UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington,
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2004
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2005 | |
OR | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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: Number 0-23357BIOANALYTICAL SYSTEMS, INC.(Exact name of registrant as specified in its charter)
BIOANALYTICAL SYSTEMS, INC. (Exact name of the registrant as specified in its charter) | ||
INDIANA | 35-1345024 | |
(State or other jurisdiction of | ( | |
2701 | ||
WEST LAFAYETTE, IN | 47906 | |
(Address of principal executive offices) | (Zip | |
(765) 463-4527 | ||
(Registrant's telephone number, | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d)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 [ ]
YES | x | NO | o |
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
YES | o | NO | x |
As of July 31, 2004, 4,869,502,April 30, 2005, 4,870,502 common shares of the registrant were outstanding.
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PAGE | ||
PART | FINANCIAL INFORMATION |
Item 1 | Condensed Consolidated Financial Statements (Unaudited): |
Condensed Consolidated Balance Sheets as of | 3 |
Condensed Consolidated Statements of Operations for the | 4 |
Condensed Consolidated Statements of Cash Flows for the | 5 |
Notes to Condensed Consolidated Financial Statements | 6 |
Item 2 | Management's Discussion and Analysis of Financial Condition and | 10 |
Item 3 | Quantitative and Qualitative Disclosures About Market Risk | 16 |
Item 4 | Controls and Procedures | 16 |
PART II | OTHER INFORMATION | |
Item 4 | Submission of Matters to Vote of Security Holders | 17 |
Item 6 | Exhibits | 17 |
SIGNATURES | 18 |
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PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited) March 31, 2005 | September 30, 2004 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Unaudited) June 30, 2004 | September 30, 2003 | ||||||||||||||||||
Assets | |||||||||||||||||||
Current assets: | |||||||||||||||||||
Cash and cash equivalents | $ | 778 | $ | 1,378 | $ | 1,315 | $ | 773 | |||||||||||
Accounts receivable | |||||||||||||||||||
Accounts receivable: | |||||||||||||||||||
Trade | 5,429 | 3,978 | 6,740 | 5,352 | |||||||||||||||
Grants | 13 | 13 | |||||||||||||||||
Unbilled revenues and other | 1,085 | 954 | 1,360 | 1,086 | |||||||||||||||
Inventories | 1,833 | 2,055 | �� | 2,259 | 1,570 | ||||||||||||||
Deferred income taxes | 465 | 465 | 469 | 469 | |||||||||||||||
Refundable income taxes | 167 | 84 | 740 | 603 | |||||||||||||||
Prepaid expenses | 589 | 397 | 668 | 503 | |||||||||||||||
Total current assets | 10,359 | 9,324 | 13,551 | 10,356 | |||||||||||||||
Property and equipment, net | 32,120 | 31,171 | 26,708 | 31,901 | |||||||||||||||
Goodwill | 1,659 | 984 | 1,445 | 1,445 | |||||||||||||||
Intangible assets, net | 2,259 | 2,778 | 2,323 | 2,491 | |||||||||||||||
Debt issue costs | 379 | 428 | 337 | 340 | |||||||||||||||
Other assets | 307 | 300 | 328 | 262 | |||||||||||||||
Total assets | $ | 47,083 | $ | 44,985 | $ | 44,692 | $ | 46,795 | |||||||||||
Liabilities and shareholders' equity | |||||||||||||||||||
Current liabilities: | |||||||||||||||||||
Accounts payable | $ | 3,157 | $ | 3,073 | $ | 1,555 | $ | 2,021 | |||||||||||
Accrued expenses | 995 | 1,245 | 2,384 | 2,332 | |||||||||||||||
Customer advances | 2,470 | 1,658 | 4,134 | 2,817 | |||||||||||||||
Revolving line of credit | 3,109 | 2,388 | — | 2,826 | |||||||||||||||
Current portion of capital lease obligation | 120 | 123 | 231 | 73 | |||||||||||||||
Current portion of long-term debt | 788 | 1,132 | 691 | 783 | |||||||||||||||
Total current liabilities | 10,639 | 9,619 | 8,995 | 10,852 | |||||||||||||||
Capital lease obligation, less current portion | 101 | --- | 759 | 80 | |||||||||||||||
Long-term debt, less current portion | 9,007 | 6,949 | 8,724 | 8,893 | |||||||||||||||
Construction line of credit | --- | 1,676 | |||||||||||||||||
Subordinated debt, long-term | 5,231 | 5,188 | 4,828 | 5,188 | |||||||||||||||
Deferred income taxes | 2,251 | 1,827 | 2,217 | 2,362 | |||||||||||||||
Shareholders' equity: | |||||||||||||||||||
Preferred shares: Authorized shares - 1,000, | |||||||||||||||||||
Preferred shares: Authorized shares — 1,000, | |||||||||||||||||||
Issued and outstanding shares - none | --- | --- | — | — | |||||||||||||||
Common shares, no par value: Authorized shares - 19,000, | |||||||||||||||||||
Issued and outstanding shares - 4,870 at June 30, 2004 | |||||||||||||||||||
and 4,831 at September 30, 2003 | 1,177 | 1,168 | |||||||||||||||||
Common shares: Authorized shares — 19,000, | |||||||||||||||||||
Issued and outstanding shares — 4,870 at March 31, 2005 | |||||||||||||||||||
and 4,870 at September 30, 2004 | 1,177 | 1,177 | |||||||||||||||||
Additional paid-in capital | 11,263 | 11,122 | 11,263 | 11,263 | |||||||||||||||
Retained earnings | 7,500 | 7,498 | 6,802 | 7,295 | |||||||||||||||
Accumulated other comprehensive loss | (86 | ) | (62 | ) | (73 | ) | (315 | ) | |||||||||||
Total shareholders' equity | 19,854 | 19,726 | 19,169 | 19,420 | |||||||||||||||
Total liabilities and shareholders' equity | $ | 47,083 | $ | 44,985 | $ | 44,692 | $ | 46,795 | |||||||||||
See accompanying notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Three Months Ended June 30, | Nine Months Ended June 30, | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||||||||||||||
Service revenue | $ | 7,684 | $ | 5,643 | $ | 19,270 | $ | 14,739 | $ | 7,543 | $ | 5,608 | $ | 14,832 | $ | 11,586 | ||||||||||||
Product revenue | 2,948 | 2,231 | 8,789 | 7,059 | 1,596 | 3,042 | 4,001 | 5,841 | ||||||||||||||||||||
Total revenue | 10,632 | 7,874 | 28,059 | 21,798 | 9,139 | 8,650 | 18,833 | 17,427 | ||||||||||||||||||||
Cost of service revenue | 5,217 | 3,864 | 15,493 | 10,840 | 6,056 | 5,217 | 11,271 | 10,276 | ||||||||||||||||||||
Cost of product revenue | 1,191 | 858 | 3,503 | 2,864 | 657 | 1,229 | 1,509 | 2,312 | ||||||||||||||||||||
Total cost of revenue | 6,408 | 4,722 | 18,996 | 13,704 | 6,713 | 6,446 | 12,780 | 12,588 | ||||||||||||||||||||
Gross profit | 4,224 | 3,152 | 9,063 | 8,094 | 2,426 | 2,204 | 6,053 | 4,839 | ||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||
Selling | 672 | 557 | 1,963 | 2,199 | 626 | 665 | 1,202 | 1,291 | ||||||||||||||||||||
Research and development | 260 | 305 | 801 | 996 | 173 | 295 | 392 | 541 | ||||||||||||||||||||
General and administrative | 2,054 | 1,436 | 5,686 | 3,723 | 2,603 | 1,785 | 4,530 | 3,632 | ||||||||||||||||||||
Total operating expenses | 2,986 | 2,298 | 8,450 | 6,918 | 3,402 | 2,745 | 6,124 | 5,464 | ||||||||||||||||||||
Operating income | 1,238 | 854 | 613 | 1,176 | ||||||||||||||||||||||||
Operating loss | (976 | ) | (541 | ) | (71 | ) | (625 | ) | ||||||||||||||||||||
Interest income | 2 | 1 | 5 | 3 | 2 | 2 | 4 | 3 | ||||||||||||||||||||
Interest expense | (306 | ) | (148 | ) | (720 | ) | (396 | ) | (257 | ) | (207 | ) | (532 | ) | (414 | ) | ||||||||||||
Other income | 21 | 20 | 39 | 79 | ||||||||||||||||||||||||
Other income (expense) | (28 | ) | 2 | (22 | ) | 18 | ||||||||||||||||||||||
Gain (loss) on sale of property and equipment | (10 | ) | 49 | (10 | ) | 81 | ||||||||||||||||||||||
Loss on sale of property and equipment | (12 | ) | — | (12 | ) | — | ||||||||||||||||||||||
Loss before income taxes | (1,271 | ) | (744 | ) | (633 | ) | (1,018 | ) | ||||||||||||||||||||
Income taxes | (375 | ) | (241 | ) | (140 | ) | (385 | ) | ||||||||||||||||||||
Income (loss) before income taxes | 945 | 776 | (73 | ) | 943 | |||||||||||||||||||||||
Income tax provision (benefit) | 310 | 422 | (75 | ) | 481 | |||||||||||||||||||||||
Net income | $ | 635 | $ | 354 | $ | 2 | $ | 462 | ||||||||||||||||||||
Net loss | $ | (896 | ) | $ | (503 | ) | $ | (493 | ) | $ | (633 | ) | ||||||||||||||||
Net income per share: | ||||||||||||||||||||||||||||
Net loss per share: | ||||||||||||||||||||||||||||
Basic | $ | 0.13 | $ | 0.08 | $ | 0.00 | $ | 0.10 | $ | (0.18 | ) | $ | (0.10 | ) | $ | (0.10 | ) | $ | (0.13 | ) | ||||||||
Diluted | $ | 0.13 | $ | 0.08 | $ | 0.00 | $ | 0.10 | $ | (0.18 | ) | $ | (0.10 | ) | $ | (0.10 | ) | $ | (0.13 | ) | ||||||||
Weighted common and common equivalent | ||||||||||||||||||||||||||||
shares outstanding: | ||||||||||||||||||||||||||||
Basic | 4,870 | 4,605 | 4,857 | 4,595 | 4,870 | 4,870 | 4,870 | 4,851 | ||||||||||||||||||||
Diluted | 5,150 | 4,609 | 4,866 | 4,616 | 4,870 | 4,870 | 4,870 | 4,851 |
See accompanying notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended June 30, | Six Months Ended March 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2004 | 2003 | 2005 | 2004 | |||||||||||||
Operating activities | ||||||||||||||||
Net income | $ | 2 | $ | 462 | ||||||||||||
Adjustments to reconcile net income to net | ||||||||||||||||
Net loss | $ | (493 | ) | $ | (633 | ) | ||||||||||
Adjustments to reconcile net income (loss) to net | ||||||||||||||||
cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 2,771 | 1,783 | 1,429 | 1,617 | ||||||||||||
(Gain) loss on sale of property and equipment | 10 | (81 | ) | |||||||||||||
Interest on subordinated debt | 193 | --- | ||||||||||||||
Loss on sale of property and equipment | 12 | — | ||||||||||||||
Deferred income taxes | --- | 242 | (145 | ) | (93 | ) | ||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (1,582 | ) | 605 | (1,662 | ) | (421 | ) | |||||||||
Inventories | 222 | 255 | (689 | ) | 130 | |||||||||||
Prepaid expenses and other assets | (199 | ) | 153 | (231 | ) | (735 | ) | |||||||||
Accounts payable | 84 | (476 | ) | (466 | ) | 24 | ||||||||||
Income taxes | (261 | ) | (92 | ) | ||||||||||||
Refundable income taxes | (137 | ) | — | |||||||||||||
Accrued expenses | (1,355 | ) | 1 | 28 | 173 | |||||||||||
Customer advances | 812 | (141 | ) | 1,317 | 1,442 | |||||||||||
Net cash provided by operating activities | 697 | 2,711 | ||||||||||||||
Net cash provided (used) by operating activities | (1,037 | ) | 1,504 | |||||||||||||
Investing activities | ||||||||||||||||
Capital expenditures | (2,029 | ) | (4,077 | ) | (1,029 | ) | (2,229 | ) | ||||||||
Proceeds from sale of property and equipment | --- | 1,023 | 5,866 | — | ||||||||||||
Payments for purchase of LC Resources, Inc. net of cash acquired | --- | (163 | ) | |||||||||||||
Payments for purchase of PharmaKinetics Laboratories, Inc., net of cash acquired | --- | (816 | ) | |||||||||||||
Net cash used by investing activities | (2,029 | ) | (4,033 | ) | ||||||||||||
Net cash provided (used) by investing activities | 4,837 | (2,229 | ) | |||||||||||||
Financing activities | ||||||||||||||||
Borrowings on line of credit | 9,629 | 3,826 | 6,968 | 6,705 | ||||||||||||
Payments on line of credit | (8,908 | ) | (5,955 | ) | (9,794 | ) | (6,823 | ) | ||||||||
Borrowings on construction line of credit | 574 | 3,343 | — | 574 | ||||||||||||
Payments on capital lease obligations | (3 | ) | (1,071 | ) | (53 | ) | (130 | ) | ||||||||
Borrowings of long-term debt, net of issuance costs | 2,250 | 4,950 | ||||||||||||||
Payments of long-term debt | (2,786 | ) | (3,658 | ) | (621 | ) | (293 | ) | ||||||||
Net proceeds from the exercise of stock options | --- | 39 | ||||||||||||||
Net cash provided by financing activities | 756 | 1,474 | ||||||||||||||
Net cash provided (used) by financing activities | (3,500 | ) | 33 | |||||||||||||
Effects of exchange rate changes | (24 | ) | (6 | ) | 242 | (179 | ) | |||||||||
Net increase (decrease) in cash and cash equivalents | (600 | ) | 146 | 542 | (871 | ) | ||||||||||
Cash and cash equivalents at beginning of period | 1,378 | 826 | 773 | 1,378 | ||||||||||||
Cash and cash equivalents at end of period | $ | 778 | $ | 972 | $ | 1,315 | $ | 507 | ||||||||
See accompanying notes to condensed consolidated financial statements.
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BIOANALYTICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. |
|
Bioanalytical Systems, Inc. and its subsidiaries (“("We,”" the “Company”"Company" or “BASi”"BASi") engage in laboratory services and other services related to pharmaceutical development. We also manufacture scientific instruments for medical research, which we sell with related software for use in industrial, governmental and academic laboratories. Our customers are located throughout the world.
We have prepared the accompanying unaudited interim condensedconsolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”("SEC") regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles generally accepted in the United States (“GAAP”("GAAP"), and therefore should be read in conjunction with our audited consolidated financial statements, and the notes thereto, included in our Form 10-K for the year ended September 30, 2003.2004. In the opinion of management, the condensed consolidated financial statements for the three and ninesix months ended June 30,March 31, 2005 and 2004 and 2003 include all adjustments which are necessary for a fair presentation of the results of the interim periods and of our financial position at June 30, 2004.March 31, 2005. The results of operations for the three and ninesix months ended June 30, 2004March 31, 2005 are not necessarily indicative of the results for the year ending September 30, 2004.2005.
All amounts in the condensed consolidated financial statements and the notes thereto are presented in thousands, except for per share data or where otherwise noted.
2. | Stock Based Compensation |
At June 30, 2004,March 31, 2005, we had four stock-based employee compensation plans, which are described more fully in Note 9 in the Notes to the Consolidated Financial Statements in our Form 10-K for the year ended September 30, 2003.2004. Because all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant, we do not recognize any stock-based employee compensation cost in our financial statements. The following table illustrates the effect on net income (loss)loss and earnings (loss)loss per share had we applied the alternative fair value treatment of recognizing costs as stock-based employee compensation.
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||
Net income as reported | $ | 635 | $ | 354 | $ | 2 | $ | 462 | ||||||
Deduct: Total stock-based employee | ||||||||||||||
compensation expense determined under | ||||||||||||||
the fair value based method for all | ||||||||||||||
awards, net of related tax effects | (49 | ) | (5 | ) | (67 | ) | (15 | ) | ||||||
Pro forma net income (loss) | $ | 586 | $ | 349 | $ | (65 | ) | $ | 447 | |||||
Earnings (loss) per share: | ||||||||||||||
Basic - as reported | $ | 0.13 | $ | 0.08 | $ | 0.00 | $ | 0.10 | ||||||
Basic - pro forma | $ | 0.12 | $ | 0.08 | $ | (0.01 | ) | $ | 0.10 | |||||
Diluted-as reported | $ | 0.13 | $ | 0.08 | $ | 0.00 | $ | 0.10 | ||||||
Diluted--pro forma | $ | 0.12 | $ | 0.08 | $ | (0.01 | ) | $ | 0.10 |
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2005 | 2004 | 2005 | 2004 | |||||||||||
Net loss as reported | $ | (896 | ) | $ | (503 | ) | $ | (493 | ) | $ | (633 | ) | ||
Deduct: Total stock-based employee | ||||||||||||||
compensation expense determined under the | ||||||||||||||
fair value based method for all awards, | ||||||||||||||
net of related tax effects | (50 | ) | (16 | ) | (93 | ) | (22 | ) | ||||||
Pro forma net loss | $ | (946 | ) | $ | (519 | ) | $ | (586 | ) | $ | (655 | ) | ||
Loss per share: | ||||||||||||||
Basic and diluted — as reported | $ | (0.1 | 8) | $ | (0.1 | 0) | $ | (0.1 | 0) | $ | (0.1 | 3) | ||
Basic and diluted — pro forma | $ | (0.1 | 9) | $ | (0.1 | 1) | $ | (0.1 | 2) | $ | (0.1 | 4) |
3. | Loss per Share |
We compute basic earningsloss per share using the weighted average number of common shares outstanding. We compute diluted earningsloss per share using the weighted average number of common and potential common shares outstanding. PotentialBecause all potential common shares includeare anti-dilutive to loss per share, the dilutive effect of shares issuable upon exercise of options to purchase common shares and upon conversion of convertible subordinated debt. Shares issuable upon conversion of convertible subordinated debt have only been included in the three months ended June 30, 2004, as they were not dilutive in any other period.
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The following table reconciles our computation of basic earningsand diluted loss per share to diluted earnings per share:is the same for all periods presented.
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||
Shares: | ||||||||||||||
Basic shares | 4,870 | 4,605 | 4,857 | 4,595 | ||||||||||
Effect of dilutive securities | ||||||||||||||
Options | 8 | 4 | 9 | 21 | ||||||||||
Convertible subordinated debt | 272 | --- | --- | --- | ||||||||||
Diluted shares | 5,150 | 4,609 | 4,866 | 4,616 | ||||||||||
Basic net income | $ | 635 | $ | 354 | $ | 2 | $ | 462 | ||||||
Diluted net income | $ | 674 | $ | 354 | $ | 2 | $ | 462 | ||||||
Basic earnings per share | $ | 0.13 | $ | 0.08 | $ | 0.00 | $ | 0.10 | ||||||
Diluted earnings per share | $ | 0.13 | $ | 0.08 | $ | 0.00 | $ | 0.10 |
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4. | Sale of Building |
On December 13, 2002January 5, 2005 we acquired LC Resources, Inc. (“LCR”), now BASi Northwest Laboratories, Inc., purchasing allsold the building which houses our clinical research unit in Baltimore for a $6,500 cash selling price, with a three-year leaseback of approximately 85% of the outstanding shares of LCR for $1,999. The purchase price consisted of cash payments of $199 and issuance of $1,800space in 10% subordinated notes payable. We engaged an independent valuation firm to determine the fair value of identifiable intangible assets. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:
Current assets | $ | 639 | |||
Property and equipment | 347 | ||||
Intangible assets | 1,251 | ||||
Goodwill | 561 | ||||
Total assets acquired | 2,798 | ||||
Liabilities assumed | (799 | ) | |||
Net assets acquired | $ | 1,999 | |||
As of December 31, 2003 we recorded a deferred tax liability in the amount of $518 with a corresponding increase in goodwill. The intangible assets arising from this transaction include $180 assigned to methodologies, $359 assigned to customer relationships and $712 assigned to the regulated facility/FDA compliant laboratory site. We estimated the economic useful lives of the acquired methodologies and customer relationships to be 5 years, using straight-line amortization, and determined that the acquired regulated facility/FDA compliant laboratory site is an indefinite-lived intangible asset not subject to amortization.
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On May 26, 2003, we converted our $791 of convertible notes of PharmaKinetics Laboratories, Inc. (“PKLB”) into 4,992,300 shares of PKLB common stock, representing a 67% ownership interest in PKLB. On June 30, 2003, we purchased the remaining common stock and all preferred stock of PKLB through the exchange of 228,857 shares of the Company’s common stock valued at $1,179 and the issuance of $4,000 of 6% convertible notes due 2008. These notes plus any accrued interest are convertible into shares of the Company’s common stock at the holder’s option any time after June 1, 2004 at the conversion rate of sixteen dollars per share of our common stock.
The Company paid cash aggregating $1,506 (including the above purchase of convertible notes) representing acquisition costs and cash advances made to PKLB from June 2002 through May 2003. PKLB was a publicly traded company based in Baltimore, Maryland, that provided clinical research and development services to the pharmaceutical and biotechnology industries in the development of prescription and non-prescription drug products. PKLB has been renamed BASi Maryland, Inc.
The purchase price has been allocated based on the estimated fair values of the assets and liabilities acquired. The purchase price has been allocated as follows:
Current assets | $ | 626 | |||
Property and equipment | 6,448 | ||||
Intangible assets | 1,311 | ||||
Goodwill | 213 | ||||
Total assets acquired | 8,598 | ||||
Liabilities assumed | (1,913 | ) | |||
Net assets acquired | $ | 6,685 | |||
During the fiscal quarter ended June 30, 2004, we concluded our valuation of the acquisition, primarily the assessment of intangible assets. Also during the quarter, we received a third party offer on the land and building, which we have accepted. We will lease a portion of the building for two years$800 annually, plus operating expenses, which approximates market rental. We are accounting for the transaction as a sale/leaseback. The net cash received in the transaction, after expenses, approximated the close under an operating lease. We have used the net salecarrying value of the building in our final valuation. Property and equipment were increased by $127; intangible assets were decreased by $268, goodwill was increased by $158 and liabilities assumed were increased by $17 as a result of these changes.
During the nine months ended June 30, 2004, we recorded additional adjustments from our original estimates to reduce deferred revenue at the acquisition date by $189, record taxes on the revaluationbuilding. The net proceeds of the basis of property of $86,sale were used to pay off our revolving credit facility and record acquisition costs of $48, resulting in reductions of intangible assets of $64 and goodwill of $4.for working capital.
5. | Inventories |
Of the $1,311 in value of the acquired intangible assets, $80 was assigned to methodologies, $626 was assigned to customer relationships and $605 has been assigned to the regulated facility/FDA compliant laboratory site. We estimated the economic useful lives of the acquired methodologies and customer relationships to be 5 years, using straight-line amortization, and determined that the acquired regulated facility/FDA compliant laboratory site is an indefinite-lived intangible asset not subject to amortization.
Inventories consisted of the following:
June 30, 2004 | September 30, 2003 | |||||||
Raw materials | $ | 1,137 | $ | 1,161 | ||||
Work in progress | 310 | 338 | ||||||
Finished goods | 488 | 658 | ||||||
1,955 | 2,157 | |||||||
Less LIFO reserve | (102 | ) | (102 | ) | ||||
$ | 1,833 | $ | 2,055 | |||||
March 31, 2005 | September 30, 2004 | |||||||
---|---|---|---|---|---|---|---|---|
Raw materials | $ | 1,900 | $ | 1,392 | ||||
Work in progress | 288 | 196 | ||||||
Finished goods | 218 | 129 | ||||||
2,406 | 1,717 | |||||||
Less LIFO reserve | (147 | ) | (147 | ) | ||||
$ | 2,259 | $ | 1,570 | |||||
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6. | Segment Information |
We operate in two principal segments —- research servicesServices and research products.Products. Our Services segment provides research and development support on a contract basis directly to pharmaceutical companies. Our Products segment provides liquid chromatography, electrochemical and physiological monitoring products to pharmaceutical companies, universities, government research centers and medical research institutions. Our accounting policies in these segments are the same as those described in the summary of significant accounting policies.
The following table presents operating results by segment:
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||
Operating income (loss): | ||||||||||||||
Services | $ | 1,164 | $ | 546 | $ | (581 | ) | $ | 739 | |||||
Products | 74 | 308 | 1,194 | 437 | ||||||||||
Total operating income | 1,238 | 854 | 613 | 1,176 | ||||||||||
Corporate expenses | (293 | ) | (78 | ) | (686 | ) | (233 | ) | ||||||
Income (loss) before income taxes | $ | 945 | $ | 776 | $ | (73 | ) | $ | 943 | |||||
Prior
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2005 | 2004 | 2005 | 2004 | |||||||||||
Operating loss: | ||||||||||||||
Services | $ | (307 | ) | $ | (1,035 | ) | $ | 304 | $ | (1,745 | ) | |||
Products | (669 | ) | 494 | (375 | ) | 1,120 | ||||||||
Total operating loss | (976 | ) | (541 | ) | (71 | ) | (625 | ) | ||||||
Corporate expenses | (295 | ) | (203 | ) | (562 | ) | (393 | ) | ||||||
Loss before income taxes | $ | (1,271 | ) | $ | (744 | ) | $ | (633 | ) | $ | (1,018 | ) | ||
7. | New Accounting Pronouncements |
In November, 2004 the FASB issued Statement of Financial Accounting Standards ("SFAS") Number 151 dealing with inventory costs. The statement clarifies what costs can be included in inventory, requiring that absorption factors be based on normal capacities of manufacturing facilities and excess capacity be expensed as incurred. Our current costing methodology substantially conforms with the new standard; therefore, we do not expect a material change in our costing methods from adoption of this statement.
In December, 2004 SFAS No. 123 (Revised) was issued dealing with Share-Based Payments. In general, this statement requires that companies compute the fair value of options and other stock-based employee incentives, and charge this value to operations over the period earned, generally the vesting period. The only instruments we use that are governed by this statement are stock options for Directors and employees. The impact on reported results of adoption of this statement, required for interim and annual periods after June 15, 2005, is presented in footnote 2 above. The impact on operations in future periods will be determined by amortizing the remaining value of our currently outstanding options, plus the value imputed to future option grants using the above described methods. There is no impact on cash flow. Subsequent to the acquisitionissuance of PKLB inSFAS No. 123 (R), the Securities and Exchange commission has altered the adoption period to annual periods beginning after June 2003, a current director of the Company who had been a director of PKLB made loans to PKLB to support their cash needs under the terms of a $350 convertible promissory note (“Old Note”) dated November 22, 2002. On December 31, 2003, the Company issued a $350 8% convertible note payable (“New Note”) in exchange15, 2005, which means that our initial adoption will be for the Old Note. The New Note is convertible into the Company’s common shares at a price based upon the market price of the common shares at the time of the conversion and is scheduled to matureour fiscal period beginning on JuneOctober 1, 2005. On that same day, the Company prepaid $100 of the outstanding principal amount of the New Note, plus approximately $31 in accrued interest, and the holder converted $150 of the New Note into 38 of the Company’s common shares. The Company issued the holder a new 8% note due June 1, 2005, on substantially the same terms as the New Note, for the remaining $100 principal amount.
In May, 2004 the Company converted its construction loans totalling $2,250 into long-term debt under the terms of the initial loans. The loan bears interest at the rate of 5.7% through June 1, 2007 and matures October 29, 2012. Monthly payments total $16 for principle and interest.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q may contain “forward-looking"forward-looking statements,”" within the meaning of Section 27A of the Securities Act of 1933, as amended, and/or Section 21E of the Securities Exchange Act of 1934, as amended. Those statements may include but are not limited to, discussions regarding BASi’sBASi's intent, belief or current expectations with respect to (i) BASi’sBASi's strategic plans; (ii) BASi’sBASi's future profitability; (iii) BASi’sBASi's capital requirements; (iv) industry trends affecting the Company’sCompany's financial condition or results of operations; (v) the Company’sCompany's sales or marketing plans; or (vi) BASi’sBASi's growth strategy. Investors in BASi’sBASi's Common Shares are cautioned that reliance on any forward-looking statement involves risks and uncertainties, including the risk factors contained in Exhibit 99.1 to BASi’sBASi's annual report on Form 10-K for the year ended September 30, 2003.2004. Although the Company believes that the assumptions on which the forward-looking statements contained herein are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based upon those assumptions also could be incorrect. In light of the uncertainties inherent in any forward-looking statement, the inclusion of a forward-looking statement herein should not be regarded as a representation by the Company that BASi’sBASi's plans and objectives will be achieved.
GENERAL
The business of Bioanalytical Systems, Inc. is very much dependent on the level of pharmaceutical and biotech companies’companies' efforts in new drug discovery and approval. Our Services segment is the direct beneficiary of these efforts, through their outsourcing of laboratory and analytical needs, and our Products segment is the indirect beneficiary, as increased drug development leads to capital expansion, providing opportunities to sell the equipment we produce and the consumable supplies we provide that support our products.
Developments withinIn our Annual Report on Form 10-K for the industriesyear ended September 30, 2004, we servecommented on the impacts and anticipated impacts that developments in the pharmaceutical industry have on our businesses, as well as some of the potential risks of our dependence on the pharmaceutical industry. Those comments continue to be relevant to our business, and are found under "General" in Part I, Item 2 of that report.
The fallout from Merck's recall of Vioxx, and related questions about that class of therapeutics, has thus far been confusing and speculative. There already was considerable discussion regarding making the results of clinical trials of pharmaceutical companies publicly available in the United States, and we believe the Vioxx recall will add to pressure for public disclosure. We cannot predict at this time the impact any public disclosure requirements will have on our business. It appears likely, however, that the amount of information that the pharmaceutical industry will be required to disclose will increase, requiring additional effort and cost for its presentation and interpretation, as well as increased quality control procedures relating to the information. Increased burdens on the pharmaceutical industry are likely to increase the amount of services we can supply to our customers, although it is likely to increase our costs as well. We have seen no impact from these developments to date.
A number of very successful pharmaceutical products are nearing the end of their patent lives. We have observed a direct,significant amount of attention being given to the rate of approval of new treatments compared to the expiration of exclusivity of old products. The relative weakness of this "pipeline" of new products is generally viewed by analysts of this market as requiring increased effort by the industry in developing new products. Additionally, the pharmaceutical industry is under pressure to reduce fixed costs to improve future operating results. Both of these developments are viewed as creating demand for outsourced services such as those we provide. Our ability to capitalize on these developments will be dependent on successful sales efforts, as well as our ability to continue to meet the quality of service standards of the markets we serve.
Both governmental regulation of the pharmaceutical industry and sometimesgovernment programs related to health care, drug availability and cost, and drug importation, continue to impact the operations of the pharmaceutical industry. These issues continue to receive considerable attention in the national discussion. We have not experienced any noticeable change in our markets as a result of any recent changes in government actions. We expect these issues, and perhaps others, will continue to be part of the political debate and the subject of proposed reform, which could have a material impact on our operations. One significant development in the past decade has been the continuing consolidation among large pharmaceutical corporations. We believe that, on the whole, this consolidation should have a positive impact on our business, as these increasingly larger pharmaceutical companies will devote their internal resources, our main competitor, to only those drug candidates with the potential to have a material impact on their operations, and will outsource more of their lesser opportunities. Additionally, many drug candidates will not meet the financial hurdles established by the major pharmaceutical companies, and will be developed by smaller, specialty pharmaceutical companies that do not possess internal capabilities to test and analyze the drug candidate, or have the capability to scientifically monitor the product once approved. Offsetting those potential positive impacts, the major pharmaceutical companies tend to reevaluate their development programs after major acquisitions, which sometimes cause them to defer, or cancel, work that we were scheduled to perform. We are also at risk that a significant client for us may be acquired by a corporation that prefers to perform the work internally, or has a long-standing relationship with one of our competitors. We anticipate that as companies in our markets consolidate, our competitors will also consolidate, which will result in fewer, but much stronger, competitors for our business.
Two very significant demographic developments are impacting pharmaceutical companies, and therefore, our markets. The first is the well-documented aging of Western populations, with the incident increase of diseases associated with aging and the increasing periods of treatment. The other is the so-called genomic era, where the knowledge of the genome, including human and other organisms, is spawning the technologies and investment to develop additional therapies. We believe that both will positively impact our markets by increasing the amount of drug development and monitoring activity.
Research and analytical services are capital intensive. The investment in equipment and facilities to serve our markets is substantial and continuing. While our physical facilities are excellent to meet market needs for the near term, rapid changes in automation, precision, speed and technologies necessitate a constant investment in equipment and software to meet market demands. We are also impacted by the heightened regulatory environment and the need to improve our business infrastructure to support our increasingly diverse operations, which will necessitate additional capital investment. Our ability to generate capital to reinvest in our capabilities, both through operations and financial transactions, is critical to our success. While we are currently committed to fully utilizing recent additions to our capacity, sustained growth will require additional investment in future periods.
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One of the more important factors in our profitability is the utilization of our capacity. In the past two years, we have added significant new capacity through acquisitions in Baltimore, Maryland and McMinville, Oregon, and through facility expansions in West Lafayette and Evansville, Indiana. These expansions created a higher level of basic operating expenses. Those related to productive capacity are included in cost of services. As a result, after expansion, while we are developing the sales to fill these facilities, our percentage margins on services have declined because many of these costs are the same as they will be at full capacity, but are being spread over less-than-capacity revenues. While the capacity and capabilities added have the potential to positively impact future operating results, their costs have had a negative impact in the current quarter and nine months.
RESULTS OF OPERATIONS
The following table summarizes the consolidated statement of operations as a percentage of total revenues:
Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||
Service revenue | 72 | .3 | 71 | .7 | 68 | .7 | 67 | .6 | |||||
Product revenue | 27 | .7 | 28 | .3 | 31 | .3 | 32 | .4 | |||||
Total revenue | 100 | .0 | 100 | .0 | 100 | .0 | 100 | .0 | |||||
Cost of service revenue(a) | 67 | .9 | 68 | .5 | 80 | .4 | 73 | .5 | |||||
Cost of product revenue(a) | 40 | .4 | 38 | .5 | 39 | .9 | 40 | .6 | |||||
Total cost of revenue | 60 | .3 | 60 | .0 | 67 | .7 | 62 | .9 | |||||
Gross profit | 39 | .7 | 40 | .0 | 32 | .3 | 37 | .1 | |||||
Total operating expenses | 28 | .1 | 29 | .2 | 30 | .1 | 31 | .7 | |||||
Operating income | 11 | .6 | 10 | .8 | 2 | .2 | 5 | .4 | |||||
Other (expense) | (2 | .8) | (1 | .0) | (2 | .5) | (1 | .0) | |||||
Income (loss) before income taxes | 8 | .8 | 9 | .8 | (0 | .3) | 4 | .4 | |||||
Income tax expense (benefit) | 2 | .9 | 5 | .4 | (0 | .3) | 2 | .2 | |||||
Net income | 5 | .9 | 4 | .4 | 0 | .0 | 2 | .2 | |||||
Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2005 | 2004 | 2005 | 2004 | ||||||||||||
Service revenue | 82 | .5% | 64 | .8% | 78 | .8% | 66 | .5% | |||||||
Product revenue | 17 | .5 | 35 | .2 | 21 | .2 | 33 | .5 | |||||||
Total revenue | 100 | .0% | 100 | .0% | 100 | .0% | 100 | .0% | |||||||
Cost of service revenue (a) | 80 | .3% | 93 | .0% | 76 | .0% | 88 | .7% | |||||||
Cost of product revenue (a) | 41 | .2 | 40 | .4 | 37 | .7 | 39 | .6 | |||||||
Total cost of revenue | 73 | .5% | 74 | .5% | 67 | .7% | 72 | .2% | |||||||
Gross profit | 26 | .5 | 25 | .5 | 32 | .1 | 27 | .8 | |||||||
Total operating expenses | 37 | .2 | 31 | .7 | 32 | .5 | 31 | .4 | |||||||
Operating loss | (10 | .7) | (6 | .3) | (0 | .3) | (3 | .6) | |||||||
Other expense | (3 | .2) | (2 | .4) | (3 | .0) | (2 | .3) | |||||||
Loss before income taxes | (13 | .9) | (8 | .6) | (3 | .3) | (5 | .8) | |||||||
Income tax benefit | (4 | .1) | (2 | .8) | (0 | .7) | (2 | .2) | |||||||
Net loss | (9 | .8)% | (5 | .8)% | (2 | .6)% | (3 | .6)% | |||||||
(a) Percentage of service and product revenues, respectively.
Three Months Ended June 30, 2004March 31, 2005 Compared to Three Months Ended June 30, 2003March 31, 2004
Service and Product Revenues
Revenues for the thirdsecond fiscal quarter ended June 30, 2004March 31, 2005 increased 35%6% to $10.6$9.1 million compared to $7.9$8.7 million for the thirdsecond quarter last year. Service revenue increases were the result of strong demand by the Company’s two acquisitions completed in fiscal 2003. PreclinicalCompany's traditional pharmaceutical customers for our services, capacity utilization and UK-basedparticularly bioanalytical laboratory services. This increased demand for our services (aidedwas largely offset by a strong pound sterling that causes U.K. revenues to translate into more U.S. dollars), showed significant improvement for the quarter. Our Product revenues increased 32%, driven by strong47% decline in sales of our products. The decline in sales of our leading Culex line of products comprised most of this decline. Our major customers tend to place large orders for these units on a sporadic basis, and our second quarter of fiscal 2005 was negatively impacted by a decline in these large shipments. Contributing to the decline in sales of the Company's line of Culex automated blood sampling product line.systems in the quarter were a postponement of one large order and completion of another major customer's current upgrade program.
Cost of Revenues
Cost of revenues for the thirdsecond quarter ended June 30, 2004March 31, 2005 was $6.4$6.7 million or 60%74% of revenue compared to $4.7$6.4 million, or 60%75% of revenue for the thirdsecond quarter last year. The increaseThis slight decrease in cost of revenues is related to the Company’s Services segment and is due to the inclusion of costs from operations acquired in fiscal 2003 that were not included in the prior year. Our cost of revenues as a percentage of revenues improved this quarter tois the level of the same period last year as a result of higher utilization of our capacity. Future similar, orservice facilities, which improved operating margins, are dependent on maintaining or improving volume, aseven though we had a decline in product sales, which have significantly greater capacityhigher margins than we did in fiscal 2003. Higher utilization ofservices. Our services margins continue to be negatively impacted by underutilized capacity in our Baltimore facility, acquired last year, impacted the margin improvement in the current quarter.clinical unit and our Evansville toxicology facility. The costs of the underutilized capacity in our ServicesProduct segment are included in cost of services, with the result that those costs remain fairly constant, regardless of our Services volume. The cost of product revenue as a percentage of product revenue continues within our planned range, impacted mainly by the mix of product.is similar to last year.
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Operating Expenses
Selling expenses for the three months ended June 30, 2004 increased 21%March 31, 2005 decreased 6% to $672,000$626,000 from $557,000$665,000 for the three months ended June 30, 2003.March 31, 2004, primarily as a result of reduced commissions due to lower product sales. Research and development expenses which are net of grant reimbursements, for the three months ended June 30, 2004March 31, 2005 decreased 15%41% to $260,000$173,000 from $305,000$295,000 for the three months ended June 30, 2003. These changes were in line withMarch 31, 2004. This decrease is attributable to timing of activities relating to new products and services. For the full fiscal year, we expect our expectationsselling and reflect, in the case of selling expenses, our efforts to increase our utilization of our capacity, and with regard to research and development our current focus on improving operations in our recent acquisitions, reducing our expenditures in research and development. For the near term, we intend to focus our attention on improving the operations of our acquired companies, balancing our human and financial resources between operations and new development opportunities.be similar to last year.
General and administrative expenses for the three months ended June 30, 2004March 31, 2005 increased 43%46% to $2,054,000,$2,603,000, up from $1,436,000$1,785,000 for the three months ended June 30, 2003. ThisMarch 31, 2004. Of this increase, approximately $165,000 is primarily attributablerent on the Baltimore facility that was previously owned, depreciation on new facilities placed in service of $70,000, underabsorbtion of overheads of $160,000 in our Baltimore facility due to the Company’s acquisitions in fiscal 2003,a delay on a project, additional expenses for compliance with Sarbanes-Oxley of $100,000 and includes additional recruitment and compensation costs to add key personnel.our annual salary increases.
Other (Expense)Expense
Interest expense increased 107%24% to $306,000$257,000 in the three months ended June 30, 2004March 31, 2005 from $148,000$207,000 in the comparable quarter of the prior year. This increase is due to higher interest expense onrates, additional laboratory equipment being purchased with capital leases, partially offset by the subordinated debt issuedpay-down in connectionthe current quarter of our revolving line of credit with the Company’s 2003 acquisitions and increases in long-term debt due to facility expansions at its Evansville and West Lafayette sites. We alsoproceeds from the sale of our Baltimore building. Our higher interest rates result from the premium we incurred when we decided to fix our mortgage interest rates on our $9,000,000 of mortgage financing at 5.7% through May, 2007 as monetary policy tightens. This increase of 1.4% over our prior floating rate added approximately $20,000for three years in thethis fiscal year's first quarter. This was done to limit interest rate risk.
Income Taxes
We computed our tax benefit using an effective tax rate for both the three months ended June 30, 2004 of 32.8% compared to 54.4%March 31, 2005 and for the three months ended June 30, 2003. This decline in effective rate isMarch 31, 2004 of 40% on the result of profitable operations in our United Kingdom subsidiaries, where prior period loss carryforwards are being recognized as utilized.US taxable loss. We did not provide a benefit on foreign losses because we had no foreign carrybacks or deferred taxes against which to utilize those benefits.
Net IncomeLoss
As a result of the above factors, we earned $635,000 ($.13 per share basic and $.12 per share diluted) in the quarter ended June 30, 2004, compared to $354,000 ($.08lost $896,000 or $0.18 per share, both basic and diluted)diluted, in the quarter ended March 31, 2005, compared to a loss of $503,000 or $0.10 per share, both basic and diluted, in the same period last year.
NineSix Months Ended June 30, 2004March 31, 2005 Compared to NineSix Months Ended June 30, 2003March 31, 2004
General
Our current year-to-date operations reflect the operations of our two acquisitions of last year for the full period. Prior year results included operations of our Oregon acquisition from December 12, 2002, and our Baltimore acquisition from May 26, 2003. Both of these acquisitions contributed to our losses in prior periods of the current year. Neither of these operations were profitable in the comparable period last fiscal year, however, because of inclusion for the full period in the current year, current fiscal year operating results have been impacted more than last year.
Service and Product Revenues
Revenues for the ninesix months ended June 30, 2004March 31, 2005 increased 29%8% to $28.0$18.8 million compared to $21.8$17.4 million for the ninesame six month period last year. Service revenue increases were primarily the result of the Company’s two aforementioned acquisitions. Product revenues increased 25%factors cited above for the current quarter. Revenues for our products declined 32% for the six months, a smaller percentage decline than the current quarter as a result of better sales in the successfirst quarter of our Culex product line.the current fiscal year.
– 12 –
Cost of Revenues
Cost of revenues for the ninesix months ended June 30, 2004March 31, 2005 was $19.0$12.8 million or 68% of revenue compared to $13.7$12.6 million, or 63%72% of revenue for the same period last year. The increase in cost of revenues is primarily related to the Company’s Services segment and is due to the acquisitions in fiscal 2003. The increasedecrease in cost of revenue as a percentage of revenue is impacted by operating inefficienciesincreased capacity utilization of our service segment due to the strong demand mentioned above in the Services segment as the Company integrates the acquired businesses, and by underutilization of capacity. This impact was most severe in the first two quarters of fiscal 2004. We devoted significant manpower to changing site infrastructure and absorbing new job methodologies, which reduced billable work. During the first quarter of the current fiscal year, we absorbed the costs of a client project overrun, new staff in training, and lower than optimal capacity utilization.quarter. The product segment cost of revenue as a percentage of product revenue was in line with our historical experience.similar to the prior year's first six months.
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Operating Expenses
Selling expenses for the ninesix months ended June 30, 2004March 31, 2005 decreased 11%7% to $1,963,000$1,202,000 from $2,199,000$1,291,000 for the ninesix months ended June 30, 2003.March 31, 2004 as the result of reduced number of people devoted to full-time sales and reduced commissions. Research and development expenses which are net of grant reimbursements, for the ninesix months ended June 30, 2004March 31, 2005 decreased 20%28% to $801,000$392,000 from $996,000$541,000 for the ninesix months ended June 30, 2003.March 31, 2004. As described in the three month discussion above, these decreases are primarilythis decrease is attributable to the Company’s efforts to control expenses.timing of Company's developmental efforts.
General and administrative expenses for the ninesix months ended June 30, 2004March 31, 2005 increased 53%25% to $5,686,000,$4,530,000, up from $3,723,000$3,632,000 for the ninesix months ended June 30, 2003.March 31, 2004. The principal reasons for this increase are the expenses ofsame as those discussed above for the acquired operations, in addition to significant consulting expenses for interim financial management while the Company recruited new personnel (accomplished in the third quarter of this fiscal year).current quarter.
Other (Expense)Expense
Interest expense increased 82%28% to $720,000$531,000 in the ninesix months ended June 30, 2004March 31, 2005 from $396,000$414,000 in the comparable periodquarter of the prior fiscal -year.year. This increase is due to higher interest expense on the subordinated debt issued in connection with the Company’s fiscal 2003 acquisitions and increases in long-term debt due to facility expansions at its Evansville and West Lafayette sites.
Income Taxes
Our tax provision for the nine months ended June 30, 2004 is the result of our estimate of income for the full year. As of June 30, 2004, we had losses in the U.S., which we project can be utilized against fourth quarter income. These losses were offset by earnings in the U.K., where we have loss carryforwards to offset our current income. We are recognizing the benefit of that carryforward as it is realized, due to the uncertainties of its realization, resulting in no net provisionrates in the current period, additional financing of equipment through capital leases, and, in the first quarter of fiscal 2005, higher amounts outstanding under our revolving line of credit.
Income Taxes
We computed our tax benefit using an effective tax rate for U.K. profits. The nine month benefit from taxes reflectsboth the projection that we will be profitablesix months ended March 31, 2005 and for the full year insix months ended March 31, 2004 of 40% on the U.S., while utilizing unrecorded benefits in the U.K. Our fourth quarter and full year provision forUS taxable loss. We did not provide a benefit on foreign losses because we had no foreign carrybacks or deferred taxes could be impacted by failureagainst which to attain these projections.utilize those benefits.
Net IncomeLoss
As a result of the above, we experienced a net earningsloss of $2,000 ($0.00 earnings$493,000, or $0.10 per share, both basic and diluted)diluted for the first ninesix months of the current fiscal year, compared to net incomeloss in the same period of the prior fiscal year of $462,000 ($.10 income$633,000, or $0.13 per share, both basic and diluted) .diluted.
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LIQUIDITY AND CAPITAL RESOURCESComparative Cash Flow Analysis
Since its inception, BASi’sBASi's principal sources of cash have been cash flow generated from operations and funds received from bank borrowings and other financings. At June 30, 2004, BASiMarch 31, 2005 we had cash and cash equivalents of $778,000,$1,315,000, compared to cash and cash equivalents of $1,378,000$773,000 at September 30, 2003. Our cash receipts are immediately applied to our line2004. Approximately 40% of credit in the U.S., the result of which is that our cash balances are principallywere in the U.K. as of March 31, 2005. We monitor our U.K. cash needs to avoid currency conversion costs, which in the current interest rate environment can exceed interest. Our cash balance is therefore less significant than our available borrowing capacity.
Our net cash providedused by operating activities was $697,000$1,037,000 for the ninesix months ended June 30,March 31, 2005, as compared to net cash provided of $1,504 for the same period in 2004. Cash provided by operations during the nine months ended June 30, 2004 consisted of net profits of $2,000, non-cash charges against operations of $2,974,000 and a net increase in assets employed of $2,279,000 in current assets and liabilities. During the current nine month period, we maintained significant customer advance payments for work to begin after this period, which contributed $812,000 to cash flow. Our sales in the third quarter of our fiscal yearincreased business resulted in an increase inincreases accounts receivable and inventories of $1,451,000 over$2,351,000. Our accounts payable at March 31, 2005 were significantly lower than usual as we paid balances early to avoid the cost and difficulty of converting these balances to our last year-end,new ERP system installed in April. We had increases in customer deposits, again as a result of increased business activity, and increased accrued expenses which was financed by utilizing our working capital credit facility.offset some of the cash used in operations.
Net cash usedgenerated by investing activities decreased to $2,029,000 forwas $4,837,000 in the ninesix months ended June 30, 2004 from $4,033,000 for the nine months ended June 30, 2003. The current period’s investment is theMarch 31, 2005 as a result of facilities expansion in West Lafayette, Indianathe sale/leaseback transaction of our Baltimore building, net of a routine level of new equipment purchases. We paid down a net amount of $3,500,000 of outstanding debt from these proceeds.
Capital Resources
A condition of our leaseback of the Baltimore building was the securing of a substantial portion of our lease obligation with a three year irrevocable letter of credit issued to the purchaser. The letter of credit is for $2,800,000 the first year, $2,000,000 the second year, and Evansville, Indiana, while two acquisitions in fiscal 2003 accounted$1,000,000 the final year. In order to arrange this letter of credit, we extended our $6,000,000 revolving credit agreement with our bank for three additional years to December 31, 2007.
The letter of credit reduces the higher levelamount of funds available under the borrowing base formula. Our recent monthly average qualifying assets for our borrowing base have been approximately $5,000,000. The presence of this outstanding letter of credit could therefore substantially reduce the amount of cash available under our revolving credit facility.
We expect our total capital additions in the prior comparable period.
Cash provided by financing activities forcurrent fiscal year to be in the nine months ended June 30, 2004 was $756,000 duerange of $2,000,000 to additional borrowings from$2,500,000. We have arranged leases with our lines of credit, offset by payments on long term debt and leases. In the nine months ended June 30, 2003, the Company refinanced its existing revolving line of credit and term loan and secured new financing for facilities expansion and improvements. Throughout fiscal 2003, BASi used these fundsbank's leasing affiliate to finance its expansions$1,500,000 of this with capital leases with 3 and improvements in Evansville and West Lafayette and for other capital expenditures. As the availability from the new facilities financings was expended by late fiscal 2003, the Company began to support these expansions with available funds5 year terms.
Liquidity
We believe that cash flow from operations will be sufficient and itswe do not foresee the need to borrow extensively under our revolving credit line.
Total expenditures by BASiagreement to finance current operations, except for property and equipment were $2,029,000 and $4,077,000 for the nine months ended June 30, 2004 and 2003, respectively. Expenditures for the first nine months of 2004 include the construction of the new early development facility in West Lafayette, accounting for the largest portion of these expenditures, and expenditures to bring the Baltimore facility to Company standards. Capital expenditures also include the purchaseperiods when rapid growth of new toxicologybusiness may necessitate amounts to finance the buildup of receivables and pathology softwareinventory.
At March 31, 2005, we had $1,315 in the Company’s Evansville location that will improve efficiencycash, and ensure future regulatory compliance. The software is in the validation process and is expected to be fully operational in November 2004. These expenditures were primarily funded by the Company’s construction lineapproximately $2,200,000 of available borrowings under our revolving credit and revolving line of credit. Capital investments correspond to anticipated increases in research services to be provided by BASi. BASi expects to make other investments to expand its operations through internal growth, strategic acquisitions, alliances, and joint ventures as demand and capital allow.facility.
The Company has implemented a phased plan to improve the operations of its Baltimore clinical research unit and expects to fund the operations with cash provided from company-wide operations supplemented by its revolving line of credit. The planned improvements include renovation of the clinic, selectively updating equipment and hiring highly qualified, experienced management personnel. Improvements already completed and in process have had measurable effects on attracting new clients
BASi’sOur revolving line of credit expires September 30, 2006.December 31, 2007. The maximum amount available under the terms of the agreement is $6,000,000 with outstanding borrowings limited to the borrowing base as defined in the agreement. Interest accrues monthly on the outstanding balance at the bank’sbank's prime rate to prime rate plus 12525 basis points, or at the Eurodollar rate plus 200250 to 350300 basis points, as elected by BASi,at our election, depending upon the ratio of BASi’sour interest bearing indebtedness (less subordinated debt) to EBITDA. BASi paysWe pay a fee equal to 25 to 50 basis points depending upon the same financial ratio, on the unused portion of the line of credit. As of June 30, 2004, BASi had approximately $1.8 million of availability under this facility.
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During 2002, the Company began expanding facilities at its site in West Lafayette, Indiana. Phase one of this facility became fully functional in the third fiscal quarter of 2004 at a cost of $3.4 million. Phases two and three will be completed as business justifies. Construction on the West Lafayette facilities is expected to have a total cost of $4.0 million when complete. The Company funded part of this expansion by obtaining a $2,250,000 construction loan with a bank. The loan expires November 1, 2012 and requires interest payments only until completion of the project in West Lafayette, Indiana. Interest is charged at the prime rate. The Company exhausted this construction loan in the first quarter of fiscal 2004 and converted the $2,250,000 to a term mortgage in May 2004. Future expenditures to complete the site will be funded by cash from operations, as new business is generated and facilities are filled, and the Company’s revolving line of credit.
We currently have a contract to sell our Baltimore facility, requiring a two-year leaseback of space in excess of our needs. The contract is subject to due diligence procedures by the buyer, which, in essence, makes the contract non-binding. Should the contract not be consummated, we had competing offers at similar terms. The net proceeds from this transaction should exceed $6,000,000, which we intend to use to retire $2,000,000 of subordinated debt and pay down our revolving line of credit, with the excess to be retained as working capital.
BASi isare required to make cash payments in the future on debt and lease obligations. The following table summarizes BASi’sBASi's contractual term debt, and lease obligations and other commitments at June 30, 2004March 31, 2005 and the effect such obligations are expected to have on itsour liquidity and cash flows in future periods (amounts presented for 20042005 are those items required in the final fiscal quarter)two quarters):
Fiscal Year Ending September 30, | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2004 | 2005 | 2006 | After 2006 | Total | |||||||||||||
(in thousands) | |||||||||||||||||
Mortgage notes payable | $ | 183 | $ | 390 | $ | 395 | $ | 6,171 | $ | 7,139 | |||||||
Subordinated debt* | 401 | 460 | 360 | 4,467 | 5,688 | ||||||||||||
Future debt obligations** | 36 | 69 | 56 | 2,089 | 2,250 | ||||||||||||
Capital lease obligations | 62 | 74 | 80 | --- | 216 | ||||||||||||
Operating leases | 327 | 529 | 518 | 274 | 1,648 | ||||||||||||
$ | 1,009 | $ | 1,522 | $ | 1,409 | $ | 13,001 | $ | 16,941 | ||||||||
* Subordinated debt includes notes
2005 | 2006 | 2007 | 2008 | 2009 | After 2009 | Total | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Capital expenditures | $ | 500 | — | — | — | — | — | $ | 500 | ||||||||||||||
Mortgage notes payable | 165 | $ | 342 | $ | 362 | $ | 1,993 | $ | 277 | $ 5,915 | 9,054 | ||||||||||||
Subordinated debt | — | 360 | 360 | 4,468 | — | — | 5,188 | ||||||||||||||||
Capital lease obligations | 113 | 239 | 171 | 183 | 197 | 87 | 990 | ||||||||||||||||
Operating leases | 1,068 | 2,109 | 1,598 | 631 | 10 | — | 5,416 | ||||||||||||||||
$ | 1,846 | $ | 3,050 | $ | 2,491 | $ | 7,275 | $ | 484 | $ 6,002 | $ | 21,148 | |||||||||||
For further details on our indebtedness, see Note 7 to related parties.
** Future debt obligations is an estimate of payments uponour Consolidated Financial Statements included in our Annual Report on Form 10-K for the conversion in May 2004 of the current construction line of credit into a $2,250,000 mortgage note payable.year ended September 30, 2004.
The covenants in the Company’sCompany's credit agreement requiring the maintenance of certain ratios of interest bearing indebtedness (not including subordinated debt) to EBITDA and net cash flow to debt servicing requirements may restrict the amount the Company can borrow to fund future operations, acquisitions and capital expenditures. We have undertaken steps to improve our liquidity, operations and cash flow, with the objectives of reducing our debt, strengthening our financial position and meeting our financial covenants.
Based on our current business activities, we believe cash generated from our operations and amounts available under our existing credit facilities combined with the action plan described above,and cash on hand, will be sufficient to fund the Company’sCompany's working capital and capital expenditure requirements for the foreseeable future.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
BASi’s
BASi's primary market risk exposure with regard to financial instruments is changes in interest rates. TheBorrowings under the credit agreement between BASi and The ProvidentNational City Bank dated October 29, 2002 bearsJanuary 4, 2005 bear interest at a rate of either the bank’sbank's prime rate to prime plus 0 to 12525 basis points, or at the Eurodollar rate plus 200250 to 350300 basis points, depending in each case upon the ratio of BASi’sBASi's interest-bearing indebtedness (less subordinated debt) to EBITDA, at BASi’sBASi's option. As discussed previously, we have taken steps to fix the interest rate on a significant amount of our debt through May, 2007. Historically, BASi has not used derivative financial instruments to manage exposure to interest rate changes. BASi estimates that a hypothetical 10% adverse change in interest rates would not affect the consolidated operating results of BASi by a material amount.
BASi operates internationally and is, therefore, subject to potentially adverse movements in foreign currency exchange rates. The effect of movements in the exchange rates was not material to the consolidated operating results of BASi in fiscal years 2004 and 2003. BASi estimates that a hypothetical 10% adverse change in foreign currency exchange rates would not affect the consolidated operating results of BASi by a material amount.
ITEM 4. CONTROLS AND PROCEDURES
Based on their most recent evaluation, which was completed as of the end of the period covered by this report, BASi’sCompany's Chief Executive Officer and Chief Financial Officer believe BASi’sthat, because of the situation described below, the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) are) were not effective in timely alerting BASi’s managementas of March 31, 2005 to materialensure that information required to be includeddisclosed by the Company in this Form 10-Q was recorded, processed, summarized and otherreported within the time periods specified by the Securities and Exchange Commission's rules and forms. As disclosed in its annual report on form 10-K for the fiscal year ended September 30, 2004, the Company currently operates on accounting systems that are different at its various locations, and which are decentralized and obsolete. The Company is continuing in its efforts to standardize, centralize and update the accounting systems. The Chief Executive Officer and Chief Financial Officer believe that implementation of these new accounting systems will allow the Company to record, process, summarize and report accounting information to timely file its Exchange Act filings.reports. The Company has recruited new staff and taken other steps to allow timely filing of this form 10-Q; nevertheless, the underlying deficiencies noted earlier will continue to exist until the implementation of new systems is completed.
There was no change in the Company’sCompany's internal control over financial reporting during the Company’sCompany's most recently completed fiscal quarter that has materially affected, or is reasonably likely to marteriallymaterially affect, the Company’sCompany's internal control over financial reporting.
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PART II —- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 26, 2004, the Annual Meeting of Shareholders of BASi was held at the principal executive offices of BASi. The following matters were voted on at the meeting:
MATTER: | VOTES CAST FOR: | VOTES CAST AGAINST | VOTES WITHHELD:(1) |
---|
Election of the directors of BASi: | |||
Peter T. Kissinger | 4,124,847 | 146 | 218,609 |
Candice B. Kissinger | 4,119,947 | 146 | 322,817 |
William E. Baitinger | 4,202,002 | 135 | 7,682 |
David W. Crabb | 4,116,655 | 146 | |
Leslie B. Daniels | 4,218,264 | 146 | 16,032 |
Gayl W. Doster | 4,025,030 | 146 | |
W. Leigh Thompson | 4,025,030 | 146 | 151,981 |
Approve the amendment of the 1997 Employee Incentive Stock Option Plan to increase the number of shares available for option grants | 2,106,127 | 516,032 | 1,836,443 |
Approve the amendment of the 1997 Outside Director Stock Option Plan to increase the number of shares available for option grants | 2,213,896 | 409,612 | 1,835,094 |
(1) Includes abstentions and broker non-votes
ITEM 6. | EXHIBITS |
(a) Exhibit
Exhibits
Number assigned
in Regulation S-K | ||
Item 601 | Description of Exhibits |
(3) | 3.1 |
| Second Amended and Restated Articles of Incorporation of Bioanalytical Systems, Inc. (incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarter ended December 31, 1997).
|
| 3.2 |
| Second Restated Bylaws of Bioanalytical Systems, Inc. (incorporated by reference to Exhibit 3.2 Form 10-Q for the quarter ended December 31, 1997).
|
(4) | 4.1 |
| Specimen Certificate for Common Shares (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-1, Registration No. 333-36429).
|
(10) | 10.1 |
| Purchase and Sale Agreement between BASi Maryland, Inc. and 300 W. Fayette Street, LLC, closed January 5, 2005 (incorporated by reference to Exhibit 10.1 to Form 8-K filed January 10, 2005).
|
10.2 |
| Form of First Amendment to the Purchase and Sale Agreement dated September 7, 2004 (incorporated by reference to Exhibit 10.2 to Form 8-K filed January 10, 2005).
| |
10.3 |
| Form of Second Amendment to the Purchase and Sale Agreement dated on or about November 11, 2004 (incorporated by reference to Exhibit 10.3 to Form 8-K filed January 10, 2005).
| |
10.4 |
| Form of Office Lease by and between BASi Maryland, Inc. and 300 W. Fayette Street, LLC (incorporated by reference to Exhibit 10.4 to Form 8-K filed January 10, 2005).
| |
10.5 |
| Amended and Restated Credit Agreement between Bioanalytical Systems, Inc. and National City Bank, executed January 4, 2005 (incorporated by reference to Exhibit 10.5 to Form 8-K filed January 10, 2005).
| |
10.6 |
| Replacement Promissory Note between Bioanalytical Systems, Inc. and National City Bank, executed January 4, 2005 (incorporated by reference to Exhibit 10.6 to Form 8-K filed January 10, 2005).
| |
10.7 |
| Amended and Restated General Security Agreement between Bioanalytical Systems, Inc. and National City Bank, executed January 4, 2005 (incorporated by reference to Exhibit 10.7 to Form 8-K filed January 10, 2005).
| |
(31) | 31.1 |
| Certification of Peter T. Kissinger †
|
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| 31.2 |
| Certification of Michael R. Cox †
|
(32) | 32.1 |
| Section 1350 Certifications † |
(99) | 99.1 |
| Risk factors (incorporated by reference to Exhibit 99.1 to Form 10-K for the year ended September 30, 2004).
|
† Filed with this Quarterly Report on Form 10-Q.
(b) Reports on Form 8-K
SIGNATURES
Form 8-K furnished April 29, 2004, reporting under Item 12 “Results of Operations and Financial Condition,” relating to the Company’s announcement of its results for the quarter ended March 31, 2004.
– 17 –
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:
BIOANALYTICAL SYSTEMS, INC. |
By: /s/ PETER T. KISSINGER |
Peter T. Kissinger |
President and Chief Executive Officer |
(Principal Executive Officer) |
Date: May 16, 2005 |
By: /s/ MICHAEL R. COX |
Michael R. Cox |
Vice President-Finance |
and Chief Financial Officer |
(Principal Financial and Accounting Officer) |
Date: May 16, 2005 |
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