file services actually rendered, within the meaning of Section 280G(b)(4) of the Code, and such payments are deductible by the Company. The value of any non-cash benefit or any deferred cash payment shall be determined by the Company in accordance with the principles of Section 280G(d)(3) and (4) of the Code. (d) Except to the extent that Congressional or Joint Committee Reports or temporary or final regulations interpreting Section 280G of the Code specify that such payments would result, under subsection (c) above, in a reduction in the Severance Payment: (i) The Company shall pay to the Employee, not later than the fifth day following the Date of Termination, a lump sum amount equal to the sum of (x) any bonus compensation which has been allocated or awarded for a fiscal year preceding the Date of 14 Termination but has not yet been paid, and (y) a pro rata portion of any bonus compensation which the Employee has earned for the fiscal year in which the Date of Termination occurs determined by multiplying the Employee's prior years' bonus compensation by a fraction equal to the number of full calendar months in the fiscal year prior to the Date of Termination over twelve. (ii) The Company shall also pay all legal fees and expenses incurred by the Employee as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement). (e) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Employee and the Company in applying the terms of this Section 8, the aggregate "parachute payments" paid are in an amount that would result in any portion of such "parachute payments" not being deductible by the Company by reason of Section 280G of the Code, then the Employee shall have an obligation to pay the Company upon demand an amount equal to the sum of (i) the portion of the aggregate "parachute payments" paid that would not be deductible by reason of Section 280G of the Code and (ii) interest on the amount set forth in clause (i) of this sentence at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of receipt of such excess until the date of such payment. 15 (f) As used in the Agreement, the term "Change in Control" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A issued under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as in effect as of the date hereof (regardless of whether or not a Proxy Statement is being filed pursuant to such Regulation at such time), or if Item 6(e) is no longer in effect, any subsequent regulation issued under the Exchange Act for a similar purpose, whether or not the Company is subject to such reporting requirements; provided, that without limitation, such a change in control shall be deemed to have occurred if: (i) any "person" other than the Employee is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two consecutive years (not including any period prior to the date of the Agreement), individuals who at the beginning of such period constitute the Board of Directors, and any new director, whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for elections was previously 16 approved, cease for any reason to constitute a majority of the Board; or (iii) the business of the Company is disposed of by the Company pursuant to a liquidation, sale of assets of the Company, or otherwise. 9. Confidential Information. The Employee acknowledges an obligation of confidentiality to the Company and shall not divulge, disclose or communicate any trade secret, private or confidential information or other proprietary knowledge of the Company or its associated companies obtained or acquired by him while so employed. This restriction shall apply after the termination of the Employee's employment without limit in point of time but shall cease to apply to information or knowledge which may come into the public domain or whose disclosure may be required by law or court order or pursuant to the written consent of the Corporation. 10. Return of Information. Upon termination of employment, the Employee agrees to not take with him and to deliver to the Company all records, notes, data, memoranda, models, equipment, blueprints, drawings, manuals, letters, reports and all other materials of a secret or confidential nature relating to the business of the Company which are in possession or control of the Employee. 11. General Provisions. (a) This Agreement contains the entire transaction between the parties, and there are no other representations, 17 warranties, conditions or agreements relating to the subject matter of this Agreement. (b) The waiver by any party of any breach or default of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. (c) This Agreement may not be changed orally but only by an Agreement in writing duly executed on behalf of the party against which enforcement of any waiver, change, modification, consent or discharge is sought. (d) This Agreement shall be binding upon and be enforceable against the Company and its successors and assigns. Insofar as the Employee is concerned, this Agreement is personal and cannot be assigned. (e) This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (f) This Agreement shall be construed pursuant to and in accordance with the laws of the State of New Jersey. (g) If any term or provision of this Agreement is held or deemed to be invalid or unenforceable, in whole or in part, by a court of competent jurisdiction, this Agreement shall be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement. (h) Any dispute, grievance or controversy arising under or in connection with this Agreement shall be referred to the Board 18 of Directors of the Company and shall be dealt with by personal discussion, and if not satisfactorily resolved, shall be submitted to arbitration under the Rules of the American Arbitration Association in New York City. (i) Any consent of the Company required under this Agreement shall not be unreasonably withheld or delayed. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. COMPANY: Bio-Reference Laboratories, Inc. By /s/Marc D. Grodman President Duly Authorized EMPLOYEE: /s/Sam Singer Sam Singer 19 Exhibit 10.8 ASSET SALE/PURCHASE AGREEMENT AGREEMENT made as of the 2nd day of December 1999 by and among The Medical Marketing Group, Inc., a New York corporation with a principal place of business at 401 Columbus Avenue, Valhalla, New York 10595 ("MMGI") and Craig Allison residing at 1 Newton Court, Croton-on-Hudson, New York 10520 ("Allison") on the one hand and Bio-Reference Laboratories, Inc., a New Jersey corporation with its principal place of business at 481 Edward H. Ross Drive, Elmwood Park, New Jersey 07407 ("BRLI") on the other hand. W I T N E S S E T H : ------------------WHEREAS, Allison is the president, chief executive officer and having acquired Dean Steinman's ("Steinman") approximately 48% capital stock interest, is now the owner of approximately 93% of the outstanding capital stock of MMGI, and WHEREAS, MMGI, among other activities, is engaged in selling Internet website design and other Internet-oriented services to medical professionals and other healthcare professionals including individual and group physician practices, hospitals, medical groups, medical societies, health centers and healthcare facilities (referred to at times as the "WEB Business") and in connection therewith, is the owner of the domain names listed in Exhibit A hereto (the "Domain Names"), and WHEREAS, MMGI has created certain algorithms for placement on commercial search engines associated with the Domain Names, and WHEREAS, MMGI has entered into formal and informal agreements with the healthcare clients set forth on Exhibit B attached hereto to provide website as well as non-website services, and WHEREAS, MMGI and Allison desire that MMGI sell and BRLI desires to purchase certain assets utilized by MMGI in the operation of the WEB Business as well as MMGI's rights under its agreements and arrangements with the healthcare clients set forth in Exhibit B to the extent they relate to website services, on the terms and conditions herein set forth. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt whereof and sufficiency of which are hereby acknowledged, it is hereby agreed as follows: 1. Sale and Transfer of the WEB Business Based upon the representations and warranties herein contained and subject to the terms and conditions hereinafter set forth; (A) MMGI shall sell, transfer, assign and deliver to BRLI all of its right, title and interest in the WEB Business including all of its right, title and interest to any and all assets utilized or capable of being utilized by MMGI in the WEB Business including but not limited to the Domain Names, software applications, search engines, database engines, data, HTML pages, search engine designs and algorithms for inclusion in other Internet-based search engines, software and database licenses, custom software and custom applications with associated source and data, licenses, lists, links and authorizations for links, banners and agreements for banners and associated advertising revenues, advertising, advertising contracts and agreements, and listing contracts with associated revenues as well as any and all custom programs, applications or solutions that MMGI has developed itself or hired others to produce for it if any of those programs, applications or solutions are useful and/or appropriate to the operation of the WEB Business (such assets being collectively referred to as the "WEB Assets") and all of its right, title and interest to all websitebased agreements, partial agreements or arrangements with the healthcare clients set forth on Exhibit B hereto as well as its rights to all future revenues therefrom (collectively the "WEB Business Agreements"). (B) BRLI shall issue and deliver 140,000 shares of its authorized but unissued common stock in payment for the WEB Business including the WEB Assets and the WEB Business Agreements, as hereinafter described (with an additional 60,000 of such shares to be issued and delivered in consideration for the Non-Competition Agreements hereinafter described). 2. Closing (A) The closing of such sale and purchase (the "Closing") shall take place at the offices of BRLI at 481 Edward H. Ross Drive, Elmwood Park, New Jersey 07407 at 9:00 o'clock A.M. (EST) on Thursday, December 2, 1999 or at such place, date and time thereafter as the parties hereto shall mutually agree, in a writing executed by BRLI on the one hand and by MMGI on the other. The date of the closing is hereinafter referred to as the "Closing Date." (B) At the Closing, MMGI shall execute and deliver a bill of sale to BRLI, in the form of Exhibit C hereto (the "Bill of Sale") and such other good and sufficient duly executed instruments of transfer and conveyance, including any and all required 2 authorizations, assignments and consents, satisfactory in form and content to BRLI, as shall vest in BRLI, all of MMGI's right, title and interest in and to the WEB Assets and the WEB Business Agreements, free and clear of all liens and encumbrances, and as shall enable BRLI to operate the WEB Business as currently operated by MMGI, without impediment. (C) At the Closing, BRLI on the one hand and MMGI, Allison and Steinman on the other will each execute and deliver to each other, Non-Competition Agreements substantially in the form of Exhibits D-1, D-2 and D-3 attached hereto. (D) At the Closing, BRLI on the one hand and MMGI and Allison on the other will execute and deliver to each other an Advertising Consulting Agreement substantially in the form of Exhibit E attached hereto. (E) (1) At the Closing, BRLI shall issue and deliver an aggregate 140,000 shares of its authorized but unissued common stock in full payment for the WEB Business (including the WEB Assets and the WEB Business Agreements), registered in the names of the persons and entities designated by MMGI as set forth in Exhibit F hereto, in the amounts set forth opposite their respective names, against receipt of appropriate investment letters prepared by BRLI and duly executed by each such proposed stockholder. (2) At the Closing, BRLI shall execute and deliver an aggregate 60,000 shares of its authorized but unissued common stock to MMGI and Allison and a cash payment of $10,000 to Steinman in consideration for the three Non-Competition Agreements, in the amounts therein set forth. (3) All of the said 200,000 shares of common stock will not be registered under the Securities Act of 1933; each of the stock certificates will contain a restrictive legend and transfer stops will be placed against the shares of stock. (F) At the Closing, BRLI shall deliver its check in the sum of $15,000 payable to MMGI, to MMGI, in accordance with the Advertising Consulting Agreement, representing the initial retainer thereunder. (G) At the Closing, BRLI shall execute and deliver an Option Agreement to MMGI, substantially in the form of Exhibit G hereto, granting options exercisable to purchase a maximum 100,000 shares of BRLI authorized but issued common stock on the terms and conditions therein set forth. 3. Representations and Warranties Concerning MMGI and the WEB ---------------------------------------------------------Business 3 (A) As an inducement to BRLI to enter into this Asset Sale/Purchase Agreement (the "Agreement") and the MMGI Non- Competition Agreement, the Advertising Consulting Agreement and the Option Agreement (collectively the "Subsidiary Agreements") as well as the Non-Competition Agreement with Allison and to effectuate the transactions contemplated hereby and thereby, MMGI on an absolute basis and Allison to his actual knowledge and belief, hereby severally represent and warrant to BRLI that: (1) MMGI is a corporation duly organized, validly existing and in good standing under the laws of the State of New York and has all requisite corporate power and authority to enter into this Agreement and the Subsidiary Agreements, to consummate the transactions herein and therein contemplated, to own, lease and operate its properties and to carry on its business including the WEB Business as it is now being conducted. (2) The execution and delivery of this Agreement and the Subsidiary Agreements, the consummation of the transactions herein and therein contemplated and the performance, observance and fulfillment by MMGI of all of the terms and conditions hereof and thereof on its part to be performed, observed, and fulfilled, (a) have all been approved and effectively authorized by MMGI's board of directors and by the vote of its stockholders and no other proceedings on the part of MMGI or its stockholders are necessary to authorize this Agreement and the Subsidiary Agreements, or the consummation of the transactions contemplated hereby and thereby, (b) do not and will not (either immediately or with the lapse of time, or with notice, or both) (i) conflict with any of the provisions of the Certificate of Incorporation or by-laws of MMGI, (ii) violate any provisions of any judicial or administrative order, award, judgment, decree, statute, rule or regulation applicable to MMGI or any of its properties, (iii) conflict with or result in a breach of, constitute a default under, contravene, result in a forfeiture of a right under, or result in the acceleration of payment or performance under, any note, bond, mortgage, indenture, deed, trust, license, lease, agreement, or other instrument or obligation to which MMGI is a party or by which MMGI or any of the WEB Assets or any of the WEB Business Agreements may be bound or affected, or (iv) result in the creation or imposition of any lien, security interest, charge or other encumbrance against any of the WEB Assets or any of the WEB Business Agreements. (3) This Agreement and each of the Subsidiary Agreements, has been duly and validly executed and delivered by MMGI and constitute valid, binding and enforceable obligations of MMGI. Although an involuntary bankruptcy proceeding was initiated by creditors against MMGI on July 22, 1999 in the United States Bankruptcy Court for the Southern District of New York (Docket No. 4 99B-21772), such proceeding was dismissed with prejudice on or about November 19, 1999. With the exception of such dismissed proceeding, no petition in bankruptcy has been filed by or against MMGI. Furthermore, no petition in bankruptcy has been filed by or against Allison. MMGI has the right, power, legal capacity and authority to enter into and perform its obligations under this Agreement and each of the Subsidiary Agreements and no consent of any third party is necessary with respect thereto which has not been obtained. (4) Except as described in Exhibit H hereto, there is no material action, dispute, claim, litigation, arbitration, investigation, or other proceeding, at law or in equity or by or before any court or governmental or administrative body (U.S. or foreign), pending or threatened against MMGI, its business or properties, or with respect to the transactions contemplated by this Agreement and each of the Subsidiary Agreements, and MMGI is not subject to any adverse judicial, governmental or agency judgment, decree or order, nor does MMGI or Allison know of any basis for any such action, dispute, claim, litigation, arbitration, investigation or other proceeding. (5) MMGI has made adequate provision for, and is not in default of any current or long-term liabilities (including contingent liabilities), or obligations, contractual or otherwise. debts (6) MMGI has paid, or made adequate provision for the payment of, any and all outstanding tax (income, employment, sales and all other) liabilities and MMGI has properly prepared and duly filed all tax returns required to be filed by it through the date hereof. (7) MMGI has no subsidiary nor does it own or control any stock of or have any proprietary interest in any other entity. (8) The assets being sold to BRLI substantially all of MMGI's assets. hereunder do not constitute (9) Upon completion of the Closing as described in Section 2 herein, BRLI will be vested in and will own all of MMGI's right, title and interest in and to the WEB Assets and the WEB Business Agreements free of all liens and encumbrances and there shall be no impediment to BRLI operating the WEB Business as currently operated by MMGI. (B) The foregoing representations and warranties are made with the knowledge and expectation that BRLI is placing complete reliance thereon. 5 4. Representations and Warranties of BRLI (A) As an inducement to MMGI to enter into this Subsidiary Agreements and consummate the transactions thereby, BRLI represents and warrants: Agreement and the contemplated hereby and (1) BRLI is a corporation duly organized, validly existing and in good standing under the laws of the State of New Jersey and has all requisite corporate power and authority to enter into this Agreement and the Subsidiary Agreements, to consummate the transactions herein and therein contemplated, to own, lease and operate its properties and to carry on its business as it is now being conducted, and is duly licensed, authorized and qualified to do business and is in good standing in all jurisdictions in which the conduct of its business or the ownership or leasing of its properties requires it to be so qualified, authorized or licensed. (2) The execution and delivery of this Agreement and the Subsidiary Agreements, the consummation of the transactions herein and therein contemplated and the performance, observance and fulfillment by BRLI of all of the terms and conditions hereof and thereof, on its part to be performed, observed, and fulfilled, (a) have all been approved and effectively authorized by BRLI's board of directors and no other proceedings on the part of BRLI are necessary to authorize execution and delivery of this Agreement and the Subsidiary Agreements or the consummation of the transactions contemplated hereby and thereby, (b) do not and will not (either immediately or with the lapse of time, or with notice, or both) (i) conflict with any of the provisions of the Articles of Incorporation or by-laws of BRLI, violate any provisions of any judicial or administrative order, award, judgment, decree, statute, rule or regulation applicable to BRLI or any of its properties, (iii) conflict with or result in a breach of, constitute a default under, contravene, result in a forfeiture of a right under, or result in the acceleration of payment or performance under, any note, bond, mortgage, indenture, deed, trust, license, lease, agreement, or other instrument or obligation to which BRLI is a party or by which BRLI or any of its properties may be bound or affected, or (iv) result in the creation or imposition of any lien, security interest, charge or other encumbrance against any properties of BRLI. (3) This Agreement and the Subsidiary Agreements have been duly and validly executed and delivered by BRLI and constitute valid, binding and enforceable obligations of BRLI. BRLI has the right, power, legal capacity and authority to enter into and perform its obligations under this Agreement and the Subsidiary Agreements and no consent of any third party is necessary with respect thereto. 6 (4) There is no material action, dispute, claim, litigation, arbitration, investigation, or other proceeding, at law or in equity or by or before any court or governmental or administrative body (U.S. or foreign), pending or threatened against BRLI, its business or properties, or with respect to the transactions contemplated by this Agreement and/or the Subsidiary Agreements, and BRLI is not subject to any adverse judicial, governmental or agency judgment, decree or order, nor does BRLI know of any basis for any such action, dispute, claim, litigation, arbitration, investigation or other proceeding. (5) All of the shares of BRLI common stock issuable pursuant to this Agreement and the Subsidiary Agreements are duly authorized and will, when issued, be validly issued, fully paid (assuming delivery of the Bill of Sale and MMGI and Allison's Non- Competition Agreements and payment in full of the Option Exercise Price) and non-assessable, and none of such shares will have been issued in violation of the pre-emptive rights of any BRLI shareholder. (B) The foregoing representations and warranties are made with the knowledge and expectation that MMGI and Allison are placing complete reliance thereon. 5. Indemnification (A) Provided that the representations made by BRLI in this Agreement and the Subsidiary Agreements are accurate and BRLI is in compliance with its obligations under this Agreement, MMGI and Allison and each of them, severally hereby agree to indemnify and hold harmless BRLI against and in respect of: (1) all liabilities and obligations of, or claims against BRLI based on liabilities and obligations of MMGI unless same shall result from the acts or omissions of BRLI; (2) any damage resulting from any material misrepresentation, or nonfulfillment of any agreement on the part of MMGI or Allison or either of them under this Agreement and/or any of the Subsidiary Agreements or from any material misrepresentation in or omission from any certificate or other instrument furnished or to be furnished to BRLI under this Agreement and the Subsidiary Agreements; (provided that with respect to indemnification based on material misrepresentations, Allison's indemnification is limited to indemnification for damages resulting from a violation of those representations and warranties which are deemed made upon his actual knowledge and belief); and 7 (3) all actions, suits, proceedings, demands, assessments, judgments, costs and expenses incident to any of the foregoing. (B) Provided that the representations made by MMGI and Allison in this Agreement and the Subsidiary Agreements are accurate and MMGI and Allison are in compliance with its and his obligations under this Agreement and the Subsidiary Agreements, BRLI hereby agrees to indemnify and hold harmless MMGI and Allison and each of them against and in respect of: (1) all liabilities and obligations of, or claims against MMGI and Allison or any of them with respect to the operation of the WEB Business, for periods after the Closing as a result of BRLI's purchase of the WEB Business hereunder or BRLI's operation of the WEB Business thereafter unless same shall result from the intentional or grossly negligent acts or omissions of MMGI and Allison or either of them; (2) any damage or deficiency resulting from any material misrepresentation, breach of warranty, or nonfulfillment of any agreement on the part of BRLI under this Agreement and the Subsidiary Agreements or from any material misrepresentation in or omission from any certificate or other instrument furnished or to be furnished by BRLI under this Agreement and the Subsidiary Agreements; and (3) all actions, suits, proceedings, demands, assessments, judgments, costs and expenses incident to any of the foregoing. 6. Conditions to BRLI's Obligation to Close The obligation of BRLI to consummate each of the following conditions: this Agreement shall be subject to (A) Each of the representations and warranties made by MMGI and Allison and each of them herein shall be true and accurate as of the date hereof except as affected by the transactions expressly contemplated by this Agreement. (B) Each and every covenant, agreement and condition required by this Agreement to be performed or complied with by MMGI or its affiliates and/or by Allison at or prior to the Closing shall have been performed or complied with at or prior to the Closing hereunder. (C) MMGI and Allison and each of them shall have delivered to BRLI all of the executed agreements, instruments, certificates and other documents referred to hereinabove required to be delivered by 8 it and/or him at or prior to the Closing including the Bill Non-Competition Agreements and Advertising Consulting Agreement. of Sale, (D) Each of the individuals and entities set forth in Exhibit F hereto shall have delivered to BRLI executed investment letters satisfactory in form to BRLI's securities counsel. (E) MMGI shall have delivered its written agreement to BRLI that it will, within five (5) business days after the Closing, in a letter approved by BRLI (which approval shall not be unreasonably withheld), provide written notification to each of the healthcare clients listed in Exhibit B hereto of its transfer to BRLI of the WEB Business and that it will use its best efforts to obtain each such client's consent to the transfer and continuation as a client of BRLI. In addition, MMGI shall promptly deliver to BRLI all executed consents which it is able to obtain using its best efforts, to the assignment to BRLI of each of the WEB Business Agreements as well as executed authorizations which it has been able to obtain using its best efforts, from each of the service providers to the WEB Business permitting BRLI to utilize the same services and service providers in BRLI's operation of the WEB Business as are currently utilized by MMGI, and at the same rates. (F) No suit or action, no investigation or inquiry by any administrative agency or governmental body, and no legal or administrative proceeding shall have been instituted or threatened which in any way questions the validity or legality of this Agreement or the transactions contemplated thereby, at or prior to the Closing. (G) Each and every one of the transactions required herein to occur at the Closing shall have been completed. 7. Conditions to MMGI's Obligation to Close The obligation of MMGI to consummate each of the following conditions: this Agreement shall be subject to (A) Each of the representations and warranties made by BRLI herein shall be true and accurate as of the date hereof except as affected by transactions expressly contemplated by this Agreement. the (B) Each and every covenant, agreement and condition required by this Agreement to be performed or complied with by BRLI at or prior to the Closing shall have been performed or complied with at or prior to the Closing hereunder. 9 (C) BRLI shall have delivered to MMGI and Allison and each of them, all of the executed agreements, instruments, certificates and other documents referred to hereinabove required to be delivered by it at or prior to the Closing including the Non-Competition Agreements, the Advertising Consulting Agreement and the Option Agreement. (D) Each of the individuals and entities set forth in Exhibit F hereto shall have received that number of shares of BRLI common stock registered in his or its name as are set forth opposite their respective names in Exhibit F (aggregating 140,000 shares). (E) MMGI and Allison shall have received an aggregate 60,000 shares of BRLI common stock registered in their respective names pursuant to Non-Competition Agreements. the (F) No suit or action, no investigation or inquiry by any administrative agency or governmental body, and no legal or administrative proceeding shall have been instituted or threatened which in any way questions the validity or legality of this Agreement or the transactions contemplated thereby, at or prior to the Closing. (G) Each and every one of the transactions required herein to occur at the Closing shall have been completed. 8. Further Covenants and Agreements of MMGI and BRLI ------------------------------------------------(A) Within seven (7) business days after the Closing, MMGI will provide BRLI with all written information necessary to enable BRLI to acquire, license or take over MMGI's interest in all custom software utilized by MMGI in operating the WEB Business. MMGI represents and warrants to BRLI that it will use its best efforts to obtain transfers by consent or through licenses to BRLI of all of such software products which are not standard, commercially available, over-the-counter software products. MMGI agrees to fully cooperate with BRLI on a timely basis in order to enable BRLI to acquire such software products. (B) BRLI agrees that after the Closing, website-design services and other Internet as well as non-Internet website services clients, free and clear of any right, title MMGI may continue to provide services for non-healthcare clients, for healthcare and non-healthcare or interest therein by BRLI. (C) MMGI covenants and agrees that immediately after the Closing, except as provided in paragraph (D) of this Section 8, MMGI shall terminate and cease the conduct of any and all Internet website business of any kind for any and all healthcare or healthcare-related Internet website design, development, 10 implementation, programming maintenance, linking, search engine development, revenue or non-revenue producing activities for individual or group physician practices, hospitals, clinics, laboratories, medical groups, medical societies, health centers and healthcare facilities of any kind whatsoever (collectively "Healthcare and Healthcare-Related Businesses"), during the one (1) year term of the Advertising Consulting Agreement plus any renewals (up to three (3) years thereof), and for an additional one (1) year period after termination of the Advertising Consulting Agreement (i.e., a maximum five (5) year period). (D) Anything to the contrary herein contained notwithstanding, MMGI shall have the right; (1) to submit sites hosted by BRLI to Internet Search Engines for purposes of increasing traffic to the site or sites hosted by BRLI. In the event that BRLI shall wish to utilize the website design services of MMGI at any time, MMGI agrees to provide such services to BRLI upon BRLI's written request at the rates as set forth in Exhibit "I," attached hereto and made a part hereof. This provision is a substantial part of the consideration for this Agreement and shall remain in effect for five (5) years from the Closing. BRLI shall pay a commission to MMGI for web-design services sold on behalf of BRLI by MMGI pursuant to BRLI's written request during such five (5) year period in the sum of 40% of net revenues received by BRLI from the customer for such services when received by BRLI; (2) to provide Internet website design services to Healthcare and Healthcare-Related Businesses whose facilities are located in Westchester and New York counties in the State of New York during the one (1) year period commencing at the Closing, provided that such services are limited solely to the actual design, content, programming and off-net site development of the website and not to the hosting and worldwide hosting aspects of the site; that the healthcare or healthcare-related site excepted is hosted on a BRLI website; that regardless of any fee arrangements that may otherwise be entered into, the said healthcare or healthcare-related client must be charged a website design fee payable to BRLI pursuant to the fee schedule attached hereto and made a part hereof as Exhibit "J"; and that the fee to BRLI must be paid to BRLI as an initial fee before any other Internet website- related fees are paid to MMGI. The said healthcare client shall be required to pay monthly or annual fees to BRLI for website hosting on standard terms and conditions for all BRLI Internet Websites. All website maintenance fees shall be paid by the client to BRLI for maintenance to the on-line website in accordance with standard terms and conditions of all BRLI Internet Websites. (E) MMGI agrees and covenants with BRLI to provide a maximum 50 hours of technical training related to the WEB Business during 11 the 90-day period commencing at the Closing, and to provide a maximum 100 hours of sales training and/or support related to the WEB Business during the 180-day period commencing at the Closing. Such training shall be without charge to BRLI and shall be provided to BRLI's designated employees and agents. Any additional training shall be at such additional times and on such terms as the parties may mutually agree upon as necessary and reasonable. (F) MMGI agrees during the period that the Advertising Consulting Agreement is in full force and effect (the "Measuring Period") to market Internet-oriented services to Healthcare and Healthcare-Related Businesses for linkage to and participation in the WEB Business conducted by BRLI. Any customer unaffiliated with the healthcare clients set forth in Exhibit B hereto who executes a contract for such services during the Measuring Period on terms acceptable to BRLI in its sole and absolute discretion shall be deemed an "Additional Customer." Upon delivery by MMGI through its sales efforts of the 1,000th Additional Customer during the Measuring Period, BRLI agrees and covenants to pay a commission to MMGI equal to fifteen percent (15%) of the recurring Internet access and website fees paid to BRLI pursuant to the initial contract with such Additional Customer (provided that said contract shall not exceed three (3) years in duration and is on terms acceptable to BRLI). Such commission shall be payable to MMGI solely with respect to any Additional Customers after the 1,000th Additional Customer, solely with respect to contracts executed during the Measuring Period and only with respect to each payment after it has actually been received by BRLI. 9. Expenses Each of the parties shall pay its own expenses (including without limitation, the fees and expenses of the agents, representatives, counsel and accountants) incidental to the preparation and consummation of this Agreement and the Subsidiary Agreements. 10. Brokerage Each party shall indemnify and hold the other free and harmless from all losses, damages, costs, and expenses (including attorney's fees) that may be suffered as a result of claims brought by any broker or finder seeking compensation on account of this transaction arising out of the actions of such party. 11. Survival of Representations, Warranties, Agreements and Covenants 12 The parties agree that the representations, warranties, agreements, and covenants contained in this Agreement, the Subsidiary Agreements or in any other documents delivered in accordance with or by virtue of this Agreement and the Subsidiary Agreements shall survive the execution and delivery of this Agreement and the Subsidiary Agreements and all other instruments in connection herewith or therewith. 12. Notices All notices and other documents required or permitted to be given pursuant to this Agreement shall be in writing and shall be deemed to have been given if delivered by hand with an acknowledgement of receipt therefor or mailed or forwarded by registered or certified mail or by Federal Express to the parties at the addresses provided above (or such other address for a party as shall be specified by notice given pursuant to this paragraph). 13. Binding Effect and Assignability This Agreement and the Subsidiary Agreements shall be binding upon and shall inure to the benefit of the parties hereto and thereto and their respective successors and assigns. BRLI shall be permitted to assign its rights (but not its obligations) hereunder to a wholly-owned subsidiary. 14. Governing Law and Jurisdiction This Agreement and the Subsidiary Agreements shall be construed and enforced in accordance with the laws of the State of New Jersey without regard to the principle of the conflict of laws. The parties hereto consent to the in personam jurisdiction of the courts of the State of New Jersey and further agree that any action with respect to this Agreement and the Subsidiary Agreements shall be commenced and prosecuted only in such courts. The parties hereby waive trial by jury in any action or proceeding arising under this Agreement and the Subsidiary Agreements. 15. Remedies No remedy herein conferred upon or reserved to a party is intended to be exclusive of any other available remedy, but each and every such remedy shall be cumulative and in addition to every other remedy given under this Agreement and the Subsidiary Agreements or in connection with this Agreement and the Subsidiary Agreements and now or hereafter existing at law or in equity. 13 16. Entire Agreement This Agreement and the Subsidiary Agreements referred to herein constitute the entire agreement among the parties with respect to the subject matter contained herein and therein and supersede all prior agreements and understandings, oral or written. This Agreement and the Subsidiary Agreements may not be amended or modified except in writing executed by each of the parties hereto. IN WITNESS WHEREOF, the parties have executed this and year first above written. THE MEDICAL MARKETING GROUP, INC. By /s/Craig Allison Title Craig Allison, President /s/Craig Allison ---------------Craig Allison (Individually) BIO-REFERENCE LABORATORIES, INC. By /s/Marc D. Grodman Title Marc D. Grodman, President 14 Agreement on the day Exhibit 10.9 ASSET SALE/PURCHASE AGREEMENT AGREEMENT made as of the 14th day of December 1999 by and between Right Body Foods Inc., a New York corporation with its principal place of business at 118 Jackson Avenue, Syosset, Long Island, New York 11791 ("RBF") and Rebecca Klafter residing at 102 Bristol Drive, Woodbury, New York 11797 ("Klafter"), the chief executive officer and sole stockholder of RBF (Klafter and RBF being at times collectively referred to as the "Sellers") on the one hand, and Bio-Reference Laboratories, Inc., a New Jersey corporation ("BRLI") and its wholly-owned subsidiary, BRLI No. 1 Acquisition Corp., a New Jersey corporation (the "Purchaser"), each with its principal place of business at 481 Edward H. Ross Drive, Elmwood Park, New Jersey 07407. W I T N E S S E T H : WHEREAS RBF is engaged in the manufacture of certain health food products at its leased facility at 118 Jackson Avenue, Syosset, Long Island, New York 11791 and in the distribution of such products under the name "Right Body Foods" in the greater New York metropolitan area (the "Health Food Business"); and WHEREAS the Sellers desire to sell and Purchaser desires to purchase certain assets used by RBF in its operation of the Health Food Business so as to enable Purchaser to operate the Health Food Business; and WHEREAS Purchaser is unwilling to effect such purchase unless it is able to employ Klafter to serve as Director of the Health Food Business operations and to obtain Klafter's agreement not to compete with Purchaser and/or BRLI in its operation of the Health Food Business. NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter contained and other good and valuable consideration, the receipt whereof and sufficiency of which are hereby acknowledged, it is hereby agreed as follows: 1. Purchase and Sale (a) At the Closing (hereinafter defined) Sellers will sell, transfer, convey, grant, relinquish, release, assign, and deliver to Purchaser, and Purchaser will purchase and acquire from Sellers, on the terms and subject to the conditions set forth in this Agreement, certain assets and rights of Sellers related to the Health Food Business as they exist as of the Closing including Sellers' rights to the tradename "Right Body Foods Inc." and to all other registered or unregistered patents, trademarks and/or tradenames, licenses, recipes, labels, artwork, food ingredients, supplies, certain equipment, leaseholds, customer lists and associated goodwill used in the operation of the Health Food Business and certain other assets, all of which are specifically enumerated on Schedule A hereto and are hereafter referred to as the "Assets." (b) At the Closing, BRLI shall issue an aggregate 180,000 shares of its authorized but unissued common stock and deliver same to Purchaser, registered in the name of RBF, or if RBF so designates, in the name of Klafter, which upon delivery to the registered owner together with BRLI and the Purchaser's assumption of the liabilities enumerated in Schedule B hereto, shall constitute full payment for the Assets. (c) Excluded from this sale and purchase are any and all liabilities (including but not limited to tax liabilities of the Sellers) except for those liabilities specifically enumerated on Schedule B hereto which shall be assumed by the Purchaser. (d) At the Closing, BRLI shall issue an aggregate 20,000 additional shares of its authorized but unissued common stock and deliver same to Purchaser, registered in Klafter's name, for delivery to Klafter in full payment for her non-competition agreement. 2. The Closing (a) The closing of the sale and purchase (the "Closing") shall take place at the principal offices of the Purchaser on Tuesday, December 14, 1999 or at such date and time thereafter as the parties hereto shall mutually agree in writing (the "Closing Date"). (b) At the Closing, Sellers shall deliver or cause to be delivered to the Purchaser; (i) a duly executed bill of sale substantially in the form of Schedule C hereto ("Bill of Sale") and other good and sufficient instruments of transfer and conveyance, including assignments if appropriate, as shall vest in Purchaser all of Sellers' rights, title and interest in and to the Assets, free from all encumbrances; (ii) a duly executed assignment to Purchaser of the exclusive right to use of all of Sellers' registered and unregistered patents, trademarks and tradenames including the right to the name "Right Body Foods"; (iii) an employment agreement (the "Employment Agreement") in the form of Schedule D hereto, duly executed by Klafter; 2 (iv) a non-competition agreement (the "Non-Competition Agreement") in the form of Schedule E hereto, duly executed by Klafter; (v) a duly executed assignment of the lease of the Premises in Syosset, Long Island, New York utilized by RBF in the operation of the Health Food Business to Purchaser and a duly executed consent from the Landlord with respect to such assignment; (vi) an investment representation letter substantially in the form of Schedule F hereto, with respect to the shares of BRLI common stock to be issued at the Closing, duly executed by the recipient(s) of such shares; and (vii) all such other duly executed assignments and consents, satisfactory in form and content to the Purchaser, as the Purchaser may reasonably require in order to effectuate transfer of the Assets to the Purchaser. (c) At the Closing, the Purchaser shall deliver or cause to be delivered to RBF and/or Klafter, as the case may be; (i) a duly executed assumption of certain liabilities agreement substantially in the form of Schedule G hereto ("Assumption of Certain Liabilities Agreement") as shall be binding upon both BRLI and the Purchaser with respect to those liabilities of RBF specifically enumerated on Schedule B; (ii) an aggregate 180,000 shares of BRLI's authorized but unissued common stock to RBF, or if RBF so designates in writing, to Klafter, registered in the recipient's name, in full payment (together with the Assumption of Certain Liabilities Agreement) for the Assets; (iii) the Employment Agreement, duly executed by BRLI; (iv) the Non-Competition Agreement, duly executed by BRLI and the Purchaser; (v) an aggregate 20,000 shares of BRLI's authorized but unissued common stock to Klafter, registered in Klafter's name, in full payment for her execution and delivery of the Non-Competition Agreement; (vi) an assumption by Purchaser of the lease for the Premises in Syosset, Long Island, New York and a guarantee of the Purchaser's obligations thereunder executed by BRLI; and (vii) all such other duly executed consents and assumptions satisfactory in form and content to the Sellers, as the 3 Sellers may reasonably require in order to consummate the transactions described herein. 3. Representations and Warranties of Sellers (a) As an inducement to Purchaser to enter into this Agreement and consummate the transactions contemplated hereby, the Sellers, and each of them, jointly and severally, represent and warrant to BRLI and the Purchaser that: (i) RBF is a corporation duly organized, validly existing and in good standing under the laws of the State of New York and has all requisite power and authority to enter into this Agreement, to consummate the transactions herein contemplated, and to own, lease and operate its properties. They have no actual knowledge of any impairment of RBF's power and authority to carry on the Health Food business as it is now being conducted. (ii) The execution and delivery of this Agreement, the consummation of the transactions herein contemplated and the performance, observance and fulfillment by RBF of all of the terms and conditions hereof on its part to be performed, observed, and fulfilled, (a) have been duly approved and effectively authorized by the Board of Directors and by the sole stockholder of RBF and no other proceedings are necessary to authorize this Agreement or the consummation of the transactions contemplated hereby, (b) do not and will not (either immediately or with the lapse of time, or with notice, or both) (1) violate any provisions of any judicial or administrative order, award, judgment, decree, statute, rule or regulation applicable to RBF or any of its properties, (2) conflict with or result in a breach of, constitute a default under, contravene, result in a forfeiture of a right under, or result in the acceleration of payment or performance under, any note, bond, mortgage, indenture, deed, trust, license, lease, agreement, or other instrument or obligation to which RBF is a party or by which RBF or any of the Assets may be bound or affected, or (3) result in the creation or imposition of any lien, security interest, charge or other encumbrance against any of the Assets. (iii) This Agreement has been duly and validly executed and delivered by the Sellers and upon execution and delivery, will constitute valid, binding and enforceable obligations of the Sellers subject to bankruptcy, insolvency and similar laws affecting creditors rights generally and subject to general principles of equity. No petition in bankruptcy has been filed by or against either of the Sellers. The Sellers have the right, power, legal capacity and authority to enter into and perform their obligations under this Agreement (and with respect to Klafter, her obligations under the Employment Agreement and the Non-Competition Agreement) and no consent of any third party is necessary with respect thereto which has not been obtained. 4 (iv) There is no material action, dispute, claim, litigation, arbitration, investigation, or other proceeding, at law or in equity or by or before any court or governmental or administrative body (U.S. or foreign), pending or threatened against RBF, its business or properties, or with respect to the transactions contemplated by this Agreement, and RBF is not subject to any adverse judicial, governmental or agency judgment, decree or order, nor do the Sellers know of any basis for any such action, dispute, claim, litigation, arbitration, investigation or other proceeding. (v) RBF has made, and will continue to make, adequate provision for payment of its obligations, and RBF is not in default of and will not with the passage of time or otherwise become in default of, any current or long-term liabilities (including contingent liabilities), debts or obligations, contractual or otherwise. (vi) Immediately after the Closing, RBF will cease all operations relating to the Health Food Business and will engage solely in collecting any receivables outstanding on the Closing Date and paying all payables and other obligations which are not expressly assumed hereunder by BRLI and the Purchaser. RBF shall be permitted to maintain a bank account for such purposes. Furthermore, RBF will not engage in any facet of the Health Food Business anywhere in the continental United States east of the Mississippi River for a period of five (5) years after the Closing. (vii) Annexed hereto as Schedule H is a copy of the sole governmental license which RBF has obtained in connection with its operation of the Health Food Business. Sellers have no actual knowledge that said license is not in full force and effect. (viii) Annexed hereto as Schedule I is a schedule listing each and every inspection or other visit to RBF's premises by any federal, state or local governmental organization or authority which is or was related to the Health Food Business including (a) the date of such inspection or visit; (b) the name of the organization or authority; (c) the substance of the communication from the organization or authority after such visit; and (d) the responsive action (if any) taken by RBF. (ix) Since its inception, the food products sold and/or distributed by RBF in its operation of the Health Food Business have been tested for quality by independent testing entities and RBF has not received any negative reports concerning such tests. (x) From August 31, 1999 through the date hereof, there has been no material adverse change in RBF's financial condition, operating business, and no sale or distribution of 5 results or assets and no incurrence of liabilities or indebtedness, except in each case, in the ordinary course of its business. (xi) As soon as possible after the Closing but no later than two (2) weeks after the Closing, RBF will file a duly executed amendment to its certificate of incorporation with the New York Department of State, changing its name from "Right Body Foods, Inc." (b) The foregoing representations and warranties are made with the knowledge and expectation that the Purchaser is placing complete reliance thereon. 4. Representations and Warranties of BRLI and Purchaser ---------------------------------------------------(a) As an inducement to the Sellers to enter into this Agreement and consummate the transactions contemplated hereby, BRLI and Purchaser, and each of them, represent and warrant: (i) BRLI and Purchaser are each corporations duly organized, validly existing and in good standing under the laws of the State of New Jersey and each has all requisite corporate power and authority to enter into this Agreement, to consummate the transactions herein contemplated, to own, lease and operate its properties and to carry on its business as it is now being conducted, and each is duly licensed, authorized and qualified to do business and is in good standing in all jurisdictions in which the conduct of its business or the ownership or leasing of its properties requires it to be so qualified, authorized or licensed. (ii) The execution and delivery of this Agreement, the consummation of the transactions herein and therein contemplated and the performance, observance and fulfillment by BRLI and by Purchaser of all of the terms and conditions hereof and thereof, on each of their parts to be performed, observed, and fulfilled, (A) have all been approved and effectively authorized by BRLI and by Purchaser's boards of directors and no other proceedings on the part of BRLI or of Purchaser are necessary to authorize this Agreement or the consummation of the transactions contemplated hereby and thereby, (B) do not and will not (either immediately or with the lapse of time, or with notice, or both) (1) conflict with any of the provisions of the Articles of Incorporation or by-laws of BRLI or of Purchaser, violate any provisions of any judicial or administrative order, award, judgment, decree, statute, rule or regulation applicable to BRLI or Purchaser or any of their properties, (2) conflict with or result in a breach of, constitute a default under, contravene, result in a forfeiture of a right under, or result in the acceleration of payment or performance under, any note, bond, mortgage, indenture, deed, trust, license, lease, agreement, or other instrument or obligation to which BRLI or Purchaser is a party or by which BRLI or Purchaser or any of 6 their properties may be bound or affected, or (3) result in the creation or imposition of any lien, security interest, charge or other encumbrance against any properties of BRLI or Purchaser. (iii) This Agreement has been duly and validly executed and delivered by BRLI and by Purchaser and upon execution and delivery, will constitute valid, binding and enforceable obligations of BRLI and Purchaser. BRLI and the Purchaser each has the right, power, legal capacity and authority to enter into and perform its obligations under this Agreement and no consent of any third party is necessary with respect thereto, which has not been obtained. No petition in bankruptcy has been filed by or against or is contemplated to be filed by BRLI or the Purchaser. (iv) There is no material action, dispute, claim, litigation, arbitration, investigation, or other proceeding, at law or in equity or by or before any court or governmental or administrative body (U.S. or foreign), pending or threatened against BRLI or the Purchaser, or against their businesses or properties, or with respect to the transactions contemplated by this Agreement, and neither BRLI nor the Purchaser is subject to any adverse judicial, governmental or agency judgment, decree or order, nor does BRLI or the Purchaser know of any basis for any such action, dispute, claim, litigation, arbitration, investigation or other proceeding. (v) At the Closing Date, BRLI will have not more than 8,000,000 shares of its common stock, $.01 par value, issued and outstanding, each share of which is entitled to one vote on all matters on which stockholders are entitled to vote. In addition, at such date, the only other outstanding class of BRLI capital stock will be Series A Senior Preferred Stock, $.10 par value ("Senior Preferred Stock") of which 604,078 shares were issued and outstanding. Each share of Senior Preferred Stock is entitled to one vote on all matters on which stockholders are entitled to vote. Furthermore, each share of Senior Preferred Stock is convertible into one share of common stock at a conversion price of $.75. (b) The foregoing representations and warranties are made with the knowledge and expectation that the Sellers are placing complete reliance thereon. 5. Indemnification (a) Provided that the representations made by BRLI and by Purchaser in this Agreement are accurate and BRLI and Purchaser are in compliance with their obligations under this Agreement, the Sellers and each of them, jointly and severally hereby agree to indemnify and hold harmless BRLI and Purchaser, and each of them, against and in respect of: 7 (i) all liabilities and obligations of, or claims against BRLI and/or the Purchaser based on liabilities and obligations of RBF or the individual Seller in connection with the operation up to the Closing Date of the Health Food Business, including but not limited to liabilities (if any) based on alleged violations of food processing, licensing and/or labeling laws as well as liabilities for income, employment, sales and all other taxes as well as penalties and interest thereon (if any); unless same shall result from the acts or omissions of BRLI and/or the Purchaser or are liabilities of RBF expressly assumed hereunder by BRLI and/or the Purchaser; (ii) any damage misrepresentation, part of any of misrepresentation furnished or to be or deficiency resulting from any material breach of warranty or nonfulfillment of any agreement on the the Sellers under this Agreement or from any material in or omission from any certificate or other instrument furnished to Purchaser under this Agreement; and (iii) all actions, suits, proceedings, demands, assessments, judgments, costs and expenses incident to any of the foregoing. (b) Provided that the representations made by the Sellers in this Agreement are accurate and each Seller is in compliance with its and her obligations under this Agreement, BRLI and the Purchaser, and each of them hereby agrees to indemnify and hold harmless the Sellers and each of them, against and in respect of: (i) all liabilities and obligations of, or claims against the Sellers or any of them with respect to the Assets, for periods after the Closing as a result of Purchaser's purchase of the Assets hereunder unless same shall result from the acts or omissions of Sellers; (ii) any damage or deficiency resulting from any material misrepresentation, breach of warranty, or nonfulfillment of any agreement on the part of Purchaser under this Agreement or from any material misrepresentation in or omission from any certificate or other instrument furnished or to be furnished to Sellers under this Agreement; and (iii) all actions, suits, proceedings, demands, assessments, judgments, costs and expenses incident to any of the foregoing. (c) In the event that any parties hereunder (the "Indemnitees") elect to assert their rights pursuant to this Section 5 to indemnification against the other parties hereto (the "Indemnitors"), prior to settling or defending against any claim as to which they may seek indemnification hereunder, the Indemnitees 8 shall give notice to the Indemnitors of such election and the claim with respect to which indemnification is sought. The Indemnitors shall have the right within seven (7) days after such notice, time being of the essence, to give notice to the Indemnitees that they elect to contest such claim and thereupon, upon posting reasonably adequate security with the Indemnitees, will be entitled at their own expense, to contest same. In the event they so elect to contest the claim, the Indemnitors will also have the right to settle same at their own expense with the Indemnitees' consent, which consent will not be unreasonably withheld. 6. Expenses Each of the parties shall pay its or her own expenses (including without limitation, the fees and expenses of the agents, representatives, counsel and accountants) incidental to the preparation and consummation of this Agreement. 7. Brokerage Each party shall indemnify and hold the other parties free and harmless from all losses, damages, costs, and expenses (including attorney's fees) that may be suffered as a result of claims brought by any broker or finder seeking compensation on account of this transaction arising out of the actions of such party. 8. Survival of Representations and Warranties The parties agree that the representations, warranties, agreements, and covenants contained in this Agreement or in any other documents delivered in accordance with or by virtue of this Agreement shall survive the execution and delivery of this Agreement and all other instruments in connection herewith or therewith. 9. Notices All notices and other documents required or permitted to be given pursuant to this Agreement shall be in writing and shall be deemed to have been given if delivered by hand with an acknowledgement of receipt therefor or mailed by registered or certified mail, return receipt requested, to the parties at the addresses provided above (or such other address for a party as shall be specified by notice given pursuant to this paragraph) with a copy by certified mail, return receipt requested, to the attorneys for the respective parties at the following addresses: for Sellers - Vitale & Levitt, 445 Broadhollow Road, Suite 124, Melville, New York 11747 and for BRLI and the Purchaser - Tolins & Lowenfels, A Professional Corporation, 12 East 49th Street, New York, New York 10017. 9 10. Binding Effect and Assignability This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors, heirs and assigns. 11. Governing Law and Jurisdiction This Agreement shall be construed and enforced in accordance with the laws of the State of New Jersey without regard to the principle of the conflict of laws. The parties hereto consent to the in personam jurisdiction of the courts of the State of New Jersey and further agree that any action with respect to this Agreement shall be commenced and prosecuted only in such courts. The parties hereby waive trial by jury in any action or proceeding arising under this Agreement. 12. Remedies No remedy herein conferred upon or reserved to a party is intended to be exclusive of any other available remedy, but each and every such remedy shall be cumulative and in addition to every other remedy given under this Agreement or in connection with this Agreement and now or hereafter existing at law or in equity. 13. Entire Agreement This Agreement, the Employment Agreement and the Non- Competition Agreement constitute the entire agreement among the parties with respect to the subject matter contained herein and therein and supersedes all prior agreements and understandings, oral or written. This Agreement and such other Agreements may not be amended or modified except in writing executed by each of the parties hereto and thereto. 14. Confidentiality of Agreement and Disclosure The parties agree that the terms of this Agreement and the transactions contemplated hereby will be kept confidential and not publicly disclosed until such time and in such manner as shall be determined by the Purchaser, although Klafter shall be permitted to disclose the terms of the transaction to members of her immediate family and her professional advisors. 10 IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written. /s/Rebecca Klafter -----------------Rebecca Klafter (individually) Right Body Foods Inc. By /s/Rebecca Klafter Rebecca Klafter, President Bio-Reference Laboratories, Inc. By /s/Howard Dubinett Howard Dubinett, Executive Vice President BRLI No. 1 Acquisition Corp. By /s/Howard Dubinett Howard Dubinett, Executive Vice President 11 Exhibit 10.10 EMPLOYMENT AGREEMENT AGREEMENT made this 14th day of December 1999, by and between Rebecca Klafter having an address at 102 Bristol Drive, Woodbury, New York 11797 (hereinafter referred to as the "Employee") and Bio- Reference Laboratories, Inc., a New Jersey corporation with principal offices located at 481 Edward H. Ross Drive, Elmwood Park, New Jersey 07407 (hereinafter referred to as the "Company"). WITNESSETH: WHEREAS, the Company is a New Jersey Corporation laboratory business; and engaged in the clinical WHEREAS, the Employee is the chief executive officer and sole stockholder of Right Body Foods Inc., a New York corporation engaged in the manufacture of certain health food products at its facility at 118 Jackson Avenue, Syosset, Long Island, New York 11791 ("RBF") and the distribution of such products in the greater New York metropolitan area (the "Health Food Business"); and WHEREAS, the Company has agreed through its wholly-owned subsidiary, BRLI No. 1 Acquisition Corp. ("BRLI Acq. Corp.") to purchase certain assets used by RBF in its operation of the Health Food Business so as to enable BRLI Acq. Corp. to operate the Health Food Business; and WHEREAS, the Company is unwilling to effect such purchase unless it is able to employ the Employee to serve as Director of the Health Food Business operations of BRLI Acq. Corp. and to obtain the Employee's agreement not to compete with the Company and/or BRLI Acq. Corp. in the operation of the Health Food Business; and WHEREAS, the Employee desires to commence employment with the Company, pursuant to the terms and conditions herein set forth, superseding any and all prior agreements, express or implied, between the Company, its subsidiaries and/or predecessors and the Employee; NOW THEREFORE, follows: it is mutually agreed by and between the parties hereto as ARTICLE I EMPLOYMENT Subject to and upon the terms and conditions of this Agreement, the Company hereby employs the Employee, and the Employee hereby accepts such employment in her capacity as Director of the Health Food Business operations of BRLI Acq. Corp. The Company agrees that during the term of her employment hereunder, the Employee will be consulted with by the president and/or the 2 executive vice president of the Company with regard to and will be provided with the opportunity to review each recipe as well as each proposed change in recipe with respect to each food product manufactured and distributed by the Health Food Business. Employee represents and warrants that there is no restriction or impediment, contractual or otherwise to her accepting such employment as provided for herein, and that she is not in breach or violation of any covenant or agreement with any party relating to her employment. Employee represents and warrants, and covenants and agrees that in entering into employment with the Company and in the performance of her duties that she is not utilizing any secret or confidential information of any other person. ARTICLE II DUTIES (A) The Employee shall, during the continuation of her employment with the Company, and subject to the direction and control of the Company's Chief Executive Officer and Chief Operating Officer, perform such executive and marketing duties and functions as she may be called upon to perform by such executive officers during the terms of this Agreement principally on Long Island in the State of New York but also in the State of New Jersey. (B) During the continuation of her employment, the Employee agrees to devote her full time to the performance of her duties for the Company and to render such services for any subsidiary or 3 affiliate corporation of the Company including BRLI Acq. Corp. provided that from the date hereof through December 31, 1999, the Employee shall be permitted to render her services hereunder on a part-time basis provided that she devotes a minimum of 25 hours per five-day week (pro-rated for partial weeks) to the performance of her duties hereunder. (C) The Employee shall perform to the best of her ability the following services and duties for the Company and its subsidiary and affiliate corporations (by way of example, and not by way of limitation): (i) Those duties attendant to the position with the Company and BRLI Acq. Corp. for which she is being hired, including the establishment, supervision of manufacturing and marketing of products for the Health Food Business; (ii) Assisting the Company and BRLI Acq. Corp. in the planning and implementation of all sales promotion, advertising, public relations, personnel and product development programs for the Health Food Business; (iii) Promotion of the relationships of the Company and its subsidiary and affiliate corporations including BRLI Acq. Corp. with their respective employees, customers, suppliers and others in the business community. (iv) Working with the Company's and BRLI Acq. Corp.'s professional staff toward the development of special programs to offer Health Food Business products and services to physicians and healthcare facilities. 4 ARTICLE III COMPENSATION Solely during the time that this Employment Agreement is in full force and effect, the Company shall make the following payments to the Employee and shall provide her with the following benefits as compensation for all of her services rendered hereunder. (A) Salary - initially at the rate of $150,000 per annum (the "Annual Base Salary"), payable in weekly installments or pursuant to the Company's regular pay periods. For each successive twelve- month period that this Agreement is in effect beginning with the twelve-month period commencing November 1, 2000, the Annual Base Salary in effect immediately prior to such November 1 date shall be increased (but never decreased) by the same percentage increase as that of the percentage increase in the Consumer Price Index -- All Items for the New York metropolitan area for the month of November in the successive period over the first month of the twelve-month or shorter fiscal period then ended. (B) Signing Bonus - in the aggregate amount of $100,000 paid in 24 consecutive equal monthly installments of $4,166.67, without interest, commencing February 1, 2000. (C) Commission Bonus and Bonus Guarantee - The Employee will be paid a "Commission Bonus" in an amount equal to the following percentages of the net cash receipts (net of required credits and refunds) during the period commencing on the date hereof and ending 5 on October 31, 2000 and during each successive twelve-month period, actually collected by the division or subsidiary of the Company organized to operate the Health Food Business, which receipts are attributable to such business: Collected Cash Receipts In excess of ------------$ 1,000,000 $ 5,000,000 $10,000,000 Not more than ------------$ 1,000,000 $ 5,000,000 $10,000,000 $20,000,000 Bonus-Percentage of the Collected Net Cash Receipts ------------------------None 5% 2% 1% By way of example, if the net cash receipts (net of required credits and refunds) of the Health Food Business actually collected during an applicable period totalled $7,500,000, the Commission Bonus with respect to such period would be $250,000 ($0 + $200,000 + $50,000) subject to offset by the Bonus Guarantee hereinafter described. No net cash receipts collected during one period shall be carried back or forward to a prior or subsequent period for purposes of computing the Commission Bonus with respect to such prior or subsequent period. Each Commission Bonus shall be paid within 60 days after the close of each such period. The Company agrees that the Health Food Business will be operated through BRLI Acq. Corp. The Company agrees to provide the Employee and her agents with access to the books and records of the Health Food Business on a quarterly basis during normal business hours in order to verify the "Collected Cash Receipts" of the Health Food Business. 6 With respect to the initial period only commencing on the date hereof and ending on October 31, 2000 (the "First Bonus Period"), the Employee shall also be paid a $50,000 non-refundable "Bonus Guarantee" against her Commission Bonus. Such Bonus Guarantee shall be paid in twelve consecutive equal monthly installments of $4,166.66, without interest, commencing February 1, 2000 but shall be credited solely against the Employee's Commission Bonus earned with respect to the First Bonus Period. By way of example, if the net cash receipts of the Health Food Business actually collected during the First Bonus Period totalled $1,800,000, the Employee will be entitled to retain her entire Bonus Guarantee of $50,000 as it is non-refundable but would not be paid any Commission Bonus with respect to such period as the $50,000 Bonus Guarantee exceeds the $40,000 Commission Bonus to which she would otherwise be entitled. If such net cash receipts during the First Bonus Period totalled $5,500,000, the Employee would be paid a $160,000 Commission Bonus ($210,000 Commission Bonus less $50,000 Bonus Guarantee) but would also be entitled to retain her entire Bonus Guarantee of $50,000 as it is non-refundable. (D) Other Benefits - The Company will provide the Employee with three weeks of paid vacation for each approximately 12 month period ending October 31 commencing with the period ending October 31, 2000, on such dates as she may elect, as well as participation on an equitable basis in any medical, health benefit or other employee benefit plan established for senior management of the Company. The Company will provide the Employee with a $500 per 7 month automobile allowance towards lease or purchase and insurance coverage costs and will reimburse the Employee upon presentation of the appropriate vouchers for business and travel expenses incurred by the Employee on behalf of the Company as well as for reasonable maintenance and repairs of the automobile used by the Employee in connection with the Health Food Business. (E) Key-Man Life Insurance - In the event the Company wishes to obtain "Key-Man" Life Insurance on the life of the Employee, Employee agrees to cooperate with the Company in completing any applications necessary to obtain such insurance and to promptly submit to such physical examinations and furnish such information as any proposed insurance carrier may request, providing Employee is insurable. ARTICLE IV TERM AND TERMINATION The term of this Agreement shall be for a period of approximately five (5) years commencing on the date hereof and terminating on October 31, 2004. The Company, at its option, exercised in writing not less than 30 days prior to the end of such term (the "Initial Term"), may elect to extend the term of this Agreement for an additional twelve-month period terminating on October 31, 2005 (the "First Extension Year"). In the event of such election, all of the terms and conditions of this Agreement shall remain in full force and effect except that (a) the Employee's Annual Salary in effect at 8 the end of the Initial Term shall be increased by 10% but shall not be modified by changes in the Consumer Price Index; (b) the Employee shall not be entitled to an additional Signing Bonus or a Bonus Guarantee; but (c) the terms of the Commission Bonus shall remain in full force and effect. If the Company so extends the Initial Term for a First Extension Year, it may at its option, exercised not less than 30 days prior to the end of the First Extension Year, extend the term of this Agreement for a second additional twelve-month period terminating on October 31, 2006 (the "Second Extension Year"). In the event of such election, all of the terms and conditions of this Agreement shall remain in full force and effect except that (a) the Employee's Annual Salary during the Second Extension Year shall remain the same as her Annual Salary in effect during the First Extension Year and shall not be modified by changes in the Consumer Price Index; (b) the Employee shall not be entitled to an additional Signing Bonus or a Bonus Guarantee; but (c) the terms of the Commission Bonus shall remain in full force and effect. The Company shall have the right to terminate this Agreement upon twenty (20) days prior written notice to the Employee for "cause," defined as gross dereliction of duty, gross negligence affecting Employee's performance, conviction of a "crime," or substantial violation of the terms of this Agreement provided that prior to the expiration of such twenty (20) day period, if the Employee is able to and cures such "cause," such termination will not be effective. For purposes of this Agreement, "crime" is 9 defined as a felony or a crime of high moral turpitude, but in no event shall a traffic offense or an offense which is considered to be a disorderly person offense or a misdemeanor be deemed a "crime" permitting termination. In the event of termination of this Agreement "for cause," no unpaid or future payments required hereunder including payments of Annual Salary, the Signing Bonus, the Commission Bonus and/or the Bonus Guarantee shall be required to be paid to the Employee after such termination date. ARTICLE V NON-DISCLOSURE OF INFORMATION AND TRADE SECRETS Employee acknowledges that BRLI Acq. Corp. has purchased certain secret information relating to the Health Food Business including business plans and programs, marketing plans, contractual arrangements with others, formulations, recipes and customer lists and that in the course of her duties hereunder, the Company and/or BRLI Acq. Corp. will make available to her and she may also develop additional secret information of like nature relating to the Health Food Business. All of such secret information whether purchased by BRLI Acq. Corp. or developed during the course of her employment is hereinafter collectively referred to as the "Proprietary Information." Employee waives any and all rights to the Proprietary Information and agrees that all such rights shall be vested solely in the Company and BRLI Acq. Corp. even after termination of her employment. Upon the termination of employment, Employee shall promptly deliver all correspondence, notes, reports, programs, 10 proposals, formulations, recipes, customer lists and books and records, or any other documents, and all copies thereof, relating to the Health Food Business, to BRLI Acq. Corp. (The Company and BRLI Acq. Corp. have entered into a separate Non-Competition Agreement with the Employee as of the date hereof.) ARTICLE VI SEVERABILITY If any provision of the Agreement shall be held invalid and unenforceable, the remainder of this Agreement shall remain in full force and effect. If any provision is held invalid or unenforceable with respect to particular circumstances, it shall remain in full force and effect in all other circumstances. ARTICLE VII NOTICES All notices required to be given under the terms of this Agreement shall be in writing and shall be deemed to have been duly given only if delivered to the addressee in person or mailed by certified mail, return receipt requested, as follows: IF TO COMPANY: Bio-Reference Laboratories, Inc. (or BRLI Acq. Corp.) AND/OR TO 481 Edward H. Ross Drive BRLI ACQ. CORP. Elmwood Park, New Jersey 07407 Attn: Howard Dubinett, Executive Vice President WITH COPY TO: Roger Tolins, Esq. Tolins and Lowenfels 12 East 49th St - 21st Floor New York, New York 10017 11 IF TO EMPLOYEE: Rebecca Klafter 102 Bristol Drive Woodbury, New York 11797 WITH COPY TO: Paul Levitt, Esq. Vitale & Levitt 445 Broadhollow Road, Suite 124 Melville, New York 11747 or such other additional address as the party to receive the notice shall advise by due notice in accordance with this paragraph. ARTICLE VIII BENEFIT This agreement shall inure to, and be binding upon, the parties the successors and assigns of the Company, and the heirs representatives of the Employee. hereto, and personal ARTICLE IX WAIVER The waiver by either party of any breach or violation of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach of construction and validity. ARTICLE X GOVERNING LAW This Agreement shall be construed and enforced in accordance with the laws of the State of New Jersey without regard to the principle of the conflict of laws. The parties hereto consent to the in personam jurisdiction of the courts of the State of New 12 Jersey and further agree that any action with respect to this Agreement shall be commenced and prosecuted only in such courts. The parties hereby waive trial by jury in any action or proceeding arising under this Agreement. ARTICLE XI JURISDICTION In case any provision of this Agreement shall be invalid under the laws of any county, state or jurisdiction, such invalidity shall not affect any other provisions of this Agreement. ARTICLE XII REMEDIES No remedy herein conferred upon or reserved to a party is intended to be exclusive of any other available remedy, but each and every such remedy shall be cumulative and in addition to every other remedy given under this Agreement or in connection with this Agreement and now or hereafter existing at law or in equity. ARTICLE XIII ENTIRE AGREEMENT This Agreement, the Non-Competition Agreement and the Asset/Sale Purchase Agreement constitute the entire agreement among the parties with respect to the subject matter contained herein and therein and supersedes all prior agreements and understandings, oral or written. This Agreement and such other Agreements may not 13 be amended or modified except in writing and thereto. executed by each of the parties hereto IN WITNESS WHEREOF, the parties have hereto set their hands and seals the day and year written below their names. Signed, sealed and delivered in the presence of: WITNESS: Bio-Reference Laboratories, Inc. /s/Roger Tolins -------------------------Howard Dubinett, Executive Vice President Date: December 14, 1999 By /s/Howard Dubinett ------------------- WITNESS: /s/Paul Levitt -------------Rebecca Klafter Date: December 14, 1999 14 /s/Rebecca Klafter ------------------ <ARTICLE> 5 <LEGEND> This Schedule contains summary financial information extracted from (a) the Balance Sheet and Statement of Operations filed as part of the Quarterly Report on Form 10-Q and is qualified in its entirety by reference to such (b) Report on Form 10-Q. </LEGEND> <PERIOD-TYPE> <FISCAL-YEAR-END> <PERIOD-END> <CASH> <SECURITIES> <RECEIVABLES> <ALLOWANCES> <INVENTORY> <CURRENT-ASSETS> <PP <DEPRECIATION> <TOTAL-ASSETS> <CURRENT-LIABILITIES> <BONDS> <PREFERRED-MANDATORY> <PREFERRED> <COMMON> <OTHER-SE> <TOTAL-LIABILITY-AND-EQUITY> <SALES> <TOTAL-REVENUES> <CGS> <TOTAL-COSTS> <OTHER-EXPENSES> <LOSS-PROVISION> <INTEREST-EXPENSE> <INCOME-PRETAX> <INCOME-TAX> <INCOME-CONTINUING> <DISCONTINUED> <EXTRAORDINARY> <CHANGES> <NET-INCOME> <EPS-BASIC> <EPS-DILUTED> Year OCT-31-1999 OCT-31-1999 2,128,274 0 18,615,496 15,312,935 572,279 21,720,373 5,211,467 3,039,128 32,317,998 18,268,350 12,905,365 0 60,408 77,008 23,294,673 32,317,998 53,856,414 53,856,414 30,850,337 57,282,246 1,185,316 6,855,221 1,465,765 (4,611,148) 367,300 (4,978,448) 0 0 0 (4,978,448) (.68) (.68)