The following table summarizes the consolidated statement of operations as a percentage of total revenues:
We increased our revenues in our first fiscal quarter of the current year by $917, or 10% over the comparable quarter last year. Revenue from bioanalytical services provided in West Lafayette, IN and McMinnville, OR had increases of $518 and $572, respectively. The increase in West Lafayette was the result of significant contracts initiated in this quarter that were obtained in our last fiscal year, then delayed. The increase in McMinnville was the result of our effort to balance the utilization of our facilities by moving services to sites with available capacity. We have increased our ability to do this by standardizing equipment, systems and procedures across our sites. We had a decline in product revenues of $395 compared to the same quarter last year. This is the result of an unusually large order for our Culex product in the first quarter of last fiscal year, which increased revenues by $500 last year. Revenues from our products among other customers for the comparable quarters increased in the current quarter.
Our cost of service revenues as a percentage of revenues improved to 71.5% in the current quarter, compared to 84.6% for the same period last year. A substantial portion of our cost of productive capacity (personnel, facilities and laboratory equipment) is relatively fixed. When we increase revenues, these costs are spread over a larger revenue amount, resulting in improvement of our margins as a percentage of sales. We also had open laboratory staff positions in the quarter that saved approximately $100 of costs (2% of cost of services). These positions will be filled in future periods. Our ability to allocate laboratory projects among locations also increases margins as it raises utilization of our capacity without increasing costs. Our cost of product revenue fluctuation is predominately a factor of sales volume. The variance in the relationship of these costs to revenues, 35.4% this quarter compared to 38.7% in the same quarter last year, is within the range of variations we experience from period to period as a result of changes in product mix.
Operating Expenses
Our selling expenses were down slightly in our first fiscal quarter compared to the same quarter in the prior year, which was the result of a reduction in the number of people devoted full time to sales. We expect our selling expenses for the full fiscal year to be similar to our last fiscal year. Our expenditures on research and development likewise had a slight decline due to the timing of activities relating to new products and services. We do not currently anticipate a significant change in the overall level of our research and development expenditures from those of our last full fiscal year. General and administrative expenses for the three months ended December 31, 2004 increased 4% to $1,927, from $1,847 for the three months ended December 31, 2003. This increase is the result of annual pay increases that averaged 4% for the company and higher accruals for audit and consulting fees to comply with Sarbanes-Oxley requirements in the current year, offset by a reduction in outside consultants' fees from last year when consultants were utilized to fill key financial roles on an interim basis.
Other (Expense)
Our interest expense increased 33% to $275 in the current fiscal quarter from $207 in the comparable quarter of the prior year. The increase is attributable to a) approximately $2,000 higher average outstanding borrowings from the completion of construction projects that were in process in the prior year, b) the expensing of interest on those projects as they were placed in service, compared to the capitalization of that interest during construction, and c) the increase in interest rates. We elected in June, 2004 to fix our mortgage borrowing interest rate on approximately $9,000 of mortgage financing for a three-year period at 5.7% per annum, under the terms of the mortgage. That decision had the immediate effect of raising the cost of borrowed funds, but limits our interest rate exposure for the three-year period.
Income Taxes
We computed our tax provision using an overall effective tax rate on domestic earnings of 40%, which is our estimate of our combined federal and local tax rates for the current year. We made no provision for income taxes on net pre-tax earnings of $47 in the United Kingdom, as we expect our current year's earnings there will not exhaust prior years' loss carry-forwards.
Net Income
As a result of the above factors, we earned $404 ($.08 per share basic and diluted) in the quarter ended December 31, 2004, compared to a loss of $130 ($.03 per share, both basic and diluted) in the same period last year. The computation of average outstanding shares in the current period included the dilutive effect of options whereas options were anti-dilutive in the similar period last year. The effect of conversion of our outstanding convertible subordinated debentures was anti-dilutive in both years.
LIQUIDITY AND CAPITAL RESOURCES
Comparative Cash Flow Analysis
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 December 31, 2004, we had cash and cash equivalents of $1,394, compared to cash and cash equivalents of $773 at December 31, 2003. Approximately 40% of our cash balances were in the U.K. We monitor our U.K. cash needs to avoid currency conversion costs, which in the current interest rate environment can exceed interest.
Our net cash used by operating activities was $594 for the three months ended December 31, 2004. Our increased business resulted in increased investments in accounts receivable and inventories of $2,000. Our accounts payable at September 30, 2004 included amounts due on capital asset purchases, which were subsequently paid, accounting for a significant portion of the cash used to reduce payables in the quarter. We had increases in customer deposits, again as a result of increased business activity, and increased accrued expenses which offset some of the cash used in operations.
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Net cash used by investing activities decreased to $532 for the three months ended December 31, 2004 from $1,351 for the three months ended December 31, 2003. Prior year amounts include higher expenditures to complete facilities expansion at two of our locations. We also paid down $439 of long-term debt.
We financed these activities with higher borrowings under our revolving credit facility, which were possible because of the higher asset base.
Capital Resources
As we disclosed in Note 6 to the Condensed Consolidated Financial Statements, subsequent to the end of the quarter, we sold our building in Baltimore for $6,500, and signed a three-year leaseback for a substantial portion of its space. As a result, we paid off amounts outstanding under our revolving line of credit, and retained approximately $2,000 of cash.
A condition of our leaseback 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 the first year, $2,000 the second year, and $1,000 the final year. In order to arrange this letter of credit, we extended our $6,000 revolving credit agreement with our bank for three additional years to December 31, 2007.
The letter of credit reduces the amount of funds available under the borrowing base formula. Our recent monthly average qualifying assets for our borrowing base have been approximately $4,000. 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 current fiscal year to be in the range of $2,000 to $2,500. We expect to complete leases with our bank's leasing affiliate to finance $1,500 of this with capital leases with 3 and 5 year terms.
Liquidity
We do not foresee the need to borrow extensively under our revolving credit agreement to finance current operations, except for periods when rapid growth of new business may necessitate amounts to finance the buildup of receivables and inventory. We are also considering the prepayment of approximately $1,100 of our subordinated long-term debt, as the interest rate we are paying is considerably higher than what we can earn in short-term investments. We will evaluate that possibility in the second fiscal quarter.
At December 31, 2004, we had $1,394 in cash, and $1,200 of available borrowings under our revolving credit facility.
Our revolving line of credit expires December 31, 2007. The maximum amount available under the terms of the agreement is $6,000 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 25 basis points, or at the Eurodollar rate plus 250 to 300 basis points, at our election, depending upon the ratio of our interest bearing indebtedness (less subordinated debt) to EBITDA. We pay a fee equal to 25 basis points on the unused portion of the line of credit.
We are required to make cash payments in the future on debt and lease obligations. The following table summarizes BASi's contractual term debt, lease obligations and other commitments at December 31, 2004 and the effect such obligations are expected to have on our liquidity and cash flows in future periods (amounts presented for 2005 are those items required in the final three quarters):
| 2005
| | 2006
| | 2007
| | 2008
| | 2009
| | After 2009
| | Total
|
|---|
| |
| Capital expenditures | | | $ | 500 | | $ | --- | | $ | --- | | $ | --- | | $ | --- | | $ | -- | | $ | 500 | |
| Mortgage notes payable | | | | 243 | | | 342 | | | 362 | | | 1,993 | | | 277 | | | 5,915 | | | 9,137 | |
| Subordinated debt | | | | 100 | | | 360 | | | 360 | | | 4,468 | | | --- | | | --- | | | 5,288 | |
| Capital lease obligations | | | | 56 | | | 80 | | | --- | | | --- | | | --- | | | --- | | | 136 | |
| Operating leases | | | | 1,243 | | | 1,982 | | | 1,524 | | | 610 | | | --- | | | --- | | | 5,358 | |
|
| |
| |
| |
| |
| |
| |
| |
| | | | $ | 2,142 | | $ | 2,764 | | $ | 2,246 | | $ | 7,071 | | $ | 277 | | $ | 5,919 | | $ | 20,419 | |
|
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The above table does not include $4,782 outstanding under our revolving credit facility which was repaid on January 5, 2005. For further details on our indebtedness, see Note 7 to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended September 30, 2004.
The covenants in the 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 the Company can borrow to fund future operations, acquisitions and capital expenditures. Based on our current business activities, we believe cash generated from our operations and amounts available under our existing credit facilities and cash on hand, will be sufficient to fund the Company’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 primary market risk exposure with regard to financial instruments is changes in interest rates. Borrowings under the credit agreement between BASi and National City Bank dated January 4, 2005 bear interest at a rate of either the bank’s prime rate to prime plus 25 basis points, or at the Eurodollar rate plus 250 to 300 basis points, depending in each case upon the ratio of BASi’s interest-bearing indebtedness (less subordinated debt) to EBITDA, at BASi’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, the Company’s Chief Executive Officer and Chief Financial Officer believe that, 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)) were not effective as of December 31, 2004 to ensure that information required to be disclosed by the Company in this Form 10-Q was recorded, processed, summarized and reported 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 reports. In the quarter ended December 31, 2004, the Company recruited new staff and took 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.
Other than the personnel addition cited above, there was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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ITEM 6. EXHIBITS
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 | Second Amendment to the Purchase and Sale Agreement between BASi Maryland, Inc. and 300 W. Fayette, LLC (incorporated by reference to Exhibit 10.21 of Form 10-K filed January 13, 2005) |
| |
| (31) | 31.1 | Certification of Peter T. Kissinger + |
| |
| 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.
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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
Peter T. Kissinger
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 11, 2005
By: /s/ MICHAEL R. COX
Michael R. Cox
Vice President-Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: February 11, 2005
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.