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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, 1999.
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
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 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 $5,916,747. As of November 30, 1999,
4,514,349 shares of registrant's Common Stock were outstanding. No shares of
registrant's Preferred Stock were outstanding as of November 30, 1999.
Documents Incorporated by Reference: Certain portions of the Registrant's
definitive Proxy Statement to be filed pursuant to Regulation 14A in connection
with its 2000 Annual Meeting of Shareholders is incorporated by reference to
those items listed in Part III of this Form 10-K.
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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 17
Operations
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 40
Disclosure
Part III
Item 10. Directors and Executive Officers of the Registrant 41
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial Owners and Management 41
Item 13. Certain Relationships and Related Transactions 41
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 42
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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. As a consequence 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
services and products 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 services and products 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
biotechnology industries.
Over the past five years, the Company regularly has provided its services
and/or products to all of the top 25 pharmaceutical companies in the world, as
ranked by 1998 research and development spending. In fiscal 1999, 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 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 1999,
pharmaceutical and biotechnology companies spent approximately
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$24 billion worldwide on research and development, of which approximately 25%,
or $6.0 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.
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.
Changing Nature of Pharmaceutical Industry
The Company provides services and products 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 services are generally
marketed to pharmaceutical and other biotechnical companies engaged in later
stages of drug testing, while the Company's products are generally marketed to
both public and private research organizations engaged in the early stages of
drug development. 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, whereas the Company competes against several large equipment
manufacturers with respect to its products. While the markets for the Company's
services and products 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.
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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 47% 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.
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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 25 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 services and instrumentation products 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
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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 Services and Products
Overview
The Company provides a broad array of bioanalytical services in all phases
of the drug development process, and also provides products and procedures for
the $11 billion per year analytical instrument industry. Over its 25 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.
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.
o 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
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in product support testing. Of the Company's 202 employees as of
September 30, 1999, more than 30 are Company scientists (including
nine who hold Ph.D. degrees) who are experienced with method
development and validation.
o 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.
o 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.
o 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.
o 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(R) 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.
o 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.
o 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.
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:
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o Bioanalytical separation instrumentation that utilizes liquid
chromatography and Windows(R) software to detect low concentrations of
substances in biological fluids and tissues.
o 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.
o 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.
o 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.]
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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 Application(s)
----------------- ------------------- --------------
Bioanalytical Separation o Liquid chromatography Determining low concentrations of
Instrumentation o High pressure digitally substances in biological fluids and
controlled metering pumps tissues
o Electrochemistry and optics
detectors
o Customized Windows(R) software
o Customized Internet
applications
Electrochemical Analyzers and o Electrochemistry Development of biosensors for
Accessories o Real time control and data substances, such as glucose,
acquisition software lactate, glutamate; development of
o Customized Windows(R) software batteries for electronics such as
o Customized Internet pacemakers; study of corrosion of
applications implants
Acetylcholine/Choline Analyzer o Liquid chromatography Studies of Alzheimer's disease;
o Enzymology chemical warfare agents; and infant
o Electrochemistry formula
Serotonin and Dopamine Analyzer o Liquid chromatography Developing serotonin reuptake
o Electrochemistry inhibitors; studies of the
mechanism of cocaine addiction
Amino Acid Analyzer o Derivatization chemistry Studies of aspartate, glutamate,
o Liquid chromatography and GABA in the brain; research to
o Electrochemistry and/or minimize the impact of stroke and
o Fluorescence other ischemic events in the brain
In vivo sampling devices ("artificial o Hydrophilic membrane fibers Following pharmacokinetics in vivo;
blood vessels") and auxiliary o Digitally controlled pumping monitoring glucose;
instrumentation systems, miniature fraction neurotransmitters, peptides, and
collectors, and valves 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 o Robotics Evaluating cardiovascular disease,
neurotransmitters and homocysteine in o Liquid chromatography inborn errors of metabolism, and
human blood and urine o Electrochemistry cancers of neurological origin
o Customized Windows(R) software
Simultaneous determination of multiple o Robotics "Cocktail" therapy for AIDS; drug
drugs in blood plasma o Solid phase extraction interaction studies during clinical
o Liquid chromatography trials
o Mass spectrometry
Vital signs monitoring o Electrocardiology (ECG) ECG, respiration, blood pressure,
o Temperature transducers and temperature monitoring in
o Real time software veterinary clinics and toxicology
departments in pharmaceutical
companies
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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 1998 research and development spending. In fiscal 1999, the Company estimates
that more than one-third of its total revenue was derived from these companies.
In addition, the Company's products are purchased by the vast majority of
medical schools in North America, Europe and Asia. In fiscal 1999, the Company
provided products and services to approximately 300 institutions, including some
of the largest United States, European and Japanese drug companies.
Approximately 34% 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 1997, 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 21% of the Company's total revenues. These sales were derived from
both the products and the services units of the Company. During 1999 and 1998,
Pfizer accounted for approximately 22% and 20%, respectively, of the Company's
total revenues. Most of these sales fell under approximately 120 contracts the
Company has or had with Pfizer, the largest of which totaled approximately
$750,000. 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.
11
BAS Analytics, Ltd., 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. Bioanalytical Systems, Ltd., also a
wholly-owned subsidiary of the Company, manages most product sales in Europe. 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 one of the Company's Japanese
distributors, BAS Japan, accounted for approximately 3%, 6% and 12% of the
Company's total revenue for fiscal 1999, 1998 and 1997, respectively. Although
the Company believes it has identified a suitable replacement in the event that
BAS Japan discontinues as the Company's distributor, such an event could have an
adverse effect on the Company's business, operations and financial condition.
(See Note 10 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 stronger
local promotion and significant expansion of the Company's distributor network,
and potentially through acquisitions.
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
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. 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.
Competition
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.
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.
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
12
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, 1999, the Company had 202 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.
13
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 is invalid. Sales of the product in question
accounted for less than $150,000 of the Company's revenues in fiscal 1999. 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.
[Remainder of page intentionally left blank.]
14
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 years ended September 30, 1999 and 1998. The approximate number of
recordholders of outstanding Common Shares as of September 30, 1999 was 1700.
The Common Shares were not publicly traded prior to November 24, 1997.
Fiscal 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
1999
----
High 5.750 4.250 4.250 4.000
Low 3.625 3.000 3.500 2.875
1998
----
High 8.875 10.250 9.000 7.375
Low 7.625 6.750 6.750 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.
[Remainder of page intentionally left blank.]
15
Item 6. Selected Consolidated Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands)
The following is selected consolidated financial data of the Company for
the five years ended September 30, 1999. 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 September 30,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- -------
(in thousands, except per share data)
Statement of Income Data:
Services revenue.................... $ 9,993 $ 7,609 $ 4,991 $ 3,681 $ 2,725
Product revenue..................... 9,858 10,616 9,932 9,113 9,627
-------- -------- -------- -------- -------
Total revenue................ 19,851 18,225 14,923 12,794 12,352
Cost of services revenue............ 6,499 4,598 2,986 2,141 1,834
Cost of product revenue............. 3,943 3,911 3,334 3,227 3,448
-------- -------- -------- -------- -------
Total cost of revenue........ 10,442 8,509 6,320 5,368 5,282
-------- -------- -------- -------- -------
Gross profit........................ 9,409 9,716 8,603 7,426 7,070
Operating expenses:
Selling............................. 3,943 4,524 4,225 3,937 3,940
Research and development............ 1,955 2,165 1,568 1,424 1,124
General and administrative.......... 2,550 2,336 1,638 1,364 1,222
-------- -------- -------- -------- -------
Total operating expenses..... 8,448 9,025 7,431 6,725 6,286
-------- -------- -------- -------- -------
Operating income.................... 961 691 1,172 701 784
Other income (expense), net......... (114) (25) (75) (18) 111
-------- -------- -------- -------- -------
Income before income taxes.......... 847 666 1,097 683 895
Income taxes........................ 277 254 413 283 344
-------- -------- -------- -------- -------
Net income.......................... $ 570 $ 412 $ 684 $ 400 $ 551
======== ======== ======== ======== =======
Net income available to common
shareholders..................... $ 570 $ 412 $ 657 $ 347 $ 497
Net income per Common Share.........
Basic........................ $ .13 $ .10 $ .30 $ .16 $ .23
Diluted...................... $ .12 $ .09 $ .21 $ .11 $ .16
Weighted average Common Shares
outstanding..................
Basic........................ 4,506 4,117 2,221 2,185 2,185
Diluted...................... 4,676 4,403 3,101 3,089 3,066
September 30,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- -------
(in thousands)
Balance Sheet Data:
Working capital..................... $ 4,275 $ 3,286 $ 2,493 $ 3,059 $ 4,080
Property and equipment, net......... 17,355 14,551 10,035 6,526 3,707
Total assets........................ 26,321 22,280 15,931 11,374 9,428
Long-term debt, less current portion 4,112 1,124 5,045 2,512 416
Convertible preferred shares........ - - 1,231 1,530 2,100
Shareholders' equity................ 17,421 16,844 5,651 4,956 4,609
16
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 services and value-added products
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 State College,
Pennsylvania. 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
Instruments Ltd., to further solidify its presence in the United Kingdom. In
1998, the Company acquired a manufacturer of veterinary monitoring and
diagnostic equipment, BAS Vetronics, to provide additional preclinical support.
In 1998, the Company also acquired a contract services firm, BAS Analytics Ltd.,
to offer local service in the United Kingdom.
Revenues are derived principally from (i) analytical services provided to
customers and (ii) the sale of the Company's analytical instruments and other
products. 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
supports the pharmaceutical industry by focusing on analytical chemistry for
biomedical research, diagnostics, electrochemistry and separations science. The
Company's analytical products are sold primarily to pharmaceutical firms and
research organizations. 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 the worldwide standard for the
determination of neurotransmitter substances. Research products include in vivo
sampling devices, reagent chemicals, electrochemical apparatus and sensors.
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, and 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, and 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. 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 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 1999,
approximately 34% 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,
17
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
-------------------------------------
Year Ended September 30,
-------------------------------------
1999 1998 1997
---- ---- ----
Services revenue.................... 50.3% 41.8% 33.4%
Product revenue..................... 49.7 58.2 66.6
------ ------ ------
Total revenue.................. 100.0 100.0 100.0
Cost of services revenue............ 32.7 25.2 20.0
Cost of product revenue............. 19.9 21.5 22.3
------ ------ ------
Total cost of revenue.......... 52.6 46.7 42.3
------ ------ ------
Gross profit........................ 47.4 53.3 57.7
Operating expenses:.................
Selling............................. 19.9 24.8 28.3
Research and development............ 9.8 11.9 10.5
General and administrative.......... 12.8 12.8 11.0
------ ------ ------
Total operating expenses....... 42.5 49.5 49.8
------ ------ ------
Operating income.................... 4.9 3.8 7.9
Other income (expense), net......... (0.6) (0.1) (0.5)
------ ------ ------
Income before income taxes.......... 4.3 3.7 7.4
Income taxes........................ 1.4 1.4 2.8
------ ------ ------
Net income.......................... 2.9% 2.3% 4.6%
====== ====== ======
Year ended September 30, 1999 compared with Year ended September 30, 1998
Total revenue for the year ended September 30, 1999 increased 8.9% to $19.9
million from $18.2 million in the year ended September 30, 1998. The net
increase of $1.7 million related primarily to increased revenue from services,
which increased to $10.0 million in the year ended September 30, 1999 from $7.6
million in the year ended September 30, 1998 as a result of the expansion of the
types and volume of services provided by the Company. During this same period,
product revenue decreased to $9.9 million for the year ended September 30, 1999
from $10.6 million for the year ended September 30, 1998 primarily as a result
of decreased sales in the Asian electrochemistry markets.
Costs of revenue increased 22.7% to $10.4 million for the year ended
September 30, 1999 from $8.5 million for the year ended September 30, 1998. This
increase of $1.9 million was largely due to the addition of a UK services
facility. Costs of revenue for the Company's services increased to 65.0% as a
percentage of services revenue for the year ended September 30, 1999 from 60.4%
of services revenue for the year ended September 30, 1998 due to an increase in
services support staff. Costs of revenue for the Company's products increased to
40.0% as a percentage of product revenue for the year ended September 30, 1999
from 36.8% of product revenue for the year ended September 30, 1998, due
primarily to a change in product mix.
Selling expenses for the year ended September 30, 1999 decreased 12.8% to
$3.9 million from $4.5 million during the year ended September 30, 1998 due to
decreased foreign commission expense. Research and development expenses for the
year ended September 30, 1999 decreased 9.7% to $2.0 million from $2.2 million
for the year ended September 30, 1998 due to the decrease in research grant
activity. General and administrative expenses for the year ended September 30,
1999 increased 9.2% to $2.6 million from $2.3 million for the year ended
September 30, 1998, primarily as a result of an increase in administrative staff
expense and an increase in health care costs.
18
Other income (expense), net, was $(114,000) in the year ended September 30,
1999 as compared to $(25,000) in the year ended September 30, 1998 as a result
of the increase in interest expense due to an increase in long term debt.
The Company's effective tax rate for 1999 was 32.8% as compared to 38.2%
for fiscal 1998. This decrease was primarily due to a decrease in nondeductible
foreign losses incurred in fiscal 1999.
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
$18.2 million from $14.9 million in the year ended September 30, 1997. The net
increase of $3.3 million related primarily to increased revenue from services,
which increased to $7.6 million in the year ended September 30, 1998 from $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 $10.6 million for the year ended September 30, 1998
from $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 $8.5 million for the year ended
September 30, 1998 from $6.3 million for the year ended September 30, 1997. This
increase of $2.2 million was largely due to the hiring of support staff in the
services unit. Costs of revenue for the Company's services increased to 60.4% as
a percentage of services revenue for the year ended September 30, 1998 from
59.8% of services revenue for the year ended September 30, 1997 due to an
increase in services support staff. 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.
Selling expenses for the year ended September 30, 1998 increased 7.1% to
$4.5 million from $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 $2.2 million from $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 $2.3 million from $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 $(25,000) in the year ended September 30,
1998 as compared to $(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.
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 completed in November
1997. At September 30, 1999, the Company had cash and cash equivalents of $1.9
million, compared to cash and cash equivalents of $1.2 million at September 30,
1998. The increase in cash resulted primarily from the increase in debt which
partially 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 $1.6 million
for the year ended September 30, 1999. Cash provided by operations during the
year ended September 30, 1999 consisted of net income of $570,000, plus non-cash
charges of $1,321,000, less a net increase of $304,000 in operating assets and
liabilities. The most significant increase in operating assets related to trade
accounts receivable, which increased $638,000 at September 30, 1999.
Cash used by investing activities decreased to $4.0 million for the year
ended September 30, 1999 from $5.0 million for the year ended September 30,
1998, primarily as a result of the Company's completed construction of
additional facilities. Cash provided by financing activities for fiscal 1999 was
$3.2 million due to the increase in debt.
The Company's net cash provided by operating activities was $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 $412,000,
19
plus non-cash charges of $989,000, plus a net decrease of $969,000 in operating
assets and liabilities. The most significant decrease in operating assets
related to trade accounts receivable, which decreased $431,000 at September 30,
1998.
Cash used by investing activities increased to $5.0 million for the year
ended September 30, 1998 from $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 (BAS
Analytics, Ltd). Cash provided by financing activities for fiscal 1998 was $3.7
million due to the initial public offering partially offset by the reduction of
debt.
Total expenditures by the Company for property and equipment were $4.1
million, $4.9 million and $4.1 million in fiscal 1999, 1998 and 1997,
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 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 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.
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 working capital line of credit, which expires April 1,
2000 and allows borrowings of up to $3,500,000. Interest accrues monthly on the
outstanding balance at the bank's prime rate minus 25 basis points (8.0 % at
September 30, 1999) or at the London Interbank Offered Rate (LIBOR) plus 2% as
elected by the Company. The line is collateralized by inventories and accounts
receivable and requires the Company to maintain certain financial ratios. There
was no balance outstanding on this line of credit at September 30, 1999.
The Company has an acquisition line of credit agreement, which expires
April 1, 2000 and allows borrowings of up to $4,000,000. Interest accrues
monthly on the outstanding balance at the bank's prime rate (8.25 % at September
30, 1999). There was no balance outstanding on this line of credit at September
30, 1999.
On June 24, 1999 the Company obtained a $3,500,000 commercial mortgage with
a bank. The mortgage note requires 59 monthly principal payments of $19,444 plus
interest followed by a final payment for the unpaid principal amount of
$2,352,804 due June 24, 2004. Interest is charged at the one-month LIBOR rate
plus 200 basis points (7.40% at September 30, 1999).
Inflation
The Company believes that inflation has not had a material adverse effect
on its business, operations or financial condition.
Year 2000
The Company undertook in fiscal 1998 to identify information technology and
other systems which may not be Year 2000 compliant. The Company has modified its
computer hardware and software systems to recognize the Year 2000. Management
has contacted 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 impact its
operations. The Company is also assessing the effect on its operations should
those organizations fail to properly remediate their computer systems. The cost
of the Year 2000 initiatives is not expected to be material to the Company's
results of operations or financial position.
20
New Accounting Pronouncements
Effective October 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 131 (SFAS No. 131), "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selective information about operating segments in interim financial
reports. SFAS No. 131 also establishes standards about products and services,
geographic areas and major customers. The adoption of SFAS No. 131 did not
affect results of operations or financial position, but did affect the
disclosure of segment information.
Effective October 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130 (SFAS No. 130), "Reporting
Comprehensive Income," which requires entities to report comprehensive income in
their financial statements. Comprehensive income refers to the change in an
entity's equity during a period resulting from all transactions and events other
than capital contributed by and distributions to the entity's owners. For the
Company, comprehensive income is equal to net income adjusted for the change in
currency translation. The Company has elected to report comprehensive income in
the consolidated statements of shareholders' equity. The Company's prior years'
financial statements have been reclassified for comparative reporting purposes,
however, there was no change in the net income or total shareholders' equity
previously reported for the years ended September 30, 1998 and 1997.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
21
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended September 30, 1999 in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Indianapolis, Indiana
November 5, 1999
22
Bioanalytical Systems, Inc.
Consolidated Balance Sheets
September 30,
1999 1998
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 1,924,409 $ 1,208,157
Accounts receivable:
Trade 3,564,795 2,774,714
Grants 46,752 209,164
Other 71,715 61,603
Inventories 1,790,733 1,880,680
Deferred income taxes 242,260 168,649
Prepaid expenses 80,600 59,694
------------ ------------
Total current assets 7,721,264 6,362,661
Property and equipment:
Land and improvements 171,014 171,014
Buildings and improvements 11,638,468 8,355,058
Machinery and equipment 9,144,104 7,463,099
Office furniture and fixtures 1,318,662 1,073,572
Construction in process 106,798 1,464,092
------------ ------------
22,379,046 18,526,835
Less accumulated depreciation and amortization (5,023,942) (3,975,912)
------------ ------------
17,355,104 14,550,923
Goodwill, less accumulated amortization of
$143,328 in 1999 and, $62,120 in 1998 1,053,057 1,134,265
Other assets 191,429 231,865
------------ ------------
Total assets $26,320,854 $22,279,714
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 2,019,989 $ 1,940,615
Income taxes payable 2,260 155,480
Accrued expenses 815,770 352,403
Customer advances 154,521 319,420
Current portion of capital lease obligation 220,432 308,447
Current portion of long-term debt 233,328 -
------------ ------------
Total current liabilities 3,446,300 3,076,365
Capital lease obligation, less current portion 903,315 1,123,747
Long-term debt, less current portion 3,208,340 -
Deferred income taxes 1,341,605 1,236,093
Shareholders' equity:
Preferred shares:
Authorized shares - 1,000,000
Issued and outstanding shares - none
Common shares, no par value:
Authorized shares - 19,000,000
Issued and outstanding shares - 4,514,349 in 1999,
and 4,495,319 in 1998 999,992 995,778
Additional paid-in capital 10,481,978 10,467,957
Retained earnings 5,959,919 5,390,342
Accumulated other comprehensive income (loss) (20,595) (10,568)
------------ ------------
17,421,294 16,843,509
------------ ------------
Total liabilities and shareholders' equity $ 26,320,854 $ 22,279,714
============ ============
See accompanying notes.
23
Bioanalytical Systems, Inc.
Consolidated Statements of Income
Year ended September 30,
1999 1998 1997
------------ ------------ ------------
Services revenue $ 9,992,670 $ 7,608,792 $ 4,991,348
Product revenue 9,858,271 10,616,363 9,932,022
------------ ------------ ------------
Total revenue 19,850,941 18,225,155 14,923,370
Cost of services revenue 6,498,817 4,598,266 2,985,858
Cost of product revenue 3,943,437 3,910,740 3,334,413
------------ ------------ ------------
Total cost of revenue 10,442,254 8,509,006 6,320,271
------------ ------------ ------------
Gross profit 9,408,687 9,716,149 8,603,099
Operating expenses:
Selling 3,942,681 4,524,664 4,224,523
Research and development 1,955,673 2,164,951 1,568,417
General and administrative 2,549,806 2,335,564 1,638,465
------------ ------------ ------------
Total operating expenses 8,448,160 9,025,179 7,431,405
------------ ------------ ------------
Operating income 960,527 690,970 1,171,694
Interest income 30,842 86,521 4,835
Interest expense (226,518) (92,855) (100,177)
Other income (expense) 93,520 (26,587) 12,306
Gain (loss) on sale of property and equipment (11,293) 8,486 8,831
------------ ------------ ------------
Income before income taxes 847,078 666,535 1,097,489
Income taxes 277,501 254,342 413,395
------------ ------------ ------------
Net income $ 569,577 $ 412,193 $ 684,094
============ ============ ============
Net income available to common shareholders $ 569,577 $ 412,193 $ 657,046
Net income per share:
Basic $ 0.13 $ 0.10 $ 0.30
Diluted $ 0.12 $ 0.09 $ 0.21
Weighted average common shares outstanding:
Basic 4,505,819 4,117,088 2,221,146
Diluted 4,675,850 4,402,755 3,101,429
See accompanying notes.
24
Bioanalytical Systems, Inc.
Consolidated Statements of Preferred Shares and Shareholders' Equity
Accumulated
Redeemable Convertible Other Total
Preferred Preferred Common Additional Retained Comprehensive Shareholders'
Shares Shares Shares Paid-in Capital Earnings Income Equity
---------- ------------ -------- --------------- ----------- ------------- -------------
Balance at September 30, 1996 $ 298,302 $ 1,231,242 $484,375 $ 151,233 $4,321,103 $ (1,043) $ 6,485,212
Comprehensive income
Net income - - - - 684,094 - 684,094
Other comprehensive income:
Foreign currency translation
adjustments - - - - - (1,901) (1,901)
-------
Total comprehensive income 682,193
Accrual of cumulative dividends
on preferred shares 27,048 - - - (27,048) - -
Exercise of stock options - - 13,500 27,000 - - 40,500
Redemption of preferred shares (325,350) - - - - - (325,350)
---------- ------------ -------- ----------- ----------- --------- ------------
Balance at September 30, 1997 - 1,231,242 497,875 178,233 4,978,149 (2,944) 6,882,555
Comprehensive income
Net income - - - - 412,193 - 412,193
Other comprehensive income:
Foreign currency translation
adjustments - - - - - (7,624) (7,624)
-------
Total comprehensive income 404,569
Conversion of preferred shares
at IPO - (1,231,242) 166,667 1,064,575 - - -
Exercise of stock options - - 32,192 165,454 - - 197,646
Issuance of common stock at IPO - - 299,044 9,059,695 - - 9,358,739
---------- ------------ -------- ----------- ----------- --------- ------------
Balance at September 30, 1998 - - 995,778 10,467,957 5,390,342 (10,568) 16,843,509
Comprehensive income
Net income - - - - 569,577 - 569,577
Other comprehensive income:
Foreign currency translation
adjustments - - - - - (10,027) (10,027)
--------
Total comprehensive income 559,550
Exercise of stock options - - 4,214 14,021 - - 18,235
---------- ------------ -------- ----------- ----------- --------- ------------
Balance at September 30, 1999 $ - $ - $999,992 $10,481,978 $5,959,919 $(20,595) $17,421,294
========== ============ ======== =========== =========== ========= ============
See accompanying notes.
25
Bioanalytical Systems, Inc.
Consolidated Statements of Cash Flows
Year ended September 30,
1999 1998 1997
------------ ------------ ------------
Operating activities
Net income $ 569,577 $ 412,193 $ 684,094
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,196,353 841,854 524,389
Amortization 81,208 32,118 12,000
Loss (gain) on sale of property and equipment 11,293 (8,486) (8,831)
Deferred income taxes 31,901 122,973 56,080
Changes in operating assets and liabilities:
Accounts receivable (637,781) 431,159 (1,361,559)
Inventories 89,947 113,507 20,619
Prepaid expenses and other assets 19,530 159,274 (107,656)
Accounts payable 79,374 369,983 611,071
Income taxes payable (153,220) (212,652) 216,591
Accrued expenses 463,367 (16,990) 112,767
Customer advances (164,899) 124,551 82,115
------------ ------------ ------------
Net cash provided by operating activities 1,586,650 2,369,484 841,680
Investing activities
Capital expenditures (4,054,319) (3,508,342) (4,095,651)
Proceeds from sale of property and
equipment 42,492 77,359 70,778
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 (4,011,827) (5,023,953) (4,024,873)
Financing activities
Borrowings on lines of credit 2,850,000 860,093 615,377
Payments on lines of credit (2,850,000) (1,375,470) (100,000)
Payments on capital lease obligations (308,447) (187,894) (83,321)
Borrowings of long-term debt 3,500,000 43,365 2,722,995
Payments of long-term debt (58,332) (5,187,567) (119,108)
Net proceeds from Initial Public Offering - 9,358,739 -
Net proceeds from the exercise of stock options 18,235 197,646 40,500
Redemption of preferred shares - - (325,350)
------------ ------------ ------------
Net cash provided by financing activities 3,151,456 3,708,912 2,751,093
Effect of exchange rate changes (10,027) (7,624) (1,901)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 716,252 1,046,819 (434,001)
Cash and cash equivalents at beginning of year 1,208,157 161,338 595,339
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,924,409 $ 1,208,157 $ 161,338
============ ============ ============
See accompanying notes.
26
Bioanalytical Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 1999
1. Significant Accounting Policies
Nature of Business
Bioanalytical Systems, Inc. and its subsidiaries (the "Company") engages in
laboratory services, consulting and research related to analytical chemistry and
chemical instrumentation. The Company also manufactures 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'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 highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents.
Financial Instruments
Financial instruments that subject the Company to credit risk consist
principally of trade accounts receivable. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not require
collateral on trade accounts receivable.
The Company's cash and cash equivalents, accounts receivable, accounts payable
and certain other accrued liabilities are all short-term in nature and their
carrying amounts approximate fair value. The Company's bank debt has primarily
variable interest rates, thus their carrying amounts approximate fair value.
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.
27
1. Significant Accounting Policies (continued)
Property and Equipment
Property and equipment is recorded at cost, including interest capitalized in
connection with the construction of major facilities. Depreciation, including
amortization on capital leases, 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
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. Revenue from
the sale of the Company's products and the related costs are recognized upon
shipment of the products to customers.
Advertising Expense
The Company expenses advertising costs as incurred. Advertising expense was
$308,831, $551,848 and $275,850 for 1999, 1998 and 1997, respectively.
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.
Stock Options
In accordance with Statement of Financial Accounting Standards No. 123 (SFAS No.
123), "Accounting for Stock-Based Compensation," the Company uses the intrinsic
value method to account for stock options, consistent with the existing rules
established by Accounting Principles Board No. 25, "Accounting for Stock Issued
to Employees."
Segment Reporting
Effective October 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 131 (SFAS No. 131), "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selective information about operating segments in interim financial
reports. SFAS No. 131 also establishes standards about products and services,
geographic areas and major customers. The adoption of SFAS No. 131 did not
affect results of operations or financial position, but did affect the
disclosure of segment information.
28
1. Significant Accounting Policies (continued)
Comprehensive Income
Effective October 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130 (SFAS No. 130), "Reporting Comprehensive
Income," which requires entities to report comprehensive income in their
financial statements. Comprehensive income refers to the change in an entity's
equity during a period resulting from all transactions and events other than
capital contributed by and distributions to the entity's owners. For the
Company, comprehensive income is equal to net income adjusted for the change in
currency translation. The Company has elected to report comprehensive income in
the consolidated statements of shareholders' equity. The Company's prior years'
financial statements have been reclassified for comparative reporting purposes,
however, there was no change in the net income or total shareholders' equity
previously reported for the years ended September 30, 1998 and 1997.
2. Earnings Per Share
Basic earnings per share is computed on the basis of the weighted average number
of common shares outstanding. Diluted earnings per share is computed on the
basis of the weighted average number of common and common equivalent shares
outstanding. Common equivalent shares include the dilutive effect of employee
and director options to purchase common shares and convertible preferred shares,
which are assumed to be converted. The dilutive effect of employee and director
options to purchase common shares was to increase the weighted average number of
common shares outstanding by 170,031, 172,382, and 127,884 shares in 1999, 1998
and 1997, respectively. The dilutive effect of convertible preferred shares was
to increase the weighted average number of common shares outstanding by 113,285
and 752,399 shares in 1998 and 1997, respectively.
3. Acquisitions
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.
Both 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 their 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, 1998 and 1997 was $19,413,000,
$718,000, $0.16 and $16,840,000, $1,154,000, $0.37, 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.
29
3. Acquisitions (continued)
Pro forma amounts for the years ended September 30, 1998 and 1997 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.
4. Inventories
Inventories at September 30 consisted of the following:
1999 1998
---- ----
Raw materials $ 1,049,682 $ 966,314
Work in progress 253,329 316,648
Finished goods 594,549 677,522
----------- -----------
1,897,560 1,960,484
LIFO reserve (106,827) (79,804)
------------- ------------
$1,790,733 $1,880,680
========== ==========
5. Debt Arrangements
The Company has a working capital line of credit, which expires April 1, 2000
and allows borrowings of up to $3,500,000. Interest accrues monthly on the
outstanding balance at the bank's prime rate minus 25 basis points (8.0 % at
September 30, 1999) or at the London Interbank Offered Rate (LIBOR) plus 2% as
elected by the Company. The line is collateralized by inventories and accounts
receivable and requires the Company to maintain certain financial ratios. There
was no balance outstanding on this line of credit at September 30, 1999.
The Company has an acquisition line of credit agreement, which expires April 1,
2000 and allows borrowings of up to $4,000,000. Interest accrues monthly on the
outstanding balance at the bank's prime rate (8.25 % at September 30, 1999).
There was no balance outstanding on this line of credit at September 30, 1999.
On June 24, 1999 the Company obtained a $3,500,000 commercial mortgage with a
bank. The mortgage note requires 59 monthly principal payments of $19,444 plus
interest followed by a final payment for the unpaid principal amount of
$2,352,804 due June 24, 2004. Interest is charged at the one-month LIBOR rate
plus 200 basis points (7.40% at September 30, 1999).
Cash interest payments of $287,058, $260,249 and $345,018 were made in 1999,
1998 and 1997, respectively. Cash interest payments for 1999, 1998 and 1997
included interest of $64,833, $127,077 and $266,200, 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.
30
6. Lease Arrangements
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, 1999, are as follows:
2000 $ 307,494
2001 307,494
2002 307,494
2003 302,215
2004 126,932
-----------
Total minimum lease payments 1,351,629
Amounts representing interest (227,882)
-----------
Present value of minimum lease payments 1,123,747
Less current portion (220,432)
-----------
$ 903,315
===========
The total amount of property and equipment capitalized under capital lease
obligations as of September 30, 1999 and 1998 was $1,917,625. Accumulated
amortization at September 30, 1999 and 1998 was $482,604 and $290,841,
respectively.
The Company leases office space under noncancelable operating leases that
terminate in 2004. These leases contain renewal options ranging from 1 to 5
years. Total rental expense was $33,849, $27,498 and $26,058 in 1999, 1998, and
1997, respectively. Future minimum lease payments at September 30, 1999 are as
follows:
2000 $24,975
2001 19,890
2002 19,890
2003 19,890
2004 3,315
=======
$87,960
=======
31
7. Income Taxes
Significant components of the Company's deferred tax liabilities and assets as
of September 30 are as follows:
1999 1998
---- ----
Deferred tax liabilities:
Tax over book depreciation $1,114,510 $ 952,224
Deferred DISC income 227,095 283,869
----------- -----------
Total deferred liabilities 1,341,605 1,236,093
Deferred tax assets:
Inventory pricing 64,380 69,559
Accrued vacation 125,199 73,743
Other-net 52,681 25,347
Foreign net operating loss 200,698 207,116
----------- -----------
Total deferred tax assets 442,958 375,765
Valuation allowance for deferred tax assets (200,698) (207,116)
----------- -----------
Net deferred tax assets 242,260 168,649
---------- -----------
Net deferred tax liabilities $1,099,345 $1,067,444
---------- -----------
Significant components of the provision for income taxes are as
follows:
1999 1998 1997
---- ---- ----
Current:
Federal $146,471 $ 80,911 $265,776
State 99,129 50,458 91,539
-------- -------- --------
Total current 245,600 131,369 357,315
Deferred:
Federal 25,581 99,504 54,849
State 6,320 23,469 1,231
-------- -------- --------
Total deferred 31,901 122,973 56,080
-------- -------- --------
$277,501 $254,342 $413,395
======== ======== ========
32
7. Income Taxes (continued)
The effective income tax rate varied from the statutory federal income tax rate
as follows:
1999 1998 1997
---- ---- ----
Statutory federal income tax rate 34.0% 34.0% 34.0%
Increases (decreases):
Amortization of goodwill and other 2.9 3.3 1.2
Nondeductible expenses
Benefit of foreign sales corporation, net (5.7) (6.2) (5.8)
State income taxes, net of federal tax 8.2 7.4 5.6
benefit
Research and development credit (7.2) (13.4) (5.0)
Nondeductible foreign losses 1.1 10.3 7.6
Other (0.5) 2.8 0.1
32.8% 38.2% 37.7%
In fiscal 1999, 1998 and 1997, the Company's foreign operations generated a loss
before income taxes of $26,771, $201,294 and $245,800, respectively.
Payments made in 1999, 1998, and 1997 for federal and state income taxes
amounted to $212,400, $78,000 and $140,000, respectively.
8. 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 terminated on January 1, 1999.
33
8. 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 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.
A summary of the Company's stock option activity and related information for the
years ended September 30 is as follows:
1999 1998 1997
----------------------- ---------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------- --------- --------- -------- -------- --------
Outstanding beginning
of year 164,343 $2.70 272,671 $1.27 338,129 $1.16
Exercised (19,030) .96 (145,328) 1.36 (60,944) .66
Granted 73,000 4.25 39,000 8.00 - -
Terminated (12,014) 3.73 (2,000) 8.00 (4,514) 1.32
-------- --------- --------
Outstanding end of year 206,299 $3.35 164,343 $2.70 272,671 $1.27
======== ========= ========
34
8. 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 1999 Life Price 1999 Price
- --------------- -------------- ---------------- ---------- ----------------- ----------
$0.66 - $1.00 50,050 .27 $0.66 50,050 $0.66
$1.01 - $1.50 8,292 2.28 $1.33 8,292 $1.33
$1.51 - $2.10 45,457 3.53 $1.73 45,457 $1.73
$2.11 - $8.00 102,500 8.84 $5.55 - -
------- -------
206,299 103,799
======= =======
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 .43 (.52 in 1998)
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.
35
8. 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:
1999 1998
---- ----
Pro forma net income $ 504,268 $ 367,190
Pro forma net income per share (diluted) $ 0.11 $.08
The weighted average fair value of options granted during the year was $2.29 in
1999 and $4.77 in 1998.
9. 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. The Company made no
discretionary contributions under the Plan in 1999, 1998, and 1997. Contribution
expense was $227,022, $187,896 and $158,924 in 1999, 1998 and 1997,
respectively.
10. 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. The Company evaluates performance and allocates resources based on
these segments. The accounting policies of these segments are the same as those
described in the summary of significant accounting policies.
36
10. Segment Information (continued)
Operating Segments:
Year Ended September 30,
------------------------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
Revenue
Services $ 9,993 $ 7,609 $ 4,991
Products 9,858 10,616 9,932
-------- -------- --------
Total revenue $19,851 $18,225 $14,923
======== ======== ========
Operating Income (Loss)
Services $ 2,075 $ 1,753 $ 1,279
Products (1,114) (1,062) (107)
-------- -------- --------
Total operating income 961 691 1,172
Corporate income (expenses) (114) (24) (75)
-------- -------- --------
Income before income taxes $ 847 $ 667 $ 1,097
======== ======== ========
Identifiable Assets
Services $16,523 $12,819 $ 9,710
Product 9,798 9,461 6,221
-------- -------- --------
Total assets $26,321 $22,280 $15,931
======== ======== ========
Depreciation and Amortization
Services $ 912 $ 560 $ 292
Products 366 314 244
-------- -------- --------
Total depreciation and amortization $ 1,278 $ 874 $ 536
======== ======== ========
Capital expenditures
Services $ 3,285 $ 4,571 $ 3,943
Products 769 369 153
-------- -------- --------
Total capital expenditures $ 4,054 $ 4,940 $ 4,096
======== ======== ========
37
10. Segment Information (continued)
Geographic Information:
Year Ended September 30
----------------------------------
1999 1998 1997
------- ------- -------
(in thousands)
Sales to external customers by
geographic region
North America $13,012 $12,715 $ 9,826
Pacific Rim:
Japan 716 1,053 1,740
Other 695 771 1,215
Europe 2,776 1,126 1,105
Other 2,652 2,560 1,037
------- ------- -------
$19,851 $18,225 $14,923
======= ======= =======
Long-lived assets by geographic
region
North America $16,991 $14,632 $10,397
Europe 1,609 1,285 191
------- ------- -------
$18,600 $15,917 $10,588
======= ======= =======
Major Customers:
During 1999, 1998 and 1997, a major United States-based pharmaceutical company
accounted for approximately 22.2%, 19.6% and 20.9%, respectively, of the
Company's total revenues and 23.9% and 27.3% of total trade accounts receivable
at September 30, 1999 and 1998, respectively.
The Company sells its products through international distributors, one of which
represents 6%, 10% and 17% of 1999, 1998 and 1997 product sales, respectively.
Accounts receivable from this foreign distributor were $39,522 and $107,034 at
September 30, 1999 and 1998, respectively.
11. 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
its results of operations.
[Remainder of page intentionally left blank.]
38
Bioanalytical Systems, Inc.
Quarterly Financial Data
Bioanalytical Systems, Inc.
Unaudited (Amounts in thousands, except for per share data)
For the Quarter Ended in Fiscal 1999 December 31 March 31 June 30 September 30
----------- -------- ------- ------------
Total revenue $4,598 $5,057 $4,973 $5,223
Gross profit 2,096 2,537 2,277 2,499
Net income (loss) available to common (6) 200 67 309
shareholders
Basic net income (loss) per common share(1) .00 .04 .01 .07
Diluted net income (loss) per common and
common equivalent share(1) .00 .04 .01 .07
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 available to common shareholders 196 231 130 (145)
Basic net income per common share(1) .06 .05 .03 (.03)
Diluted net income per common and common
equivalent share(1) .05 .05 .03 (.03)
(1) The sum of the net income per common share may not equal the annual net
income per share due to interim quarter rounding.
39
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
[Remainder of page intentionally left blank.]
40
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 to be filed pursuant to
Regulation 14A in connection with its 1999 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.]
41
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, 1999
and September 30, 1998.
Consolidated Statements of Income for the Years Ended
September 30, 1999, 1998 and 1997.
Consolidated Statements of Preferred Shares and
Shareholders' Equity for the Years Ended September
30, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1999, 1998 and 1997.
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.
42
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 28, 1999
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 28, 1999
- ------------------------------------ Officer and Director
Peter T. Kissinger
/s/ Douglas P. Wieten Chief Financial Officer, December 28, 1999
- ------------------------------------ and Treasurer
Douglas P. Wieten
/s/ William E. Baitinger Director December 28, 1999
- ------------------------------------
William E. Baitinger
/s/ Michael K. Campbell Director December 28, 1999
- ------------------------------------
Michael K. Campbell
/s/ Candice B. Kissinger Director December 28, 1999
- ------------------------------------
Candice B. Kissinger
/s/ Jack A. Kraeutler Director December 28, 1999
- ------------------------------------
Jack A. Kraeutler
/s/ Ronald E. Shoup Director December 28, 1999
- ------------------------------------
Ronald E. Shoup
/s/ W. Leigh Thompson Director December 28, 1999
- ------------------------------------
W. Leigh Thompson
43
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) 10.1 Form of Employee Confidentiality Agreement (Incorporated by
reference to Exhibit 10.1 to Registration Statement on Form S-1,
Registration No. 333-36429).
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. 333-6429).
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. 333-6429).
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. 333-6429).
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).
44
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. 333-6429).
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. 333-6429).
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).
45
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).
10.18 Business Loan Agreement by and between Bioanalytical Systems,
Inc. and Bank One, Indianapolis, NA, dated June 24, 1999
related to loan in the amount of $3,500,000 (Incorporated
by reference to Exhibit 10.18 to Form 10-Q for the
quarter ended June 30, 1999).
(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
(22) No Exhibit
(23) 23.1 Consent of Independent Auditors
(24) No Exhibit
(27) 27.1 Financial Data Schedule
(99) No Exhibit
46