UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1TO
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.1934
For the quarterly period ended June 30, 2003.2004
orOR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.1934
For the transition period from to .
Commission File Number: 0-23357
BIOANALYTICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
INDIANA | 35-1345024 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
2701 Kent Avenue West Lafayette, IN | 47906 | |
(Address of principal executive offices) | (Zip Code) | |
(765) 463-4527 | ||
(Registrant's telephone number, including area code) |
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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of August 19, 2003, 4,831,460 Common SharesJuly 31, 2004, 4,869,502, common shares of the registrant were outstanding.
The purpose of this amendment is to correct certain typographical errors in the financial statements and throughout the document, to provide additional information in response to Part I, Item 4, and to replace Exhibits 31.1 and 31.2, which were inadvertently missing portions of the certifications required to be filed as part thereof, which information and exhibits were omitted due to clerical error.
– 1 –
PAGE NUMBER
PART | FINANCIAL INFORMATION |
Item | Condensed Consolidated Financial Statements (Unaudited): |
Condensed Consolidated Balance Sheets as of | |||
June 30, September 30, | 2003 | 3 | |
Condensed Consolidated Statements of Operations for the | |||
Three Months and Nine Months | |||
Condensed Consolidated Statements of Cash Flows for the | |||
Nine Months Ended June 30, | |||
Notes to Condensed Consolidated Financial Statements | |||
Item | Management's Discussion and Analysis of Financial Condition and Results of Operations | 10 | |
Item | Quantitative and Qualitative Disclosures About Market Risk | ||
Item | Controls and Procedures | ||
PART | OTHER INFORMATION |
Item | Exhibits and Reports on Form 8-K |
SIGNATURES |
– 2 –
PART I —- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOANALYTICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
In thousands)
June 30, 2003 (Unaudited) | September 30, 2002 | (Unaudited) June 30, 2004 | September 30, 2003 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
ASSETS | |||||||||||||||||||
Assets | |||||||||||||||||||
Current assets: | |||||||||||||||||||
Cash and cash equivalents | $ | 972 | $ | 826 | $ | 778 | $ | 1,378 | |||||||||||
Accounts receivable | |||||||||||||||||||
Trade | 4,374 | 3,699 | 5,429 | 3,978 | |||||||||||||||
Grants | 14 | 116 | 13 | 13 | |||||||||||||||
Unbilled revenues and other | 456 | 739 | 1,085 | 954 | |||||||||||||||
Inventories | 2,418 | 2,624 | 1,833 | 2,055 | |||||||||||||||
Deferred income taxes | 455 | 455 | 465 | 465 | |||||||||||||||
Refundable income taxes | 117 | 52 | 167 | 84 | |||||||||||||||
Prepaid expenses | 365 | 283 | 589 | 397 | |||||||||||||||
Total current assets | 9,171 | 8,794 | 10,359 | 9,324 | |||||||||||||||
Property and equipment: | |||||||||||||||||||
Land and improvements | 486 | 496 | |||||||||||||||||
Buildings and improvements | 24,200 | 14,476 | |||||||||||||||||
Machinery and equipment | 14,237 | 13,363 | |||||||||||||||||
Office furniture and fixtures | 1,144 | 1,114 | |||||||||||||||||
Construction in process | 1,564 | 2,359 | |||||||||||||||||
Total property and equipment | 41,631 | 31,808 | |||||||||||||||||
Less accumulated depreciation | (10,719 | ) | (8,984 | ) | |||||||||||||||
Net property and equipment | 30,912 | 22,824 | |||||||||||||||||
Goodwill, less accumulated amortization of $360 | 3,766 | 884 | |||||||||||||||||
Intangible and other assets | 240 | 961 | |||||||||||||||||
Property and equipment, net | 32,120 | 31,171 | |||||||||||||||||
Goodwill | 1,659 | 984 | |||||||||||||||||
Intangible assets, net | 2,259 | 2,778 | |||||||||||||||||
Debt issue costs | 446 | --- | 379 | 428 | |||||||||||||||
Other assets | 307 | 300 | |||||||||||||||||
Total assets | $ | 44,535 | $ | 33,463 | $ | 47,083 | $ | 44,985 | |||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||||||||||
Liabilities and shareholders' equity | |||||||||||||||||||
Current liabilities: | |||||||||||||||||||
Accounts payable | $ | 3,529 | $ | 2,459 | $ | 3,157 | $ | 3,073 | |||||||||||
Income taxes payable | 15 | 42 | |||||||||||||||||
Accrued expenses | 1,171 | 753 | 995 | 1,245 | |||||||||||||||
Customer advances | 1,601 | 1,285 | 2,470 | 1,658 | |||||||||||||||
Revolving line of credit | 1,620 | 3,750 | 3,109 | 2,388 | |||||||||||||||
Current portion of capital lease obligation | 188 | 1,138 | 120 | 123 | |||||||||||||||
Current portion of long-term debt | 428 | 278 | 788 | 1,132 | |||||||||||||||
Total current liabilities | 8,552 | 9,705 | 10,639 | 9,619 | |||||||||||||||
Capital lease obligation, less current portion | 3 | 124 | 101 | --- | |||||||||||||||
Long-term debt, less current portion | 9,007 | 6,949 | |||||||||||||||||
Construction line of credit | 1,139 | --- | --- | 1,676 | |||||||||||||||
Long-term debt, less current portion | 7,056 | 3,124 | |||||||||||||||||
Subordinated debt, long-term | 5,754 | --- | 5,231 | 5,188 | |||||||||||||||
Deferred income taxes | 1,922 | 1,612 | 2,251 | 1,827 | |||||||||||||||
Shareholders' equity: | |||||||||||||||||||
Preferred Shares: | |||||||||||||||||||
Authorized shares - 1,000,000 | |||||||||||||||||||
Preferred shares: Authorized shares - 1,000, | |||||||||||||||||||
Issued and outstanding shares - none | --- | --- | --- | --- | |||||||||||||||
Common Shares: | |||||||||||||||||||
Authorized shares - 19,000,000 | |||||||||||||||||||
Issued and outstanding shares - 4,831,460 and | |||||||||||||||||||
4,578,516 | 1,168 | 1,014 | |||||||||||||||||
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 | |||||||||||||||||
Additional paid-in capital | 11,122 | 10,521 | 11,263 | 11,122 | |||||||||||||||
Retained earnings | 7,873 | 7,411 | 7,500 | 7,498 | |||||||||||||||
Accumulated other comprehensive loss | (54 | ) | (48 | ) | (86 | ) | (62 | ) | |||||||||||
Total shareholders' equity | 20,109 | 18,898 | 19,854 | 19,726 | |||||||||||||||
Total liabilities and shareholders' equity | $ | 44,535 | $ | 33,463 | $ | 47,083 | $ | 44,985 | |||||||||||
See accompanying notes to condensed consolidated financial statements.
– 3 –
BIOANALYTICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITYOPERATIONS
(in thousands)In thousands, except per share amounts)
(Unaudited)
Preferred Shares | Common Shares | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Shareholders Equity | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at September 30, 2002 | $ | --- | $ | 1,014 | $ | 10,521 | $ | 7,411 | $ | (48 | ) | $ | 18,898 | ||||||||||
Comprehensive income (loss) | |||||||||||||||||||||||
Net income | --- | --- | --- | 275 | --- | 275 | |||||||||||||||||
Other comprehensive loss: | |||||||||||||||||||||||
Foreign currency | |||||||||||||||||||||||
translation adjustments | --- | --- | --- | --- | (1 | ) | (1 | ) | |||||||||||||||
Total comprehensive income | 274 | ||||||||||||||||||||||
Exercise of stock options | --- | 3 | 16 | --- | --- | 19 | |||||||||||||||||
Balance at December 31, 2002 | --- | 1,017 | 10,537 | 7,686 | (49 | ) | 19,191 | ||||||||||||||||
Comprehensive income (loss) | |||||||||||||||||||||||
Net income | --- | --- | --- | (167 | ) | --- | (167 | ) | |||||||||||||||
Other comprehensive loss: | |||||||||||||||||||||||
Foreign currency | |||||||||||||||||||||||
translation adjustments | --- | --- | --- | --- | 1 | 1 | |||||||||||||||||
Total comprehensive income | (166 | ) | |||||||||||||||||||||
Exercise of stock options | --- | 3 | 17 | --- | --- | 20 | |||||||||||||||||
Balance at March 31, 2003 | --- | 1,020 | 10,554 | 7,519 | (48 | ) | 19,045 | ||||||||||||||||
Total comprehensive income | --- | --- | |||||||||||||||||||||
Net income | --- | --- | --- | 354 | --- | 354 | |||||||||||||||||
Other comprehensive loss: | |||||||||||||||||||||||
Foreign currency | |||||||||||||||||||||||
translation adjustments | (6 | ) | (6 | ) | |||||||||||||||||||
Total comprehensive income | 348 | ||||||||||||||||||||||
Issuance of new shares | --- | 148 | 568 | --- | --- | 716 | |||||||||||||||||
Balance at June 30, 2003 | $ | --- | $ | 1,168 | $ | 11,122 | $ | 7,873 | $ | (54 | ) | $ | 20,109 |
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||
Service revenue | $ | 7,684 | $ | 5,643 | $ | 19,270 | $ | 14,739 | ||||||
Product revenue | 2,948 | 2,231 | 8,789 | 7,059 | ||||||||||
Total revenue | 10,632 | 7,874 | 28,059 | 21,798 | ||||||||||
Cost of service revenue | 5,217 | 3,864 | 15,493 | 10,840 | ||||||||||
Cost of product revenue | 1,191 | 858 | 3,503 | 2,864 | ||||||||||
Total cost of revenue | 6,408 | 4,722 | 18,996 | 13,704 | ||||||||||
Gross profit | 4,224 | 3,152 | 9,063 | 8,094 | ||||||||||
Operating expenses: | ||||||||||||||
Selling | 672 | 557 | 1,963 | 2,199 | ||||||||||
Research and development | 260 | 305 | 801 | 996 | ||||||||||
General and administrative | 2,054 | 1,436 | 5,686 | 3,723 | ||||||||||
Total operating expenses | 2,986 | 2,298 | 8,450 | 6,918 | ||||||||||
Operating income | 1,238 | 854 | 613 | 1,176 | ||||||||||
Interest income | 2 | 1 | 5 | 3 | ||||||||||
Interest expense | (306 | ) | (148 | ) | (720 | ) | (396 | ) | ||||||
Other income | 21 | 20 | 39 | 79 | ||||||||||
Gain (loss) on sale of property and equipment | (10 | ) | 49 | (10 | ) | 81 | ||||||||
Income (loss) before income taxes | 945 | 776 | (73 | ) | 943 | |||||||||
Income tax provision (benefit) | 310 | 422 | (75 | ) | 481 | |||||||||
Net income | $ | 635 | $ | 354 | $ | 2 | $ | 462 | ||||||
Net income per share: | ||||||||||||||
Basic | $ | 0.13 | $ | 0.08 | $ | 0.00 | $ | 0.10 | ||||||
Diluted | $ | 0.13 | $ | 0.08 | $ | 0.00 | $ | 0.10 | ||||||
Weighted common and common equivalent | ||||||||||||||
shares outstanding: | ||||||||||||||
Basic | 4,870 | 4,605 | 4,857 | 4,595 | ||||||||||
Diluted | 5,150 | 4,609 | 4,866 | 4,616 |
See accompanying notes to condensed consolidated financial statements.
– 4 –
BIOANALYTICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSCASH FLOWS
(in thousands, except share and per share amounts)In thousands)
(Unaudited)
Three Months Ended June 30, 2003 | Three Months Ended June 30, 2002 | Nine Months Ended June 30, 2003 | Nine Months Ended June 30, 2002 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Service revenue | $ | 5,643 | $ | 4,086 | $ | 14,739 | $ | 11,902 | ||||||
Product revenue | 2,231 | 2,490 | 7,059 | 8,082 | ||||||||||
Total revenue | 7,874 | 6,576 | 21,798 | 19,984 | ||||||||||
Cost of service revenue | 3,864 | 3,050 | 10,840 | 8,463 | ||||||||||
Cost of product revenue | 858 | 1,034 | 2,864 | 3,326 | ||||||||||
Total cost of revenue | 4,722 | 4,084 | 13,704 | 11,789 | ||||||||||
Gross profit | 3,152 | 2,492 | 8,094 | 8,195 | ||||||||||
Operating expenses: | ||||||||||||||
Selling | 557 | 621 | 2,199 | 2,275 | ||||||||||
Research and development | 305 | 393 | 996 | 1,105 | ||||||||||
General and administrative | 1,436 | 1,170 | 3,723 | 3,275 | ||||||||||
Total operating expenses | 2,298 | 2,184 | 6,918 | 6,655 | ||||||||||
Operating income | 854 | 308 | 1,176 | 1,540 | ||||||||||
Interest income | 1 | --- | 3 | 2 | ||||||||||
Interest expense | (148 | ) | (62 | ) | (396 | ) | (177 | ) | ||||||
Other income | 20 | 13 | 79 | 65 | ||||||||||
Gain (loss) on sale of property and equipment | 49 | - | 81 | (13 | ) | |||||||||
Income before income taxes | 776 | 259 | 943 | 1,417 | ||||||||||
Income taxes (benefit) | 422 | (22 | ) | 481 | 370 | |||||||||
Net income | $ | 354 | $ | 281 | $ | 462 | $ | 1,047 | ||||||
Basic and diluted net income per common share and | ||||||||||||||
common equivalent share | $ | .08 | $ | .06 | $ | .10 | $ | .23 | ||||||
Basic weighted average common shares outstanding | ||||||||||||||
4,605,118 | 4,578,261 | 4,594,993 | 4,575,146 | |||||||||||
Diluted weighted average common and common | ||||||||||||||
equivalent shares outstanding | 4,608,541 | 4,614,622 | 4,615,530 | 4,620,150 | ||||||||||
Nine Months Ended June 30, | ||||||||
2004 | 2003 | |||||||
Operating activities | ||||||||
Net income | $ | 2 | $ | 462 | ||||
Adjustments to reconcile net income to net | ||||||||
cash provided by operating activities: | ||||||||
Depreciation and amortization | 2,771 | 1,783 | ||||||
(Gain) loss on sale of property and equipment | 10 | (81 | ) | |||||
Interest on subordinated debt | 193 | --- | ||||||
Deferred income taxes | --- | 242 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (1,582 | ) | 605 | |||||
Inventories | 222 | 255 | ||||||
Prepaid expenses and other assets | (199 | ) | 153 | |||||
Accounts payable | 84 | (476 | ) | |||||
Income taxes | (261 | ) | (92 | ) | ||||
Accrued expenses | (1,355 | ) | 1 | |||||
Customer advances | 812 | (141 | ) | |||||
Net cash provided by operating activities | 697 | 2,711 | ||||||
Investing activities | ||||||||
Capital expenditures | (2,029 | ) | (4,077 | ) | ||||
Proceeds from sale of property and equipment | --- | 1,023 | ||||||
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 | ) | ||||
Financing activities | ||||||||
Borrowings on line of credit | 9,629 | 3,826 | ||||||
Payments on line of credit | (8,908 | ) | (5,955 | ) | ||||
Borrowings on construction line of credit | 574 | 3,343 | ||||||
Payments on capital lease obligations | (3 | ) | (1,071 | ) | ||||
Borrowings of long-term debt, net of issuance costs | 2,250 | 4,950 | ||||||
Payments of long-term debt | (2,786 | ) | (3,658 | ) | ||||
Net proceeds from the exercise of stock options | --- | 39 | ||||||
Net cash provided by financing activities | 756 | 1,474 | ||||||
Effects of exchange rate changes | (24 | ) | (6 | ) | ||||
Net increase (decrease) in cash and cash equivalents | (600 | ) | 146 | |||||
Cash and cash equivalents at beginning of period | 1,378 | 826 | ||||||
Cash and cash equivalents at end of period | $ | 778 | $ | 972 | ||||
See accompanying notes to condensed consolidated financial statements.
– 5 –
BIOANALYTICAL SYSTEMS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(Unaudited)
Nine Months Ended June 30, 2003 | Nine Months Ended June 30, 2002 | |||||||
---|---|---|---|---|---|---|---|---|
Operating activities: | ||||||||
Net income | $ | 462 | $ | 1,047 | ||||
Adjustments to reconcile net income to net cash (used) provided by | ||||||||
operating activities: | ||||||||
Depreciation and amortization | 1,783 | 1,478 | ||||||
Loss (gain) on sale of property and equipment | (81 | ) | 13 | |||||
Deferred income taxes | 242 | 293 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 605 | (257 | ) | |||||
Inventories | 255 | (321 | ) | |||||
Prepaid expenses and other assets | 153 | (165 | ) | |||||
Accounts payable | (476 | ) | (295 | ) | ||||
Income taxes payable | (92 | ) | (273 | ) | ||||
Accrued expenses | 1 | (455 | ) | |||||
Customer advances | (141 | ) | (842 | ) | ||||
Net cash provided (used) by operating activities | 2,711 | (223 | ) | |||||
Investing activities: | ||||||||
Capital expenditures | (4,077 | ) | (3,786 | ) | ||||
Proceeds from sale of property and equipment | 1,023 | --- | ||||||
Payments for purchase of net assets from LC Resources, Inc. net | ||||||||
of cash acquired | (163 | ) | --- | |||||
Payments for purchase of net assets from Pharmakinetics Laboraties, | ||||||||
Inc. net of cash acquired | (816 | ) | --- | |||||
Net cash used by investing activities | (4,033 | ) | (3,786 | ) | ||||
Financing activities: | ||||||||
Borrowings on line of credit | 3,826 | 3,774 | ||||||
Payments on line of credit | (5,955 | ) | (707 | ) | ||||
Borrowings on construction line of credit | 3,343 | --- | ||||||
Payments on capital lease obligations | (1,071 | ) | (175 | ) | ||||
Borrowings of long-term debt | 5,410 | 680 | ||||||
Payments of debt issue costs | (460 | ) | --- | |||||
Payments of long-term debt | (3,658 | ) | (183 | ) | ||||
Net proceeds from the exercise of stock options | 39 | 17 | ||||||
Net cash provided by financing activities | 1,474 | 3,406 | ||||||
Effects of exchange rate changes | (6 | ) | (8 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 146 | (165 | ) | |||||
Cash and cash equivalents at beginning of period | 826 | 374 | ||||||
Cash and cash equivalents at end of period | $ | 972 | $ | 209 | ||||
See accompanying notes to consolidated financial statements.
– 6 –
BIOANALYTICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of the Business and Basis of Presentation
(1) DESCRIPTION OF THE BUSINESS
Bioanalytical Systems, Inc. and its subsidiaries (“BASi”We,” the “Company” or “BASi”) engage in drug developmentlaboratory services consulting and researchother services related to analytical chemistry and chemical instrumentation. BASipharmaceutical development. We also manufactures and marketsmanufacture scientific instruments for use in the determination of trace amounts of organic compounds in biological, environmental and industrial materials. BASi also sells its equipment andmedical research, which we sell with related software for use in industrial, governmentgovernmental and academic laboratories. BASiOur customers are located throughout the world.
(2) INTERIM FINANCIAL STATEMENT PRESENTATION AND STOCK BASED COMPENSATION
TheWe have prepared the accompanying unaudited interim condensed consolidated financial statements are unaudited and have been prepared by BASi pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted accounting principles for complete financial statements,in the United States (“GAAP”), and therefore these consolidated financial statements should be read in conjunction with the Company’sour audited consolidated financial statements, and the notes thereto, included in our Form 10-K for the year ended September 30, 2002.2003. In the opinion of management, the condensed consolidated financial statements for the three and nine months ended June 30, 20032004 and 20022003 include all adjustments, consisting only of normal and recurring adjustments which are necessary for a fair presentation of the results of the interim periods.periods and of our financial position at June 30, 2004. The results of operations for the three and nine months ended June 30, 20032004 are not necessarily indicative of the results for the year ending September 30, 2003.2004.
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.
At June 30, 2003, BASi2004, we had four stock-based employee compensation plans, which are described more fully in Note 8 of9 in the annual report of BASi onNotes to the Consolidated Financial Statements in our Form 10-K for the year ended September 30, 2002. BASi accounts for these plans under the recognition and measurement principals of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. No stock-based employee compensation cost is reflected in the net income of BASi, as2003. 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.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) and earnings (loss) per share had we applied the alternative fair value treatment of recognizing 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 |
We compute basic earnings per share if BASi had appliedusing the fair value recognition provisionsweighted average number of Financial Accounting Standards Board (“FASB”) Statement No. 123, “Accounting for Stock-Based Compensation”,common shares outstanding. We compute diluted earnings per share using the weighted average number of common and potential common shares outstanding. Potential common shares include the dilutive effect of shares issuable upon exercise of options to stock-based employee compensation.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.
(in thousands, except per share data) | Three Months Ended June 30, 2003 | Three Months Ended June 30, 2002 | Nine Months Ended June 30, 2003 | Nine Months Ended June 30, 2002 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net income as reported | $ | 354 | $ | 281 | $ | 462 | $ | 1047 | ||||||
Deduct: Total stock-based employee | ||||||||||||||
compensation expense determined | ||||||||||||||
under fair value based method for | ||||||||||||||
all awards, net of related tax | ||||||||||||||
effects | 5 | 5 | 15 | 15 | ||||||||||
Pro forma net income | $ | 349 | $ | 276 | $ | 447 | $ | 1032 | ||||||
Earnings per share: | ||||||||||||||
Basic and diluted - as reported | $ | .08 | $ | .06 | $ | .10 | $ | .23 | ||||||
Basic and diluted - pro forma | $ | .08 | $ | .06 | $ | .10 | $ | .23 |
– 76 –
(3) NEW ACCOUNTING PRONOUNCEMENTS
As of October 1, 2002, BASi adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. Pursuant to the provisions of SFAS No. 142 BASi stopped amortizing goodwill as of October 1, 2002 and will perform an impairment test on its goodwill at least annually. During the second quarter of 2003, BASi completed the transitional impairment test required under SFAS No. 142. The initial step of the impairment test was to identify potential goodwill impairment by comparing the fair value of BASi’s reporting units to their carrying values, including the applicable goodwill. These fair values were determined by calculating the discounted free cash flow expected to be generated by each reporting unit taking into account what BASi considers to be the appropriate industry and market rate assumptions. If the carrying value exceeded the fair value, then a second step was performed, which compared the implied fair value of the applicable reporting unit’s goodwill with the carrying amount of that goodwill, to measure the amount of goodwill impairment, if any. As a result of the initial transitional impairment test, BASi determined that no goodwill impairment existed at October 1, 2002.
In addition to performing the required transitional impairment test on BASi’s goodwill, SFAS No. 142 required BASi to reassess the expected useful lives of existing intangible assets including patents and licenses for which the useful life is determinable. (See note 7 for cost and accumulated amortization). BASi incurred no impairment charges as a result of SFAS No. 142 for intangibles with determinable useful lives which are subject to amortization.
The following table shows BASi’s 2002 results presented on a comparable basis to the 2003 results, adjusted to exclude amortization expense related to goodwill (in thousands, exceptreconciles our computation of basic earnings per share data):
Three Months Ended June 30, 2003 | Three Months Ended June 30, 2002 | Nine Months Ended June 30, 2003 | Nine Months Ended June 30, 2002 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net income - as reported | $ | 354 | $ | 281 | $ | 462 | $ | 1,047 | ||||||
Goodwill amortization | --- | 26 | --- | 53 | ||||||||||
Net income - as adjusted | $ | 354 | $ | 307 | $ | 462 | $ | 1,100 | ||||||
Basic and diluted per share: | ||||||||||||||
Net income - as reported | $ | .08 | $ | .06 | $ | .10 | $ | .23 | ||||||
Goodwill amortization | $ | --- | $ | .01 | $ | --- | $ | .01 | ||||||
Net income - as adjusted | $ | .08 | $ | .07 | $ | .10 | $ | .24 | ||||||
The sum of the net incometo diluted earnings per common share may not equal the annual net income per share due to interim quarter rounding.share:
Effective January 1, 2003, BASi adopted FASB Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 elaborates on the disclosures that must be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of FIN 45 apply on a prospective basis to certain guarantees and indemnifications issued or modified after December 31, 2002. Accordingly, any contractual guarantees or indemnifications BASi issues or modifies subsequent to December 31, 2002 will be evaluated and, if required, a liability for the fair value of the obligation undertaken will be recognized. The adoption of FIN 45 did not have a material effect on BASi’s financial position or results of operations during the third quarter.
In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (“ARB”) No. 51.” FIN 46 requires a variable interest entity (“VIE”) to be consolidated by the primary beneficiary of the entity under certain circumstances. FIN 46 is effective for all new VIEs created or acquired after January 31, 2003. For VIEs created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. Based on its preliminary review of its interests in other entities, BASi does not expect that the adoption of FIN 46 will have a material impact its financial position or results of operations.
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(4) ACQUISITIONS
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 |
On December 13, 2002 BASiwe acquired LC Resources, Inc. (“LCR”), a privately-held company based in Walnut Creek, California.now BASi purchasedNorthwest Laboratories, Inc., purchasing all of the outstanding shares of LCR for $2,000,000 in cash and subordinated notes. BASi paid cash of $176,000, including acquisition costs, at closing and issued subordinated notes in the principal amount of $2,250,000. Following an adjustment in the purchase price required by the terms of the acquisition agreement, the principal amount of the notes was adjusted (as of the closing date) to $1,800,000, and BASi paid the sellers an additional $75,000 in cash. The notes bear interest at 10% per annum, and mature on October 1, 2007. The holders of the notes have the option to require BASi to repay up to 20% of the outstanding principal balance each October 1 prior to maturity, commencing October 1, 2003. Holders of $1,258,650 in aggregate principal amount of these notes have notified BASi that they will require payments of 20% of the outstanding principal of their notes plus accrued interest on October 1, 2003. These notes are subordinate to BASi’s bank debt.
The acquisition was accounted for using the purchase method of accounting as required by Statement of Financial Accounting Standards No. 141, “Business Combinations.”$1,999. The purchase price has been allocatedconsisted of cash payments of $199 and issuance of $1,800 in 10% subordinated notes payable. We engaged an independent valuation firm to the estimated fair values of net assets acquired based on management’s estimate. The allocation of the purchase price is preliminary and subject to change pending the completion of management's analysis, including an assessment ofdetermine the fair value of LCR owned properties and of any identifiable intangible assets. The following table summarizes the fair values of the assets required to be accounted for apart from goodwill. The excess preliminary purchase price has been allocated to goodwillacquired 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 $1,351,000$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 results of operations of LCR have been included with those of BASi sinceregulated facility/FDA compliant laboratory site. We estimated the dateeconomic useful lives of the acquisition. LCR has recently been renamed BASi Northwestacquired 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, Pharmakineticswe converted our $791 of convertible notes of PharmaKinetics Laboratories, Inc. (“PKLB”) became a majority owned subsidiary through the conversion of $791,000 in convertible notes receivable tointo 4,992,300 shares of PKLB common stock, representing a 67% interest.ownership interest in PKLB. On June 30, 2003, BASi completed its acquisitionwe purchased the remaining common stock and all preferred stock of PKLB through the exchange of approximately 228,857 shares of BASithe Company’s common stock valued at $1,179,000 for all of the outstanding common stock and Class B preferred stock of PKLB,$1,179 and the issuance of $4,000,000$4,000 of 6% convertible notes due 2009 (“6% Notes”) for all of PKLB’s Class A redeemable preferred stock. The 6% Notes do not bear2008. These notes plus any accrued interest for the first year after their date of issuance and are convertible into shares of the Company’s common stock at the holder’s option any time after June 1, 2004 at the first anniversaryconversion rate of the datesixteen dollars per share of issuance into approximately 249,990 shares of BASiour common stock. BASi
The Company paid cash aggregating $1,505,000,$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 publicpublicly traded company based in Baltimore, Maryland, providesthat 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 Baltimore,Maryland, Inc. The acquisition was accounted for using the purchase method of accounting as required by SFAS No. 141, “Business Combinations.”
The purchase price has been allocated tobased on the estimated fair values of netthe assets acquired based on management’s estimate. The allocation of the purchase price is preliminary and subject to change pending the completion of management’s analysis, including an assessment of the fair value of PKLB owned properties and of any identifiable intangible assets required to be accounted for apart from goodwill.liabilities acquired. The purchase price has been allocated (preliminary) as follows:
Current assets | $ | 626 | $ | 626 | ||||||
Property and equipment | 6,321 | 6,448 | ||||||||
Intangible assets | 1,311 | |||||||||
Goodwill | 1,494 | 213 | ||||||||
Total assets | 8,441 | |||||||||
Liabilities | 2,206 | |||||||||
Total assets acquired | 8,598 | |||||||||
Liabilities assumed | (1,913 | ) | ||||||||
$ | 6,235 | |||||||||
Net assets acquired | $ | 6,685 | ||||||||
The resultsDuring the fiscal quarter ended June 30, 2004, we concluded our valuation of operationsthe acquisition, primarily the assessment of PKLBintangible 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 after the close under an operating lease. We have used the net sale 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 revaluation of the basis of property of $86, and record acquisition costs of $48, resulting in reductions of intangible assets of $64 and goodwill of $4.
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 included with thoseassigned to the regulated facility/FDA compliant laboratory site. We estimated the economic useful lives of BASi since May 26, 2003. Pro forma revenue, net income (loss)the acquired methodologies and income (loss) per share informationcustomer relationships to be 5 years, using straight-line amortization, and determined that the acquired regulated facility/FDA compliant laboratory site is as follows (in thousands, except per share data):an indefinite-lived intangible asset not subject to amortization.
Three Months Ended June 30, 2003 | Three Months Ended June 30, 2002 | Nine Months Ended June 30, 2003 | Nine Months Ended June 30, 2002 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Revenue | $ | 8,536 | $ | 7,545 | $ | 24,510 | $ | 24,600 | ||||||
Net income (loss) | $ | 18 | $ | (489 | ) | $ | (902 | ) | $ | 36 | ||||
Earnings (loss) per share: | ||||||||||||||
Basic and diluted | $ | .00 | $ | (.10 | ) | $ | (.19 | ) | $ | .01 |
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(5) INVENTORIES
Inventories consisted of (in thousands):
June 30, 2003 | September 30, 2002 | |||||||
---|---|---|---|---|---|---|---|---|
Raw materials | $ | 1,281 | $ | 1,347 | ||||
Work in progress | 360 | 339 | ||||||
Finished goods | 930 | 1,091 | ||||||
2,571 | 2,777 | |||||||
LIFO reserve | (153 | ) | (153 | ) | ||||
$ | 2,418 | $ | 2,624 | |||||
(6) DEBT
BASi has a revolving line of credit which expires September 30, 2005. 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’s prime rate to prime rate plus 125 basis points or at the Eurodollar rate plus 200 to 350 basis points, as elected by BASi, depending upon certain financial ratios (4.00% at June 30, 2003). BASi pays a fee equal to 25 to 50 basis points, depending on certain financial ratios, on the unused portion of the line of credit.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 | |||||
BASi has a $5,410,000 commercial mortgage with a bank. The mortgage note requires 119 monthly principal payments of $22,542 plus interest, followed by a final payment for the unpaid principal amount of $2,727,502 due November 1, 2012. Interest is charged at the prime rate (4.00% at June 30, 2003).
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BASi has a $2,250,000 construction loan with a bank which expires November 1, 2012. Proceeds from this loan will be used to fund the expansion of BASi’s facilities in West Lafayette, Indiana. The loan requires interest payments only until completion of the project in West Lafayette, Indiana. Interest is charged at the prime rate (4.00% at June 30, 2003).
BASi had a $2,340,000 construction loan with a bank. BASi utilized $2,221,000 of the amount available which was converted to a term loan effective April 1, 2003. Proceeds from this loan were used to fund the expansion of BASi’s facilities in Evansville, Indiana. The loan requires 60 monthly principal and interest payments of $16,712 with the balance to be paid on April 1, 2008. Interest is charged at the prime rate (4.00% at June 30, 2003).
BASi has $5,754,000 in subordinated notes payable issued in connection with the acquisitions of LCR and PKLB (see Note 4).
(7) SEGMENT INFORMATION
BASi operatesWe operate in two principal segments – analytical— research services and analyticalresearch products. BASi’s analytical services unitOur Services segment provides drugresearch and development support on a contract basis directly to pharmaceutical companies. BASi’s products unitOur Products segment provides liquid chromatography, electrochemical and physiological monitoring products to pharmaceutical companies, universities, government research centers and medical research institutions. BASi evaluates performance and allocates resources based onOur accounting policies in these segments.segments are the same as those described in the summary of significant accounting policies.
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The following table presents required segment information:operating results by segment:
(in thousands) | Three Months Ended June 30, 2003 | Three Months Ended June 30, 2002 | Nine Months Ended June 30, 2003 | Nine Months Ended June 30, 2002 | ||||||||||
Operating income: | ||||||||||||||
Services | $ | 546 | $ | 123 | $ | 739 | $ | 885 | ||||||
Products | 308 | 185 | 437 | 655 | ||||||||||
Total operating income | 854 | 308 | 1,176 | 1,540 | ||||||||||
Corporate expenses | (78 | ) | (49 | ) | (233 | ) | (123 | ) | ||||||
Income before income taxes | ||||||||||||||
$ | 776 | $ | 259 | $ | 943 | $ | 1,417 | |||||||
(in thousands) | June 30, 2003 | September 30, 2002 | ||||||||||||
Carrying amounts of goodwill: | ||||||||||||||
Services | $ | 3,392 | $ | 510 | ||||||||||
Products | 374 | 374 | ||||||||||||
Goodwill | $ | 3,766 | $ | 884 | ||||||||||
(in thousands) | June 30, 2003 | September 30, 2002 | ||||||||||||
Carrying amounts of definite-lived intangible assets | ||||||||||||||
Products: | ||||||||||||||
Patents and licenses | $ | 320 | $ | 311 | ||||||||||
Less accumulated amortization | 116 | 88 | ||||||||||||
Patents and licenses | $ | 204 | $ | 223 | ||||||||||
The are no intangible assets associated with the services segment. | ||||||||||||||
(in thousands) | June 30, 2003 | September 30, 2002 | ||||||||||||
Carrying amounts of identifiable assets | ||||||||||||||
Services | $ | 30,225 | $ | 22,255 | ||||||||||
Products | 14,310 | 11,208 | ||||||||||||
Total assets | $ | 44,535 | $ | 33,463 | ||||||||||
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 to the acquisition of PKLB in 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 exchange 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 mature on June 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q may contain “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’s intent, belief or current expectations with respect to (i) BASi’s strategic plans; (ii) BASi’s future revenues or profitability; (iii) BASi’s capital requirements; (iv) industry trends affecting the Company’s financial condition or results of operations; (v) the Company’s sales or marketing plans; or (vi) BASi’s growth strategy. Investors in BASi’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’s annual report on Form 10-K for the year ended September 30, 2002.2003. 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’s plans and objectives will be achieved.
The business of Bioanalytical Systems, Inc. is very much dependent on the level of pharmaceutical and biotech 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 within the industries we serve have a direct, and sometimes 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.
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 | |||||
(a) Percentage of service and product revenues, respectively.
Service and Product Revenues
Revenues for the third fiscal quarter ended June 30, 20022004 increased 35% to $10.6 million compared to $7.9 million for the third quarter last year. Service revenue increases were the result of the Company’s two acquisitions completed in fiscal 2003. Preclinical services capacity utilization and UK-based bioanalytical services (aided 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 strong sales of our Culex automated blood sampling product line.
Cost of Revenues
TotalCost of revenues for the third quarter ended June 30, 2004 was $6.4 million or 60% of revenue compared to $4.7 million, or 60% of revenue for the three months ended June 30, 2003 increased 19.7%third quarter last year. The increase in cost of revenues is related to $7,874,000 from $6,576,000 for the three months ended June 30, 2002. The net increase of $1,298,000 was primarilyCompany’s Services segment and is due to an increasethe inclusion of costs from operations acquired in service revenuefiscal 2003 that were not included in the prior year. Our cost of revenues as a percentage of revenues improved this quarter to $5,643,000 for the three months ended June 30, 2003 from $4,086,000 forlevel of the three months ended June 30, 2002, primarilysame period last year as a result of higher utilization of our capacity. Future similar, or improved, margins are dependent on maintaining or improving volume, as we have significantly greater capacity than we did in fiscal 2003. Higher utilization of capacity in our Baltimore facility, acquired last year, impacted the operation of LC Resources, Inc.margin improvement in the current quarter. The impactcosts of the increaseunderutilized capacity in service revenue was partially offset by a $259,000 decreaseour Services segment are included in product revenue from the comparable period in 2002.
Total cost of revenue for the three months ended June 30, 2003 increased 15.6% to $4,722,000 from $4,084,000 for the three months ended June 30, 2002. This increase of $638,000 was primarily due to increased costs of service revenue associatedservices, with the operationresult that those costs remain fairly constant, regardless of LC Resources, Inc. and an increase in the costs of bioanalytical services in the United Kingdom. Costs of service revenue decreased to 68.5% of service revenue for the three months ended June 30, 2003 from 74.6% for the three months ended June 30, 2002, primarily due to increased revenue associated with the acquisition of LC Resources, Inc. and an increase in the revenue of bioanalytical services in the United States. Costour Services volume. The cost of product revenue decreased to 38.5%as a percentage of product revenue forcontinues within our planned range, impacted mainly by the three months ended June 30, 2003 from 41.5% for the three months ended June 30, 2002, primarily due to a change in product mix.mix of product.
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Operating Expenses
Selling expenses for the three months ended June 30, 2003 decreased 10.3%2004 increased 21% to $557,000$672,000 from $621,000$557,000 for the three months ended June 30, 2002. Selling expenses decreased $64,000 due to decreased advertising expense, and the relocation of the United Kingdom instrument sales office.2003. Research and development expenses, which are net of grant reimbursements, for the three months ended June 30, 20032004 decreased 22.4%15% to $305,000$260,000 from $393,000$305,000 for the three months ended June 30, 2002. The decrease2003. These changes were in line with our expectations and reflect, in the case of $88,000 is primarily dueselling expenses, our efforts to a reallocationincrease our utilization of certainour capacity, and with regard to research and development, personnel. 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.
General and administrative expenses for the three months ended June 30, 20032004 increased 22.7%43% to $1,436,000$2,054,000, from $1,170,000$1,436,000 for the three months ended June 30, 2002,2003. This increase is primarily as a result of increasesattributable to the Company’s acquisitions in professional feesfiscal 2003, and outside services. As a result of the foregoing, total operating expensesincludes additional recruitment and compensation costs to add key personnel.
Other (Expense)
Interest expense increased $114,000, or 5.2%,107% to $2,298,000 for the three months ended June 30, 2003 from $2,184,000 for the three months ended June 30, 2002.
Other expense, net, was $78,000$306,000 in the three months ended June 30, 2003, as compared to $49,0002004 from $148,000 in the three months ended June 30, 2002, primarily as a resultcomparable quarter of increasedthe prior year. This increase is due to interest expense on the subordinated debt issued in connection with the Company’s 2003 acquisitions and increases in long-term debt due to increased debt.facility expansions at its Evansville and West Lafayette sites. We also decided to fix our 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 $20,000 in the quarter. This was done to limit interest rate risk.
BASi’sIncome Taxes
We computed our tax benefit using an effective tax rate for the three months ended June 30, 2003 was 54.4%2004 of 32.8% compared to 8.5% (tax benefit)54.4% for the three months ended June 30, 2002. In2003. This decline in effective rate is the thirdresult of profitable operations in our United Kingdom subsidiaries, where prior period loss carryforwards are being recognized as utilized.
Net Income
As a result of the above factors, we earned $635,000 ($.13 per share basic and $.12 per share diluted) in the quarter BASi changed its estimated annual effective tax rate from 35%ended June 30, 2004, compared to 51% due$354,000 ($.08 per share, both basic and diluted) in the same period last year.
General
Our current year-to-date operations reflect the impactoperations of nondeductible foreign losses. The effectour two acquisitions of this change resulted in an increase in income tax expense of $150,000 ($0.03 per share)last year for the threefull 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 nine months ended June 30, 2003.2004 increased 29% to $28.0 million compared to $21.8 million for the nine month period last year. Service revenue increases were primarily the result of the Company’s two aforementioned acquisitions. Product revenues increased 25% as a result of the success of our Culex product line.
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Nine Months Ended June 30, 2003 Compared With Nine Months Ended June 30, 2002Cost of Revenues
Total revenueCost of revenues for the nine months ended June 30, 2003 increased 9.1%2004 was $19.0 million or 68% of revenue compared to $21,798,000 from $19,984,000 for the nine months ended June 30, 2002. The net increase of $1,814,000 was primarily due to an increase in service revenue to $14,739,000 for the nine months ended June 30, 2003 from $11,902,000 for the nine months ended June 30, 2002, primarily as a result of an increase in bioanalytical services in the United States. The increase in service revenue was partially offset by a decline in product revenue of $1,023,000 from the comparable period in 2002, which was due primarily to lower sales volume of Culex units in fiscal 2003.
Total cost$13.7 million, or 63% of revenue for the nine months ended June 30, 2003 increased 16.2% to $13,704,000 from $11,789,000 for the nine months ended June 30, 2002. Thissame period last year. The increase in cost of $1,915,000 wasrevenues is primarily due to increased costs of service revenue related to the additional contract services provided by the bioanalytical services group. Costs of service revenue increased to 73.5% of services revenue for the nine months ended June 30, 2003 from 71.1% for the nine months ended June 30, 2002, primarilyCompany’s Services segment and is due to increased costs associated with the operation of LC Resources, Inc. and anacquisitions in fiscal 2003. The increase in cost of revenue as a percentage of revenue is impacted by operating inefficiencies 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 bioanalytical servicesa client project overrun, new staff in the United Kingdom. Costtraining, and lower than optimal capacity utilization. The product segment cost of revenue as a percentage of product revenue decreased to 40.6% of product revenue for the nine months ended June 30, 2003 from 41.2% for the nine months ended June 30, 2002, primarily due to a changewas in product mix.line with our historical experience.
Operating Expenses
Selling expenses for the nine months ended June 30, 20032004 decreased 3.3%11% to $2,199,000$1,963,000 from $2,275,000$2,199,000 for the nine months ended June 30, 2002. Selling expenses decreased $76,000 due to decreased advertising and the relocation of the UK instrument sales office.2003. Research and development expenses, which are net of grant reimbursements, for the nine months ended June 30, 20032004 decreased 9.9%20% to $996,000$801,000 from $1,105,000$996,000 for the nine months ended June 30, 2002. 2003. As described in the three month discussion above, these decreases are primarily attributable to the Company’s efforts to control expenses.
General and administrative expenses for the nine months ended June 30, 20032004 increased 13.7%53% to $3,723,000$5,686,000, from $3,275,000$3,723,000 for the nine months ended June 30, 2002, primarily as a result2003. The principal reasons for this increase are the expenses of 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).
Other (Expense)
Interest expense increased 82% to $720,000 in the nine months ended June 30, 2004 from $396,000 in the comparable period of the prior fiscal -year. This increase is due to interest expense on the subordinated debt issued in connection with the Company’s fiscal 2003 acquisitions and increases in professional feeslong-term debt due to facility expansions at its Evansville and outside services. As a result of the foregoing, total operating expenses increased $263,000, or 4.0%, to $6,918,000West Lafayette sites.
Income Taxes
Our tax provision for the nine months ended June 30, 2003 from $6,655,0002004 is the result of our estimate of income for the nine months endedfull year. As of June 30, 2002.
Other expense, net, was $233,0002004, we had losses in the nine months ended June 30, 2003, as compared to $123,000U.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 provision in the current period for U.K. profits. The nine months ended June 30, 2002, primarily asmonth benefit from taxes reflects the projection that we will be profitable for the full year in the U.S., while utilizing unrecorded benefits in the U.K. Our fourth quarter and full year provision for taxes could be impacted by failure to attain these projections.
Net Income
As a result of increased interest expense due to increased debt.
BASi’s effective tax ratethe above, we experienced net earnings of $2,000 ($0.00 earnings per share, both basic and diluted) for the first nine months ended June 30, 2003 was 51.0%of the current fiscal year, compared to 26.1% fornet income in the nine months ended June 30, 2002. In the third quarter, BASi changed its estimated annual effective tax rate from 35% to 51% due to the impactprior fiscal year of nondeductible foreign losses. The effect of this change resulted in an increase in$462,000 ($.10 income tax expense of $150,000 ($0.03 per share) for the nine months ended June 30, 2003.share, both basic and diluted) .
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Since its inception, BASi’s principal sources of cash have been cash flow generated from operations and funds received from bank borrowings and other financings. At June 30, 2003,2004, BASi had cash and cash equivalents of $972,000,$778,000, compared to cash and cash equivalents of $826,000$1,378,000 at September 30, 2002.2003. Our cash receipts are immediately applied to our line of credit in the U.S., the result of which is that our cash balances are principally in the U.K. We monitor our U.K. cash needs to avoid conversion costs, which in the current interest rate environment can exceed interest. Our cash balance is therefore less significant than our available borrowing capacity.
BASi’sOur net cash provided by operating activities was $2,711,000$697,000 for the nine months ended June 30, 2003.2004. Cash provided by operations during the nine months ended June 30, 20032004 consisted of net incomeprofits of $462,000,$2,000, non-cash charges against operations of $1,944,000$2,974,000 and a net increase in assets employed of $305,000$2,279,000 in operatingcurrent assets and liabilities. The mostDuring the current nine month period, we maintained significant item affectingcustomer advance payments for work to begin after this period, which contributed $812,000 to cash flow. Our sales in the changethird quarter of our fiscal year resulted in operating assets and liabilities was a decreasean increase in accounts receivable of $605,000.$1,451,000 over our last year-end, which was financed by utilizing our working capital credit facility.
CashNet cash used by investing activities decreased to $2,029,000 for the nine months ended June 30, 2004 from $4,033,000 for the nine months ended June 30, 2003. The current period’s investment is the result of facilities expansion in West Lafayette, Indiana and Evansville, Indiana, while two acquisitions in fiscal 2003 from $3,786,000accounted for the nine months ended June 30, 2002, primarily due tohigher level in the acquisition of LC Resources, Inc. and PharmaKinetics Laboratories, Inc. prior comparable period.
Cash provided by financing activities for the nine months ended June 30, 20032004 was $1,474,000,$756,000 due to additional borrowings from 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 funds to finance its expansions and improvements in Evansville and West Lafayette and for other capital expenditures. As the construction lineavailability from the new facilities financings was expended by late fiscal 2003, the Company began to support these expansions with available funds from operations and increased long-term debt.its revolving credit line.
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Total expenditures by BASi for property and equipment were $4,077,000$2,029,000 and $3,786,000$4,077,000 for the nine months ended June 30, 20032004 and 2002,2003, respectively. Expenditures made in connection withfor the expansionfirst nine months of BASi’s operating facilities2004 include the construction of the new early development facility in West Lafayette, and Evansville, Indiana and in the United Kingdom and purchases of laboratory equipment accountaccounting for the largest portionsportion of these expenditures, in each period. The capital investments relateand expenditures to bring the Baltimore facility to Company standards. Capital expenditures also include the purchase of additional laboratory equipment correspondingnew toxicology and pathology software in the Company’s Evansville location that will improve efficiency 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 line of 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, and strategic acquisitions, alliances, and joint ventures.ventures as demand and capital allow.
During 2001, BASi commenced constructionThe Company has implemented a phased plan to expandimprove the operations of its preclinical facilities in Evansville, Indiana. Construction of these preclinical facilities was completed during the nine months ended June 30, 2003. During 2002, BASi began expanding its facilities in West Lafayette, Indiana. Construction on the West Lafayette facilities is expected to have a total cost of $4,000,000. BASi obtained bank financing for each of these construction projects.
On December 13, 2002, BASi acquired LC Resources, Inc. (“LCR”), a privately-held company based in Walnut Creek, California. BASi purchased all of the outstanding shares of LCR for $2,000,000 in cashBaltimore clinical research unit and subordinated notes. BASi paid cash of $176,000, including acquisition costs, at closing and issued subordinated notes in the principal amount of $2,250,000. Following an adjustment in the purchase price required by the terms of the acquisition agreement, the principal amount of the notes was adjusted (as of the closing date) to $1,800,000, and BASi paid the sellers an additional $75,000 in cash. The notes bear interest at 10% per annum, and mature on October 1, 2007. The holders of the notes have the option to require BASi to repay up to 20% of the outstanding principal balance each October 1 prior to maturity, commencing October 1, 2003. Holders of $1,258,650 in aggregate principal amount of these notes have notified BASi that they will require payments of 20% of the outstanding principal of their notes plus accrued interest on October 1, 2003. These notes are subordinate to BASi’s bank debt.
On May 26, 2003, Pharmakinetics Laboratories, Inc. (“PKLB”) became a majority owned subsidiary through the conversion of $791,000 in convertible notes receivable to 4,992,300 shares of PKLB common stock, representing a 67% interest. On June 30, 2003, BASi completed its acquisition of PKLB through the exchange of approximately 228,857 shares of BASi common stock valued at $1,179,000 for all of the outstanding common stock and Class B preferred stock of PKLB, and the issuance of $4,000,000 of 6% convertible notes payable due 2009 (“6% Notes”) for all of PKLB’s Class A redeemable preferred stock. The 6% Notes are convertible into approximately 249,990 shares of BASi common stock. BASi paid cash aggregating $1,505,000, representing acquisition costs and cash advances made to PKLB from June 2002 through May 2003.
Now that the merger has been completed, BASi expects to expend additional amounts to pay trade payables and other obligations of PKLB and to fund PKLB’s continuing operations. BASi intends to fund these expenses usingthe operations with cash provided from company-wide operations and borrowings undersupplemented by its revolving line of credit. BASi’s credit agreement also requires BASi to sell the Baltimore, Maryland real property within 180 days following its acquisition of PKLB. BASi intends to use the net proceeds from the sale to pay down the line of credit. BASi management believes that the saleThe planned improvements include renovation of the building will enable it to fund PKLB operations until such time as the cash flow generated from those operations becomes adequate to support the operations.
On October 29, 2002, BASi obtainedclinic, selectively updating equipment and hiring highly qualified, experienced management personnel. Improvements already completed and in process have had measurable effects on attracting new credit agreements with two different banks that completely refinanced and replaced all outstanding bank debt arrangements that were in place at September 30, 2002. These new credit agreements provide for a $6,000,000 revolving line of credit with a bank and a mortgage note and two construction term loans payable with another bank aggregating $10,000,000. Borrowings under these new credit agreements are collateralized by substantially all assets related to BASi’s operations, all common stock of BASi’s United States subsidiaries and 65% of the common stock of its non-United States subsidiaries, and the assignment of a life insurance policy on BASi’s Chairman and CEO. Under the terms of these credit agreements, BASi has agreed to restrict advances to foreign subsidiaries, limit additional indebtedness and capital expenditures as well as to comply with certain financial covenants outlined in the borrowing agreements. These financial covenants include: maintenance of a certain ratio of interest bearing indebtedness (not including subordinated debt) to earnings before income taxes, depreciation, amortization, and interest expense (“EBITDA”); maintenance of a certain ratio of total indebtedness to tangible net worth and subordinated debt; maintenance of a certain ratio of EBITDA to certain identified fixed charges; maintenance of a certain ratio of current assets to current liabilities; limits on the amount of capital expenditures that can be made using funds other than long-term indebtedness in a single fiscal year; and maintenance of a certain ratio of net cash flow to debt servicing requirements. These credit agreements contain cross-default provisions.clients
BASi’s revolving line of credit expires September 30, 2005.2006. 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’s prime rate to prime rate plus 125 basis points, or at the Eurodollar rate plus 200 to 350 basis points, as elected by BASi, depending upon the ratio of BASi’s interest bearing indebtedness (less subordinated debt) to EBITDA. BASi pays 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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BASi hasDuring 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 $5,410,000 commercial mortgage withcost 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 bank.total cost of $4.0 million when complete. The mortgage note requires 119 monthly principal paymentsCompany funded part of $22,542 plus interest, followedthis expansion by a final payment for the unpaid principal amount of $2,727,502 due November 1, 2012. Interest is charged at the prime rate. BASi hasobtaining a $2,250,000 construction loan with the same bank, whicha bank. The loan expires November 1, 2012. The loan2012 and requires interest payments only until completion of the project in West Lafayette, Indiana. Interest is charged at the prime rate. BASi had a $2,340,000The Company exhausted this construction loan with a bank. BASi utilized $2,221,000in the first quarter of fiscal 2004 and converted the amount available which was converted$2,250,000 to a commercialterm mortgage effective April 1, 2003. Proceedsin 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 loan were usedtransaction should exceed $6,000,000, which we intend to fund the expansionuse to retire $2,000,000 of BASi’s facilities in Evansville, Indiana. The loan requires 60 monthly principalsubordinated debt and interest paymentspay down our revolving line of $16,712credit, with the balanceexcess to be paid on April 1, 2008. Interest is charged at the prime rate (4.00% at June 30, 2003). On November 15, 2002, BASi obtained a $1,500,000 lease line for equipment with a bank. At June 30, 2003, $1,090,000 was utilized under the terms of operating leases requiring 60 payments of $17,820.retained as working capital.
To obtain the foregoing new credit agreements, BASi entered into an agreement with Periculum Capital Company, LLC (“Periculum”). Under the terms of the agreement, BASi paid $300,000 in fees to Periculum upon closing of the refinancing.
BASi is required to make cash payments in the future on debt and lease obligations. The following table summarizes BASi’s contractual term debt and lease obligations at June 30, 20032004 and the effect such obligations are expected to have on its liquidity and cash flows in future periods (amounts presented for 2004 are those items required in thousands).the final fiscal quarter):
Fiscal Year Ending September 30, | ||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2004 | 2005 | 2006 | After 2006 | Total | ||||||||||||||||||||||||||||||
Payments due for fiscal years ending September 30: | (in thousands) | |||||||||||||||||||||||||||||||||
2003 | 2004-2005 | 2006-2007 | After 2007 | Total | ||||||||||||||||||||||||||||||
Mortgage notes payable | $ | 316 | $ | 943 | $ | 943 | $ | 5,385 | $ | 7,587 | $ | 183 | $ | 390 | $ | 395 | $ | 6,171 | $ | 7,139 | ||||||||||||||
Subordinated debt | 75 | 252 | --- | 5,552 | 5,879 | |||||||||||||||||||||||||||||
Subordinated debt* | 401 | 460 | 360 | 4,467 | 5,688 | |||||||||||||||||||||||||||||
Future debt obligations** | 36 | 69 | 56 | 2,089 | 2,250 | |||||||||||||||||||||||||||||
Capital lease obligations | 265 | 69 | --- | --- | 334 | 62 | 74 | 80 | --- | 216 | ||||||||||||||||||||||||
Operating leases | 474 | 617 | 432 | 36 | 1,559 | 327 | 529 | 518 | 274 | 1,648 | ||||||||||||||||||||||||
$ | 1,130 | $ | 1,881 | $ | 1,375 | $ | 10,973 | $ | 15,359 | |||||||||||||||||||||||||
$ | 1,009 | $ | 1,522 | $ | 1,409 | $ | 13,001 | $ | 16,941 | |||||||||||||||||||||||||
BASi’s borrowings under its revolving* Subordinated debt includes notes to related parties.
** Future debt obligations is an estimate of payments upon the conversion in May 2004 of the current construction line of credit for working capital needs and borrowings to fund capital expenditures using construction loans will each affect BASi’s liquidity and cash flows in future periods. These obligations are not reflected in the above schedule. into a $2,250,000 mortgage note payable.
The covenants in BASi’sthe Company’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 BASithe Company can borrow to fund future operations, acquisitions and capital expenditures.
During the first quarter of fiscal 2003, BASi borrowed additional funds We have undertaken steps to continue construction on its West Lafayette expansion project. In order to better assure complianceimprove our liquidity, operations and cash flow, with the covenants in the credit agreement, constructionobjectives of reducing our debt, strengthening our financial position and meeting our financial covenants.
Based on this project was delayed until May of 2003. The commencement of construction has required BASi to incur additional indebtedness. BASi has formulated and begun to implement a plan to reduce debt and improve itsour current business activities, we believe cash flow to better enable it to satisfy the credit agreement covenants in the future. The plan includes, but is not limited to, the sale of real estate assets in West Lafayette. BASi believes that delaying construction of the West Lafayette project reduced pressure on cash flow. By temporarily halting construction, BASi has been able to maintain leverage at current, acceptable levels, although delaying the construction project also resulted in a delay in the income expectedgenerated from the facility. Furthermore, delaying construction also allowed BASi to defer hiring the additional employees necessary to staff the new facility. BASi has also begun to implement headcount reductions and other cost saving measures at its West Lafayette facility. BASi has reduced headcount by electing not to replace certain terminated employees and by reducing the hours of several formerly full-time employees. As an additional cost saving measure, all salaries have been frozen indefinitely and certain employees have elected to take temporary pay cuts. BASi has also implemented capital expenditure reductions and has limited the amount of business travel made by employees. BASi believes continued compliance with loan covenants will be achieved.
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BASi issued additional subordinated debt of approximately $4,000,000 in connection with the acquisition of PKLB. Interest does not begin to accrue on the indebtedness until June 30, 2004 and the first interest payment is due on July 15, 2004. This indebtedness does not affect BASi’s compliance with the leverage covenant in its credit agreement. However, as discussed above, BASi has used cash fromour operations and amounts available under itsour existing credit agreement to pay trade payables and other obligations of PKLB and to fund PKLB’s future operations. To offset these requirements, BASi's credit agreement requires it to sell a building owned by PKLB, located in Baltimore, Maryland.
Based on its current business activities, BASi believes cash generated from its operations, amounts available under its existing bank line of credit and credit facility, andfacilities, combined with the proposed action plan described above, will be sufficient to fund BASi’s short and long-termthe Company’s working capital and capital expenditure requirements for the foreseeable future and through September 30, 2004.future.
Inflation
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BASi believes that inflation has not had a material adverse effect on its business, operations or financial condition.
New Accounting Pronoucements
Please refer to the Notes to Consolidated Financial Statements for a discussion of recently issued accounting standards.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
BASi’s primary market risk exposure with regard to financial instruments is changes in interest rates. The credit agreement between BASi and The Provident Bank dated October 29, 2002 bears interest at a rate of either the bank’s prime rate plus 0 to 125 basis points, or at Eurodollar rate plus 200 to 350 basis points, depending in each case upon the ratio of BASi’s interest-bearing indebtedness (less subordinated debt) to EBITDA, at BASI’sBASi’s option. BASi also has construction loans andAs discussed previously, we have taken steps to fix the interest rate on a commercial mortgage which bear interest at the prime rate.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 rates change.exchange rates. The effect of movements in the exchange rates was not material to the consolidated operating results of BASi in fiscal years 20022004 and 2001.2003. 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.
Based on their most recent evaluation, which was completed as of the end of the period covered by this report, BASi’s Chief Executive Officer and Chief Financial Officer believe BASi’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were are effective as of June 30, 2003. Except as disclosedin timely alerting BASi’s management to material information required to be included in this Form 10-Q and other Exchange Act filings.
There was no change in the following sentences, there were no significant changes in BASi’s internal controls over financial reporting that have materially affected, or are reasonable likely to materially affect the company’sCompany’s internal control over financial reporting subsequentduring the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to marterially affect, the date of their evaluation, and there were no significant deficiencies or material weaknesses which required corrective actions. On July 21, 2003, the controller of BASi gave notice that she intended to resign. Subsequently, the controller has worked on a part-time basis to assist in the preparation of this Form 10-Q. BASi is currently searching for a new controller.Company’s internal control over financial reporting.
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PART II — OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) ExhibitsExhibit
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 to 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) |
10.4 | Fourth Amendment dated May 13, 2004 to Credit Agreement dated October 29, 2002 with The Provident Bank (incorporated by reference to Exhibit 10.4 to Form 10-Q for the quarter ended March 31, 2004). |
(31) | 31.1 |
31.2 |
Certification of |
(32) | 32.1 |
(99) | 99.1 | Risk factors (incorporated by reference to Exhibit 99.1 to Form 10-K for the year ended September 30, 2002). |
† Filed with this Quarterly Report on Form 10-Q.
(b) Reports on Form 8-K
Form 8-K filedfurnished April 16, 200329, 2004, reporting under itmes 5Item 12 “Results of Operations and 7.Form 8-K filed May 9, 2003 reporting under itmes 5.Form 8-K filed May 15, 2003 reporting under itmes 5 and 7.Form 8-K filed May 22, 2003 reporting under itmes 7 and 9.Form 8-K filed May 29, 2003 reporting under itmes 5 and 7.Financial Condition,” relating to the Company’s announcement of its results for the quarter ended March 31, 2004.
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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
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