Inotiv, Inc. - Quarter Report: 2004 March (Form 10-Q)

LIQUIDITY AND CAPITAL RESOURCES

Comparative Cash Flow Analysis

Since its inception, BASi’s principal sources of cash have been cash flow generated from operations and funds received from bank borrowings and other financings. At March 31, 2004, BASi had cash and cash equivalents of $507,000, compared to cash and cash equivalents of $1,378,000 at September 30, 2003. The decrease in cash resulted primarily from payments for capital expenditures and to support the operations of the recently acquired Baltimore clinical research unit.

BASi’s net cash provided by operating activities was $1,504,000 for the six months ended March 31, 2004. Cash provided by operations during the six months ended March 31, 2004 consisted of net losses of $633,000, offset by non-cash charges of $1,524,000 and a net decrease of $613,000 in operating assets and liabilities. During the current six month period, we received significant customer advance payments for work begun in April, which contributed $1,442,000 to cash flow. In addition to funding the Baltimore clinical research unit, the other driving factors that consumed cash from operations were a reduction in the rate of receivable collections from some of the Company’s larger customers and significant shipments of its Culex ABS.

Cash used by investing activities decreased to $2,229,000 for the six months ended March 31, 2004 from $3,244,000 for the six months ended March 31, 2003. This decrease is due to reduced capital expenditures in the six months ending March 31, 2004. Additionally, the Company expended cash for its acquisition of LC Resources, Inc. in December 2002 and for loans and advances to PharmaKinetics Laboratories, Inc., which was acquired in June 2003.

Cash provided by financing activities for the six months ended March 31, 2004 was $33,000 due to additional borrowings from our construction line of credit, offset by payments on long term debt and leases. In the six months ended March 31, 2003, the Company refinanced its existing revolving line of credit and term loan and secured new financing for facilities expansion and improvements. Throughout fiscal 2003, BASi used these funds to finance its expansions and improvements in Evansville and West Lafayette and for other capital expenditures. As the availability from the new facilities financings was expended by late fiscal 2003, the Company began to support these expansions with available funds from operations and its revolving credit line. This resulted in negative cash flows being generated from operations. However, expansions are now complete in Evansville and nearly complete in West Lafayette and as the Company continues to integrate its new acquisitions and fill its new facilities with business, cash from operations should begin to show improvements.

Capital Resources

Total expenditures by BASi for property and equipment were $2,229,000 and $3,217,000 for the six months ended March 31, 2004 and 2003, respectively. Expenditures for the first half of 2004 include the construction of the new early development facility in West Lafayette, accounting for the largest portion of these expenditures, and expenditures to bring the Baltimore facility to Company standards. Capital expenditures also include the purchase of new toxicology and pathology software in the Company’s Evansville location that will improve efficiency and ensure future regulatory compliance. The software is in the validation process and is expected to be fully operational in November 2004. These expenditures were primarily funded by the Company’s construction line of credit and revolving line of credit. Capital investments correspond to anticipated increases in research services to be provided by BASi. BASi expects to make other investments to expand its operations through internal growth, strategic acquisitions, alliances, and joint ventures as demand and capital allow.

The Company has implemented a phased plan to improve the operations of its Baltimore clinical research unit and expects to fund the operations with cash provided from company-wide operations supplemented by its revolving line of credit. The planned improvements include renovation of the clinic, selectively updating equipment and hiring highly qualified, experienced management personnel. Improvements already completed and in process have had measurable effects on attracting new clients.

BASi’s revolving line of credit expires September 30, 2006. The maximum amount available under the terms of the agreement is $6,000,000 with outstanding borrowings limited to the borrowing base as defined in the agreement. Interest accrues monthly on the outstanding balance at the bank’s prime rate to prime rate plus 125 basis points, or at the Eurodollar rate plus 200 to 350 basis points, as elected by BASi, depending upon the ratio of BASi’s interest bearing indebtedness (less subordinated debt) to EBITDA. BASi pays a fee equal to 25 to 50 basis points, depending upon the same financial ratio, on the unused portion of the line of credit. As of March 31, 2004, BASi had approximately $2.1 million of availability subject to limitations by its bank debt covenant ratios.

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During 2002, the Company began expanding facilities at its site in West Lafayette, Indiana. Phase one of this facility is expected to be fully functional in the third fiscal quarter of 2004 at a cost of $3.4 million. Phases two and three will be completed as business justifies. Construction on the West Lafayette facilities is expected to have a total cost of $4.0 million when complete. The Company funded part of this expansion by obtaining a $2,250,000 construction loan with a bank. The loan expires November 1, 2012 and requires interest payments only until completion of the project in West Lafayette, Indiana. Interest is charged at the prime rate. The Company exhausted this construction loan in the first quarter and expects to convert the $2,250,000 to a term note in May 2004. Future expenditures to complete the site will be funded by cash from operations, as new business is generated and facilities are filled, and the Company’s revolving line of credit.

Liquidity

BASi is required to make cash payments in the future on debt and lease obligations. The following table summarizes BASi’s contractual term debt and lease obligations at March 31, 2004 and the effect such obligations are expected to have on its liquidity and cash flows in future periods (amounts presented for 2004 are those items required in the final two fiscal quarters):

			Fiscal Years Ending September 30,
			2004			2005			2006			After 2006			Total
			(in thousands)
Mortgage notes payable			$	183		$	390		$	395		$	6,171		$	7,139
Subordinated debt*				401			460			360			4,467			5,688
Future debt obligations**				36			69			56			2,089			2,250
Capital lease obligations				62			74			80			---			216
Operating leases				327			529			518			274			1,648
			$	1,009		$	1,522		$	1,409		$	13,001		$	16,941

  *  Subordinated debt includes notes to related parties.

**  Future debt obligations is an estimate of payments upon the conversion in May 2004 of the current construction line of credit into a $2,250,000 mortgage note payable.

The covenants in the Company’s credit agreement requiring the maintenance of certain ratios of interest bearing indebtedness (not including subordinated debt) to EBITDA and net cash flow to debt servicing requirements may restrict the amount the Company can borrow to fund future operations, acquisitions and capital expenditures. The Company was in violation of one of the credit agreement’s financial covenants for both the first fiscal quarter ended December 31, 2003 and the second fiscal quarter ended March 31, 2004. On January 8, 2004 and May 13, 2004, the banks waived compliance with this financial covenant for the twelve months ended March 31, 2004 and have amended certain of the financial covenants through September 30, 2004. As a condition to these waivers, we have granted our banks a secured mortgage on our Baltimore facility.

We have undertaken steps to improve our liquidity, operations and cash flow, with the objectives of reducing our debt, strengthening our financial position and meeting our financial covenants. We have reorganized our business development efforts to increase new business, added information technology improvements to become more efficient, and are attempting to sell our Baltimore physical facility. We are tightly monitoring and managing our cash flow, and we are not incurring new capital expenditures for expansion.

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Based on our current business activities, we believe cash generated from our operations and amounts available under our existing credit facilities, combined with the action plan described above, will be sufficient to fund the Company’s working capital and capital expenditure requirements for the foreseeable future and through September 30, 2004.

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ITEM 3.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

BASi’s primary market risk exposure with regard to financial instruments is changes in interest rates. The credit agreement between BASi and The Provident Bank dated October 29, 2002 bears interest at a rate of either the bank’s prime rate plus 0 to 125 basis points, or at Eurodollar rate plus 200 to 350 basis points, depending in each case upon the ratio of BASi’s interest-bearing indebtedness (less subordinated debt) to EBITDA, at BASi’s option. BASi also has a construction loan and a commercial mortgage which bear interest at the prime rate. Historically, BASi has not used derivative financial instruments to manage exposure to interest rate changes. BASi estimates that a hypothetical 10% adverse change in interest rates would not affect the consolidated operating results of BASi by a material amount.

BASi operates internationally and is, therefore, subject to potentially adverse movements in foreign currency exchange rates. The effect of movements in the exchange rates was not material to the consolidated operating results of BASi in fiscal years 2003 and 2002. BASi estimates that a hypothetical 10% adverse change in foreign currency exchange rates would not affect the consolidated operating results of BASi by a material amount.

ITEM 4.        CONTROLS AND PROCEDURES

Based on their most recent evaluation, which was completed as of the end of the period covered by this report, BASi’s Chief Executive Officer and Chief Financial Officer believe BASi’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) are effective in timely alerting BASi’s management to material information required to be included in this Form 10-Q and other Exchange Act filings.

There were no significant changes in the Company’s internal controls or other factors that could significantly affect those controls subsequent to the date of their evaluation, and there were no significant deficiencies or material weaknesses which required corrective action.

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PART II — OTHER INFORMATION

ITEM 4.        SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

On February 26, 2004, the Annual Meeting of Shareholders of BASi was held at the principal executive offices of BASi. The following matters were voted on at the meeting:

MATTER:			VOTES CAST FOR:			VOTES CAST AGAINST OR WITHHELD: (1)
Election of the directors of BASi:
Peter T. Kissinger, Ph.D				4,323,861			218,609
Ronald E. Shoup, Ph.D				4,356,902			185,568
Candice B. Kissinger				4,219,653			322,817
William E. Baitinger				4,534,788			7,682
Leslie B. Daniels				4,526,438			16,032
W. Leigh Thompson, Ph.D., M.D				4,390,491			151,981
Ratification of the selection by the Board of Directors of Ernst & Young LLP as independent auditors of BASi for the fiscal year ending September 30, 2004				4,526,159			3,964
(1)  Includes abstentions and broker non-votes

ITEM 6.        EXHIBITS AND REPORTS ON FORM 8-K

(a)        Exhibits

Number assigned in Regulation S-K Item 601

Description of Exhibits

(3)

3.1

Second Amended and Restated Articles of Incorporation of Bioanalytical Systems, Inc. (incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarter ended December 31, 1997).

3.2

Second Restated Bylaws of Bioanalytical Systems, Inc. (incorporated by reference to Exhibit 3.2 Form 10-Q for the quarter ended December 31, 1997).

(4)

4.1

Specimen Certificate for Common Shares (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-1, Registration No. 333-36429).

(10)

10.1

Form of Employment agreement dated March 18, 2004 with Michael R. Cox+

10.2

Form of Grant of qualified stock options dated April 1, 2004 to Michael R. Cox+

10.3

Form of Grant of non-qualified stock options dated April 1 to Michael R. Cox+

10.4

Form of Fourth Amendment dated May 13, 2004 to Credit Agreement dated October 29, 2002 with The Provident Bank+

(31)

31.1

Certification of Peter T. Kissinger +

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31.2

Certification of Michael R. Cox +

(32)

32.1

Section 1350 Certifications +

(99)

99.1

Risk factors (incorporated by reference to Exhibit 99.1 to Form 10-K for the year ended September 30, 2002).

+ Filed with this Quarterly Report on Form 10-Q.

(b)        Reports on Form 8-K

        Form 8-K furnished February 17, 2004, reporting under Item 12 “Results of Operations and Financial Condition,” relating to the Company’s announcement of its results for the year ended September 30, 2003.

        Form 8-K furnished February 17, 2004, reporting under Item 12” “Results of Operations and Financial Condition,” relating to the Company’s announcement of its results for the quarter ended December 31, 2003.

        Form 8-K furnished March 18, 2004, reporting under Items 7 & 9 “Financial Statements and Exhibits” and “Regulation FD Disclosure,” relating to the hiring of a new CFO.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:

BIOANALYTICAL SYSTEMS, INC. By:  /s/ PETER T. KISSINGER Peter T. Kissinger President and Chief Executive Officer Date:  May 17, 2004 By:  /s/ MICHAEL R. COX Michael R. Cox Chief Financial Officer (Principal Financial and Accounting Officer) Date:  May 17, 2004

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