UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended September 30, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 for the transition period from ___________ to
_____________.
Commission File Number 333-36429
BIOANALYTICAL SYSTEMS, INC.
(Exact name of the registrant as specified in its charter)
INDIANA 35-1345024
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2701 KENT AVENUE
WEST LAFAYETTE, IN 47906
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(Address of principal executive offices) (Zip code)
(765) 463-4527
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(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Shares
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ( 229.045 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant is $9,211,230. As of September 30, 1998,
4,495,319 shares of registrant's Common Stock were outstanding. No shares of
registrant's Preferred Stock were outstanding as of September 30, 1998.
Documents Incorporated by Reference: Certain portions of the Registrant's
definitive Proxy Statement to be filed pursuant to Regulation 14A in connection
with its 1999 Annual Meeting of Shareholders is incorporated by reference to
those items listed in Part III of this Form 10-K.
TABLE OF CONTENTS
Part I Page
----
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 15
Item 6. Selected Consolidated Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 21
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 43
Part III
Item 10. Directors and Executive Officers of the Registrant 44
Item 11. Executive Compensation 44
Item 12. Security Ownership of Certain Beneficial Owners and Management 44
Item 13. Certain Relationships and Related Transactions 44
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 45
Part I
This Report contains certain statements that are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, as amended. Readers of this Report are
cautioned that reliance on any forward-looking statement involves risks and
uncertainties. Although the Company believes that the assumptions on which the
forward-looking statements contained herein are based are reasonable, any of
those assumptions could prove to be inaccurate given the inherent uncertainties
as to the occurrence or nonoccurrence of future events. There can be no
assurance that the forward-looking statements contained in this Report will
prove to be accurate. The inclusion of a forward-looking statement herein should
not be regarded as a representation by the Company that the Company's objectives
will be achieved.
Item 1. Business
General
The Company is a contract research organization (CRO) providing research
and development resources to many of the leading pharmaceutical, medical device
and biotechnology companies in the world. The Company offers an efficient,
variable-cost alternative to its clients' internal product development,
compliance and quality control programs. Founded in 1974, the Company initially
focused primarily on providing new products and procedures which facilitated
research progress at client sites. Recently, as a result of increasing
pressures to bring products to market on a cost-effective and accelerated basis,
many clients have requested the Company to carry out proprietary projects at the
Company's facilities. As a result, the Company now derives its revenues from
both the sale of its analytical instruments and other products as well as
research services provided to customers. The Company provides a broad array of
value-added products and services focused on chemical analysis, allowing its
clients to perform their research and development functions either "in-house" or
at the Company. The Company believes that among CROs that provide statistical,
clinical, and medical services, the Company is the only one that designs and
sells analytical instrumentation. Within the analytical instruments business,
the Company believes that it is one of very few firms to maintain a separate
business unit devoted to contract analytical services under the regulatory
framework of good laboratory practices (GLPs) and good manufacturing practices
(GMPs).
The Company's products and services combine basic research with diagnostic
and therapeutic experience. One consequence of the restructuring of the
healthcare industry is the greater reliance on outsourcing research services for
both clinical trials and formulation development. The Company is capable of
supporting the analytical needs of researchers and clinicians, from small
molecule drugs and hormones through large biomolecules such as proteins. The
Company's scientists have the skills necessary in instrumentation, chemical
reagents and computer software to make the products and services it provides
increasingly valuable to the worldwide pharmaceutical, medical device and
biotechnological industries.
Over the past five years, the Company regularly has provided its products
and/or services to all of the top 25 pharmaceutical companies in the world, as
ranked by 1997 research and development spending. In fiscal 1998, the Company
estimates that more than one-third of its total revenue was derived from these
companies. As a result of its (i) client focus, (ii) reputation for
high-quality services and products, (iii) capital investment in cutting-edge
instrumentation and facilities, (iv) skilled and experienced professional staff,
and (v) expertise in performing critical development and support services, the
Company believes that it is a value-added partner in solving its clients'
complex product development problems.
The Company designs, manufactures and markets a broad range of products and
related scientific procedures that detect and quantify the presence of chemicals
in certain substances. With respect to its products, the Company competes in
the $11 billion per year analytical instrument industry. The Company's focus,
however, is not on marketing hardware and software, but rather on developing
solutions to challenging analytical problems which permit the Company to utilize
its talented personnel in providing a total solution not generally offered by
hardware-focused competitors. The Company's products utilize state-of-the-art
scientific technology, including liquid chromatography, electrochemistry and in
vivo sampling instrumentation. The Company's analytical instruments are sold
primarily to
pharmaceutical firms and research organizations. Principal clients of the
Company include scientists engaged in drug metabolism studies and basic
neuroscience research.
The Company provides a wide variety of services to pharmaceutical
companies, medical device manufacturers, medical research centers, academic
institutions and others. These analytical services support screening and
pharmacological testing, toxicology/safety testing, formulation development,
laboratory testing, regulatory and compliance consulting and quality control
testing. The Company began offering its services primarily in response to
requests from customers who had used or were using the Company's products. To
reduce overhead and speed drug approval requests through the Food and Drug
Administration ("FDA"), pharmaceutical companies are contracting increasing
amounts of their analytical work to outside firms such as the Company. The
Pharmaceutical Research and Manufacturing Association estimates that in 1997,
pharmaceutical and biotechnology companies spent approximately $19 billion
worldwide on research and development, of which approximately 28%, or $5.4
billion, was outsourced to independent contract service providers. The Company
believes that this outsourcing trend will continue as a result of drug
development pressures, the emphasis on cost containment, patent expirations,
consolidation in the pharmaceutical industry, virtual drug company and
biotechnology industry growth, the need for technical and data management
expertise and the globalization of the pharmaceutical marketplace.
Changing Nature of Pharmaceutical Industry
The Company provides products and services on a world wide basis to
pharmaceutical, medical device and biotechnology companies, academic
institutions and the United States government to facilitate the research and
development of drugs and medical devices. The Company's products are generally
marketed to both public and private research organizations engaged in the early
stages of drug development, while the Company's services are generally marketed
to pharmaceutical and other biotechnical companies engaged in later stages of
drug testing. The Company competes against several large equipment
manufacturers with respect to its products, whereas the research services
industry is a highly fragmented one consisting of several hundred service
providers operating in various segments of the market and a small number of
larger companies focusing primarily on managing clinical trials. While the
markets for the Company's products and services have distinct customers (often
separate divisions in a large pharmaceutical company) and requirements, the
Company believes that both markets are facing increased pressure to outsource
certain facets of their research and development activities. The Company
believes that the factors identified below will contribute to a continuing
increase in outsourcing activities by its customers.
Drug Development Pressure
The pharmaceutical industry is under pressure to rapidly develop new drugs
to treat chronic illnesses and life threatening conditions such as AIDS and
Alzheimer's disease as consumers, doctors, health care providers and
pharmaceutical company shareholders continue to demand quicker and more
efficient drug development. Responding to this pressure, pharmaceutical
companies are attempting to accelerate the drug development process, including
relying to an increasing extent on external providers of research and
development services to perform testing and analysis in all phases of the
process.
Emphasis on Cost Containment
Pharmaceutical companies are facing increasing pressure to develop more
efficient operating strategies as a result of margin pressure from market
forces, including (i) a shift toward managed care, (ii) patent expirations,
(iii) generic substitution, (iv) increased purchasing power of large buyer
groups and (v) governmental initiatives designed to reduce drug prices. The
Company believes that the pharmaceutical and medical device industries are
responding to these pressures by downsizing internal research and development
programs, thereby favoring outsourcing as a variable-cost alternative. Further,
the need for additional capacity to increase the speed of new product
development, to maximize the period of marketing exclusivity and to increase
economic returns, has driven the need for outsourced services.
Patent Expirations
Patents on all major pharmaceuticals continue to age and expire. According
to the Pharmaceutical Research and Marketing Association, since 1984
prescriptions for generic drugs have risen from 20% to 43% of all prescriptions
written. Moving generic drugs onto the market more rapidly can result in an
estimated 2 to 5 year reduction in effective patent protection for brand name
drugs. Patent expirations are forcing drug companies to develop new products or
modify existing products to maintain market share against generic product
competition. The Company believes that the pressure to develop new products and
modify or reformulate existing products, combined with internal capacity
constraints, is leading companies to outsource these activities.
Consolidation in the Pharmaceutical Industry
The pharmaceutical industry is increasingly consolidating as drug
development companies continue to pursue new avenues of growth and more
efficient ways of conducting business. As companies seek to combine varied
personnel, resources and activities, the Company believes that they will
increasingly focus on ways to reduce costs and streamline operations, thus
leading to the greater use of companies providing contract research services.
Biotechnology Industry and "Virtual" Drug Company Growth
The biotechnology industry has grown rapidly over the last 10 years and has
introduced a significant number of new compounds for development. As a result,
many biotechnology companies do not have the necessary in-house resources to
conduct required development and testing. Furthermore, there has been an
increase in the number of pharmaceutical and medical device companies whose
business strategy is to develop a product sufficiently to attract a strategic
partner that will manufacture and market the drug. Many of these "virtual" drug
development companies, having little or no internal development or support
resources, must outsource a substantial portion of drug development and testing.
Need for Technical Expertise
The increasing complexity of new drugs requires high quality, innovative,
solution-driven contract work through all phases of the development process,
ranging from preclinical toxicology and pharmacokinetics through reformulation
pharmacokinetic studies and post-market clinical drug monitoring. The Company
believes that this need for specialized technical expertise will increasingly
lead to outsourcing of research activities.
Need for Data Management Expertise
Regulatory agencies are increasing the volume of data required for
regulatory filings, as well as requesting increased access to such data.
Furthermore, the FDA is encouraging the use of computer-assisted filings in an
effort to expedite the approval process. Consequently, drug companies are
increasingly outsourcing to firms with automated data management capabilities.
Moreover, in response to clients' demands for access to data as it is acquired
in the laboratory, the Company is able to provide clients with remote access to
Company computer systems while at the same time protecting client data from
unauthorized access.
Globalization of the Marketplace
Foreign pharmaceutical companies, particularly those of Japan and Europe,
are increasingly seeking to obtain approval to market their products in the
United States. Due to a lack of familiarity with the complex United States
regulatory system and the difficulty in bringing their operating facilities into
FDA-required GMP compliance, foreign firms are relying on independent
development companies with experience in the United States to provide integrated
services through all phases of product development and to assist in preparing
regulatory submissions. The Company believes that domestic firms with
established regulatory expertise and a broad range of integrated development
services will benefit from this trend.
The Company's Role in the Drug Development Process
Overview of Process
The Company has 24 years of experience in developing methodology to support
the analytical chemistry requirements of the drug discovery process. Under the
United States regulatory system, the development process for new pharmaceutical
products can be divided into three distinct phases. The preclinical phase
involves the discovery, characterization, product formulation and animal testing
necessary to prepare an Investigational New Drug ("IND") exemption for
submission to the FDA. The IND must be accepted by the FDA before the drug can
be tested in humans. The second, or clinical phase of development follows a
successful IND submission and involves the activities necessary to demonstrate
the safety, tolerability, efficacy and dosage of the substance in humans, as
well as the ability to produce the substance in accordance with the FDA's GMP
regulations. Data from these activities are compiled in a New Drug Application
("NDA"), or for biotechnology products, a Product License Application ("PLA"),
for submission to the FDA requesting approval to market the drug. The third
phase follows FDA approval of the NDA or PLA and involves the production and
continued analytical and clinical monitoring of the drug. The post-approval
phase also involves the development and regulatory approval of product
modifications and line extensions, including improved dosage forms.
Process Specifics and the Company's Role
The Preclinical Phase. The development of a new pharmaceutical agent
begins with the discovery or synthesis of an array of new molecules which may
influence a specific target such as a membrane bound receptor or an enzyme
involved in the disease under study. These libraries of molecules are screened
for pharmacological activity using various in vivo models, with the goal of
selecting relatively few "leads" for further development. Once the
pharmacologically active molecule is fully characterized, the agent is analyzed
to confirm the integrity and quality of material produced. Development of the
initial dosage forms to be used in clinical trials is completed, together with
analytical chemistry protocols to determine their stability. Upon successful
completion of preclinical safety and efficacy studies in animals, an IND
submission is prepared and provided to the FDA for review prior to the
implementation of human clinical trials.
Most of the Company's products are designed for use in the preclinical
phase of drug development. The Company also provides its bioanalytical services
in this phase. A good example of the role of the Company's products in the
preclinical phase is the utilization of Company technology in the development of
drug substances impacting the central nervous system neurotransmitters,
including serotonin, dopamine, norepinephrine, and acetylcholine. These drugs
are used in the treatment of such conditions as depression, Parkinson's disease,
schizophrenia and Alzheimer's disease. The Company's chromatography products
were used extensively to study the influence of reuptake inhibitors on serotonin
uptake and release in the central nervous system (CNS) programs at universities
and a major pharmaceutical company. The Company believes that the synergy
between the Company's instrumentation products and services has been a factor in
the Company being selected by major pharmaceutical companies to determine new
drug candidates in thousands of Phase I-III clinical specimens.
The Clinical Phase. Following successful submission of an IND application,
the sponsor is permitted to conduct Phase I human clinical trials in a limited
number of healthy individuals to determine the drug's safety and tolerability.
This work requires bioanalytical assays to determine the availability and
metabolism of the active ingredient following administration. Expertise in
method development and validation is essential for this phase, particularly with
respect to new chemical entities. Phase II clinical trials involve
administering the drug to individuals who suffer from the target disease or
condition to determine the drug's potential effectiveness and ideal dose. When
further safety
(toxicology), tolerability and dosing regimens have been established, Phase III
clinical trials involving large numbers of patients are conducted to verify
efficacy and safety. After the successful completion of Phase III clinical
trials, the sponsor of the new drug submits an NDA or PLA to the FDA requesting
that the product be approved for marketing.
The Company's bioanalytical work is most individually intensive in Phase I
studies where relatively few individuals are dosed. In Phase II and III the
number of individuals treated accelerates rapidly, but the number of blood
samples drawn per patient declines. Phase II and III studies are carried out
over several years with what has become a well established analytical protocol.
To maintain consistency in the analytical data, it is unusual for a sponsor to
change laboratories unless there are problems in the quality or timely delivery
of results.
An area of particular interest to the Company is drug interaction studies.
With increasing numbers of patients receiving multiple drug therapy, it is
critical that the impact of each drug be assessed with respect to its influence
on the effectiveness and toxicology of other drugs dosed simultaneously. This
process complicates and often extends clinical trials. Because drugs from
different manufacturers frequently will be used together, a CRO such as the
Company can provide services to several firms simultaneously in cases where a
potential synergy exists in another area (e.g. the "cocktail" approach to HIV
therapy). In such instances, a given assay technology might well be of interest
to a number of clients, thus spreading the assay development cost. More
importantly, drug interaction studies often develop new clients for the Company
in a much more cost effective manner than advertising or an outside sales force.
The Post-approval Phase. Following approval, the drug manufacturer must
comply with quality assurance and quality control requirements throughout
production and must continue chemical analytical and stability studies of the
drug during commercial production in order to continue to validate production
processes and confirm product shelf life. The drug manufacturer's raw materials
must be analyzed prior to use in production, and samples from each manufactured
batch must be tested prior to release of the batch for distribution to the
public. The Company also provides its bioanalytical services in all areas
during the post-approval phase, concentrating on bioequivalence studies of new
formulations, line extensions, new disease indications and drug interaction
studies.
Company Products and Services
Overview
The Company provides products and procedures for the $11 billion per year
analytical instrument industry, and also provides a broad array of bioanalytical
services in all phases of the drug development process. Over its 24 year
history, the Company has developed expertise in a number of core scientific
technologies which it has utilized in developing state-of-the-art procedures
designed to determine amounts of chemical substances in complex materials.
These technologies include: liquid chromatography, electrochemistry, solid phase
extraction, mass spectrometry, enzymology and fluorescence. The Company also
uses its expertise in analytical chemistry to provide a wide range of
bioanalytical services to pharmaceutical companies, academic institutions and
others involved in pharmaceutical research and development.
Products
The Company designs, manufactures and markets a broad range of products and
related scientific procedures that detect and quantify the presence of chemicals
in certain substances. The Company's products utilize state-of-the-art
scientific technology including liquid chromatography, electrochemistry and in
vivo sampling instrumentation. Presently, the Company's products and procedures
include:
- - Bioanalytical separation instrumentation that utilizes liquid
chromatography and Windows software to detect low concentrations of
substances in biological fluids and tissues.
- - A wide-range of chemical analyzers that utilize scientific technologies
including electrochemistry, liquid chromatography and enzymology to
analyze levels of chemicals such as acetylcholine, choline, serotonin and
dopamine in biological materials. These instruments assist scientists in
the study of, among other things, Alzheimer's disease, cocaine addiction
and the effects of chemical warfare agents and strokes.
- - Diagnostic kits and procedures, designed to utilize the Company's
instrumentation, that enable clinical laboratories and pharmaceutical
researchers to determine the presence of multiple drugs in blood plasma
and to measure neurotransmitters and their metabolites in plasma and
urine. These kits and procedures assist researchers in developing new
drugs for diseases such as AIDS and cardiovascular disease.
- - A line of miniaturized in vivo sampling devices, marketed to veterinary
and animal research centers, pharmaceutical companies and medical research
centers, which assist in the study of a number of medical conditions,
including stroke, depression, Parkinson's disease, diabetes and
osteoporosis.
[Remainder of page intentionally left blank.]
The chart below sets forth the Company's product categories, the technology
supporting each category and the applications of each category.
Product/Procedure Enabling Technology
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Bioanalytical Separation Instrumentation Liquid chromatography
High pressure digitally controlled metering
pumps
Electrochemistry and optics detectors
Customized Windows software
Customized Internet applications
Electrochemical Analyzers and Accessories Electrochemistry
Real time control and data acquisition
software
Customized Windows software
Customized Internet applications
Acetylcholine/Choline Analyzer Liquid chromatography
Enzymology
Electrochemistry
Serotonin and Dopamine Analyzer Liquid chromatography
Electrochemistry
Amino Acid Analyzer Derivatization chemistry
Liquid chromatography
Electrochemistry and/or
Fluorescence
In vivo sampling devices ("artificial blood Hydrophilic membrane fibers
vessels") and auxiliary instrumentation Digitally controlled pumping systems,
miniature fraction collectors, and valves
Kits for clinical measurement of Robotics
neurotransmitters and homocysteine in human Liquid chromatography
blood and urine Electrochemistry
Customized Windows software
Simultaneous determination of multiple drugs Robotics
in blood plasma Solid phase extraction
Liquid chromatography
Mass spectrometry
Vital signs monitoring Electrocardiology (ECG)
Temperature transducers
Real time software
Product/Procedure Application(s)
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Bioanalytical Separation Instrumentation Determining low concentrations of substances
in biological fluids and tissues
Electrochemical Analyzers and Accessories Development of biosensors for substances,
such as glucose, lactate, glutamate;
development of batteries for electronics such
as pacemakers; study of corrosion of implants
Acetylcholine/Choline Analyzer Studies of Alzheimer's disease; chemical
warfare agents; and infant formula
Serotonin and Dopamine Analyzer Developing serotonin reuptake inhibitors;
studies of the mechanism of cocaine addiction
Amino Acid Analyzer Studies of aspartate, glutamate, and GABA in
the brain; research to minimize the impact of
stroke and other ischemic events in the brain
In vivo sampling devices ("artificial blood Following pharmacokinetics in vivo;
vessels") and auxiliary instrumentation monitoring glucose; neurotransmitters,
peptides, and amino acids; studies of stroke,
depression, Parkinson's Disease, diabetes and
calcium loss related to osteoporosis and
weightlessness; reducing the use of animals in
research
Kits for clinical measurement of Evaluating cardiovascular disease, inborn
neurotransmitters and homocysteine in human errors of metabolism, and cancers of
blood and urine neurological origin
Simultaneous determination of multiple drugs "Cocktail" therapy for AIDS; drug interaction
in blood plasma studies during clinical trials
Vital signs monitoring ECG, respiration, blood pressure, and
temperature monitoring in veterinary clinics
and toxicology departments in pharmaceutical
companies
Services
The Company provides a wide variety of services to pharmaceutical
companies, medical device manufacturers, medical and research centers, academic
institutions and others. The Company's services unit has grown rapidly over the
last several years. The Company began providing services primarily in response
to requests from customers who
had used or were using the Company's products. As the Company's reputation has
grown, the Company's customers increasingly have drawn on the Company's
expertise in analytical chemistry to solve complex problems which arise in the
course of drug research and development. The Company's range of services now
include: method development and validation, product characterization, stability
testing, bioanalytical testing, diagnostic testing and in vivo sampling. The
Company is poised to utilize its expertise to provide a greater volume and
broader array of services. These services involve the application of the
Company's analytical chemistry expertise to a broad range of challenging and
complex issues, such as the services described below.
- - Method Development and Validation. The Company develops and validates
methods used in a broad range of laboratory testing necessary to
determine physical or chemical characteristics of compounds and finished
dosage forms. Analytical methods are developed to demonstrate potency,
purity, stability or physical attributes. These methods are validated to
ensure that the data generated are accurate, precise, reproducible and
reliable and are used throughout the drug development process and in
product support testing. Of the Company's 205 employees as of
September 30, 1998, more than 30 are Company scientists (including nine
who hold Ph.D. degrees) who are experienced with method development and
validation.
- - Product Characterization. The Company has the expertise and instruments
required to identify and characterize a broad range of chemical
entities. Characterization analysis identifies the chemical composition,
structure and physical properties of a compound, and characterization data
forms a significant portion of a regulatory application. The Company uses
numerous techniques to characterize the compound, including
chromatography, spectroscopy, electrochemistry and other physical
chemistry techniques. Once appropriate test methods are developed and
validated, and appropriate reference standards (highly pure samples) are
characterized and certified, the Company can assist clients by routinely
testing compounds for clinical and commercial use.
- - Stability Testing. The Company provides stability testing and secure
storage facilities necessary to establish and confirm product purity,
potency and other shelf-life characteristics. Stability testing is
required at all phases of product development in order to confirm shelf
life of each manufactured batch. The Company maintains a four-chamber, ICH
(International Conference on Harmonization) validated controlled climate
GMP facility. FDA regulations require that samples of clinical and
commercial products placed in stability chambers be analyzed in a timely
fashion after scheduled "pull points" occur, based on the date of
manufacture.
- - Bioanalytical Testing. The Company offers bioanalytical testing services
to support clinical trials by analyzing plasma samples to characterize
the drug's concentration and determine the rate of absorption and
elimination. Bioanalytical studies of new drugs often present challenging
and complex issues, with products being metabolized into multiple active
and inactive forms. The Company works with its clients to develop and
validate analytical methods to permit detection and measurement of the
various components to trace levels. In some cases clients expect the
Company to develop methodology, while in other cases methodology is
transferred from the client and refined and validated by the Company
personnel. The most common technology used in such studies is liquid
chromatography coupled with various detectors, including mass spectrometry
as well as optical and electrochemical devices.
- - Diagnostic Testing. The Company has manufactured bioanalytical chemistry
products since its start in 1974. The Company produces fully automated,
networkable state-of-the-art liquid chromatographs and electrochemical
analyzers based on Windows software. The Company has recently developed
and now produces a line of diagnostic kits designed to fit its
instrumentation. These kits help measure neurotransmitters and their
metabolites and homocysteine, an experimental cardiovascular disease
indicator in plasma and urine. These measurement processes are often
performed by Company personnel utilizing Company products.
- - In Vivo Sampling. The Company pioneered and has commercialized
miniaturized in vivo sampling methodology, which involves the
continuous monitoring of chemical changes in live animals. This technology
is sold as both a service and a line of products. The Company is
aggressively adding new components to this line, with the goal of selling
complete, automated sampling systems. Target markets include veterinary
and animal research centers, pharmaceutical companies and medical research
centers. The Company has received two significant Phase II SBIR (Small
Business Innovation Research) grants that involve subcontracts with Purdue
University and the University of Kansas for the purpose of exploiting this
emerging technology.
- - Formulation Development Services. In the future, the Company plans to
provide integrated formulation development services, enabling the Company
to take a client's compound and develop a safe and stable product with
desired characteristics. The Company believes its strong academic
connections to Purdue University and other academic institutions,
formulation expertise and extensive analytical capabilities position the
Company to provide a significant contribution to this area.
Clients
Over the past five years, the Company regularly has provided services and
products to all of the top 25 pharmaceutical companies in the world, as ranked
by 1997 research and development spending. In fiscal 1998, the Company
estimates that more than one-third of its total revenue was derived from these
companies. In addition, the Company products are purchased by the vast majority
of medical schools in North America, Europe and Asia. In fiscal 1998, the
Company provided products and services to approximately 300 institutions,
including some of the largest United States, European and Japanese drug
companies. Approximately 30% of the Company's revenues are generated from
customers located outside the United States.
The Company believes that a concentration of business among certain large
clients is not uncommon in the CRO industry. The Company has experienced such
concentration in the past and may do so again in the future. During 1996, four
operating groups (Quality Control, Analytical Research and Development, Clinical
Pharmacokinetics, and Drug Metabolism) of Pfizer, Inc. ("Pfizer"), a major
United States pharmaceutical company, in the aggregate accounted for
approximately 18% of the Company's total revenues. These sales were derived
from both the products and the services units of the Company. During 1997 and
1998, Pfizer accounted for approximately 21% and 20%, respectively, of the
Company's total revenues. Most of these sales fell under approximately 80
contracts the Company has or had with Pfizer, the largest of which totaled
approximately $400,000. Although the Company strives to reduce its reliance on
a limited number of major clients, there can be no assurance that the Company's
business will not be dependent upon certain major clients, the loss of which
could have a material adverse effect on the Company. In addition, due to the
project-oriented nature of the Company's business, there can be no assurance
that significant clients in any one period will continue to be significant
clients in other periods.
Sales and Marketing
Marketing and sales initiatives have been created to address market needs
and economic reality. These services have grown primarily through direct,
internal recommendations among major pharmaceutical manufacturers. Frequently,
these customers have had prior relationships with the Company's staff and
positive experiences with the Company's products and services. The Company
recognizes that its growth and continued customer satisfaction are dependent
upon its ability to continually improve its sales and marketing functions.
In North America, the Company's products are sold directly to the end user.
The Company has approximately 20 personnel selling a range of products and an
equal number providing technical and development support. All staff members are
technically trained and function in both capacities. The Company also has
established a highly professional collection of catalogs, training and technical
support literature, video tapes, CD-Rom presentations, web sites, workshops, and
academic publications. The Company's peer- reviewed journal, Current
Separations, describes independent research in technologies of interest to the
Company's customers, and is distributed to 18,500 readers worldwide, many of
whom are current or potential customers.
Product sales, marketing and technical support is based in the Company's
main office located in West Lafayette, Indiana. The Company also maintains an
office in New Jersey with a small sales and technical staff, thus enabling the
Company to demonstrate its products and present technical workshops in close
proximity of its largest concentration of key customers. The Company also
maintains sales and technical support capabilities in Massachusetts, New York,
Ohio, Texas, Pennsylvania and Kansas.
The Company's marketing plan provides for new sales representation in
California and the Midwest, stronger promotion of all product lines, enhanced
workshops, improved training and implementation of demonstration capabilities in
the Company's new facilities. The Company's primary marketing and sales
strategy is to be more aggressive, focus on customer needs and further
strengthen communications with its markets. In so doing, the Company will build
on its long history of innovation and technical excellence.
Bioanalytical Systems, Ltd., a wholly-owned subsidiary of the Company,
manages most product sales in Europe. BAS Analytics, Ltd., also a wholly-owned
subsidiary of the Company, provides direct liaison with research service clients
in the United Kingdom and maintains a laboratory to provide such services. In
addition, the Company has a network of more than 20 established distributors
covering Japan, the Pacific Basin, South America, the Middle East, India, South
Africa and Eastern Europe. Revenue generated from the Company's Japanese
distributor, BAS Japan, accounted for approximately 12% and 6% of the Company's
total revenue for fiscal 1997 and 1998, respectively. Although the Company
believes that it could identify a suitable replacement in the event that BAS
Japan discontinues as the Company's distributor, such an event could have a
material adverse effect on the Company's business, operations and financial
condition. (See Note 8 of Notes to Consolidated Financial Statements.) All of
the Company's distributor relationships are managed from the Company's
headquarters in West Lafayette, Indiana. International growth is planned
through acquisitions, stronger local promotion and significant expansion of the
Company's distributor network.
Contractual Arrangements
The Company's service contracts typically establish an estimated fee for
identified services. While the Company is performing a contract, clients often
adjust the scope of services to be provided by the Company in light of interim
project results, at which time the amount of fees is adjusted accordingly.
Generally, the Company's fee-for-service contracts are terminable by the client
upon written notice of 30 days or less. Contracts may be terminated for a
variety of reasons, including the client's decision to forego a particular
study, the failure of product prototypes to satisfy safety requirements and
unexpected or undesired results of product testing. The loss of a large
contract or the loss of multiple contracts could adversely affect the Company's
future revenue and profitability.
Backlog
Backlog for the Company's products consists of booked purchase orders for
products which have not been shipped. The Company rarely has a backlog for its
products of more than one month of sales. Many products are shipped within 24
hours of receipt of order. Because the arrangements pursuant to which the
Company provides its services are terminable upon written notice of 30 days or
less, the Company does not calculate backlog for the services it provides and
does not believe that determining such amount would provide a meaningful
indicator of the future performance of its services unit.
Competition
With respect to its products, the Company competes with several large
equipment manufacturers, including Hewlett Packard, Waters Corporation and
Perkin Elmer Corporation. Competitive factors include product quality,
reliability and price. The Company believes it competes favorably in its
targeted markets because of its ability to combine quality products with
technical assistance and services to meet customer needs.
With respect to its services, the Company competes primarily with in-house
research, development, quality control and other support service departments of
pharmaceutical and biotechnology companies, as well as university research
laboratories and teaching hospitals. In addition, there are numerous
full-service CRO's that compete in this industry. The largest CRO competitors
offering similar research services include Covance, Inc., Pharmaceutical Product
Development, Inc., Applied Analytical Industries, Inc., Phoenix International
Life Sciences Inc. and MDS Health Group Ltd. CROs generally compete on the
basis of previous experience, medical and scientific expertise in specific
therapeutic areas, quality of contract research, ability to organize and manage
large-scale trials on a global basis, medical database management capabilities,
ability to provide statistical and regulatory services, ability to recruit
investigators, ability to integrate information technology with systems to
improve the efficiency of contract research, existence of an international
presence with strategically located facilities, financial viability and price.
Many of the Company's competitors are much larger and have significantly
greater financial resources than the Company.
Government Regulation
The services performed by the Company are subject to various regulatory
requirements designed to ensure the quality and integrity of pharmaceutical and
diagnostic products. These regulations are governed primarily under the
Federal Food, Drug and Cosmetic Act, as well as Associated GLP and GMP
regulations which are administered by the FDA in accordance with current
industry standards. The regulatory requirements apply to all phases of
manufacturing, testing and record keeping, including personnel, facilities,
equipment, control of materials, processes and laboratories, packaging, labeling
and distribution. Noncompliance by the Company with GLPs and GMPs by the Company
could result in disqualification of data collected by the Company in a
particular project. Material violation of GLP or GMP requirements could result
in additional regulatory sanctions and, in severe cases, could also result in a
discontinuance of selected Company operations. Such discontinuance would have a
material adverse effect on the Company's business, financial condition and
results of operations.
To help assure compliance with applicable regulations, the Company has
established quality assurance controls at its facilities that monitor ongoing
compliance by auditing test data and regularly inspecting facilities, procedures
and other GMP compliance parameters. In addition, FDA regulations and
guidelines serve as a basis for the Company's standard operating procedures,
where applicable. Certain of the Company's development and testing activities
are subject to the Controlled Substances Act, administered by the Drug
Enforcement Agency ("DEA"), which strictly regulates all narcotic and
habit-forming substances. The Company maintains restricted-access facilities
and heightened control procedures for projects involving such substances due to
the level of security and other controls required by the DEA. In addition to
FDA regulations, the Company is subject to other federal and state regulations
concerning such matters as occupational safety and health and protection of the
environment.
The Company's activities involve the controlled use of hazardous materials
and chemicals. The Company is subject to foreign, federal, state and local laws
and regulations governing the use, storage, handling and disposal of such
materials and certain waste products. The risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of
such an accident, the Company could be held liable for any damages that result.
Such damages could have a material adverse effect on the Company's business and
results of operations.
Product Liability and Insurance
The Company maintains product liability and professional errors and
omissions liability insurance, providing approximately $6.0 million in coverage
on a claims-made basis. Additionally, in certain circumstances the Company
seeks to manage its liability risk through contractual provisions with clients
requiring the Company to be indemnified by the client or covered by clients'
product liability insurance policies. Also, in certain types of engagements the
Company seeks to limit its contractual liability to clients to the amount of
fees received by the Company. The contractual arrangements are subject to
negotiation with clients and the terms and scope of such indemnification,
liability limitation and insurance coverage vary based upon client and project.
Although most of the Company's clients are large, well-capitalized companies,
the financial performance of these indemnities is not secured. Therefore, the
Company bears the risk that the indemnifying party may not have the financial
ability to fulfill its indemnification obligations or that liability would
exceed the amount of applicable insurance. Furthermore, the Company could be
held liable for errors and omissions in connection with the services it
performs. There can be no assurance that the Company's insurance coverage will
be adequate or that insurance coverage will continue to be available on terms
acceptable to the Company, or that the Company can obtain indemnification
arrangements or otherwise be able to limit its liability risk.
Employees
At September 30, 1998, the Company had 205 full-time employees, 125 of
which hold college degrees, including 30 Ph.D.s. All employees enter into
confidentiality agreements intended to protect the Company's proprietary
information. The Company believes that its relations with its employees are
good. None of the Company's employees are represented by a union. The
Company's performance depends on its ability to attract and retain qualified
professional, scientific and technical staff. The level of competition among
employers for skilled personnel is high. The Company believes that its employee
benefit plans enhance employee morale, professional commitment and work
productivity and provide an incentive for employees to remain with the Company.
While the Company has not experienced any significant problems in attracting or
retaining qualified personnel, there can be no assurance that the Company will
be able to avoid these problems in the future.
Item 2. Properties
The Company's principal executive offices are located at 2701 Kent Avenue,
West Lafayette, Indiana, 47906, and constitute approximately 100,000 square feet
of operational and administrative space. The Company also maintains offices
which provide sales and technical support services in New Jersey, Pennsylvania
and the United Kingdom, and employs sales and technical support service
representatives in North Carolina and Texas. The Company believes that its
facilities are adequate for the Company's operations and that suitable
additional space will be available when needed.
Item 3. Legal Proceedings
The Company from time to time may be involved in various claims and legal
proceedings arising in the ordinary course of business. The Company does not
believe that any pending claims or proceedings, individually or in the
aggregate, would have a material adverse effect on the Company's financial
condition or results of operations. In April, 1997, CMA Microdialysis Holding
A.B. ("CMA") filed an action against the Company in the United States District
Court for the District of New Jersey in which CMA alleged that the Company's
microdialysis probes infringe U.S. Patent No. 4,694,832. The Company has filed
an answer in which it denied infringement and in which it asserted that the
patent on which CMA relies in invalid. Sales of the product in question
accounted for less than $120,000 of the Company's revenues in fiscal 1998. The
matter is now awaiting a trial date. Management intends to continue a vigorous
defense of CMA's claims, and believes that the ultimate outcome of this matter
will not have a material adverse effect on the Company's financial condition or
result of operations. However, legal expenses associated with the defense of
this suit have had and will continue to have an adverse effect on earnings.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
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Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The following table shows the quarterly range of high and low sales prices
for the Company's Common Shares as reported by the Nasdaq Stock Market for the
fiscal year ended September 30, 1998. The approximate number of recordholders
of outstanding Common Shares as of September 30, 1998 was 1700. The Common
Shares were not publicly traded prior to November 24, 1997.
Fiscal 1998 High Low
- -------------- ------- -------
First Quarter $ 8.875 $ 7.625
Second Quarter 10.250 6.750
Third Quarter 9.000 6.750
Fourth Quarter 7.375 4.625
On November 24, 1997, the SEC declared effective the Company's Registration
Statement on Form S-1, File Number 333-36429. Item 2 of Part II of the
Company's Form 10-Q for the period ended December 31, 1997 set forth information
regarding the net proceeds received by the Company from the offering pursuant to
such registration statement and the Company's use of such proceeds. The
information below reflects changes since such disclosure.
The net proceeds received by the Company from the offering were $9,362,000
after deducting expenses paid by the Company of $1,438,000, consisting of
$756,000 for underwriting discounts and commissions and $682,000 for legal,
accounting and printing fees.
As of September 30, 1998, the Company had used approximately $8,200,000 of
the net proceeds from the offering to repay indebtedness and fund operations.
The balance of the net proceeds, or approximately $1,200,000, was invested in
money market funds.
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Item 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands)
The following is selected audited consolidated financial data of the
Company for the five years ended September 30, 1998. The data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements of
Bionalytical Systems, Inc. and notes thereto contained elsewhere in this Form
10-K.
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1997 1998
------------------ ------------------ ------------------ ------------------ ------------------
(in thousands, (in thousands, (in thousands, (in thousands, (in thousands,
except per share except per share except per share except per share except per share
data) data) data) data) data)
------------------ ------------------ ------------------ ------------------ ------------------
Statement of Income Data:
Product revenue $ 8,903 $ 9,627 $ 9,113 $ 9,932 $ 10,616
Services revenue 1,800 2,725 3,681 4,991 7,609
------------------ ------------------ ------------------ ------------------ ------------------
Total revenue 10,703 12,352 12,794 14,923 18,225
Cost of product revenue 3,418 3,448 3,227 3,334 3,911
Cost of services revenue 1,039 1,834 2,141 2,986 4,598
------------------ ------------------ ------------------ ------------------ ------------------
Total cost of revenue 4,457 5,282 5,368 6,320 8,509
------------------ ------------------ ------------------ ------------------ ------------------
Gross profit 6,246 7,070 7,426 8,603 9,716
------------------ ------------------ ------------------ ------------------ ------------------
Operating expenses:
Selling 3,531 3,940 3,937 4,225 4,524
Research and Development 1,122 1,124 1,424 1,568 2,165
General and administrative 984 1,222 1,364 1,638 2,336
------------------ ------------------ ------------------ ------------------ ------------------
Total operating expenses 5,637 6,286 6,725 7,431 9,025
------------------ ------------------ ------------------ ------------------ ------------------
Operating Income 609 784 701 1,172 691
Other income (expense), net 192 111 (18) (75) (25)
------------------ ------------------ ------------------ ------------------ ------------------
Income before income taxes 801 895 683 1,097 666
Income taxes 253 344 283 413 254
------------------ ------------------ ------------------ ------------------ ------------------
Net income $ 548 $ 551 $ 400 $ 684 $ 412
================== ================== ================== ================== ==================
Net income available to common
shareholders $ 495 $ 497 $ 347 $ 657 $ 412
Net income per Common Share
Basic $ .24 $ .23 $ .16 $ .30 $ .10
Diluted $ .16 $ .16 $ .11 $ .21 $ .09
Weighted average Common Shares
outstanding
Basic 2,097 2,185 2,185 2,221 4,117
Diluted 3,048 3,066 3,089 3,101 4,403
September 30, September 30, September 30, September 30, September 30,
1994 1995 1996 1997 1998
-------------- -------------- -------------- -------------- ---------------
(in thousands) (in thousands) (in thousands) (in thousands) (in thousands)
-------------- -------------- -------------- -------------- ---------------
Balance Sheet Data:
Working capital $ 4,392 $ 4,080 $ 3,059 $ 2,493 $ 3,286
Property and equipment, net 2,736 3,707 6,526 10,035 14,551
Total assets 8,163 9,428 11,374 15,931 22,280
Long-term debt, less current portion 187 416 2,512 5,045 1,124
Convertible Preferred Shares 2,047 2,100 1,530 1,231 -
Shareholders' equity 4,056 4,609 4,956 5,651 16,844
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis should be read in conjunction with
Selected Consolidated Financial Data and the Company's Consolidated Financial
Statements and notes thereto included elsewhere in this Report. In addition to
the historical information contained herein, the discussions in this Report may
contain forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed herein.
Overview
The Company provides a broad range of value-added products and services
focused on chemical analysis to the worldwide pharmaceutical, medical device and
biotechnology industries. The Company's customer-focused approach and high
quality products and services enable it to serve as a value-added partner in
solving complex scientific problems by providing cost-effective results to its
customers on an accelerated basis. Founded in 1974 in Lansing, Michigan and
relocated to West Lafayette, Indiana in 1975, the Company has experienced growth
primarily through internal expansion, supplemented by strategic acquisitions.
As part of its internal growth strategy, the Company has developed technical
specialties in such areas as chromatography, electrochemistry, in vivo sampling
and mass spectrometry. The Company's growth has strategically positioned it to
take advantage of globalization in the marketplace and to provide new services
and areas of technical expertise to its customers. During this phase, the
Company has been continuously profitable since 1987.
Throughout its history, the Company has taken steps to position itself as a
global leader in the analytical chemistry field. Development of the Company's
infrastructure began in 1975 when it established relationships with several
customers and multiple international distributors. In 1981, the Company
increased its sphere of influence to include Japan with the creation of BAS
Japan, an independent distributor. In 1988, the Company enhanced its computer
software expertise by acquiring Interactive Microware, Inc. In 1990, the
Company began offering contract services to customers that lacked the time or
expertise to perform certain analyses using the Company's analytical products.
In 1995, the Company acquired a distributor, BAS Technicol Ltd., to further
solidify its presence in the United Kingdom.
Revenues are derived principally from (i) the sale of the Company's
analytical instruments and other products, and (ii) analytical services provided
to customers. Both methods of generating revenue utilize the Company's ability
to identify, isolate and resolve client problems relating to the separation and
quantification of individual substances in complex mixtures. The Company's
analytical products are sold primarily to pharmaceutical firms and research
organizations. The Company supports the pharmaceutical industry by focusing on
analytical chemistry for biomedical research, diagnostics, electrochemistry and
separations science. Principal customers include scientists engaged in drug
metabolism studies, as well as those engaged in basic neuroscience research.
The Company was the first to commercialize the liquid chromatograph and
electrochemistry technology which is now considered the worldwide standard for
the determination of neurotransmitter substances. Research products include in
vivo sampling devices, reagent chemicals, electrochemical apparatus and sensors.
Revenue from the sale of the Company's products and the related costs are
recognized upon shipment of the products to customers. The Company's
pharmaceutical service contracts generally have terms ranging from several
months to several years. A portion of the contract fee is generally payable
upon receipt of the initial samples with the balance payable in installments
over the life of the contract. The contracts are broken down into discrete
units of deliverable services for which a fixed fee per unit is established.
Revenue and related direct costs are recognized as specific contract terms are
fulfilled under the percentage of completion method utilizing units of delivery.
The termination of a contract results in no material adjustments to revenue or
direct costs previously recognized. The Company is entitled to payment for all
work performed through the date of notice of termination and all costs
associated with termination of a contract.
The Company's management believes that fluctuations in the Company's
quarterly results are caused by a number of factors, including the Company's
success in attracting new business, the size and duration of service contracts,
the timing of its clients' decisions to enter into new contracts, the
cancellation or delays of on-going contracts, the timing of acquisitions and
other factors, many of which are beyond the Company's control. In fiscal 1998,
approximately 30% of the Company's total revenue was derived from customers
located outside the United States. These markets tend to be much more volatile
than the United States market. Significant governmental, regulatory, political,
economic and
cultural issues or changes could adversely affect the growth or profitability
of the Company's business activities in any such market.
Results of Operations
The following table sets forth, for the periods indicated, certain
statement of income data as a percentage of total revenue.
Percentage of Revenue Percentage of Revenue Percentage of Revenue
---------------------- ---------------------- ----------------------
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1996 1997 1998
---------------------- ---------------------- ----------------------
Product revenue 71.2% 66.6% 58.2%
Services revenue 28.8 33.4 41.8
---------------------- ---------------------- ----------------------
Total revenue 100.0 100.0 100.0
Cost of product revenue 25.2 22.3 21.5
Cost of services revenue 16.8 20.0 25.2
---------------------- ---------------------- ----------------------
Total cost of revenue 42.0 42.3 46.7
---------------------- ---------------------- ----------------------
Gross profit 58.0 57.7 53.3
Operating expenses:
Selling 30.8 28.3 24.8
Research and development 11.1 10.5 11.9
General and
administrative 10.7 11.0 12.8
---------------------- ---------------------- ----------------------
Total operating
expenses 52.6 49.8 49.5
Operating income 5.4 7.9 3.8
Other income (expense),
net (0.1) (0.5) (0.1)
---------------------- ---------------------- ----------------------
Income before income
taxes 5.3 7.4 3.7
Income taxes 2.2 2.8 1.4
---------------------- ---------------------- ----------------------
Net income 3.1% 4.6% 2.3%
====================== ====================== ======================
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Year ended September 30, 1998 compared with Year ended September 30, 1997
Total revenue for the year ended September 30, 1998 increased 22.1% to
approximately $18.2 million from approximately $14.9 million in the year ended
September 30, 1997. The net increase of approximately $3.3 million related
primarily to increased revenue from services, which increased to approximately
$7.6 million in the year ended September 30, 1998 from approximately $5.0
million in the year ended September 30, 1997 as a result of the expansion of the
types and volume of services provided by the Company. During this same period,
product revenue increased to approximately $10.6 million for the year ended
September 30, 1998 from approximately $9.9 million for the year ended September
30, 1997 primarily as a result of increased penetration in the physiology and
the liquid chromatography markets.
Costs of revenue increased 34.6% to approximately $8.5 million for the year
ended September 30, 1998 from approximately $6.3 million for the year ended
September 30, 1997. This increase of approximately $2.2 million was largely due
to the hiring of additional support staff in the services unit. Costs of
revenue for the Company's products increased to 36.8% as a percentage of product
revenue for the year ended September 30, 1998 from 33.6% of product revenue for
the year ended September 30, 1997, due primarily to a change in product mix.
Costs of revenue for the Company's services increased to approximately 60.4% as
a percentage of services revenue for the year ended September 30, 1998 from
approximately 59.8% of services revenue for the year ended September 30, 1997
due to an increase in services support staff.
Selling expenses for the year ended September 30, 1998 increased 7.1% to
approximately $4.5 million from approximately $4.2 million during the year ended
September 30, 1997 due to increased salary expense. Research and development
expenses for the year ended September 30, 1998 increased 38.1% to approximately
$2.2 million from approximately $1.6 million for the year ended September 30,
1997 due to the increase in research grant activity. General and administrative
expenses for the year ended September 30, 1998 increased 42.6% to approximately
$2.3 million from approximately $1.6 million for the year ended September 30,
1997, primarily as a result of increased legal expenses associated with the
patent infringement suit. (See Item 3 - Legal Proceedings)
Other income (expense), net, was approximately $(25,000) in the year ended
September 30, 1998 as compared to approximately $(75,000) in the year ended
September 30, 1997 as a result of the increase in interest income due to an
increase in cash and cash equivalents resulting from the initial public
offering.
The Company's effective tax rate for 1998 was 38.2% as compared to 37.7%
for fiscal 1997. This increase was primarily due to nondeductible foreign
losses incurred in fiscal 1998.
Year ended September 30, 1997 compared with Year ended September 30, 1996
Total revenue for the year ended September 30, 1997 increased 16.6% to
approximately $14.9 million from approximately $12.8 million in the year ended
September 30, 1996. The net increase of approximately $2.1 million related
primarily to increased revenue from services, which increased to approximately
$5.0 million in the year ended September 30, 1997 from approximately $3.7
million in the year ended September 30, 1996 as a result of the expansion of
types and volume of services provided by the Company. During this same period,
product revenue increased to approximately $9.9 million for the year ended
September 30, 1997 from approximately $9.1 million for the year ended September
30, 1996 primarily as a result of increased penetration in the electrochemistry
and the liquid chromatography markets.
Costs of revenue increased 17.7% to approximately $6.3 million for the year
ended September 30, 1997 from approximately $5.4 million for the year ended
September 30, 1996. This increase of approximately $952,000 was largely due to
the hiring of additional support staff in the services unit. Costs of revenue
for the Company's products decreased to 33.6% as a percentage of product revenue
for the year ended September 30, 1997 from 35.4% of product revenue for the year
ended September 30, 1996, due to a change in product mix. Costs of revenue for
the Company's services increased to approximately 59.8% as a percentage of
services revenue for the year ended September 30, 1997 from approximately 58.2%
of services revenue for the year ended September 30, 1996 due to an increase in
services support staff.
Selling expenses for the year ended September 30, 1997 increased 7.3% to
approximately $4.2 million from approximately $3.9 million during the year ended
September 30, 1996 due to increased commissions on foreign sales. Research and
development expenses for the year ended September 30, 1997 increased 10.1% to
approximately $1.6 million from approximately $1.4 million for the year ended
September 30, 1996 due to the development of the in vivo product line.
General and administrative expenses for the year ended September 30, 1997
increased 20.1% to approximately $1.6 million from approximately $1.4 million
for the year ended September 30, 1996, primarily as a result of increased
property taxes incurred in connection with the Company's purchase and
construction of additional facilities.
Other income (expense), net, was approximately $(75,000) in the year ended
September 30, 1997 as compared to approximately $(18,000) in the year ended
September 30, 1996 as a result of a reduction of interest income due to a
reduction in cash and cash equivalents resulting from the redemption of
Redeemable Preferred Shares owned by the Company's venture capital shareholders
in accordance with their terms.
The Company's effective tax rate for 1997 was 37.7% as compared to 41.4%
for fiscal 1996. This decrease was primarily due to utilization of the research
and development tax credit.
Liquidity and Capital Resources
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 including the Company's initial public offering which was completed
in November 1997. At September 30, 1998, the Company had cash and cash
equivalents of approximately $1.2 million, compared to cash and cash equivalents
of approximately $161,000 at September 30, 1997. The increase in cash resulted
primarily from the initial public offering which funded the increase in capital
expenditures made to expand the Company's facilities and operations.
The Company's net cash provided by operating activities was approximately
$2.4 million for the year ended September 30, 1998. Cash provided by operations
during the year ended September 30, 1998 consisted of net income of
approximately $412,000, plus non-cash charges of approximately $989,000, plus a
net decrease of approximately $969,000 in operating assets and liabilities. The
most significant decrease in operating assets related to trade accounts
receivable, which decreased approximately $431,000 at September 30, 1998.
Cash used by investing activities increased to approximately $5.0 million
for the year ended September 30, 1998 from approximately $4.0 million for the
year ended September 30, 1997, primarily as a result of the Company's purchase
and construction of additional facilities, as well as the acquisition of
Clinical Innovations. Cash provided by financing activities for fiscal 1998 was
approximately $3.7 million due to the initial public offering partially offset
by the reduction of debt.
The Company's net cash provided by operating activities was approximately
$842,000 for the year ended September 30, 1997. Cash provided by operations
during the year ended September 30, 1997 consisted of net income of
approximately $684,000 plus non-cash charges of approximately $584,000 partially
offset by a net increase of approximately $426,000 in operating assets and
liabilities. The most significant increase in operating assets related to
accounts receivable, which increased to approximately $3.0 million at September
30, 1997 from approximately $1.6 million at September 30, 1996, due primarily to
sales growth.
Cash used by investing activities increased to approximately $4.0 million
for the year ended September 30, 1997 from approximately $3.2 million for the
year ended September 30, 1996, primarily as a result of the Company's purchase
and construction of additional facilities. Cash provided by financing
activities for fiscal 1997 was approximately $2.7 million due to an increase in
the Company's long and short term debt and offset by the redemption of
Redeemable Preferred Shares in accordance with their terms.
Total expenditures by the Company for property and equipment were
approximately $3.2 million, $4.1 million and $4.9 million in fiscal 1996, 1997
and 1998, respectively. Expenditures made in connection with the expansion of
the Company's operating facilities and purchases of laboratory equipment account
for the largest portions of these expenditures. The Company anticipates
increased levels of capital expenditures in fiscal 1999. The increased capital
investments relate to the completion of the renovation and construction of
additional facilities and the purchase of
additional laboratory equipment corresponding to anticipated increases in
research services to be provided by the Company. The Company also completed two
acquisitions during fiscal 1998. Net payments made in connection with these
acquisitions were approximately $1.6 million. The Company expects to make other
investments to expand its operations through internal growth, strategic
acquisitions, alliances and joint ventures. However, the Company currently has
no firm commitments for capital expenditures other than in connection with the
expansion of the Company's facilities.
Based on its current business activities, the Company believes that cash
generated from its operations, amounts available under its existing bank lines
of credit and credit facility and the remaining net proceeds from its initial
public offering will be sufficient to fund the Company's working capital and
capital expenditure requirements for the foreseeable future.
The Company has a $7.5 million bank line of credit agreement which expires
March 1, 1999. Interest is charged at the prime rate (8.25% at September 30,
1998). At September 30, 1998, the line was unused. The line is collateralized
by inventories and accounts receivable. All prior year bank debt obligations
were repaid in full on November 27, 1997 using the proceeds received from the
Company's initial public offering.
Inflation
To date, the Company believes that the effects of inflation have not had a
material adverse effect on its business, operations or financial condition.
Year 2000
The Company undertook in fiscal 1998 to identify those information
technology and other systems which may not be Year 2000 compliant. The Company
has identified that its primary computer hardware and software systems
will require modifications, and the Company has developed and commenced
implementation of a plan to modify such systems to recognize the Year 2000.
Management currently expects this project to be substantially complete by the
spring of 1999, and management estimates that the project will involve capital
expenditures (excluding normal system upgrades and replacements) of less than
$75,000. Management has initiated discussions with significant suppliers,
customers and financial institutions to ensure that those parties have
appropriate plans to remediate Year 2000 issues where their systems interface
with the Company's systems or otherwise impact its operations. The Company is
also assessing the extent to which its operations are vulnerable should those
organizations fail to properly remediate their computer systems. The cost
of the Year 2000 initiatives in the aggregate is not expected to be material to
the Company's results of operations or financial position.
New Accounting Pronouncements
In July 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information." Under SFAS 131, the Company will report financial and
descriptive information about its operating segments. SFAS 131 is effective for
fiscal years beginning after December 15, 1997. The Company plans to adopt SFAS
131 on October 1, 1998. The Company has not yet evaluated the impact of SFAS
131.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No.130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS 130 establishes
standards for the reporting and display of comprehensive income in financial
statements. SFAS 130 is effective for fiscal years beginning after December 15,
1997. The Company plans to adopt SFAS 130 on October 1, 1998. The Company has
not yet evaluated the impact of SFAS 130.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
Item 8. Financial Statements and Supplementary Data
Report of Independent Auditors
Board of Directors and Shareholders
Bioanalytical Systems, Inc.
We have audited the accompanying consolidated balance sheets of Bioanalytical
Systems, Inc. as of September 30, 1998 and 1997, and the related consolidated
statements of income, preferred shares and shareholders' equity and cash flows
for each of the three years in the period ended September 30, 1998. 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 generally accepted auditing
standards. 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. at September 30, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended September 30, 1998 in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Indianapolis, Indiana
November 6, 1998
Bioanalytical Systems, Inc.
Consolidated Balance Sheets
September 30, September 30,
1997 1998
-------------- --------------
Assets
Current assets:
Cash and cash equivalents $ 161,338 $ 1,208,157
Accounts receivable (Note 4):
Trade 2,361,591 2,774,714
Grants 370,198 209,164
Other 281,579 61,603
Inventories (Notes 3 and 4) 1,911,231 1,880,680
Deferred income taxes (Note 5) 209,695 168,649
Prepaid expenses 46,787 59,694
-------------- ---------------
Total current assets 5,342,419 6,362,661
Goodwill, less accumulated amortization of
$30,002 in 1997 and, $62,120 in 1998 (Note 2) 210,030 1,134,265
Other assets 343,120 231,865
Property and equipment (Note 4):
Land and improvements 171,014 171,014
Buildings and improvements 4,294,183 8,355,058
Machinery and equipment 4,067,319 7,463,099
Office furniture and fixtures 680,395 1,073,572
Construction in process 3,625,062 1,464,092
-------------- ---------------
12,837,973 18,526,835
Less accumulated depreciation and amortization (2,802,823) (3,975,912)
-------------- ---------------
10,035,150 14,550,923
-------------- ---------------
Total assets $ 15,930,719 $ 22,279,714
============== ===============
Liabilities, Preferred Shares and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,341,181 $ 1,940,615
Income taxes payable 250,153 155,480
Accrued expenses 352,593 352,403
Customer advances 101,986 319,420
Current portion of long-term debt 287,833 308,447
Lines of credit 515,377 -
-------------- ---------------
Total current liabilities 2,849,123 3,076,365
Long-term debt, less current portion (Note 4) 5,044,875 1,123,747
Deferred income taxes (Note 5) 1,154,166 1,236,093
Preferred shares (Note 6):
Authorized shares - 1,000,000
Issued and outstanding shares:
Convertible - 166,667 in 1997 1,231,242 -
Shareholders' equity (Note 6):
Common shares, no par value:
Authorized shares - 19,000,000
Issued and outstanding shares - 2,247,601 in 1997,
and 4,495,319 in 1998 497,875 995,778
Additional paid-in capital 178,233 10,467,957
Retained earnings 4,978,149 5,390,342
Currency translation adjustment (2,944) (10,568)
-------------- ---------------
5,651,313 16,843,509
-------------- ---------------
Total liabilities, preferred shares and shareholders' equity $ 15,930,719 $ 22,279,714
============== ===============
See accompanying notes.
Bioanalytical Systems, Inc.
Consolidated Statements of Income
Year ended Year ended Year ended
September 30, September 30, September 30,
1996 1997 1998
--------------- --------------- ---------------
Product revenue $ 9,113,297 $ 9,932,022 $ 10,616,363
Services revenue 3,680,838 4,991,348 7,608,792
--------------- --------------- ---------------
Total Revenue 12,794,135 14,923,370 18,225,155
Cost of product revenue 3,226,736 3,334,413 3,910,740
Cost of services revenue 2,141,715 2,985,858 4,598,266
--------------- --------------- ---------------
Total Cost of Revenue 5,368,451 6,320,271 8,509,006
--------------- --------------- ---------------
Gross profit 7,425,684 8,603,099 9,716,149
Operating expenses:
Selling 3,937,224 4,224,523 4,524,664
Research and development 1,423,901 1,568,417 2,164,951
General and administrative 1,363,921 1,638,465 2,335,564
--------------- --------------- ---------------
Total Operating Expenses 6,725,046 7,431,405 9,025,179
--------------- --------------- ---------------
Operating income 700,638 1,171,694 690,970
Interest income 38,843 4,835 86,521
Interest expense (81,396) (100,177) (92,855)
Other income (expense) 28,180 12,306 (26,587)
Gain (loss) on sale of property
and equipment (3,218) 8,831 8,486
--------------- --------------- ---------------
Income before income taxes 683,047 1,097,489 666,535
Income taxes (Note 5) 282,648 413,395 254,342
--------------- --------------- ---------------
Net income $ 400,399 $ 684,094 $ 412,193
=============== =============== ===============
Net income available to common
shareholders $ 347,063 $ 657,046 $ 412,193
Net income per share:
Basic $ 0.16 $ 0.30 $ 0.10
Diluted $ 0.11 $ 0.21 $ 0.09
Weighted average common
shares outstanding:
Basic 2,185,149 2,221,146 4,117,088
Diluted 3,089,308 3,101,429 4,402,755
See accompanying notes.
Bioanalytical Systems, Inc.
Consolidated Statements of Preferred Shares and Shareholders' Equity
Redeemable Convertible Currency
Preferred Preferred Common Additional Retained Translation
Shares Shares Shares Paid-in Capital Earnings Adjustment
------------ ------------- --------- ---------------- ----------- -------------
Balance at September 30, 1995 $ 868,997 $ 1,231,242 $ 483,375 $ 149,233 $3,974,040 $ 2,309
Net income - - - - 400,399 -
Accrual of cumulative dividends
on preferred shares 53,336 - - - (53,336) -
Issuance of 4,514 common shares
for the exercise of stock options - - 1,000 2,000 - -
Redemption of Preferred Shares (624,031) - - - - -
Currency translation adjustment - - - - - (3,352)
------------ ------------- --------- ---------------- ----------- -------------
Balance at September 30, 1996 298,302 1,231,242 484,375 151,233 4,321,103 (1,043)
Net income - - - - 684,094 -
Accrual of cumulative dividends
on preferred shares 27,048 - - - (27,048) -
Issuance of 60,944 common shares for
the exercise of stock options - - 13,500 27,000 - -
Redemption of Preferred Shares (325,350) - - - - -
Currency translation adjustment - - - - - (1,901)
------------ ------------- --------- ---------------- ----------- -------------
Balance at September 30, 1997 - 1,231,242 497,875 178,233 4,978,149 (2,944)
Net income - - - - 412,193 -
Conversion of preferred shares
at IPO - (1,231,242) 166,667 1,064,575 - -
Issuance of 145,328 common shares for
the exercise of stock options - - 32,192 165,454 - -
Issuance of common stock at IPO - - 299,044 9,059,695 - -
Currency translation adjustment - - - - - (7,624)
------------ ------------- --------- ---------------- ----------- -------------
Balance at September 30, 1998 $ - $ - $ 995,778 $ 10,467,957 $5,390,342 $ (10,568)
============ ============= ========= ================ =========== =============
See accompanying notes.
Bioanalytical Systems, Inc.
Consolidated Statements of Cash Flows
Year ended Year ended Year ended
September 30, September 30, September 30,
1996 1997 1998
--------------- --------------- ---------------
Operating activities
Net income $ 400,399 $ 684,094 $ 412,193
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 399,797 536,389 873,972
Loss (gain) on sale of property and equipment 3,218 (8,831) (8,486)
Deferred income taxes 100,437 56,080 122,973
Changes in operating assets and liabilities:
Accounts receivable (251) (1,361,559) 431,159
Inventories (148,617) 20,619 113,507
Prepaid expenses and other assets (248,569) (107,656) 159,274
Accounts payable (75,773) 611,071 369,983
Income taxes payable (82,012) 216,591 (212,652)
Accrued expenses (41,509) 112,767 (16,990)
Customer advances (6,129) 82,115 124,551
--------------- --------------- ---------------
Net cash provided by operating activities 300,991 841,680 2,369,484
Investing activities
Capital expenditures (3,178,499) (4,095,651) (3,508,342)
Proceeds from sale of property and
equipment 21,412 70,778 77,359
Payments for purchase of net assets from
Vetronics, net of cash acquired - - (327,740)
Payments for purchase of net assets from
Clinical Innovations, net of cash acquired - - (1,265,230)
--------------- --------------- ---------------
Net cash used by investing activities (3,157,087) (4,024,873) (5,023,953)
Financing activities
Borrowings of long-term debt 2,401,035 2,722,995 43,365
Payments of long-term debt (124,732) (202,429) (5,375,461)
Borrowings on lines of credit - 615,377 860,093
Payments on lines of credit - (100,000) (1,375,470)
Net proceeds from Initial Public Offering - - 9,358,739
Net proceeds from the exercise of stock options 3,000 40,500 197,646
Redemption of preferred shares (624,031) (325,350) -
Other (3,352) (1,901) (7,624)
--------------- --------------- ---------------
Net cash provided by financing activities 1,651,920 2,749,192 3,701,288
--------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents (1,204,176) (434,001) 1,046,819
Cash and cash equivalents at beginning of year 1,799,515 595,339 161,338
--------------- --------------- ---------------
Cash and cash equivalents at end of year $ 595,339 $ 161,338 $ 1,208,157
=============== =============== ===============
See accompanying notes.
Bioanalytical Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 1998
1. Significant Accounting Policies
Nature of Business
Bioanalytical Systems, Inc. and its subsidiaries (the "Company") manufacture
scientific instruments for use in the determination of trace amounts of organic
compounds in biological, environmental and industrial materials. The Company
sells its equipment and software for use in industrial, governmental and
academic laboratories. The Company also engages in laboratory services,
consulting and research related to analytical chemistry and chemical
instrumentation. The Company's customers are located in the United States and
throughout the world.
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.
Cash Equivalents
The Company considers all short-term, highly liquid investments to be cash
equivalents.
Financial Instruments
Management has estimated that the fair value of financial instruments, including
cash and cash equivalents, accounts receivable, accounts payable and debt
approximates the carrying values.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the last-in, first-out (LIFO) method.
Goodwill
Goodwill represents the excess of cost of acquisitions over the fair value of
net assets acquired and is amortized by the straight-line method over periods
ranging from 15-20 years.
1. Significant Accounting Policies (continued)
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of 4 through 40 years.
Expenditures for maintenance and repairs are charged to expense as incurred.
Revenue Recognition
Revenue from the sale of the Company's products and the related costs are
recognized upon shipment of the products to customers. The Company's
pharmaceutical service contracts generally have terms ranging from several
months to several years. The typical contract is one year in duration and
includes a one-year renewal option. A portion of the contract fee is generally
payable upon receipt of the initial samples with the balance payable in
installments over the life of the contract. A majority of the Company's
contracts are broken down into discrete units of deliverable services for which
a fixed fee for each unit is established and revenue and related direct costs
are recognized as units of deliverable services are fulfilled. For all other
service contracts, the Company allocates a ratable portion of the total contract
fee to the units of deliverable services and recognizes revenue and the related
direct costs as the units of deliverable services are fulfilled.
Income Taxes
The Company computes its income tax provision in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 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 liabilities
and assets 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 in effect at the balance sheet
date.
1. Significant Accounting Policies (continued)
Advertising Expense
The Company expenses advertising costs as incurred. Advertising expense was,
$267,184, $275,850 and $551,848 for 1996, 1997, and 1998, respectively.
Net Income Per Common Share
Basic net income per common share is computed on the basis of the weighted
average number of common shares outstanding. Diluted net income per common
share is computed on the basis of the weighted average number of common and
common equivalent shares outstanding. Common equivalent shares include options
to purchase Common Shares and Convertible Preferred Shares, which are assumed to
be converted. In these computations, net income in 1996 and 1997 is reduced by
dividends accrued on the Redeemable Preferred Shares.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Recently Issued Accounting Standards
In July 1997, the FASB issued Statement No. 131 (SFAS 131), "Disclosures about
Segments of an Enterprise and Related Information." Under SFAS 131, the Company
will report financial and descriptive information about its operating segments.
SFAS 131 is effective for fiscal years beginning after December 15, 1997. The
Company plans to adopt SFAS 131 on October 1, 1998. The Company has not yet
evaluated the impact of adoption of SFAS 131.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130 establishes
standards for reporting and display of comprehensive income in the financial
statements. SFAS 130 is effective for fiscal years beginning after December 15,
1997. The Company plans to adopt SFAS 130 on October 1, 1998. The Company has
not yet evaluated the impact of SFAS 130.
2. Acquisition
Effective October 31, 1997 the Company acquired all of the capital stock of
Vetronics Inc., for cash approximating $200,000 and a $150,000 note payable.
The acquired business was involved in the distribution of veterinary equipment
and supplies in the United States.
Effective July 1, 1998 the Company acquired all of the capital stock of Clinical
Innovations Ltd., for cash approximating $1,500,000. The acquired business was
involved in the processing of bioanalytical samples for pharmaceutical firms in
the United Kingdom.
The acquisitions were accounted for using the purchase method of accounting and
the results of operations have been included in the consolidated financial
statements since the dates of acquisition. The purchase price was allocated to
the net assets acquired, including $956,000 to goodwill, based upon the fair
market value at the date of acquisition.
On an unaudited pro forma basis, revenue, net income and net income per common
share (diluted) for the years ended September 30, 1997 and 1998 was $16,840,000,
$1,154,000 $0.37 and $19,413,000, $718,000, $0.16, respectively. This pro forma
data presents the consolidated results of operations as if the acquisitions had
occurred on October 1, 1996, after giving effect to certain adjustments,
including amortization of goodwill, increased interest expense and related
income tax effects.
The pro forma results have been prepared for comparative purposes only and do
not purport to indicate the results of operations which would actually have
occurred had the acquisition been in effect on the date indicated, or which may
occur in the future.
Pro forma amounts for the years ended September 30, 1997 and 1998 include the
acquired entities' financial data for the years ended December 31 and February
28, respectively, as it was not practicable to determine the September 30 year
end results.
3. Inventories
Inventories at September 30 consisted of:
1997 1998
----------- -----------
Raw materials $ 909,258 $ 966,314
Work in progress 278,386 316,648
Finished goods 800,880 677,522
----------- -----------
1,988,524 1,960,484
LIFO reserve (77,293) (79,804)
----------- -----------
Total LIFO cost $1,911,231 $1,880,680
=========== ===========
4. Debt Arrangements
Bank Debt
The Company has a bank line of credit agreement which expires March 1, 1999 and
allows borrowings of up to $7,500,000. Interest is charged at the prime rate
(8.25% at September 30, 1998). At September 30, 1998, the line was unused. The
line is collateralized by inventories and accounts receivable. All prior year
bank debt obligations were repaid in full on November 27, 1997 using proceeds
received from the Company's initial public offering (see Note 6).
Cash interest payments of $99,057, $345,018 and $260,249 were made in 1996, 1997
and 1998, respectively. Cash interest payments for 1996, 1997 and 1998 included
interest of $28,868, $266,200 and $127,077, respectively, which was capitalized.
These amounts included interest required to be paid on a portion of the
undistributed earnings of a subsidiary which qualifies as a domestic
international sales corporation. (see Note 5).
4. Debt Arrangements (continued)
Capital Leases
The Company has capital lease arrangements to finance the acquisition of
equipment. Future minimum lease payments, based upon scheduled payments under
the lease arrangements, as of September 30, 1998, are as follows:
1999 $ 417,540
2000 307,494
2001 307,494
2002 307,494
2003 307,494
Thereafter 121,652
-----------
Total minimum lease payments 1,769,168
Amounts representing interest (336,974)
-----------
Present value of minimum lease payments $1,432,194
===========
The total amount of property and equipment capitalized under capital lease
obligations as of September 30, 1997 and 1998 was $486,043 and $1,917,625,
respectively. Accumulated amortization at September 30, 1997 and 1998 was
$169,795 and $290,841, respectively. Assets acquired during 1998 using capital
leases were $1,431,582.
5. Income Taxes
Significant components of the Company's deferred tax liabilities and assets as
of September 30 are as follows:
1997 1998
---------- ----------
Deferred tax liabilities:
Tax over book depreciation $ 818,420 $ 952,224
Deferred DISC income 340,642 283,869
---------- ----------
Total deferred liabilities 1,159,062 1,236,093
Deferred tax assets:
Inventory pricing 71,199 69,559
Accrued vacation 63,470 73,743
Other-net 79,922 25,347
---------- ----------
Total deferred tax assets 214,591 168,649
---------- ----------
Net deferred tax liabilities $ 944,471 $1,067,444
========== ==========
5. Income Taxes (continued)
Significant components of the provision for income taxes are as follows:
1996 1997 1998
-------- -------- --------
Current:
Federal $123,625 $265,776 $ 80,911
State 58,586 91,539 50,458
-------- -------- --------
Total current 182,211 357,315 131,369
Deferred:
Federal 81,928 54,849 99,504
State 18,509 1,231 23,469
-------- -------- --------
Total deferred 100,437 56,080 122,973
-------- -------- --------
$282,648 $413,395 $254,342
======== ======== ========
The effective income tax rate varied from the statutory federal income tax rate
as follows:
1996 1997 1998
----- ----- ------
Statutory federal income tax rate 34.0% 34.0% 34.0%
Increases (decreases):
Amortization of goodwill and other
nondeductible expenses 2.1 1.2 3.3
Benefit of foreign sales corporation, net (8.6) (5.8) (6.2)
State income taxes, net of federal tax
benefit 7.5 5.6 7.4
Research and development credit - (5.0) (13.4)
Nondeductible foreign losses 10 7.6 10.3
Other (3.6) 0.1 2.8
----- ----- ------
41.4% 37.7% 38.2%
===== ===== ======
5. Income Taxes (continued)
In fiscal 1996, 1997 and 1998, the Company's foreign operations generated a loss
before income taxes of $200,145, $245,800 and $201,294, respectively.
Payments made in 1996, 1997, and 1998 for federal and state income taxes
amounted to $160,000, $140,000, and $78,000, respectively.
6. Shareholders' Equity
Initial Public Offering
On September 24, 1997, the Company's Board of Directors approved a 4.514 for 1
share split of common shares effective November 21, 1997. All common share and
per share amounts and information concerning stock option plans have been
adjusted retroactively to give effect to this share split.
On November 26, 1997, the Company completed an initial public offering of
1,250,000 Common Shares at an offering price of $8.00 per share. On December
19, 1997, the underwriters exercised an option to purchase an additional 100,000
Common Shares. The net proceeds to the Company from the public offering and the
exercise of the over-allotment option by the underwriters, after deducting the
underwriting discounts and commissions and offering expenses payable by the
Company, were approximately $9.4 million. Upon the closing of the offering, all
of the Company's outstanding Convertible Preferred Shares were converted into
752,399 Common Shares.
Stock Option Plans
During 1990, the Company established an Employee Incentive Stock Option Plan
whereby options to purchase shares of the Company's Common Shares at fair market
value can be granted to employees of the Company. Options granted become
exercisable in four equal installments beginning two years after the date of the
grant. The plan terminates in the year 2000.
During fiscal 1989, the Company established an Outside Director Stock Option
Plan whereby options to purchase shares of the Company's Common Shares at fair
market value can be granted to outside directors. Options granted become
exercisable in four equal installments beginning two years after the date of
grant. The plan terminates in 1999.
6. Shareholders' Equity (continued)
The Company has adopted new stock option plans in connection with its initial
public offering and accordingly does not plan to grant any more options pursuant
to the plans discussed above.
During fiscal year 1998, the Company established an Employee Stock Option Plan
whereby options to purchase shares of the Company's Common Stock at fair market
value can be granted to employees of the Company. Options granted become
exercisable in four equal installments beginning two years after the date of
grant. The plan terminates in fiscal 2008.
During fiscal year 1998, the Company established an Outside Director Stock
Option Plan whereby options to purchase shares of the Company's Common Stock at
fair market value can be granted to outside directors. Options granted become
exercisable in four equal installments beginning two years after the date of
grant. The plan terminates in fiscal 2008.
The Company applies the provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under SFAS 123, "Accounting for
Stock-Based Compensation," requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying shares on the date of grant, no compensation expense is
recognized. A summary of the Company's stock option activity, and related
information for the years ended September 30 follows:
1996 1996 1997 1997 1998 1998
------- --------- ------- --------- ------- ---------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- --------- ------- --------- ------- ---------
Outstanding-beginning
of year 342,643 $ 1.15 338,129 $ 1.16 272,671 $ 1.27
Exercised (4,514) 0.66 (60,944) 0.66 (145,328) 1.36
Granted - - - - 39,000 8.00
Terminated - - (4,514) 1.32 (2,000) 8.00
------- ------- -------
Outstanding-end of year 338,129 $ 1.16 272,671 $ 1.27 164,343 2.70
======= ======= =======
6. Shareholders' Equity (continued)
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
Range of September 30, Contractual Exercise September 30, Exercise
Exercise Prices 1998 Life Price 1998 Price
- ---------------- -------------- ----------- --------- -------------- ---------
0.66 - $1.00 62,163 1.27 $ 0.66 62,163 $ 0.66
1.01 - $1.50 11,495 3.28 $ 1.33 11,495 $ 1.33
1.51 - $2.10 53,685 4.49 $ 1.72 50,301 $ 1.60
2.11 - $8.00 37,000 9.15 $ 8.00 - -
-------------- --------------
164,343 123,959
============== ==============
A special non-qualified option was granted for 4,514 Common Shares at $1.27 per
share to a consultant to the Company in August 1991. This option was exercised
during the fiscal year ended September 30, 1998.
Disclosure of pro forma information regarding net income and earnings per share
is required by SFAS No. 123 as if the Company has accounted for its employee
stock options granted subsequent to December 31, 1994, under the fair value
method as defined by that Statement. The fair value for options granted by the
Company was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions:
Risk-free interest rate 5.50%
Dividend yield 0.00%
Volatility factor of the expected market
price of the Company's common stock 0.52
Expected life of the options (years) 7
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
6. Shareholders' Equity (continued)
For purposes of pro forma disclosures, the estimated fair value of the options
are amortized to expense over the related vesting period. Because compensation
expense is recognized over the vesting period, the initial impact on pro forma
net income may not be representative of compensation expense in future years,
when the effect of amortization of multiple awards would be reflected in the
consolidated statements of income. The Company's pro forma information giving
effect to the estimated compensation expense related to stock options is as
follows:
1998
--------
Pro forma net income $367,190
Pro forma net income per share (diluted) $ 0.08
The weighted average fair value of options granted during the year was $4.77.
7. Retirement Plan
Effective July 1, 1984, the Company established an Internal Revenue Code Section
401(k) Retirement 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. 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 10% of the participant's annual wages. Contribution expense was,
$138,142, $158,924 and $187,896 in 1996, 1997 and 1998, respectively.
8. Segment Information
The Company operates in two principal segments - analytical services and
analytical products. The Company's analytical services unit provides analytical
chemistry support on a contract basis directly to pharmaceutical companies. The
Company's analytical products unit provides liquid chromatography,
electrochemical, and physiological monitoring products to pharmaceutical
companies, universities, government research centers and medical research
institutions.
INDUSTRY SEGMENT DATA:
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998
--------------- --------------- ---------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
REVENUE
Products $ 9,113 $ 9,932 $ 10,616
Services 3,681 4,991 7,609
--------------- --------------- ---------------
Total Revenue $ 12,794 $ 14,923 $ 18,225
=============== =============== ===============
OPERATING INCOME (LOSS)
Products $ (366) $ (107) $ (1,062)
Services 1,067 1,279 1,753
--------------- --------------- ---------------
Total Operating Income 701 1172 691
Corporate income (expenses) (18) (75) (24)
Income before income taxes $ 683 $ 1,097 $ 667
=============== =============== ===============
IDENTIFIABLE ASSETS
Products $ 6,116 $ 6,221 $ 9,461
Services 5,258 9,710 12,819
--------------- --------------- ---------------
Total Assets $ 11,374 $ 15,931 $ 22,280
=============== =============== ===============
8. Segment Information (continued)
Depreciation and amortization
Products $ 224 $ 244 $ 314
Services 176 292 560
------ ------ ------
$ 400 $ 536 $ 874
====== ====== ======
Capital expenditures
Products $ 324 $ 153 $ 369
Services 2,854 3,943 4,571
------ ------ ------
$3,178 $4,096 $4,940
====== ====== ======
Export Sales:
Export sales to unaffiliated customer by destination of sales are summarized as
follows (in thousands):
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1996 1997 1998
-------------- -------------- --------------
Pacific Rim:
Japan $ 1,769 $ 1,740 $ 1,053
Other 1,134 1,215 771
-------------- -------------- --------------
2,903 2,955 1,824
Europe 1,144 1,105 1,126
Other 556 1,037 2,560
-------------- -------------- --------------
$ 4,603 $ 5,097 $ 5,510
============== ============== ==============
Major Customers:
During 1996, 1997 and 1998, a major United States-based pharmaceutical company
accounted for approximately 18.3%, 20.9%, and 19.6%, respectively, of the
Company's total revenues.
8. Segment Information (continued)
The Company sells its products through international distributors, one of which
represents 19%, 17% and 10% of 1996, 1997 and 1998 product sales, respectively.
Accounts receivable from this foreign distributor are $124,104 and $107,034 at
September 30, 1997 and 1998, respectively.
9. Litigation
In April 1997, CMA Microdialysis Holding A.B. ("CMA") filed an action against
the Company in the United States District Court for the District of New Jersey
in which CMA alleged that the Company's microdialysis probes infringe U.S.
Patent No. 4,693,832. The Company has filed an answer in which it denied
infringement and in which it asserted that the patent on which CMA relies is
invalid. The matter is now awaiting a trial date. Although an estimate of the
possible loss has not been made, management intends to continue a vigorous
defense of CMA's claims, and believes that the ultimate outcome of this matter
will not have a material adverse effect on the Company's financial condition or
result of operations.
[Remainder of page intentionally left blank.]
Bioanalytical Systems, Inc.
Quarterly Financial Data
Bioanalytical Systems, Inc.
Unaudited (Amounts in thousands, except for per share data)
For the Quarter Ended in Fiscal 1998 December 31 March 31 June 30 September 30
----------- -------- ------- ------------
Total revenue $ 4,330 $ 4,450 $ 4,521 $ 4,924
Gross profit 2,483 2,550 2,511 2,172
Net income (loss) available to common
shareholders 196 231 130 (145)
Basic net income (loss) per common
share(1) .06 .05 .03 (.03)
Diluted net income (loss) per common
and common equivalent share(1) .05 .05 .03 (.03)
For the Quarter Ended in Fiscal 1997 December 31 March 31 June 30 September 30
----------- -------- ------- ------------
Total revenue $ 3,516 $ 3,648 $ 3,840 $ 3,919
Gross profit 2,179 2,128 2,272 2,024
Net income available to common
shareholders 161 265 218 13
Basic net income per common share(1) .07 .12 .10 .01
Diluted net income per common and
common equivalent share(1) .05 .09 .07 .00
<FN>
- -------------------------
(1) The sum of the net income per common share may not equal the annual net income
per share due to interim quarter rounding.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
[Remainder of page intentionally left blank.]
Part III
Item 10. Directors and Executive Officers of the Registrant.
The information included under the caption "Directors and Executive
Officers" in the Company's definitive Proxy Statement filed pursuant to
Regulation 14A in connection with its 1998 Annual Meeting of Shareholders (the
"Proxy Statement") is incorporated herein by reference in response to this item.
Item 11. Executive Compensation.
The information included under the captions "Election of Directors -
Compensation of Directors" and "Executive Compensation" 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" in the Proxy Statement is incorporated herein
by reference in response to this item.
Item 13. Certain Relationships and Related Transactions.
The information contained under the caption "Certain Transactions" in the
Proxy Statement is incorporated herein by reference in response to this item.
[Remainder of page intentionally left blank.]
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report.
--------------------------------------------
1. Financial Statements:
----------------------
Included as outlined in Item 8 of Part II of this report.
Report of Independent Auditors.
Consolidated Balance Sheets as of September 30, 1997 and
September 30, 1998.
Consolidated Statements of Income for the Years Ended September
30, 1996, 1997 and 1998.
Consolidated Statements of Preferred Shares and Shareholders'
Equity for the Years Ended September 30, 1996, 1997 and 1998.
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1996, 1997 and 1998.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules:
--------------------------------
No schedules are required to be filed as part of this report.
Schedules other than those listed above are omitted as they are
not required, are not applicable, or the information is shown in
the Notes to the Consolidated Financial Statements.
(b) Reports on Form 8-K. None.
----------------------
(c) Exhibits. See Index to Exhibits.
--------
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.
BIOANALYTICAL SYSTEMS, INC.
----------------------------
(Registrant)
By:/s/ Peter T. Kissinger
----------------------------
Peter T. Kissinger
President and Chief
Executive Officer
By:/s/ Douglas P. Wieten
----------------------------
Douglas P. Wieten
Chief Financial Officer,
Treasurer and Controller
(Principal Financial and
Accounting Officer)
Date: December 24, 1998
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.
Signature Capacity Date
- ------------------------- -------------------------- -----------------
/s/ Peter T. Kissinger President, Chief Executive December 24, 1998
- -------------------------
Peter T. Kissinger Officer and Director
/s/ Douglas P. Wieten Chief Financial Officer, December 24, 1998
- -------------------------
Douglas P. Wieten Treasurer and Controller
/s/ William E. Baitinger Director December 24, 1998
- -------------------------
William E. Baitinger
/s/ Michael K. Campbell Director December 24, 1998
- -------------------------
Michael K. Campbell
/s/ Candice B. Kissinger Director December 24, 1998
- -------------------------
Candice B. Kissinger
/s/ Jack A. Kraeutler Director December 24, 1998
- -------------------------
Jack A. Kraeutler
/s/ Ronald E. Shoup Director December 24, 1998
- -------------------------
Ronald E. Shoup
/s/ W. Leigh Thompson Director December 24, 1998
- -------------------------
W. Leigh Thompson
INDEX TO EXHIBITS
Sequential
Number Numbering
Assigned In System Page
Regulation S-K Number of
Item 601 Description of Exhibits Exhibit
- --------------- ------------------------------------------------------------------ -----------
(2) No Exhibit
(3) 3.1 Second Amended and Restated Articles of Incorporation of
Bioanalytical Systems, Inc. (Incorporated by reference to Exhibit
3.1 to Form 10-Q for the quarter ended December 31, 1997.)
3.2 Second Restated Bylaws of Bioanalytical Systems, Inc.
(Incorporated by reference to Exhibit 3.2 to Form 10-Q for the
quarter ended December 31, 1997.)
(4) 4.1 Specimen Certificate for Common Shares (Incorporated by
reference to Exhibit 4.1 to Registration Statement on Form S-1,
Registration No. 333-36429).
4.2 See Exhibits 3.1 and 3.2
(9) No Exhibit
(10) 10.2 Bioanalytical Systems, Inc. Outside Director Stock Option Plan
(Incorporated by reference to Exhibit 10.2 to Registration
Statement on Form S-1, Registration No. 333-36429).
10.3 Form of Bioanalytical Systems, Inc. Outside Director Stock
Option Agreement (Incorporated by reference to Exhibit 10.3 to
Registration Statement on Form S-1, Registration No. 333-36429).
10.4 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).
10.5 Form of Bioanalytical Systems, Inc. 1990 Employee Stock
Option Agreement (Incorporated by reference to Exhibit 10.5 to
Registration Statement on Form S-1, Registration No. 333-36429).
10.6 Security Agreement by and between Bioanalytical Systems, Inc.
and Bank One, Lafayette, N.A., dated August 22, 1996
(Incorporated by reference to Exhibit 10.17 to Registration
Statement on Form S-1, Registration No. 333-36429).
10.7 Master Lease Agreement by and between Bioanalytical Systems,
Inc. and Bank One Leasing Corporation dated November 9,
1994 (Incorporated by reference to Exhibit 10.18 to
Registration Statement on Form S-1, Registration No. 333-36429).
10.8 Financing Lease by and between Bioanalytical Systems, Inc. and
Bank One Leasing Corporation, dated November 9, 1994
(Incorporated by reference to Exhibit 10.19 to Registration
Statement on Form S-1, Registration No. 333-36429).
10.9 Credit Agreement by and between Bioanalytical Systems, Inc.
and Bank One, Indiana, N.A., dated August 30, 1996
(Incorporated by reference to Exhibit 10.24 to Registration
Statement on Form S-1, Registration No. 333-36429).
10.10 Bioanalytical Systems, Inc. 1997 Employee Incentive Stock
Option Plan (Incorporated by reference to Exhibit 10.26 to
Registration Statement on Form S-1, Registration No. 333-36429).
10.11 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).
10.12 1997 Bioanalytical Systems, Inc. Outside Director Stock Option
Plan (Incorporated by reference to Exhibit 10.28 to Registration
Statement on Form S-1, Registration No. 333-36429).
10.13 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).
10.14 Business Loan Agreement by and between Bioanalytical
Systems, Inc., and Bank One, Indiana, N.A. dated March 1,
1998 (Incorporated by reference to Exhibit 10.14 to Form 10-Q
for the quarter ended March 31, 1998).
10.15 Commercial Security Agreement by and between Bioanalytical
Systems, Inc. and Bank One, Indiana, N.A., dated March 1,
1998 (Incorporated by reference to Exhibit 10.15 to Form 10-Q
for the quarter ended March 31, 1998).
10.16 Negative Pledge Agreement by and between Bioanalytical
Systems, Inc. and Bank One, Indiana, N.A., dated March 1,
1998 (Incorporated by reference to Exhibit 10.16 to Form 10-Q
for the quarter ended March 31, 1998).
10.17 Promissory Note for $7,500,000 executed by Bioanalytical
Systems, Inc. in favor of Bank One, N.A., dated March 1, 1998
(Incorporated by reference to Exhibit 10.17 to Form 10-Q for
the quarter ended March 31, 1998).
(11) 11.1 Statement Regarding Computation of Per Share Earnings.
(12) No Exhibit
(13) No Exhibit
(16) No Exhibit
(18) No Exhibit
(21) 21.1 Subsidiaries of the Registrant
(23) 23.1 Consent of Independent Auditors
(24) No Exhibit
(27) 27.1 Financial Data Schedule
(99) No Exhibit