The following table summarizes the consolidated statement of operations as a percentage of total revenues:
Revenues for the second fiscal quarter ended March 31, 2005 increased 6% to $9.1 million compared to $8.7 million for the second quarter last year. Service revenue increases were the result of strong demand by the Company's traditional pharmaceutical customers for our services, particularly bioanalytical laboratory services. This increased demand for our services was largely offset by a 47% decline in sales of our products. The decline in sales of our leading Culex line of products comprised most of this decline. Our major customers tend to place large orders for these units on a sporadic basis, and our second quarter of fiscal 2005 was negatively impacted by a decline in these large shipments. Contributing to the decline in sales of the Company's line of Culex automated blood sampling systems in the quarter were a postponement of one large order and completion of another major customer's current upgrade program.
Cost of revenues for the second quarter ended March 31, 2005 was $6.7 million or 74% of revenue compared to $6.4 million, or 75% of revenue for the second quarter last year. This slight decrease in cost of revenues as a percentage of revenues is the result of higher utilization of our service facilities, which improved operating margins, even though we had a decline in product sales, which have higher margins than services. Our services margins continue to be negatively impacted by underutilized capacity in our Baltimore clinical unit and our Evansville toxicology facility. The Product segment cost of revenue as a percentage of product revenue is similar to last year.
Operating Expenses
Selling expenses for the three months ended March 31, 2005 decreased 6% to $626,000 from $665,000 for the three months ended March 31, 2004, primarily as a result of reduced commissions due to lower product sales. Research and development expenses for the three months ended March 31, 2005 decreased 41% to $173,000 from $295,000 for the three months ended March 31, 2004. This decrease is attributable to timing of activities relating to new products and services. For the full fiscal year, we expect our selling and research and development expenditures to be similar to last year.
General and administrative expenses for the three months ended March 31, 2005 increased 46% to $2,603,000, up from $1,785,000 for the three months ended March 31, 2004. Of this increase, approximately $165,000 is rent on the Baltimore facility that was previously owned, depreciation on new facilities placed in service of $70,000, underabsorbtion of overheads of $160,000 in our Baltimore facility due to a delay on a project, additional expenses for compliance with Sarbanes-Oxley of $100,000 and our annual salary increases.
Other Expense
Interest expense increased 24% to $257,000 in the three months ended March 31, 2005 from $207,000 in the comparable quarter of the prior year. This increase is due to higher interest rates, additional laboratory equipment being purchased with capital leases, partially offset by the pay-down in the current quarter of our revolving line of credit with the proceeds from the sale of our Baltimore building. Our higher interest rates result from the premium we incurred when we decided to fix our mortgage interest rates for three years in this fiscal year's first quarter.
Income Taxes
We computed our tax benefit using an effective tax rate for both the three months ended March 31, 2005 and for the three months ended March 31, 2004 of 40% on the US taxable loss. We did not provide a benefit on foreign losses because we had no foreign carrybacks or deferred taxes against which to utilize those benefits.
Net Loss
As a result of the above factors, we lost $896,000 or $0.18 per share, both basic and diluted, in the quarter ended March 31, 2005, compared to a loss of $503,000 or $0.10 per share, both basic and diluted, in the same period last year.
Six Months Ended March 31, 2005 Compared to Six Months Ended March 31, 2004
Service and Product Revenues
Revenues for the six months ended March 31, 2005 increased 8% to $18.8 million compared to $17.4 million for the same six month period last year. Service revenue increases were the result of the factors cited above for the current quarter. Revenues for our products declined 32% for the six months, a smaller percentage decline than the current quarter as a result of better sales in the first quarter of the current fiscal year.
Cost of Revenues
Cost of revenues for the six months ended March 31, 2005 was $12.8 million or 68% of revenue compared to $12.6 million, or 72% of revenue for the same period last year. The decrease in cost of revenue as a percentage of revenue is impacted by increased capacity utilization of our service segment due to the strong demand mentioned above in the current quarter. The product segment cost of revenue as a percentage of product revenue was similar to the prior year's first six months.
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Operating Expenses
Selling expenses for the six months ended March 31, 2005 decreased 7% to $1,202,000 from $1,291,000 for the six months ended March 31, 2004 as the result of reduced number of people devoted to full-time sales and reduced commissions. Research and development expenses for the six months ended March 31, 2005 decreased 28% to $392,000 from $541,000 for the six months ended March 31, 2004. As described in the three month discussion above, this decrease is attributable to the timing of Company's developmental efforts.
General and administrative expenses for the six months ended March 31, 2005 increased 25% to $4,530,000, up from $3,632,000 for the six months ended March 31, 2004. The principal reasons for this increase are the same as those discussed above for the current quarter.
Other Expense
Interest expense increased 28% to $531,000 in the six months ended March 31, 2005 from $414,000 in the comparable quarter of the prior year. This increase is due to higher interest rates in the current period, additional financing of equipment through capital leases, and, in the first quarter of fiscal 2005, higher amounts outstanding under our revolving line of credit.
Income Taxes
We computed our tax benefit using an effective tax rate for both the six months ended March 31, 2005 and for the six months ended March 31, 2004 of 40% on the US taxable loss. We did not provide a benefit on foreign losses because we had no foreign carrybacks or deferred taxes against which to utilize those benefits.
Net Loss
As a result of the above, we experienced a net loss of $493,000, or $0.10 per share, both basic and diluted for the first six months of the current year, compared to net loss in the same period of the prior year of $633,000, or $0.13 per share, both basic and diluted.
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LIQUIDITY AND CAPITAL RESOURCES
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 March 31, 2005 we had cash and cash equivalents of $1,315,000, compared to cash and cash equivalents of $773,000 at September 30, 2004. Approximately 40% of our cash balances were in the U.K. as of March 31, 2005. We monitor our U.K. cash needs to avoid currency conversion costs, which in the current interest rate environment can exceed interest.
Our net cash used by operating activities was $1,037,000 for the six months ended March 31, 2005, as compared to net cash provided of $1,504 for the same period in 2004. Our increased business resulted in increases accounts receivable and inventories of $2,351,000. Our accounts payable at March 31, 2005 were significantly lower than usual as we paid balances early to avoid the cost and difficulty of converting these balances to our new ERP system installed in April. We had increases in customer deposits, again as a result of increased business activity, and increased accrued expenses which offset some of the cash used in operations.
Net cash generated by investing activities was $4,837,000 in the six months ended March 31, 2005 as a result of the sale/leaseback transaction of our Baltimore building, net of a routine level of new equipment purchases. We paid down a net amount of $3,500,000 of outstanding debt from these proceeds.
Capital Resources
A condition of our leaseback of the Baltimore building was the securing of a substantial portion of our lease obligation with a three year irrevocable letter of credit issued to the purchaser. The letter of credit is for $2,800,000 the first year, $2,000,000 the second year, and $1,000,000 the final year. In order to arrange this letter of credit, we extended our $6,000,000 revolving credit agreement with our bank for three additional years to December 31, 2007.
The letter of credit reduces the amount of funds available under the borrowing base formula. Our recent monthly average qualifying assets for our borrowing base have been approximately $5,000,000. The presence of this outstanding letter of credit could therefore substantially reduce the amount of cash available under our revolving credit facility.
We expect our total capital additions in the current fiscal year to be in the range of $2,000,000 to $2,500,000. We have arranged leases with our bank's leasing affiliate to finance $1,500,000 of this with capital leases with 3 and 5 year terms.
Liquidity
We believe that cash flow from operations will be sufficient and 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.
At March 31, 2005, we had $1,315 in cash, and approximately $2,200,000 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 $6,000,000 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.
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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 March 31, 2005 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 two quarters):
| 2005
| | 2006
| | 2007
| | 2008
| | 2009
| | After 2009
| | Total
|
|---|
| Capital expenditures | | | $ | 500 | | | — | | | — | | | — | | | — | | — | | | $ | 500 | |
| Mortgage notes payable | | | | 165 | | $ | 342 | | $ | 362 | | $ | 1,993 | | $ | 277 | | $ 5,915 | | | | 9,054 | |
| Subordinated debt | | | | — | | | 360 | | | 360 | | | 4,468 | | | — | | — | | | | 5,188 | |
| Capital lease obligations | | | | 113 | | | 239 | | | 171 | | | 183 | | | 197 | | 87 | | | | 990 | |
| Operating leases | | | | 1,068 | | | 2,109 | | | 1,598 | | | 631 | | | 10 | | — | | | | 5,416 | |
|
| |
| |
| |
| |
| |
| |
| |
| | | | $ | 1,846 | | $ | 3,050 | | $ | 2,491 | | $ | 7,275 | | $ | 484 | | $ 6,002 | | | $ | 21,148 | |
|
| |
| |
| |
| |
| |
| |
| |
For further details on our indebtedness, see Note 7 to 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 March 31, 2005 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. The Company has recruited new staff and taken other steps to allow timely filing of this form 10-Q; nevertheless, the underlying deficiencies noted earlier will continue to exist until the implementation of new systems is completed.
There was no change in the Company'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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PART II - OTHER INFORMATION
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 26, 2004, the Annual Meeting of Shareholders of BASi was held at the principal executive offices of BASi. The following matters were voted on at the meeting:
MATTER:
| VOTES
CAST FOR:
| VOTES CAST
AGAINST
| VOTES
WITHHELD:(1)
|
|---|
| Election of the directors of BASi: | | | |
| Peter T. Kissinger | 4,124,847 | 146 | 218,609 |
| Candice B. Kissinger | 4,119,947 | 146 | 322,817 |
| William E. Baitinger | 4,202,002 | 135 | 7,682 |
| David W. Crabb | 4,116,655 | 146 |
| Leslie B. Daniels | 4,218,264 | 146 | 16,032 |
| Gayl W. Doster | 4,025,030 | 146 |
| W. Leigh Thompson | 4,025,030 | 146 | 151,981 |
| |
Approve the amendment of the 1997
Employee Incentive Stock Option Plan to increase the number of shares available for option grants | 2,106,127 | 516,032 | 1,836,443 |
| |
Approve the amendment of the 1997
Outside Director Stock Option Plan to
increase the number of shares available for
option grants | 2,213,896 | 409,612 | 1,835,094 |
(1) Includes abstentions and broker non-votes
Exhibits
Number assigned
in Regulation S-K | |
Item 601 | Description of Exhibits |
| | |
(3) | 3.1 | | Second Amended and Restated Articles of Incorporation of Bioanalytical Systems, Inc. (incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarter ended December 31, 1997). |
| 3.2 | | Second Restated Bylaws of Bioanalytical Systems, Inc. (incorporated by reference to Exhibit 3.2 Form 10-Q for the quarter ended December 31, 1997). |
(4) | 4.1 | | Specimen Certificate for Common Shares (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-1, Registration No. 333-36429). |
(10) | 10.1 | | Purchase and Sale Agreement between BASi Maryland, Inc. and 300 W. Fayette Street, LLC, closed January 5, 2005 (incorporated by reference to Exhibit 10.1 to Form 8-K filed January 10, 2005). |
| 10.2 | | Form of First Amendment to the Purchase and Sale Agreement dated September 7, 2004 (incorporated by reference to Exhibit 10.2 to Form 8-K filed January 10, 2005). |
| 10.3 | | Form of Second Amendment to the Purchase and Sale Agreement dated on or about November 11, 2004 (incorporated by reference to Exhibit 10.3 to Form 8-K filed January 10, 2005). |
| 10.4 | | Form of Office Lease by and between BASi Maryland, Inc. and 300 W. Fayette Street, LLC (incorporated by reference to Exhibit 10.4 to Form 8-K filed January 10, 2005). |
| 10.5 | | Amended and Restated Credit Agreement between Bioanalytical Systems, Inc. and National City Bank, executed January 4, 2005 (incorporated by reference to Exhibit 10.5 to Form 8-K filed January 10, 2005). |
| 10.6 | | Replacement Promissory Note between Bioanalytical Systems, Inc. and National City Bank, executed January 4, 2005 (incorporated by reference to Exhibit 10.6 to Form 8-K filed January 10, 2005). |
| 10.7 | | Amended and Restated General Security Agreement between Bioanalytical Systems, Inc. and National City Bank, executed January 4, 2005 (incorporated by reference to Exhibit 10.7 to Form 8-K filed January 10, 2005). |
(31) | 31.1 | | Certification of Peter T. Kissinger † |
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| 31.2 | | Certification of Michael R. Cox † |
(32) | 32.1 | | Section 1350 Certifications † |
(99) | 99.1 | | Risk factors (incorporated by reference to Exhibit 99.1 to Form 10-K for the year ended September 30, 2004). |
† Filed with this Quarterly Report on Form 10-Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:
BIOANALYTICAL SYSTEMS, INC. |
|
|
|
|
By: /s/ PETER T. KISSINGER |
Peter T. Kissinger |
President and Chief Executive Officer |
(Principal Executive Officer) |
Date: May 16, 2005 |
|
|
|
|
By: /s/ MICHAEL R. COX |
Michael R. Cox |
Vice President-Finance |
and Chief Financial Officer |
(Principal Financial and Accounting Officer) |
|
Date: May 16, 2005 |
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