The following table summarizes the consolidated statement of operations as a percentage of total revenues:
Total revenue for the year ended September 30, 2006 increased 1% to $43.0 million from $42.4 million for the year ended September 30, 2005. Service revenue increased to $34.3 million for the year ended September 30, 2006 from $33.0 million for the year ended September 30, 2005, an increase of 4%. This increase was the result of 36% growth in our toxicology business, offset by a 25% decline in revenues of our clinical research unit. Revenues in our bioanalytical laboratories were essentially flat compared to the prior year. The revenue decline in our clinical research unit was the result of the acquisition of its largest client, resulting in the cessation of research by them in our facility. As a consequence, we revalued the assets of that unit, recording an impairment charge in the third quarter of our 2006 fiscal year (discussed below). Revenues in our bioanalytical laboratories were negatively impacted by delays in critical projects by our clients. Our revenues from products declined in the current year to $8.7 million, an 8% decline from last year’s product revenues of $9.4 million. This decline was across our product line. In the fiscal year ended September 30, 2006, we did not have any major new adopters of our Culex® system, which resulted in flat year-to-year sales. Our mature analytical instruments line continued prior trends of declining sales. Inflation in prices did not have a material impact on revenue increases.
Costs of revenue increased 8% to $29.2 million for the year ended September 30, 2006 from $27.1 million for the year ended September 30, 2005. This increase of $2.2 million was due to: a) increases in the cost of service revenue as a result of the capacity added in our bioanalytical laboratories in fiscal 2005 which was not fully utilized in the current fiscal year as a result of the lack of revenue growth in the current year, b) increased staffing in ourin vivo pharmacology unit as we increased our commercial offerings, and c) additional costs in our toxicology business as a result of its growth. Cost of revenue as a percentage of revenues increased in both service and product segments due to the lower utilization of capacity. A significant portion of our production costs are relatively fixed, which results in decreased margins as we decrease our utilization of facilities. Costs of revenue for the Company’s products segment increased to 40.6% as a percentage of product revenue for the year ended September 30, 2006 from 36.7% of product revenue for the year ended September 30, 2005.
Selling expenses for the year ended September 30, 2006 increased by 6% to $2.7 million from $2.6 million during the year ended September 30, 2005, as we filled positions in our expanded sales group during the year. Research and development expenses for the year ended September 30, 2006 increased 9% to $1.4 million from $1.3 million for the year ended September 30, 2005. This increase is primarily due to additional research activities around our Culex® product line.
General and administrative expenses for the year ended September 30, 2006 increased 18% to $12.0 million from $10.2 million for the year ended September 30, 2005. In September of 2006, in order to address our lack of profitability, we reduced our headcount by approximately 12%, which resulted in severance costs of $600,000. In fiscal 2006, we began expensing employee stock options, increasing expenses by $319,000. Our provision for bad debts increased by $480,000, principally the result of one contract that we were not able to collect. Increases in our costs of health insurance, property taxes, outside audit, and additional administrative support of our growth in toxicology were major contributors to the remainder of the increase.
In our third fiscal quarter of the current year, we determined that, due to the loss of a significant customer in our clinical research unit, there had been a permanent impairment of the value of its assets. We determined that the carrying value of the unit's assets exceeded their fair value, requiring adjustment. The adjustment of $1.1 million is shown as a separate line item in our 2006 Consolidated Statement of Operations.
Other income (expense), net, was $(1,013,000) for the year ended September 30, 2006 as compared to $(969,000) in the year ended September 30, 2005, as a result of increased interest expense. We reduced our average outstanding borrowings on both our revolving line of credit and our mortgage financing, while adding $1.5 million of lease financing to acquire laboratory equipment.
The Company’s effective tax rate was 41.2% for the benefits of our loss for fiscal 2006.
As a result of the above, the Company lost $0.53 per share in fiscal 2006, both basic and diluted, compared to a net loss in fiscal 2005 of $0.02 per share, both basic and diluted.
Year Ended September 30, 2005, Compared with Year Ended September 30, 2004
Total revenue for the year ended September 30, 2005 increased 14% to $42.4 million from $37.2 million for the year ended September 30, 2004. Service revenue increased to $33.0 million for the year ended September 30, 2005 from $24.9 million for the year ended September 30, 2004, an increase of 33%. This increase came from all domestic locations, as we had strong growth in our bioanalytical laboratories, our toxicology facility, and our clinical research unit. Our laboratory in the UK had a decline in revenues. Our revenues from products declined in fiscal 2005 to $9.4 million, a 23% decline from prior fiscal year’s product revenues of $12.2 million. This decline was across our product line, following a particularly strong year in product sales in fiscal 2004. In the fiscal year ended September 30, 2005, we did not have any major new adopters of our Culex® system, whereas the prior fiscal year’s sales had been strongly influenced by some major buying programs by our customers. Our sales of Culex® supplies, on the other hand, increased due to the larger installed base of Culex® users. Inflation in prices did not have a material impact on revenue increases.
Costs of revenue increased 6% to $27.1 million for the year ended September 30, 2005 from $25.6 million for the year ended September 30, 2004. This increase of $1.5 million was due to increases in the cost of service revenue as a result of the significant increase in the volume of our services business in fiscal 2005, partially offset by a reduction in the cost of product revenue resulting from the decrease in the number of products sold and a change in product mix. Cost of service revenue as a percentage of service revenues decreased due to the higher utilization of capacity in our Services segment. A significant portion of our costs in our Services segment are relatively fixed, which results in increasing margins as we increase our utilization of facilities. Costs of revenue for the Company’s products segment increased to 36.7% as a percentage of product revenue for the year ended September 30, 2005 from 34.9% of product revenue for the year ended September 30, 2004. This small change was the result of lower utilization of manufacturing capacity.
21
Selling expenses for the year ended September 30, 2005 decreased by 4% to $2.6 million from $2.7 million during the year ended September 30, 2004, due to decreased headcount in sales. Research and development expenses for the year ended September 30, 2005 increased 18% to $1.3 million from $1.1 million for the year ended September 30, 2004. This increase is primarily due to additional research activities around our Culex® product line.
General and administrative expenses for the year ended September 30, 2005 increased 36% to $10.2 million from $7.5 million for the year ended September 30, 2004. Approximately $1.7 million of the increase was in our Baltimore clinical unit, where we had approximately $700,000 of additional personnel expense as a result of increased business, more expensive new hires and compensation increases, and $800,000 of occupancy cost relating to the sale and leaseback of our building. In our West Lafayette facility, we commissioned approximately 19,000 square feet of new research and laboratory space, causing approximately $500,000 of additional depreciation and other space related costs. The remainder of the increase was related to compensation increases, increases in liability, property and health care coverages, and higher energy costs.
Other income (expense), net, was $(969,000) in the year ended September 30, 2005 as compared to $(832,000) in the year ended September 30, 2004, as a result of increased interest expense. We reduced our average outstanding borrowings from the second fiscal quarter due to the sale of our Baltimore building, but added $1.1 million of capital leases to finance new laboratory equipment and had higher interest rates on our floating rate revolving credit facility.
The Company’s effective tax rate was 135% for fiscal 2005 as a result of foreign taxable losses which reduced our pre-tax income by approximately $800,000, without corresponding tax benefit. The prior year’s tax benefit was the result of a U.S. loss which we could carry back against prior year’s income, and foreign income for which foreign tax loss carryforwards were available.
As a result of the above, the Company lost $0.02 per share in fiscal 2005, both basic and diluted, compared to a net loss fiscal 2004 of $0.04 per share, both basic and diluted.
Liquidity and Capital Resources
Comparative Cash Flow Analysis
Since its inception, the Company’s principal sources of cash have been cash flow generated from operations and funds received from bank borrowings and other financings. At September 30, 2006, the Company had cash and cash equivalents of $1.6 million compared to $1.3 million at September 30, 2005.
The Company’s net cash generated by operating activities was $3.9 million for the year ended September 30, 2006, compared to cash used of $0.5 million in fiscal 2005 and cash generated of $2.8 million in fiscal 2004. Cash generated was primarily from improved collection of receivables, generating $4.5 million, offset by a reduction in customer advances of $1.7 million. Non-cash charges to operations of $3.9 million for depreciation and amortization, and $1.1 million for the impairment of long-term assets in our clinical research unit increased our loss, but did not consume cash. Our receivables vary depending on where we stand in our mix of contracts, however, we believe that new procedures instituted during the year in billings and collections contributed to the improved cash flow.
Cash used by investing activities was $1.5 million for the year ended September 30, 2006 compared to cash provided of $3.6 million and cash used of $3.5 million for the years ended September 30, 2005 and 2004, respectively. During fiscal 2005, the Company sold and leased back its building in Baltimore, MD. This transaction resulted in net cash to the Company of $5.9 million, which helped finance the $2.3 million investment in capital assets in fiscal 2005. In fiscal 2006, our investments were in recurring capital asset additions and replacements.
Cash used by financing activities was $2.0 million for the year ended September 30, 2006, compared to cash used of $2.8 and cash provided of $0.3 million, respectively for fiscal 2005 and 2004. Cash utilized in fiscal 2006 was used for payment of debt and lease obligations.
In January, 2005 the Company sold and leased back its facility in Baltimore, Maryland. The sales price was $6.5 million, and the Company leased back the majority of the space through December, 2007. After transaction expenses, the Company generated $5.9 million in cash from this transaction, which was used to reduce outstanding debt and increase working capital.
22
Capital Resources
Total expenditures by the Company for property and equipment were $1.7 million, $2.3 million (funded by proceeds from the sale of the Baltimore building), and $3.6 million (funded by funds generated from operations, long-term debt and revolving credit), in fiscal 2006, 2005 and 2004, respectively. Expenditures in fiscal 2006 and 2005 were primarily for the purchase of laboratory equipment. In fiscal 2004, expenditures were for completion of facilities expansion in West Lafayette and Evansville, Indiana, and improvements in the Baltimore clinical facility. The decline in capital expenditures in fiscal 2006 is the result of the completion of expansion programs. Capital investments for the purchase of additional laboratory equipment are driven by anticipated increases in research services to be provided by the Company, and by the replacement or upgrading of the Company’s equipment. Additionally, the Company funded $1.5 million of laboratory equipment in fiscal 2006 through capital leases. Although the Company may consider strategic acquisition opportunities it does not intend to aggressively pursue additional acquisitions until the Company is fully utilizing existing capacity.
The Company has a revolving credit facility of $6 million with a commercial bank and three mortgage notes payable to another bank aggregating $8.5 million. Borrowings under these credit agreements are collateralized by substantially all assets related to the Company’s operations and all common stock of the Company’s U.S. subsidiaries and 65% of the common stock of its non-United States subsidiaries, and the assignment of a life insurance policy on the Company’s Chairman. Under the terms of these credit agreements, the Company has agreed to restrict advances to subsidiaries, limit additional indebtedness and capital expenditures as well as to comply with certain financial covenants outlined in the borrowing agreements. These credit agreements contain cross-default provisions. Details of each debt issue are discussed below. We were not in compliance with our loan covenants at September 30, 2006, and have received a waiver from our bank of the non-compliance. In connection with the waiver, our bank raised our rate from LIBOR plus 250-300 basis points to LIBOR plus 325 basis points, or from prime plus 25 basis points to prime plus 50 basis points, increased our fee on the unused portion of the line from 25 basis points to 37.5 basis points, and limited capital additions for fiscal 2007 to $1.2 million. None of the other provisions of the Company’s debt agreement are expected to have an impact on operations. The Company expects to be in compliance with the loan covenants throughout fiscal 2007.
The maximum amount available under the terms of the Company’s revolving line of credit is $6 million with outstanding borrowings limited to the borrowing base as defined in the agreement. As of September 30, 2006 there were no outstanding balances on this line of credit. Interest accrues monthly on the outstanding balance at the bank’s prime rate to prime rate plus 50 basis points or at LIBOR plus 325 basis points, as elected by the Company. As of September 30, 2006 the prime rate was 8.25%. The Company paid a fee equal to 37.5 basis points on the unused portion of the line of credit. Borrowings under the facility are based on a lending formula utilizing the Company’s accounts receivable and inventory. At September 30, 2006 the Company had $1.8 million available under the facility after offsetting a $2 million outstanding letter of credit which secures the Baltimore lease (this letter of credit reduces to $1.0 million in January 2007). The Company’s line of credit is a revolver against which the Company applies cash receipts, and draws cash as needed. The line of credit is committed until January, 2008.
The Company has three outstanding mortgages with a commercial bank on its facilities in West Lafayette and Evansville, Indiana, with essentially the same terms, which total $8.5 million. The mortgages have a fixed interest rate of 5.69% through June, 2007 and mature in November 2012. See Note 6 to the Consolidated Financial Statements.
The following table summarizes the cash payments under the Company’s contractual term debt and lease obligations at September 30, 2006 and the effect such obligations are expected to have on its liquidity and cash flows in future periods (amounts in thousands). The table does not include the Company’s revolving credit facility.
23
| 2007
| | 2008
| | 2009
| | 2010
| | 2011
| | After 2011
| | Total
|
|---|
| |
| Mortgage notes payable | | | $ | 361 | | $ | 384 | | $ | 407 | | $ | 431 | | $ | 456 | | $ | 6,507 | | $ | 8,546 | |
| Subordinated debt* | | | | 360 | | | 4,477 | | | — | | | — | | | — | | | — | | | 4,837 | |
| Capital lease obligations | | | | 472 | | | 510 | | | 582 | | | 424 | | | 132 | | | — | | | 2,120 | |
| Operating leases | | | | 2,139 | | | 491 | | | 69 | | | 8 | | | — | | | — | | | 2,707 | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| | | | $ | 3,332 | | $ | 5,862 | | | 1,058 | | | 863 | | $ | 588 | | $ | 6,507 | | $ | 18,210 | |
| |
| |
| |
| |
| |
| |
| |
| |
* Subordinated debt includes notes to related parties.
The Company expects to spend approximately $1.2 million in fiscal 2007 on capital assets, primarily laboratory equipment. As of September 30, 2006, no firm commitments had been made to purchase capital assets.
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 its current business activities, the Company believes cash generated from its operations and amounts available under its existing credit facilities will be sufficient to fund the Company’s working capital and capital expenditure requirements for the foreseeable future and through September 30, 2007. The Company has $4.0 million of subordinated convertible notes maturing in January, 2008 which will require the Company to develop sources to fund the payment.
Inflation
The Company believes that inflation has not had a material adverse effect on its business, operations or financial condition.
Critical Accounting Policies
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Liquidity and Capital Resources” discusses the consolidated financial statements of the Company, which have been prepared in accordance with accounting principles generally accepted in the United States. Preparation of these financial statements requires management to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and liabilities. Certain significant accounting policies applied in the preparation of the financial statements require management to make difficult, subjective or complex judgments, and are considered critical accounting policies by the Company. The Company has identified the following areas as critical accounting policies.
Revenue Recognition
The majority of the Company’s service contracts involve the processing of bioanalytical samples for pharmaceutical companies. These contracts generally provide for a fixed fee for each assay method developed or sample processed and revenue is recognized under the specific performance method of accounting. Under the specific performance method, revenue and related direct costs are recognized when services are performed. The Company’s other service contracts generally consist of preclinical and clinical trial studies for pharmaceutical companies. Service revenue is recognized based on the ratio of direct costs incurred to total estimated direct costs under the proportional performance method of accounting. Losses on contracts are provided in the period in which the loss becomes determinable. Revisions in profit estimates are reflected on a cumulative basis in the period in which such revisions become known. The establishment of contract prices and total contract costs involves estimates made by the Company at the inception of the contract period. These estimates could change during the term of the contract which could impact the revenue and costs reported in the consolidated financial statements. Projected losses on contracts are provided for in their entirety when known. Revisions to estimates have not been material to the Company. Service contract fees received upon acceptance are deferred and classified within customer advances, until earned. Unbilled revenues represent revenues earned under contracts in advance of billings.
24
The Company’s product revenue is derived primarily from sales of equipment utilized for scientific research. Revenue from equipment not requiring installation, testing or training is recognized upon shipment to customers. One Company product includes internally developed software and requires installation, testing and training, which occur concurrently. Revenue from this product is recognized upon completion of the installation, testing and training.
Impairment of Long-Lived Assets, Including Goodwill
Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.
Goodwill and other indefinite lived intangible assets, collectively referred to as “indefinite lived assets”, are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s indefinite lived assets over the implied fair value of those indefinite lived assets. The implied fair value of the indefinite lived assets is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141,Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit’s indefinite lived assets.
Our clinical research unit was acquired in a business combination in fiscal 2003. It had experienced losses since acquisition, including $2,952,000 in fiscal 2006 before impairment charge. Although improvement had been achieved in operating results since acquisition prior to fiscal 2006, the acquisition of one of its major customers by a company that had other clinical study providers, and the subsequent cancellation of previously scheduled studies seriously impacted operating results in fiscal 2006. Establishing future profitable operations of the unit will require additional sales effort to attract new customers. Consequently, in the third quarter of fiscal 2006, we determined that there was a permanent impairment of value of the assets acquired (net of accumulated amortization), and recorded an impairment loss of $1,100,000 to write down the value of property and equipment by $330,000, other intangible assets by $387,000 and reduce the value of goodwill by $383,000 to adjust the values to our estimate of realizable values. We also recorded a deferred tax benefit of $436,000 related to these charges. The clinical research unit is included in the Services segment in the financial statements and footnotes.
Income Tax Accounting
Income taxes are accounted for in accordance with SFAS No. 109,Accounting for Income Taxes. SFAS No. 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities. These deferred taxes are measured by applying the provisions of tax laws expected to be in effect at the time the differences reverse.
The Company recognizes deferred tax assets in its balance sheet which typically represent items deducted currently in the financial statements that will be deducted in future periods in tax returns. In accordance with SFAS No. 109, a valuation allowance is recorded against these deferred tax assets to reduce the total deferred tax assets to an amount that will, more likely than not, be realized in future periods. The valuation allowance is based, in part, on management’s estimate of future taxable income, the expected utilization of tax loss carry forwards and the expiration dates of tax loss carry forwards. Significant assumptions are used in developing the analysis of future taxable income for purposes of determining the valuation allowance for deferred tax assets which, in the opinion of management, are reasonable under the circumstances.
25
The Company has an accumulated net deficit in its UK subsidiaries, consequently, United States deferred tax liabilities on such earnings have not been recorded.
New Accounting Pronouncements
The following two pronouncements were adopted by the Company for periods beginning October 1, 2005.
In November, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 151 dealing with inventory costs. The statement clarifies what costs can be included in inventory, requiring that absorption factors be based on normal capacities of manufacturing facilities and excess capacity be expensed as incurred. The Company’s historical costing methodology substantially conformed with this standard; therefore, the Company did not experience any change from this pronouncement.
In December, 2004, SFAS No. 123 (Revised) ("SFAS 123R") was issued dealing with Share-Based Payments. In general, this statement requires that companies compute the fair value of options and other stock based employee incentives, and charge this value to operations over the period earned, generally the vesting period. The Company incurred expenses, net of tax benefit, of $319,000 in fiscal 2006 (see Note 1 to financial statements), relating to SFAS 123R.
The following recent pronouncements may impact the Company’s accounting policies:
In July 2006, the FASB released Interpretation No. 48,Accounting for Uncertainty in Income Taxes. This Interpretation revises the recognition tests for tax positions taken in tax returns such that a tax benefit is recorded only when it is more likely than not that the tax position will be allowed upon examination by taxing authorities. The amount of such a tax benefit to record is the largest amount that is more likely than not to be allowed. Any reduction in deferred tax assets or increase in tax liabilities upon adoption will correspondingly reduce retained earnings. The Company has not yet determined the effect of adopting this Interpretation, which is effective for it in the fiscal year beginning October 1, 2007.
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements, which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP. As a result of SFAS No. 157, there is now a common definition of fair value to be used throughout GAAP. The Company is reviewing the impact that adopting SFAS No. 157 will have on its financial statements. SFAS No. 157 is effective for the Company in the fiscal year beginning October 1, 2008.
On September 13, 2006, the SEC staff issued Staff Accounting Bulletin (SAB) Topic 1N,Financial Statements; Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 addresses how a registrant should evaluate whether an error in its financial statements is material. The SEC staff concludes in SAB 108 that materiality should be evaluated using both the “rollover” and “iron curtain” methods. We will be required to comply with the guidance in SAB 108 in our financial statements for our fiscal year ending September 30, 2007.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The Company’s primary market risk exposure with regard to financial instruments is the changes in interest rates. The Revolving Credit Agreement between the Company and National City Bank bears interest at a rate of either the bank’s prime rate plus 50 basis points, or at LIBOR plus 325 basis points, depending in each case upon the ratio of the Company’s interest-bearing indebtedness (less subordinated debt) to EBITDA, at the Company’s option. Historically, the Company has not used derivative financial instruments to manage exposure to interest rate changes. The Company estimates that a hypothetical 10% adverse change in interest rates would not materially affect the consolidated operating results of the Company. While the interest on the Company’s revolving line of credit is at variable rates, the Company’s real estate mortgages are fixed at 5.69% interest until June 2007.
The Company operates internationally and is, therefore, subject to potentially adverse movements in foreign currency rates change. The effect of movements in the exchange rates was not material to the consolidated operating results of the Company in fiscal years 2006, 2005 and 2004. The Company estimates that a hypothetical 10% adverse change in foreign currency exchange rates would not materially affect the consolidated operating results of the Company.
Item 8. Financial Statements.
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Bioanalytical Systems, Inc.
We have audited the accompanying consolidated balance sheet of Bioanalytical Systems, Inc. and Subsidiaries as of September 30, 2006 and the related consolidated statements of operations, shareholders' equity and comprehensive income (loss) and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2006 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bioanalytical Systems, Inc. and Subsidiaries as of September 30, 2006, and the results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.
/s/ Crowe Chizek and Company LLC
Indianapolis, Indiana
December 29, 2006
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Bioanalytical Systems, Inc.:
We have audited the accompanying consolidated balance sheet of Bioanalytical Systems, Inc. and subsidiaries as of September 30, 2005, and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows for each of the years in the two-year period ended September 30, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bioanalytical Systems, Inc. and subsidiaries as of September 30, 2005, and the consolidated results of their operations and their cash flows for each of the years in the two-year period ended September 30, 2005, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
January 7, 2006
28
BIOANALYTICAL SYSTEMS, INC.
Consolidated Balance Sheets
At September 30,
| 2006
| | 2005
|
|---|
| Assets | | | | | | | | |
| |
| Current assets: | | |
| Cash and cash equivalents | | | $ | 1,647,066 | | $ | 1,254,269 | |
| Accounts receivable: | | |
| Trade, net of allowance for bad debts of $520,000 in 2006 and $40,000 in 2005 | | | | 6,492,375 | | | 10,351,881 | |
| Unbilled revenues and other | | | | 1,545,297 | | | 2,677,130 | |
| Inventories | | | | 1,887,093 | | | 2,041,335 | |
| Deferred income taxes | | | | 603,797 | | | 380,765 | |
| Refundable income taxes | | | | 888,087 | | | — | |
| Prepaid expenses | | | | 599,043 | | | 429,690 | |
|
| |
| |
| |
| Total current assets | | | | 13,662,758 | | | 17,135,070 | |
|
| |
| |
| |
| Property and equipment: | | |
| Land and improvements | | | | 449,479 | | | 431,110 | |
| Buildings and improvements | | | | 21,584,083 | | | 22,333,119 | |
| Machinery and equipment | | | | 20,662,670 | | | 19,104,934 | |
| Office furniture and fixtures | | | | 1,425,136 | | | 1,457,130 | |
| Construction in process | | | | 252,489 | | | 57,812 | |
|
| |
| |
| | | | | 44,373,857 | | | 43,384,105 | |
| |
| Less accumulated depreciation and amortization | | | | (18,608,280 | ) | | (16,818,721 | ) |
|
| |
| |
| | | | | 25,765,577 | | | 26,565,384 | |
| |
| Goodwill | | | | 1,854,652 | | | 1,444,652 | |
| | |
| |
| Intangible assets, net of accumulated amortization of $749,256 | | |
| in 2006 and $786,587 in 2005 | | | | 517,460 | | | 2,155,786 | |
| Debt issue costs, net | | | | 245,880 | | | 279,858 | |
| Other assets | | | | 267,552 | | | 257,679 | |
|
| |
| |
| |
| Total assets | | | $ | 42,313,879 | | $ | 47,838,429 | |
|
| |
| |
See accompanying notes to consolidated financial statements.
29
BIOANALYTICAL SYSTEMS, INC.
Consolidated Balance Sheets
At September 30,
| 2006
| | 2005
|
|---|
| Liabilities and Shareholders' Equity | | | | | | | | |
| |
| Current liabilities: | | |
| | |
| Accounts payable | | | $ | 1,609,821 | | $ | 1,681,078 | |
| Accrued expenses | | | | 3,080,900 | | | 2,789,613 | |
| Customer advances | | | | 4,226,285 | | | 5,974,136 | |
| Income taxes payable | | | | — | | | 31,275 | |
| Revolving line of credit | | | | — | | | 920,000 | |
| Current portion of capital lease obligations | | | | 472,146 | | | 278,398 | |
| Current portion of long-term debt | | | | 720,653 | | | 700,352 | |
|
| |
| |
| | |
| |
| Total current liabilities | | | | 10,109,805 | | | 12,374,852 | |
| | |
| |
| Capital lease obligations, less current portion | | | | 1,648,243 | | | 807,356 | |
| Long-term debt, less current portion | | | | 8,186,311 | | | 8,579,123 | |
| Subordinated notes payable, including $498,648 in 2006 and | | |
| $735,989 in 2005 to related parties, less current portion | | | | 4,477,348 | | | 4,828,511 | |
| Deferred income taxes | | | | 538,633 | | | 1,650,857 | |
| | |
| |
| Shareholders' equity: | | |
| Preferred shares: | | |
| Authorized 1,000,000 shares; none issued and outstanding | | | | — | | | — | |
| Common shares, no par value: | | |
| Authorized 19,000,000 shares; issued and | | |
| outstanding 4,892,127 shares in 2006 and | | |
| 4,871,127 shares in 2005 | | | | 1,182,003 | | | 1,177,352 | |
| Additional paid-in-capital | | | | 11,676,661 | | | 11,267,919 | |
| Retained earnings | | | | 4,584,123 | | | 7,194,065 | |
| Accumulated other comprehensive loss | | | | (89,248 | ) | | (41,606 | ) |
|
| |
| |
| |
| Total shareholders' equity | | | | 17,353,539 | | | 19,597,730 | |
|
| |
| |
| |
| Total liabilities and shareholders' equity | | | $ | 42,313,879 | | $ | 47,838,429 | |
|
| |
| |
See accompanying notes to consolidated financial statements.
30
BIOANALYTICAL SYSTEMS, INC.
Consolidated Statements of Operations
Years ended September 30,
| 2006
| | 2005
| | 2004
|
|---|
| |
| Service revenue | | | $ | 34,318,150 | | $ | 32,951,218 | | $ | 24,928,305 | |
| Product revenue | | | | 8,729,525 | | | 9,443,828 | | | 12,224,155 | |
|
| |
| |
| |
| Total revenue | | | | 43,047,675 | | | 42,395,046 | | | 37,152,460 | |
|
| |
| |
| |
| |
| Cost of service revenue | | | | 25,690,825 | | | 23,588,654 | | | 21,347,731 | |
| Cost of product revenue | | | | 3,546,893 | | | 3,462,361 | | | 4,270,720 | |
|
| |
| |
| |
| Total cost of revenue | | | | 29,237,718 | | | 27,051,015 | | | 25,618,451 | |
|
| |
| |
| |
| |
| Gross profit | | | | 13,809,957 | | | 15,344,031 | | | 11,534,009 | |
|
| |
| |
| |
| |
| Operating expenses: | | |
| Selling | | | | 2,749,703 | | | 2,591,521 | | | 2,703,450 | |
| Research and development | | | | 1,444,441 | | | 1,326,032 | | | 1,099,533 | |
| General and administrative | | | | 11,976,283 | | | 10,187,904 | | | 7,476,646 | |
| (Gain) loss on sale of property and equipment | | | | (37,867 | ) | | (21,428 | ) | | 28,757 | |
| Impairment loss | | | | 1,100,000 | | | — | | | — | |
|
| |
| |
| |
| Total operating expenses | | | | 17,232,560 | | | 14,084,029 | | | 11,308,386 | |
|
| |
| |
| |
| |
| Operating income (loss) | | | | (3,422,603 | ) | | 1,260,002 | | | 225,623 | |
| |
| Interest income | | | | 10,808 | | | 18,548 | | | 7,621 | |
| Interest expense | | | | (1,033,308 | ) | | (987,914 | ) | | (942,463 | ) |
| Other income | | | | 9,680 | | | 756 | | | 102,557 | |
|
| |
| |
| |
| |
| Income (loss) before income taxes | | | | (4,435,423 | ) | | 291,392 | | | (606,662 | ) |
| Income tax provision (benefit) | | | | (1,825,481 | ) | | 392,390 | | | (403,308 | ) |
|
| |
| |
| |
| Net loss | | | $ | (2,609,942 | ) | $ | (100,998 | ) | $ | (203,354 | ) |
|
| |
| |
| |
| |
| Net loss per share: | | |
| Basic | | | $ | (0.53 | ) | $ | (0.02 | ) | | (0.04 | ) |
| Diluted | | | $ | (0.53 | ) | $ | (0.02 | ) | | (0.04 | ) |
| |
| Weighted average common shares outstanding: | | |
| Basic | | | | 4,882,505 | | | 4,870,370 | | | 4,860,095 | |
| Diluted | | | | 4,882,505 | | | 4,870,370 | | | 4,860,095 | |
See accompanying notes to consolidated financial statements.
31
BIOANALYTICAL SYSTEMS, INC.
Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss)
Years ended September 30, 2006, 2005, and 2004
| Common Shares
| | Additional
paid in | | Retained | | Accumulated
other
comprehensive | | Total
Shareholders' |
|---|
| Number
| | Amount
| | capital
| | earnings
| | loss
| | equity
|
|---|
| |
| | | | | | |
|---|
| |
| Balance at September 30, 2003 | | | | 4,831,460 | | $ | 1,168,163 | | $ | 11,121,795 | | $ | 7,498,417 | | $ | (61,911 | ) | $ | 19,726,464 | |
| Comprehensive (loss): | | |
| Net loss | | | | — | | | — | | | — | | | (203,354 | ) | | — | | | (203,354 | ) |
| Other comprehensive loss: | | |
| Foreign currency translation | | |
| adjustments | | | | — | | | — | | | — | | | — | | | (252,927 | ) | | (252,927 | ) |
| | | | | |
| |
| Total comprehensive loss | | | | | | | | | | | | | | | | | | | (456,281 | ) |
| Conversion of note | | | | 38,042 | | | 8,427 | | | 141,573 | | | — | | | — | | | 150,000 | |
|
| |
| |
| |
| |
| |
| |
| |
| Balance at September 30, 2004 | | | | 4,869,502 | | | 1,176,590 | | | 11,263,368 | | | 7,295,063 | | | (314,838 | ) | | 19,420,183 | |
| |
| Comprehensive income: | | |
| Net loss | | | | — | | | — | | | — | | | (100,998 | ) | | — | | | (100,998) | |
| Other comprehensive income: | | |
| Foreign currency translation | | |
| adjustments | | | | — | | | — | | | — | | | — | | | 273,232 | | | 273,232 | |
| | | | | |
| |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | 172,234 | |
| Exercise of stock options | | | | 1,625 | | | 762 | | | 4,551 | | | — | | | — | | | 5,313 | |
|
| |
| |
| |
| |
| |
| |
| |
| Balance at September 30, 2005 | | | | 4,871,127 | | | 1,177,352 | | | 11,267,919 | | | 7,194,065 | | | (41,606 | ) | | 19,597,730 | |
| Comprehensive (loss): | | |
| Net loss | | | | — | | | — | | | — | | | (2,609,942 | ) | | — | | | (2,609,942 | ) |
| Other comprehensive loss: | | |
| Foreign currency translation | | |
| adjustments | | | | — | | | — | | | — | | | — | | | (47,642 | ) | | (47,642 | ) |
| | | | | |
| |
| Total comprehensive loss | | | | | | | | | | | | | | | | | | | (2,657,584 | ) |
| Stock compensation | | | | — | | | — | | | 318,923 | | | — | | | — | | | 318,923 | |
| Exercise of stock options | | | | 21,000 | | | 4,651 | | | 89,819 | | | — | | | — | | | 94,470 | |
|
| |
| |
| |
| |
| |
| |
| |
| Balance at September 30, 2006 | | | | 4,892,127 | | $ | 1,182,003 | | $ | 11,676,661 | | $ | 4,584,123 | | $ | (89,248 | ) | $ | 17,353,539 | |
|
| |
| |
| |
| |
| |
| |
See accompanying notes to consolidated financial statements.
32
BIOANALYTICAL SYSTEMS, INC.
Consolidated Statements of Cash Flows
Years ended September 30,
| 2006
| | 2005
| | 2004
|
|---|
| Operating activities: | | | | | | | | | | | |
| |
| Net loss | | | $ | (2,609,942 | ) | $ | (100,998 | ) | $ | (203,354 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | |
| Depreciation and amortization | | | | 3,888,899 | | | 3,441,420 | | | 3,441,127 | |
| Asset impairment loss | | | | 1,100,000 | | | — | | | — | |
| Employee stock compensation expense | | | | 318,923 | | | — | | | — | |
| Bad debt expense | | | | 473,357 | | | — | | | — | |
| (Gain) loss on sale of property and equipment | | | | (37,867 | ) | | (21,428 | ) | | 28,757 | |
| Deferred income taxes | | | | (1,335,256 | ) | | (623,230 | ) | | 12,927 | |
| Changes in operating assets and liabilities: | | |
| Accounts receivable | | | | 4,517,982 | | | (6,590,646 | ) | | (1,492,620 | ) |
| Inventories | | | | 154,242 | | | (471,808 | ) | | 485,612 | |
| Refundable and payable income taxes | | | | (919,362 | ) | | 633,914 | | | (518,763 | ) |
| Prepaid expenses and other assets | | | | (179,226 | ) | | (84,268 | ) | | (113,471 | ) |
| Accounts payable | | | | (71,257 | ) | | (1,080,882 | ) | | (310,906 | ) |
| Accrued expenses | | | | 291,287 | | | 1,199,366 | | | 344,894 | |
| Customer advances | | | | (1,747,851 | ) | | 3,157,310 | | | 1,159,308 | |
|
| |
| |
| |
| |
| Net cash provided (used) by operating activities | | | | 3,843,929 | | | (541,250 | ) | | 2,833,511 | |
|
| |
| |
| |
| |
| Investing activities: | | |
| Capital expenditures | | | | (1,686,860 | ) | | (2,301,153 | ) | | (3,568,045 | ) |
| Proceeds from sale of property and equipment | | | | 270,919 | | | 5,887,428 | | | 79,010 | |
| Payments for purchase of LC Resources, Inc., | | |
| net of cash acquired | | | | — | | | — | | | (8,118 | ) |
|
| |
| |
| |
| |
| Net cash provided (used) by investing activities | | | | (1,415,941 | ) | | 3,586,275 | | | (3,497,153 | ) |
|
| |
| |
| |
| |
| Financing activities: | | |
| Payments of long-term debt | | | | (723,674 | ) | | (755,808 | ) | | (504,749 | ) |
| Borrowings on line of credit | | | | 12,624,000 | | | 7,888,423 | | | 13,465,370 | |
| Payments on line of credit | | | | (13,544,000 | ) | | (9,794,084 | ) | | (13,027,555 | ) |
| Borrowings on construction line of credit | | | | — | | | — | | | 574,247 | |
| Payments on capital lease obligations | | | | (438,345 | ) | | (180,721 | ) | | (196,166 | ) |
| Net proceeds from the exercise of stock options | | | | 94,470 | | | 5,313 | | | — | |
|
| |
| |
| |
| |
| Net cash provided (used) by financing activities | | | | (1,987,549 | ) | | (2,836,877 | ) | | 311,147 | |
|
| |
| |
| |
| |
| Effect of exchange rate changes | | | | (47,642 | ) | | 273,232 | | | (252,927 | ) |
|
| |
| |
| |
| |
| Net increase (decrease) in cash and cash equivalents | | | | 392,797 | | | 481,380 | | | (605,422 | ) |
| |
| Cash and cash equivalents at beginning of year | | | | 1,254,269 | | | 772,889 | | | 1,378,311 | |
|
| |
| |
| |
| |
| Cash and cash equivalents at end of year | | | $ | 1,647,066 | | $ | 1,254,269 | | $ | 772,889 | |
|
| |
| |
| |
See accompanying notes to consolidated financial statements.
33
(1) Significant Accounting Policies
(a) Nature of Business
Bioanalytical Systems, Inc. and its subsidiaries (the “Company” or “BASi”) engage in research services and other services related to pharmaceutical development. We also manufacture scientific instruments for medical research, which we sell with related software for use in industrial, governmental and academic laboratories. We conduct our businesses through our research facilities in Indiana, Oregon, Maryland and the United Kingdom and our manufacturing facility in Indiana. Our customers are located throughout the world.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated.
(c) Revenue Recognition
The majority of our service contracts involve the development of analytical methods and the processing of bioanalytical samples for pharmaceutical companies. These contracts generally provide for a fixed fee for each sample processed, and revenue is recognized under the specific performance method of accounting. Under the specific performance method, revenue and related direct costs are recognized when services are performed. Our other service contracts generally consist of preclinical and clinical trial studies for pharmaceutical companies. We recognize service revenue on these contracts based on the ratio of direct costs incurred to total estimated direct costs under the proportional performance method of accounting. When we revise profit estimates, we adjust on a cumulative basis in the period in which the revisions become known. The establishment of contract prices and total contract costs involves estimates made by us at the inception of the contract period. These estimates could change during the term of the contract, which impacts the revenue and costs we report in the consolidated financial statements. We provide for projected losses on contracts in their entirety when the loss becomes determinable.
We generally bill a portion of service contract fees upon acceptance by our customers. These billings are classified as customer advances until earned. Unbilled revenues represent revenues earned under contracts in advance of billings.
Our product revenue is derived primarily from sales of instruments utilized for scientific research. Revenue from products not requiring installation, testing, or training is recognized upon shipment to customers. One of our products includes internally developed software and sometimes requires installation, testing, and training, which occur concurrently. Revenue from this product is recognized upon completion of the installation, testing, and training.
(d) Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
(e) Financial Instruments
Our credit risk consists principally of trade accounts receivable. We perform periodic credit evaluations of our customers’ financial conditions and generally do not require collateral on trade accounts receivable. The Company accounts for trade receivables based on the amounts billed to customers. Past due receivables are determined based on contractual terms. The Company does not accrue interest on any of its trade receivables. The allowance for doubtful accounts is determined by management based on the Company’s historical losses, specific customer circumstances, and general economic conditions. Periodically, management reviews accounts receivable and adjusts the allowance based on current circumstances and charges off uncollectible receivables when all attempts to collect have failed. Our allowance for doubtful accounts was $520,000 and $40,000 at September 30, 2006 and 2005, respectively.
Our cash and cash equivalents, accounts receivable, accounts payable and certain other accrued liabilities are all short-term in nature and their carrying amounts approximate fair value. We have both variable rate borrowings, which adjust to the current market, and borrowings with fixed rates for up to three years. The carrying value of our fixed rate debt also approximates its fair value.
(f) Inventories
We state our inventories at the lower of cost or market, using the last-in, first-out (LIFO) method.
34
(g) Property and Equipment
We record property and equipment at cost, including interest capitalized during the period of construction of major facilities. We compute depreciation, including amortization on capital leases, using the straight-line method over the estimated useful lives of the assets, which we estimate to be: buildings and improvements, 34 to 40 years; machinery and equipment, 5 to 10 years, and office furniture and fixtures, 10 years. Our depreciation expense was $3,228,000 in fiscal 2006, $3,047,000 in fiscal 2005 and $3,053,000 in fiscal 2004. Expenditures for maintenance and repairs are expensed as incurred.
(h) Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.
Goodwill and other indefinite lived intangible assets, collectively referred to as “indefinite lived useful assets”, are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s indefinite lived useful assets over the implied fair value of those indefinite lived useful assets. The implied fair value of the indefinite lived useful assets is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141,Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit’s indefinite lived useful assets. In fiscal 2006 we determined that an impairment existed, see(i)for additional information.
(i) Goodwill and Intangible Assets
We carry goodwill at cost. Other intangible assets with definite lives are stated at cost and are amortized on a straight-line basis over their estimated useful lives. All intangible assets acquired that are obtained through contractual or legal right, or are capable of being separately sold, transferred, licensed, rented, or exchanged, are recognized as an asset apart from goodwill. Goodwill and intangibles with indefinite lives are not amortized, but are subject to an annual assessment for impairment by applying a fair value based test.
In fiscal 2003, we completed acquisitions of a bioanalytical laboratory performing chemical analyses and a clinical research unit performing clinical testing in humans to establish drug safety or bioequivalence. In valuing the intangible assets acquired in these two acquisitions, we determined that the replacement cost, in a start-up situation, of establishing these two operations as FDA compliant research sites was $1,267,000 and recorded intangible assets of that amount. We determined that these assets had an indefinite life, and accordingly did not amortize the assets. During the fiscal year ended September 30, 2006, we re-examined the make-up of these assets, and determined that of the total recorded, $793,000 related to the hiring and training of the in-place workforce. SFAS No. 141 requires that such assets be included in goodwill, accordingly, we reclassified that amount to goodwill. The remaining $474,000 of the intangible assets relates to the replacement costs of creating and documenting the operating systems and procedure, their validation and audit. The evolving nature of procedures in a regulated environment requires that we constantly monitor and update those procedures. Accordingly, we have revised our estimate of the useful life of that asset to a ten year life, and recorded the amortization in Cost of Services.
We complete a fair value-based impairment test on our goodwill and intangible assets not subject to amortization at the close of each fiscal year, in addition to other times if events indicate there is a likely decline in value. Our clinical research unit acquired in fiscal 2003 had experienced losses since acquisition, including $2,952,000 in fiscal 2006 before impairment charge. Although improvement had been achieved in operating results since acquisition and prior to fiscal 2006, the acquisition of one of our major customers by a company that had other clinical study providers, and the subsequent cancellation of previously scheduled studies seriously impacted operating results for this unit in fiscal 2006. Establishing future profitable operations of the unit will require additional sales effort to attract new customers. Consequently, in the third quarter of fiscal 2006, we determined there was a permanent impairment of the value of the assets acquired and recorded a charge of $1,100,000 to write down the value of property and equipment by $330,000, other intangible assets by $387,000 (net of accumulated amortization) and reduce the value of goodwill by $383,000. The impairment charge was necessary to adjust the carrying values of the respective assets to our estimate of fair value. We also recorded a deferred tax benefit of $436,000 related to these charges. The clinical research unit is included in the Services segment in these financial statements and footnotes.
35
The carrying amount of goodwill at September 30, 2006 and 2005 was $ 1,854,652 and $1,444,652, respectively.
The components of intangible assets subject to amortization are as follows:
| September 30, 2006
|
|---|
| Weighted
average
life (years)
| | Gross carrying
amount
| | Accumulated
amortization
|
|---|
| FDA Compliant Facility | | | 10 | | | $ | 401,760 | | $ | 130,423 | |
| Methodologies | | | 5 | | | | 180,000 | | | 135,000 | |
| Volunteer database | | | 5 | | | | 325,956 | | | 214,588 | |
| Customer relationships | | | 5 | | | | 359,000 | | | 269,245 | |
| |
| |
| |
| | | | | | $ | 1,266,716 | | $ | 749,256 | |
| |
| |
| |
| September 30, 2005
|
|---|
| Weighted
average
life (years)
| | Gross carrying
amount
| | Accumulated
amortization
|
|---|
| Methodologies | | | | 5 | | $ | 754,561 | | $ | 340,755 | |
| Volunteer database | | | | 5 | | | 561,993 | | | 248,382 | |
| Customer relationships | | | | 5 | | | 359,000 | | | 197,450 | |
| |
| |
| |
| | | | | | $ | 1,675,554 | | $ | 786,587 | |
| |
| |
| |
At September 30, 2005, we also had indefinite lived intangible assets of $1,266,711 related to FDA compliant facilites, of which $792,711 was reclassified to goodwill in fiscal 2006. The remaining assets were assigned a ten year life.
The following is a reconciliation of goodwill and other intangible assets from September 30, 2005 to September 30, 2006:
| September 30, 2005
| | Reclassification
| | Impairment Loss
| | Amortization
| | September 30, 2006
|
|---|
| Asset: | | | | | | | | | | | | | | | | | |
| |
| Goodwill | | | $ | 1,444,652 | | $ | 792,711 | | $ | (382,711 | ) | $ | — | | $ | 1,854,652 | |
|
| |
| |
| |
| |
| |
| FDA compliant facility | | | $ | 1,266,711 | | $ | (792,711 | ) | $ | (72,240 | ) | $ | — | | $ | 401,760 | |
| Methodologies | | | | 754,561 | | | — | | | (574,561 | ) | | — | | | 180,000 | |
| Volunteer database | | | | 561,993 | | | — | | | (236,037 | ) | | — | | | 325,956 | |
| Customer relationships | | | | 359,000 | | | — | | | — | | | — | | | 359,000 | |
|
| |
| |
| |
| |
| |
| | | | $ | 2,942,265 | | $ | (792,711 | ) | $ | (882,838 | ) | $ | — | | $ | 1,266,716 | |
|
| |
| |
| |
| |
| |
| |
| Accumulated amortization | | |
| FDA compliant facility | | | $ | — | | $ | — | | $ | (27,184 | ) | $ | 157,607 | | $ | 130,423 | |
| Methodologies | | | | 340,755 | | | — | | | (327,561 | ) | | 121,806 | | | 135,000 | |
| Volunteer database | | | | 248,382 | | | — | | | (141,378 | ) | | 107,584 | | | 214,588 | |
| Customer relationships | | | | 197,450 | | | — | | | — | | | 71,795 | | | 269,245 | |
|
| |
| |
| |
| |
| |
| | | | $ | 786,587 | | $ | — | | $ | (496,123 | ) | $ | 458,792 | | $ | 749,256 | |
|
| |
| |
| |
| |
| |
36
Amortization expense for intangible assets for fiscal years ended September 30, 2006, 2005 and 2004 was $458,792, $335,116 and $335,116 respectively. The following table provides information regarding estimated amortization expense for the remaining intangible lives:
| |
|---|
| |
|---|
| 2007 | | | $ | 212,987 | |
| 2008 | | | | 113,135 | |
| 2009 | | | | 40,000 | |
| 2010 | | | | 40,000 | |
| 2011 | | | | 40,000 | |
| Thereafter | | | | 71,338 | |
|
| |
| | | | $ | 517,460 | |
|
| |
(j) Advertising Expense
We expense advertising costs as incurred. Advertising expense was $284,000, $111,800, and $270,780 for the years ended September 30, 2006, 2005, and 2004, respectively.
(k) Stock-Based Compensation
The Company has an Employee Stock Option Plan whereby options to purchase the Company’s common shares at fair market value at date of grant can be granted to our employees. Options granted vest and become exercisable in four equal installments beginning two years after the date of grant, and expire upon the earlier of the employee’s termination of employment with the Company, or ten years from the date of grant. This plan terminates in fiscal 2008.
The Company established an Outside Director Stock Option Plan whereby options to purchase the Company’s common shares at fair market value at date of grant can be granted to outside directors. Options granted vest and become exercisable in four equal installments beginning two years after the date of grant and expire upon the earlier of the director’s termination of board service with the Company, or ten years from the date of grant. This plan terminates in fiscal 2008.
On October 1, 2005, we adopted SFAS No. 123 (revised 2004),Share-Based Payment (SFAS 123R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors under our stock option plans, based on fair values. Previously, we had not recognized expense for employee stock options.
We adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard as of October 1, 2005, the first day of our fiscal year. In accordance with the modified prospective transition method, our Consolidated Financial Statements for prior years do not include the impact of SFAS 123R. Stock-based compensation expense for employee stock options recognized under SFAS 123R for the year ended September 30, 2006 was $356,000 with a related tax benefit of $37,000.
SFAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Statement of Operations. Prior to the adoption of SFAS 123R, the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under SFAS No. 123. Under the intrinsic value method, no stock-based compensation expense was recognized in the Company’s Consolidated Statement of Operations for fiscal 2005 and 2004.
Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is expected to vest during the period, reduced for estimated forfeitures. Stock-based compensation expense recognized in our Consolidated Statement of Operations for the year ended September 30, 2006 included compensation expense for share-based payment awards granted prior to, but not yet vested as of October 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. There were no awards granted during fiscal 2006. Compensation expense for all share-based payment awards are recognized using the straight-line single option approach.
With the adoption of SFAS 123R, we continued to use a binomial option-pricing model as our method of valuation for share-based awards.
Stock based compensation expense recognized in fiscal 2006 is the result of grants in prior fiscal years.
37
The following table presents the effect on earnings and earnings per share had we applied the same treatment to stock-based employee compensation in the fiscal years ended September 30:
| 2005
| | 2004
|
|---|
| |
| | |
|---|
| Net loss as reported | | | $ | (100,998 | ) | $ | (203,354 | ) |
| Deduct: Total stock-based employee | | |
| compensation expense determined under the | | |
| fair value based method for all awards, | | |
| net of related tax effects | | | | (177,125 | ) | | (43,911 | ) |
|
| |
| |
| Pro forma net loss | | | $ | (278,123 | ) | $ | (247,265 | ) |
|
| |
| |
| |
| Loss per share: | | |
| Basic and diluted - as reported | | | $ | (0.02 | ) | $ | (0.04 | ) |
| Basic and diluted- pro forma | | | $ | (0.06 | ) | $ | (0.05 | ) |
The assumptions used in computing our stock based compensation expense for the fiscal years ended September 30 were as follows:
| 2005
| 2004
|
|---|
| |
| | |
|---|
| Risk-free interest rate | | | | 3 | .00% | | 3 | .50% |
| Dividend yield | | | | 0 | .00% | | 0 | .00% |
| Volatility factor of the expected market | | |
| price of the Company's common stock | | | | 0 | .668 | | 0 | .724 |
| Expected life of the options (years) | | | | 7 | .0 | | 7 | .0 |
(l) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We record valuation allowances based on a determination of the expected realization of tax assets.
(m) New Accounting Pronouncements
In July 2006, the FASB released Interpretation No. 48,Accounting for Uncertainty in Income Taxes. This Interpretation revises the recognition tests for tax positions taken in tax returns such that a tax benefit is recorded only when it is more likely than not that the tax position will be allowed upon examination by taxing authorities. The amount of such a tax benefit to record is the largest amount that is more likely than not to be allowed. Any reduction in deferred tax assets or increase in tax liabilities upon adoption will correspondingly reduce retained earnings. The Company has not yet determined the effect of adopting this Interpretation, which is effective for it in the fiscal year beginning October 1, 2007.
38
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements, which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under Generally Accepted Accounting Principles (“GAAP”). As a result of SFAS No. 157, there is now a common definition of fair value to be used throughout GAAP. The Company is reviewing the impact that adopting SFAS No. 157 will have on its financial statements. SFAS No. 157 is effective for the Company in the fiscal year beginning October 1, 2008.
On September 13, 2006, the Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin (SAB) Topic 1N,Financial Statements — Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 addresses how a registrant should evaluate whether an error in its financial statements is material. The SEC staff concludes in SAB 108 that materiality should be evaluated using both the “rollover” and “iron curtain” methods. We will be required to comply with the guidance in SAB 108 in our financial statements for our fiscal year ending September 30, 2007.
(n) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Our actual results could differ from those estimates.
(2) Earnings (loss) per Share
We compute basic earnings or loss per share on the basis of the weighted average number of common shares outstanding. We compute diluted earnings per share on the basis of the weighted average number of common and potential common shares outstanding. Potential common shares include the dilutive effect of employee and director options to purchase common shares and convertible subordinated debt, which is assumed to be converted. The convertible subordinated debt was not dilutive in any period presented.
Because of losses in each year of the three year period ended September 30, 2006, outstanding potential common shares were anti-dilutive in each year; therefore, basic and diluted loss per share are the same.
At September 30, 2006 we had 250,000 shares issuable upon the conversion of our subordinated debt and 403,878 shares issuable upon exercise of stock options that are not included in our outstanding share calculation as they are anti-dilutive.
(3) Sale of Building
On January 5, 2005 we sold our building in Baltimore, MD, valued at approximately $6.2 million for a $6.5 million cash selling price. Concurrently, we entered into a three year leaseback of approximately 85% of the space in the building for $800,000 annually, plus operating expenses. Accordingly, we have accounted for the transaction as a sale/leaseback transaction. We recorded a deferred gain on the building of $218,000 which is being amortized over the life of the lease which expires December 31, 2007. The net proceeds of the sale were used to pay off our revolving credit facility and for working capital. The unamortized remaining value of the deferred gain was $91,000 and $163,000 as of September 30, 2006 and 2005, respectively.
39
(4) Inventories
Inventories at September 30 consisted of the following:
| 2006
| | 2005
|
|---|
| Raw materials | | | $ | 1,334,513 | | $ | 1,425,610 | |
| Work in progress | | | | 277,879 | | | 375,219 | |
| Finished goods | | | | 357,279 | | | 423,910 | |
|
| |
| |
| | | | | 1,969,671 | | | 2,224,739 | |
| Less LIFO reserve | | | | (82,578 | ) | | (183,404 | ) |
|
| |
| |
| | | | $ | 1,887,093 | | $ | 2,041,335 | |
|
| |
| |
(5) Lease Arrangements
The total amount of equipment capitalized under capital lease obligations as of September 30, 2006 and 2005 was $2,739,454 and $1,112,000, respectively. Accumulated amortization on capital leases at September 30, 2006 and 2005 was $343,026 and $54,000, respectively. Amortization of assets acquired through capital leases is included in depreciation expense.
We acquired equipment totaling $1,473,000 through capital lease arrangements during the year ended September 30, 2006. Future minimum lease payments on capital leases at September 30, 2006 are as follows:
| Principal
| | Interest
| | Total
|
|---|
| 2007 | | | $ | 472,146 | | $ | 154,578 | | $ | 626,724 | |
| 2008 | | | | 509,993 | | | 116,532 | | | 626,525 | |
| 2009 | | | | 581,711 | | | 73,586 | | | 655,297 | |
| 2010 | | | | 424,237 | | | 30,271 | | | 454,508 | |
| 2011 | | | | 132,302 | | | 3,307 | | | 135,609 | |
|
| |
| |
| |
| | | | $ | 2,120,389 | | $ | 378,274 | | $ | 2,498,663 | |
|
| |
| |
| |
We lease office space and equipment under noncancelable operating leases that terminate at various dates through 2010. Certain of these leases contain renewal options. Total rental expense under these leases was $1,808,083, $913,514, and $488,294 in fiscal 2006, 2005, and 2004, respectively.
Future minimum lease payments for the following fiscal years under operating leases at September 30, 2006 are as follows:
| |
|---|
| 2007 | | | $ | 2,138,705 | |
| 2008 | | | | 490,708 | |
| 2009 | | | | 68,780 | |
| 2010 | | | | 8,545 | |
|
| |
| | | | $ | 2,706,738 | |
|
| |
40
(6) Debt Arrangements
Long-term debt consisted of the following at September 30:
| 2006
| | 2005
|
|---|
| Mortgage note payable to a bank, payable in monthly | | | | | | | | |
| principal and interest installments of $36,500 until | | |
| June 1, 2007 when they adjust under the terms of the | | |
| note. Interest is fixed at 5.69% to June 1, 2007, when | | |
| it adjusts based on market rates. Due November, 2012. | | | $ | 4,610,461 | | $ | 4,791,016 | |
| |
| Mortgage note payable to a bank, payable in monthly | | |
| principal and interest installments of $18,241 until May | | |
| 17, 2007 when they adjust under the terms of the note | | |
| Interest is fixed at 5.69% to June 1, 2007, when it | | |
| adjusts based on market rates. Due November, 2012. | | | | 1,842,976 | | | 1,963,224 | |
| |
| 6% convertible subordinated notes payable due January 1, | | |
| 2008. Interest payable in arrears on the 15th of January | | |
| and July after June 1, 2005 (4.67% effective rate). | | | | 3,999,840 | | | 3,999,840 | |
| |
| 10% subordinated notes payable due October 1, 2007 | | |
| Holders can require the Company to repay 20% of the | | |
| original outstanding balance each October 1. Interest | | |
| payable upon demand each October 1 through maturity. | | | | 837,508 | | | 1,188,671 | |
| |
| Mortgage note payable to a bank, payable in monthly | | |
| principal and interest installments of $15,755 until June | | |
| 1, 2007, when they adjust under the terms of the note | | |
| Interest is fixed at 5.69% to June 1, 2007, when it | | |
| adjusts based on market rates. Due November, 2012. | | | | 2,093,527 | | | 2,165,235 | |
|
| |
| |
| | | | | 13,384,312 | | | 14,107,986 | |
| | | | | 720,653 | | | 700,352 | |
|
| |
| |
| Less current portion | | | $ | 12,663,659 | | $ | 13,407,634 | |
|
| |
| |
41
The following table summarizes our principal payment obligations for the years ending September 30:
| |
|---|
| 2007 | | | $ | 720,653 | |
| 2008 | | | | 4,861,178 | |
| 2009 | | | | 406,568 | |
| 2010 | | | | 430,653 | |
| 2011 | | | | 456,165 | |
| Thereafter | | | | 6,509,095 | |
|
| |
| | | | $ | 13,384,312 | |
|
| |
Cash interest payments of $1,169,093, $1,112,000, and $522,838 were made in 2006, 2005, and 2004, respectively. Cash interest payments for 2004 included interest of $33,834 which was capitalized.
(a) Revolving Credit Facility
We have a revolving line of credit through December, 2007 with our commercial bank which we use for working capital and other purposes. Borrowings under the agreement are collateralized by substantially all assets related to the Company’s operations and all common stock of the Company’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 the Company’s Chairman. Under the terms of the agreement, the Company has agreed to restrict advances to subsidiaries, limit additional indebtedness and capital expenditures as well as to comply with certain financial covenants outlined in the borrowing agreement. The credit agreement contains cross-default provisions with our mortgages or other borrowings.
Our revolving line of credit limits outstanding borrowings to the borrowing base as defined in the agreement, to a maximum available amount of $6 million. As of September 30, 2006, there were no borrowings on this line. We also have an outstanding letter of credit to secure our lease in Baltimore, Maryland for $2.0 million (reducing to $1 million in January, 2007), which is counted against our allowable borrowings. Under the computation of the borrowing base, we had $1.8 million of available additional borrowing capacity at September 30, 2006. We were not in compliance with our loan covenants at September 30, 2006, and have received a waiver from our bank of the non-compliance. In connection with the waiver, our bank raised our rate on outstanding borrowings from LIBOR plus 250-300 basis point to LIBOR plus 325 basis points, or from prime plus 25 basis points to prime plus 50 basis points, increased our fee on the unused portion of the line from 25 basis points to 37.5 basis points, and limited capital additions for fiscal 2007 to $1.2 million. None of the other provisions of the Company’s debt agreements are expected to have an impact on operations.
(b) Subordinated Debt
In connection with an acquisition in fiscal 2003, we issued 10% subordinated notes of $1,800,000. The remaining outstanding principal on these notes was $837,508 at September 30, 2006. We made principal payments of $360,000, which was included in current portion of long-term debt at September 30, 2006 and interest payments of $84,718 in October, 2006. These notes are subordinated to the Company’s senior debt.
In connection with another acquisition in fiscal 2003, we issued $3,999,840 of 6% convertible notes payable, including $500,000 payable to a current director of the Company, due January 1, 2008. These notes were non-interest bearing until June 1, 2005. We are accruing interest expense over the term of these notes using the effective interest rate method. The holders of these notes may convert all or part of the outstanding notes and accrued interest into our common stock at a conversion rate of $16 per common share. These notes are convertible into 249,990 shares of the Company’s common stock. The Company, at its option, may prepay all or any portion of the outstanding notes plus accrued interest, with prior written notice to the holders. As of September 30, 2006, we have not made any prepayment elections. These notes are subordinated to the Company’s senior debt.
42
(7) Income Taxes
Significant components of our deferred tax liabilities and assets as of September 30 are as follows:
| 2006
| | 2005
|
|---|
| Deferred tax liabilities: | | | | | | | | |
| Tax over book depreciation | | | $ | 682,702 | | $ | 1,124,871 | |
| Lower tax basis on assets of acquired company | | | | 291,641 | | | 525,986 | |
| Asset impairment | | | | (435,710 | ) | | — | |
|
| |
| |
| Total deferred tax liabilities | | | | 538,633 | | | 1,650,857 | |
|
| |
| |
| |
| Deferred tax assets: | | |
| Inventory pricing | | | | 111,428 | | | 85,374 | |
| Accrued vacation | | | | 229,880 | | | 229,881 | |
| Accrued expenses and other - net | | | | 106,734 | | | 65,510 | |
| Foreign tax credit carryover | | | | 119,850 | | | — | |
| Deferred gain on sale/leaseback | | | | 35,905 | | | — | |
| Foreign net operating loss | | | | 456,121 | | | 501,447 | |
|
| |
| |
| Total deferred tax assets | | | | 1,059,918 | | | 882,212 | |
| |
| Valuation allowance for deferred tax assets | | | | (456,121 | ) | | (501,447 | ) |
|
| |
| |
| |
| Net deferred tax assets | | | | 603,797 | | | 380,765 | |
|
| |
| |
| |
| Net deferred tax (assets) liabilities | | | $ | (65,164 | ) | $ | 1,270,092 | |
|
| |
| |
Significant components of the provision (benefit) for income taxes are as follows:
| 2006
| | 2005
| | 2004
|
|---|
| Current: | | | | | | | | | | | |
| Federal | | | $ | (520,901 | ) | $ | 802,058 | | $ | (394,167 | ) |
| State | | | | (89,174 | ) | | 213,562 | | | (28,747 | ) |
| Foreign | | | | 119,850 | | | — | | | 6,679 | |
|
| |
| |
| |
| Total Current | | | $ | (490,225 | ) | $ | 1,015,620 | | $ | (416,235 | ) |
|
| |
| |
| |
| | | |
| |
| Deferred: | | |
| Federal | | | $ | (1,074,438 | ) | $ | (489,489 | ) | $ | (46,129 | ) |
| State | | | | (260,818 | ) | | (133,741 | ) | | 59,056 | |
|
| |
| |
| |
| Total deferred | | | | (1,335,256 | ) | | (623,230 | ) | | 12,927 | |
|
| |
| |
| |
| | | | $ | (1,825,481 | ) | $ | 392,390 | | $ | (403,308 | ) |
|
| |
| |
| |
43
The effective income tax rate varied from the statutory federal income tax rate as follows:
| 2006
| 2005
| 2004
|
|---|
| Statutory federal income tax rate | | | | (34 | .0)% | | 34 | .0% | | (34 | .0)% |
| Increases (decreases): | | |
| Nondeductible expenses | | | | 0 | .5 | | 6 | .8 | | 3 | .9 |
| Tax benefit of foreign sales | | | | (1 | .5) | | (14 | .6) | | (2 | .8) |
| State income taxes, net of federal tax benefit | | | | (5 | .1) | | 18 | .1 | | 3 | .3 |
| Nontaxable foreign (gains) losses | | | | 1 | .1 | | 90 | .2 | | (29 | .6) |
| Other | | | | (2 | .2) | | 0 | .0 | | (7 | .3) |
|
| |
| | | | | (41 | .2)% | | 134 | .5% | | (66 | .5)% |
|
| |
In fiscal 2006, 2005, and 2004, our foreign operations generated income (loss) before income taxes of $141,645, $(773,784), and 528,556, respectively.
Payments made in 2006, 2005, and 2004 for income taxes amounted to $498,094, $407,073, and $113,000, respectively.
The Company has foreign net operating loss carryforwards of $1,425,377 that have an indefinite life under current UK tax law.
(8) Stock Option Plans
The Company established an Employee Stock Option Plan whereby options to purchase the Company’s common shares at fair market value at date of grant can be granted to our employees. Options granted become exercisable in four equal annual installments beginning two years after the date of grant. This plan terminates in fiscal 2008.
The Company also established an Outside Director Stock Option Plan whereby options to purchase the Company’s common shares at fair market value at date of grant can be granted to outside directors. Options granted become exercisable in four equal annual installments beginning two years after the date of grant. This plan terminates in fiscal 2008.
Options in both plans expire the earlier of ten years from grant date or termination of employment.
A summary of our stock option activity and related information for the years ended September 30 is as follows:
| 2006
| | 2005
| | 2004
|
|---|
| Options
| | Weighted
exercise
price
| | Options
| | Weighted
exercise
price
| | Options
| | Weighted
exercise
price
|
|---|
| |
| Outstanding - beginning of year | | | | 480,253 | | $ | 4.95 | | | 342,500 | | $ | 4.66 | | | 106,527 | | $ | 4.70 | |
| Exercised | | | | (21,000 | ) | | 4.50 | | | (1,625 | ) | | 4.25 | | | — | | | — | |
| Granted | | | | — | | | — | | | 173,378 | | | 5.39 | | | 254,000 | | | 4.53 | |
| Terminated | | | | (55,375 | ) | | 4.90 | | | (34,000 | ) | | 4.63 | | | (18,027 | ) | | 2.49 | |
|
| | | |
| | | |
| | | |
| Outstanding - end of year | | | | 403,878 | | $ | 4.98 | | | 480,253 | | $ | 4.95 | | | 342,500 | | $ | 4.66 | |
|
| | | |
| | | |
| | | |
| Weighted grant date fair values | | | | | | | | | | | | $ | 3.38 | | | | | $ | 2.92 | |
| | | | | | |
| | | |
| |
44
The intrinsic values of options exercised in the years ended September 30, 2006 and 2005 were $37,000 and $4,000 respectively. We received $94,470 and $5,313 from the exercise of qualified employee stock options in fiscal 2006 and 2005, respectively, for which no tax benefit was recognized. The options on the 403,878 shares outstanding at September 30, 2006 had an aggregate intrinsic value of $204,783 and a weighted average contract term of 7.1 years.
A summary of non-vested options for the year ended September 30, 2006 is as follows:
| Number
| | Weighted Average
Grant Date
Fair Value
|
|---|
| | |
|---|
| Non-vested options, beginning of year | | | | 342,753 | | $ | 4 | .94 |
| Granted | | | | — | | | | — |
| Vested | | | | (37,500 | ) | | 3 | .57 |
| Forfeited | | | | (26,875 | ) | | 3 | .90 |
|
| | |
| |
|---|
| Non-vested options, end of year | | | | 278,378 | | $ | 3 | .75 |
|
| | |
| |
|---|
| | |
At September 30, 2006, there were 125,500 shares vested, all of which were exercisable. The weighted average exercise price for these shares was $5.31 per share; the aggregate intrinsic value of these shares was $63,685 and the weighted average remaining term was 6.3 years.
At September 30, 2006, there are 300,375 shares available for grants under the two plans.
45
The following applies to options outstanding at September 30, 2006:
Range of exercise prices
| Number outstanding
at September 30,
2006
| Weighted
average
remaining
contractual
life (years)
| Weighted
average
exercise
price
| Number
exercisable at
September
30, 2006
| Weighted
average
exercise
price
|
|---|
| |
| | | | | |
|---|
| $2.80 - 4.58 | 204,000 | 6.64 | 4.38 | 68,500 | 4.33 |
| $4.96 - 5.74 | 180,378 | 8.34 | 5.34 | 37,500 | 5.69 |
| $7.18 - 8.00 | 19,500 | 1.15 | 8.00 | 19,500 | 8.00 |
At September 30, 2006, we had $536,000 of compensation expense to be recognized for non-vested options with a weighted average vesting period of 2.95 years.
(9) Retirement Plan
The Company has an Internal Revenue Code Section 401(k) Retirement Plan (the “Plan”) covering all employees over twenty-one years of age with at least one year of service. Under the terms of the Plan, the Company contributes 2% of each participant’s total wages to the Plan and matches 44% of the first 10% of the employee contribution. The Plan also includes provisions for various contributions which may be instituted at the discretion of the Board of Directors. The contribution made by the participant may not exceed 30% of the participant’s annual wages. The Company made no discretionary contributions under the plan in 2006, 2005, and 2004. Contribution expense was $638,398, $554,624, and $432,283 in fiscal 2006, 2005, and 2004, respectively.
(10) Segment Information
We operate in two principal segments – research services and research products. Our services segment provides research and development support on a contract basis directly to pharmaceutical companies. Our analytical products segment provides liquid chromatography, electrochemical and physiological monitoring products to pharmaceutical companies, universities, government research centers, and medical research institutions. We evaluate performance and allocate resources based on these segments. Certain of our assets are not directly attributable to the service or product segments. These assets are grouped into the Corporate segment and include cash and cash equivalents, deferred income taxes, refundable income taxes, debt issue costs and certain other assets. We do not allocate such items to the principal segments because they are not used to evaluate their financial position. The accounting policies of these segments are the same as those described in the summary of significant accounting policies.
46
(a) Operating Segments
| Year ended September 30
|
|---|
| 2006
| | 2005
| | 2004
|
|---|
| (In thousands) |
|---|
| |
| Revenue: | | | | | | | | | | | |
| Service | | | $ | 34,318 | | $ | 32,951 | | $ | 24,928 | |
| Product | | | | 8,730 | | | 9,444 | | | 12,224 | |
|
| |
| |
| |
| Total | | | $ | 43,048 | | $ | 42,395 | | $ | 37,152 | |
|
| |
| |
| |
| |
| Operating income: | | |
| Service | | | $ | (3,728 | ) | $ | 148 | | $ | (4,850 | ) |
| Product | | | | 306 | | | 1,112 | | | 5,104 | |
|
| |
| |
| |
| Total operating income (loss) | | | | (3,422 | ) | | 1,260 | | | 254 | |
| |
| Corporate expenses | | | | (1,013 | ) | | (969 | ) | | (861 | ) |
|
| |
| |
| |
| Income (loss) before income taxes | | | $ | (4,435 | ) | $ | 291 | | $ | (607 | ) |
|
| |
| |
| |
| |
| |
| As of and for the year ended
September 30,
|
|---|
| 2006
| | 2005
| | 2004
|
|---|
| (In thousands) |
|---|
| Identifiable assets: | | |
| Service | | | $ | 24,539 | | $ | 31,739 | | $ | 31,071 | |
| Product | | | | 9,897 | | | 10,211 | | | 9,940 | |
| Corporate | | | | 7,878 | | | 5,888 | | | 5,784 | |
|
| |
| |
| |
| Total | | | $ | 42,314 | | $ | 47,838 | | $ | 46,795 | |
|
| |
| |
| |
| |
| Goodwill, net: | | |
| Service | | | $ | 1,481 | | $ | 1,071 | | $ | 1,071 | |
| Product | | | | 374 | | | 374 | | | 374 | |
|
| |
| |
| |
| Total | | | $ | 1,855 | | $ | 1,445 | | $ | 1,445 | |
|
| |
| |
| |
| |
| Intangible assets, net: | | |
| Service | | | $ | 517 | | $ | 2,156 | | $ | 2,491 | |
| Product | | | | -- | | | -- | | | -- | |
|
| |
| |
| |
| Total | | | $ | 517 | | $ | 2,156 | | $ | 2,491 | |
|
| |
| |
| |
| |
| Depreciation and amortization: | | |
| Service | | | $ | 2,753 | | $ | 3,125 | | $ | 3,175 | |
| Product | | | | 475 | | | 316 | | | 266 | |
|
| |
| |
| |
| Total | | | $ | 3,228 | | $ | 3,441 | | $ | 3,441 | |
|
| |
| |
| |
| |
| Capital expenditures: | | |
| Service | | | $ | 1,518 | | $ | 2,596 | | $ | 3,534 | |
| Product | | | | 169 | | | 818 | | | 34 | |
|
| |
| |
| |
| Total | | | $ | 1,687 | | $ | 3,414 | | $ | 3,568 | |
|
| |
| |
| |
47
(b) Geographic Information
| Year ended September 30
|
|---|
| 2006
| | 2005
| | 2004
|
|---|
| (In thousands) |
|---|
| | | | | | | | | | | |
| Sales to external customers: | | |
| North America | | | $ | 37,614 | | $ | 34,046 | | $ | 29,664 | |
| Pacific Rim | | | | 693 | | | 1,052 | | | 924 | |
| Europe | | | | 4,299 | | | 4,899 | | | 4,871 | |
| Other | | | | 441 | | | 2,398 | | | 1,693 | |
|
| |
| |
| |
| Total | | | $ | 43,047 | | $ | 42,395 | | $ | 37,152 | |
|
| |
| |
| |
| Long-lived assets: | | |
| North America | | | $ | 27,675 | | $ | 29,499 | | $ | 34,888 | |
| Europe | | | | 976 | | | 1,204 | | | 1,550 | |
|
| |
| |
| |
| Total | | | $ | 28,651 | | $ | 30,703 | | $ | 36,438 | |
|
| |
| |
| |
(c) Major Customers
In 2006, 2005 and 2004, Pfizer (and its predecessor companies) accounted for approximately 7.3%, 10.1%, and 12.5%, respectively, of the Company’s total revenues and 12.8% and 6.0% of total trade accounts receivable at September 30, 2006 and 2005, respectively.
(11) Related Party Transactions
As of September 30, 2006, we have a 6% subordinated convertible note payable for $500,000 to one of our directors (a former director of PKLB). During fiscal 2004, we repaid $350,000 of debt to this director through a series of transactions which resulted in our paying $200,000 of principal in cash (plus accrued interest to the date of repayment) and exchanging 38,042 shares of common stock for $150,000 face amount of debt.
48
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Effective September 15, 2006 KPMG LLP (‘KPMG”) resigned as the Company’s independent accountant. KPMG’s reports on the Company’s consolidated financial statements as of and for the years ended September 30, 2005 and September 30, 2004 did not contain an adverse opinion or disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope or accounting principle. During the years ended September 30, 2005 and 2004, and through September 15, 2006, there were (1) no disagreements with KPMG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of KPMG would have caused KPMG to make reference thereto in KPMG’s reports on the financial statements for such years; and (2) no other reportable events, as defined in Item 304(a)(1)(v) of the Commission’s Regulation S-K, except for the matters set forth below.
In connection with KPMG’s review of the Report on Form 10-Q and the First Amendment to the Report on Form 10-Q for the three and nine months ended June 30, 2006, KPMG presented a letter regarding the following items to the Audit Committee of the Board of Directors, dated August 29, 2006 relating to its review of the unaudited interim financial statements for the Company as of June 30, 2006, and for the three and nine months then ended (the “Letter”). KPMG noted certain conditions involving the Company’s internal control and its operation that KPMG considered to be “material weaknesses.” “Material weakness” was defined in the Letter as “a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected by the entity’s internal control.” The material weaknesses noted by KPMG consisted of a failure to set an appropriate “tone at the top” to instill a company-wide attitude of control consciousness; failure to maintain adequate procedures for anticipating and identifying financial reporting risks and for reacting to changes in its operating environment that could have a material effect on financial reporting; failure to maintain adequately trained personnel to perform effective review of accounting procedures critical to financial reporting; and a lack of adequately trained finance and accounting personnel with the ability to apply U.S. generally accepted accounting principles associated with the impairment of certain long-lived assets in accordance with Statement of Financial Accounting Standards No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. Management concurred with the assessment of KPMG. KPMG discussed the matters described in this paragraph with the Audit Committee of the Company. The Company authorized KPMG to respond fully to the inquiries of its successor accountant concerning these matters.
KPMG also communicated to the Audit Committee in the Letter that the Company had filed its Report on Form 10-Q for the three and nine month periods ended June 30, 2006, prior to the completion of its interim review. KPMG has subsequently completed its interim review and the Company filed an amended report on Form 10-Q/A for the three and nine month periods ended June 30, 2006.
On October 30, 2006 the Audit Committee of the Company’s Board of Directors engaged Crowe Chizek and Company LLC (“Crowe Chizek”) to be the Company’s independent registered public accounting firm to audit and report on the Company’s consolidated financial statements for the year ended September 30, 2006. During the two most recent fiscal years ended September 30, 2006 and 2005, and through October 30, 2006, the Company has not consulted with Crowe Chizek regarding either: (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s financial statements; or (ii) any matter that was either the subject of a disagreement (as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to that Item) or a reportable event (as that term is defined in Item 304(a)(1)(v) of Regulation S-K).
Item 9A. Controls and Procedures.
Based on their most recent evaluation, which was completed as of September 30, 2006, the Company’s Chief Executive Officer and Chief Financial Officer believe that the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of September 30, 2006. In response to the matters described in Item 9 above, and to ensure that information required to be disclosed by the Company in this Form 10-K was recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, as of September 30, 2006, the Company had retained a new Chief Executive Officer with a financial background to set a better “tone at the top” regarding the Company’s systems and regard for internal control. The Company has also instituted additional procedures to more timely identify financial statement risks. In order to maintain a capability to perform effective review of accounting procedures critical to financial reporting, the Company decided to retain an outside accounting firm, separate from its auditors, to consult on accounting and reporting issues where the Company does not have sufficient internal capabilities. The Chief Executive Officer and Chief Financial Officer believe that implementing these new procedures resulted in effective disclosure controls and procedures as of September 30, 2006.
Except as noted above, 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 September 30, 2006.
Item 9B. Other Information.
None.
49
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following information concerns the persons who served as the directors of the Company as of September 30, 2006. Except as indicated in the following paragraphs, the principal occupations of these persons has not changed in the past five years. Information concerning the executive officers of the Company may be found in “Executive Officers of the Registrant” under Item 1 of this report, which is incorporated herein by reference.
Name
| Age
| Position
|
|---|
| | |
|---|
| Peter T. Kissinger, Ph.D. | 61 | Chairman of the Board; Chief Scientific Officer |
| Candice B. Kissinger | 54 | Senior Vice President, Marketing; Secretary; Director |
| William E. Baitinger | 73 | Director |
| David W. Crabb | 53 | Director |
| Leslie B. Daniels | 59 | Director |
Information concerningPeter T. Kissinger, Ph.D. is incorporated by reference to the discussion under Item 1 "Executive Officers of the Registrant" in this report.
Information concerningCandice B. Kissinger is incorporated by reference to the discussion under Item 1 “Executive Officers of the Registrant” in this report.
William E. Baitinger has served as a director of the Company since 1979. Mr. Baitinger was Director of Technology Transfer for the Purdue Research Foundation from 1988 until 2000. In this capacity he was responsible for all licensing and commercialization activities from Purdue University. He currently serves as Special Assistant to the Vice President for Research at Purdue University. Mr. Baitinger has a Bachelor of Science degree in Chemistry and Physics from Marietta College and a Master of Science degree in Chemistry from Purdue University.
David W. Crabb, M.D. has served as a director of the Company since February, 2004. He has been Chairman of the Indiana University Department of Medicine since 2001. Previously he had served as Chief Resident of Internal Medicine and on the Medicine and Biochemistry faculty of Indiana University. He was appointed Vice Chairman for Research for the department and later Assistant Dean for Research. Dr. Crabb serves on several editorial boards and on the Board of Indiana Alcohol Research Center. He was a recipient of a NIH Merit award and numerous other research and teaching awards.
Leslie B. Daniels has served as a director of the Company since June 2003. Mr. Daniels is a founding partner of CAI, a private equity fund in New York City. He previously was President of Burdge, Daniels & Co., Inc., a principal in venture capital and buyout investments as well as trading of private placement securities, and before that, a Senior Vice President of Blyth, Eastman, Dillon & Co. where he had responsibility for the corporate fixed income sales and trading departments. Mr. Daniels is a former Director of Aster-Cephac SA, IVAX Corporation, MIM Corporation, Mylan Laboratories, Inc., NBS Technologies Inc. and MIST Inc. He was also Chairman of Zenith Laboratories, Inc. and currently serves as a Director of SafeGuard Health Enterprises, Inc.
The Board of Directors has established an Audit Committee. The Audit Committee is responsible for recommending independent auditors, reviewing, in connection with the independent auditors, the audit plan, the adequacy of internal controls, the audit report and management letter and undertaking such other incidental functions as the board may authorize. William E. Baitinger, David W. Crabb and Leslie B. Daniels are the members of the Audit Committee. The Board of Directors has determined that Mr. Daniels is an audit committee financial expert (as defined by Item 401(h) of Regulation S-K). All of the members of the Audit Committee are “independent” (as defined by Item 7(d)(3)(iv) of Schedule 14A).
The Board of Directors has adopted a Code of Ethics (as defined by Item 406 of Regulation S-K) that applies to the Company’s Officers and Directors a copy of which is filed as an exhibit to this Form 10-K.
The information contained under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement is incorporated herein by reference.
50
Item 11. Executive Compensation.
The information included under the captions “Election of Directors – Compensation of Directors,” “Executive Compensation” and “Compensation Committee Interlocks and Insider Participation” in the Proxy Statement is incorporated herein by reference in response to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information contained under the captions “Share Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Proxy Statement is incorporated herein by reference in response to this item.
For additional information regarding the Company’s stock option plans, please see Note 9 in the Notes to Consolidated Financial Statements in this report.
Item 13. Certain Relationships and Related Transactions.
The information included under the caption “Certain Relationships and Related Transactions” in the Proxy Statement is incorporated herein by reference in response to this item.
Item 14. Principal Accounting Fees and Services.
The information included under the caption “Selection of Independent Accountants” in the Proxy Statement is incorporated herein by reference.
[Remainder of page intentionally left blank.]
51
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Documents filed as part of this Report.
| | 1. | Financial Statements:
Included in Item 8 of Part II of this report as follows:
Reports of Independent Registered Public Accounting Firms.
Consolidated Balance Sheets as of September 30, 2006 and 2005.
Consolidated Statements of Operations for the Years Ended September 30, 2006, 2005 and 2004.
Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the Years Ended September 30, 2006, 2005 and 2004.
Consolidated Statements of Cash Flows for the Years Ended September 30, 2006, 2005 and 2004.
Notes to Consolidated Financial Statements. |
| | 2. | Financial Statement Schedules:
Schedules are not required, are not applicable or the information is shown in the Notes to the Consolidated Financial Statements. |
(b) Exhibits. See Index to Exhibits.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: December 21, 2006
Date: December 21, 2006 | BIOANALYTICAL SYSTEMS, INC.
(Registrant)
By: /s/ Richard M. Shepperd
Richard M. Shepperd
President and Chief Executive Officer
By: /s/ Michael R. Cox
Michael R. Cox
Vice President, Finance, Chief Financial Officer
and Treasurer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Peter T. Kissinger
Peter T. Kissinger | Chairman and Chief Scientific
Officer and Director | | December 20, 2006 |
/s/ Richard M. Shepperd
Richard M. Shepperd | President and Chief Executive Officer
(Principal Executive Officer) | | December 20, 2006 |
/s/ Michael R. Cox
Michael R. Cox | Vice President, Finance, Chief
Financial Officer and Treasurer
(Principal Financial and Accounting Officer) | | December 20, 2006 |
/s/ William E. Baitinger
William E. Baitinger | Director | | December 20, 2006 |
/s/ David W. Crabb
David W. Crabb | Director | | December 21, 2006 |
/s/ Candice B. Kissinger
Candice B. Kissinger | Director | | December 22, 2006 |
/s/ Leslie B. Daniels
Leslie B. Daniels | Director | | December 20, 2006 |
53
INDEX TO 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 | Amended and Restated Bylaws of Bioanalytical Systems, Inc. (including all amendments made through September 30, 2006). |
(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). |
| 4.2 | See Exhibits 3.1 and 3.2 to this Form 10-K. |
| 4.3 | Form of 6% Subordinated Convertible Note due 2008 (incorporated by reference to Form 8-K filed November 21, 2002). |
| 4.4 | Form of 10% Subordinated Note due 2007 (incorporated by reference to Exhibit 4.3 of Form 10-Q for the quarter ended June 30, 2003). |
(10) | 10.1 | Bioanalytical Systems, Inc. 1990 Employee Incentive Stock Option Plan (incorporated by reference to Exhibit 10.4 to Registration Statement on Form S-1, Registration No. 333-36429). |
| 10.2 | Form of Bioanalytical Systems, Inc. 1990 Employee Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.5 to Registration Statement on Form S-1, Registration No. 333-36429). |
| 10.3 | Bioanalytical Systems, Inc. 1997 Employee Incentive Stock Option Plan, as amended January 24, 2004 (incorporated by reference to Appendix A to definitive Proxy Statement filed January 28, 2003 SEC File No. 000-23357). |
| 10.4 | Form of Bioanalytical Systems, Inc. 1997 Employee Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.27 to Registration Statement on Form S-1, Registration No. 333-36429). |
1
Number Assigned In
Regulation S-K
Item 601 | | Description of Exhibits |
| 10.5 | 1997 Bioanalytical Systems, Inc. Outside Director Stock Option Plan, as amended January 24, 2004 (incorporated by reference to Appendix B to definitive Proxy Statement SEC File No. 000-23357). |
| 10.6 | Form of Bioanalytical Systems, Inc. 1997 Outside Director Stock Option Agreement (incorporated by reference to Exhibit 10.29 to Registration Statement on Form S-1, Registration No. 333-36429). |
| 10.7 | Master Equipment Lease Agreement by and between Bioanalytical Systems, Inc. and Keycorp Leasing, dated December 5, 1997 (incorporated by reference to Exhibit 10.9 of Form 10-K for the fiscal year ended September 30, 2002). |
| 10.8 | Amended and Restated Credit Agreement by and between Bioanalytical Systems, Inc., and National City Bank, executed January 4, 2005 (incorporated by reference to Exhibit 10.5 of Form 8-K filed January 10, 2005). |
| 10.9 | Amended and Restated General Security Agreement by and between Bioanalytical Systems, Inc. and National City Bank executed January 4, 2005 (incorporated by reference to Exhibit 10.7 of Form 8-K filed January 10, 2005). |
| 10.10 | Trademark Security Agreement by and between Bioanalytical Systems and The Provident Bank, dated October 29, 2003 (incorporated by reference to Exhibit 10.12 of Form 10-K for the fiscal year ended September 30, 2002). |
| 10.11 | Patent Security Agreement by and between Bioanalytical Systems and The Provident Bank, dated October 29, 2003 (incorporated by reference to Exhibit 10.13 of Form 10-K for the fiscal year ended September 30, 2002). |
| 10.12 | Replacement Promissory Note by and between Bioanalytical Systems, Inc. and National City Bank, executed January 4, 2005 (incorporated by reference to Exhibit 10.6 of Form 8-K filed January 10, 2005). |
| 10.13 | Loan Agreement between Bioanalytical Systems, Inc. and Union Planters Bank, dated October 29, 2002 (incorporated by reference to Exhibit 10.15 of Form 10-K for the fiscal year ended September 30, 2002). |
2
Number Assigned In
Regulation S-K
Item 601 | | Description of Exhibits |
| 10.14 | Real Estate Mortgage and Security Agreement between Bioanalytical Systems, Inc. and Union Planters Bank, dated October 29, 2002 (incorporated by reference to Exhibit 10.16 of Form 10-K for the fiscal year ended September 30, 2002). |
| 10.15 | Real Estate Mortgage and Security Agreement between Bioanalytical Systems, Inc. and Union Planters Bank, dated October 29, 2002 (incorporated by reference to Exhibit 10.17 of Form 10-K for the fiscal year ended September 30, 2002). |
| 10.16 | Term Loan Promissory Note made by Bioanalytical Systems, Inc. in favor of Union Planters Bank, dated October 29, 2002 (incorporated by reference to Exhibit 10.18 of Form 10-K for the fiscal year ended September 30, 2002). |
| 10.17 | Promissory Note made by Bioanalytical Systems, Inc. in favor of Union Planters Bank, dated October 29, 2002 (incorporated by reference to Exhibit 10.19 of Form 10-K for the fiscal year ended September 30, 2002). |
| 10.18 | Employment Agreement by and between Bioanalytical Systems, Inc. and Michael R. Cox dated April 1, 2004 (incorporated by reference to Exhibit 10.1 to Form 10-Q for the fiscal quarter ended March 31, 2004). |
| 10.19 | Purchase and Sale Agreement between BASi Maryland, Inc. and 300 W. Fayette, LLC, closed January 5, 2005 (incorporated by reference to Exhibit 10.1 of Form 8-K filed January 10, 2005). |
| 10.20 | First Amendment to the Purchase and Sale Agreement dated September 7, 2004 (incorporated by reference to Exhibit 10.20 to Form 10-K for the fiscal year ended September 30, 2004). |
| 10.21 | Second Amendment to the Purchase and Sale Agreement dated on or about November 11, 2004 (incorporated by reference to Exhibit 10.21 to Form 10-K for the fiscal year ended September 30, 2004). |
| 10.22 | Office Lease by and between BASi Maryland, Inc. and 300 W. Fayette Street, LLC, dated on or about January 5, 2004 (incorporated by reference to Exhibit 10.22 to Form 10-K for the fiscal year ended September 30, 2004). |
3
Number Assigned In
Regulation S-K
Item 601 | | Description of Exhibits |
| 10.23 | Employment Agreement by and between Bioanalytical Systems, Inc. and Edward M. Chait dated August 1, 2005 (incorporated by reference to Exhibit 10.1 to Form 8-K filed August 5, 2005). |
| 10.24 | Form of Grant of non-qualified stock options dated August 1, 2005 to Edward M. Chait (incorporated by reference to Exhibit 10.24 to Form 10-K for the fiscal year ended September 30, 2005). |
| 10.25 10.26 | Form of Grant of non-qualified stock options dated April 1, 2004 to Michael R. Cox (incorporated by reference to Exhibit 10.3 to Form 10-Q for the fiscal quarter ended March 31, 2004). Severance Agreement and Release of All Claims with Michael P. Silvon, dated July 17, 2006 (incorporated by reference to Exhibit 10.1 to Form 8-K filed July 31, 2006). |
| 10.27 | Summary of Executive Compensation of Officers and Directors. |
(13) (14) | 13.1 14 | 2006 Annual Report. This report, except for those portions which are expressly incorporated by reference in this Form 10-K, is furnished for the information of the Commission and is not to be deemed “filed” as part of this Form 10-K. Code of Ethics. |
(21) | 21.1 | Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to Form 10-K for the fiscal year ended September 30, 2005). |
(23) | 23.1 | Consent of Independent Registered Public Accounting Firm Crowe Chizek and Company LLC. |
| 23.2 | Consent of Independent Registered Public Accounting Firm KPMG LLP. |
(31) | 31.1 | Certification of Chief Executive Officer. |
| 31.2 | Certification of Chief Financial Officer. |
(32) | 32.1 | Section 1350 Certifications. |
4
NO 