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 $150, or 2% over the comparable quarter last year. In our Service segment, revenue from our bioanalytical services declined $1.6 million, a 34% decline, offset by increases of $650 in our Baltimore clinical research unit (a 36% increase) and our Evansville, Indiana toxicology unit of $890 (an 85% increase). The largest decline was in our laboratory in West Lafayette, which had a significant project delayed until our second fiscal quarter. The improvements in our clinical and toxicology operations reflect our continued investment in improving the operations and capabilities of the sites, as well as our successful sales efforts for those services. Product segment revenues had a decline of $99, or 4%, from the comparable period last year.
Total cost of revenue increased to 68.0% in the current quarter from 62.6% in the same period of fiscal 2004, primarily as a result of lower service revenues in the current quarter. Our cost of service revenues as a percentage of revenues increased to 77.8% in the current quarter, compared to 71.5% for the same period last year. A substantial portion of our cost of productive capacity (personnel, facilities and laboratory equipment) is relatively fixed. When our revenues decrease, these costs are spread over a smaller revenue amount, resulting in a decline of our margins as a percentage of sales. Additionally, our margins in our clinical research unit and our toxicology unit, while improving with our increased volume, are lower than what we experience in our bioanalytical laboratories when we have higher capacity utilization. Our margin deterioration for the Service segment in the current fiscal quarter is therefore the result of both our mix of services and underutilized capacity. Our cost of product revenue fluctuation is predominately a factor of sales volume. The variance in the relationship of these costs to revenues, 36.3% this quarter compared to 35.4% 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 increased by $157 in our first fiscal quarter compared to the same quarter in the prior year, which was the result of an increasing number of people devoted full time to sales, as well as adding a senior executive to direct our sales and marketing efforts. We are investing in our sales capabilities in order to expand our reach in the markets we serve. Research and development expenses increased by $220 in the first fiscal quarter over the comparable period last year as a result of a higher level of activities in the first fiscal quarter compared to last year. 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, 2005 increased 50% to $2,887, from $1,927 for the three months ended December 31, 2004. Our Baltimore clinical research unit accounted for 56% of this increase as a result of increased occupancy costs as a result of the sales/leaseback of the building we occupy, and additional personnel and other costs that our higher business volume in that operation requires. Our Evansville toxicology unit increased these expenses by 14% as a result of increased business volume. General and administrative expenses in our West Lafayette location increased by $184. The largest single component of this increase was $67 of expenses for employee stock options which we began expensing in the current fiscal year.
Other (Expense)
Our interest expense decreased 6% to $258 in the current fiscal quarter from $275 in the comparable quarter of the prior year. The decrease is attributable to lower levels of borrowing in the current year. Although our revolving credit facility has a floating interest rate, which has increased since last year, our long-term debt and capital leases were at the same interest rates in the comparable periods.
Income Taxes
We computed our tax benefit using an overall effective tax rate on domestic losses of 40%, which is our estimate of our combined federal and local tax rates for the current year.
Net Income
As a result of the above factors, we had a net loss of $716 ($.15 per share, both basic and diluted) in the quarter ended December 31, 2005, compared to net income of $404 ($.08 per share, both basic and diluted) in the same period last year. The computation of average outstanding shares in the current period did not include options which are anti-dilutive in the current year, whereas options were included in the computation of diluted earnings 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, 2005, we had cash and cash equivalents of $680 compared to cash and cash equivalents of $1,254 at September 20, 2005. Approximately 70% 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 $339 for the three months ended December 31, 2005. Although our earned revenues were down in the quarter, we had a significant amount of new bookings on which we bill up to 30% of the contracts upon signing. Our customer advances increased from $5,974 at September 30, 2005 to $7,347 at December 31, 2005. This balance represents work that will be performed, and revenues that will be recognized, in future periods.
Net cash used by investing activities decreased to $146 for the three months ended December 31, 2005 from $532 for the three months ended December 31, 2004. We did, however, add $504 of equipment in the current quarter that we financed with capital leases. We paid down $461 of long-term debt.
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Capital Resources
We have a $6,000 revolving credit agreement with a commercial bank which extends until December 31, 2007. We may utilize up to that amount based upon our qualifying inventory and accounts receivable.
We have an outstanding letter of credit securing our lease on our Baltimore facility for $2,000. This letter of credit reduces under its terms to $1,000 in January, 2007, and expires in January, 2008. This letter of credit reduces our amounts available under our revolving credit facility by the balance outstanding.
We expect our total capital expenditures 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.
At December 31, 2005, we had $680 in cash, and $2,629 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 have certain financial ratio covenants in our loan agreement. As a result of the loss for the quarter ended December 31, 2005, we were not in compliance with our fixed charge coverage ratio. We have obtained a waiver from our bank of this event of non-compliance, and expect to be in compliance in future periods.
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, 2005 and the effect such obligations are expected to have on our liquidity and cash flows in future periods:
| 2006
| | 2007
| | 2008
| | 2009
| | 2010
| | After 2010
| | Total
|
|---|
| Capital expenditures | | | $ | 500 | | | — | | | — | | | — | | | — | | | — | | $ | 500 | |
| Mortgage notes payable | | | | 346 | | $ | 362 | | $ | 384 | | $ | 406 | | $ | 430 | | $ | 6,881 | | | 8,809 | |
| Subordinated debt | | | | 360 | | | 360 | | | 4,117 | | | — | | | — | | | — | | | 4,837 | |
| Capital lease obligations | | | | 333 | | | 314 | | | 329 | | | 346 | | | 182 | | | 6 | | | 1,510 | |
| Operating leases | | | | 2,109 | | | 1,846 | | | 631 | | | — | | | — | | | — | | | 4,586 | |
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| | | | $ | 3,648 | | $ | 2,882 | | $ | 5,461 | | $ | 752 | | $ | 612 | | $ | 6,887 | | $ | 20,242 | |
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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, 2005.
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 2005 and 2004. 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, 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. In the second and third quarters of fiscal 2005, the Company implemented a new ERP system at its five locations. Previously, the Company operated on accounting systems that were different at its various locations, and which were decentralized and obsolete. As a result, financial transactions in the prior fiscal year were recorded in both the old and new systems. The Chief Executive Officer and Chief Financial Officer have concluded that the Company’s current accounting systems have prevented the Company from completing and having audited on a timely basis the accounting information necessary to complete its Form 10-K for the fiscal year ended September 30, 2005. As the Company completes steps to standardize and capture all of fiscal 2006 data in one system, the Chief Executive Officer and Chief Financial Officer believe that the new accounting systems will allow the Company to record, process, summarize and report accounting information to timely file its Exchange Act reports.
There were no significant changes in the Company’s internal controls or other factors that could significantly affect those controls subsequent to the date of their evaluation, which was completed as of December 31, 2005.
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Although the Company was not required to disclose risk factors in response to Item 1A to Part I in its Form 10-K for the fiscal year ended September 30, 2005 (the "2005 Form 10-K"), the Company did file as Exhibit 99.1 to the 2005 Form 10-K a list of risks that may impact the Company. There have been no material changes to the risks set forth on Exhibit 99.1 to the Form 10-K.
Exhibits
Number assigned
in Regulation S-K | |
Item 601 | Description of Exhibits |
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(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, 2005). |
† 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. |
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By: /s/ PETER T. KISSINGER
Peter T. Kissinger
President and Chief Executive Officer
(Principal Executive Officer) |
Date: February 11, 2005 |
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By: /s/ MICHAEL R. COX
Michael R. Cox
Vice President-Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer) |
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Date: February 11, 2005 |
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