UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31,June 30, 2004
orOR
[ ] 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: 0-23357
BIOANALYTICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
| INDIANA | 35-1345024 | |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
| 2701 Kent Avenue West Lafayette, IN | 47906 | |
| (Address of principal executive offices) | (Zip Code) | |
| (765) 463-4527 | ||
| (Registrant's telephone number, including area code) |
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of April 30,July 31, 2004, 4,869,502, common shares of the registrant were outstanding.
– 1 –
| PART | FINANCIAL INFORMATION |
| Item | Condensed Consolidated Financial Statements (Unaudited): |
| Condensed Consolidated Balance Sheets as of | |||
September 30, 2003 | 3 | ||
| Condensed Consolidated Statements of Operations for the | |||
Three Months and | 4 | ||
| Condensed Consolidated Statements of Cash Flows for the | |||
Nine Months Ended | 5 | ||
| Notes to Condensed Consolidated Financial Statements | 6 | ||
| Item | Management's Discussion and Analysis of Financial Condition and Results of Operations | 10 | |
| Item | Quantitative and Qualitative Disclosures About Market Risk | 16 | |
| Item | Controls and Procedures | 16 | |
| PART | OTHER INFORMATION |
| Item | |||
| Exhibits and Reports on Form 8-K | 17 | ||
| SIGNATURES | 18 |
– 2 –
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
| (Unaudited) March 31, 2004 | September 30, 2003 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Unaudited) June 30, 2004 | September 30, 2003 | ||||||||||||||||||
| Assets | |||||||||||||||||||
| Current assets: | |||||||||||||||||||
| Cash and cash equivalents | $ | 507 | $ | 1,378 | $ | 778 | $ | 1,378 | |||||||||||
| Accounts receivable | |||||||||||||||||||
| Trade | 4,509 | 3,978 | 5,429 | 3,978 | |||||||||||||||
| Grants | 13 | 13 | 13 | 13 | |||||||||||||||
| Unbilled revenues and other | 844 | 954 | 1,085 | 954 | |||||||||||||||
| Inventories | 1,925 | 2,055 | 1,833 | 2,055 | |||||||||||||||
| Deferred income taxes | 465 | 465 | 465 | 465 | |||||||||||||||
| Refundable income taxes | 467 | 84 | 167 | 84 | |||||||||||||||
| Prepaid expenses | 724 | 397 | 589 | 397 | |||||||||||||||
| Total current assets | 9,454 | 9,324 | 10,359 | 9,324 | |||||||||||||||
| Property and equipment, net | 32,347 | 31,171 | 32,120 | 31,171 | |||||||||||||||
| Goodwill | 1,499 | 984 | 1,659 | 984 | |||||||||||||||
| Intangible assets, net | 2,589 | 2,778 | 2,259 | 2,778 | |||||||||||||||
| Debt issue costs | 399 | 428 | 379 | 428 | |||||||||||||||
| Other assets | 364 | 300 | 307 | 300 | |||||||||||||||
| Total assets | $ | 46,652 | $ | 44,985 | $ | 47,083 | $ | 44,985 | |||||||||||
| Liabilities and shareholders' equity | |||||||||||||||||||
| Current liabilities: | |||||||||||||||||||
| Accounts payable | $ | 3,097 | $ | 3,073 | $ | 3,157 | $ | 3,073 | |||||||||||
| Accrued expenses | 1,418 | 1,245 | 995 | 1,245 | |||||||||||||||
| Customer advances | 3,100 | 1,658 | 2,470 | 1,658 | |||||||||||||||
| Revolving line of credit | 2,270 | 2,388 | 3,109 | 2,388 | |||||||||||||||
| Current portion of capital lease obligation | 120 | 123 | 120 | 123 | |||||||||||||||
| Current portion of long-term debt | 788 | 1,132 | 788 | 1,132 | |||||||||||||||
| Total current liabilities | 10,793 | 9,619 | 10,639 | 9,619 | |||||||||||||||
| Capital lease obligation, less current portion | 101 | --- | 101 | --- | |||||||||||||||
| Long-term debt, less current portion | 6,850 | 6,949 | 9,007 | 6,949 | |||||||||||||||
| Construction line of credit | 2,250 | 1,676 | --- | 1,676 | |||||||||||||||
| Subordinated debt, long-term | 5,188 | 5,188 | 5,231 | 5,188 | |||||||||||||||
| Deferred income taxes | 2,252 | 1,827 | 2,251 | 1,827 | |||||||||||||||
| Shareholders' equity: | |||||||||||||||||||
| Preferred shares: Authorized shares - 1,000, | |||||||||||||||||||
| Issued and outstanding shares - none | --- | --- | --- | --- | |||||||||||||||
| Common shares: Authorized shares - 19,000, | |||||||||||||||||||
| Issued and outstanding shares - 4,870 at March 31, 2004 | |||||||||||||||||||
| Common shares, no par value: Authorized shares - 19,000, | |||||||||||||||||||
| Issued and outstanding shares - 4,870 at June 30, 2004 | |||||||||||||||||||
| and 4,831 at September 30, 2003 | 1,177 | 1,168 | 1,177 | 1,168 | |||||||||||||||
| Additional paid-in capital | 11,263 | 11,122 | 11,263 | 11,122 | |||||||||||||||
| Retained earnings | 6,865 | 7,498 | 7,500 | 7,498 | |||||||||||||||
| Accumulated other comprehensive loss | (87 | ) | (62 | ) | (86 | ) | (62 | ) | |||||||||||
| Total shareholders' equity | 19,218 | 19,726 | 19,854 | 19,726 | |||||||||||||||
| Total liabilities and shareholders' equity | $ | 46,652 | $ | 44,985 | $ | 47,083 | $ | 44,985 | |||||||||||
See accompanying notes to condensed consolidated financial statements.
– 3 –
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
| Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||||||||
| Service revenue | $ | 5,608 | $ | 4,564 | $ | 11,586 | $ | 9,096 | $ | 7,684 | $ | 5,643 | $ | 19,270 | $ | 14,739 | ||||||||||||
| Product revenue | 3,042 | 2,386 | 5,841 | 4,828 | 2,948 | 2,231 | 8,789 | 7,059 | ||||||||||||||||||||
| Total revenue | 8,650 | 6,950 | 17,427 | 13,924 | 10,632 | 7,874 | 28,059 | 21,798 | ||||||||||||||||||||
| Cost of service revenue | 5,217 | 3,721 | 10,276 | 6,976 | 5,217 | 3,864 | 15,493 | 10,840 | ||||||||||||||||||||
| Cost of product revenue | 1,229 | 972 | 2,312 | 2,006 | 1,191 | 858 | 3,503 | 2,864 | ||||||||||||||||||||
| Total cost of revenue | 6,446 | 4,693 | 12,588 | 8,982 | 6,408 | 4,722 | 18,996 | 13,704 | ||||||||||||||||||||
| Gross profit | 2,204 | 2,257 | 4,839 | 4,942 | 4,224 | 3,152 | 9,063 | 8,094 | ||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||
| Selling | 665 | 884 | 1,291 | 1,642 | 672 | 557 | 1,963 | 2,199 | ||||||||||||||||||||
| Research and development | 295 | 323 | 541 | 691 | 260 | 305 | 801 | 996 | ||||||||||||||||||||
| General and administrative | 1,785 | 1,197 | 3,632 | 2,287 | 2,054 | 1,436 | 5,686 | 3,723 | ||||||||||||||||||||
| Total operating expenses | 2,745 | 2,404 | 5,464 | 4,620 | 2,986 | 2,298 | 8,450 | 6,918 | ||||||||||||||||||||
| Operating income (loss) | (541 | ) | (147 | ) | (625 | ) | 322 | |||||||||||||||||||||
| Operating income | 1,238 | 854 | 613 | 1,176 | ||||||||||||||||||||||||
| Interest income | 2 | 1 | 3 | 2 | 2 | 1 | 5 | 3 | ||||||||||||||||||||
| Interest expense | (207 | ) | (138 | ) | (414 | ) | (248 | ) | (306 | ) | (148 | ) | (720 | ) | (396 | ) | ||||||||||||
| Other income (expense) | 2 | 30 | 18 | 59 | ||||||||||||||||||||||||
| Other income | 21 | 20 | 39 | 79 | ||||||||||||||||||||||||
| Gain (loss) on sale of property and equipment | --- | (5 | ) | --- | 32 | (10 | ) | 49 | (10 | ) | 81 | |||||||||||||||||
| Income (loss) before income taxes | (744 | ) | (259 | ) | (1,018 | ) | 167 | 945 | 776 | (73 | ) | 943 | ||||||||||||||||
| Income taxes | (241 | ) | (92 | ) | (385 | ) | 59 | |||||||||||||||||||||
| Income tax provision (benefit) | 310 | 422 | (75 | ) | 481 | |||||||||||||||||||||||
| Net income (loss) | $ | (503 | ) | $ | (167 | ) | $ | (633 | ) | $ | 108 | |||||||||||||||||
| Net income | $ | 635 | $ | 354 | $ | 2 | $ | 462 | ||||||||||||||||||||
| Net income (loss) per share: | ||||||||||||||||||||||||||||
| Net income per share: | ||||||||||||||||||||||||||||
| Basic | $ | (0.10 | ) | $ | (0.04 | ) | $ | (0.13 | ) | $ | 0.02 | $ | 0.13 | $ | 0.08 | $ | 0.00 | $ | 0.10 | |||||||||
| Diluted | $ | (0.10 | ) | $ | (0.04 | ) | $ | (0.13 | ) | $ | 0.02 | $ | 0.13 | $ | 0.08 | $ | 0.00 | $ | 0.10 | |||||||||
| Weighted common and common equivalent | ||||||||||||||||||||||||||||
| shares outstanding: | ||||||||||||||||||||||||||||
| Basic | 4,870 | 4,601 | 4,851 | 4,590 | 4,870 | 4,605 | 4,857 | 4,595 | ||||||||||||||||||||
| Diluted | 4,870 | 4,601 | 4,851 | 4,619 | 5,150 | 4,609 | 4,866 | 4,616 | ||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
– 4 –
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Six Months Ended March 31, | Nine Months Ended June 30, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
| Operating activities | ||||||||||||||||
| Net income (loss) | $ | (633 | ) | $ | 108 | |||||||||||
| Adjustments to reconcile net income (loss) to net | ||||||||||||||||
| Net income | $ | 2 | $ | 462 | ||||||||||||
| Adjustments to reconcile net income to net | ||||||||||||||||
| cash provided by operating activities: | ||||||||||||||||
| Depreciation and amortization | 1,617 | 1,155 | 2,771 | 1,783 | ||||||||||||
| Gain on sale of property and equipment | --- | (32 | ) | |||||||||||||
| (Gain) loss on sale of property and equipment | 10 | (81 | ) | |||||||||||||
| Interest on subordinated debt | 193 | --- | ||||||||||||||
| Deferred income taxes | (93 | ) | (124 | ) | --- | 242 | ||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Accounts receivable | (421 | ) | (234 | ) | (1,582 | ) | 605 | |||||||||
| Inventories | 130 | 208 | 222 | 255 | ||||||||||||
| Prepaid expenses and other assets | (735 | ) | 86 | (199 | ) | 153 | ||||||||||
| Accounts payable | 24 | (592 | ) | 84 | (476 | ) | ||||||||||
| Income taxes payable | --- | (101 | ) | |||||||||||||
| Income taxes | (261 | ) | (92 | ) | ||||||||||||
| Accrued expenses | 173 | (137 | ) | (1,355 | ) | 1 | ||||||||||
| Customer advances | 1,442 | (83 | ) | 812 | (141 | ) | ||||||||||
| Net cash provided by operating activities | 1,504 | 254 | 697 | 2,711 | ||||||||||||
| Investing activities | ||||||||||||||||
| Capital expenditures | (2,229 | ) | (3,217 | ) | (2,029 | ) | (4,077 | ) | ||||||||
| Proceeds from sale of property and equipment | --- | 892 | --- | 1,023 | ||||||||||||
| Payments for purchase of net assets from LC Resources, Inc. net of cash acquired | --- | (163 | ) | |||||||||||||
| Loans to PharmaKinetics Laboratories, Inc. | --- | (517 | ) | |||||||||||||
| Deferred acquisition costs for PharmaKinetics Laboratories, Inc. | --- | (239 | ) | |||||||||||||
| Payments for purchase of LC Resources, Inc. net of cash acquired | --- | (163 | ) | |||||||||||||
| Payments for purchase of PharmaKinetics Laboratories, Inc., net of cash acquired | --- | (816 | ) | |||||||||||||
| Net cash used by investing activities | (2,229 | ) | (3,244 | ) | (2,029 | ) | (4,033 | ) | ||||||||
| Financing activities | ||||||||||||||||
| Borrowings on line of credit | 6,705 | 3,826 | 9,629 | 3,826 | ||||||||||||
| Payments on line of credit | (6,823 | ) | (4,428 | ) | (8,908 | ) | (5,955 | ) | ||||||||
| Borrowings on construction line of credit | 574 | 3,179 | 574 | 3,343 | ||||||||||||
| Payments on capital lease obligations | (130 | ) | (998 | ) | (3 | ) | (1,071 | ) | ||||||||
| Borrowings of long-term debt, net of issuance costs | --- | 4,950 | 2,250 | 4,950 | ||||||||||||
| Payments of long-term debt | (293 | ) | (3,515 | ) | (2,786 | ) | (3,658 | ) | ||||||||
| Net proceeds from the exercise of stock options | --- | 39 | --- | 39 | ||||||||||||
| Net cash provided by financing activities | 33 | 3,053 | 756 | 1,474 | ||||||||||||
| Effects of exchange rate changes | (179 | ) | --- | (24 | ) | (6 | ) | |||||||||
| Net increase (decrease) in cash and cash equivalents | (871 | ) | 63 | (600 | ) | 146 | ||||||||||
| Cash and cash equivalents at beginning of period | 1,378 | 826 | 1,378 | 826 | ||||||||||||
| Cash and cash equivalents at end of period | $ | 507 | $ | 889 | $ | 778 | $ | 972 | ||||||||
See accompanying notes to condensed consolidated financial statements.
– 5 –
BIOANALYTICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of the Business and Basis of Presentation
Bioanalytical Systems, Inc. and its subsidiaries (“We,” the “Company” or “BASi”) engage in laboratory services and other services related to pharmaceutical development. We also manufacture scientific instruments for medical research, which we sell with related software for use in industrial, governmental and academic laboratories. Our customers are located throughout the world.
We have prepared the accompanying unaudited interim condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted accounting principlesin the United States (“GAAP”), and therefore should be read in conjunction with our audited consolidated financial statements, and the notes thereto, included in our Form 10-K for the year ended September 30, 2003. In the opinion of management, the condensed consolidated financial statements for the three and sixnine months ended March 31,June 30, 2004 and 2003 include all adjustments which are necessary for a fair presentation of the results of the interim periods and of our financial position at March 31,June 30, 2004. The results of operations for the three and sixnine months ended March 31,June 30, 2004 are not necessarily indicative of the results for the year ending September 30, 2004.
All amounts in the condensed consolidated financial statements and the notes thereto are presented in thousands, except for per share data or where otherwise noted.
At March 31,June 30, 2004, we had four stock-based employee compensation plans, which are described more fully in Note 9 in the Notes to the Consolidated Financial Statements in our Form 10-K for the year ended September 30, 2003. Because all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant, we do not recognize any stock-based employee compensation cost in our financial statements. The following table illustrates the effect on net income (loss) and earnings (loss) per share had we applied the alternative fair value treatment of recognizing costs as stock-based employee compensation.
| Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | |||||||||||
| Net income (loss) as reported | $ | (503 | ) | $ | (167 | ) | $ | (633 | ) | $ | 108 | |||
| Deduct: Total stock-based employee | ||||||||||||||
| compensation expense determined under the | ||||||||||||||
| fair value based method for all awards, | ||||||||||||||
| net of related tax effects | (16 | ) | (5 | ) | (22 | ) | (10 | ) | ||||||
| Pro forma net income (loss) | $ | (519 | ) | $ | (172 | ) | $ | (655 | ) | $ | 98 | |||
| Earnings (loss) per share: | ||||||||||||||
| Basic and diluted - as reported | $ | (0.1 | 0) | $ | (0.0 | 4) | $ | (0.1 | 3) | $ | 0.02 | |||
| Basic and diluted - pro forma | $ | (0.1 | 1) | $ | (0.0 | 4) | $ | (0.1 | 4) | $ | 0.02 | |||
Three Months Ended
June 30,Nine Months Ended
June 30,2004 2003 2004 2003 Net income as reported $ 635 $ 354 $ 2 $ 462 Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects (49 ) (5 ) (67 ) (15 ) Pro forma net income (loss) $ 586 $ 349 $ (65 ) $ 447 Earnings (loss) per share: Basic - as reported $ 0.13 $ 0.08 $ 0.00 $ 0.10 Basic - pro forma $ 0.12 $ 0.08 $ (0.01 ) $ 0.10 Diluted-as reported $ 0.13 $ 0.08 $ 0.00 $ 0.10 Diluted--pro forma $ 0.12 $ 0.08 $ (0.01 ) $ 0.10
We compute basic earnings per share using the weighted average number of common shares outstanding. We compute diluted earnings per share using the weighted average number of common and potential common equivalent shares outstanding. Common equivalentPotential common shares include the dilutive effect of shares issuable upon exercise of options to purchase common shares.shares and upon conversion of convertible subordinated debt. Shares issuable upon conversion of convertible subordinated debt have notonly been included in the three months ended June 30, 2004, as they were not dilutive.dilutive in any other period.
– 6 –
The following table reconciles our computation of basic earnings per share to diluted earnings per share:
| Three Months Ended March 31, | Six Months Ended March 31, | Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||||
| Shares: | ||||||||||||||||||||||||||||
| Basic shares | 4,870 | 4,601 | 4,851 | 4,590 | 4,870 | 4,605 | 4,857 | 4,595 | ||||||||||||||||||||
| Effect of dilutive securities | ||||||||||||||||||||||||||||
| Options | --- | --- | --- | 29 | 8 | 4 | 9 | 21 | ||||||||||||||||||||
| Convertible subordinated debt | --- | --- | --- | --- | 272 | --- | --- | --- | ||||||||||||||||||||
| Diluted shares | 4,870 | 4,601 | 4,851 | 4,619 | 5,150 | 4,609 | 4,866 | 4,616 | ||||||||||||||||||||
| Basic and diluted net income (loss) | $ | (503 | ) | $ | (167 | ) | $ | (633 | ) | $ | 108 | |||||||||||||||||
| Basic net income | $ | 635 | $ | 354 | $ | 2 | $ | 462 | ||||||||||||||||||||
| Diluted net income | $ | 674 | $ | 354 | $ | 2 | $ | 462 | ||||||||||||||||||||
| Basic earnings (loss) per share | $ | (0.10 | ) | $ | (0.04 | ) | $ | (0.13 | ) | $ | 0.02 | |||||||||||||||||
| Diluted earnings (loss) per share | $ | (0.10 | ) | $ | (0.04 | ) | $ | (0.13 | ) | $ | 0.02 | |||||||||||||||||
| Basic earnings per share | $ | 0.13 | $ | 0.08 | $ | 0.00 | $ | 0.10 | ||||||||||||||||||||
| Diluted earnings per share | $ | 0.13 | $ | 0.08 | $ | 0.00 | $ | 0.10 | ||||||||||||||||||||
On December 13, 2002 we acquired LC Resources, Inc. (“LCR”), now BASi Northwest Laboratories, Inc., purchasing all of the outstanding shares of LCR for $1,999. The purchase price consisted of cash payments of $199 and issuance of $1,800 in 10% subordinated notes payable. We engaged an independent valuation firm to determine the fair value of identifiable intangible assets. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:
| Current assets | $ | 639 | |||
| Property and equipment | 347 | ||||
| Intangible assets | 1,251 | ||||
| Goodwill | 561 | ||||
| Total assets acquired | 2,798 | ||||
| Liabilities assumed | (799 | ) | |||
| Net assets acquired | $ | 1,999 | |||
As of December 31, 2003 we recorded a deferred tax liability in the amount of $518 with a corresponding increase in goodwill. The intangible assets arising from this transaction include $180 assigned to methodologies, $359 assigned to customer relationships and $712 assigned to the regulated facility/FDA compliant laboratory site. We estimated the economic useful lives of the acquired methodologies and customer relationships to be 5 years, using straight-line amortization, and determined that the acquired regulated facility/FDA compliant laboratory site is an indefinite-lived intangible asset not subject to amortization.
– 7 –
On May 26, 2003, we converted our $791 of convertible notes of PharmaKinetics Laboratories, Inc. (“PKLB”) into 4,992,300 shares of PKLB common stock, representing a 67% ownership interest in PKLB. On June 30, 2003, we purchased the remaining common stock and all preferred stock of PKLB through the exchange of 228,857 shares of the Company’s common stock valued at $1,179 and the issuance of $4,000 of 6% convertible notes due 2008. These notes plus any accrued interest are convertible into shares of the Company’s common stock at the holder’s option any time after June 1, 2004 at the conversion rate of sixteen dollars per share of our common stock.
The Company paid cash aggregating $1,506 (including the above purchase of convertible notes) representing acquisition costs and cash advances made to PKLB from June 2002 through May 2003. PKLB was a publicly traded company based in Baltimore, Maryland, that providesprovided clinical research and development services to the pharmaceutical and biotechnology industries in the development of prescription and non-prescription drug products. PKLB has been renamed BASi Maryland, Inc.
The purchase price has been allocated based on the estimated fair values of the assets and liabilities acquired. The purchase price has been preliminarily allocated as follows:
| Current assets | $ | 626 | $ | 626 | ||||||
| Property and equipment | 6,321 | 6,448 | ||||||||
| Intangible assets | 1,579 | 1,311 | ||||||||
| Goodwill | 55 | 213 | ||||||||
| Total assets acquired | 8,581 | 8,598 | ||||||||
| Liabilities assumed | (1,896 | ) | (1,913 | ) | ||||||
| Net assets acquired | $ | 6,685 | $ | 6,685 | ||||||
During the fiscal quarter March 31,ended June 30, 2004, we concluded our valuation of the acquisition, primarily the assessment of intangible assets. Also during the quarter, we received a third party offer on the land and building, which we have accepted. We will lease a portion of the building for two years after the close under an operating lease. We have used the net sale value of the building in our final valuation. Property and equipment were increased by $127; intangible assets were decreased by $268, goodwill was increased by $158 and liabilities assumed were increased by $17 as a result of these changes.
During the nine months ended June 30, 2004, we recorded additional adjustments from our earlieroriginal estimates to reduce deferred revenue at the acquisition date by $189, record taxes on the revaluation of the basis of property of $86, and record acquisition costs of $48, resulting in reductions of intangible assets of $64 and goodwill of $4.
Of the $1,579$1,311 in preliminary value of the acquired intangible assets, $227$80 was assigned to methodologies, $453$626 was assigned to customer relationships and $899$605 has been assigned to the regulated facility/FDA compliant laboratory site. We estimated the economic useful lives of the acquired methodologies and customer relationships to be 5 years, using straight-line amortization, and determined that the acquired regulated facility/FDA compliant laboratory site is an indefinite-lived intangible asset not subject to amortization.
Our estimate of fair values and allocation of the purchase price is preliminary and subject to change pending the final valuation, to be determined with the assistance of the independent valuation firm we engaged. Accordingly, we may revise the carrying value of assets subject to amortization and the related estimated useful economic lives.
Inventories consisted of the following:
| March 31, 2004 | September 30, 2003 | June 30, 2004 | September 30, 2003 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Raw materials | $ | 1,020 | $ | 1,161 | $ | 1,137 | $ | 1,161 | ||||||||
| Work in progress | 288 | 338 | 310 | 338 | ||||||||||||
| Finished goods | 719 | 658 | 488 | 658 | ||||||||||||
| 2,027 | 2,157 | 1,955 | 2,157 | |||||||||||||
| Less LIFO reserve | (102 | ) | (102 | ) | (102 | ) | (102 | ) | ||||||||
| $ | 1,925 | $ | 2,055 | $ | 1,833 | $ | 2,055 | |||||||||
– 8 –
We operate in two principal segments — research services and research products. Our Services segment provides research and development support on a contract basis directly to pharmaceutical companies. Our Products segment provides liquid chromatography, electrochemical and physiological monitoring products to pharmaceutical companies, universities, government research centers and medical research institutions. Our accounting policies in these segments are the same as those described in the summary of significant accounting policies.
The following table presents operating results by segment:
| Three Months Ended March 31, | Six Months Ended March 31, | Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||||
| Operating income (loss): | ||||||||||||||||||||||||||||
| Services | $ | (1,035 | ) | $ | (189 | ) | $ | (1,745 | ) | $ | 193 | $ | 1,164 | $ | 546 | $ | (581 | ) | $ | 739 | ||||||||
| Products | 494 | 42 | 1,120 | 129 | 74 | 308 | 1,194 | 437 | ||||||||||||||||||||
| Total operating income (loss) | (541 | ) | (147 | ) | (625 | ) | 322 | |||||||||||||||||||||
| Total operating income | 1,238 | 854 | 613 | 1,176 | ||||||||||||||||||||||||
| Corporate expenses | (203 | ) | (112 | ) | (393 | ) | (155 | ) | (293 | ) | (78 | ) | (686 | ) | (233 | ) | ||||||||||||
| Income (loss) before income taxes | $ | (744 | ) | $ | (259 | ) | $ | (1,018 | ) | $ | 167 | $ | 945 | $ | 776 | $ | (73 | ) | $ | 943 | ||||||||
Prior to the acquisition of PKLB in June 2003, a current director of the Company who had been a director of PKLB made loans to PKLB to support their cash needs under the terms of a $350 convertible promissory note (“Old Note”) dated November 22, 2002. On December 31, 2003, the Company issued a $350 8% convertible note payable (“New Note”) in exchange for the Old Note. The New Note wasis convertible into the Company’s common shares at a price based upon the market price of the common shares at or about the time of the conversion and wasis scheduled to mature on June 1, 2005. On that same day, the Company prepaid $100 of the outstanding principal amount of the New Note, plus approximately $31 in accrued interest, and the holder converted $150 of the New Note into 38 of the Company’s common shares. The Company issued the holder a new 8% note due June 1, 2005, on substantially the same terms as the New Note, for the remaining $100 principal amount.
In May, 2004 the Company converted its construction loans totalling $2,250 into long-term debt under the terms of the initial loans. The loan bears interest at the rate of 5.7% through June 1, 2007 and matures October 29, 2012. Monthly payments total $16 for principle and interest.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q may contain “forward-looking statements,” within the meaning of Section 27A of the Securities Act of 1933, as amended, and/or Section 21E of the Securities Exchange Act of 1934, as amended. Those statements may include, but are not limited to, discussions regarding BASi’s intent, belief or current expectations with respect to (i) BASi’s strategic plans; (ii) BASi’s future profitability; (iii) BASi’s capital requirements; (iv) industry trends affecting the Company’s financial condition or results of operations; (v) the Company’s sales or marketing plans; or (vi) BASi’s growth strategy. Investors in BASi’s Common Shares are cautioned that reliance on any forward-looking statement involves risks and uncertainties, including the risk factors contained in Exhibit 99.1 to BASi’s annual report on Form 10-K for the year ended September 30, 2003. 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, and as a result, the forward-looking statements based upon those assumptions also could be incorrect. In light of the uncertainties inherent in any forward-looking statement, the inclusion of a forward-looking statement herein should not be regarded as a representation by the Company that BASi’s plans and objectives will be achieved.
The business of Bioanalytical Systems, Inc. is very much dependent on the level of pharmaceutical and biotech companies’ efforts in new drug discovery and approval. Our Services segment is the direct beneficiary of theirthese efforts, through their outsourcing of laboratory and analytical needs, and our Products segment is the indirect beneficiary, as increased drug development leads to capital expansion providing opportunities to sell the equipment we produce and the consumable supplies we provide that support our products.
Developments within the industries we serve have a direct, and sometimes material, impact on our operations. One significant development in the past decade has been the continuing consolidation among large pharmaceutical corporations. We believe that, on the whole, this consolidation should have a positive impact on our business, as these increasingly larger pharmaceutical companies will devote their internal resources, our main competitor, to only those drug candidates with the potential to have a material impact on their operations, and will outsource more of their lesser opportunities. Additionally, many drug candidates will not meet the financial hurdles established by the major pharmaceutical companies, and will be developed by smaller, specialty pharmaceutical companies that do not possess internal capabilities to test and analyze the drug candidate, or have the capability to scientifically monitor the product once approved. Offsetting those potential positive impacts, the major pharmaceutical companies tend to reevaluate their development programs after major acquisitions, which sometimes causescause them to defer, or cancel, work that we were scheduled to perform. We are also at risk that a significant client for us may be acquired by a corporation that prefers to perform the work internally, or has a long-standing relationship with one of our competitors. We do not anticipate that the pending acquisition of Aventis by Sanofi-Synthelabo will have any impact on our operations, as neither of the companies currently provides significant business for us. We anticipate that as companies in our markets consolidate, our competitors will also consolidate, which will result in fewer, but much stronger, competitors for our business.
Two very significant demographic developments are impacting pharmaceutical companies, and therefore, our markets. The first is the well-documented aging of Western populations, with the incident increase of diseases associated with aging and the increasing periods of treatment. The other is the so-called genomic era, where the knowledge of the genome, including human and other organisms, is spawning the technologies and investment to develop additional therapies. We believe that both will positively impact our markets by increasing the amount of drug development and monitoring activity.
Research and analytical services are capital intensive. The investment in equipment and facilities to serve our markets is substantial and continuing. While our physical facilities are excellent to meet market needs for the near term, rapid changes in automation, precision, speed and technologies necessitate a constant investment in equipment and software to meet market demands. We are also impacted by the heightened regulatory environment and the need to improve our business infrastructure to support our increasingly diverse operations, which will necessitate additional capital investment. Our ability to generate capital to reinvest in our capabilities, both through operations and financial transactions, is critical to our success. While we are currently committed to fully utilizing recent additions to our capacity, sustained growth will require additional investment in future periods.
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One of the more important factors in our profitability is the utilization of our capacity. In the past two years, we have added significant new capacity through acquisitions in Baltimore, Maryland and McMinville, Oregon, and through facility expansions in West Lafayette and Evansville, Indiana. These expansions created a higher level of basic operating expenses. Those related to productive capacity are included in cost of services. As a result, after expansion, while we are developing the sales to fill these facilities, our percentage margins on services have declined because many of these costs are the same as they will be at full capacity, but are being spread over less-than-capacity revenues. While the capacity and capabilities added have the potential to positively impact future operating results, their costs have had a negative impact in the current quarter and sixnine months.
The following table summarizes the consolidated statement of operations as a percentage of total revenues:
| Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||||||||
| Service revenue | 64 | .8 | 65 | .7 | 66 | .5 | 65 | .3 | 72 | .3 | 71 | .7 | 68 | .7 | 67 | .6 | ||||||||||||
| Product revenue | 35 | .2 | 34 | .3 | 33 | .5 | 34 | .7 | 27 | .7 | 28 | .3 | 31 | .3 | 32 | .4 | ||||||||||||
| Total revenue | 100 | .0 | 100 | .0 | 100 | .0 | 100 | .0 | 100 | .0 | 100 | .0 | 100 | .0 | 100 | .0 | ||||||||||||
| Cost of service revenue (a) | 93 | .0 | 81 | .5 | 88 | .7 | 76 | .7 | 67 | .9 | 68 | .5 | 80 | .4 | 73 | .5 | ||||||||||||
| Cost of product revenue (a) | 40 | .4 | 40 | .7 | 39 | .6 | 41 | .6 | 40 | .4 | 38 | .5 | 39 | .9 | 40 | .6 | ||||||||||||
| Total cost of revenue | 74 | .5 | 67 | .5 | 72 | .2 | 64 | .5 | 60 | .3 | 60 | .0 | 67 | .7 | 62 | .9 | ||||||||||||
| Gross profit | 25 | .5 | 32 | .5 | 27 | .8 | 35 | .5 | 39 | .7 | 40 | .0 | 32 | .3 | 37 | .1 | ||||||||||||
| Total operating expenses | 31 | .7 | 34 | .6 | 31 | .4 | 33 | .2 | 28 | .1 | 29 | .2 | 30 | .1 | 31 | .7 | ||||||||||||
| Operating income | 11 | .6 | 10 | .8 | 2 | .2 | 5 | .4 | ||||||||||||||||||||
| Operating income (loss) | (6 | .3) | (2 | .1) | (3 | .6) | 2 | .3 | ||||||||||||||||||||
| Other income (expense) | (2 | .4) | (1 | .6) | (2 | .3) | (1 | .1) | ||||||||||||||||||||
| Other (expense) | (2 | .8) | (1 | .0) | (2 | .5) | (1 | .0) | ||||||||||||||||||||
| Income (loss) before income taxes | (8 | .6) | (3 | .7) | (5 | .8) | 1 | .2 | 8 | .8 | 9 | .8 | (0 | .3) | 4 | .4 | ||||||||||||
| Income tax expense (benefit) | (2 | .8) | (1 | .3) | (2 | .2) | 0 | .4 | 2 | .9 | 5 | .4 | (0 | .3) | 2 | .2 | ||||||||||||
| Net income (loss) | (5 | .8) | (2 | .4) | (3 | .6) | 0 | .8 | ||||||||||||||||||||
| Net income | 5 | .9 | 4 | .4 | 0 | .0 | 2 | .2 | ||||||||||||||||||||
(a) Percentage of service and product revenues, respectively.
Service and Product Revenues
Revenues for the secondthird fiscal quarter ended March 31,June 30, 2004 increased 24%35% to $8.7$10.6 million compared to $7.0$7.9 million for the secondthird quarter last year. Service revenue increases were the result of the Company’s two acquisitions completed in fiscal 2003. Preclinical services capacity utilization and UK-based bioanalytical services (aided by a strong pound sterling that causes U.K. revenues to translate into more U.S. dollars), showed significant improvement for the quarter, while US-based bioanalytical services revenues were negatively impacted by the deferral of the commencement of work on a contract for which we had reserved capacity.quarter. Our Product revenues were essentially flat compared to the prior year.increased 32%, driven by strong sales of our Culex automated blood sampling product line.
11
Cost of Revenues
Cost of revenues for the secondthird quarter ended March 31,June 30, 2004 was $6.5$6.4 million or 75%60% of revenue compared to $4.7 million, or 68%60% of revenue for the secondthird quarter last year. The increase in cost of revenues is related to the Company’s Services segment and is due to the inclusion of costs from operations acquired operations in fiscal 2003 that were not included in the prior year. The increase inOur cost of revenues as a percentage of revenues isimproved this quarter to the level of the same period last year as a result of higher utilization of our capacity. Future similar, or improved, margins are dependent on maintaining or improving volume, as we have significantly greater capacity than we did in fiscal 2003. Higher utilization of capacity in our Baltimore facility, acquired last year, impacted by operating inefficienciesthe margin improvement in the Service segment as the Company integrates the acquired businesses, and underutilization of capacity.current quarter. The costs of the underutilized capacity in our Services segment are included in costscost of services, thereby reducingwith the result that those costs remain fairly constant, regardless of our Services margins.volume. The Product segment cost of product revenue as a percentage of product revenue iscontinues within our planned range, impacted mainly by the same as last year.mix of product.
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Operating Expenses
Selling expenses for the three months ended March 31,June 30, 2004 decreased 24%increased 21% to $665,000$672,000 from $884,000$557,000 for the three months ended March 31,June 30, 2003. Research and development expenses, which are net of grant reimbursements, for the three months ended March 31,June 30, 2004 decreased 9%15% to $295,000$260,000 from $323,000$305,000 for the three months ended March 31,June 30, 2003. These decreases are primarily attributable tochanges were in line with our expectations and reflect, in the Company’scase of selling expenses, our efforts to control expenses through elimination or deferralincrease our utilization of discretionaryour capacity, and with regard to research and development, our current focus on improving operations in our recent acquisitions, reducing our expenditures in research and reductiondevelopment. For the near term, we intend to focus our attention on improving the operations of staff.our acquired companies, balancing our human and financial resources between operations and new development opportunities.
General and administrative expenses for the three months ended March 31,June 30, 2004 increased 49%43% to $1,785,000, up$2,054,000, from $1,197,000$1,436,000 for the three months ended March 31,June 30, 2003. This increase is primarily attributable to the Company’s acquisitions in fiscal 2003, and incremental financial consulting fees incurred dueincludes additional recruitment and compensation costs to the resignation of the Company’s Chief Financial Officer as previously disclosed. Subsequent to March, 2004, we filled that position, as well as hired a controller, which should reduce consulting expenses in future periods. As the Company integrates its acquisitions, we expect to decrease overall general and administrative costs.add key personnel.
Other Income (Expense)
Interest expense increased 50%107% to $207,000$306,000 in the three months ended March 31,June 30, 2004 from $138,000$148,000 in the comparable quarter of the prior year. This increase is due to interest expense on the subordinated debt issued in connection with the Company’s 2003 acquisitions and increases in long-term debt due to facility expansions at its Evansville and West Lafayette sites. We also decided to fix our interest rates on our $9,000,000 of mortgage financing at 5.7% through May, 2007 as monetary policy tightens. This increase of 1.4% over our prior floating rate added approximately $20,000 in the quarter. This was done to limit interest rate risk.
Income Taxes
We computed our tax benefit using an effective tax rate for the three months ended March 31,June 30, 2004 of 32.4%32.8% compared to 35.5%54.4% for the three months ended March 31,June 30, 2003. This decline in effective rate is the result of profitable operations in our United Kingdom subsidiaries, where prior period loss carryforwards are being recognized as utilized.
Net Income (Loss)
As a result of the above factors, we lost $503,000earned $635,000 ($.10 loss.13 per share both basic and $.12 per share diluted) in the quarter ended March 31,June 30, 2004, compared to a loss of $167,000$354,000 ($.04 loss.08 per share, both basic and diluted) in the same period last year.
General
Our current year-to-date operations reflect the operations of our two acquisitions of last year for the full period. Prior year results included operations of our Oregon acquisition from December 12, 2002, and our Baltimore acquisition from May 26, 2003. Both of these acquisitions contributed to our losses in prior periods of the current year. Neither of these operations were profitable in the comparable period last fiscal year, however, because of inclusion for the full period in the current year, current fiscal year operating results have been impacted more than last year.
Service and Product Revenues
Revenues for the sixnine months ended March 31,June 30, 2004 increased 25%29% to $17.4$28.0 million compared to $13.9$21.8 million for the sixnine month period last year. Service revenue increases were primarily the result of the Company’s two acquisitions completed in fiscal 2003. For the six month period, ouraforementioned acquisitions. Product revenues were largely impacted by the same itemsincreased 25% as in the discussion abovea result of the second quarter.success of our Culex product line.
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Cost of Revenues
Cost of revenues for the sixnine months ended March 31,June 30, 2004 was $12.6$19.0 million or 72%68% of revenue compared to $9.0$13.7 million, or 65%63% of revenue for the same period last year. The increase in cost of revenues is primarily related to the Company’s Services segment and is due to the acquisitions in fiscal 2003. The increase in cost of revenue as a percentage of revenue is impacted by operating inefficiencies in the serviceServices segment as the Company integrates the acquired businesses, and by underutilization of capacity. This impact was most severe in the first two quarters of fiscal 2004. We devoted significant manpower to changing site infrastructure and absorbing new job methodologies, which reduced billable work. During the first quarter of the current fiscal year, we absorbed the costs of a client project overrun, new staff in training, and lower than optimal capacity utilization. The product segment cost of revenue as a percentage of product revenue decreased over the prior year’s first six months due to a higher margin product mix.was in line with our historical experience.
13
Operating Expenses
Selling expenses for the sixnine months ended March 31,June 30, 2004 decreased 21%11% to $1,291,000$1,963,000 from $1,642,000$2,199,000 for the sixnine months ended March 31,June 30, 2003. Research and development expenses, which are net of grant reimbursements, for the sixnine months ended March 31,June 30, 2004 decreased 22%20% to $541,000$801,000 from $691,000$996,000 for the sixnine months ended March 31,June 30, 2003. As described in the three month discussion above, these decreases are primarily attributable to the Company’s efforts to control expenses.
General and administrative expenses for the sixnine months ended March 31,June 30, 2004 increased 59%53% to $3,632,000, up$5,686,000, from $2,287,000$3,723,000 for the sixnine months ended March 31,June 30, 2003. The principal reasons for this increase are the same as those discussed aboveexpenses of the acquired operations, in addition to significant consulting expenses for interim financial management while the current quarter.Company recruited new personnel (accomplished in the third quarter of this fiscal year).
Other Income (Expense)
Interest expense increased 67%82% to $414,000$720,000 in the sixnine months ended March 31,June 30, 2004 from $248,000$396,000 in the comparable quarterperiod of the prior year.fiscal -year. This increase is due to interest expense on the subordinated debt issued in connection with the Company’s fiscal 2003 acquisitions and increases in long-term debt due to facility expansions at its Evansville and West Lafayette sites.
Income Taxes
The effectiveOur tax rate we used in computing our tax benefit for the six months ended March 31, 2004 was 37.8% compared to 35.3% for the provision for the sixnine months ended March 31, 2003.June 30, 2004 is the result of our estimate of income for the full year. As of June 30, 2004, we had losses in the U.S., which we project can be utilized against fourth quarter income. These losses were offset by earnings in the U.K., where we have loss carryforwards to offset our current income. We are recognizing the benefit of that carryforward as it is realized, due to the uncertainties of its realization, resulting in no net provision in the current period for U.K. profits. The nine month benefit from taxes reflects the projection that we will be profitable for the full year in the U.S., while utilizing unrecorded benefits in the U.K. Our fourth quarter and full year provision for taxes could be impacted by failure to attain these projections.
Net Income (Loss)
As a result of the above, we experienced a net lossearnings of $633,000$2,000 ($.13 loss0.00 earnings per share, both basic and diluted) for the first sixnine months of the current fiscal year, compared to net income in the prior fiscal year of $108,000$462,000 ($.02.10 income per share, both basic and diluted).
The Company discloses earnings before interest, taxes, depreciation and amortization (EBITDA), which is not a measure of performance calculated in accordance with generally accepted accounting principles (GAAP) in the United States. The Company has presented this to supplement GAAP measures because management believes it to be an indicator of operating health of the Company. EBITDA should not be considered in isolation or as an alternative to net income (loss), cash flows from operating, investing or financing activities or other financial statement data presented in the consolidated financial statements as an indicator of financial performance or liquidity. Because EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, the benchmarks presented may not be comparable to other similarly titled measures of other companies. EBITDA for the second quarter ended March 31, 2004 and 2003 was $0.3 million compared to $0.5 million, respectively, and $1.0 million and $1.6 million for the six months ended March 31, 2004 and 2003, respectively.
Set forth below is a reconciliation of the Company’s GAAP net income (loss) to EBITDA (in thousands):
| Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | |||||||||||
| Net income (loss) | $ | (503 | ) | $ | (167 | ) | $ | (633 | ) | $ | 108 | |||
| Interest expense | 207 | 138 | 414 | 248 | ||||||||||
| Income tax expense (benefit) | (241 | ) | (92 | ) | (385 | ) | 59 | |||||||
| Depreciation and amortization | 789 | 586 | 1,618 | 1,155 | ||||||||||
| EBITDA | $ | 252 | $ | 465 | $ | 1,014 | $ | 1,570 | ||||||
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Since its inception, BASi’s principal sources of cash have been cash flow generated from operations and funds received from bank borrowings and other financings. At March 31,June 30, 2004, BASi had cash and cash equivalents of $507,000,$778,000, compared to cash and cash equivalents of $1,378,000 at September 30, 2003. The decreaseOur cash receipts are immediately applied to our line of credit in the U.S., the result of which is that our cash resulted primarily from payments for capital expenditures andbalances are principally in the U.K. We monitor our U.K. cash needs to supportavoid conversion costs, which in the operations of the recently acquired Baltimore clinical research unit.current interest rate environment can exceed interest. Our cash balance is therefore less significant than our available borrowing capacity.
BASi’sOur net cash provided by operating activities was $1,504,000$697,000 for the sixnine months ended March 31,June 30, 2004. Cash provided by operations during the sixnine months ended March 31,June 30, 2004 consisted of net lossesprofits of $633,000, offset by$2,000, non-cash charges against operations of $1,524,000$2,974,000 and a net decreaseincrease in assets employed of $613,000$2,279,000 in operatingcurrent assets and liabilities. During the current sixnine month period, we receivedmaintained significant customer advance payments for work begun in April,to begin after this period, which contributed $1,442,000$812,000 to cash flow. In addition to funding the Baltimore clinical research unit, the other driving factors that consumed cash from operations were a reductionOur sales in the ratethird quarter of our fiscal year resulted in an increase in accounts receivable collections from some of the Company’s larger customers and significant shipments of its Culex ABS.$1,451,000 over our last year-end, which was financed by utilizing our working capital credit facility.
CashNet cash used by investing activities decreased to $2,229,000$2,029,000 for the sixnine months ended March 31,June 30, 2004 from $3,244,000$4,033,000 for the sixnine months ended March 31,June 30, 2003. This decreaseThe current period’s investment is due to reduced capital expendituresthe result of facilities expansion in West Lafayette, Indiana and Evansville, Indiana, while two acquisitions in fiscal 2003 accounted for the higher level in the six months ending March 31, 2004. Additionally, the Company expended cash for its acquisition of LC Resources, Inc. in December 2002 and for loans and advances to PharmaKinetics Laboratories, Inc., which was acquired in June 2003.prior comparable period.
Cash provided by financing activities for the sixnine months ended March 31,June 30, 2004 was $33,000$756,000 due to additional borrowings from our construction linelines of credit, offset by payments on long term debt and leases. In the sixnine months ended March 31,June 30, 2003, the Company refinanced its existing revolving line of credit and term loan and secured new financing for facilities expansion and improvements. Throughout fiscal 2003, BASi used these funds to finance its expansions and improvements in Evansville and West Lafayette and for other capital expenditures. As the availability from the new facilities financings was expended by late fiscal 2003, the Company began to support these expansions with available funds from operations and its revolving credit line. This resulted in negative cash flows being generated from operations. However, expansions are now complete in Evansville and nearly complete in West Lafayette and as the Company continues to integrate its new acquisitions and fill its new facilities with business, cash from operations should begin to show improvements.
Total expenditures by BASi for property and equipment were $2,229,000$2,029,000 and $3,217,000$4,077,000 for the sixnine months ended March 31,June 30, 2004 and 2003, respectively. Expenditures for the first halfnine months of 2004 include the construction of the new early development facility in West Lafayette, accounting for the largest portion of these expenditures, and expenditures to bring the Baltimore facility to Company standards. Capital expenditures also include the purchase of new toxicology and pathology software in the Company’s Evansville location that will improve efficiency and ensure future regulatory compliance. The software is in the validation process and is expected to be fully operational in November 2004. These expenditures were primarily funded by the Company’s construction line of credit and revolving line of credit. Capital investments correspond to anticipated increases in research services to be provided by BASi. BASi expects to make other investments to expand its operations through internal growth, strategic acquisitions, alliances, and joint ventures as demand and capital allow.
The Company has implemented a phased plan to improve the operations of its Baltimore clinical research unit and expects to fund the operations with cash provided from company-wide operations supplemented by its revolving line of credit. The planned improvements include renovation of the clinic, selectively updating equipment and hiring highly qualified, experienced management personnel. Improvements already completed and in process have had measurable effects on attracting new clients.clients
BASi’s revolving line of credit expires September 30, 2006. The maximum amount available under the terms of the agreement is $6,000,000 with outstanding borrowings limited to the borrowing base as defined in the agreement. Interest accrues monthly on the outstanding balance at the bank’s prime rate to prime rate plus 125 basis points, or at the Eurodollar rate plus 200 to 350 basis points, as elected by BASi, depending upon the ratio of BASi’s interest bearing indebtedness (less subordinated debt) to EBITDA. BASi pays a fee equal to 25 to 50 basis points, depending upon the same financial ratio, on the unused portion of the line of credit. As of March 31,June 30, 2004, BASi had approximately $2.1$1.8 million of availability subject to limitations by its bank debt covenant ratios.under this facility.
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During 2002, the Company began expanding facilities at its site in West Lafayette, Indiana. Phase one of this facility is expected to bebecame fully functional in the third fiscal quarter of 2004 at a cost of $3.4 million. Phases two and three will be completed as business justifies. Construction on the West Lafayette facilities is expected to have a total cost of $4.0 million when complete. The Company funded part of this expansion by obtaining a $2,250,000 construction loan with a bank. The loan expires November 1, 2012 and requires interest payments only until completion of the project in West Lafayette, Indiana. Interest is charged at the prime rate. The Company exhausted this construction loan in the first quarter of fiscal 2004 and expects to convertconverted the $2,250,000 to a term notemortgage in May 2004. Future expenditures to complete the site will be funded by cash from operations, as new business is generated and facilities are filled, and the Company’s revolving line of credit.
We currently have a contract to sell our Baltimore facility, requiring a two-year leaseback of space in excess of our needs. The contract is subject to due diligence procedures by the buyer, which, in essence, makes the contract non-binding. Should the contract not be consummated, we had competing offers at similar terms. The net proceeds from this transaction should exceed $6,000,000, which we intend to use to retire $2,000,000 of subordinated debt and pay down our revolving line of credit, with the excess to be retained as working capital.
BASi is required to make cash payments in the future on debt and lease obligations. The following table summarizes BASi’s contractual term debt and lease obligations at March 31,June 30, 2004 and the effect such obligations are expected to have on its liquidity and cash flows in future periods (amounts presented for 2004 are those items required in the final two fiscal quarters)quarter):
| Fiscal Years Ending September 30, | Fiscal Year Ending September 30, | |||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2005 | 2006 | After 2006 | Total | 2004 | 2005 | 2006 | After 2006 | Total | |||||||||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||
| Mortgage notes payable | $ | 183 | $ | 390 | $ | 395 | $ | 6,171 | $ | 7,139 | $ | 183 | $ | 390 | $ | 395 | $ | 6,171 | $ | 7,139 | ||||||||||||||
| Subordinated debt* | 401 | 460 | 360 | 4,467 | 5,688 | 401 | 460 | 360 | 4,467 | 5,688 | ||||||||||||||||||||||||
| Future debt obligations** | 36 | 69 | 56 | 2,089 | 2,250 | 36 | 69 | 56 | 2,089 | 2,250 | ||||||||||||||||||||||||
| Capital lease obligations | 62 | 74 | 80 | --- | 216 | 62 | 74 | 80 | --- | 216 | ||||||||||||||||||||||||
| Operating leases | 327 | 529 | 518 | 274 | 1,648 | 327 | 529 | 518 | 274 | 1,648 | ||||||||||||||||||||||||
| $ | 1,009 | $ | 1,522 | $ | 1,409 | $ | 13,001 | $ | 16,941 | $ | 1,009 | $ | 1,522 | $ | 1,409 | $ | 13,001 | $ | 16,941 | |||||||||||||||
* Subordinated debt includes notes to related parties.
** Future debt obligations is an estimate of payments upon the conversion in May 2004 of the current construction line of credit into a $2,250,000 mortgage note payable.
The covenants in the Company’s credit agreement requiring the maintenance of certain ratios of interest bearing indebtedness (not including subordinated debt) to EBITDA and net cash flow to debt servicing requirements may restrict the amount the Company can borrow to fund future operations, acquisitions and capital expenditures. The Company was in violation of one of the credit agreement’s financial covenants for both the first fiscal quarter ended December 31, 2003 and the second fiscal quarter ended March 31, 2004. On January 8, 2004 and May 13, 2004, the banks waived compliance with this financial covenant for the twelve months ended March 31, 2004 and have amended certain of the financial covenants through September 30, 2004. As a condition to these waivers, we have granted our banks a secured mortgage on our Baltimore facility.
We have undertaken steps to improve our liquidity, operations and cash flow, with the objectives of reducing our debt, strengthening our financial position and meeting our financial covenants. We have reorganized our business development efforts to increase new business, added information technology improvements to become more efficient, and are attempting to sell our Baltimore physical facility. We are tightly monitoring and managing our cash flow, and we are not incurring new capital expenditures for expansion.
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Based on our current business activities, we believe cash generated from our operations and amounts available under our existing credit facilities, combined with the action plan described above, will be sufficient to fund the Company’s working capital and capital expenditure requirements for the foreseeable future and through September 30, 2004.future.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
BASi’s primary market risk exposure with regard to financial instruments is changes in interest rates. The credit agreement between BASi and The Provident Bank dated October 29, 2002 bears interest at a rate of either the bank’s prime rate plus 0 to 125 basis points, or at Eurodollar rate plus 200 to 350 basis points, depending in each case upon the ratio of BASi’s interest-bearing indebtedness (less subordinated debt) to EBITDA, at BASi’s option. BASi also hasAs discussed previously, we have taken steps to fix the interest rate on a construction loan and a commercial mortgage which bear interest at the prime rate.significant amount of our debt through May, 2007. Historically, BASi has not used derivative financial instruments to manage exposure to interest rate changes. BASi estimates that a hypothetical 10% adverse change in interest rates would not affect the consolidated operating results of BASi by a material amount.
BASi operates internationally and is, therefore, subject to potentially adverse movements in foreign currency exchange rates. The effect of movements in the exchange rates was not material to the consolidated operating results of BASi in fiscal years 20032004 and 2002.2003. BASi estimates that a hypothetical 10% adverse change in foreign currency exchange rates would not affect the consolidated operating results of BASi by a material amount.
Based on their most recent evaluation, which was completed as of the end of the period covered by this report, BASi’s Chief Executive Officer and Chief Financial Officer believe BASi’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-1413a-15(e) and 15d-14)15d-15(e) are effective in timely alerting BASi’s management to material information required to be included in this Form 10-Q and other Exchange Act filings.
There werewas no significant changeschange in the Company’s internal controlscontrol over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or other factors that could significantlyis reasonably likely to marterially affect, those controls subsequent to the date of their evaluation, and there were no significant deficiencies or material weaknesses which required corrective action.Company’s internal control over financial reporting.
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PART II — OTHER INFORMATION
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 26, 2004, the Annual Meeting of Shareholders of BASi was held at the principal executive offices of BASi. The following matters were voted on at the meeting:
| MATTER: | VOTES CAST FOR: | VOTES CAST AGAINST OR WITHHELD: (1) | ||||||
|---|---|---|---|---|---|---|---|---|
| Election of the directors of BASi: | ||||||||
| Peter T. Kissinger, Ph.D | 4,323,861 | 218,609 | ||||||
| Ronald E. Shoup, Ph.D | 4,356,902 | 185,568 | ||||||
| Candice B. Kissinger | 4,219,653 | 322,817 | ||||||
| William E. Baitinger | 4,534,788 | 7,682 | ||||||
| Leslie B. Daniels | 4,526,438 | 16,032 | ||||||
| W. Leigh Thompson, Ph.D., M.D | 4,390,491 | 151,981 | ||||||
| Ratification of the selection by the Board of Directors of Ernst & Young LLP as independent auditors of BASi for the fiscal year ending September 30, 2004 | 4,526,159 | 3,964 | ||||||
| (1) Includes abstentions and broker non-votes | ||||||||
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) ExhibitsExhibit
| Number assigned in Regulation S-K Item 601 | Description of Exhibits | |
| (3) | 3.1 | Second Amended and Restated Articles of Incorporation of Bioanalytical Systems, Inc. (incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarter ended December 31, 1997). |
| 3.2 | Second Restated Bylaws of Bioanalytical Systems, Inc. (incorporated by reference to Exhibit 3.2 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). |
| (10) | 10.1 |
| 10.2 |
| 10.3 |
| 10.4 |
| (31) | 31.1 | Certification of Peter T. Kissinger |
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| 31.2 | Certification of Michael R. Cox |
| (32) | 32.1 | Section 1350 Certifications |
| (99) | 99.1 | Risk factors (incorporated by reference to Exhibit 99.1 to Form 10-K for the year ended September 30, 2002). |
† Filed with this Quarterly Report on Form 10-Q.
(b) Reports on Form 8-K
Form 8-K furnished February 17,April 29, 2004, reporting under Item 12 “Results of Operations and Financial Condition,” relating to the Company’s announcement of its results for the year ended September 30, 2003. Form 8-K furnished February 17, 2004, reporting under Item 12” “Results of Operations and Financial Condition,” relating to the Company’s announcement of its results for the quarter ended DecemberMarch 31, 2003.2004.
Form 8-K furnished March 18, 2004, reporting under Items 7 & 9 “Financial Statements and Exhibits” and “Regulation FD Disclosure,” relating to the hiring of a new CFO.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:
BIOANALYTICAL SYSTEMS, INC. |
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