-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GYmbBSdg4uWL8x+iSiQ47tQrAThCuILWplf71RUFEv5NZ9g34TsIBV6kxufAuSGj WH/OZYrJPKTi+X9U3Iwk+Q== 0000927946-98-000098.txt : 19981228 0000927946-98-000098.hdr.sgml : 19981228 ACCESSION NUMBER: 0000927946-98-000098 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981224 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIOANALYTICAL SYSTEMS INC CENTRAL INDEX KEY: 0000720154 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY APPARATUS & FURNITURE [3821] IRS NUMBER: 351345024 STATE OF INCORPORATION: IN FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23357 FILM NUMBER: 98775641 BUSINESS ADDRESS: STREET 1: 2701 KENT AVE CITY: WEST LAFAYETT STATE: IN ZIP: 47906-1382 BUSINESS PHONE: 3174634527 MAIL ADDRESS: STREET 1: 2701 KENT AVENUE CITY: WEST LAFAYETTE STATE: IN ZIP: 47906-1382 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended September 30, 1998. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ___________ to _____________. Commission File Number 333-36429
BIOANALYTICAL SYSTEMS, INC. (Exact name of the registrant as specified in its charter) INDIANA 35-1345024 - ---------------------------------------------------------- ------------------- (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 ( 229.045 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant is $9,211,230. As of September 30, 1998, 4,495,319 shares of registrant's Common Stock were outstanding. No shares of registrant's Preferred Stock were outstanding as of September 30, 1998. Documents Incorporated by Reference: Certain portions of the Registrant's definitive Proxy Statement to be filed pursuant to Regulation 14A in connection with its 1999 Annual Meeting of Shareholders is incorporated by reference to those items listed in Part III of this Form 10-K.
TABLE OF CONTENTS Part I Page ---- Item 1. Business 3 Item 2. Properties 14 Item 3. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 15 Item 6. Selected Consolidated Financial Data 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 21 Item 8. Financial Statements and Supplementary Data 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 43 Part III Item 10. Directors and Executive Officers of the Registrant 44 Item 11. Executive Compensation 44 Item 12. Security Ownership of Certain Beneficial Owners and Management 44 Item 13. Certain Relationships and Related Transactions 44 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 45
Part I This Report contains certain statements that are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. Readers of this Report are cautioned that reliance on any forward-looking statement involves risks and uncertainties. Although the Company believes that the assumptions on which the forward-looking statements contained herein are based are reasonable, any of those assumptions could prove to be inaccurate given the inherent uncertainties as to the occurrence or nonoccurrence of future events. There can be no assurance that the forward-looking statements contained in this Report will prove to be accurate. The inclusion of a forward-looking statement herein should not be regarded as a representation by the Company that the Company's objectives will be achieved. Item 1. Business General The Company is a contract research organization (CRO) providing research and development resources to many of the leading pharmaceutical, medical device and biotechnology companies in the world. The Company offers an efficient, variable-cost alternative to its clients' internal product development, compliance and quality control programs. Founded in 1974, the Company initially focused primarily on providing new products and procedures which facilitated research progress at client sites. Recently, as a result of increasing pressures to bring products to market on a cost-effective and accelerated basis, many clients have requested the Company to carry out proprietary projects at the Company's facilities. As a result, the Company now derives its revenues from both the sale of its analytical instruments and other products as well as research services provided to customers. The Company provides a broad array of value-added products and services focused on chemical analysis, allowing its clients to perform their research and development functions either "in-house" or at the Company. The Company believes that among CROs that provide statistical, clinical, and medical services, the Company is the only one that designs and sells analytical instrumentation. Within the analytical instruments business, the Company believes that it is one of very few firms to maintain a separate business unit devoted to contract analytical services under the regulatory framework of good laboratory practices (GLPs) and good manufacturing practices (GMPs). The Company's products and services combine basic research with diagnostic and therapeutic experience. One consequence of the restructuring of the healthcare industry is the greater reliance on outsourcing research services for both clinical trials and formulation development. The Company is capable of supporting the analytical needs of researchers and clinicians, from small molecule drugs and hormones through large biomolecules such as proteins. The Company's scientists have the skills necessary in instrumentation, chemical reagents and computer software to make the products and services it provides increasingly valuable to the worldwide pharmaceutical, medical device and biotechnological industries. Over the past five years, the Company regularly has provided its products and/or services to all of the top 25 pharmaceutical companies in the world, as ranked by 1997 research and development spending. In fiscal 1998, the Company estimates that more than one-third of its total revenue was derived from these companies. As a result of its (i) client focus, (ii) reputation for high-quality services and products, (iii) capital investment in cutting-edge instrumentation and facilities, (iv) skilled and experienced professional staff, and (v) expertise in performing critical development and support services, the Company believes that it is a value-added partner in solving its clients' complex product development problems. The Company designs, manufactures and markets a broad range of products and related scientific procedures that detect and quantify the presence of chemicals in certain substances. With respect to its products, the Company competes in the $11 billion per year analytical instrument industry. The Company's focus, however, is not on marketing hardware and software, but rather on developing solutions to challenging analytical problems which permit the Company to utilize its talented personnel in providing a total solution not generally offered by hardware-focused competitors. The Company's products utilize state-of-the-art scientific technology, including liquid chromatography, electrochemistry and in vivo sampling instrumentation. The Company's analytical instruments are sold primarily to pharmaceutical firms and research organizations. Principal clients of the Company include scientists engaged in drug metabolism studies and basic neuroscience research. The Company provides a wide variety of services to pharmaceutical companies, medical device manufacturers, medical research centers, academic institutions and others. These analytical services support screening and pharmacological testing, toxicology/safety testing, formulation development, laboratory testing, regulatory and compliance consulting and quality control testing. The Company began offering its services primarily in response to requests from customers who had used or were using the Company's products. To reduce overhead and speed drug approval requests through the Food and Drug Administration ("FDA"), pharmaceutical companies are contracting increasing amounts of their analytical work to outside firms such as the Company. The Pharmaceutical Research and Manufacturing Association estimates that in 1997, pharmaceutical and biotechnology companies spent approximately $19 billion worldwide on research and development, of which approximately 28%, or $5.4 billion, was outsourced to independent contract service providers. The Company believes that this outsourcing trend will continue as a result of drug development pressures, the emphasis on cost containment, patent expirations, consolidation in the pharmaceutical industry, virtual drug company and biotechnology industry growth, the need for technical and data management expertise and the globalization of the pharmaceutical marketplace. Changing Nature of Pharmaceutical Industry The Company provides products and services on a world wide basis to pharmaceutical, medical device and biotechnology companies, academic institutions and the United States government to facilitate the research and development of drugs and medical devices. The Company's products are generally marketed to both public and private research organizations engaged in the early stages of drug development, while the Company's services are generally marketed to pharmaceutical and other biotechnical companies engaged in later stages of drug testing. The Company competes against several large equipment manufacturers with respect to its products, whereas the research services industry is a highly fragmented one consisting of several hundred service providers operating in various segments of the market and a small number of larger companies focusing primarily on managing clinical trials. While the markets for the Company's products and services have distinct customers (often separate divisions in a large pharmaceutical company) and requirements, the Company believes that both markets are facing increased pressure to outsource certain facets of their research and development activities. The Company believes that the factors identified below will contribute to a continuing increase in outsourcing activities by its customers. Drug Development Pressure The pharmaceutical industry is under pressure to rapidly develop new drugs to treat chronic illnesses and life threatening conditions such as AIDS and Alzheimer's disease as consumers, doctors, health care providers and pharmaceutical company shareholders continue to demand quicker and more efficient drug development. Responding to this pressure, pharmaceutical companies are attempting to accelerate the drug development process, including relying to an increasing extent on external providers of research and development services to perform testing and analysis in all phases of the process. Emphasis on Cost Containment Pharmaceutical companies are facing increasing pressure to develop more efficient operating strategies as a result of margin pressure from market forces, including (i) a shift toward managed care, (ii) patent expirations, (iii) generic substitution, (iv) increased purchasing power of large buyer groups and (v) governmental initiatives designed to reduce drug prices. The Company believes that the pharmaceutical and medical device industries are responding to these pressures by downsizing internal research and development programs, thereby favoring outsourcing as a variable-cost alternative. Further, the need for additional capacity to increase the speed of new product development, to maximize the period of marketing exclusivity and to increase economic returns, has driven the need for outsourced services. Patent Expirations Patents on all major pharmaceuticals continue to age and expire. According to the Pharmaceutical Research and Marketing Association, since 1984 prescriptions for generic drugs have risen from 20% to 43% of all prescriptions written. Moving generic drugs onto the market more rapidly can result in an estimated 2 to 5 year reduction in effective patent protection for brand name drugs. Patent expirations are forcing drug companies to develop new products or modify existing products to maintain market share against generic product competition. The Company believes that the pressure to develop new products and modify or reformulate existing products, combined with internal capacity constraints, is leading companies to outsource these activities. Consolidation in the Pharmaceutical Industry The pharmaceutical industry is increasingly consolidating as drug development companies continue to pursue new avenues of growth and more efficient ways of conducting business. As companies seek to combine varied personnel, resources and activities, the Company believes that they will increasingly focus on ways to reduce costs and streamline operations, thus leading to the greater use of companies providing contract research services. Biotechnology Industry and "Virtual" Drug Company Growth The biotechnology industry has grown rapidly over the last 10 years and has introduced a significant number of new compounds for development. As a result, many biotechnology companies do not have the necessary in-house resources to conduct required development and testing. Furthermore, there has been an increase in the number of pharmaceutical and medical device companies whose business strategy is to develop a product sufficiently to attract a strategic partner that will manufacture and market the drug. Many of these "virtual" drug development companies, having little or no internal development or support resources, must outsource a substantial portion of drug development and testing. Need for Technical Expertise The increasing complexity of new drugs requires high quality, innovative, solution-driven contract work through all phases of the development process, ranging from preclinical toxicology and pharmacokinetics through reformulation pharmacokinetic studies and post-market clinical drug monitoring. The Company believes that this need for specialized technical expertise will increasingly lead to outsourcing of research activities. Need for Data Management Expertise Regulatory agencies are increasing the volume of data required for regulatory filings, as well as requesting increased access to such data. Furthermore, the FDA is encouraging the use of computer-assisted filings in an effort to expedite the approval process. Consequently, drug companies are increasingly outsourcing to firms with automated data management capabilities. Moreover, in response to clients' demands for access to data as it is acquired in the laboratory, the Company is able to provide clients with remote access to Company computer systems while at the same time protecting client data from unauthorized access. Globalization of the Marketplace Foreign pharmaceutical companies, particularly those of Japan and Europe, are increasingly seeking to obtain approval to market their products in the United States. Due to a lack of familiarity with the complex United States regulatory system and the difficulty in bringing their operating facilities into FDA-required GMP compliance, foreign firms are relying on independent development companies with experience in the United States to provide integrated services through all phases of product development and to assist in preparing regulatory submissions. The Company believes that domestic firms with established regulatory expertise and a broad range of integrated development services will benefit from this trend. The Company's Role in the Drug Development Process Overview of Process The Company has 24 years of experience in developing methodology to support the analytical chemistry requirements of the drug discovery process. Under the United States regulatory system, the development process for new pharmaceutical products can be divided into three distinct phases. The preclinical phase involves the discovery, characterization, product formulation and animal testing necessary to prepare an Investigational New Drug ("IND") exemption for submission to the FDA. The IND must be accepted by the FDA before the drug can be tested in humans. The second, or clinical phase of development follows a successful IND submission and involves the activities necessary to demonstrate the safety, tolerability, efficacy and dosage of the substance in humans, as well as the ability to produce the substance in accordance with the FDA's GMP regulations. Data from these activities are compiled in a New Drug Application ("NDA"), or for biotechnology products, a Product License Application ("PLA"), for submission to the FDA requesting approval to market the drug. The third phase follows FDA approval of the NDA or PLA and involves the production and continued analytical and clinical monitoring of the drug. The post-approval phase also involves the development and regulatory approval of product modifications and line extensions, including improved dosage forms. Process Specifics and the Company's Role The Preclinical Phase. The development of a new pharmaceutical agent begins with the discovery or synthesis of an array of new molecules which may influence a specific target such as a membrane bound receptor or an enzyme involved in the disease under study. These libraries of molecules are screened for pharmacological activity using various in vivo models, with the goal of selecting relatively few "leads" for further development. Once the pharmacologically active molecule is fully characterized, the agent is analyzed to confirm the integrity and quality of material produced. Development of the initial dosage forms to be used in clinical trials is completed, together with analytical chemistry protocols to determine their stability. Upon successful completion of preclinical safety and efficacy studies in animals, an IND submission is prepared and provided to the FDA for review prior to the implementation of human clinical trials. Most of the Company's products are designed for use in the preclinical phase of drug development. The Company also provides its bioanalytical services in this phase. A good example of the role of the Company's products in the preclinical phase is the utilization of Company technology in the development of drug substances impacting the central nervous system neurotransmitters, including serotonin, dopamine, norepinephrine, and acetylcholine. These drugs are used in the treatment of such conditions as depression, Parkinson's disease, schizophrenia and Alzheimer's disease. The Company's chromatography products were used extensively to study the influence of reuptake inhibitors on serotonin uptake and release in the central nervous system (CNS) programs at universities and a major pharmaceutical company. The Company believes that the synergy between the Company's instrumentation products and services has been a factor in the Company being selected by major pharmaceutical companies to determine new drug candidates in thousands of Phase I-III clinical specimens. The Clinical Phase. Following successful submission of an IND application, the sponsor is permitted to conduct Phase I human clinical trials in a limited number of healthy individuals to determine the drug's safety and tolerability. This work requires bioanalytical assays to determine the availability and metabolism of the active ingredient following administration. Expertise in method development and validation is essential for this phase, particularly with respect to new chemical entities. Phase II clinical trials involve administering the drug to individuals who suffer from the target disease or condition to determine the drug's potential effectiveness and ideal dose. When further safety (toxicology), tolerability and dosing regimens have been established, Phase III clinical trials involving large numbers of patients are conducted to verify efficacy and safety. After the successful completion of Phase III clinical trials, the sponsor of the new drug submits an NDA or PLA to the FDA requesting that the product be approved for marketing. The Company's bioanalytical work is most individually intensive in Phase I studies where relatively few individuals are dosed. In Phase II and III the number of individuals treated accelerates rapidly, but the number of blood samples drawn per patient declines. Phase II and III studies are carried out over several years with what has become a well established analytical protocol. To maintain consistency in the analytical data, it is unusual for a sponsor to change laboratories unless there are problems in the quality or timely delivery of results. An area of particular interest to the Company is drug interaction studies. With increasing numbers of patients receiving multiple drug therapy, it is critical that the impact of each drug be assessed with respect to its influence on the effectiveness and toxicology of other drugs dosed simultaneously. This process complicates and often extends clinical trials. Because drugs from different manufacturers frequently will be used together, a CRO such as the Company can provide services to several firms simultaneously in cases where a potential synergy exists in another area (e.g. the "cocktail" approach to HIV therapy). In such instances, a given assay technology might well be of interest to a number of clients, thus spreading the assay development cost. More importantly, drug interaction studies often develop new clients for the Company in a much more cost effective manner than advertising or an outside sales force. The Post-approval Phase. Following approval, the drug manufacturer must comply with quality assurance and quality control requirements throughout production and must continue chemical analytical and stability studies of the drug during commercial production in order to continue to validate production processes and confirm product shelf life. The drug manufacturer's raw materials must be analyzed prior to use in production, and samples from each manufactured batch must be tested prior to release of the batch for distribution to the public. The Company also provides its bioanalytical services in all areas during the post-approval phase, concentrating on bioequivalence studies of new formulations, line extensions, new disease indications and drug interaction studies. Company Products and Services Overview The Company provides products and procedures for the $11 billion per year analytical instrument industry, and also provides a broad array of bioanalytical services in all phases of the drug development process. Over its 24 year history, the Company has developed expertise in a number of core scientific technologies which it has utilized in developing state-of-the-art procedures designed to determine amounts of chemical substances in complex materials. These technologies include: liquid chromatography, electrochemistry, solid phase extraction, mass spectrometry, enzymology and fluorescence. The Company also uses its expertise in analytical chemistry to provide a wide range of bioanalytical services to pharmaceutical companies, academic institutions and others involved in pharmaceutical research and development. Products The Company designs, manufactures and markets a broad range of products and related scientific procedures that detect and quantify the presence of chemicals in certain substances. The Company's products utilize state-of-the-art scientific technology including liquid chromatography, electrochemistry and in vivo sampling instrumentation. Presently, the Company's products and procedures include: - - Bioanalytical separation instrumentation that utilizes liquid chromatography and Windows software to detect low concentrations of substances in biological fluids and tissues. - - A wide-range of chemical analyzers that utilize scientific technologies including electrochemistry, liquid chromatography and enzymology to analyze levels of chemicals such as acetylcholine, choline, serotonin and dopamine in biological materials. These instruments assist scientists in the study of, among other things, Alzheimer's disease, cocaine addiction and the effects of chemical warfare agents and strokes. - - Diagnostic kits and procedures, designed to utilize the Company's instrumentation, that enable clinical laboratories and pharmaceutical researchers to determine the presence of multiple drugs in blood plasma and to measure neurotransmitters and their metabolites in plasma and urine. These kits and procedures assist researchers in developing new drugs for diseases such as AIDS and cardiovascular disease. - - A line of miniaturized in vivo sampling devices, marketed to veterinary and animal research centers, pharmaceutical companies and medical research centers, which assist in the study of a number of medical conditions, including stroke, depression, Parkinson's disease, diabetes and osteoporosis. [Remainder of page intentionally left blank.] The chart below sets forth the Company's product categories, the technology supporting each category and the applications of each category.
Product/Procedure Enabling Technology - -------------------------------------------- ---------------------------------------------- Bioanalytical Separation Instrumentation Liquid chromatography High pressure digitally controlled metering pumps Electrochemistry and optics detectors Customized Windows software Customized Internet applications Electrochemical Analyzers and Accessories Electrochemistry Real time control and data acquisition software Customized Windows software Customized Internet applications Acetylcholine/Choline Analyzer Liquid chromatography Enzymology Electrochemistry Serotonin and Dopamine Analyzer Liquid chromatography Electrochemistry Amino Acid Analyzer Derivatization chemistry Liquid chromatography Electrochemistry and/or Fluorescence In vivo sampling devices ("artificial blood Hydrophilic membrane fibers vessels") and auxiliary instrumentation Digitally controlled pumping systems, miniature fraction collectors, and valves Kits for clinical measurement of Robotics neurotransmitters and homocysteine in human Liquid chromatography blood and urine Electrochemistry Customized Windows software Simultaneous determination of multiple drugs Robotics in blood plasma Solid phase extraction Liquid chromatography Mass spectrometry Vital signs monitoring Electrocardiology (ECG) Temperature transducers Real time software Product/Procedure Application(s) - -------------------------------------------- ---------------------------------------------- Bioanalytical Separation Instrumentation Determining low concentrations of substances in biological fluids and tissues Electrochemical Analyzers and Accessories Development of biosensors for substances, such as glucose, lactate, glutamate; development of batteries for electronics such as pacemakers; study of corrosion of implants Acetylcholine/Choline Analyzer Studies of Alzheimer's disease; chemical warfare agents; and infant formula Serotonin and Dopamine Analyzer Developing serotonin reuptake inhibitors; studies of the mechanism of cocaine addiction Amino Acid Analyzer Studies of aspartate, glutamate, and GABA in the brain; research to minimize the impact of stroke and other ischemic events in the brain In vivo sampling devices ("artificial blood Following pharmacokinetics in vivo; vessels") and auxiliary instrumentation monitoring glucose; neurotransmitters, peptides, and amino acids; studies of stroke, depression, Parkinson's Disease, diabetes and calcium loss related to osteoporosis and weightlessness; reducing the use of animals in research Kits for clinical measurement of Evaluating cardiovascular disease, inborn neurotransmitters and homocysteine in human errors of metabolism, and cancers of blood and urine neurological origin Simultaneous determination of multiple drugs "Cocktail" therapy for AIDS; drug interaction in blood plasma studies during clinical trials Vital signs monitoring ECG, respiration, blood pressure, and temperature monitoring in veterinary clinics and toxicology departments in pharmaceutical companies
Services The Company provides a wide variety of services to pharmaceutical companies, medical device manufacturers, medical and research centers, academic institutions and others. The Company's services unit has grown rapidly over the last several years. The Company began providing services primarily in response to requests from customers who had used or were using the Company's products. As the Company's reputation has grown, the Company's customers increasingly have drawn on the Company's expertise in analytical chemistry to solve complex problems which arise in the course of drug research and development. The Company's range of services now include: method development and validation, product characterization, stability testing, bioanalytical testing, diagnostic testing and in vivo sampling. The Company is poised to utilize its expertise to provide a greater volume and broader array of services. These services involve the application of the Company's analytical chemistry expertise to a broad range of challenging and complex issues, such as the services described below. - - Method Development and Validation. The Company develops and validates methods used in a broad range of laboratory testing necessary to determine physical or chemical characteristics of compounds and finished dosage forms. Analytical methods are developed to demonstrate potency, purity, stability or physical attributes. These methods are validated to ensure that the data generated are accurate, precise, reproducible and reliable and are used throughout the drug development process and in product support testing. Of the Company's 205 employees as of September 30, 1998, more than 30 are Company scientists (including nine who hold Ph.D. degrees) who are experienced with method development and validation. - - Product Characterization. The Company has the expertise and instruments required to identify and characterize a broad range of chemical entities. Characterization analysis identifies the chemical composition, structure and physical properties of a compound, and characterization data forms a significant portion of a regulatory application. The Company uses numerous techniques to characterize the compound, including chromatography, spectroscopy, electrochemistry and other physical chemistry techniques. Once appropriate test methods are developed and validated, and appropriate reference standards (highly pure samples) are characterized and certified, the Company can assist clients by routinely testing compounds for clinical and commercial use. - - Stability Testing. The Company provides stability testing and secure storage facilities necessary to establish and confirm product purity, potency and other shelf-life characteristics. Stability testing is required at all phases of product development in order to confirm shelf life of each manufactured batch. The Company maintains a four-chamber, ICH (International Conference on Harmonization) validated controlled climate GMP facility. FDA regulations require that samples of clinical and commercial products placed in stability chambers be analyzed in a timely fashion after scheduled "pull points" occur, based on the date of manufacture. - - Bioanalytical Testing. The Company offers bioanalytical testing services to support clinical trials by analyzing plasma samples to characterize the drug's concentration and determine the rate of absorption and elimination. Bioanalytical studies of new drugs often present challenging and complex issues, with products being metabolized into multiple active and inactive forms. The Company works with its clients to develop and validate analytical methods to permit detection and measurement of the various components to trace levels. In some cases clients expect the Company to develop methodology, while in other cases methodology is transferred from the client and refined and validated by the Company personnel. The most common technology used in such studies is liquid chromatography coupled with various detectors, including mass spectrometry as well as optical and electrochemical devices. - - Diagnostic Testing. The Company has manufactured bioanalytical chemistry products since its start in 1974. The Company produces fully automated, networkable state-of-the-art liquid chromatographs and electrochemical analyzers based on Windows software. The Company has recently developed and now produces a line of diagnostic kits designed to fit its instrumentation. These kits help measure neurotransmitters and their metabolites and homocysteine, an experimental cardiovascular disease indicator in plasma and urine. These measurement processes are often performed by Company personnel utilizing Company products. - - In Vivo Sampling. The Company pioneered and has commercialized miniaturized in vivo sampling methodology, which involves the continuous monitoring of chemical changes in live animals. This technology is sold as both a service and a line of products. The Company is aggressively adding new components to this line, with the goal of selling complete, automated sampling systems. Target markets include veterinary and animal research centers, pharmaceutical companies and medical research centers. The Company has received two significant Phase II SBIR (Small Business Innovation Research) grants that involve subcontracts with Purdue University and the University of Kansas for the purpose of exploiting this emerging technology. - - Formulation Development Services. In the future, the Company plans to provide integrated formulation development services, enabling the Company to take a client's compound and develop a safe and stable product with desired characteristics. The Company believes its strong academic connections to Purdue University and other academic institutions, formulation expertise and extensive analytical capabilities position the Company to provide a significant contribution to this area. Clients Over the past five years, the Company regularly has provided services and products to all of the top 25 pharmaceutical companies in the world, as ranked by 1997 research and development spending. In fiscal 1998, the Company estimates that more than one-third of its total revenue was derived from these companies. In addition, the Company products are purchased by the vast majority of medical schools in North America, Europe and Asia. In fiscal 1998, the Company provided products and services to approximately 300 institutions, including some of the largest United States, European and Japanese drug companies. Approximately 30% of the Company's revenues are generated from customers located outside the United States. The Company believes that a concentration of business among certain large clients is not uncommon in the CRO industry. The Company has experienced such concentration in the past and may do so again in the future. During 1996, four operating groups (Quality Control, Analytical Research and Development, Clinical Pharmacokinetics, and Drug Metabolism) of Pfizer, Inc. ("Pfizer"), a major United States pharmaceutical company, in the aggregate accounted for approximately 18% of the Company's total revenues. These sales were derived from both the products and the services units of the Company. During 1997 and 1998, Pfizer accounted for approximately 21% and 20%, respectively, of the Company's total revenues. Most of these sales fell under approximately 80 contracts the Company has or had with Pfizer, the largest of which totaled approximately $400,000. Although the Company strives to reduce its reliance on a limited number of major clients, there can be no assurance that the Company's business will not be dependent upon certain major clients, the loss of which could have a material adverse effect on the Company. In addition, due to the project-oriented nature of the Company's business, there can be no assurance that significant clients in any one period will continue to be significant clients in other periods. Sales and Marketing Marketing and sales initiatives have been created to address market needs and economic reality. These services have grown primarily through direct, internal recommendations among major pharmaceutical manufacturers. Frequently, these customers have had prior relationships with the Company's staff and positive experiences with the Company's products and services. The Company recognizes that its growth and continued customer satisfaction are dependent upon its ability to continually improve its sales and marketing functions. In North America, the Company's products are sold directly to the end user. The Company has approximately 20 personnel selling a range of products and an equal number providing technical and development support. All staff members are technically trained and function in both capacities. The Company also has established a highly professional collection of catalogs, training and technical support literature, video tapes, CD-Rom presentations, web sites, workshops, and academic publications. The Company's peer- reviewed journal, Current Separations, describes independent research in technologies of interest to the Company's customers, and is distributed to 18,500 readers worldwide, many of whom are current or potential customers. Product sales, marketing and technical support is based in the Company's main office located in West Lafayette, Indiana. The Company also maintains an office in New Jersey with a small sales and technical staff, thus enabling the Company to demonstrate its products and present technical workshops in close proximity of its largest concentration of key customers. The Company also maintains sales and technical support capabilities in Massachusetts, New York, Ohio, Texas, Pennsylvania and Kansas. The Company's marketing plan provides for new sales representation in California and the Midwest, stronger promotion of all product lines, enhanced workshops, improved training and implementation of demonstration capabilities in the Company's new facilities. The Company's primary marketing and sales strategy is to be more aggressive, focus on customer needs and further strengthen communications with its markets. In so doing, the Company will build on its long history of innovation and technical excellence. Bioanalytical Systems, Ltd., a wholly-owned subsidiary of the Company, manages most product sales in Europe. BAS Analytics, Ltd., also a wholly-owned subsidiary of the Company, provides direct liaison with research service clients in the United Kingdom and maintains a laboratory to provide such services. In addition, the Company has a network of more than 20 established distributors covering Japan, the Pacific Basin, South America, the Middle East, India, South Africa and Eastern Europe. Revenue generated from the Company's Japanese distributor, BAS Japan, accounted for approximately 12% and 6% of the Company's total revenue for fiscal 1997 and 1998, respectively. Although the Company believes that it could identify a suitable replacement in the event that BAS Japan discontinues as the Company's distributor, such an event could have a material adverse effect on the Company's business, operations and financial condition. (See Note 8 of Notes to Consolidated Financial Statements.) All of the Company's distributor relationships are managed from the Company's headquarters in West Lafayette, Indiana. International growth is planned through acquisitions, stronger local promotion and significant expansion of the Company's distributor network. Contractual Arrangements The Company's service contracts typically establish an estimated fee for identified services. While the Company is performing a contract, clients often adjust the scope of services to be provided by the Company in light of interim project results, at which time the amount of fees is adjusted accordingly. Generally, the Company's fee-for-service contracts are terminable by the client upon written notice of 30 days or less. Contracts may be terminated for a variety of reasons, including the client's decision to forego a particular study, the failure of product prototypes to satisfy safety requirements and unexpected or undesired results of product testing. The loss of a large contract or the loss of multiple contracts could adversely affect the Company's future revenue and profitability. Backlog Backlog for the Company's products consists of booked purchase orders for products which have not been shipped. The Company rarely has a backlog for its products of more than one month of sales. Many products are shipped within 24 hours of receipt of order. Because the arrangements pursuant to which the Company provides its services are terminable upon written notice of 30 days or less, the Company does not calculate backlog for the services it provides and does not believe that determining such amount would provide a meaningful indicator of the future performance of its services unit. Competition With respect to its products, the Company competes with several large equipment manufacturers, including Hewlett Packard, Waters Corporation and Perkin Elmer Corporation. Competitive factors include product quality, reliability and price. The Company believes it competes favorably in its targeted markets because of its ability to combine quality products with technical assistance and services to meet customer needs. With respect to its services, the Company competes primarily with in-house research, development, quality control and other support service departments of pharmaceutical and biotechnology companies, as well as university research laboratories and teaching hospitals. In addition, there are numerous full-service CRO's that compete in this industry. The largest CRO competitors offering similar research services include Covance, Inc., Pharmaceutical Product Development, Inc., Applied Analytical Industries, Inc., Phoenix International Life Sciences Inc. and MDS Health Group Ltd. CROs generally compete on the basis of previous experience, medical and scientific expertise in specific therapeutic areas, quality of contract research, ability to organize and manage large-scale trials on a global basis, medical database management capabilities, ability to provide statistical and regulatory services, ability to recruit investigators, ability to integrate information technology with systems to improve the efficiency of contract research, existence of an international presence with strategically located facilities, financial viability and price. Many of the Company's competitors are much larger and have significantly greater financial resources than the Company. Government Regulation The services performed by the Company are subject to various regulatory requirements designed to ensure the quality and integrity of pharmaceutical and diagnostic products. These regulations are governed primarily under the Federal Food, Drug and Cosmetic Act, as well as Associated GLP and GMP regulations which are administered by the FDA in accordance with current industry standards. The regulatory requirements apply to all phases of manufacturing, testing and record keeping, including personnel, facilities, equipment, control of materials, processes and laboratories, packaging, labeling and distribution. Noncompliance by the Company with GLPs and GMPs by the Company could result in disqualification of data collected by the Company in a particular project. Material violation of GLP or GMP requirements could result in additional regulatory sanctions and, in severe cases, could also result in a discontinuance of selected Company operations. Such discontinuance would have a material adverse effect on the Company's business, financial condition and results of operations. To help assure compliance with applicable regulations, the Company has established quality assurance controls at its facilities that monitor ongoing compliance by auditing test data and regularly inspecting facilities, procedures and other GMP compliance parameters. In addition, FDA regulations and guidelines serve as a basis for the Company's standard operating procedures, where applicable. Certain of the Company's development and testing activities are subject to the Controlled Substances Act, administered by the Drug Enforcement Agency ("DEA"), which strictly regulates all narcotic and habit-forming substances. The Company maintains restricted-access facilities and heightened control procedures for projects involving such substances due to the level of security and other controls required by the DEA. In addition to FDA regulations, the Company is subject to other federal and state regulations concerning such matters as occupational safety and health and protection of the environment. The Company's activities involve the controlled use of hazardous materials and chemicals. The Company is subject to foreign, federal, state and local laws and regulations governing the use, storage, handling and disposal of such materials and certain waste products. The risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result. Such damages could have a material adverse effect on the Company's business and results of operations. Product Liability and Insurance The Company maintains product liability and professional errors and omissions liability insurance, providing approximately $6.0 million in coverage on a claims-made basis. Additionally, in certain circumstances the Company seeks to manage its liability risk through contractual provisions with clients requiring the Company to be indemnified by the client or covered by clients' product liability insurance policies. Also, in certain types of engagements the Company seeks to limit its contractual liability to clients to the amount of fees received by the Company. The contractual arrangements are subject to negotiation with clients and the terms and scope of such indemnification, liability limitation and insurance coverage vary based upon client and project. Although most of the Company's clients are large, well-capitalized companies, the financial performance of these indemnities is not secured. Therefore, the Company bears the risk that the indemnifying party may not have the financial ability to fulfill its indemnification obligations or that liability would exceed the amount of applicable insurance. Furthermore, the Company could be held liable for errors and omissions in connection with the services it performs. There can be no assurance that the Company's insurance coverage will be adequate or that insurance coverage will continue to be available on terms acceptable to the Company, or that the Company can obtain indemnification arrangements or otherwise be able to limit its liability risk. Employees At September 30, 1998, the Company had 205 full-time employees, 125 of which hold college degrees, including 30 Ph.D.s. All employees enter into confidentiality agreements intended to protect the Company's proprietary information. The Company believes that its relations with its employees are good. None of the Company's employees are represented by a union. The Company's performance depends on its ability to attract and retain qualified professional, scientific and technical staff. The level of competition among employers for skilled personnel is high. The Company believes that its employee benefit plans enhance employee morale, professional commitment and work productivity and provide an incentive for employees to remain with the Company. While the Company has not experienced any significant problems in attracting or retaining qualified personnel, there can be no assurance that the Company will be able to avoid these problems in the future. Item 2. Properties The Company's principal executive offices are located at 2701 Kent Avenue, West Lafayette, Indiana, 47906, and constitute approximately 100,000 square feet of operational and administrative space. The Company also maintains offices which provide sales and technical support services in New Jersey, Pennsylvania and the United Kingdom, and employs sales and technical support service representatives in North Carolina and Texas. The Company believes that its facilities are adequate for the Company's operations and that suitable additional space will be available when needed. Item 3. Legal Proceedings The Company from time to time may be involved in various claims and legal proceedings arising in the ordinary course of business. The Company does not believe that any pending claims or proceedings, individually or in the aggregate, would have a material adverse effect on the Company's financial condition or results of operations. In April, 1997, CMA Microdialysis Holding A.B. ("CMA") filed an action against the Company in the United States District Court for the District of New Jersey in which CMA alleged that the Company's microdialysis probes infringe U.S. Patent No. 4,694,832. The Company has filed an answer in which it denied infringement and in which it asserted that the patent on which CMA relies in invalid. Sales of the product in question accounted for less than $120,000 of the Company's revenues in fiscal 1998. The matter is now awaiting a trial date. Management intends to continue a vigorous defense of CMA's claims, and believes that the ultimate outcome of this matter will not have a material adverse effect on the Company's financial condition or result of operations. However, legal expenses associated with the defense of this suit have had and will continue to have an adverse effect on earnings. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. [Remainder of page intentionally left blank.] Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The following table shows the quarterly range of high and low sales prices for the Company's Common Shares as reported by the Nasdaq Stock Market for the fiscal year ended September 30, 1998. The approximate number of recordholders of outstanding Common Shares as of September 30, 1998 was 1700. The Common Shares were not publicly traded prior to November 24, 1997.
Fiscal 1998 High Low - -------------- ------- ------- First Quarter $ 8.875 $ 7.625 Second Quarter 10.250 6.750 Third Quarter 9.000 6.750 Fourth Quarter 7.375 4.625
On November 24, 1997, the SEC declared effective the Company's Registration Statement on Form S-1, File Number 333-36429. Item 2 of Part II of the Company's Form 10-Q for the period ended December 31, 1997 set forth information regarding the net proceeds received by the Company from the offering pursuant to such registration statement and the Company's use of such proceeds. The information below reflects changes since such disclosure. The net proceeds received by the Company from the offering were $9,362,000 after deducting expenses paid by the Company of $1,438,000, consisting of $756,000 for underwriting discounts and commissions and $682,000 for legal, accounting and printing fees. As of September 30, 1998, the Company had used approximately $8,200,000 of the net proceeds from the offering to repay indebtedness and fund operations. The balance of the net proceeds, or approximately $1,200,000, was invested in money market funds. [Remainder of page intentionally left blank.] Item 6. Selected Financial Data SELECTED CONSOLIDATED FINANCIAL DATA (In thousands) The following is selected audited consolidated financial data of the Company for the five years ended September 30, 1998. The data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of Bionalytical Systems, Inc. and notes thereto contained elsewhere in this Form 10-K.
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1994 1995 1996 1997 1998 ------------------ ------------------ ------------------ ------------------ ------------------ (in thousands, (in thousands, (in thousands, (in thousands, (in thousands, except per share except per share except per share except per share except per share data) data) data) data) data) ------------------ ------------------ ------------------ ------------------ ------------------ Statement of Income Data: Product revenue $ 8,903 $ 9,627 $ 9,113 $ 9,932 $ 10,616 Services revenue 1,800 2,725 3,681 4,991 7,609 ------------------ ------------------ ------------------ ------------------ ------------------ Total revenue 10,703 12,352 12,794 14,923 18,225 Cost of product revenue 3,418 3,448 3,227 3,334 3,911 Cost of services revenue 1,039 1,834 2,141 2,986 4,598 ------------------ ------------------ ------------------ ------------------ ------------------ Total cost of revenue 4,457 5,282 5,368 6,320 8,509 ------------------ ------------------ ------------------ ------------------ ------------------ Gross profit 6,246 7,070 7,426 8,603 9,716 ------------------ ------------------ ------------------ ------------------ ------------------ Operating expenses: Selling 3,531 3,940 3,937 4,225 4,524 Research and Development 1,122 1,124 1,424 1,568 2,165 General and administrative 984 1,222 1,364 1,638 2,336 ------------------ ------------------ ------------------ ------------------ ------------------ Total operating expenses 5,637 6,286 6,725 7,431 9,025 ------------------ ------------------ ------------------ ------------------ ------------------ Operating Income 609 784 701 1,172 691 Other income (expense), net 192 111 (18) (75) (25) ------------------ ------------------ ------------------ ------------------ ------------------ Income before income taxes 801 895 683 1,097 666 Income taxes 253 344 283 413 254 ------------------ ------------------ ------------------ ------------------ ------------------ Net income $ 548 $ 551 $ 400 $ 684 $ 412 ================== ================== ================== ================== ================== Net income available to common shareholders $ 495 $ 497 $ 347 $ 657 $ 412 Net income per Common Share Basic $ .24 $ .23 $ .16 $ .30 $ .10 Diluted $ .16 $ .16 $ .11 $ .21 $ .09 Weighted average Common Shares outstanding Basic 2,097 2,185 2,185 2,221 4,117 Diluted 3,048 3,066 3,089 3,101 4,403
September 30, September 30, September 30, September 30, September 30, 1994 1995 1996 1997 1998 -------------- -------------- -------------- -------------- --------------- (in thousands) (in thousands) (in thousands) (in thousands) (in thousands) -------------- -------------- -------------- -------------- --------------- Balance Sheet Data: Working capital $ 4,392 $ 4,080 $ 3,059 $ 2,493 $ 3,286 Property and equipment, net 2,736 3,707 6,526 10,035 14,551 Total assets 8,163 9,428 11,374 15,931 22,280 Long-term debt, less current portion 187 416 2,512 5,045 1,124 Convertible Preferred Shares 2,047 2,100 1,530 1,231 - Shareholders' equity 4,056 4,609 4,956 5,651 16,844
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with Selected Consolidated Financial Data and the Company's Consolidated Financial Statements and notes thereto included elsewhere in this Report. In addition to the historical information contained herein, the discussions in this Report may contain forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed herein. Overview The Company provides a broad range of value-added products and services focused on chemical analysis to the worldwide pharmaceutical, medical device and biotechnology industries. The Company's customer-focused approach and high quality products and services enable it to serve as a value-added partner in solving complex scientific problems by providing cost-effective results to its customers on an accelerated basis. Founded in 1974 in Lansing, Michigan and relocated to West Lafayette, Indiana in 1975, the Company has experienced growth primarily through internal expansion, supplemented by strategic acquisitions. As part of its internal growth strategy, the Company has developed technical specialties in such areas as chromatography, electrochemistry, in vivo sampling and mass spectrometry. The Company's growth has strategically positioned it to take advantage of globalization in the marketplace and to provide new services and areas of technical expertise to its customers. During this phase, the Company has been continuously profitable since 1987. Throughout its history, the Company has taken steps to position itself as a global leader in the analytical chemistry field. Development of the Company's infrastructure began in 1975 when it established relationships with several customers and multiple international distributors. In 1981, the Company increased its sphere of influence to include Japan with the creation of BAS Japan, an independent distributor. In 1988, the Company enhanced its computer software expertise by acquiring Interactive Microware, Inc. In 1990, the Company began offering contract services to customers that lacked the time or expertise to perform certain analyses using the Company's analytical products. In 1995, the Company acquired a distributor, BAS Technicol Ltd., to further solidify its presence in the United Kingdom. Revenues are derived principally from (i) the sale of the Company's analytical instruments and other products, and (ii) analytical services provided to customers. Both methods of generating revenue utilize the Company's ability to identify, isolate and resolve client problems relating to the separation and quantification of individual substances in complex mixtures. The Company's analytical products are sold primarily to pharmaceutical firms and research organizations. The Company supports the pharmaceutical industry by focusing on analytical chemistry for biomedical research, diagnostics, electrochemistry and separations science. Principal customers include scientists engaged in drug metabolism studies, as well as those engaged in basic neuroscience research. The Company was the first to commercialize the liquid chromatograph and electrochemistry technology which is now considered the worldwide standard for the determination of neurotransmitter substances. Research products include in vivo sampling devices, reagent chemicals, electrochemical apparatus and sensors. Revenue from the sale of the Company's products and the related costs are recognized upon shipment of the products to customers. The Company's pharmaceutical service contracts generally have terms ranging from several months to several years. A portion of the contract fee is generally payable upon receipt of the initial samples with the balance payable in installments over the life of the contract. The contracts are broken down into discrete units of deliverable services for which a fixed fee per unit is established. Revenue and related direct costs are recognized as specific contract terms are fulfilled under the percentage of completion method utilizing units of delivery. The termination of a contract results in no material adjustments to revenue or direct costs previously recognized. The Company is entitled to payment for all work performed through the date of notice of termination and all costs associated with termination of a contract. The Company's management believes that fluctuations in the Company's quarterly results are caused by a number of factors, including the Company's success in attracting new business, the size and duration of service contracts, the timing of its clients' decisions to enter into new contracts, the cancellation or delays of on-going contracts, the timing of acquisitions and other factors, many of which are beyond the Company's control. In fiscal 1998, approximately 30% of the Company's total revenue was derived from customers located outside the United States. These markets tend to be much more volatile than the United States market. Significant governmental, regulatory, political, economic and cultural issues or changes could adversely affect the growth or profitability of the Company's business activities in any such market. Results of Operations The following table sets forth, for the periods indicated, certain statement of income data as a percentage of total revenue.
Percentage of Revenue Percentage of Revenue Percentage of Revenue ---------------------- ---------------------- ---------------------- Year Ended Year Ended Year Ended September 30, September 30, September 30, 1996 1997 1998 ---------------------- ---------------------- ---------------------- Product revenue 71.2% 66.6% 58.2% Services revenue 28.8 33.4 41.8 ---------------------- ---------------------- ---------------------- Total revenue 100.0 100.0 100.0 Cost of product revenue 25.2 22.3 21.5 Cost of services revenue 16.8 20.0 25.2 ---------------------- ---------------------- ---------------------- Total cost of revenue 42.0 42.3 46.7 ---------------------- ---------------------- ---------------------- Gross profit 58.0 57.7 53.3 Operating expenses: Selling 30.8 28.3 24.8 Research and development 11.1 10.5 11.9 General and administrative 10.7 11.0 12.8 ---------------------- ---------------------- ---------------------- Total operating expenses 52.6 49.8 49.5 Operating income 5.4 7.9 3.8 Other income (expense), net (0.1) (0.5) (0.1) ---------------------- ---------------------- ---------------------- Income before income taxes 5.3 7.4 3.7 Income taxes 2.2 2.8 1.4 ---------------------- ---------------------- ---------------------- Net income 3.1% 4.6% 2.3% ====================== ====================== ======================
[Remainder of page intentionally left blank.] Year ended September 30, 1998 compared with Year ended September 30, 1997 Total revenue for the year ended September 30, 1998 increased 22.1% to approximately $18.2 million from approximately $14.9 million in the year ended September 30, 1997. The net increase of approximately $3.3 million related primarily to increased revenue from services, which increased to approximately $7.6 million in the year ended September 30, 1998 from approximately $5.0 million in the year ended September 30, 1997 as a result of the expansion of the types and volume of services provided by the Company. During this same period, product revenue increased to approximately $10.6 million for the year ended September 30, 1998 from approximately $9.9 million for the year ended September 30, 1997 primarily as a result of increased penetration in the physiology and the liquid chromatography markets. Costs of revenue increased 34.6% to approximately $8.5 million for the year ended September 30, 1998 from approximately $6.3 million for the year ended September 30, 1997. This increase of approximately $2.2 million was largely due to the hiring of additional support staff in the services unit. Costs of revenue for the Company's products increased to 36.8% as a percentage of product revenue for the year ended September 30, 1998 from 33.6% of product revenue for the year ended September 30, 1997, due primarily to a change in product mix. Costs of revenue for the Company's services increased to approximately 60.4% as a percentage of services revenue for the year ended September 30, 1998 from approximately 59.8% of services revenue for the year ended September 30, 1997 due to an increase in services support staff. Selling expenses for the year ended September 30, 1998 increased 7.1% to approximately $4.5 million from approximately $4.2 million during the year ended September 30, 1997 due to increased salary expense. Research and development expenses for the year ended September 30, 1998 increased 38.1% to approximately $2.2 million from approximately $1.6 million for the year ended September 30, 1997 due to the increase in research grant activity. General and administrative expenses for the year ended September 30, 1998 increased 42.6% to approximately $2.3 million from approximately $1.6 million for the year ended September 30, 1997, primarily as a result of increased legal expenses associated with the patent infringement suit. (See Item 3 - Legal Proceedings) Other income (expense), net, was approximately $(25,000) in the year ended September 30, 1998 as compared to approximately $(75,000) in the year ended September 30, 1997 as a result of the increase in interest income due to an increase in cash and cash equivalents resulting from the initial public offering. The Company's effective tax rate for 1998 was 38.2% as compared to 37.7% for fiscal 1997. This increase was primarily due to nondeductible foreign losses incurred in fiscal 1998. Year ended September 30, 1997 compared with Year ended September 30, 1996 Total revenue for the year ended September 30, 1997 increased 16.6% to approximately $14.9 million from approximately $12.8 million in the year ended September 30, 1996. The net increase of approximately $2.1 million related primarily to increased revenue from services, which increased to approximately $5.0 million in the year ended September 30, 1997 from approximately $3.7 million in the year ended September 30, 1996 as a result of the expansion of types and volume of services provided by the Company. During this same period, product revenue increased to approximately $9.9 million for the year ended September 30, 1997 from approximately $9.1 million for the year ended September 30, 1996 primarily as a result of increased penetration in the electrochemistry and the liquid chromatography markets. Costs of revenue increased 17.7% to approximately $6.3 million for the year ended September 30, 1997 from approximately $5.4 million for the year ended September 30, 1996. This increase of approximately $952,000 was largely due to the hiring of additional support staff in the services unit. Costs of revenue for the Company's products decreased to 33.6% as a percentage of product revenue for the year ended September 30, 1997 from 35.4% of product revenue for the year ended September 30, 1996, due to a change in product mix. Costs of revenue for the Company's services increased to approximately 59.8% as a percentage of services revenue for the year ended September 30, 1997 from approximately 58.2% of services revenue for the year ended September 30, 1996 due to an increase in services support staff. Selling expenses for the year ended September 30, 1997 increased 7.3% to approximately $4.2 million from approximately $3.9 million during the year ended September 30, 1996 due to increased commissions on foreign sales. Research and development expenses for the year ended September 30, 1997 increased 10.1% to approximately $1.6 million from approximately $1.4 million for the year ended September 30, 1996 due to the development of the in vivo product line. General and administrative expenses for the year ended September 30, 1997 increased 20.1% to approximately $1.6 million from approximately $1.4 million for the year ended September 30, 1996, primarily as a result of increased property taxes incurred in connection with the Company's purchase and construction of additional facilities. Other income (expense), net, was approximately $(75,000) in the year ended September 30, 1997 as compared to approximately $(18,000) in the year ended September 30, 1996 as a result of a reduction of interest income due to a reduction in cash and cash equivalents resulting from the redemption of Redeemable Preferred Shares owned by the Company's venture capital shareholders in accordance with their terms. The Company's effective tax rate for 1997 was 37.7% as compared to 41.4% for fiscal 1996. This decrease was primarily due to utilization of the research and development tax credit. Liquidity and Capital Resources Since its inception, the Company's principal sources of cash have been cash flow generated from operations and funds received from bank borrowings and other financings including the Company's initial public offering which was completed in November 1997. At September 30, 1998, the Company had cash and cash equivalents of approximately $1.2 million, compared to cash and cash equivalents of approximately $161,000 at September 30, 1997. The increase in cash resulted primarily from the initial public offering which funded the increase in capital expenditures made to expand the Company's facilities and operations. The Company's net cash provided by operating activities was approximately $2.4 million for the year ended September 30, 1998. Cash provided by operations during the year ended September 30, 1998 consisted of net income of approximately $412,000, plus non-cash charges of approximately $989,000, plus a net decrease of approximately $969,000 in operating assets and liabilities. The most significant decrease in operating assets related to trade accounts receivable, which decreased approximately $431,000 at September 30, 1998. Cash used by investing activities increased to approximately $5.0 million for the year ended September 30, 1998 from approximately $4.0 million for the year ended September 30, 1997, primarily as a result of the Company's purchase and construction of additional facilities, as well as the acquisition of Clinical Innovations. Cash provided by financing activities for fiscal 1998 was approximately $3.7 million due to the initial public offering partially offset by the reduction of debt. The Company's net cash provided by operating activities was approximately $842,000 for the year ended September 30, 1997. Cash provided by operations during the year ended September 30, 1997 consisted of net income of approximately $684,000 plus non-cash charges of approximately $584,000 partially offset by a net increase of approximately $426,000 in operating assets and liabilities. The most significant increase in operating assets related to accounts receivable, which increased to approximately $3.0 million at September 30, 1997 from approximately $1.6 million at September 30, 1996, due primarily to sales growth. Cash used by investing activities increased to approximately $4.0 million for the year ended September 30, 1997 from approximately $3.2 million for the year ended September 30, 1996, primarily as a result of the Company's purchase and construction of additional facilities. Cash provided by financing activities for fiscal 1997 was approximately $2.7 million due to an increase in the Company's long and short term debt and offset by the redemption of Redeemable Preferred Shares in accordance with their terms. Total expenditures by the Company for property and equipment were approximately $3.2 million, $4.1 million and $4.9 million in fiscal 1996, 1997 and 1998, respectively. Expenditures made in connection with the expansion of the Company's operating facilities and purchases of laboratory equipment account for the largest portions of these expenditures. The Company anticipates increased levels of capital expenditures in fiscal 1999. The increased capital investments relate to the completion of the renovation and construction of additional facilities and the purchase of additional laboratory equipment corresponding to anticipated increases in research services to be provided by the Company. The Company also completed two acquisitions during fiscal 1998. Net payments made in connection with these acquisitions were approximately $1.6 million. The Company expects to make other investments to expand its operations through internal growth, strategic acquisitions, alliances and joint ventures. However, the Company currently has no firm commitments for capital expenditures other than in connection with the expansion of the Company's facilities. Based on its current business activities, the Company believes that cash generated from its operations, amounts available under its existing bank lines of credit and credit facility and the remaining net proceeds from its initial public offering will be sufficient to fund the Company's working capital and capital expenditure requirements for the foreseeable future. The Company has a $7.5 million bank line of credit agreement which expires March 1, 1999. Interest is charged at the prime rate (8.25% at September 30, 1998). At September 30, 1998, the line was unused. The line is collateralized by inventories and accounts receivable. All prior year bank debt obligations were repaid in full on November 27, 1997 using the proceeds received from the Company's initial public offering. Inflation To date, the Company believes that the effects of inflation have not had a material adverse effect on its business, operations or financial condition. Year 2000 The Company undertook in fiscal 1998 to identify those information technology and other systems which may not be Year 2000 compliant. The Company has identified that its primary computer hardware and software systems will require modifications, and the Company has developed and commenced implementation of a plan to modify such systems to recognize the Year 2000. Management currently expects this project to be substantially complete by the spring of 1999, and management estimates that the project will involve capital expenditures (excluding normal system upgrades and replacements) of less than $75,000. Management has initiated discussions with significant suppliers, customers and financial institutions to ensure that those parties have appropriate plans to remediate Year 2000 issues where their systems interface with the Company's systems or otherwise impact its operations. The Company is also assessing the extent to which its operations are vulnerable should those organizations fail to properly remediate their computer systems. The cost of the Year 2000 initiatives in the aggregate is not expected to be material to the Company's results of operations or financial position. New Accounting Pronouncements In July 1997, the Financial Accounting Standards Board (the "FASB") issued Statement No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information." Under SFAS 131, the Company will report financial and descriptive information about its operating segments. SFAS 131 is effective for fiscal years beginning after December 15, 1997. The Company plans to adopt SFAS 131 on October 1, 1998. The Company has not yet evaluated the impact of SFAS 131. In June 1997, the FASB issued Statement of Financial Accounting Standards No.130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS 130 establishes standards for the reporting and display of comprehensive income in financial statements. SFAS 130 is effective for fiscal years beginning after December 15, 1997. The Company plans to adopt SFAS 130 on October 1, 1998. The Company has not yet evaluated the impact of SFAS 130. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not Applicable. Item 8. Financial Statements and Supplementary Data Report of Independent Auditors Board of Directors and Shareholders Bioanalytical Systems, Inc. We have audited the accompanying consolidated balance sheets of Bioanalytical Systems, Inc. as of September 30, 1998 and 1997, and the related consolidated statements of income, preferred shares and shareholders' equity and cash flows for each of the three years in the period ended September 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bioanalytical Systems, Inc. at September 30, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 1998 in conformity with generally accepted accounting principles. Ernst & Young LLP Indianapolis, Indiana November 6, 1998
Bioanalytical Systems, Inc. Consolidated Balance Sheets September 30, September 30, 1997 1998 -------------- -------------- Assets Current assets: Cash and cash equivalents $ 161,338 $ 1,208,157 Accounts receivable (Note 4): Trade 2,361,591 2,774,714 Grants 370,198 209,164 Other 281,579 61,603 Inventories (Notes 3 and 4) 1,911,231 1,880,680 Deferred income taxes (Note 5) 209,695 168,649 Prepaid expenses 46,787 59,694 -------------- --------------- Total current assets 5,342,419 6,362,661 Goodwill, less accumulated amortization of $30,002 in 1997 and, $62,120 in 1998 (Note 2) 210,030 1,134,265 Other assets 343,120 231,865 Property and equipment (Note 4): Land and improvements 171,014 171,014 Buildings and improvements 4,294,183 8,355,058 Machinery and equipment 4,067,319 7,463,099 Office furniture and fixtures 680,395 1,073,572 Construction in process 3,625,062 1,464,092 -------------- --------------- 12,837,973 18,526,835 Less accumulated depreciation and amortization (2,802,823) (3,975,912) -------------- --------------- 10,035,150 14,550,923 -------------- --------------- Total assets $ 15,930,719 $ 22,279,714 ============== =============== Liabilities, Preferred Shares and Shareholders' Equity Current liabilities: Accounts payable $ 1,341,181 $ 1,940,615 Income taxes payable 250,153 155,480 Accrued expenses 352,593 352,403 Customer advances 101,986 319,420 Current portion of long-term debt 287,833 308,447 Lines of credit 515,377 - -------------- --------------- Total current liabilities 2,849,123 3,076,365 Long-term debt, less current portion (Note 4) 5,044,875 1,123,747 Deferred income taxes (Note 5) 1,154,166 1,236,093 Preferred shares (Note 6): Authorized shares - 1,000,000 Issued and outstanding shares: Convertible - 166,667 in 1997 1,231,242 - Shareholders' equity (Note 6): Common shares, no par value: Authorized shares - 19,000,000 Issued and outstanding shares - 2,247,601 in 1997, and 4,495,319 in 1998 497,875 995,778 Additional paid-in capital 178,233 10,467,957 Retained earnings 4,978,149 5,390,342 Currency translation adjustment (2,944) (10,568) -------------- --------------- 5,651,313 16,843,509 -------------- --------------- Total liabilities, preferred shares and shareholders' equity $ 15,930,719 $ 22,279,714 ============== ===============
See accompanying notes.
Bioanalytical Systems, Inc. Consolidated Statements of Income Year ended Year ended Year ended September 30, September 30, September 30, 1996 1997 1998 --------------- --------------- --------------- Product revenue $ 9,113,297 $ 9,932,022 $ 10,616,363 Services revenue 3,680,838 4,991,348 7,608,792 --------------- --------------- --------------- Total Revenue 12,794,135 14,923,370 18,225,155 Cost of product revenue 3,226,736 3,334,413 3,910,740 Cost of services revenue 2,141,715 2,985,858 4,598,266 --------------- --------------- --------------- Total Cost of Revenue 5,368,451 6,320,271 8,509,006 --------------- --------------- --------------- Gross profit 7,425,684 8,603,099 9,716,149 Operating expenses: Selling 3,937,224 4,224,523 4,524,664 Research and development 1,423,901 1,568,417 2,164,951 General and administrative 1,363,921 1,638,465 2,335,564 --------------- --------------- --------------- Total Operating Expenses 6,725,046 7,431,405 9,025,179 --------------- --------------- --------------- Operating income 700,638 1,171,694 690,970 Interest income 38,843 4,835 86,521 Interest expense (81,396) (100,177) (92,855) Other income (expense) 28,180 12,306 (26,587) Gain (loss) on sale of property and equipment (3,218) 8,831 8,486 --------------- --------------- --------------- Income before income taxes 683,047 1,097,489 666,535 Income taxes (Note 5) 282,648 413,395 254,342 --------------- --------------- --------------- Net income $ 400,399 $ 684,094 $ 412,193 =============== =============== =============== Net income available to common shareholders $ 347,063 $ 657,046 $ 412,193 Net income per share: Basic $ 0.16 $ 0.30 $ 0.10 Diluted $ 0.11 $ 0.21 $ 0.09 Weighted average common shares outstanding: Basic 2,185,149 2,221,146 4,117,088 Diluted 3,089,308 3,101,429 4,402,755
See accompanying notes.
Bioanalytical Systems, Inc. Consolidated Statements of Preferred Shares and Shareholders' Equity Redeemable Convertible Currency Preferred Preferred Common Additional Retained Translation Shares Shares Shares Paid-in Capital Earnings Adjustment ------------ ------------- --------- ---------------- ----------- ------------- Balance at September 30, 1995 $ 868,997 $ 1,231,242 $ 483,375 $ 149,233 $3,974,040 $ 2,309 Net income - - - - 400,399 - Accrual of cumulative dividends on preferred shares 53,336 - - - (53,336) - Issuance of 4,514 common shares for the exercise of stock options - - 1,000 2,000 - - Redemption of Preferred Shares (624,031) - - - - - Currency translation adjustment - - - - - (3,352) ------------ ------------- --------- ---------------- ----------- ------------- Balance at September 30, 1996 298,302 1,231,242 484,375 151,233 4,321,103 (1,043) Net income - - - - 684,094 - Accrual of cumulative dividends on preferred shares 27,048 - - - (27,048) - Issuance of 60,944 common shares for the exercise of stock options - - 13,500 27,000 - - Redemption of Preferred Shares (325,350) - - - - - Currency translation adjustment - - - - - (1,901) ------------ ------------- --------- ---------------- ----------- ------------- Balance at September 30, 1997 - 1,231,242 497,875 178,233 4,978,149 (2,944) Net income - - - - 412,193 - Conversion of preferred shares at IPO - (1,231,242) 166,667 1,064,575 - - Issuance of 145,328 common shares for the exercise of stock options - - 32,192 165,454 - - Issuance of common stock at IPO - - 299,044 9,059,695 - - Currency translation adjustment - - - - - (7,624) ------------ ------------- --------- ---------------- ----------- ------------- Balance at September 30, 1998 $ - $ - $ 995,778 $ 10,467,957 $5,390,342 $ (10,568) ============ ============= ========= ================ =========== =============
See accompanying notes.
Bioanalytical Systems, Inc. Consolidated Statements of Cash Flows Year ended Year ended Year ended September 30, September 30, September 30, 1996 1997 1998 --------------- --------------- --------------- Operating activities Net income $ 400,399 $ 684,094 $ 412,193 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 399,797 536,389 873,972 Loss (gain) on sale of property and equipment 3,218 (8,831) (8,486) Deferred income taxes 100,437 56,080 122,973 Changes in operating assets and liabilities: Accounts receivable (251) (1,361,559) 431,159 Inventories (148,617) 20,619 113,507 Prepaid expenses and other assets (248,569) (107,656) 159,274 Accounts payable (75,773) 611,071 369,983 Income taxes payable (82,012) 216,591 (212,652) Accrued expenses (41,509) 112,767 (16,990) Customer advances (6,129) 82,115 124,551 --------------- --------------- --------------- Net cash provided by operating activities 300,991 841,680 2,369,484 Investing activities Capital expenditures (3,178,499) (4,095,651) (3,508,342) Proceeds from sale of property and equipment 21,412 70,778 77,359 Payments for purchase of net assets from Vetronics, net of cash acquired - - (327,740) Payments for purchase of net assets from Clinical Innovations, net of cash acquired - - (1,265,230) --------------- --------------- --------------- Net cash used by investing activities (3,157,087) (4,024,873) (5,023,953) Financing activities Borrowings of long-term debt 2,401,035 2,722,995 43,365 Payments of long-term debt (124,732) (202,429) (5,375,461) Borrowings on lines of credit - 615,377 860,093 Payments on lines of credit - (100,000) (1,375,470) Net proceeds from Initial Public Offering - - 9,358,739 Net proceeds from the exercise of stock options 3,000 40,500 197,646 Redemption of preferred shares (624,031) (325,350) - Other (3,352) (1,901) (7,624) --------------- --------------- --------------- Net cash provided by financing activities 1,651,920 2,749,192 3,701,288 --------------- --------------- --------------- Net increase (decrease) in cash and cash equivalents (1,204,176) (434,001) 1,046,819 Cash and cash equivalents at beginning of year 1,799,515 595,339 161,338 --------------- --------------- --------------- Cash and cash equivalents at end of year $ 595,339 $ 161,338 $ 1,208,157 =============== =============== ===============
See accompanying notes. Bioanalytical Systems, Inc. Notes to Consolidated Financial Statements September 30, 1998 1. Significant Accounting Policies Nature of Business Bioanalytical Systems, Inc. and its subsidiaries (the "Company") manufacture scientific instruments for use in the determination of trace amounts of organic compounds in biological, environmental and industrial materials. The Company sells its equipment and software for use in industrial, governmental and academic laboratories. The Company also engages in laboratory services, consulting and research related to analytical chemistry and chemical instrumentation. The Company's customers are located in the United States and throughout the world. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. Cash Equivalents The Company considers all short-term, highly liquid investments to be cash equivalents. Financial Instruments Management has estimated that the fair value of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and debt approximates the carrying values. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (LIFO) method. Goodwill Goodwill represents the excess of cost of acquisitions over the fair value of net assets acquired and is amortized by the straight-line method over periods ranging from 15-20 years. 1. Significant Accounting Policies (continued) Property and Equipment Property and equipment is recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of 4 through 40 years. Expenditures for maintenance and repairs are charged to expense as incurred. Revenue Recognition Revenue from the sale of the Company's products and the related costs are recognized upon shipment of the products to customers. The Company's pharmaceutical service contracts generally have terms ranging from several months to several years. The typical contract is one year in duration and includes a one-year renewal option. A portion of the contract fee is generally payable upon receipt of the initial samples with the balance payable in installments over the life of the contract. A majority of the Company's contracts are broken down into discrete units of deliverable services for which a fixed fee for each unit is established and revenue and related direct costs are recognized as units of deliverable services are fulfilled. For all other service contracts, the Company allocates a ratable portion of the total contract fee to the units of deliverable services and recognizes revenue and the related direct costs as the units of deliverable services are fulfilled. Income Taxes The Company computes its income tax provision in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities. These deferred taxes are measured by applying the provisions of tax laws in effect at the balance sheet date. 1. Significant Accounting Policies (continued) Advertising Expense The Company expenses advertising costs as incurred. Advertising expense was, $267,184, $275,850 and $551,848 for 1996, 1997, and 1998, respectively. Net Income Per Common Share Basic net income per common share is computed on the basis of the weighted average number of common shares outstanding. Diluted net income per common share is computed on the basis of the weighted average number of common and common equivalent shares outstanding. Common equivalent shares include options to purchase Common Shares and Convertible Preferred Shares, which are assumed to be converted. In these computations, net income in 1996 and 1997 is reduced by dividends accrued on the Redeemable Preferred Shares. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Recently Issued Accounting Standards In July 1997, the FASB issued Statement No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information." Under SFAS 131, the Company will report financial and descriptive information about its operating segments. SFAS 131 is effective for fiscal years beginning after December 15, 1997. The Company plans to adopt SFAS 131 on October 1, 1998. The Company has not yet evaluated the impact of adoption of SFAS 131. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130 establishes standards for reporting and display of comprehensive income in the financial statements. SFAS 130 is effective for fiscal years beginning after December 15, 1997. The Company plans to adopt SFAS 130 on October 1, 1998. The Company has not yet evaluated the impact of SFAS 130. 2. Acquisition Effective October 31, 1997 the Company acquired all of the capital stock of Vetronics Inc., for cash approximating $200,000 and a $150,000 note payable. The acquired business was involved in the distribution of veterinary equipment and supplies in the United States. Effective July 1, 1998 the Company acquired all of the capital stock of Clinical Innovations Ltd., for cash approximating $1,500,000. The acquired business was involved in the processing of bioanalytical samples for pharmaceutical firms in the United Kingdom. The acquisitions were accounted for using the purchase method of accounting and the results of operations have been included in the consolidated financial statements since the dates of acquisition. The purchase price was allocated to the net assets acquired, including $956,000 to goodwill, based upon the fair market value at the date of acquisition. On an unaudited pro forma basis, revenue, net income and net income per common share (diluted) for the years ended September 30, 1997 and 1998 was $16,840,000, $1,154,000 $0.37 and $19,413,000, $718,000, $0.16, respectively. This pro forma data presents the consolidated results of operations as if the acquisitions had occurred on October 1, 1996, after giving effect to certain adjustments, including amortization of goodwill, increased interest expense and related income tax effects. The pro forma results have been prepared for comparative purposes only and do not purport to indicate the results of operations which would actually have occurred had the acquisition been in effect on the date indicated, or which may occur in the future. Pro forma amounts for the years ended September 30, 1997 and 1998 include the acquired entities' financial data for the years ended December 31 and February 28, respectively, as it was not practicable to determine the September 30 year end results. 3. Inventories Inventories at September 30 consisted of:
1997 1998 ----------- ----------- Raw materials $ 909,258 $ 966,314 Work in progress 278,386 316,648 Finished goods 800,880 677,522 ----------- ----------- 1,988,524 1,960,484 LIFO reserve (77,293) (79,804) ----------- ----------- Total LIFO cost $1,911,231 $1,880,680 =========== ===========
4. Debt Arrangements Bank Debt The Company has a bank line of credit agreement which expires March 1, 1999 and allows borrowings of up to $7,500,000. Interest is charged at the prime rate (8.25% at September 30, 1998). At September 30, 1998, the line was unused. The line is collateralized by inventories and accounts receivable. All prior year bank debt obligations were repaid in full on November 27, 1997 using proceeds received from the Company's initial public offering (see Note 6). Cash interest payments of $99,057, $345,018 and $260,249 were made in 1996, 1997 and 1998, respectively. Cash interest payments for 1996, 1997 and 1998 included interest of $28,868, $266,200 and $127,077, respectively, which was capitalized. These amounts included interest required to be paid on a portion of the undistributed earnings of a subsidiary which qualifies as a domestic international sales corporation. (see Note 5). 4. Debt Arrangements (continued) Capital Leases The Company has capital lease arrangements to finance the acquisition of equipment. Future minimum lease payments, based upon scheduled payments under the lease arrangements, as of September 30, 1998, are as follows:
1999 $ 417,540 2000 307,494 2001 307,494 2002 307,494 2003 307,494 Thereafter 121,652 ----------- Total minimum lease payments 1,769,168 Amounts representing interest (336,974) ----------- Present value of minimum lease payments $1,432,194 ===========
The total amount of property and equipment capitalized under capital lease obligations as of September 30, 1997 and 1998 was $486,043 and $1,917,625, respectively. Accumulated amortization at September 30, 1997 and 1998 was $169,795 and $290,841, respectively. Assets acquired during 1998 using capital leases were $1,431,582. 5. Income Taxes Significant components of the Company's deferred tax liabilities and assets as of September 30 are as follows:
1997 1998 ---------- ---------- Deferred tax liabilities: Tax over book depreciation $ 818,420 $ 952,224 Deferred DISC income 340,642 283,869 ---------- ---------- Total deferred liabilities 1,159,062 1,236,093 Deferred tax assets: Inventory pricing 71,199 69,559 Accrued vacation 63,470 73,743 Other-net 79,922 25,347 ---------- ---------- Total deferred tax assets 214,591 168,649 ---------- ---------- Net deferred tax liabilities $ 944,471 $1,067,444 ========== ==========
5. Income Taxes (continued) Significant components of the provision for income taxes are as follows:
1996 1997 1998 -------- -------- -------- Current: Federal $123,625 $265,776 $ 80,911 State 58,586 91,539 50,458 -------- -------- -------- Total current 182,211 357,315 131,369 Deferred: Federal 81,928 54,849 99,504 State 18,509 1,231 23,469 -------- -------- -------- Total deferred 100,437 56,080 122,973 -------- -------- -------- $282,648 $413,395 $254,342 ======== ======== ========
The effective income tax rate varied from the statutory federal income tax rate as follows:
1996 1997 1998 ----- ----- ------ Statutory federal income tax rate 34.0% 34.0% 34.0% Increases (decreases): Amortization of goodwill and other nondeductible expenses 2.1 1.2 3.3 Benefit of foreign sales corporation, net (8.6) (5.8) (6.2) State income taxes, net of federal tax benefit 7.5 5.6 7.4 Research and development credit - (5.0) (13.4) Nondeductible foreign losses 10 7.6 10.3 Other (3.6) 0.1 2.8 ----- ----- ------ 41.4% 37.7% 38.2% ===== ===== ======
5. Income Taxes (continued) In fiscal 1996, 1997 and 1998, the Company's foreign operations generated a loss before income taxes of $200,145, $245,800 and $201,294, respectively. Payments made in 1996, 1997, and 1998 for federal and state income taxes amounted to $160,000, $140,000, and $78,000, respectively. 6. Shareholders' Equity Initial Public Offering On September 24, 1997, the Company's Board of Directors approved a 4.514 for 1 share split of common shares effective November 21, 1997. All common share and per share amounts and information concerning stock option plans have been adjusted retroactively to give effect to this share split. On November 26, 1997, the Company completed an initial public offering of 1,250,000 Common Shares at an offering price of $8.00 per share. On December 19, 1997, the underwriters exercised an option to purchase an additional 100,000 Common Shares. The net proceeds to the Company from the public offering and the exercise of the over-allotment option by the underwriters, after deducting the underwriting discounts and commissions and offering expenses payable by the Company, were approximately $9.4 million. Upon the closing of the offering, all of the Company's outstanding Convertible Preferred Shares were converted into 752,399 Common Shares. Stock Option Plans During 1990, the Company established an Employee Incentive Stock Option Plan whereby options to purchase shares of the Company's Common Shares at fair market value can be granted to employees of the Company. Options granted become exercisable in four equal installments beginning two years after the date of the grant. The plan terminates in the year 2000. During fiscal 1989, the Company established an Outside Director Stock Option Plan whereby options to purchase shares of the Company's Common Shares at fair market value can be granted to outside directors. Options granted become exercisable in four equal installments beginning two years after the date of grant. The plan terminates in 1999. 6. Shareholders' Equity (continued) The Company has adopted new stock option plans in connection with its initial public offering and accordingly does not plan to grant any more options pursuant to the plans discussed above. During fiscal year 1998, the Company established an Employee Stock Option Plan whereby options to purchase shares of the Company's Common Stock at fair market value can be granted to employees of the Company. Options granted become exercisable in four equal installments beginning two years after the date of grant. The plan terminates in fiscal 2008. During fiscal year 1998, the Company established an Outside Director Stock Option Plan whereby options to purchase shares of the Company's Common Stock at fair market value can be granted to outside directors. Options granted become exercisable in four equal installments beginning two years after the date of grant. The plan terminates in fiscal 2008. The Company applies the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under SFAS 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying shares on the date of grant, no compensation expense is recognized. A summary of the Company's stock option activity, and related information for the years ended September 30 follows:
1996 1996 1997 1997 1998 1998 ------- --------- ------- --------- ------- --------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------- --------- ------- --------- ------- --------- Outstanding-beginning of year 342,643 $ 1.15 338,129 $ 1.16 272,671 $ 1.27 Exercised (4,514) 0.66 (60,944) 0.66 (145,328) 1.36 Granted - - - - 39,000 8.00 Terminated - - (4,514) 1.32 (2,000) 8.00 ------- ------- ------- Outstanding-end of year 338,129 $ 1.16 272,671 $ 1.27 164,343 2.70 ======= ======= =======
6. Shareholders' Equity (continued)
Weighted Number Average Weighted Number Weighted Outstanding at Remaining Average Exercisable at Average Range of September 30, Contractual Exercise September 30, Exercise Exercise Prices 1998 Life Price 1998 Price - ---------------- -------------- ----------- --------- -------------- --------- 0.66 - $1.00 62,163 1.27 $ 0.66 62,163 $ 0.66 1.01 - $1.50 11,495 3.28 $ 1.33 11,495 $ 1.33 1.51 - $2.10 53,685 4.49 $ 1.72 50,301 $ 1.60 2.11 - $8.00 37,000 9.15 $ 8.00 - - -------------- -------------- 164,343 123,959 ============== ==============
A special non-qualified option was granted for 4,514 Common Shares at $1.27 per share to a consultant to the Company in August 1991. This option was exercised during the fiscal year ended September 30, 1998. Disclosure of pro forma information regarding net income and earnings per share is required by SFAS No. 123 as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994, under the fair value method as defined by that Statement. The fair value for options granted by the Company was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
Risk-free interest rate 5.50% Dividend yield 0.00% Volatility factor of the expected market price of the Company's common stock 0.52 Expected life of the options (years) 7
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 6. Shareholders' Equity (continued) For purposes of pro forma disclosures, the estimated fair value of the options are amortized to expense over the related vesting period. Because compensation expense is recognized over the vesting period, the initial impact on pro forma net income may not be representative of compensation expense in future years, when the effect of amortization of multiple awards would be reflected in the consolidated statements of income. The Company's pro forma information giving effect to the estimated compensation expense related to stock options is as follows:
1998 -------- Pro forma net income $367,190 Pro forma net income per share (diluted) $ 0.08
The weighted average fair value of options granted during the year was $4.77. 7. Retirement Plan Effective July 1, 1984, the Company established an Internal Revenue Code Section 401(k) Retirement Plan covering all employees over twenty-one years of age with at least one year of service. Under the terms of the Plan, the Company contributes 2% of each participant's total wages to the Plan. The Plan also includes provisions for various contributions which may be instituted at the discretion of the Board of Directors. The contribution made by the participant may not exceed 10% of the participant's annual wages. Contribution expense was, $138,142, $158,924 and $187,896 in 1996, 1997 and 1998, respectively. 8. Segment Information The Company operates in two principal segments - analytical services and analytical products. The Company's analytical services unit provides analytical chemistry support on a contract basis directly to pharmaceutical companies. The Company's analytical products unit provides liquid chromatography, electrochemical, and physiological monitoring products to pharmaceutical companies, universities, government research centers and medical research institutions.
INDUSTRY SEGMENT DATA: YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1996 1997 1998 --------------- --------------- --------------- (IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS) REVENUE Products $ 9,113 $ 9,932 $ 10,616 Services 3,681 4,991 7,609 --------------- --------------- --------------- Total Revenue $ 12,794 $ 14,923 $ 18,225 =============== =============== =============== OPERATING INCOME (LOSS) Products $ (366) $ (107) $ (1,062) Services 1,067 1,279 1,753 --------------- --------------- --------------- Total Operating Income 701 1172 691 Corporate income (expenses) (18) (75) (24) Income before income taxes $ 683 $ 1,097 $ 667 =============== =============== =============== IDENTIFIABLE ASSETS Products $ 6,116 $ 6,221 $ 9,461 Services 5,258 9,710 12,819 --------------- --------------- --------------- Total Assets $ 11,374 $ 15,931 $ 22,280 =============== =============== ===============
8. Segment Information (continued)
Depreciation and amortization Products $ 224 $ 244 $ 314 Services 176 292 560 ------ ------ ------ $ 400 $ 536 $ 874 ====== ====== ====== Capital expenditures Products $ 324 $ 153 $ 369 Services 2,854 3,943 4,571 ------ ------ ------ $3,178 $4,096 $4,940 ====== ====== ======
Export Sales: Export sales to unaffiliated customer by destination of sales are summarized as follows (in thousands):
Year Ended Year Ended Year Ended September 30, September 30, September 30, 1996 1997 1998 -------------- -------------- -------------- Pacific Rim: Japan $ 1,769 $ 1,740 $ 1,053 Other 1,134 1,215 771 -------------- -------------- -------------- 2,903 2,955 1,824 Europe 1,144 1,105 1,126 Other 556 1,037 2,560 -------------- -------------- -------------- $ 4,603 $ 5,097 $ 5,510 ============== ============== ==============
Major Customers: During 1996, 1997 and 1998, a major United States-based pharmaceutical company accounted for approximately 18.3%, 20.9%, and 19.6%, respectively, of the Company's total revenues. 8. Segment Information (continued) The Company sells its products through international distributors, one of which represents 19%, 17% and 10% of 1996, 1997 and 1998 product sales, respectively. Accounts receivable from this foreign distributor are $124,104 and $107,034 at September 30, 1997 and 1998, respectively. 9. Litigation In April 1997, CMA Microdialysis Holding A.B. ("CMA") filed an action against the Company in the United States District Court for the District of New Jersey in which CMA alleged that the Company's microdialysis probes infringe U.S. Patent No. 4,693,832. The Company has filed an answer in which it denied infringement and in which it asserted that the patent on which CMA relies is invalid. The matter is now awaiting a trial date. Although an estimate of the possible loss has not been made, management intends to continue a vigorous defense of CMA's claims, and believes that the ultimate outcome of this matter will not have a material adverse effect on the Company's financial condition or result of operations. [Remainder of page intentionally left blank.] Bioanalytical Systems, Inc. Quarterly Financial Data
Bioanalytical Systems, Inc. Unaudited (Amounts in thousands, except for per share data) For the Quarter Ended in Fiscal 1998 December 31 March 31 June 30 September 30 ----------- -------- ------- ------------ Total revenue $ 4,330 $ 4,450 $ 4,521 $ 4,924 Gross profit 2,483 2,550 2,511 2,172 Net income (loss) available to common shareholders 196 231 130 (145) Basic net income (loss) per common share(1) .06 .05 .03 (.03) Diluted net income (loss) per common and common equivalent share(1) .05 .05 .03 (.03) For the Quarter Ended in Fiscal 1997 December 31 March 31 June 30 September 30 ----------- -------- ------- ------------ Total revenue $ 3,516 $ 3,648 $ 3,840 $ 3,919 Gross profit 2,179 2,128 2,272 2,024 Net income available to common shareholders 161 265 218 13 Basic net income per common share(1) .07 .12 .10 .01 Diluted net income per common and common equivalent share(1) .05 .09 .07 .00 - ------------------------- (1) The sum of the net income per common share may not equal the annual net income per share due to interim quarter rounding.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. [Remainder of page intentionally left blank.] Part III Item 10. Directors and Executive Officers of the Registrant. The information included under the caption "Directors and Executive Officers" in the Company's definitive Proxy Statement filed pursuant to Regulation 14A in connection with its 1998 Annual Meeting of Shareholders (the "Proxy Statement") is incorporated herein by reference in response to this item. Item 11. Executive Compensation. The information included under the captions "Election of Directors - Compensation of Directors" and "Executive Compensation" in the Proxy Statement is incorporated herein by reference in response to this item. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information contained under the captions "Share Ownership of Certain Beneficial Owners and Management" in the Proxy Statement is incorporated herein by reference in response to this item. Item 13. Certain Relationships and Related Transactions. The information contained under the caption "Certain Transactions" in the Proxy Statement is incorporated herein by reference in response to this item. [Remainder of page intentionally left blank.] Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Documents filed as part of this Report. -------------------------------------------- 1. Financial Statements: ---------------------- Included as outlined in Item 8 of Part II of this report. Report of Independent Auditors. Consolidated Balance Sheets as of September 30, 1997 and September 30, 1998. Consolidated Statements of Income for the Years Ended September 30, 1996, 1997 and 1998. Consolidated Statements of Preferred Shares and Shareholders' Equity for the Years Ended September 30, 1996, 1997 and 1998. Consolidated Statements of Cash Flows for the Years Ended September 30, 1996, 1997 and 1998. Notes to Consolidated Financial Statements. 2. Financial Statement Schedules: -------------------------------- No schedules are required to be filed as part of this report. Schedules other than those listed above are omitted as they are not required, are not applicable, or the information is shown in the Notes to the Consolidated Financial Statements. (b) Reports on Form 8-K. None. ---------------------- (c) Exhibits. See Index to Exhibits. -------- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BIOANALYTICAL SYSTEMS, INC. ---------------------------- (Registrant) By:/s/ Peter T. Kissinger ---------------------------- Peter T. Kissinger President and Chief Executive Officer By:/s/ Douglas P. Wieten ---------------------------- Douglas P. Wieten Chief Financial Officer, Treasurer and Controller (Principal Financial and Accounting Officer) Date: December 24, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Capacity Date - ------------------------- -------------------------- ----------------- /s/ Peter T. Kissinger President, Chief Executive December 24, 1998 - ------------------------- Peter T. Kissinger Officer and Director /s/ Douglas P. Wieten Chief Financial Officer, December 24, 1998 - ------------------------- Douglas P. Wieten Treasurer and Controller /s/ William E. Baitinger Director December 24, 1998 - ------------------------- William E. Baitinger /s/ Michael K. Campbell Director December 24, 1998 - ------------------------- Michael K. Campbell /s/ Candice B. Kissinger Director December 24, 1998 - ------------------------- Candice B. Kissinger /s/ Jack A. Kraeutler Director December 24, 1998 - ------------------------- Jack A. Kraeutler /s/ Ronald E. Shoup Director December 24, 1998 - ------------------------- Ronald E. Shoup /s/ W. Leigh Thompson Director December 24, 1998 - ------------------------- W. Leigh Thompson
INDEX TO EXHIBITS Sequential Number Numbering Assigned In System Page Regulation S-K Number of Item 601 Description of Exhibits Exhibit - --------------- ------------------------------------------------------------------ ----------- (2) No Exhibit (3) 3.1 Second Amended and Restated Articles of Incorporation of Bioanalytical Systems, Inc. (Incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarter ended December 31, 1997.) 3.2 Second Restated Bylaws of Bioanalytical Systems, Inc. (Incorporated by reference to Exhibit 3.2 to Form 10-Q for the quarter ended December 31, 1997.) (4) 4.1 Specimen Certificate for Common Shares (Incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-1, Registration No. 333-36429). 4.2 See Exhibits 3.1 and 3.2 (9) No Exhibit (10) 10.2 Bioanalytical Systems, Inc. Outside Director Stock Option Plan (Incorporated by reference to Exhibit 10.2 to Registration Statement on Form S-1, Registration No. 333-36429). 10.3 Form of Bioanalytical Systems, Inc. Outside Director Stock Option Agreement (Incorporated by reference to Exhibit 10.3 to Registration Statement on Form S-1, Registration No. 333-36429). 10.4 Bioanalytical Systems, Inc. 1990 Employee Incentive Stock Option Plan (Incorporated by reference to Exhibit 10.4 to Registration Statement on Form S-1, Registration No. 333-36429). 10.5 Form of Bioanalytical Systems, Inc. 1990 Employee Stock Option Agreement (Incorporated by reference to Exhibit 10.5 to Registration Statement on Form S-1, Registration No. 333-36429). 10.6 Security Agreement by and between Bioanalytical Systems, Inc. and Bank One, Lafayette, N.A., dated August 22, 1996 (Incorporated by reference to Exhibit 10.17 to Registration Statement on Form S-1, Registration No. 333-36429). 10.7 Master Lease Agreement by and between Bioanalytical Systems, Inc. and Bank One Leasing Corporation dated November 9, 1994 (Incorporated by reference to Exhibit 10.18 to Registration Statement on Form S-1, Registration No. 333-36429). 10.8 Financing Lease by and between Bioanalytical Systems, Inc. and Bank One Leasing Corporation, dated November 9, 1994 (Incorporated by reference to Exhibit 10.19 to Registration Statement on Form S-1, Registration No. 333-36429). 10.9 Credit Agreement by and between Bioanalytical Systems, Inc. and Bank One, Indiana, N.A., dated August 30, 1996 (Incorporated by reference to Exhibit 10.24 to Registration Statement on Form S-1, Registration No. 333-36429). 10.10 Bioanalytical Systems, Inc. 1997 Employee Incentive Stock Option Plan (Incorporated by reference to Exhibit 10.26 to Registration Statement on Form S-1, Registration No. 333-36429). 10.11 Form of Bioanalytical Systems, Inc. 1997 Employee Incentive Stock Option Agreement (Incorporated by reference to Exhibit 10.27 to Registration Statement on Form S-1, Registration No. 333-36429). 10.12 1997 Bioanalytical Systems, Inc. Outside Director Stock Option Plan (Incorporated by reference to Exhibit 10.28 to Registration Statement on Form S-1, Registration No. 333-36429). 10.13 Form of Bioanalytical Systems, Inc. 1997 Outside Director Stock Option Agreement (Incorporated by reference to Exhibit 10.29 to Registration Statement on Form S-1, Registration No. 333-36429). 10.14 Business Loan Agreement by and between Bioanalytical Systems, Inc., and Bank One, Indiana, N.A. dated March 1, 1998 (Incorporated by reference to Exhibit 10.14 to Form 10-Q for the quarter ended March 31, 1998). 10.15 Commercial Security Agreement by and between Bioanalytical Systems, Inc. and Bank One, Indiana, N.A., dated March 1, 1998 (Incorporated by reference to Exhibit 10.15 to Form 10-Q for the quarter ended March 31, 1998). 10.16 Negative Pledge Agreement by and between Bioanalytical Systems, Inc. and Bank One, Indiana, N.A., dated March 1, 1998 (Incorporated by reference to Exhibit 10.16 to Form 10-Q for the quarter ended March 31, 1998). 10.17 Promissory Note for $7,500,000 executed by Bioanalytical Systems, Inc. in favor of Bank One, N.A., dated March 1, 1998 (Incorporated by reference to Exhibit 10.17 to Form 10-Q for the quarter ended March 31, 1998). (11) 11.1 Statement Regarding Computation of Per Share Earnings. (12) No Exhibit (13) No Exhibit (16) No Exhibit (18) No Exhibit (21) 21.1 Subsidiaries of the Registrant (23) 23.1 Consent of Independent Auditors (24) No Exhibit (27) 27.1 Financial Data Schedule (99) No Exhibit
EX-11.1 2 Statement Regarding Computation of Per share Earnings (Unaudited) (in thousands except per share data)
Three Months Ended Three Months Ended Year Ended Year Ended September 30, 1997 September 30, 1998 September 30, 1997 September 30, 1998 ------------------- -------------------- ------------------- ------------------- Basic Average Common Shares Outstanding 2248 4495 2221 4117 Net income available to common shareholders 13 (145) 657 412 Per Share Amount $ .01 $ (.03) $ .30 $ .10 Diluted Average Common Shares outstanding 2248 4495 2221 4117 Net effect of dilutive stock options based on the treasury stock method using the average market price 108 140 128 172 Assumed conversion of Preferred Shares 752 - 752 114 Total 3108 4635 3101 4403 Net income available to common shareholders $ 13 $ (145) $ 657 $ 412 Per share amount $ .00 $ (.03) $ .21 $ .09
EX-21.1 3 Subsidiaries of the Registrant
List of Subsidiaries Name Jurisdiction of Organization - ---- ---------------------------- Bioanalytical Systems, Ltd. United Kingdom BAS Technicol, Ltd. United Kingdom BAS Analytics, Ltd. United Kingdom
EX-23.1 4 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-56123) pertaining to the Bioanalytical Systems, Inc. 1997 Employee Incentive Stock Option Plan and in the Registration Statement (Form S-8 No. 333-56127) pertaining to the 1997 Bioanalytical Systems, Inc. Outside Director Stock Option Plan of our report dated November 6, 1998 with respect to the consolidated financial statements included in this Annual Report (Form 10-K) of Bioanalytical System, Inc. /s/ Ernst & Young LLP Indianapolis, Indiana December 18, 1998 EX-27.1 5
5 This schedule contains summary financial information extracted from the Bioanalytical Systems, Inc. consolidated financial statements contained in the company's annual report on Form 10-K and is qualified in its entirety by reference to such financial statements. 1,000
3-MOS 12-MOS SEP-30-1998 SEP-30-1998 JUL-30-1998 OCT-30-1997 SEP-30-1998 SEP-30-1998 1,208 1,208 0 0 3,045 3,045 0 0 1,881 1,881 6,363 6,363 14,551 14,551 3,976 3,976 22,280 22,280 3,076 3,076 0 0 0 0 0 0 996 996 15,848 15,848 22,280 22,280 2634 10,616 4,924 18,225 1,,157 3,911 2,753 8,509 2,378 9,025 0 0 (47) (93) (286) 666 (141) 254 (145) 412 0 0 0 0 0 0 (145) 412 (.03) .10 (.03) .09
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