Inotiv, Inc. - Annual Report: 2007 (Form 10-K)
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, 2007.
|
|
OR
|
|
|
o
|
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 000-23357
BIOANALYTICAL
SYSTEMS, INC.
(Exact
name of the registrant as specified in its charter)
|
INDIANA
|
35-1345024
|
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
|
2701
KENT AVENUE
WEST
LAFAYETTE, INDIANA
|
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 checkmark if the registrant is a well-known seasoned issuer, as defined
by
Rule 405 of the Securities Act. YES o
NO
x
Indicate
by checkmark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. YES o
NO
x
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
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K 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. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o
Accelerated
filer o
Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). YES o
NO
x
Based
on
the closing price on the NASDAQ stock market on March 30, 2007, the
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant is $22,425,000. As of December 21, 2007,
4,909,127 shares of registrant's common shares were outstanding. No shares
of
registrant's Preferred Stock were outstanding as of December 21,
2007.
Documents
Incorporated by Reference
Portions
of the registrant’s definitive proxy statement for its 2008 Annual Meeting of
Shareholders are incorporated by reference into Part
III
hereof.
TABLE
OF CONTENTS
|
Page
|
||
|
PART
I
|
|
|
|
Item
1.
|
Business
|
1
|
|
Item
1A.
|
Risk
Factors
|
12
|
|
Item
1B.
|
Unresolved
Staff Comments
|
17
|
|
Item
2.
|
Properties
|
17
|
|
Item
3.
|
Legal
Proceedings
|
18
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
18
|
|
PART
II
|
|
|
|
Item
5.
|
Market
for Registrant's Common Equity and Related Stockholder
Matters
|
18
|
|
Item
6.
|
Selected
Financial Data
|
21
|
|
Item
7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
22
|
|
Item
7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
30
|
|
Item
8.
|
Financial
Statements
|
31
|
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
53
|
|
Item
9A.
|
Controls
and Procedures
|
54
|
|
Item
9B.
|
Other
Information
|
54
|
|
PART
III
|
|
|
|
Item
10.
|
Directors
and Executive Officers of the Registrant
|
54
|
|
Item
11.
|
Executive
Compensation
|
55
|
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management
|
55
|
|
Item
13.
|
Certain
Relationships and Related Transactions
|
56
|
|
Item
14.
|
Principal
Accounting Fees and Services
|
56
|
|
PART
IV
|
|
|
|
Item
15.
|
Exhibits
and Financial Statement Schedules
|
57
|
PART
I
This
Report contains certain statements that are "forward-looking statements"
within
the meaning of Section 27A of the Securities Act of 1933, as amended, 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 Bioanalytical Systems, Inc. (the "Company",
“we”) 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.
Risks and uncertainties that may affect our future results include, but are
not
limited to, those discussed under the heading “Risk Factors,” beginning on page
12. 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.(Dollar amounts in thousands, except per share data, unless noted
otherwise.)
ITEM
1 - BUSINESS
General
The
Company, a corporation organized in Indiana, provides contract development
services and research equipment to many leading global pharmaceutical, medical
research and biotechnology companies and institutions. We offer an efficient,
variable cost alternative to our clients' internal product development programs.
Outsourcing development work to reduce overhead and speed drug approvals
through
the Food and Drug Administration ("FDA") is an established alternative to
in-house development among pharmaceutical companies. We derive our revenues
from
sales of our research services and drug development tools, both of which
are
focused on determining drug safety and efficacy. The Company has been involved
in research to understand the underlying causes of central nervous system
disorders, diabetes, osteoporosis and other diseases since its formation
in
1974.
We
support preclinical and clinical development needs of researchers and clinicians
for small molecule through large biomolecule drug candidates. We believe
our
scientists have the skills in analytical instrumentation development, chemistry,
computer software development, physiology, medicine, and toxicology to make
the
services and products we provide increasingly valuable to our current and
potential clients. Scientists engaged in analytical chemistry, clinical trials,
drug metabolism studies, pharmacokinetics and basic neuroscience research
at
many of the largest global pharmaceutical companies are our principal
clients.
Acquisitions
PharmaKinetics
Laboratories, Inc.
On
May
26, 2003, PharmaKinetics Laboratories, Inc., a Maryland corporation ("PKLB"),
became a majority owned subsidiary of the Company. Following the acquisition,
PKLB was renamed BASi Maryland, Inc. We acquired this site to broaden our
service offering base through the addition of Phase I and bioequivalence
testing
in human subjects. In addition, we wanted to establish a meaningful operating
presence physically near current and potential clients on the East Coast
of the
United States (“U.S.”). This site's operating performance prior to the
acquisition had been poor. Since the acquisition, we have made significant
organizational, managerial, staff, and physical plant changes to improve
performance at the Baltimore clinic; however, the loss of a major client
as a
result of its acquisition during fiscal 2006 caused a significant downturn
in
BASi Maryland’s operating results. This resulted in an adjustment, in the
third quarter of fiscal 2006, to the carrying value of the assets acquired.
LC
Resources, Inc.
On
December 13, 2002, we acquired LC Resources, Inc. ("LCR"), a privately held
company with operations in McMinnville, Oregon. We believe LCR has a strong
reputation in liquid chromatography and bioanalysis, and provides a location
that is significantly closer to clients on the West Coast of the
U.S.
1
Changing
Nature of the Pharmaceutical Industry
Our
services and products are marketed globally to pharmaceutical, medical research
and biotech companies and institutions engaged in drug research and development.
The research services industry is highly fragmented among many niche vendors
led
by a small number of larger companies; the latter offer an ever-growing
portfolio of cradle-to-grave pharmaceutical development services. Our products
are also marketed to academic and governmental institutions. Our services and
products may have distinctly different customers (often separate divisions
in a
single large pharmaceutical company) and requirements. We believe that all
clients are facing increased pressure to outsource facets of their research
and
development activities and that the following factors will increase client
outsourcing:
Accelerated
Drug Development
Clients
continue to demand faster, more efficient, more selective development of a
larger pool of drug candidates. Clients demand fast, high quality service in
order to make well-informed decisions to quickly exclude poor candidates
and speed development of successful ones. The need for additional development
capacity to exploit more opportunities, accelerate development, extend market
exclusivity and increase profitability drives the demand for outsourced
services.
Cost
Containment
Pharmaceutical
companies continue to push for more efficient operations through outsourcing
to
optimize profitability as development costs climb, staff costs increase, generic
competition challenges previously secure profit generators, political and social
pressures to reduce health care costs escalate, and shareholder expectations
mount.
Patent
Expiration
As
exclusivity ends with patent expiry, drug companies defend their proprietary
positions against generic competition with various patent extension strategies.
Both the drug company creating these extensions and the generic competitors
should provide additional opportunities for us.
Alliances
Strategic
alliances allow pharmaceutical companies to share research know-how and to
develop and market new drugs faster in more diverse, global markets. We believe
that such alliances will lead to a greater number of potential drugs in
testing, many under study by small companies lacking broad technical resources.
Those small companies can add shareholder value by further developing new
products through outsourcing, reducing risk for potential
allies.
Mergers
and Acquisitions
Consolidation
in the pharmaceutical industry is commonplace. As firms blend personnel,
resources and business activities, we believe they will continue to streamline
operations and minimize staffing, which should lead to more outsourcing.
Consolidation may result in short-term disruption in placement of, or progress
on, drug development programs as merging companies rationalize their respective
drug development pipelines. As an example, in fiscal 2006, an acquisition
of a
significant client of our Baltimore clinic resulted in the client cancelling
scheduled work in our clinic, which directly contributed to losses in the
clinic’s operations.
Biotechnology
Industry and Virtual Drug Company Growth
The
biotech industry continues to grow and has introduced many new developmental
drugs. Many biotech drug developers do not have in-house resources to conduct
development. Many new companies choose only to carry a product to a developed
stage sufficient to attract a partner who will manufacture and market the drug.
Efficient use of limited funds motivates smaller firms to seek outside service
providers rather than build expensive infrastructure.
Unique
Technical Expertise
The
increasing complexity of new drugs requires highly specialized, innovative,
solution-driven research not available in all client labs. We believe that
this
need for unique technical expertise will increasingly lead to outsourcing of
research activity.
2
Data
Management Expertise
Our
clients and the FDA require more data, greater access to that data, consistent
and auditable management of that data, and greater security and control of
that
data. We have made significant investments in software throughout our contract
services groups to optimize efficiency and ensure compliance with FDA
regulations and client expectations.
Globalization
of the Marketplace
Foreign
firms are relying on independent development companies with experience in the
U.S. to provide integrated services through all phases of product development
and to assist in preparing complex regulatory submissions. Domestic drug firms
are broadening product availability globally, demanding local regulatory
approval. We believe that domestic service providers with global reach,
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
After
a
new drug candidate is identified and carried through preliminary screening,
the
development process for new drugs has three distinct phases.
1) The
preclinical
phase includes
safety testing 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. Once a pharmacologically active molecule is fully analyzed
to confirm its integrity, the initial dosage form for clinical trials is
created. An analytical chemistry method is developed to enable reliable
quantification. Stability and purity of the formulation is also
determined.
Clients
work with our preclinical services group to establish pharmacokinetics,
pharmacodynamics and safety testing of the new drug. These safety studies range
from acute safety monitoring on drugs and medical devices to chronic, multi-year
oncogenicity studies. Bioanalyses of blood sampled under these protocols by
our
bioanalytical services group provide kinetic, metabolism and dose-ranging data.
Upon successful completion of preclinical safety studies, an IND submission
is
prepared and provided to the FDA for review prior to human clinical
trials.
Many
of
our products are designed for use in preclinical development. The Culex® APS, a
robotic automated pharmacology system, enables researchers to develop
pharmacokinetic profiles of drugs during early screening in rodents quickly
and
cost effectively. Clients and our bioanalytical services group sometimes
use these electrochemistry and chromatography products to develop a single,
quick, proprietary method to screen drugs in biological samples. Liquid
chromatography coupled to mass spectrometry is now a mainstay of our
bioanalytical laboratories. We have invested heavily in robotics and mass
spectrometry systems over the last ten years.
2) The
clinical
phase further
explores the safety and efficacy of the substance in humans. The sponsor
conducts Phase I human clinical trials in a limited number of healthy
individuals to determine safety and tolerability. Bioanalytical assays determine
the availability and metabolism of the active ingredient following
administration. Expertise in method development and validation is critical,
particularly for new chemical entities.
Exhaustive
safety, tolerability and dosing regimens are established in sick humans in
Phase
II trials. Phase III clinical trials verify efficacy and safety. After
successful completion of Phase III trials, the sponsor of the new drug submits
a
New Drug Application ("NDA") or Product License Application ("PLA") to the
FDA
requesting that the product be approved for marketing. Early manufacturing
demonstrates production of the substance in accordance with FDA Good
Manufacturing Practices ("GMP") guidelines. Data are compiled in an NDA, or
for
biotechnology products a PLA, for submission to the FDA requesting approval
to
market the drug or product. Our bioanalytical work per study grows rapidly
from
Phase I through III. The number of samples per patient declines as the number
of
patients grows in later studies. Phase II and III studies take several years,
supported by well-proven, consistently applied analytical methods. It is unusual
for a sponsor to change laboratories unless there are problems in the quality
or
timely delivery of results.
We
perform Phase I studies at our clinic in Baltimore. Phase I services include
bioavailability testing to monitor the rate and extent to which a drug becomes
available in the blood. Bioavailability can also be used to compare the
bioequivalence of similar generic and brand name drugs.
3
3) Post-approval
follows
FDA approval of the NDA or PLA. This includes production and continued
analytical and clinical monitoring of the drug. The post-approval phase also
tracks development and regulatory approval of product modifications and line
extensions, including improved dosage forms. The drug manufacturer must comply
with quality assurance and quality control requirements throughout production
and must continue analytical and stability studies of the drug during commercial
production to continue to validate production processes and confirm product
shelf life. Samples from each manufactured batch must be tested prior to release
of the batch for distribution to the public.
We
also
provide 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.
The
increases in our services offerings as a result
of both acquisition and internal development have resulted in our ability to
provide a broader range of services to our clients, often using combined
services of several disciplines to address client needs.
Our
ability to solve client problems by combining our knowledge base, services
and
products has been a factor in our selection by major pharmaceutical companies
to
assist in several preclinical and Phase I clinical trials, as well as in the
post-approval phase.
Company
Services and Products
Overview
We
operate in two business segments – contract research services and research
products, both of which address the bioanalytical, preclinical, and clinical
research needs of drug developers. Both segments arose out of our expertise
in a
number of core technologies designed to quantify trace chemicals in complex
matrices. We evaluate performance and allocate resources based on these
segments.
Services
The
contract research services segment provides screening and pharmacological
testing, preclinical safety testing, formulation development, clinical trials,
regulatory compliance and quality control testing. Revenues from the services
segment were $36.1 million for fiscal 2007. The following is a description
of
the services provided by our contract research services segment:
| · |
Product
Characterization, Method Development and
Validation:
Analytical
methods primarily performed in West Lafayette, Indiana determine
potency,
purity, chemical composition, structure and physical properties of
a
compound. Methods are validated to ensure that data generated are
accurate, precise, reproducible and reliable and are used consistently
throughout the drug development process and in later product
support.
|
| · |
Bioanalytical
Testing:
We
analyze specimens from preclinical and clinical trials to measure
drug and
metabolite concentrations in complex biological matrices. Bioanalysis
is
performed at our facilities in Indiana, Oregon and the United Kingdom
(“UK”).
|
| · |
Stability
Testing:
We
test stability of drug substances and formulated drug products and
maintain secure storage facilities in West Lafayette, Indiana necessary
to
establish and confirm product purity, potency and shelf life. We
have
multiple International Conference on Harmonization validated controlled
climate GMP (Good Manufacturing Practices) systems in
place.
|
| · |
In
Vivo Pharmacology:
We
provide preclinical in
vivo sampling
services for the continuous monitoring of chemical changes in life,
in
particular, how a drug enters, travels through, and is metabolized
in
living systems. Most services are performed in customized facilities
in
Evansville, Indiana and West Lafayette, Indiana using our robotic
Culex®
APS (Automated Pharmacology System)
system.
|
| · |
Preclinical
and Pathology Services:
We
provide pharmacokinetic and safety testing in studies ranging from
acute
safety monitoring of drugs and medical devices to chronic, multi-year
oncogenicity studies in our Evansville, Indiana site. Depending on
protocol, multiple tissues may be collected to monitor pathological
changes.
|
| · |
Phase
I:
We
perform Phase I human clinical trials in our 110-bed clinic in Baltimore.
These are principally bioavailability, bioequivalence and first-in-human
studies, both for generic drug and innovator pharmaceutical
firms.
|
4
Research
Products
We
focus
our products business on expediting preclinical screening of developmental
drugs. We compete in very small niches of the multibillion dollar analytical
instrument industry. The products business targets, and in some cases dominates,
unique niches in life science research. We design, develop, manufacture and
market state-of-the-art:
| · |
Robotic
sampling systems and accessories (including disposables, training,
systems
qualification)
|
| · |
In
vivo microdialysis
collection systems
|
| · |
Physiology
monitoring tools
|
| · |
Liquid
chromatography and electrochemistry instruments
platforms
|
Revenues
for our products segment were $9.2 million for fiscal 2007. The following is
a
description of the products we offer:
| · |
The
Culex®
APS
robotic automated pharmacology system is used by pharmaceutical
researchers to monitor drug concentrations and response as a function
of
time. Compared to current manual methods, the Culex® offers greater than
80% reduction in test model use and comparable reduction in labor.
The
Culex® also offers computer-controlled blood sampling protocol, behavioral
monitoring, flexibility to collect other biological samples, exceptional
cost savings, significant reduction in model stress and expeditious
data
delivery.
|
| · |
Bioanalytical
separation systems
(liquid chromatography) are used to detect and quantify low concentrations
of substances by tracking complex chemical, physiological and behavioral
effects in biological fluids and tissues from humans and laboratory
animal
models.
|
| · |
Specialized
chemical analyzers
monitor trace levels of organic chemicals, such as neurotransmitters,
in
biological samples using core electrochemistry, liquid chromatography
and
enzymology technologies to separate and quantify drugs, xenobiotics,
metabolites and other chemicals in blood, cerebrospinal fluid and
other
biological media.
|
| · |
epsilon™
is
a single liquid chromatography and electrochemistry instrument control
platform for the separation systems and chemical analyzers noted
above.
|
| · |
A
line of miniaturized in
vivo sampling
devices
sold to drug developers and medical research centers, assist in the
study
of a number of medical conditions including stroke, depression,
Alzheimer's and Parkinson's diseases, diabetes and
osteoporosis.
|
| · |
Vetronics
small animal diagnostic electro-cardiogram and vital signs monitors
are
used primarily in veterinary
clinics.
|
Clients
Over
the
past five years, we have regularly provided our services and/or products
to most
of the top 25 pharmaceutical companies in the world, as ranked by the number
of
research and development projects in 2007 by Informa Healthcare. Approximately
13% of our revenues are generated from customers outside of North
America.
We
balance our business development effort between large pharmaceutical developers
and smaller drug development companies. We believe that smaller companies
are
more inclined to establish a consistent, long-term, strategic relationship,
but
realize that they may be poorly funded. We have adapted by increasing our
focus
on a larger number of specialist service buyers at large and small clients
and
by engaging in a more active and more diversified business development
effort.
Pfizer
(including its predecessor companies) is our largest client. Pfizer accounted
for approximately 5.3%, 7.3% and 10.1% of the Company's total revenues in fiscal
2007, 2006 and 2005, respectively. Pfizer accounted for 5.1% and 12.8% of total
trade accounts receivable at September 30, 2007 and 2006,
respectively.
There
can
be no assurance that our business will not continue to be dependent on continued
relationships with Pfizer or other clients, or that annual results will not
be
dependent on a few large projects. In addition, there can be no assurance that
significant clients in any one period will continue to be significant clients
in
other periods. In any given year, there is a possibility that a single
pharmaceutical company may account for 5% or more of our total revenue. Since
we
do not have long-term contracts with our clients, the importance of a single
client may vary dramatically from year to year.
5
Sales
and Marketing
Capitalizing
on our long history of innovation and technical excellence, our current sales
and marketing plan targets both the top 200 global pharmaceutical companies
and
smaller companies. We recognize that our growth and customer satisfaction depend
upon our ability to continually improve client relationships.
Our
products and services are sold directly to the client. We have 22 employees
on
our business development staff. In late fiscal 2005, this team was reorganized
with more clearly defined sales objectives, territories and incentives. We
also
attend multiple trade shows in many disciplines and have created a collection
of
web sites, catalogs, training and technical support literature, media
presentations, branding and workshops.
Sales,
marketing and technical support are based in the corporate headquarters located
in West Lafayette, Indiana. We also maintain offices in Baltimore, Maryland;
Evansville, Indiana; McMinnville, Oregon; and Warwickshire, UK.
We
have a
network of 15 established
distributors covering Japan, the Pacific Basin, South America, the Middle East,
India, South Africa and Eastern Europe. All of our distributor relationships
are
managed from the corporate headquarters in West Lafayette, Indiana.
International growth is planned through stronger local promotion to support
our
distributor network.
Contractual
Arrangements
Our
service contracts typically establish an estimated fee to be paid for identified
services. In most cases, some percentage of the contract costs is paid in
advance. While we are performing a contract, clients often adjust the scope
of
services to be provided based on interim project results. Fees are adjusted
accordingly. Generally, our fee-for-service contracts are terminable by the
client upon written notice of 30 days or less 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. Cancellation or delay of ongoing contracts may
result in fluctuations in our quarterly and annual results. We are generally
able to recover at least our invested costs when contracts are
terminated.
Our
products business offers annual service agreements on most product
lines.
Backlog
The
contracts pursuant to which we provide our services are terminable upon written
notice of 30 days or less. We maintain projections based on bids and contracts
to optimize asset utilization. In the past year, we have increased the use
of
sales forecasts in manufacturing our products, with the result that we rarely
have a significant backlog for products. Backlog may not be a good indicator
of
future sales trends. Management does not believe that backlog is material to
an
understanding of our business as a whole.
Competition
Services
We
compete with in-house research, development, quality control and other support
service departments of pharmaceutical and biotechnology companies. There are
also full-service Contract Research Organizations ("CROs") that compete in
this
industry. Several of our competitors have significantly greater financial
resources. The largest CRO competitors offering similar research services
include:
| · |
Covance, Inc.;
|
| · |
Pharmaceutical Product Development,
Inc.;
|
| · |
Charles River Laboratories, Inc.;
and
|
| · |
MDS Health Group Ltd.
|
6
CROs
generally compete on:
| · |
regulatory compliance record;
|
| · |
quality system;
|
| · |
previous experience;
|
| · |
medical and scientific expertise in specific therapeutic
areas;
|
| · |
scientist-to-scientist
relationships;
|
| · |
quality of contract research;
|
| · |
financial viability;
|
| · |
database management;
|
| · |
statistical and regulatory
services;
|
| · |
ability to recruit investigators;
|
| · |
ability to integrate information technology with systems to optimize
research efficiency;
|
| · |
an international presence with strategically located facilities;
and
|
| · |
price.
|
Products
Founded
as a provider of instrumentation and products utilized in life sciences research
laboratories, we continue to serve that product niche today. We target
underserved markets not addressed by larger capital equipment manufacturers.
While we must sometimes compete on price with our products, we mainly compete
on
its overall value proposition, providing equipment that enables our customers
to
attain premium scientific laboratory information, on a reasonable operating
investment. We continually invest in the refinement of our products, and in
new
product opportunities that meet our operating objectives.
| · |
Culex®
APS:
Two small vendors have offered simple, semi-automated blood sampling
systems. However, we do not believe that either vendor addresses
the
scientific need as well as Culex®. In addition, we have established strong
relationships with the largest vendors of animal models who now provide
catheterized "Culex® ready" models to our customers on a just-in-time
basis, further increasing convenience and lowering cost to the
customer.
|
| · |
Chemical
Analysis:
We compete with several large equipment manufacturers, including
Agilent,
Waters Corporation and Perkin Elmer Corporation. Competitive factors
include market presence, product quality, reliability and price.
We
believe that we compete well in niche markets because of our reputation
and the quality of our products, together with the technical assistance
and service we offer. Many of our competitors are much larger and
have
greater resources, making it difficult for us to capture business
from
clients other than those who need our unique
capabilities.
|
7
| · |
Vetronics/in
vivo sampling
devices:
There are few competitors in this area of our business; however,
a
customer for our Vetronics products has undertaken development of
a
similar product for its own use, which will require that we seek
additional customers for those
products.
|
Government
Regulation
We
are
subject to various regulatory requirements designed to ensure the quality and
integrity of our data and products. These regulations are governed primarily
under the Federal Food, Drug and Cosmetic Act, as well as by associated Good
Laboratory Practice ("GLP"), Good Manufacturing Practice ("GMP"), and Good
Clinical Practice ("GCP") guidelines administered by the FDA. The standards
of
GLP, GMP, and GCP are required by the FDA and by similar regulatory authorities
around the world. These guidelines demand rigorous attention to employee
training; detailed documentation; equipment validation; careful tracking of
changes and routine auditing of compliance. Noncompliance with these standards
could result in disqualification of project data collected by the Company.
Material violation of GLP, GMP, or GCP guidelines could result in regulatory
sanctions and, in severe cases, could also result in a discontinuance of
selected operations. Since October 2004, we have been audited, on a routine
basis, by the FDA and UK’s MHRA six times: twice in West Lafayette, once each in
the UK, Oregon, Evansville and Baltimore locations. Of the five FDA audits,
three were without findings; the audit’s findings in Baltimore in 2005 were
addressed. The audit report for the Oregon location has not yet been received.
The UK facility was found to be compliant with GLP and GCP. There were no
material adverse findings in any of these audits.
We
have
not experienced any significant problems to date in complying with the
regulations of such agencies and do not believe that any existing or proposed
regulations will require material capital expenditures or changes in our method
of operation.
Analytical
Services
Laboratories
that provide information included in INDs, NDAs and PLAs must conform to
regulatory requirements that are designed to ensure the quality and integrity
of
the testing process. Most of our contract research services are subject to
government standards for laboratory practices that are embodied in guidelines
for GLP. The FDA and other regulatory authorities require that test results
submitted to such authorities be based on studies conducted in accordance with
GLP. These guidelines are set out to help the researcher perform work in
compliance with a pre-established plan and standardized procedures. These
guidelines include but are not restricted to:
| · |
Resources –
organization, personnel, facilities and
equipment
|
| · |
Rules
– protocols and written procedures
|
| · |
Characterization
– test items and test systems
|
| · |
Documentation
– raw data, final report and
archives
|
| · |
Quality
assurance unit – formalized internal audit
function
|
We
must
also maintain reports for each study for specified periods for auditing by
the
study sponsor and by the FDA or similar regulatory authorities in other parts
of
the world. Noncompliance with GLP can result in the disqualification of data
collection during the preclinical trial.
Preclinical
Services
Our
animal research facilities are subject to a variety of federal and state laws
and regulations, including The Animal Welfare Act and the rules and regulations
enforced by the United States Department of Agriculture ("USDA") and the
National Institutes of Health ("NIH"). These regulations establish the standards
for the humane treatment, care and handling of animals by dealers and research
facilities. Our animal research facilities maintain detailed standard operating
procedures and the documentation necessary to comply with applicable regulations
for the humane treatment of the animals in our custody. Besides being licensed
by the USDA as a research facility, we are also accredited by the Association
for Assessment and Accreditation of Laboratory Animal Care International
("AAALAC") and have registered assurance with the NIH.
8
Clinical
Services
Our
Clinical Research Unit in Baltimore is principally subject to GCP guidelines
that cover activities such as obtaining informed consent, verifying
qualifications of investigators, complying with Standard Operating Procedures
("SOP"), reporting adverse reactions to drugs and maintaining thorough and
accurate records. We must maintain source documents for each study for specified
periods. Such documents are frequently reviewed by the study sponsor during
visits to our facility and may be reviewed by the FDA during audits. In the
fall
of 2005, the facility was audited by the FDA. The FDA cited areas for needed
improvement. We have addressed and responded to the FDA concerns.
We
are
subject to regulation and inspection by local, state, federal and foreign
agencies where our facilities are located. We have not experienced any
significant problems to date in complying with the regulations of such agencies
and do not believe that any existing or proposed regulations will require
material capital expenditures or changes in our method of
operation.
Quality
Assurance and Information Technology
To
assure
compliance with applicable regulations, we have established quality assurance
programs at our facilities that audit test data, train personnel and review
procedures and regularly inspect facilities. In addition, FDA regulations and
guidelines serve as a basis for our SOPs where applicable. On an ongoing basis,
we endeavor to standardize SOPs across all relevant operations. In addition,
we
have both developed and purchased software to ensure compliant documentation,
handling and reporting of all laboratory-generated study data. In fiscal 2004,
we purchased similar 21 CFR Part 11 compliant software for our preclinical
research group. At the end of fiscal 2007, our laboratory operations were fully
in compliance with 21 CFR Part 11, in our analytical, bioanalytical, toxicology,
lab information management, and document management systems. All of these
systems were also formally validated and released for use in regulated
studies.
Also
in
fiscal 2004, we initiated an implementation of a new Enterprise Resource
Planning ("ERP") system, which was launched at all of our locations in the
third
quarter of fiscal 2005. The implementation of this system is ongoing, with
various additional phases planned for fiscal 2008. The introduction of a new
ERP
system is part of our response to the Sarbanes-Oxley Act of 2002 (the
"Act"). We determined that it was not practical to comply with the control,
documentation and testing requirements of Section 404 of the Act while operating
on different, decentralized, obsolete systems at our various locations. As
part
of the implementation of the new system, documentation has been and will
continue to be developed, and testing procedures initiated, in preparing for
management's assessment and report on internal controls over financial reporting
required by the Act for fiscal 2008. Although we are working diligently to
ensure that the ERP system and related procedures will be adequately installed
and successfully tested by September 30, 2008, there can be no assurance that
all necessary procedures required by the Act will be completed by that
date.
Controlled,
Hazardous, and Environmentally Threatening Substances
Some
of
our 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. We maintain
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, we are subject to other federal and state
regulations concerning such matters as occupational safety and health and
protection of the environment.
Our
U.S.
laboratories are subject to licensing and regulation under federal, state and
local laws relating to hazard communication and employee right-to-know
regulations, the handling and disposal of medical specimens and hazardous waste,
as well as the safety and health of laboratory employees. All of our
laboratories are subject to applicable federal and state laws and regulations
relating to the storage and disposal of all laboratory specimens, including
the
regulations of the Environmental Protection Agency, the Department of
Transportation, the National Fire Protection Agency and the Resource
Conservation and Recovery Act. Although we believe that we are currently in
compliance in all material respects with such federal, state and local laws,
failure to comply could subject us to denial of the right to conduct business,
fines, criminal penalties and other enforcement actions.
The
regulations of the U.S. Department of Transportation, the U.S. Public Health
Service and the U.S. Postal Service apply to the surface and air transportation
of laboratory specimens. Our laboratories also comply with the International
Air
Transport Association regulations which govern international shipments of
laboratory specimens. Furthermore, when materials are sent to a foreign country,
the transportation of such materials becomes subject to the laws, rules and
regulations of such foreign country.
9
Safety
In
addition to comprehensive regulation of safety in the workplace, the
Occupational Safety and Health Administration has established extensive
requirements relating to workplace safety for health care employers whose
workers may be exposed to blood-borne pathogens such as HIV and the hepatitis
B
virus. These regulations, among other things, require work practice controls,
protective clothing and equipment, training, medical follow-up, vaccinations
and
other measures designed to minimize exposure to chemicals, and transmission
of
blood-borne and airborne pathogens. Furthermore, relevant employees receive
initial and periodic training focusing on compliance with applicable hazardous
materials regulations and health and safety guidelines.
HIPAA
The
Department of Health and Human Services has promulgated final regulations under
the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") that
govern the disclosure of confidential medical information in the United States.
We have had a global privacy policy in place since January 2001 and believe
that
we are in compliance with the current European Union and HIPAA requirements.
Nevertheless, we will continue to monitor our compliance with these regulations,
and we intend to take appropriate steps to ensure compliance as these and other
privacy regulations come into effect.
Product
Liability and Insurance
We
maintain product liability and professional errors and omissions liability
insurance, providing approximately $3.0 million in coverage on a claims-made
basis. Additionally, in certain circumstances, we seek to manage our liability
risk through contractual provisions with clients requiring us to be indemnified
by the client or covered by clients' product liability insurance policies.
Also,
in certain types of engagements, we seek to limit our contractual liability
to
clients to the amount of fees received. The contractual arrangements are subject
to negotiation with clients, and the terms and scope of such indemnification,
liability limitation and insurance coverage vary by client and
project.
Research
and Development
In
fiscal
2007, 2006 and 2005, we spent $881, $1,444, and $1,326, respectively, on
research and development. Separate from our contract research services business,
we maintain applications research and development to enhance our products
business.
Expenditures
cover hardware and software engineering costs, laboratory supplies, animals,
drugs and reagents, labor, prototype development and laboratory demonstrations
of new products and applications for those products.
Intellectual
Property
We
believe that our patents, trademarks, copyrights and other proprietary rights
are important to our business and, accordingly, we actively seek protection
for
those rights both in the United States and abroad. Where we deem it to be an
appropriate course of action, we will vigorously prosecute patent infringements.
We do not believe, however, that the loss of any one of our patents, trademarks,
copyrights or other proprietary rights would be material to our consolidated
revenues or earnings.
We
currently hold nine federally registered trademarks, as well as one copyright
registration for software. We also maintain a small pool of issued and pending
patents. Most of these patents are related to our Culex® or in
vivo product
line. Of these patents, most are either issued or pending in the United States,
although there are also patents issued and pending in the European Union and
Japan. Although we believe that at least two of these patents are important
to
the Culex® product line, the success of the Culex® business is not dependent on
the intellectual property rights because we also generate client value through
continuing client support, hardware and software upgrades, system reliability
and accuracy. In addition to these formal intellectual property rights, we
rely
on trade secrets, unpatented know-how and continuing applications research
which
we seek to protect through means of reasonable business procedures, such as
confidentiality agreements. We believe that the greatest value that we generate
for our clients comes from these trade secrets, know-how and applications
research.
10
Raw
Materials
There
are
no specialized raw materials that are particularly essential to our business.
We
have a variety of alternative suppliers for our essential
components.
Employees
At
September 30, 2007, we had 306 full-time employees. All employees enter into
confidentiality agreements intended to protect our proprietary information.
We
believe that our relations with our employees are good. None of our employees
are represented by a labor union. Our performance depends on our ability to
attract and retain qualified professional, scientific and technical staff.
The
level of competition among employers for skilled personnel is high. We believe
that our employee benefit plans enhance employee morale, professional commitment
and work productivity and provide an incentive for employees to remain with
the
Company.
Executive
Officers of the Registrant
The
following table illustrates information concerning the persons who served as
our
executive officers as of September 30, 2007. Except as indicated in the
following paragraphs, the principal occupations of these persons has not changed
in the past five years. Officers are elected annually at the annual meeting
of
the board of directors.
|
Age
|
Position
|
|
|
67
|
President
and Chief Executive Officer
|
|
|
Ronald
E. Shoup, Ph.D.
|
55
|
Chief
Operating Officer, BASi Contract Research Services
|
|
Michael
R. Cox
|
60
|
Vice
President, Finance; Chief Financial Officer; Treasurer
|
|
Edward
M. Chait, Ph.D.
|
65
|
Executive
Vice President; Chief Scientific Officer
|
|
Craig
S. Bruntlett, Ph.D.
|
58
|
Senior
Vice President, Sales Development
|
|
Lina
L. Reeves-Kerner
|
56
|
Vice
President, Human Resources
|
Richard
M. Shepperd was
elected President and Chief Executive Officer of the Company in September
2006,
and in May, 2007 agreed to extend his term until December 2009. Mr. Shepperd
served for two years prior to joining the Company with Able Laboratories,
Inc.,
of Cranbury, New Jersey ("Able") as its Chief Restructuring Officer and Director
of Restructuring. Able was formerly a generic pharmaceutical manufacturing
company which filed a voluntary petition for bankruptcy on July 18, 2005
following the loss of FDA approval for its product line. Mr. Shepperd's duties
for Able included exercising executive authority over all operational and
restructuring activities of Able, which included advising its Board, creditors
committee and courts regarding strategies to maintain and realize the most
value
from the company's assets. Able was not affiliated with the Company. For
the two
years prior to serving with Able, Mr. Shepperd served as an independent
management consultant for various businesses. In that capacity, he advised
these
businesses on developing strategies to improve their financial health and
maximize the assets of those organizations.
Ronald
E. Shoup, Ph.D. served
as
Chief Operating Officer of the Company's Contract Research Services and was
Managing Director of Bioanalytical Systems, Ltd. in the UK. His responsibilities
included directing operations at the Company's Contract Research Services
sites.
In October 2007, Dr. Shoup was appointed Chief Scientific Officer, assuming
responsibility for the scientific direction of the Company and ceasing his
operational duties. He joined the Company in 1980 as an applications chemist,
became Research Director in 1983 and launched the Contract Research Services
group within the Company in 1988. Dr. Shoup has a Bachelor of Science degree
in
Mathematics and Chemistry from Purdue University and then attended Michigan
State and Purdue University for his Ph.D. in Analytical Chemistry.
Dr.
Shoup
has served on the editorial board of the Journal of Chromatography, participated
in NIH Special study sections, and is a member of the external advisory board
to
the Purdue University Department of Chemistry. He has published over 40
scientific papers.
Michael
R. Cox
has been
Vice President, Finance, Chief Financial Officer and Treasurer since April
2004.
In October 2007 he assumed the additional duties of Chief Administrative
Officer. He was Vice President, Finance and CFO of Integrity Pharmaceutical
Corporation, a private specialty pharmaceutical company, from October, 2003
until its acquisition and merger in March, 2004. Prior to that he was Senior
Vice President, Finance of Intergen Company, a private biotech manufacturing
and
research products company, from 1997 until its acquisition in 2001, and
continued with the acquirer, Serologicals Corporation, on special projects
until
joining Integrity. Prior to that, Mr. Cox held various executive positions
in
two environmental services firms and an investment firm. He was a partner
in
Touche Ross & Co., where he began his career after obtaining a BS in
business administration from the University of North Carolina.
11
Edward
M. Chait, Ph.D. had
been
Executive Vice President, Chief Scientific Officer since August, 2005. In
October 2007, he relinquished that position and became Chief Business Officer,
responsible for operations across the Company’s products and services. Prior to
joining the Company, from August 2003, Dr. Chait served as the Chief Executive
Officer of Spectral Genomics, Inc., a developer of products and services
related
to molecular genetics and diagnostics enabling the identification of the
causal
factors of disease at the genetic level. From 2001 to 2003, Dr. Chait served
as
the Chief Executive Officer of PharmaCore, Inc., a small-molecule drug discovery
company providing molecular building blocks, custom organic synthesis and
GMP
services to biotechnology and pharmaceutical companies. From 1991 to 2001,
Dr.
Chait was Senior Vice President in charge of Business Development for Intergen
Company, a private biotech manufacturing and research products company. Since
2002, Dr. Chait has also served as an advisor to the Purdue Cancer Center,
a
National Cancer Center designated basic-research cancer center. From 1968
to
1991, Dr. Chait held positions of increasing responsibility in marketing
and
business development at DuPont in instrument and life science products. Dr.
Chait has a Ph.D. in chemistry from Purdue.
Craig
S. Bruntlett, Ph.D.
has been
Senior Vice President of Sales development since September 2005. Prior to that,
he was Senior Vice President of International Sales from 1999. From 1992 to
1999
he was Vice President, Electrochemical Products. From 1980 to 1990, Dr.
Bruntlett was Director of New Products Development for the Company. Dr.
Bruntlett has a Bachelor of Arts degree in Chemistry and Mathematics from St.
Cloud State University in Minnesota and a Ph.D. in Chemistry from Purdue
University.
Lina
L. Reeves-Kerner
has been
Vice President, Human Resources since 1995 and is responsible for the
administrative support functions of the Company, including shareholder
relations, human resources and community relations. From 1980 to 1990, Ms.
Reeves-Kerner served as an Administrative Assistant with the Company. Ms.
Reeves-Kerner has a Bachelor of Science degree in Business Administration from
Indiana Wesleyan University.
Investor
Information
We
file
various reports with, or furnish them to, the Securities and Exchange Commission
(the “SEC”), including our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to such reports. These reports
are available free of charge upon written request or by visiting www.bioanalytical.com/invest.
Other
media inquiries and requests for reports or investor’s kits should be directed
to:
Corporate
Communications Director, Corporate Center
2701
Kent
Avenue, West Lafayette, IN 47906 USA
Inquiries
from shareholders, security analysts, portfolio managers, registered
representatives and other interested parties should be directed to:
BASi
Investor Relations, NASDAQ: BASi
Phone
765-463-4527, fax 765-497-1102,
basi@bioanalytical.com,
www.bioanalytical.com
ITEM
1A - RISK FACTORS
Our
business is subject to many risks and uncertainties, which may affect our future
financial performance. If any of the events or circumstances described below
occurs, our business and financial performance could be adversely affected,
our
actual results could differ materially from our expectations and the market
value of our stock could decline. The risks and uncertainties discussed below
are not the only ones we face. There may be additional risks and uncertainties
not currently known to us or that we currently do not believe are material
that
may adversely affect our business and financial performance.
12
A
reduction in research and development budgets at pharmaceutical and
biotechnology companies may adversely affect our business.
Our
customers include researchers at pharmaceutical and biotechnology companies.
Our
ability to continue to grow and win new business is dependent in large part
upon
the ability and willingness of the pharmaceutical and biotechnology industries
to continue to spend on research and development and to outsource the products
and services we provide. Fluctuations in the research and development budgets
of
these researchers and their organizations could have a significant effect on
the
demand for our products and services. Research and development budgets fluctuate
due to changes in available resources, mergers of pharmaceutical and
biotechnology companies, spending priorities and institutional budgetary
policies. Our business could be adversely affected by any significant decrease
in life sciences research and development expenditures by pharmaceutical and
biotechnology companies. Similarly, economic factors and industry trends that
affect our clients in these industries also affect our business.
Our
future success depends on our ability to keep pace with rapid technological
changes that could make our services and products less competitive or obsolete.
The
biotechnology, pharmaceutical and medical device industries generally and
contract research (“CRO”) services more specifically are subject to increasingly
rapid technological changes. Our competitors or others might develop
technologies, services or products that are more effective or commercially
attractive than our current or future technologies, services or products, or
that render our technologies, services or products less competitive or obsolete.
If competitors introduce superior technologies, services or products and we
cannot make enhancements to ours to remain competitive, our competitive
position, and in turn our business, revenues and financial condition, would
be
materially and adversely affected.
The
CRO services industry is highly competitive.
The
CRO
services industry is highly competitive. We often compete for business not
only
with other CRO companies, but also with internal discovery and development
departments within our clients, some of which are large pharmaceutical and
biotechnology companies with greater resources than we have. If we do not
compete successfully, our business will suffer. The industry is highly
fragmented, with numerous smaller specialized companies and a handful of
full-service companies with global capabilities much larger than ours. Increased
competition might lead to price and other forms of competition that might
adversely affect our operating results. As a result of competitive pressures,
our industry experienced consolidation in recent years. This trend is likely
to
produce more competition among the larger companies for both clients and
acquisition candidates. In addition, there are few barriers to entry for smaller
specialized companies considering entering the industry. Because of their size
and focus, these companies might compete effectively against larger companies
such as us, which could have a material adverse impact on our business.
The
loss of our key personnel could adversely affect our
business.
Our
success depends to a significant extent upon the efforts of our senior
management team and other key personnel. The loss of the services of such
personnel could adversely affect our business. Also, because of the nature
of
our business, our success is dependent upon our ability to attract, train,
manage and retain technologically qualified personnel. There is substantial
competition for qualified personnel, and an inability to recruit or retain
qualified personnel may impact our ability to grow our business and compete
effectively in our industry.
Any
failure by us to comply with existing regulations could harm our reputation
and
operating results.
Any
failure on our part to comply with existing regulations could result in the
termination of ongoing research or the disqualification of data for submission
to regulatory authorities. This would harm our reputation, our prospects for
future work and our operating results. Furthermore, the issuance of a notice
from the FDA based on a finding of a material violation by us of good clinical
practice, good laboratory practice or good manufacturing practice requirements
could materially and adversely affect our business and financial performance.
Proposed
and future legislation or regulations might increase the cost of our business
or
limit our service or product offerings.
Federal
or state authorities might adopt healthcare legislation or regulations that
are
more burdensome than existing regulations. Changes in regulation could increase
our expenses or limit our ability to offer some of our services or products.
13
Our
business uses biological and hazardous materials, which could injure people
or
violate laws, resulting in liability that could adversely impact our financial
condition and business.
Our
activities involve the controlled use of potentially harmful biological
materials, as well as hazardous materials, chemicals and various radioactive
compounds. We cannot completely eliminate the risk of accidental contamination
or injury from the use, storage, handling or disposal of these materials. In
the
event of contamination or injury, we could be held liable for damages that
result, and any liability could exceed our ability to pay. Any contamination
or
injury could also damage our reputation, which is critical to getting new
business. In addition, we are subject to federal, state and local laws and
regulations governing the use, storage, handling and disposal of these materials
and specified waste products. The cost of compliance with these laws and
regulations is significant and if changes are made to impose additional
requirements, these costs could increase and have an adverse impact on our
financial condition and results of operations.
The
majority of our customers’ contracts can be terminated upon short notice.
Most
of
our contracts for CRO services are terminable by the client upon 30 to 90 days’
notice. Clients terminate or delay their contracts for a variety of reasons,
including but not limited to:
|
|
•
|
products
being tested fail to satisfy safety requirements;
|
|
|
•
|
products
have undesired clinical results;
|
|
|
•
|
the
client decides to forego a particular study;
|
|
|
•
|
inability
to enroll enough patients in the study;
|
|
|
•
|
inability
to recruit enough investigators;
|
|
|
•
|
production
problems cause shortages of the drug; and
|
|
|
•
|
actions
by regulatory authorities.
|
The
termination of one or more significant contracts could have a material adverse
effect on our business and
financial
performance.
Our
Products business depends on our intellectual property.
Our
products business is dependent, in part, on our ability to obtain patents in
various jurisdictions on our current and future technologies and products,
to
defend our patents and protect our trade secrets and to operate without
infringing on the proprietary rights of others. There can be no assurance that
our patents will not be challenged by third parties or that, if challenged,
those patents will be held valid. In addition, there can be no assurance that
any technologies or products developed by us will not be challenged by third
parties owning patent rights and, if challenged, will be held not to infringe
on
those patent rights. The expense involved in any patent litigation can be
significant. We also rely on unpatented proprietary technology, and there can
be
no assurance that others will not independently develop or obtain similar
products or technologies.
We
might incur substantial expense to develop products that are never successfully
developed and commercialized.
We
have
incurred and expect to continue to incur substantial research and development
and other expenses in connection with our products business. The potential
products to which we devote resources might never be successfully developed
or
commercialized by us for numerous reasons, including:
|
|
•
|
Inability
to develop products that address our customers’ needs;
|
|
|
•
|
competitive
products with superior performance;
|
|
|
•
|
patent
conflicts or unenforceable intellectual property rights;
|
|
|
•
|
demand
for the particular product; and
|
|
|
•
|
other
factors that could make the product uneconomical.
|
Incurring
significant expenses for a potential product that is not successfully developed
and/or commercialized could have a material adverse effect on our business,
financial condition, prospects and stock price.
We
dose human volunteers with new drug candidates in our clinical
operations.
Our
clinical research services involve the introduction of experimental
pharmaceutical compounds into consenting human volunteers during the studies
of
such compounds. This activity may expose us to liability as a result of adverse
reactions of these volunteers to the compounds being tested. We seek to limit
our risk through “hold harmless” provisions with the volunteers, obtaining
indemnity from the sponsors, and by maintaining insurance. We bear the risk
that
these agreements may not protect us from liabilities, that our insurance may
not
be sufficient to cover our losses, and that such insurance may no longer be
available on terms acceptable to us.
14
Providing
CRO services create a risk of liability.
In
certain circumstances, we seek to manage our liability risk through contractual
provisions with clients requiring us to be indemnified by the client or covered
by the clients’ product liability insurance policies. Although most of our
clients are large, well-capitalized companies, the financial performance of
these indemnities is not secured. Therefore, we bear the risk that the
indemnifying party may not have the financial ability to fulfill its
indemnification obligations or the liability would exceed the amount of
applicable insurance. Furthermore, we could be held liable for errors and
omissions in connection with the services we perform. There can be no assurance
that our insurance coverage will be adequate, or that insurance coverage will
continue to be available on acceptable terms, or that we can obtain
indemnification arrangements or otherwise be able to limit our liability
risk.
If
we are unable to attract suitable willing volunteers for our clinical trials,
our clinical research business might suffer.
The
clinical research studies we run in our Baltimore laboratory rely upon the
ready
accessibility and willing participation of volunteer subjects. Volunteer
subjects generally include people from the communities in which the studies
are
conducted, including our Phase I clinic in Baltimore, Maryland, which to date
has provided a substantial pool of potential subjects for research studies.
Our
clinical research development business could be adversely affected if we were
unable to attract suitable and willing volunteers on a consistent
basis.
We
may expand our business through acquisitions.
We occasionally review
acquisition candidates and, in addition to acquisitions which we have already
made, we are continually evaluating new acquisition opportunities. Factors
which
may affect our ability to grow successfully through acquisitions
include:
| · |
difficulties
and expenses in connection with integrating the acquired companies
and
achieving the expected benefits;
|
| · |
diversion
of management’s attention from current
operations;
|
| · |
the
possibility that we may be adversely affected by risk factors facing
the
acquired companies;
|
| · |
acquisitions
could be dilutive to earnings, or in the event of acquisitions made
through the issuance of our common stock to the shareholders of the
acquired company, dilutive to the percentage of ownership of our
existing
stockholders;
|
| · |
potential
losses resulting from undiscovered liabilities of acquired companies
not
covered by the indemnification we may obtain from the seller;
and
|
| · |
loss
of key employees of the acquired
companies.
|
Changes
in government regulation or in practices relating to the pharmaceutical industry
could change the need for the services we provide.
Governmental
agencies throughout the world, but particularly in the United States, strictly
regulate the drug development process. Our business involves helping
pharmaceutical and biotechnology companies comply with the regulatory drug
approval process. Changes in regulation, such as a relaxation in regulatory
requirements or the introduction of simplified drug approval procedures, or
an
increase in regulatory requirements that we have difficulty satisfying, or
that
make our services less competitive, could substantially change the demand for
our services. Also, if the government increases efforts to contain drug costs
and pharmaceutical and biotechnology company profits from new drugs, our
customers may spend less, or reduce their growth in spending on research and
development.
Privacy
regulations could increase our costs or limit our
services.
The
US
Department of Health and Human Services has issued regulations under the Health
Insurance Portability and Accountability Act of 1996 (“HIPAA”). These
regulations demand greater patient privacy and confidentiality. Some state
governments are considering more stringent regulations. These regulations might
require us to increase our investment in security or limit the services we
offer. We could be found legally liable if we fail to meet existing or proposed
regulation on privacy and security of health information.
15
We
might lose business opportunities as a result of healthcare reform.
Numerous
governments have undertaken efforts to control growing healthcare costs through
legislation, regulation and voluntary agreements with healthcare providers
and
drug companies. Healthcare reform could reduce demand for our services and
products, and, as a result, our revenue. In the last several years, the U.S.
Congress and some U.S. states have reviewed several comprehensive health care
reform proposals. The proposals are intended to expand healthcare coverage
for
the uninsured and reduce the growth of total healthcare expenditures. The U.S.
Congress has also considered and may adopt legislation that could have the
effect of putting downward pressure on the prices that pharmaceutical and
biotechnology companies can charge for prescription drugs. Any such legislation
could cause our customers to spend less on research and development. If this
were to occur, we would have fewer opportunities for our business, which could
reduce our earnings. Similarly, pending or future healthcare reform proposals
outside the United States could negatively impact our revenues from our
international operations.
Reliance
on air transportation.
Our
laboratories and certain of our other businesses are heavily reliant on air
travel for transport of samples and other material, products and people, and
a
significant disruption to the air travel system, or our access to it, could
have
a material adverse effect on our business.
We
have experienced periods of losses on our operating
activities.
Our
overall strategy includes increasing revenue and reducing/controlling operating
expenses. We have concentrated our efforts in ongoing, Company-wide efficiency
activities intended to increase productivity and reduce costs including
personnel reductions, reduction or elimination of non-personnel expenses and
realigning and streamlining operations. We cannot assure that our efforts will
result in increased profitability for any meaningful period of
time.
We
continue to experience operating losses in our Baltimore Phase I
clinic.
Since
our
acquisition of the clinic in 2003, it has experienced significant
operating losses. In fiscal 2006, we recognized an impairment loss on the
clinic's assets as a result of losing a major client. In the current fiscal
year, we have recruited a new management team for the clinic and continue to
invest to develop that business; however, there can be no assurance that we
will
be successful in our efforts.
The
outsourcing trend in the biotechnology and pharmaceutical industries may
decrease, which could slow our growth.
Over
the
past several years, some areas of our businesses have grown significantly as
a
result of the increase in pharmaceutical and biotechnology companies outsourcing
their preclinical and clinical research support activities. We believe that
due
to the significant investment in facilities and personnel required to support
drug development, pharmaceutical and biotechnology companies look to outsource
some or all of those services. By doing so, they can focus their resources
on
their core competency of drug discovery, while obtaining the outsourced services
from a full-service provider like us. While industry analysts expect the
outsourcing trend to continue for the next several years, a decrease in
preclinical and/or clinical outsourcing activity could result in a diminished
growth rate in the sales of one or more of our expected higher-growth areas
and
adversely affect our financial condition and results of operations. Furthermore,
our customer contracts are generally terminable on little or no notice.
Termination of a large contract or multiple contracts could adversely affect
our
sales and profitability.
Our
previous independent registered public accounting firm advised management and
our audit committee that they identified material weaknesses in our internal
controls as of June 30, 2006. The material weaknesses noted consisted of a
failure to set an appropriate "tone at the top" to instill a company-wide
attitude of control consciousness; failure to maintain adequate procedures
for
anticipating and identifying financial reporting risks and for reacting to
changes in its operating environment that could have a material effect on
financial reporting; failure to maintain adequately trained personnel to perform
effective review of accounting procedures critical to financial reporting;
and a
lack of adequately trained finance and accounting personnel with the ability
to
apply U.S. generally accepted accounting principles associated with the
impairment of certain long-lived assets in accordance with Statement of
Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.
Management concurred with the assessment at that time. Our business and stock
price may be adversely affected by these identified material weaknesses if
such
material weaknesses recur or if we have other material weaknesses in our
internal controls.
16
As
we
disclose in Part II, Item 9A, "Controls and Procedures" of this Form 10-K,
our
management and previous independent accountants concluded that a material
weakness existed in our internal controls as of June 30, 2006. We have
instituted measures to address these risks. We believe these actions have
addressed the weaknesses cited by our previous independent accountants. However,
any failure to maintain the improvements in the controls over our financial
reporting, could cause us to fail to meet our reporting obligations. Any
failure
to improve our internal controls to address the identified material weaknesses
could also cause investors to lose confidence in our reported financial
information, which could harm our operations or results or cause us to fail
to
meet our reporting obligations, and could have a negative impact on the trading
price of our stock. We cannot be certain that any steps we may have taken
to
improve our internal controls to address the identified material weaknesses
will
ensure that we implement and maintain adequate controls over our financial
processes and reporting in the future.
ITEM
1B- UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
2-PROPERTIES
We
operate in the following locations, all of which we own, except as otherwise
indicated:
• West
Lafayette, IN:
principal executive offices are located at 2701 Kent Avenue, West Lafayette,
Indiana 47906, and constitutes multiple buildings with approximately 135,000
square feet of operations, manufacturing, and administrative space. Both
the
services segment and the products segment conduct operations at this facility.
A
new 20,000 square foot Absorption, Distribution, Metabolism and Excretion
(ADME)
preclinical research facility became fully functional in April, 2005. It
is
custom-designed to provide contract pharmacokinetic and ADME research services
based on its Culex® Automated Pharmacology system. Both the new facility and the
prior portion of the building have been financed by mortgages.
• BAS
Evansville occupies
10 buildings with roughly 100,000 square feet of operating and administrative
space on 52 acres. Most of this site is engaged in preclinical toxicology
testing of developmental drugs in animal models. A recent addition was financed
by a mortgage.
• BASi
Clinical Research Unit (BASi
Maryland) in Baltimore, Maryland occupies a seven story, 126,000 square foot
historic building in downtown Baltimore. On January 5, 2005, this building
was
sold to a developer. We, then, entered into a three-year lease back with
the
developer for approximately 85% of the space in the building. On January
5, 2008
we will begin a new seven year lease, with two possible five-year extensions,
on
46,000 square feet of the existing premises, reducing our occupancy to 37%
of
the building, in line with our space needs in the facility. Included in our
new
lease are significant landlord improvements to both our space and the common
areas of the building. This site contains a 110-bed, three ward, Phase I
Clinical Trials facility along with administrative offices committed to
recruitment and enrollment of study participants, medical and clinical trials
staff, and data management.
• Bioanalytical
Systems, Ltd.,
Warwickshire, UK contains our contract services and instruments operations
in
roughly 12,000 square feet of leased space for laboratories, sales and technical
support services in the U.K. In April 2008 we anticipate moving into newly
constructed laboratory space in the same office park. Our new space of
approximately 7,000 square feet is specifically designed for laboratory use
and
will allow us to potentially double capacity over our present
space.
• BASi
Northwest Laboratory is
in
McMinnville, Oregon, approximately 40 miles from Portland. We lease roughly
8,600 square feet of laboratory and administrative space, principally used
for
bioanalytical services.
We
believe that our facilities are adequate for our operations and that suitable
additional space will be available if and when needed. The terms of any
mortgages and leases for the above properties are detailed in Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, and Notes 4, 6 and 7 to the Notes to Consolidated Financial
Statements.
17
ITEM
3-LEGAL PROCEEDINGS
We
currently do not have any pending legal proceedings.
ITEM
4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not
applicable.
PART
II
ITEM
5-MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Our
common stock is traded on the NASDAQ National Market System under the symbol
“BASi.” The following table sets forth the quarterly high and low sales price
per share of our common stock from October 1, 2005 through September 30,
2007.
|
|
High
|
Low
|
|||||
|
Fiscal
Year Ended September 30, 2006
|
|||||||
|
First
Quarter
|
$
|
6.40
|
$
|
4.75
|
|||
|
Second
Quarter
|
7.21
|
5.68
|
|||||
|
Third
Quarter
|
7.80
|
5.86
|
|||||
|
Fourth
Quarter
|
7.64
|
4.75
|
|||||
|
Fiscal
Year Ended September 30, 2007
|
|||||||
|
First
Quarter
|
$
|
5.74
|
$
|
4.98
|
|||
|
Second
Quarter
|
7.36
|
5.25
|
|||||
|
Third
Quarter
|
7.80
|
6.60
|
|||||
|
Fourth
Quarter
|
7.82
|
6.54
|
|||||
Holders
There
were approximately 2,700 holders of record of our common stock as of December
5,
2007.
Dividends
We
have
not paid any cash dividends on our common shares and do not anticipate paying
cash dividends in the foreseeable future.
18
Stock
Performance Graph
The
following graph shows a comparison of cumulative total returns for an investment
in our Common Stock, the NASDAQ Composite Index and a Peer Group. It covers
the
period commencing September 30, 2002 and ending September 30, 2007. The graph
assumes that the value for the investment in our common stock and in each index
was $100 on September 30, 2002 and that all dividends were reinvested. This
graph is not deemed to be “soliciting material” or to be “filed” with the SEC or
subject to the SEC’s proxy rules or to the liabilities of Section 18 of the
1934 Act, and the graph shall not be deemed to be incorporated by reference
into any prior or subsequent filing by us under the Securities Act of 1933,
as
amended, or the 1934 Act. The
Peer
Group consists of Bio-RAD Laboratories Inc., Covance Inc., Encorium Group Inc.,
Gene Logic Inc., Kendle International Inc., OI Corp. and Pharmaceutical Product
Development Inc.
[Remainder
of page intentionally left blank.]
19
Equity
Compensation Plan Information
We
maintain stock option plans that allow for the granting of options to certain
key employees and directors. The following table gives information about equity
awards under our stock option plans
(in
thousands except per share amounts):
|
Plan Category
|
Number of Securities to be
Issued upon Exercise of
Outstanding Options
|
Weighted Average
Exercise Price of
Outstanding Options
|
Number of Securities
Remaining Available for Future
Issuance under the Equity
Compensation Plan
(Excluding Securities Reflected
in First Column)
|
|||||||
|
Equity
compensation plans approved by security holders
|
240
|
|
$
5.08
|
347
|
||||||
|
|
|
|
||||||||
|
Equity
compensation plans not approved by security
holders(1)
|
50
|
$
5.14
|
—
|
|||||||
|
|
|
|||||||||
|
Options
issuable to officer upon approval by shareholders
(2)
|
275
|
|
$
7.10
|
—
|
||||||
|
|
||||||||||
|
Total
|
615
|
|
$
6.00
|
347
|
||||||
(1)
Includes option to purchase 25 shares at $4.57 granted April 1, 2004, and
25 shares at $5.69 granted August 1, 2005. Each of these grants is fully
vested and expire after 10 years.
(2)
Options granted to Richard M. Shepperd, President and CEO, to purchase shares
at
$7.10 per share. These options are contingent upon shareholder approval at
the
next shareholders' meeting. In the event such approval is not attained, the
Company will make cash payments on each vesting date equal to the value that
would have been realized on the options vesting on that date. In addition,
45,000 nonqualified options were granted to each of Edward M. Chait and Michael
R. Cox on November 6, 2007. These options are also contingent upon shareholder
approval that the next shareholders’ meeting. These options are not included in
the table above. The exercise price of these options is $8.60 per
share.
For
additional information regarding our stock option plans approved by security
holders, please see Note 9 to the Notes to Consolidated Financial
Statements included in Item 8 of this report.
[Remainder
of page intentionally left blank.]
20
ITEM
6-SELECTED FINANCIAL DATA
BASi
SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL DATA
|
Year Ended September 30,
|
||||||||||||||||
|
STATEMENT
OF OPERATIONS DATA:
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||
|
(in
thousands, except per share data)
|
|
|
|
|||||||||||||
|
Service
revenue
|
$
|
36,051
|
$
|
34,318
|
$
|
32,951
|
$
|
24,928
|
$
|
19,987
|
||||||
|
Product
revenue
|
9,194
|
8,730
|
9,444
|
12,224
|
9,852
|
|||||||||||
|
Total
revenue
|
45,245
|
43,048
|
42,395
|
37,152
|
29,839
|
|||||||||||
|
|
||||||||||||||||
|
Cost
of service revenue
|
27,544
|
25,691
|
23,589
|
21,348
|
15,625
|
|||||||||||
|
Cost
of product revenue (1)
|
3,909
|
3,647
|
3,426
|
4,224
|
3,866
|
|||||||||||
|
Total
cost of revenue (1)
|
31,453
|
29,338
|
27,015
|
25,572
|
19,491
|
|||||||||||
|
|
||||||||||||||||
|
Gross
profit
|
13,792
|
13,710
|
15,380
|
11,580
|
10,348
|
|||||||||||
|
|
||||||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Selling
|
2,783
|
2,750
|
2,591
|
2,703
|
2,853
|
|||||||||||
|
Research
and development
|
881
|
1,444
|
1,326
|
1,100
|
1,327
|
|||||||||||
|
General
and administrative
|
7,738
|
11,939
|
10,167
|
7,505
|
5,067
|
|||||||||||
|
Impairment
loss
|
|
1,100
|
||||||||||||||
|
Total
Operating Expenses
|
11,402
|
17,233
|
14,084
|
11,308
|
9,247
|
|||||||||||
|
Operating
income (loss) (1)
|
2,390
|
(3,523
|
)
|
1,296
|
272
|
1,101
|
||||||||||
|
Other
(expense), net
|
(891
|
)
|
(1,012
|
)
|
(969
|
)
|
(833
|
)
|
(592
|
)
|
||||||
|
Income
(loss) before income taxes (1)
|
1,499
|
(4,535
|
)
|
327
|
(561
|
)
|
509
|
|||||||||
|
Income
tax expense (benefit) (1)
|
573
|
(1,865
|
)
|
407
|
(386
|
)
|
463
|
|||||||||
|
Net
income (loss) (1)
|
$
|
926
|
$
|
(2,670
|
)
|
$
|
(80
|
)
|
$
|
(175
|
)
|
$
|
46
|
|||
|
Net
income (loss) per share: (1)
|
||||||||||||||||
|
Basic
|
$
|
0.19
|
$
|
(0.55
|
)
|
$
|
(0.02
|
)
|
$
|
(0.04
|
)
|
$
|
0.01
|
|||
|
Diluted
|
$
|
0.19
|
$
|
(0.55
|
)
|
$
|
(0.02
|
)
|
$
|
(0.04
|
)
|
$
|
0.01
|
|||
|
Weighted
average common shares outstanding
|
||||||||||||||||
|
Basic
|
4,909
|
4,883
|
4,870
|
4,860
|
4,655
|
|||||||||||
|
Diluted
|
4,960
|
4,883
|
4,870
|
4,860
|
4,673
|
|||||||||||
|
September 30,
|
||||||||||||||||
|
BALANCE
SHEET DATA:
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||
|
(in
thousands)
|
|
|
|
|||||||||||||
|
Working
capital (deficit) (1)
|
$
|
2,353
|
$
|
3,602
|
$
|
4,782
|
$
|
(406
|
)
|
$
|
(234
|
)
|
||||
|
Property
and equipment, net
|
22,927
|
25,765
|
26,565
|
31,901
|
31,172
|
|||||||||||
|
Goodwill
and other intangible assets, net
|
2,159
|
2,372
|
3,600
|
3,936
|
3,762
|
|||||||||||
|
Total
assets (1)
|
42,037
|
42,364
|
47,949
|
46,884
|
45,046
|
|||||||||||
|
Long-term
debt, less current portion
|
7,861
|
8,186
|
8,579
|
8,893
|
6,949
|
|||||||||||
|
Subordinated
debt
|
4,477
|
4,477
|
4,829
|
5,188
|
5,188
|
|||||||||||
|
Shareholders’
equity (1)
|
18,554
|
17,404
|
19,709
|
19,510
|
19,787
|
|||||||||||
(1)
Amounts have been retrospectively adjusted for our change in 2007 from the
last-in, first-out method of inventory accounting to the first-in, first-out
method.
21
ITEM
7-MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This
report contains statements that constitute forward looking statements within
the
meaning of the Private Securities Litigation Reform Act of 1995. Those
statements appear in a number of places in this Report and may include
statements regarding our intent, belief or current expectations with respect
to,
but are not limited to (i) our strategic plans; (ii) trends in the demand for
our products and services; (iii) trends in the industries that consume our
products and services; (iv) our ability to refinance our debt; (v) our ability
to develop new products and services; and (vi) our ability to make capital
expenditures and finance operations. Readers are cautioned that any such forward
looking statements are not guarantees of future performance and involve risks
and uncertainties. Actual results may differ materially from those in the
forward looking statements as a result of various factors, many of which are
beyond the control of the company.
In
addition, we have based these forward-looking statements on our current
expectations and projections about future events. Although we believe that
the
assumptions on which the forward-looking statements contained herein are based
are reasonable, any of those assumptions could prove to be inaccurate, and
as a
result, the forward-looking statements based upon those assumptions also could
be incorrect. The following discussion and analysis should be read in
conjunction with Selected Consolidated Financial Data and the Consolidated
Financial Statements and notes thereto included or incorporated by reference
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 which are discussed in Item 1A, Risk
Factors. Our actual results could differ materially from those discussed in
the
forward-looking statements. (Amounts in thousands unless otherwise
indicated.)
Overview
The
business of Bioanalytical Systems, Inc. is largely dependent on the level of
pharmaceutical and biotech companies' efforts in new drug discovery and
approval. Our services segment is the direct beneficiary of these efforts,
through outsourcing by these companies of research work, and our products
segment is the indirect beneficiary, as increased drug development leads to
capital expansion providing opportunities to sell the equipment we produce
and
the consumable supplies we provide that support our products.
Developments
within the industries we serve have a direct, and sometimes material, impact
on
our operations. Currently, many large pharmaceutical companies have major
"block-buster" drugs that are nearing the end of their patent protections.
This
puts significant pressure on these companies both to develop new drugs with
large market appeal, and to re-evaluate their cost structures and the
time-to-market of their products. Contract research organizations ("CRO's")
have
benefited from these developments, as the pharmaceutical industry has turned
to
out-sourcing to both reduce fixed costs, and to increase the speed of research
and data development necessary for new drug applications.
The
number of significant drugs that have reached or are nearing the end of their
patent protection has also benefited the generic drug industry. That sector
of
the drug industry has seen significant growth in the past decade, and, we
believe, will continue to experience strong growth in the foreseeable future.
Generic drug companies provide a significant source of new business for CRO's
as
they develop, test and manufacture their generic compounds.
A
significant portion of innovation in the pharmaceutical industry is now being
driven by biotech and small, venture capital funded, drug development companies.
Many of these companies are "single-molecule" entities, whose success depends
on
one innovative compound. While several of the biotech companies have reached
the
status of major pharmaceuticals, the industry is still characterized by smaller
entities. These developmental companies generally do not have the resources
to
perform much of the clinical research within their organizations, and are
therefore dependent on the CRO industry for both their research and for guidance
in preparing their FDA submissions. These companies have provided significant
new opportunities for the CRO industry, including BASi. They do, however,
provide challenges in selling, as they frequently have only one product in
development, which causes CRO's to be unable to develop a flow of projects
from
a single company. These companies may expend all their available funds and
cease
operations prior to fully developing a product. Additionally, the funding of
these companies is subject to investment market fluctuations, which
changes with changes to the risk profile and appetite of
investors.
Although
the past year has not seen large mergers in either the pharmaceutical or CRO
industries, consolidation continues at a smaller pace in the CRO sector. We
believe that consolidation of the CRO sector will continue to be a factor in
our
markets.
22
Research
services are capital intensive. The investment in equipment and facilities
to
serve our markets is substantial and continuing. While our physical facilities
are excellent to meet market needs for the near term, rapid changes in
automation, precision, speed and technologies necessitate a constant investment
in equipment and software to meet market demands. We are also impacted by the
heightened regulatory environment and the need to improve our business
infrastructure to support our increasingly diverse operations, which will
necessitate additional capital investment. Our ability to generate capital
to
reinvest in our capabilities, both through operations and financial
transactions, is critical to our success. While we are currently committed
to
fully utilizing recent additions to our capacity, sustained growth will require
additional investment in future periods.
Results
of Operations
The
following table summarizes the consolidated statement of operations as a
percentage of total revenues:
|
|
Year Ended September 30,
|
|||||||||
|
|
2007
|
2006
|
2005
|
|||||||
|
|
|
|
|
|||||||
|
Service
revenue
|
79.7
|
%
|
79.7
|
%
|
77.7
|
%
|
||||
|
Product
revenue
|
20.3
|
20.3
|
22.3
|
|||||||
|
Total
revenue
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||
|
|
|
|
|
|||||||
|
Cost
of service revenue
(a)
|
76.4
|
74.9
|
71.6
|
|||||||
|
Cost
of product revenue
(a)
|
42.5
|
41.8
|
36.3
|
|||||||
|
Total
cost of revenue
|
69.5
|
68.2
|
63.7
|
|||||||
|
|
||||||||||
|
Gross
profit
|
30.5
|
31.8
|
36.3
|
|||||||
|
|
||||||||||
|
Total
operating expenses
|
25.2
|
40.0
|
33.2
|
|||||||
|
|
||||||||||
|
Operating
income (loss)
|
5.3
|
(8.2
|
)
|
3.1
|
||||||
|
|
||||||||||
|
Other
(expense)
|
(2.0
|
)
|
(2.3
|
)
|
(2.3
|
)
|
||||
|
|
||||||||||
|
Income
(loss) before income taxes
|
3.3
|
(10.5
|
)
|
0.8
|
||||||
|
|
||||||||||
|
Income
tax expense (benefit)
|
1.3
|
(4.3
|
)
|
1.0
|
||||||
|
|
|
|
|
|||||||
|
Net
income (loss)
|
2.0
|
%
|
(6.2
|
)%
|
(0.2
|
)%
|
||||
(a)
Percentage of service and product revenues, respectively.
During
2007, we changed our method of accounting for our inventories from the last-in,
first-out (LIFO) method to the first-in, first-out (FIFO) method. Fiscal 2005
and 2006 have been retrospectively adjusted on a FIFO basis.
2007
Compared to 2006
Service
and Product Revenues
Total
revenue for the year ended September 30, 2007 increased 5.1% to $45.2 million
from $43.0 million for the year ended September 30, 2006. Service revenue
increased to $36.1 million for the year ended September 30, 2007 from $34.3
million for the year ended September 30, 2006, an increase of 5.2%. This
increase was the result of 20.4% growth in our toxicology business and a 1.3%
growth in our bioanalytical laboratories, offset by a 7.1% decline in revenues
of our clinical research unit. The revenue decline in our clinical research
unit
was the result of the acquisition of its largest client, resulting in the
cessation of research by them in our facility in fiscal 2006. As a consequence,
we revalued the assets of that unit as of September 30, 2006, recording an
impairment charge in the third quarter of that fiscal year (discussed below).
We
experienced strong demand in our pre-clinical toxicology business in line with
industry trends. Revenues in our bioanalytical laboratories were negatively
impacted by product mix as the current year had a larger number of generic
drug
samples, at lower prices, compared to the prior year. Our revenues from products
increased in the current year to $9.2 million, a 5.7% growth from last year's
product revenues of $8.7 million. This growth stemmed mainly from new adopters
of our Culex® system as well increased adoptions from our existing customers,
which was impacted by a stronger sales and marketing effort in the current
year.
Our mature analytical instruments line continued prior trends of declining
sales. Inflation in prices did not have a material impact on revenue
increases.
23
Costs
of Revenues
Costs
of
revenue increased 7.5% to $31.5 million for the year ended September 30, 2007
from $29.3 million for the year ended September 30, 2006. This increase of
$2.2
million was due to: a) increases in the cost of service revenue as a result
of
the capacity added in our bioanalytical laboratories in fiscal 2005 which was
not fully utilized in the current fiscal year as a result the lack of revenue
growth in the current year, b) increased staffing in our in
vivo
pharmacology unit as we increased our commercial offerings, and c) additional
costs in our toxicology business as a result of its growth. Cost of revenue
as a
percentage of revenues increased in the service segment due to the lower
utilization of capacity. A significant portion of our production costs are
relatively fixed, which results in decreased margins as we decrease our
utilization of facilities. Costs of revenue for our products segment increased
to 42.5% as a percentage of product revenue for the year ended September 30,
2007 from 41.8% of product revenue for the year ended September 30, 2006. This
increase is the result of continuing growth of sales of Culex
supplies which have a lower margin than the capital equipment.
Operating
Expenses
Selling
expenses for the year ended September 30, 2007 increased by 1.2% to $2,783
from
$2,750 during the year ended September 30, 2006, as we filled positions in
our
expanded sales group during the current year. Research and development
expenses for the year ended September 30, 2007 decreased 39.0% to $881 from
$1,444 for the year ended September 30, 2006. This decrease is primarily a
result of our pharmacokinetics and pharmacodynamics (“PKPD”) services payroll
costs being changed to cost of services in the current fiscal year, whereas
they
were included in research and development expenses in the prior fiscal year
due
to the commercialization of main products.
General
and administrative expenses for the year ended September 30, 2007 decreased
36.2% to $7,646 from $11,976 for the year ended September 30, 2006. The major
contributors to our cost reduction in the current year were the strategic
reductions in personnel (approximately 12%) in 2006 which reduced costs at
all
locations for 2007. Included in these expenses in the current year is
approximately $360 of severance costs for former officers of the
Company.
In
our
third fiscal quarter of the prior year, we determined that, due to the loss
of a
significant customer in our Baltimore clinical research unit, there had been
a
permanent impairment in the value of its assets. The $1.1 million impairment
loss is shown as a separate line item in our Consolidated Statement of
Operations for fiscal 2006.
Other
Income/Expense
Other
income (expense), net, was $(891) for the year ended September 30, 2007 as
compared to $(1,012) in the year ended September 30, 2006. This decline is
due
to our lower average outstanding borrowings between the comparable years. This
expense was offset by interest income of $87 in fiscal 2007 as compared to
$11
in fiscal 2006. This increase is primarily attributable to higher interest
rates
available on short-term cash investments and higher average cash balances to
invest during the year ended September 30, 2007 compared to the previous fiscal
year.
Income
Taxes
We
computed our income taxes using an effective tax rate of 41.5% on domestic
earnings for the year ended September 30, 2007. We did not provide income taxes
on foreign earnings due to the availability of net operating loss carryforwards
to offset our taxable income, which have not previously been recognized for
financial statement purposes due to the uncertainty of future utilization.
The
income tax benefit for the year ended September 30, 2006 was computed using
the
effective rate of 41.2%.
24
Net
Income
In
summary, the combined result of slightly higher revenue and significantly
lower
operating expenses resulted in net income for fiscal 2007 of $926, or $0.19
per
basic and diluted share, as compared to a net loss in fiscal 2006 of $(2,670),
or $(0.55) per basic and diluted share.
2006
Compared to 2005
Service
and Product Revenues
Total
revenue for the year ended September 30, 2006 increased 1.4% to $43.0 million
from $42.4 million for the year ended September 30, 2005. Service revenue
increased to $34.3 million for the year ended September 30, 2006 from $33.0
million for the year ended September 30, 2005, an increase of 3.9%. This
increase was the result of 36% growth in our toxicology business, offset by
a
25% decline in revenues of our clinical research unit. Revenues in our
bioanalytical laboratories were essentially flat compared to the prior year.
The
revenue decline in our clinical research unit was the result of the acquisition
of its largest client, resulting in the cessation of research by them in our
facility. As a consequence, we revalued the assets of that unit, recording
an
impairment charge in the third quarter of our 2006 fiscal year (discussed
below). Revenues in our bioanalytical laboratories were negatively impacted
by
delays in critical projects by our clients. Our revenues from products declined
in fiscal 2006 to $8.7 million, a 7.4% decline from fiscal 2005’s product
revenues of $9.4 million. This decline was across our product line. In the
fiscal year ended September 30, 2006, we did not have any major new adopters
of
our Culex® system, which resulted in flat year-to-year sales. Our mature
analytical instruments line continued prior trends of declining sales. Inflation
in prices did not have a material impact on revenue increases.
Costs
of Revenues
Costs
of
revenue increased 8.5% to $29.3 million for the year ended September 30, 2006
from $27.0 million for the year ended September 30, 2005. This increase of
$2.3
million was due to: a) increases in the cost of service revenue as a result
of
the capacity added in our bioanalytical laboratories in fiscal 2005 which was
not fully utilized in the current fiscal year as a result the lack of revenue
growth in the current year, b) increased staffing in our in
vivo
pharmacology unit as we increased our commercial offerings, and c) additional
costs in our toxicology business as a result of its growth. Cost of revenue
as a
percentage of revenues increased in both service and product segments due to
the
lower utilization of capacity. A significant portion of our production costs
are
relatively fixed, which results in decreased margins as we decrease our
utilization of facilities. Costs of revenue for our products segment increased
to 41.8% as a percentage of product revenue for the year ended September 30,
2006 from 36.3% of product revenue for the year ended September 30, 2005.
Operating
Expenses
Selling
expenses for the year ended September 30, 2006 increased by 6.1% to $2,750
from
$2,591 during the year ended September 30, 2005, as we filled positions in
our
expanded sales group during the year. Research and development expenses for
the
year ended September 30, 2006 increased 8.9% to $1,444 from $1,326 for the
year
ended September 30, 2005. This increase is primarily due to additional research
activities around our Culex® product line.
General
and administrative expenses for the year ended September 30, 2006 increased
17.6% to $11,976 from $10,188 for the year ended September 30, 2005. In
September of 2006, in order to address our lack of profitability, we reduced
our
headcount by approximately 12%, which resulted in severance costs of $600.
In
the fiscal 2006, we began expensing employee stock options, increasing expenses
by $319. Our provision for bad debts increased by $480, principally the result
of one contract that we were not able to collect. Increases in our costs
of
health insurance, property taxes, outside audit, and additional administrative
support of our growth in toxicology were major contributors to the remainder
of
the increase.
In
our
third quarter of fiscal 2006, we determined that, due to the loss of a
significant customer in our Baltimore clinical research unit, there had been
a
permanent impairment in the value of its assets. The $1.1 million impairment
loss is shown as a separate line item in our 2006 Consolidated Statement
of
Operations.
25
Other
Income/Expense
Other
income (expense), net, was $(1,012) for the year ended September 30, 2006
as
compared to $(969) in the year ended September 30, 2005, as a result of
increased interest expense. We reduced our average outstanding borrowings
on
both our revolving line of credit and our mortgage financing, while adding
$1.5
million of lease financing to acquire laboratory equipment.
Income
Taxes
Our
effective tax rate was 41.2% for the benefits of our loss for fiscal
2006.
Net
Income
In
summary, only slightly higher revenue, more than offset by higher cost of
revenue, increased general and administrative expenses and a significant
impairment loss resulted in a net loss of $0.55 per share in fiscal 2006,
both
basic and diluted, compared to a net loss in fiscal 2005 of $0.02 per share,
both basic and diluted.
Liquidity
and Capital Resources
Comparative
Cash Flow Analysis
Since
inception, our principal sources of cash have been cash flow generated from
operations and funds received from bank borrowings and other financings. At
September 30, 2007, we had cash and cash equivalents of $2.8 million compared
to
$1.6 million at September 30, 2006.
We
generated $2.9 million of cash from operating activities for the year ended
September 30, 2007, compared to cash generated of $3.8 million in fiscal 2006
and cash used of $0.5 million in fiscal 2005. Cash generated was primarily
from
net income of $0.9 million for the full year 2007 as compared to net losses
in
fiscal years 2006 and 2005 plus employee stock option expense of $0.2 in 2007,
offset by an increase in accounts receivable of $1.1 million. Non-cash charges
to operations of $3.5 million for depreciation and amortization increased our
expenses, but did not consume cash. Our receivables vary depending on where
we
stand in our mix of contracts; however, we believe that new procedures
instituted during the current year in billings and collections contributed
to
the improved cash flow.
For
fiscal 2007, we used $0.3 million from investing activities as compared to
cash
used of $1.5 million and cash provided of $3.6 million for the years ended
September 30, 2006 and 2005, respectively. During fiscal 2005, we sold and
leased back the majority of our facility in Baltimore. With a sales price of
$6.5 million, this transaction resulted in net cash of $5.9 million, after
expenses, helping finance the $2.3 million investment in capital assets in
the
fiscal 2005. In fiscal years 2007 and 2006, our investments were in recurring
capital asset additions and replacements with $0.8 million less used in capital
spending in fiscal 2007 versus fiscal 2006.
Cash
used
by financing activities was $1.1 million for the year ended September 30, 2007,
compared to cash used of $2.0 and cash used of $2.8 million, respectively for
fiscal 2006 and 2005. Cash utilized in fiscal 2007 was used for payment of
debt
and lease obligations similar to fiscal years 2006 and 2005, slightly offset
by
$79 of proceeds from stock option exercises. Cash used was lower in 2007 due
to
the paydown of the line of credit in fiscal 2006.
Capital
Resources
Property
and equipment spending totaled $0.9 million, $1.7 million (funded by proceeds
from the sale of the Baltimore building), and $2.3 million (funded by funds
generated from operations, long-term debt and revolving credit), in fiscal
2007,
2006 and 2005, respectively. Expenditures in fiscal 2007 and 2006 were primarily
for the purchase of laboratory equipment. The decline in capital expenditures
in
fiscal 2007 and 2006 is the result of the completion of expansion programs
in
fiscal 2005 to the West Lafayette and Evansville, Indiana facilities. Capital
investments for the purchase of additional laboratory equipment are driven
by
anticipated increases in research services, and by the replacement or upgrading
of our equipment. Additionally, we funded $1.5 million of laboratory equipment
in fiscal 2006 through capital leases. Although we may consider strategic
acquisition opportunities, we do not intend to aggressively pursue additional
acquisitions until we fully utilize existing capacity.
26
We
amended our revolving credit facility in October 2007, reducing our line of
credit to $5 million from $6 million as we did not have qualifying assets
sufficient to borrow the higher amount and were paying fees on amounts we could
not use. We also have three mortgage notes payable to another bank aggregating
$8.2 million. Borrowings under these credit agreements are collateralized by
substantially all assets related to our operations and all common stock of
our
U.S. subsidiaries and 65% of the common stock of our non-United States
subsidiaries. Under the terms of these credit agreements, we have agreed to
restrict advances to subsidiaries, limit additional indebtedness and capital
expenditures as well as to comply with certain financial covenants outlined
in
the borrowing agreements. These credit agreements contain cross-default
provisions. Details of each debt issue are discussed below. We were in
compliance with our loan covenants at September 30, 2007 and expect to be in
compliance with the loan covenants in the future.
The
maximum amount available under the terms of our amended revolving line of credit
is $5 million with outstanding borrowings limited to the borrowing base as
defined in the amendment to the agreement. As of September 30, 2007 there were
no outstanding balances on this line of credit. Borrowings
under the Revolving Facility bear interest at a variable rate based on the
London Interbank Offer Rate (LIBOR) or a base rate determined by the lender’s
prime rate plus an applicable margin, as defined in the agreement. The
applicable margin for borrowings under the Revolving Facility ranges from 0.00%
to 0.50% for base rate borrowings and 1.50% to 3.00% for LIBOR borrowings,
subject to adjustment based on the average availability under the Revolving
Facility. The Company also pays a commitment fee on the unused portion of the
facility ranging from 0.20% - 0.30%. All interest and fees are paid monthly.
Borrowings
under the facility are based on a lending formula utilizing accounts receivable
and inventory. At September 30, 2007, we had $3.3 million available under the
facility after offsetting a $1 million outstanding letter of credit which
secures the Baltimore lease. This letter of credit expires in January 2008
and
will not be required to be renewed under the terms of our new lease. The line
of
credit is a revolver against which we apply cash receipts, and draws cash as
needed. The line of credit is committed until December, 2009.
We
have
three outstanding mortgages with a commercial bank on our facilities in West
Lafayette and Evansville, Indiana, which total $8.2 million. Two of the
mortgages mature in November, 2012, while the other matures in May 2008.
As of June 2007, the mortgages have a floating interest rate currently at 7.10%.
We have a commitment from our bank to renew the mortgage due in May 2008
for an additional five years on essentially the same terms. See Note 7 to
the Consolidated Financial Statements.
The
following table summarizes the cash payments under our contractual term debt
and
lease obligations at September 30, 2007 and the effect such obligations are
expected to have on our liquidity and cash flows in future fiscal periods
(amounts in thousands). The table does not include our revolving line of credit.
Additional information on the subordinated debt is described in Note 7, Debt
Arrangements.
|
2008
|
|
2009
|
2010
|
2011
|
2012
|
After 2012
|
Total
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Mortgage
notes payable
|
$
|
344
|
$
|
369
|
$
|
396
|
$
|
426
|
$
|
458
|
$
|
6,212
|
$
|
8,205
|
||||||||
|
Subordinated
debt*
|
4,477
|
—
|
—
|
—
|
—
|
—
|
4,477
|
|||||||||||||||
|
Capital
lease obligations
|
510
|
553
|
453
|
132
|
—
|
—
|
1,648
|
|||||||||||||||
|
Operating
leases
|
1,768
|
1,698
|
1,597
|
1,608
|
1,628
|
2,812
|
11,111
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
|
$
|
7,099
|
$
|
2,620
|
2,446
|
2,166
|
$
|
2,086
|
$
|
9,024
|
$
|
25,441
|
||||||||||
*
Subordinated
debt includes notes to related parties.
We
anticipate spending approximately $3.0 million in fiscal 2008 on capital assets,
primarily laboratory equipment which will be financed using capital leases.
We
have committed to funding tenant improvements on our new lease in the UK, along
with other commitments at September 30, 2007 that total approximately $1
million.
The
covenants in our credit agreement require the maintenance of certain ratios
of
interest-bearing indebtedness (not including subordinated debt) to EBITDA and
net cash flow to debt servicing requirements, which may restrict the amount
we
can borrow to fund future operations, acquisitions and capital
expenditures.
Based
on
current business activities, we believe cash generated from operations and
amounts available under our existing credit facilities will be sufficient to
fund working capital and capital expenditure requirements for the foreseeable
future and through September 30, 2008. We have $4.5 million of subordinated
convertible notes maturing in January, 2008. We intend to use proceeds from
a
mortgage and cash on hand to pay the notes principal on January 1, 2008. If
necessary, we may use a portion of our existing line of credit to make up the
remaining balance. At this time, we do not anticipate the need to borrow on
the
line of credit to pay the note balance.
Inflation
We
do not
believe that inflation has had a material adverse effect on our business,
operations or financial condition.
27
Critical
Accounting Policies
"Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and
"Liquidity and Capital Resources" discusses the consolidated financial
statements of the Company, which have been prepared in accordance with
accounting principles generally accepted in the United States. Preparation
of
these financial statements requires management to make judgments and estimates
that affect the reported amounts of assets, liabilities, revenues and expenses,
and the disclosures of contingent assets and liabilities. Certain significant
accounting policies applied in the preparation of the financial statements
require management to make difficult, subjective or complex judgments, and
are
considered critical accounting policies. We have identified the following
areas
as critical accounting policies.
Revenue
Recognition
The
majority of our service contracts involve the processing of bioanalytical
samples for pharmaceutical companies. These contracts generally provide for
a
fixed fee for each assay method developed or sample processed and revenue is
recognized under the specific performance method of accounting. Under the
specific performance method, revenue and related direct costs are recognized
when services are performed. Other service contracts generally consist of
preclinical and clinical trial studies for pharmaceutical companies. Service
revenue is recognized based on the ratio of direct costs incurred to total
estimated direct costs under the proportional performance method of accounting.
Losses on contracts are provided in the period in which the loss becomes
determinable. Revisions in profit estimates are reflected on a cumulative basis
in the period in which such revisions become known. The establishment of
contract prices and total contract costs involves estimates made by the Company
at the inception of the contract period. These estimates could change during
the
term of the contract which could impact the revenue and costs reported in the
consolidated financial statements. Projected losses on contracts are provided
for in their entirety when known. Revisions to estimates have not been material.
Service contract fees received upon acceptance are deferred and classified
within customer advances, until earned. Unbilled revenues represent revenues
earned under contracts in advance of billings.
Our
product revenue is derived primarily from sales of equipment utilized for
scientific research. Revenue from equipment not requiring installation, testing
or training is recognized upon shipment to customers. One product includes
internally developed software and requires installation, testing and training,
which occur concurrently. Revenue from this product is recognized upon
completion of the installation, testing and training.
Impairment
of Long-Lived Assets, Including Goodwill
Long-lived
assets, such as property and equipment, and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of
an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds
the
fair value of the asset.
Goodwill
and other indefinite lived intangible assets, collectively referred to as
"indefinite lived assets", are tested annually for impairment, and are tested
for impairment more frequently if events and circumstances indicate that the
asset might be impaired. An impairment loss is recognized to the extent that
the
carrying amount exceeds the asset's fair value. This determination is made
at
the reporting unit level and consists of two steps. First, we determine the
fair
value of a reporting unit and compare it to its carrying amount. Second, if
the
carrying amount of a reporting unit exceeds its fair value, an impairment loss
is recognized for any excess of the carrying amount of the reporting unit's
indefinite lived assets over the implied fair value of those indefinite lived
assets. The implied fair value of the indefinite lived assets is determined
by
allocating the fair value of the reporting unit in a manner similar to a
purchase price allocation, in accordance with SFAS No. 141, Business
Combinations.
The
residual fair value after this allocation is the implied fair value of the
reporting unit's indefinite lived assets.
Our
Baltimore clinical research unit was acquired in a business combination in
fiscal 2003. Although improvement has been achieved in operating results
since
acquisition, the 2006 acquisition of one of its major customers by a company
that had other clinical study providers, and the subsequent cancellation
of
previously scheduled studies seriously impacted operating results in fiscal
2006. Consequently, in the third quarter of fiscal 2006, we determined that
there was a permanent impairment of value of the assets acquired, and recorded
an impairment loss of $1,100 to write down the value of property and equipment,
other intangible assets and the value of goodwill. We also recorded a deferred
tax benefit of $436 related to these charges. The clinical research unit
is
included in the Services segment in the financial statements and
footnotes.
28
Stock-Based
Compensation
On
October 1, 2005, we changed our accounting to recognize the cost resulting
from
all share-based payment transactions in our financial statements using a
fair-value-based method versus the previously used method in which no expense
was recorded in the financial statements. We elected to use the modified
prospective transition method of adoption. We measured compensation cost for
all
outstanding unvested stock-based awards made to our employees and directors
based on estimated fair values and recognized compensation over the service
period for awards expected to vest. We recognized $304 and $356 of
stock-based compensation related to employee stock options during the fiscal
years ended September 30, 2007 and 2006, respectively.
We
use
the binomial option valuation model to determine the grant date fair value.
The
binomial option valuation model requires us to make certain assumptions about
the future. The determination of fair value is affected by our stock price
as
well as assumptions regarding subjective and complex variables such as expected
employee exercise behavior and our expected stock price volatility over the
term
of the award. Generally, our assumptions are based on historical information
and
judgment is required to determine if historical trends may be indicators of
future outcomes. We estimated the following key assumptions for the binomial
valuation calculation:
|
|
•
|
Risk-free
interest rate.
The risk-free interest rate is based on U.S. Treasury yields in
effect at the time of grant for the expected term of the option.
|
|
|
•
|
Expected
volatility.
We
use our historical stock price volatility and consider the implied
volatility computed based on the price of short-term options publicly
traded on our common stock for our expected volatility assumption.
|
|
|
•
|
Expected
term.
The expected term represents the weighted-average period the stock
options
are expected to remain outstanding. The expected term is determined
based
on historical exercise behavior, post-vesting termination patterns,
options outstanding and future expected exercise behavior.
|
|
|
•
|
Expected
dividends.
We
assumed that we will pay no
dividends.
|
Employee
stock-based compensation expense recognized in fiscal 2007 and 2006 was
calculated based on awards ultimately expected to vest and has been reduced
for
estimated forfeitures. Forfeitures are revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates and an adjustment
will
be recognized at that time.
Changes
to our underlying stock price, our assumptions used in the binomial option
valuation calculation and our forfeiture rate as well as future grants of equity
could significantly impact compensation expense to be recognized in fiscal
2008
and future periods.
Income
Tax Accounting
Income
taxes are accounted for by 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. Deferred tax assets and liabilities
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 expected to be in effect at the time the differences
reverse.
We
recognize deferred tax assets on the balance sheet, which typically represents
items deducted currently in the financial statements that will be deducted
in
future periods in tax returns. A valuation allowance, if necessary, is recorded
against these deferred tax assets to reduce the total deferred tax assets to
an
amount that will, more likely than not, be realized in future periods. The
valuation allowance is based, in part, on management's estimate of future
taxable income, the expected utilization of tax loss carry forwards and the
expiration dates of tax loss carry forwards. Significant assumptions are used
in
developing the analysis of future taxable income for purposes of determining
the
valuation allowance for deferred tax assets which, in the opinion of management,
are reasonable under the circumstances.
We
have
an accumulated net deficit in our UK subsidiaries, consequently, United States
deferred tax liabilities on such earnings have not been recorded.
29
Inventories
Inventories
are stated at the lower of cost or market using the first-in, first-out (FIFO)
cost method of accounting. Prior to 2007, our inventories were accounted for
using the last-in, first-out (LIFO) method of accounting. During the fourth
quarter of 2007, we changed our method of accounting for inventories from the
LIFO method to the FIFO method. The FIFO method of inventory accounting better
matches revenues and expenses in accordance with sales contract terms. All
periods presented have been retrospectively adjusted on a FIFO
basis.
New
Accounting Pronouncements
We
adopted the following two pronouncements for periods beginning October 1,
2005.
In
November, 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 151 dealing with inventory costs.
The statement clarifies what costs can be included in inventory, requiring
that
absorption factors be based on normal capacities of manufacturing facilities
and
excess capacity be expensed as incurred. Our historical costing methodology
substantially conformed with this standard; therefore, we did not experience
any
change from this pronouncement.
In
December, 2004, SFAS No. 123 (Revised) was issued dealing with Share-Based
Payments. In general, this statement requires that companies compute the fair
value of options and other stock-based employee incentives, charging this value
to operations over the period earned, generally the vesting period. We incurred
expenses, net of tax benefit, of $208 and $319 in fiscal 2007 and 2006,
respectively (see Notes 2 and 9 to the consolidated financial
statements) relating to our stock option plans.
The
following recent pronouncements may impact the Company’s accounting
policies:
In
July
2006, the FASB released Interpretation No. 48, Accounting
for Uncertainty in Income Taxes.
This
Interpretation revises the recognition tests for tax positions taken in tax
returns such that a tax benefit is recorded only when it is more likely than
not
that the tax position will be allowed upon examination by taxing authorities.
The amount of such a tax benefit to record is the largest amount that is more
likely than not to be allowed. Any reduction in deferred tax assets or increase
in tax liabilities upon adoption will correspondingly reduce retained earnings.
We do not expect the adoption of this Interpretation, which is effective for
our
fiscal year beginning October 1, 2007, to have a material impact on our
financial statements.
In
September, 2006 the staff of the Securities and Exchange Commission issued
Staff
Accounting Bulletin 108, dealing with the methods of measuring misstatements
when determining materiality to the financial statements. We have been using
such methods since the SAB 108 was issued
ITEM
7A.-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Our
primary market risk exposure with regard to financial instruments is the changes
in interest rates. We have a Revolving Credit Agreement with National City
Bank,
bearing interest at a rate of either the bank's prime rate plus 50 basis points,
or at LIBOR plus 325 basis points, depending in each case upon the ratio of
our
interest-bearing indebtedness (less subordinated debt) to EBITDA. Historically,
we have not used derivative financial instruments to manage exposure to interest
rate changes. Hypothetically, we believe that a 10% adverse change in interest
rates would not materially affect our consolidated operating results. Interest
on our revolving line of credit and our real estate mortgages are at floating
rates.
Because
we operate internationally, we are subject to potentially adverse movements
in
foreign currency exchange rates. The effect of movements in the exchange rates
was not material to our consolidated operating results for fiscal years 2007,
2006 and 2005. A hypothetical 10% adverse change in foreign currency exchange
rates would not materially affect our consolidated operating
results.
30
ITEM
8-FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index
to Consolidated Financial Statements
|
Page
|
||
|
Consolidated
Financial Statements of Bioanalytical Systems, Inc. and
subsidiaries:
|
||
|
|
Consolidated
Balance Sheets as of September 30, 2007 and 2006
|
32
|
|
Consolidated
Statements of Operations for the Years Ended September 30, 2007,
2006 and
2005
|
33
|
|
|
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive Income
(Loss) for the Years Ended September 30, 2007, 2006 and
2005
|
34
|
|
Consolidated
Statements of Cash Flows for the Years Ended September 30, 2007,
2006 and
2005
|
35
|
|
|
Notes
to Consolidated Financial Statements
|
36
|
|
|
Reports
of Independent Registered Public Accounting Firms
|
||
|
Financial
Statement Schedules:
|
||
|
Schedules
are not required, are not applicable or the information is shown
in the
Notes to the Consolidated Financial
Statements.
|
||
31
BIOANALYTICAL
SYSTEMS, INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands)
|
As of September 30,
|
|||||||
|
|
2007
|
2006
|
|||||
| Assets | |||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
2,837
|
$
|
1,647
|
|||
|
Accounts
receivable:
|
|||||||
|
Trade, net of allowance for bad debts of $220 in 2007 and $520 in
2006
|
6,674
|
6,492
|
|||||
|
Unbilled revenues and other
|
2,565
|
1,545
|
|||||
|
Inventories
(a)
|
1,977
|
1,970
|
|||||
|
Deferred
income taxes (a)
|
897
|
571
|
|||||
|
Refundable
income taxes
|
774
|
888
|
|||||
|
Prepaid
expenses
|
776
|
599
|
|||||
|
Total
current assets
|
16,500
|
13,712
|
|||||
|
Property
and equipment, net
|
22,927
|
25,766
|
|||||
|
Goodwill
|
1,855
|
1,855
|
|||||
|
Intangible
assets, net
|
304
|
517
|
|||||
|
Debt
issue costs, net
|
211
|
246
|
|||||
|
Other
assets
|
240
|
268
|
|||||
|
Total
assets
|
$
|
42,037
|
$
|
42,364
|
|||
|
Liabilities
and Shareholders' Equity
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
1,589
|
$
|
1,610
|
|||
|
Accrued
expenses
|
3,056
|
3,081
|
|||||
|
Customer
advances
|
4,115
|
4,226
|
|||||
|
Income taxes payable
|
56
|
—
|
|||||
|
Current
portion of capital lease obligations
|
510
|
472
|
|||||
|
Current
portion of long-term debt
|
4,821
|
721
|
|||||
|
Total
current liabilities
|
14,147
|
10,110
|
|||||
|
|
|||||||
|
Capital
lease obligations, less current portion
|
1,138
|
1,648
|
|||||
|
Long-term
debt, less current portion
|
7,861
|
8,186
|
|||||
|
Subordinated
notes payable, less current portion
|
—
|
4,477
|
|||||
|
Deferred
income taxes
|
337
|
539
|
|||||
|
|
|||||||
|
Shareholders'
equity:
|
|||||||
|
Preferred
shares:
|
|||||||
|
Authorized 1,000 shares; none issued and outstanding
|
—
|
—
|
|||||
|
Common
shares, no par value:
|
|||||||
|
Authorized
19,000 shares; issued and outstanding 4,909 shares in 2007 and 4,892
shares in 2006
|
1,189
|
1,182
|
|||||
|
Additional
paid-in-capital
|
11,957
|
11,677
|
|||||
|
Retained
earnings (a)
|
5,560
|
4,634
|
|||||
|
Accumulated
other comprehensive loss
|
(152
|
)
|
(89
|
)
|
|||
|
Total
shareholders' equity
|
18,554
|
17,404
|
|||||
|
Total
liabilities and shareholders' equity
|
$
|
42,037
|
$
|
42,364
|
|||
(a)
2006 has been retrospectively adjusted for our change in 2007 from the last-in,
first-out method of inventory accounting to the first-in, first-out
method.
The
accompanying notes are an integral part of the consolidated financial
statements.
32
BIOANALYTICAL
SYSTEMS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share amounts)
|
For the Years Ended September 30,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Service
revenue
|
$
|
36,051
|
$
|
34,318
|
$
|
32,951
|
||||
|
Product
revenue
|
9,194
|
8,730
|
9,444
|
|||||||
|
Total
revenue
|
45,245
|
43,048
|
42,395
|
|||||||
|
|
||||||||||
|
Cost
of service revenue
|
27,544
|
25,691
|
23,589
|
|||||||
|
Cost
of product revenue (a)
|
3,909
|
3,647
|
3,426
|
|||||||
|
Total
cost of revenue (a)
|
31,453
|
29,338
|
27,015
|
|||||||
|
|
||||||||||
|
Gross
profit (a)
|
13,792
|
13,710
|
15,380
|
|||||||
|
|
||||||||||
|
Operating
expenses:
|
||||||||||
|
Selling
|
2,783
|
2,750
|
2,591
|
|||||||
|
Research
and development
|
881
|
1,444
|
1,326
|
|||||||
|
General
and administrative
|
7,646
|
11,976
|
10,188
|
|||||||
|
(Gain)
loss on sale of property and equipment
|
92
|
(37
|
)
|
(21
|
)
|
|||||
|
Impairment
loss
|
—
|
1,100
|
—
|
|||||||
|
Total
operating expenses
|
11,402
|
17,233
|
14,084
|
|||||||
|
|
||||||||||
|
Operating
income (loss) (a)
|
2,390
|
(3,523
|
)
|
1,296
|
||||||
|
Interest
income
|
87
|
11
|
18
|
|||||||
|
Interest
expense
|
(981
|
)
|
(1,033
|
)
|
(988
|
)
|
||||
|
Other
income
|
3
|
10
|
1
|
|||||||
|
|
||||||||||
|
Income
(loss) before income taxes (a)
|
1,499
|
(4,535
|
)
|
327
|
||||||
|
Income
tax provision (benefit) (a)
|
573
|
(1,865
|
)
|
407
|
||||||
|
Net
income (loss) (a)
|
$
|
926
|
$
|
(2,670
|
)
|
$
|
(
80
|
)
|
||
|
|
||||||||||
|
Net
income (loss) per share: (a)
|
||||||||||
|
Basic
|
$
|
0.19
|
$
|
(0.55
|
)
|
(0.02
|
)
|
|||
|
Diluted
|
$
|
0.19
|
$
|
(0.55
|
)
|
(0.02
|
)
|
|||
|
Weighted
average common shares outstanding:
|
||||||||||
|
Basic
|
4,909
|
4,883
|
4,870
|
|||||||
|
Diluted
|
4,960
|
4,883
|
4,870
|
|||||||
(a)
2006 and 2005 have been retrospectively adjusted for our change in 2007 from
the
last-in, first-out method of inventory accounting to the first-in, first-out
method.
The
accompanying notes are an integral part of the consolidated financial
statements.
33
BIOANALYTICAL
SYSTEMS, INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(LOSS)
(In
thousands)
|
Common shares
|
Additional
paid-in- capital
|
Retained
earnings (a)
|
Accumulated
other
comprehensive
loss
|
Total
shareholders'
equity
|
|||||||||||||||
|
|
Number
|
Amount
|
|||||||||||||||||
|
Balance
at October 1, 2004
|
4,869
|
$
|
1,177
|
$
|
11,263
|
$
|
7,384
|
$
|
(314
|
)
|
$
|
19,510
|
|||||||
|
Comprehensive
income (loss):
|
|||||||||||||||||||
|
Net
loss
|
—
|
—
|
—
|
(80
|
)
|
—
|
(80
|
)
|
|||||||||||
|
Other
comprehensive
income:
|
|||||||||||||||||||
|
Foreign
currency translation
adjustments
|
—
|
—
|
—
|
—
|
273
|
273
|
|||||||||||||
|
Total
comprehensive income
|
193
|
||||||||||||||||||
|
Exercise
of stock options
|
2
|
1
|
5
|
—
|
—
|
6
|
|||||||||||||
|
Balance
at September 30, 2005
|
4,871
|
1,178
|
11,268
|
7,304
|
(41
|
)
|
19,709
|
||||||||||||
|
Comprehensive
loss:
|
|||||||||||||||||||
|
Net
loss
|
—
|
—
|
—
|
(2,670
|
)
|
—
|
(2,670
|
)
|
|||||||||||
|
Other
comprehensive
loss:
|
|||||||||||||||||||
|
Foreign
currency translation
adjustments
|
—
|
—
|
—
|
—
|
(48
|
)
|
(48
|
)
|
|||||||||||
|
Total
comprehensive loss
|
(2,718
|
)
|
|||||||||||||||||
|
Stock
compensation
|
—
|
—
|
319
|
—
|
—
|
319
|
|||||||||||||
|
Exercise
of stock options
|
21
|
4
|
90
|
—
|
—
|
94
|
|||||||||||||
|
Balance
at September 30, 2006
|
4,892
|
1,182
|
11,677
|
4,634
|
(89
|
)
|
17,404
|
||||||||||||
|
Comprehensive
income :
|
|||||||||||||||||||
|
Net
income
|
—
|
—
|
—
|
926
|
—
|
926
|
|||||||||||||
|
Other
comprehensive
loss:
|
|||||||||||||||||||
|
Foreign
currency translation
adjustments
|
—
|
—
|
—
|
—
|
(63
|
)
|
(63
|
)
|
|||||||||||
|
Total
comprehensive income
|
863
|
||||||||||||||||||
|
Stock
compensation
|
—
|
—
|
208
|
—
|
—
|
208
|
|||||||||||||
|
Exercise
of stock options
|
17
|
7
|
72
|
—
|
—
|
79
|
|||||||||||||
|
Balance
at September 30, 2007
|
4,909
|
$
|
1,189
|
$
|
11,957
|
$
|
5,560
|
$
|
(152
|
)
|
$
|
18,554
|
|||||||
(a)
2006, 2005 and 2004 have been retrospectively adjusted for our change in
2007 from the last-in, first-out method of inventory accounting to the first-in,
first-out method.
The
accompanying notes are an integral part of the consolidated financial
statements.
34
BIOANALYTICAL
SYSTEMS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
Years Ended September 30,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Operating
activities:
|
||||||||||
|
Net
income (loss)
|
$
|
926
|
$
|
(2,670
|
)
|
$
|
(80
|
)
|
||
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||||
|
Depreciation
and amortization
|
3,458
|
3,889
|
3,441
|
|||||||
|
Asset
impairment loss
|
—
|
1,100
|
—
|
|||||||
|
Employee
stock compensation expense
|
208
|
319
|
—
|
|||||||
|
Bad
debt expense (recovery)
|
(132
|
)
|
473
|
—
|
||||||
|
(Gain)
loss on sale of property and equipment
|
92
|
(37
|
)
|
(21
|
)
|
|||||
|
Deferred
income taxes (a)
|
(472
|
)
|
(1,375
|
)
|
(609
|
)
|
||||
|
Changes
in operating assets and liabilities:
|
||||||||||
|
Accounts
receivable
|
(1,070
|
)
|
4,518
|
(6,590
|
)
|
|||||
|
Inventories
(a)
|
(7
|
)
|
254
|
(507
|
)
|
|||||
|
Refundable
and payable income taxes
|
114
|
(919
|
)
|
634
|
||||||
|
Prepaid
expenses and other assets
|
(32
|
)
|
(180
|
)
|
(84
|
)
|
||||
|
Accounts
payable
|
(21
|
)
|
(71
|
)
|
(1,081
|
)
|
||||
|
Accrued
expenses
|
(25
|
)
|
291
|
1,199
|
||||||
|
Customer
advances
|
(111
|
)
|
(1,748
|
)
|
3,157
|
|||||
|
Net
cash provided (used) by operating activities
|
2,928
|
3,844
|
(541
|
)
|
||||||
|
Investing
activities:
|
||||||||||
|
Capital
expenditures
|
(878
|
)
|
(1,687
|
)
|
(2,301
|
)
|
||||
|
Proceeds
from sale of property and equipment
|
625
|
271
|
5,887
|
|||||||
|
Net
cash provided (used) by investing activities
|
(253
|
)
|
(1,416
|
)
|
3,586
|
|||||
|
Financing
activities:
|
||||||||||
|
Payments
of long-term debt
|
(702
|
)
|
(723
|
)
|
(756
|
)
|
||||
|
Borrowings
on line of credit
|
—
|
12,624
|
7,888
|
|||||||
|
Payments
on line of credit
|
—
|
(13,544
|
)
|
(9,794
|
)
|
|||||
|
Payments
on capital lease obligations
|
(472
|
)
|
(438
|
)
|
(181
|
)
|
||||
|
Net
proceeds from the exercise of stock options
|
79
|
94
|
6
|
|||||||
|
Net
cash used by financing activities
|
(1,095
|
)
|
(1,987
|
)
|
(2,837
|
)
|
||||
|
Effect
of exchange rate changes
|
(390
|
)
|
(48
|
)
|
273
|
|||||
|
Net
increase in cash and cash equivalents
|
1,190
|
393
|
481
|
|||||||
|
Cash
and cash equivalents at beginning of year
|
1,647
|
1,254
|
773
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
2,837
|
$
|
1,647
|
$
|
1,254
|
||||
(a)
2006 and 2005 have been retrospectively adjusted for our change in 2007 from
the
last-in, first-out method of inventory accounting to the first-in, first-out
method.
The
accompanying notes are an integral part of the consolidated financial
statements.
35
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands unless otherwise listed)
1. DESCRIPTION
OF THE BUSINESS
Bioanalytical
Systems, Inc. and its subsidiaries (the “Company” or “BASi” or “we”) engage in
research services and other services related to pharmaceutical development.
We
also manufacture scientific instruments for medical research, which we sell
with
related software for use in industrial, governmental and academic laboratories.
We conduct our businesses through our research facilities in Indiana, Oregon,
Maryland and the United Kingdom and our manufacturing facility in Indiana.
Our
customers are located throughout the world.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
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.
|
Revenue
Recognition
|
The
majority of our service contracts involve the development of analytical methods
and the processing of bioanalytical samples for pharmaceutical companies.
These
contracts generally provide for a fixed fee for each sample processed, and
revenue is recognized under the specific performance method of accounting.
Under
this method, revenue and related direct costs are recognized when services
are
performed. Our other service contracts generally involve preclinical and
clinical trial studies for pharmaceutical companies. We recognize service
revenue on these contracts based on the ratio of direct costs incurred to
total
estimated direct costs under the proportional performance method of accounting.
The establishment of contract prices and total contract costs involves estimates
made by us at the inception of the contract period. When we revise profit
estimates, we adjust revenue on a cumulative basis in the period in which
the
revisions become known. These estimates could change during the term of the
contract, which impacts the revenue and costs we report in the consolidated
financial statements. We provide for projected losses on contracts in their
entirety when the loss becomes determinable.
We
generally bill a portion of service contract fees upon acceptance by our
customers. These billings are classified as customer advances until earned.
Unbilled revenues represent revenues earned under contracts in advance of
billings.
Our
product revenue is derived primarily from sales of instruments utilized for
scientific research. Revenue from products not requiring installation, testing,
or training is recognized upon shipment to customers. One of our products
includes internally developed software and sometimes requires installation,
testing, and training, which occur concurrently. Revenue is recognized upon
completion of the installation, testing, and training.
|
Cash
Equivalents
|
We
consider all highly liquid investments with an original maturity of three months
or less when purchased to be cash equivalents.
|
Financial
Instruments
|
Our
credit risk consists principally of trade accounts receivable. We perform
periodic credit evaluations of our customers’ financial conditions and generally
do not require collateral on trade accounts receivable. We
account
for trade receivables based on the amounts billed to customers. Past due
receivables are determined based on contractual terms. We do not accrue interest
on any of its trade receivables. The allowance for doubtful accounts is
determined by management based on our historical losses, specific customer
circumstances, and general economic conditions. Periodically, management reviews
accounts receivable and adjusts the allowance based on current circumstances
and
charges off uncollectible receivables when all attempts to collect have failed.
Our
allowance for doubtful accounts was $220 and $520 at September 30, 2007 and
2006, respectively.
36
A
summary of activity in our allowance for doubtful
accounts is as follows:
|
2007
|
2006
|
2005
|
||||||||||
|
Opening
balance
|
$
|
520
|
$
|
40
|
$ | 0 | ||||||
|
Charged
to expense
|
103
|
488
|
40 | |||||||||
|
Accounts
written off
|
(54
|
)
|
(8
|
)
|
— | |||||||
|
Recoveries
|
(349
|
)
|
—
|
— | ||||||||
|
Ending
balance
|
$
|
220
|
$
|
520
|
$ | 40 | ||||||
Our
cash
and cash equivalents, accounts receivable, accounts payable and certain other
accrued liabilities are all short-term in nature and their carrying amounts
approximate fair value. We have both variable rate borrowings, which adjust
to
the current market, and borrowings with fixed rates for up to three years.
The
carrying value of our fixed rate debt also approximates its fair value.
|
(e)
|
Inventories
|
Prior
to
2007, our inventories were accounted for using the last-in, first-out (LIFO)
method of accounting. During the fourth quarter of 2007, we changed our method
of accounting for inventories from the LIFO method to the FIFO method. The
FIFO
method of accounting provides better matching of revenues with expenses in
accordance with sales contract terms. All periods have been retrospectively
adjusted using FIFO accounting.
|
Property
and Equipment
|
We
record
property and equipment at cost, including interest capitalized during the period
of construction of major facilities. We compute depreciation, including
amortization on capital leases, using the straight-line method over the
estimated useful lives of the assets, which we estimate to be: buildings and
improvements, 34 to 40 years; machinery and equipment, 5 to 10 years, and office
furniture and fixtures, 10 years. Our depreciation expense was $3,218 in fiscal
2007, $3,228 in fiscal 2006 and $3,047 in fiscal 2005. Expenditures for
maintenance and repairs are expensed as incurred.
Property
and equipment, net, as of September 30, 2007 and 2006 consisted of the
following:
|
|
2007
|
2006
|
|||||
|
Land
and improvements
|
$
|
453
|
$
|
450
|
|||
|
Buildings
and improvements
|
20,745
|
21,584
|
|||||
|
Machinery
and equipment
|
21,048
|
20,663
|
|||||
|
Office
furniture and fixtures
|
1,306
|
1,425
|
|||||
|
Construction
in progress
|
79
|
252
|
|||||
|
43,631
|
44,374
|
||||||
|
Less:
accumulated depreciation
|
(20,704
|
)
|
(18,608
|
)
|
|||
|
Net
property and equipment
|
$
|
22,927
|
$
|
25,766
|
|||
|
(g)
|
Impairment
of Long-Lived Assets
|
Long-lived
assets, such as property and equipment, and purchased intangibles subject
to
amortization, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount
of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds
the
fair value. Assets to be disposed of would be separately presented in the
balance sheet and reported at the lower of the carrying amount or fair value
less costs to sell, and are no longer depreciated.
Goodwill
is tested annually for impairment, and more frequently if events and
circumstances indicate that an asset might be impaired. An impairment loss
is
recognized to the extent that the carrying amount exceeds the asset’s fair
value. This determination is made at the reporting unit level and consists
of
two steps. First, we determine the fair value of a reporting unit and compare
it
to its carrying amount. Second, if the carrying amount of a reporting unit
exceeds its fair value, an impairment loss is recognized for any excess of
the
carrying amount of the reporting unit’s goodwill over the implied fair value of
goodwill. The implied fair value of goodwill is determined by allocating
the fair value of the reporting unit in a manner similar to a purchase price
allocation. The residual fair value after this allocation is the implied
fair
value of the reporting unit’s goodwill. In fiscal 2006, we determined that an
impairment loss existed at our Baltimore facility and accordingly recorded
an
impairment loss of $1,100.
37
| Goodwill and Intangible Assets |
We
carry
goodwill at cost. Other intangible assets with definite lives are stated at
cost
and are amortized on a straight-line basis over their estimated useful lives.
All intangible assets acquired that are obtained through contractual or legal
right, or are capable of being separately sold, transferred, licensed, rented,
or exchanged, are recognized as an asset apart from goodwill. Goodwill and
intangibles with indefinite lives are not amortized, but are subject to an
annual assessment for impairment by applying a fair value based
test.
In
fiscal
2003, we completed acquisitions of a bioanalytical laboratory performing
chemical analyses and a clinical research unit performing clinical testing
in
humans to establish drug safety or bioequivalence. In valuing the intangible
assets acquired in these two acquisitions, we determined that the replacement
cost, in a start-up situation, of establishing these two operations as FDA
compliant research sites was $1,267 and recorded intangible assets of that
amount. We determined that these assets had an indefinite life, and accordingly
did not amortize the assets. During the fiscal year ended September 30, 2006,
we
re-examined the make-up of these assets, and determined that of the total
recorded, $793 related to the hiring and training of the in-place workforce.
Such assets should be included in goodwill and, accordingly, we reclassified
that amount to goodwill in fiscal 2006. The remaining $474 of the intangible
assets relates to the replacement costs of creating and documenting the
operating systems and procedure, their validation and audit. The evolving nature
of procedures in a regulated environment requires that we constantly monitor
and
update those procedures. Accordingly, we have revised our estimate of the useful
life of that asset to a ten year life, and recorded the amortization in Cost
of
Service Revenue.
We
complete a fair value-based impairment test on our goodwill and intangible
assets not subject to amortization at the close of each fiscal year, in addition
to other times if events indicate there is a likely decline in
value. Our
clinical research unit acquired in fiscal 2003 had experienced losses since
acquisition, including $2,952 in fiscal 2006 before impairment charge. Although
improvement had been achieved in operating results since acquisition and prior
to fiscal 2006, the acquisition of one of our major customers by a company
that
had other clinical study providers, and the subsequent cancellation of
previously scheduled studies seriously impacted operating results for this
unit
in fiscal 2006. Establishing future profitable operations of the unit will
require additional sales effort to attract new customers. Consequently, in
the
third quarter of fiscal 2006, we determined there was a permanent impairment
of
the value of the assets acquired, and recorded a charge of $1,100 to write
down
the value of property and equipment by $330, other intangible assets by $387
and
reduced the value of goodwill by $383 (net of accumulated amortization). The
impairment charge was necessary to adjust the carrying values of the respective
assets to our estimate of fair value. We also recorded a deferred tax benefit
of
$436 related to these charges. The clinical research unit is included in the
Services segment in these financial statements and footnotes.
The
carrying amount of goodwill at both September 30, 2007 and 2006 was $1,855.
The
components of intangible assets subject to amortization are as
follows:
|
September 30, 2007
|
||||||||||
|
Weighted
average life
(years)
|
Gross Carrying
Amount
|
Accumulated
Amortization
|
||||||||
|
FDA
compliant facility
|
10
|
$
|
402
|
$
|
171
|
|||||
|
Methodologies
|
5
|
180
|
171
|
|||||||
|
Volunteer
database
|
5
|
326
|
280
|
|||||||
|
Customer
relationships
|
5
|
359
|
341
|
|||||||
|
|
$
|
1,267
|
$
|
963
|
||||||
|
|
September 30, 2006
|
|||||||||
|
|
Weighted
average life
(years)
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
|||||||
|
FDA
compliant facility
|
10
|
$
|
402
|
$
|
131
|
|||||
|
Methodologies
|
5
|
180
|
135
|
|||||||
|
Volunteer
database
|
5
|
326
|
215
|
|||||||
|
Customer
relationships
|
5
|
359
|
269
|
|||||||
|
$
|
1,267
|
$
|
750
|
|||||||
38
Amortization
expense for intangible assets for fiscal years ended September 30, 2007,
2006 and 2005 was $213, $459 and $335 respectively. The following table provides
information regarding estimated amortization expense for the next five
years:
|
2008
|
$
|
113
|
||
|
2009
|
40
|
|||
|
2010
|
40
|
|||
|
2011
|
40
|
|||
|
2012
|
40
|
|
(i)
|
Advertising
Expense
|
We
expense advertising costs as incurred. Advertising expense was $118, $284
and
$112 for the years ended September 30, 2007, 2006, and 2005,
respectively.
|
Stock-Based
Compensation
|
On
October 1, 2005, to comply with current accounting for stock options, we
changed
our accounting policy to recognize compensation expense for all share-based
payment awards made to employees and directors under our stock option plans
based on fair values. Previously, we had not recognized expense for employee
stock options. We used the modified prospective transition method, which
requires the application of the accounting standard as of October 1, 2005,
the
first day of our fiscal year. In accordance with this method, our Consolidated
Financial Statements for fiscal 2005 do not include expenses for share-based
payments. Stock-based compensation expense for employee stock options for
the
years ended September 30, 2007 and 2006 was $304 and $356 with related
tax
benefits of $96 and $37, respectively.
SFAS
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of
the
portion of the award that is ultimately expected to vest is recognized
as
expense over the requisite service periods in our Statements of Operations.
Prior to the adoption of SFAS 123(R), we accounted for stock-based awards
to
employees and directors using the intrinsic value method in accordance
with APB
No. 25 as allowed under SFAS No. 123. Under the intrinsic value method,
no
stock-based compensation expense was recognized in our Consolidated Statements
of Operations in fiscal 2005.
Stock-based
compensation expense is recognized based on the value of the portion of
share-based payment awards that is expected to vest during the period,
reduced
for estimated forfeitures. Forfeitures are revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates and an adjustment
is
recognized at that time. Stock-based compensation expense recognized in
our
Consolidated Statement of Operations for the years ended September 30,
2007 and
2006 included compensation expense for share-based payment awards granted
prior
to, but not yet vested as of October 1, 2006 and 2005, respectively, based
on
the grant date fair value. There were 305 shares of stock awards granted
during
fiscal 2007, including grants contingent on shareholder approval. In the
event
such approval is not attained, the Company will make cash payments on each
vesting date equal to the value that would have been realized on the options
vesting on that date. Compensation expense for all share-based payment
awards
are recognized using the straight-line single option approach.
We
use a
binomial option-pricing model as our method of valuation for share-based
awards,
requiring us to make certain assumptions about the future
[Remainder
of page intentionally left blank.]
39
The
following table presents the effect on earnings and earnings per share had
we
applied the same treatment to stock-based employee compensation in the year
ended September 30, 2005:
|
Net
loss as adjusted (a)
|
$
|
(80
|
)
|
|
|
Deduct: Total
stock-based employee compensation expense determined under the
fair value
based method for all awards, net of related tax effects
|
(177
|
)
|
||
|
Pro
forma net loss
|
$
|
(257
|
)
|
|
|
Loss
per share:
|
||||
|
Basic
and diluted - as reported
|
$
|
(0.02
|
)
|
|
|
Basic
and diluted - pro forma
|
$
|
(0.05
|
)
|
(a)
2005 has been retrospectively adjusted for our change in 2007 from the last-in,
first-out method of inventory accounting to the first-in, first-out
method.
|
(k)
|
Income
Taxes
|
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax
rates is recognized in income in the period that includes the enactment date.
We
record valuation allowances based on a determination of the expected realization
of tax assets.
In
July
2006, the FASB released Interpretation No. 48, Accounting
for Uncertainty in Income Taxes.
This
Interpretation revises the recognition tests for tax positions taken in tax
returns such that a tax benefit is recorded only when it is more likely than
not
that the tax position will be allowed upon examination by taxing authorities.
The amount of such a tax benefit to record is the largest amount that is
more
likely than not to be allowed. Any reduction in deferred tax assets or increase
in tax liabilities upon adoption will correspondingly reduce retained earnings.
We do not expect the adoption of this Interpretation, which is effective
for our
fiscal year beginning October 1, 2007, to have a material impact on our
financial statements.
In
September, 2006 the staff of the Securities and Exchange Commission issued
Staff
Accounting Bulletin 108, dealing with the methods of measuring misstatements
when determining materiality to the financial statements. We have been
using
such methods since the SAB 108 was issued.
|
Use
of Estimates
|
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions that affect the amounts reported in the financial statements
and
accompanying notes. Our actual results could differ from those
estimates.
3.
INCOME (LOSS) PER SHARE
We
compute basic income or loss per share using the weighted average number
of
common shares outstanding. We compute diluted income or loss per share using
the
weighted average number of common and potential common shares outstanding.
Potential common shares include the dilutive effect of shares issuable upon
exercise of options to purchase common shares. Shares issuable upon the
conversion of convertible subordinated debt have not been included as they
were
not dilutive. Because of losses in each year of the two year period ended
September 30, 2006, outstanding potential common shares were anti-dilutive
in
each year; therefore, basic and diluted loss per share are the
same.
40
|
Years
Ended September 30,
|
|||||||||||||
|
2007
|
2006
|
2005
|
|||||||||||
|
Basic
net income/(loss) per share:
|
|||||||||||||
|
Net
income/(loss) applicable to common shareholders (a)
|
$
|
926
|
$
|
(2,670
|
)
|
$
|
(80
|
)
|
|||||
|
Weighted
average common shares outstanding
|
4,909
|
4,883
|
4,870
|
||||||||||
|
Basic
net income/(loss) per share
|
$
|
0.19
|
$
|
(0.55
|
)
|
$
|
(0.02
|
)
|
|||||
|
Diluted
net income/(loss) per share:
|
|||||||||||||
|
Diluted
net income/(loss) applicable to common (a)
|
$
|
926
|
$
|
(2,670
|
)
|
$
|
(80
|
)
|
|||||
|
Weighted
average common shares outstanding
|
4,909
|
4,883
|
4,870
|
||||||||||
|
Dilutive
stock options/shares
|
51
|
—
|
—
|
||||||||||
|
Dilutive
weighted average common shares outstanding
|
4,960
|
4,883
|
4,870
|
||||||||||
|
Diluted
net income/(loss) per share
|
$
|
0.19
|
$
|
(0.55
|
)
|
$
|
(0.02
|
)
|
|||||
a)
2006
and 2005 have been retrospectively adjusted for our change in 2007 from the
last-in, first-out method of inventory accounting to the first-in, first-out
method.
At
September 30, 2007, 2006 and 2005 we had 250 shares issuable upon the conversion
of our subordinated debt and 564, 404 and 480 shares, respectively, issuable
upon exercise of stock options that are not included in our outstanding share
calculation as they are anti-dilutive.
4.
SALE OF BUILDING
On
January 5, 2005 we sold our building in Baltimore, valued at approximately
$6.2
million for a $6.5 million cash selling price. Concurrently, we entered into
a
three year leaseback of approximately 85% of the building for $800
annually, plus operating expenses. Accordingly, we have accounted for the
transaction as a sale/leaseback transaction. We recorded a deferred gain
on the
building of $218 which is being amortized over the life of the lease which
expires December 31, 2007. The net proceeds of the sale were used to pay
off our
revolving credit facility and for working capital. The unamortized remaining
value of the deferred gain was $18 and $91 as of September 30, 2007 and 2006,
respectively.
5.
INVENTORIES
Inventories
at September 30 consisted of the following:
|
2007
|
2006
|
||||||
|
Raw
materials
|
$
|
1,480
|
$
|
1,335
|
|||
|
Work
in progress
|
273
|
278
|
|||||
|
Finished
goods
|
224
|
357
|
|||||
|
|
$
|
1,977
|
$
|
1,970
|
|||
Prior
to
2007, our inventories were accounted for using the last-in, first-out (LIFO)
method of accounting. During the fourth quarter of 2007, we changed our
method
of accounting for inventories from the LIFO method to the FIFO method.
The FIFO
method of accounting provides better matching of revenues with expenses
in
accordance with sales contract terms. All periods have been retrospectively
adjusted using FIFO accounting, resulting in an $89 increase in retained
earnings as of October 1, 2004.
The
impact to the fourth quarter is not material.
41
The
following table summarizes the effect of the accounting change on our
consolidated financial statements for the fiscal years ended September 30,
(in
thousands):
|
2006
|
2005
|
||||||||||||
|
As
Originally
Reported
|
As
Adjusted
for
Accounting
Change
|
As
Originally
Reported
|
As
Adjusted
for
Accounting
Change
|
||||||||||
|
Consolidated
statements of operations:
|
|||||||||||||
|
Cost
of product revenue
|
$
|
3,547
|
$
|
3,647
|
$
|
3,462
|
$
|
3,426
|
|||||
|
Tax
provision (benefit)
|
(1,825
|
)
|
(1,865
|
)
|
392
|
407
|
|||||||
|
Net
income (loss)
|
(2,610
|
)
|
(2,670
|
)
|
(101
|
)
|
(80
|
)
|
|||||
|
Basic
net income (loss) per share
|
(0.53
|
)
|
(0.55
|
)
|
(0.02
|
)
|
(0.02
|
)
|
|||||
|
Diluted
net income (loss) per share
|
(0.53
|
)
|
(0.55
|
)
|
(0.02
|
)
|
(0.02
|
)
|
|||||
|
Consolidated
balance sheets:
|
|||||||||||||
|
Inventories
|
1,887
|
1,970
|
2,041
|
2,225
|
|||||||||
|
Deferred
taxes, current
|
604
|
571
|
381
|
308
|
|||||||||
|
Retained
earnings
|
4,584
|
4,634
|
7,194
|
7,304
|
|||||||||
|
Consolidated
statements of cash flows:
|
|
||||||||||||
|
Deferred
taxes
|
(1,335
|
)
|
(1,375
|
)
|
(623
|
)
|
(609
|
)
|
|||||
|
Inventory
working capital change
|
154
|
254
|
(472
|
)
|
(507
|
)
|
|||||||
Had
we
continued to use the LIFO method for fiscal 2007, our cost of product revenue
would have been $59 higher and our net income would have been reduced to
$891.
6.
LEASE ARRANGEMENTS
The
total
amount of equipment capitalized under capital lease obligations as of September
30, 2007and 2006 was $2,739 and $2,739, respectively. Accumulated
amortization on capital leases at September 30, 2007 and 2006 was $825 and
$343, respectively. Amortization of assets acquired through capital leases
is
included in depreciation expense.
We
acquired equipment totaling $1,473 through capital lease arrangements during
the
year ended September 30, 2006. Future minimum lease payments on capital leases
at September 30, 2007 are as follows:
|
Principal
|
Interest
|
Total
|
||||||||
|
2008
|
$
|
510
|
$
|
117
|
$
|
627
|
||||
|
2009
|
553
|
74
|
627
|
|||||||
|
2010
|
453
|
30
|
483
|
|||||||
|
2011
|
132
|
3
|
135
|
|||||||
|
|
$
|
1,648
|
$
|
224
|
$
|
1,872
|
||||
We
lease
office space and equipment under noncancelable operating leases that terminate
at various dates through 2013. Certain of these leases contain renewal options.
Total rental expense under these leases was $2,265, $1,808, and $914 in fiscal
2007, 2006, and 2005, respectively.
42
Future
minimum lease payments for the following fiscal years under operating leases
at
September 30, 2007 are as follows:
|
2008
|
$
|
1,768
|
||
|
2009
|
1,698
|
|||
|
2010
|
1,597
|
|||
|
2011
|
1,608
|
|||
|
2012
|
1,628
|
|||
|
After
2012
|
2,812 | |||
| $ | 11,111 |
7.
DEBT ARRANGEMENTS
Long-term
debt consisted of the following at September 30:
|
2007
|
2006
|
||||||
|
Mortgage
note payable to a bank, payable in monthly principal and interest
installments of $40 until June 1, 2010 when it adjusts under
the terms of
the note. Interest adjusts based on market rates. Collateralized
by
underlying property. Due November, 2012.
|
$
|
4,445
|
$
|
4,610
|
|||
|
Mortgage
note payable to a bank, payable in monthly principal and interest
installments of $19. Interest adjusts based on market rates.
Collateralized by underlying property. Due May, 2008.
(1)
|
1,735
|
1,843
|
|||||
|
Mortgage
note payable to a bank, payable in monthly principal and interest
installments of $17 until June 1, 2010, when it adjusts under
the terms of
the note. Interest adjusts based on market rates. Collateralized
by
underlying property. Due November, 2012.
|
2,025
|
2,094
|
|||||
|
Convertible
subordinated 6% notes payable due January 1, 2008. Interest payable
in
arrears on the 15th of January and July after June 1, 2005 (4.67%
effective rate).
|
4,000
|
4,000
|
|||||
|
Subordinated
10% notes payable due October 1, 2007. Holders can require the
Company to
repay 20% of the original outstanding balance each October 1.
Interest
payable upon demand each October 1 through maturity.
|
477
|
837
|
|||||
|
12,682
|
13,384
|
||||||
|
Less
current portion
|
4,821
|
721
|
|||||
|
$
|
7,861
|
$
|
12,663
|
||||
(1)
We
have a commitment from our bank to
renew this loan for an additional five years on essentially the same
terms.
The
following table summarizes our principal payment obligations for the years
ending September 30:
|
2008
|
$
|
4,821
|
||
|
2009
|
369
|
|||
|
2010
|
396
|
|||
|
2011
|
426
|
|||
|
2012
|
458
|
|||
|
Thereafter
|
6,212
|
|||
|
|
$
|
12,682
|
43
|
(a)
|
Subordinated
Debt
|
In
connection with an acquisition in fiscal 2003, we issued 10% subordinated
notes
of $1.8 million. The remaining outstanding principal on these notes was
$477 at
September 30, 2007. We made the final principal payment of $477, which
was
included in current portion of long-term debt at September 30, 2007, and
interest payment of $48 in October, 2007. These notes were subordinated
to our
mortgage and revolving line of credit.
In
connection with another acquisition in fiscal 2003, we issued $4.0 million
of 6%
convertible notes payable, including $500 payable to a current director
of the
Company, due January 1, 2008. These notes were non-interest bearing until
June
1, 2005. We are accruing interest expense over the term of these notes
using the
effective interest rate method. The holders of these notes may convert
all or
part of the outstanding notes and accrued interest into our common stock
at a
conversion rate of $16 per common share. These notes are convertible into
250
shares of our common stock. We may, at our option, prepay all or any portion
of
the outstanding notes plus accrued interest, with prior written notice
to the
holders. As of September 30, 2007, we have not made any prepayment elections.
We
intend to use proceeds from a mortgage and cash on hand to pay the principal
of
$4.0 million on January 1, 2008. If necessary, we may use a portion of
our
existing line of credit to make up the remaining balance. At this time,
we do
not anticipate the need to borrow on the line of credit to pay the note
balance.
These notes are subordinated to our mortgages and revolving line of
credit.
|
(b)
|
Revolving
Line of Credit
|
Based
on
the Amended and Restated Loan
and
Security Agreement (Revolving Line of Credit) effective as of October 24,
2007,
we
have a
revolving line of credit through December 31, 2009 with our commercial
bank
which we use for working capital and other purposes. Borrowings under the
agreement are collateralized by substantially all assets related to our
operations and all common stock of our United States subsidiaries and 65%
of the
common stock of our non-United States subsidiaries. Under the terms of the
agreement, the Company has agreed to restrict advances to subsidiaries,
limit
additional indebtedness and capital expenditures as well as to comply with
certain financial covenants outlined in the borrowing agreement. The credit
agreement contains cross-default provisions with our mortgages or other
borrowings.
Our
amended revolving line of credit limits outstanding borrowings to the borrowing
base as defined in the agreement, to a maximum available amount of $5.0
million.
As of September 30, 2007, there were no borrowings on this line. We also
have an
outstanding letter of credit to collateralize our lease in Baltimore,
Maryland for $1.0 million, which is counted against our allowable borrowings.
Borrowings
under the line of credit bear interest at a variable rate based on the
London
Interbank Offer Rate (LIBOR) or a base rate determined by the lender’s prime
rate plus an applicable margin, as defined in the agreement. The applicable
margin for borrowings under the line of credit ranges from 0.00% to
0.50% for base rate borrowings and 1.50% to 3.00% for LIBOR borrowings,
subject
to adjustment based on the average availability under the line of credit.
We
also pay a commitment fee on the unused portion of the line of credit ranging
from 0.20% - 0.30%. All interest and fees are paid monthly. Under
the
computation of the borrowing base, we had $3.3 million of available additional
borrowing capacity at September 30, 2007. We were in compliance with our
loan
covenants at September 30, 2007.
44
8.
INCOME TAXES
Significant
components of our deferred tax liabilities and assets as of September 30
are as follows:
|
2007
|
2006
|
||||||
|
|
(a)
|
|
|||||
| Long-term deferred tax liabilities: | |||||||
|
Tax
over book depreciation
|
$
|
495
|
$
|
683
|
|||
|
Lower
tax basis on assets of acquired company
|
(101
|
)
|
(144
|
) | |||
|
Stock
options expensed
|
(
57
|
)
|
—
|
||||
|
Total
long-term deferred tax liabilities
|
$
|
337
|
$
|
539
|
|||
|
|
|||||||
|
Current
deferred tax assets:
|
|||||||
|
Inventory
pricing
|
$
|
176
|
$
|
111
|
|||
|
Accrued compensation and vacation
|
410
|
230
|
|||||
|
Accrued
expenses and other - net
|
184
|
74
|
|||||
|
Foreign
tax credit carryover
|
120
|
120
|
|||||
|
Deferred
gain on sale/leaseback
|
7
|
36
|
|||||
|
Foreign
net operating loss
|
326
|
456
|
|||||
|
Total
current deferred tax assets
|
$
|
1,223
|
$
|
1,027
|
|||
|
|
|||||||
|
Valuation
allowance for deferred tax assets
|
(326
|
)
|
(456
|
)
|
|||
|
Net
deferred tax assets
|
$
|
897
|
$
|
571
|
|||
|
Net
deferred tax (assets) liabilities
|
$
|
(560
|
) |
$
|
(32
|
)
|
|
Significant
components of the provision (benefit) for income taxes are as follows as
of the
end of the year September 30:
|
2007
|
2006
|
2005
|
||||||||
|
|
(a)
|
|
(a)
|
|
||||||
| Current: | ||||||||||
|
Federal
|
$
|
875
|
$
|
(553
|
)
|
$
|
814
|
|||
|
State
|
224
|
(97
|
)
|
216
|
||||||
|
Foreign
|
(15
|
)
|
120
|
—
|
||||||
|
Total
Current
|
$
|
1,084
|
$
|
(530
|
)
|
$
|
1,030
|
|||
|
Deferred:
|
||||||||||
|
Federal
|
$
|
(453
|
)
|
$
|
(1,074
|
)
|
$
|
(489
|
)
|
|
|
State
|
(58
|
)
|
(261
|
)
|
(134
|
)
|
||||
|
Foreign
|
130 | 45 | — | |||||||
|
Reduction
of valuation allowance
|
(130 | ) | (45 | ) | — | |||||
|
Total
deferred
|
$
|
(511
|
)
|
$
|
(1,335
|
)
|
$
|
(623
|
)
|
|
|
|
$
|
573
|
$
|
(1,865
|
)
|
$
|
407
|
|||
(a)
2006
and 2005 have been retrospectively adjusted for our change in 2007 from the
last-in, first-out method of inventory accounting to the first-in, first-out
method.
45
The
effective income tax rate varied from the statutory federal income tax rate
as
follows:
|
2007
|
2006
|
2005
|
||||||||
|
Statutory
federal income tax rate
|
34.0
|
%
|
(34.0
|
)%
|
34.0
|
%
|
||||
|
Increases
(decreases):
|
||||||||||
|
Nondeductible
expenses
|
7.7
|
0.5
|
6.8
|
|||||||
|
Tax
benefit of foreign sales
|
(0.7
|
)
|
(1.5
|
)
|
(14.6
|
)
|
||||
|
State
income taxes, net of federal tax benefit
|
7.3
|
(5.1
|
)
|
18.1
|
||||||
|
Nontaxable
foreign (gains) losses
|
(9.1
|
)
|
1.1
|
80.2
|
||||||
|
Other
|
(1.0
|
)
|
(2.1
|
)
|
0.0
|
|||||
|
|
38.2
|
% |
(41.1
|
)%
|
124.5
|
%
|
||||
Payments
made in 2007, 2006, and 2005 for income taxes amounted to $984, $498, and
$407,
respectively.
9.
STOCK-BASED COMPENSATION
Summary
of Stock Option Plans and Activity
We
have
an Employee Stock Option Plan whereby options to purchase our common shares
at
fair market value at date of grant can be granted to our employees. Options
granted vest and become exercisable in four equal installments beginning
two
years after the date of grant, and expire upon the earlier of the employee's
termination of employment with us, or ten years from the date of grant. This
plan terminates in fiscal 2008.
We
established an Outside Director Stock Option Plan whereby options to purchase
our common shares at fair market value at date of grant can be granted to
outside directors. Options granted vest and become exercisable in four equal
installments beginning two years after the date of grant and expire upon
the
earlier of the director's termination of board service with us, or ten years
from the date of grant. This plan terminates in fiscal 2008.
A
summary
of our stock option activity and related information for the years ended
September 30 is as follows (in thousands except for share prices):
|
2007
|
2006
|
2005
|
|||||||||||||||||
|
Options
(shares)
|
Weighted-
Average
Exercise Price
|
Options
(shares)
|
Weighted-
Average
Exercise Price
|
Options
(shares)
|
Weighted-
Average
Exercise Price
|
||||||||||||||
|
Outstanding –
beginning
of year
|
404
|
$
|
4.98
|
480
|
$
|
4.95
|
343
|
$
|
4.66
|
||||||||||
|
Exercised
|
(17
|
)
|
4.48
|
(21
|
)
|
4.50
|
(2
|
)
|
4.25
|
||||||||||
|
Granted
|
305
|
6.98
|
—
|
—
|
173
|
5.39
|
|||||||||||||
|
Terminated
|
(77
|
)
|
4.91
|
(55
|
)
|
4.90
|
(34
|
)
|
4.63
|
||||||||||
|
Outstanding –
end of year
|
615
|
$
|
6.00
|
404
|
$
|
4.98
|
480
|
$
|
4.95
|
||||||||||
|
Weighted
grant date fair values
|
$
|
3.57
|
$
|
—
|
$
|
3.38
|
|||||||||||||
The
intrinsic values of options exercised in the years ended September 30, 2007,
2006 and 2005 were $10, $37 and $4 respectively. We received $79, $94 and
$6
from the exercise of qualified employee stock options in fiscal 2007, 2006
and
2005, respectively, for which no tax benefit was recognized. The options
on the
615 shares outstanding at September 30, 2007 had an aggregate intrinsic value
of
$909 and a weighted average contract term of 7.9 years.
46
A
summary
of non-vested options for the year ended September 30, 2007 is as
follows:
|
Number of
Shares
|
Weighted
Average
Grant Date
Fair Value
|
||||||
|
Non-vested
options, beginning of year
|
278
|
$
|
3
.75
|
||||
|
Granted
|
305
|
3
.79
|
|||||
|
Vested
|
(134
|
)
|
3
.38
|
||||
|
Forfeited
|
(31
|
)
|
3
.47
|
||||
|
Non-vested
options, end of year
|
418
|
$
|
3
.71
|
||||
At
September 30, 2007, there were 197 shares vested, all of which were exercisable.
The weighted average exercise price for these shares was $5.02 per share;
the
aggregate intrinsic value of these shares was $490 and the weighted average
remaining term was 5.7 years. As
of
September 30, 2007, our total unrecognized compensation cost related to
non-vested stock options was $932 and is expected to be recognized over a
weighted-average service period of 2.43 years.
At
September 30, 2007, there are 347 shares available for grants under the two
plans.
The
following table summarizes outstanding and exercisable options as of
September 30, 2007 (In thousands except per share
amounts):
|
Range
of exercise prices
|
Number
of shares
outstanding
at
September 30,
2007
|
Weighted
average
remaining
contractual
life
(years)
|
Weighted
average
exercise
price
|
Number
of
shares
exercisable
at
September
30,
2007
|
Weighted
average
exercise
price
|
||||||||||||
|
$
|
2.80
- 4.58
|
158
|
5
.61
|
$ |
4
.35
|
119
|
$ |
4
.33
|
|||||||||
|
$
|
5.00
- 5.74
|
|
155
|
7
.76
|
$ |
5
.42
|
61
|
$ |
5
.54
|
||||||||
|
$
|
7.10
- 8.00
|
302
|
9
.11
|
$ |
7
.16
|
17
|
$ |
8
.00
|
|||||||||
The
assumptions used in computing our stock based compensation expense for the
fiscal years ended September 30 were as follows (because we had no grants during
fiscal 2006, no assumptions are presented for that year):
|
2007
|
2005
|
||||||
|
Risk-free
interest rate
|
4.65
|
%
|
3.00
|
%
|
|||
|
Dividend
yield
|
0.00
|
%
|
0.00
|
%
|
|||
|
Volatility
of the expected market price of
the Company's common stock
|
44.00
63.00
|
%-
%
|
67.00
|
% | |||
|
Expected
life of the options (years)
|
7.0
|
7.0
|
|||||
11.
RETIREMENT PLAN
We
have a
401(k) Retirement Plan (the “Plan”) covering all employees over twenty-one years
of age with at least one year of service. Under the terms of the Plan, we
contribute 1% (2% in 2006 and 2005) of each participant’s total wages to the
Plan and match 22% of the first 10% of the employee contribution. 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 30% of the participant’s annual wages. We made no discretionary
contributions under the plan in 2007, 2006, and 2005. Contribution expense
was
$326, $638, and $555 in fiscal 2007, 2006, and 2005, respectively.
47
12.
SEGMENT INFORMATION
We
operate in two principal segments - research services and research products.
Our
services segment provides research and development support on a contract basis
directly to pharmaceutical companies. Our analytical products segment provides
liquid chromatography, electrochemical and physiological monitoring products
to
pharmaceutical companies, universities, government research centers, and medical
research institutions. We evaluate performance and allocate resources based
on
these segments. Certain of our assets are not directly attributable to the
service or product segments. These assets are grouped into the Corporate segment
and include cash and cash equivalents, deferred income taxes, refundable income
taxes, debt issue costs and certain other assets. We do not allocate such items
to the principal segments because they are not used to evaluate their financial
position. The accounting policies of these segments are the same as those
described in the summary of significant accounting policies.
During
2007, we changed our method of accounting for inventories from the LIFO method
to the FIFO method, and accordingly, segment results for fiscal 2006 and
2005 have been retrospectively adjusted on a FIFO basis.
|
Operating
Segments
|
|
Year
ended September 30,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Revenue:
|
||||||||||
|
Service
|
$
|
36,051
|
$
|
34,318
|
$
|
32,951
|
||||
|
Product
|
9,194
|
8,730
|
9,444
|
|||||||
|
Total
|
$
|
45,245
|
$
|
43,048
|
$
|
42,395
|
||||
|
Operating
income (loss):
|
||||||||||
|
Service
|
$
|
1,720
|
$
|
(3,728
|
) |
$
|
148
|
|||
|
Product
|
670
|
205
|
1,148
|
|||||||
|
Total
operating income (loss)
|
2,390
|
(3,523
|
)
|
1,296
|
||||||
|
Corporate
expenses
|
(891
|
)
|
(1,012
|
)
|
(969
|
)
|
||||
|
Income
(loss) before income taxes
|
$
|
1,499
|
$
|
(4,535
|
)
|
$
|
327
|
|||
[Remainder
of page intentionally left blank.]
48
|
Year
ended September 30,
|
||||||||||
|
2007
|
|
2006
|
2005
|
|||||||
|
Identifiable
assets:
|
||||||||||
|
Service
|
$
|
23,979
|
$
|
24,539
|
$
|
31,739
|
||||
|
Product
|
9,258
|
9,947
|
10,322
|
|||||||
|
Corporate
|
8,800
|
7,878
|
5,888
|
|||||||
|
Total
|
$
|
42,037
|
$
|
42,364
|
$
|
47,949
|
||||
|
Goodwill,
net:
|
||||||||||
|
Service
|
$
|
1,481
|
$
|
1,481
|
$
|
1,071
|
||||
|
Product
|
374
|
374
|
374
|
|||||||
|
Total
|
$
|
1,855
|
$
|
1,855
|
$
|
1,445
|
||||
|
Intangible
assets, net:
|
||||||||||
|
Service
|
$
|
304
|
$
|
517
|
$
|
2,156
|
||||
|
Product
|
—
|
—
|
—
|
|||||||
|
Total
|
$
|
304
|
$
|
517
|
$
|
2,156
|
||||
|
Depreciation
and amortization:
|
||||||||||
|
Service
|
$
|
3,222
|
$
|
3,414
|
$
|
3,125
|
||||
|
Product
|
236
|
475
|
316
|
|||||||
|
Total
|
$
|
3,458
|
$
|
3,889
|
$
|
3,441
|
||||
|
Capital
expenditures:
|
||||||||||
|
Service
|
$
|
759
|
$
|
1,518
|
$
|
1,483
|
||||
|
Product
|
119
|
169
|
818
|
|||||||
|
Total
|
$
|
878
|
$
|
1,687
|
$
|
2,301
|
||||
|
Geographic
Information
|
|
Year
ended September 30,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Sales
to external customers:
|
||||||||||
|
North
America
|
$
|
39,420
|
$
|
37,615
|
$
|
34,046
|
||||
|
Pacific
Rim
|
700
|
693
|
1,052
|
|||||||
|
Europe
|
4,562
|
4,299
|
4,899
|
|||||||
|
Other
|
563
|
441
|
2,398
|
|||||||
|
Total
|
$
|
45,245
|
$
|
43,048
|
$
|
42,395
|
||||
|
Long-lived
assets:
|
||||||||||
|
North
America
|
$
|
24,729
|
$
|
27,676
|
$
|
29,499
|
||||
|
Europe
|
808
|
976
|
1,204
|
|||||||
|
Total
|
$
|
25,537
|
$
|
28,652
|
$
|
30,703
|
||||
49
|
(c)
|
Major
Customers
|
13.
RELATED PARTY TRANSACTIONS
As
of
September 30, 2007, we have a 6% subordinated convertible note payable for
$500 to one of our directors (a former director of PKLB). During fiscal 2004,
we
repaid $350 of debt to this director through a series of transactions which
resulted in our paying $200 of principal in cash (plus accrued interest to
the
date of repayment) and exchanging 38 shares of common stock for $150 face amount
of debt. On January 1, 2008, we expect to pay the remaining principal balance
of
the note in cash.
Included
in fiscal 2007 operating expenses is approximately $360 of severance costs
for
former officers of the Company as agreed upon on September 28, 2007 in
connection with their resignations. Approximately $88 was paid to each of
Dr.
and Mrs. Kissinger on October 5, 2007, with the remaining to be paid in six
equal installments beginning November 2007 through April 2008.
14.
CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
The
following is a summary of the unaudited quarterly results of operations for
fiscal years 2007, 2006 and 2005 (in thousands except per share amounts).
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
||||||||||
|
2007
|
|||||||||||||
|
Total
Revenue
|
$
|
10,884
|
$
|
11,311
|
$
|
12,615
|
$
|
10,435
|
|||||
|
Gross
Profit (a)
|
3,391
|
3,180
|
4,118
|
3,103
|
|||||||||
|
Net
income (loss) (a)
|
556
|
124
|
449
|
(203
|
)
|
||||||||
|
Basic
net income (loss) per common share outstanding (a)
|
0.11
|
0.03
|
0.09
|
(0.04
|
)
|
||||||||
|
Diluted
net income (loss) per common share outstanding (a)
|
0.11
|
0.03
|
0.09
|
(0.04
|
)
|
||||||||
|
2006
|
|||||||||||||
|
Total
Revenue
|
$
|
9,844
|
$
|
12,417
|
$
|
10,038
|
$
|
10,749
|
|||||
|
Gross
Profit (a)
|
3,146
|
4,934
|
2,530
|
3,100
|
|||||||||
|
Impairment
loss
|
—
|
—
|
1,100
|
—
|
|||||||||
|
Net
income (loss) (a)
|
(716
|
)
|
538
|
(1,756
|
)
|
(736
|
)
|
||||||
|
Basic
net income (loss) per common share outstanding (a)
|
(0.15
|
)
|
0.11
|
(0.36
|
)
|
(0.15
|
)
|
||||||
|
Diluted
net income (loss) per common share outstanding (a)
|
(0.15
|
)
|
0.11
|
(0.36
|
)
|
(0.15
|
)
|
||||||
|
2005
|
|||||||||||||
|
Total
Revenue
|
$
|
9,694
|
$
|
9,139
|
$
|
11,304
|
$
|
12,258
|
|||||
|
Gross
Profit (a)
|
3,627
|
2,426
|
5,026
|
4,301
|
|||||||||
|
Net
income (loss) (a)
|
404
|
(896
|
)
|
356
|
56
|
||||||||
|
Basic
net income (loss) per common share outstanding (a)
|
0.08
|
(0.18
|
)
|
0.07
|
0.01
|
||||||||
|
Diluted
net income (loss) per common share outstanding (a)
|
0.08
|
(0.18
|
)
|
0.07
|
$
|
0.01
|
|||||||
(a) Amounts have been retrospectively adjusted for our change in the fourth quarter of 2007 from the last-in, first-out method of inventory accounting to the first-in, first-out method.
50
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report
of
Independent Registered Public Accounting Firm
To
the
Board of Directors
Bioanalytical
Systems, Inc.
West
Lafayette, Indiana
We
have
audited the consolidated balance sheets of Bioanalytical Systems, Inc.and
subsidiaries as of September 30, 2007 and 2006, and the related consolidated
statements of operations, shareholders' equity and comprehensive income (loss)
and cash flows for the years then ended. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Bioanalytical Systems,
Inc
and subsidiaries as of September 30, 2007 and 2006, and the results of their
operations and their cash flows for the years then ended,
in
conformity with U.S. generally accepted accounting principles.
As
described in Notes 2 and 5 to the financial statements, the Company changed
its method of accounting for inventories in 2007. This change has been applied
retrospectively to fiscal 2005 and 2006 and, accordingly, all prior financial
statements have been adjusted. We
audited the adjustment described in Note 5 that was applied to adjust the
2005 and 2006 financial statements. In our opinion, such adjustment is
appropriate and has been properly applied.
/s/
Crowe
Chizek and Company LLC
Indianapolis,
Indiana
December
27, 2007
51
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report
of
Independent Registered Public Accounting Firm
To
the
Board of Directors
Bioanalytical
Systems, Inc.
West
Lafayette, Indiana
We
have
audited the accompanying consolidated statements of operations, shareholders'
equity and comprehensive income (loss), and cash flows of Bioanalytical
Systems,
Inc. and subsidiaries for the year ended September 30, 2005, before the
restatement described in notes 2 and 5 to the financial statements. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 audit provides a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements (before restatement) referred
to
above present fairly, in all material respects, the consolidated results
of
operations of Bioanalytical Systems, Inc. and subsidiaries and its cash
flows
for the year ended September 30, 2005, in conformity with U.S.
generally accepted accounting principles.
/s/
KPMG
LLP
Indianapolis,
Indiana
January
7, 2006
52
ITEM
9-CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Effective
September 15, 2006 KPMG LLP (“KPMG”) resigned as the Company’s independent
accountant. KPMG's reports on the Company's consolidated financial statements
as
of and for the year ended September 30, 2005 did not contain an adverse opinion
or disclaimer of opinion, nor was such report qualified or modified as to
uncertainty, audit scope or accounting principle. During the year ended
September 30, 2005, and through September 15, 2006, there were (1) no
disagreements with KPMG on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of KPMG would have caused
KPMG
to make reference thereto in KPMG's reports on the financial statements for
such
years; and (2) no other reportable events, as defined in Item 304(a)(1)(v)
of
the Commission's Regulation S-K, except for the matters set forth below.
In
connection with KPMG's review of the Report on Form 10-Q and the First Amendment
to the Report on Form 10-Q for the three and nine months ended June 30, 2006,
KPMG presented a letter regarding the following items to the Audit Committee
of
the Board of Directors, dated August 29, 2006 relating to its review of the
unaudited interim financial statements for the Company as of June 30, 2006,
and
for the three and nine months then ended (the “Letter”). KPMG noted certain
conditions involving the Company’s internal control and its operation that KPMG
considered to be “material weaknesses.” “Material weakness” was defined in the
Letter as “a control deficiency, or combination of control deficiencies, that
results in more than a remote likelihood that a material misstatement of
the
annual or interim financial statements will not be prevented or detected
by the
entity's internal control.” The material weaknesses noted by KPMG consisted of a
failure to set an appropriate "tone at the top" to instill a company-wide
attitude of control consciousness; failure to maintain adequate procedures
for
anticipating and identifying financial reporting risks and for reacting to
changes in its operating environment that could have a material effect on
financial reporting; failure to maintain adequately trained personnel to
perform
effective review of accounting procedures critical to financial reporting;
and a
lack of adequately trained finance and accounting personnel with the ability
to
apply U.S. generally accepted accounting principles associated with the
impairment of certain long-lived assets in accordance with Statement of
Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.
Management concurred with the assessment of KPMG. KPMG discussed the matters
described in this paragraph with the Audit Committee of the Company. The
Company
authorized KPMG to respond fully to the inquiries of its successor accountant
concerning these matters.
KPMG
also
communicated to the Audit Committee in the Letter that the Company had filed
its
Report on Form 10-Q for the three and nine month periods ended June 30, 2006,
prior to the completion of its interim review. KPMG has subsequently completed
its interim review and the Company filed an amended report on Form 10-Q/A
for
the three and nine month periods ended June 30, 2006.
On
October 30, 2006 the Audit Committee of the Company’s Board of Directors engaged
Crowe Chizek and Company LLC (“Crowe Chizek”) to be the Company’s independent
registered public accounting firm to audit and report on the Company’s
consolidated financial statements for the year ended September 30, 2006.
During
the two most recent fiscal years ended September 30, 2006 and 2005, and through
October 30, 2006, the Company had not consulted with Crowe Chizek regarding
either: (i) the application of accounting principles to a specified
transaction, either completed or proposed; or the type of audit opinion that
might be rendered on the Company’s financial statements; or (ii) any matter that
was either the subject of a disagreement (as that term is defined in Item
304(a)(1)(iv) of Regulation S-K and the related instructions to that Item)
or a
reportable event (as that term is defined in Item 304(a)(1)(v) of Regulation
S-K).
[Remainder
of page intentionally left blank.]
53
ITEM
9A-CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
Based
on
their most recent evaluation, which was completed as of September 30, 2007,
our
Chief Executive Officer and Chief Financial Officer believe that our disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) were effective as of September 30, 2007. In response to the matters
described in Item 9 above, and to ensure that information required to be
disclosed in this Form 10-K was recorded, processed, summarized and reported
within the time periods specified by the Securities and Exchange Commission’s
rules and forms,, as of September 30, 2007, we had retained a new Chief
Executive Officer with a financial background to set a better “tone at the top”
regarding our systems, and regard for internal control. We have also instituted
additional procedures to more timely identify financial statement risks.
In
order to maintain a capability to perform effective review of accounting
procedures critical to financial reporting, we decided to retain an outside
accounting firm, separate from our auditors, to consult on accounting and
reporting issues where we do not have sufficient internal capabilities. The
Chief Executive Officer and Chief Financial Officer believe that implementing
these new procedures resulted in effective disclosure controls and procedures
as
of September 30, 2007.
Changes
in Internal Controls
Except
as
noted above, there were no significant changes in the internal controls or
other
factors that could significantly affect those controls subsequent to the date
of
their evaluation, which was completed as of September 30, 2007.
ITEM
9B-OTHER INFORMATION
PART
III
ITEM
10-DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The
following information concerns the persons who served as the directors of the
Company as of September 30, 2007. Except as indicated in the following
paragraphs, the principal occupations of these persons has not changed in the
past five years. Information concerning the executive officers of the Company
may be found in “Executive Officers of the Registrant” under Item 1 of this
report, which is incorporated herein by reference.
|
Name
|
Age
|
Position
|
||
|
William
E. Baitinger
|
74
|
Director
|
||
|
54
|
Director
|
|||
|
Leslie
B. Daniels
|
60
|
Director
|
||
|
Larry
S. Boulet
|
61
|
Director
|
||
|
Richard
M. Shepperd
|
67
|
Director,
President and Chief Executive
Officer
|
William
E. Baitinger
has
served as a director of the Company since 1979. Mr. Baitinger was Director
of
Technology Transfer for the Purdue Research Foundation from 1988 until 2000.
In
this capacity he was responsible for all licensing and commercialization
activities from Purdue University. He currently serves as Special Assistant
to
the Vice President for Research at Purdue University. Mr. Baitinger has a
Bachelor of Science degree in Chemistry and Physics from Marietta College and
a
Master of Science degree in Chemistry from Purdue University.
David
W. Crabb, M.D.
has
served as a director of the Company since February, 2004. He has been Chairman
of the Indiana University Department of Medicine since 2001. Previously he
had
served as Chief Resident of Internal Medicine and on the Medicine and
Biochemistry faculty of Indiana University. He was appointed Vice Chairman
for
Research for the department and later Assistant Dean for Research. Dr. Crabb
serves on several editorial boards and on the Board of Indiana Alcohol Research
Center. He was a recipient of a NIH Merit award and numerous other research
and
teaching awards.
Leslie
B. Daniels
has
served as a director of the Company since June 2003. Mr. Daniels is a founding
partner of CAI, a private equity fund in New York City. He previously was
President of Burdge, Daniels & Co., Inc., a principal in venture capital and
buyout investments as well as trading of private placement securities, and
before that, a Senior Vice President of Blyth, Eastman, Dillon & Co. where
he had responsibility for the corporate fixed income sales and trading
departments. Mr. Daniels is a former Director of Aster-Cephac SA, IVAX
Corporation, MIM Corporation, Mylan Laboratories, Inc., NBS Technologies Inc.
and MIST Inc. He was also Chairman of Zenith Laboratories, Inc. and currently
serves as a Director of SafeGuard Health Enterprises, Inc.
54
Larry
S. Boulet has
served as a director of the Company since May 2007. Mr. Boulet was a Senior
Audit Partner with PriceWaterhouseCoopers (PWC) and a National Financial
Services Industry Specialist. For the last five years of his career with
PWC,
Mr. Boulet served as Partner-in-charge of the Indianapolis office’s Private
Client Group. Prior to serving on our Board, he served on the Board of Directors
of Century Realty Trust, an Indiana based, real estate investment trust.
He also
served as Audit Committee Chairman until the Trust’s sale and liquidation in
2007. Currently, Mr. Boulet also serves on the Indiana State University
Foundation Board of Directors, where he is the immediate past Chairman of
the
Board. He holds a Bachelor of Science degree in Accounting from Indiana State
University.
Richard
M. Shepperd was
elected President and Chief Executive Officer of the Company in September
2006,
and in May, 2007 agreed to extend his term until December 2009. Mr. Shepperd
served for two years prior to joining the Company with Able Laboratories,
Inc.,
of Cranbury, New Jersey ("Able") as its Chief Restructuring Officer and
Director
of Restructuring. Able was formerly a generic pharmaceutical manufacturing
company which filed a voluntary petition for bankruptcy on July 18, 2005
following the loss of FDA approval for its product line. Mr. Shepperd's
duties
for Able included exercising executive authority over all operational and
restructuring activities of Able, which included advising its Board, creditors
committee and courts regarding strategies to maintain and realize the most
value
from the company's assets. Able was not affiliated with the Company. For
the two
years prior to serving with Able, Mr. Shepperd served as an independent
management consultant for various businesses. In that capacity, he advised
these
businesses on developing strategies to improve their financial health and
maximize the assets of those organizations.
The
Board
of Directors has established an Audit Committee. The Audit Committee is
responsible for recommending independent auditors, reviewing, in connection
with
the independent auditors, the audit plan, the adequacy of internal controls,
the
audit report and management letter and undertaking such other incidental
functions as the board may authorize. Larry S. Boulet, William E. Baitinger,
David W. Crabb and Leslie B. Daniels are the members of the Audit Committee.
The
Board of Directors has determined that each of Mr. Daniels and Mr. Boulet
is an
audit committee financial expert (as defined by Item 401(h) of Regulation
S-K).
All of the members of the Audit Committee are “independent” (as defined by Item
7(d)(3)(iv) of Schedule 14A).
The
Board
of Directors has adopted a Code of Ethics (as defined by Item 406 of Regulation
S-K) that applies to the Company’s Officers, Directors and employees, a
copy of which is filed as an exhibit to this Form 10-K.
The
information contained under the caption “Section 16(a) Beneficial Ownership
Reporting Compliance” in the Proxy Statement is incorporated herein by
reference.
ITEM
11-EXECUTIVE COMPENSATION
The
information included under the captions “Election of Directors - Compensation of
Directors,” “Executive Compensation” and “Compensation Committee Interlocks and
Insider Participation” 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 caption “Compensation of Directors and Executive
Officers” in the Proxy Statement is incorporated herein by reference in
response to this item.
For
additional information regarding our stock option plans, please see Note 9
in
the Notes to Consolidated Financial Statements in this report.
55
ITEM
13-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The
information included under the caption “Certain Relationships and Related
Transactions” in the Proxy Statement is incorporated herein by reference in
response to this item.
ITEM
14-PRINCIPAL ACCOUNTING FEES AND SERVICES
The
information included under the caption “Selection of Independent Accountants” in
the Proxy Statement is incorporated herein by reference.
[Remainder
of page intentionally left blank.]
56
PART
IV
ITEM
15-EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
Documents filed as part of this Report.
|
1.
|
Financial
Statements: See Index to Consolidated Financial Statements under
Item 8 on
Page 31 of this report.
|
|
2.
|
Financial
Statement Schedules: Schedules are not required, are not applicable
or the
information is shown in the Notes to the Consolidated Financial
Statements.
|
|
3.
|
Exhibits:
The following exhibits are filed as part of, or incorporated by reference
into, this report:
|
|
Number
|
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
Amended and Restated Bylaws of Bioanalytical Systems, Inc. (incorporated
by reference to Exhibit 3.2 to Form 10-Q for the quarter ended
March 31,
2007).
|
|
(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 to this Form 10-K.
|
|
4.3
|
Form
of 6% Subordinated Convertible Note due 2008 (incorporated by reference
to
Form 8-K filed November 21, 2002).
|
|
4.4
|
Form
of 10% Subordinated Note due 2007 (incorporated by reference to Exhibit
4.3 of Form 10-Q for the quarter ended June 30, 2003).
|
|
(10)
|
10.1
|
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).
|
|
10.2
|
Form
of Bioanalytical Systems, Inc. 1990 Employee Incentive Stock Option
Agreement (*) (incorporated by reference to Exhibit 10.5 to
Registration Statement on Form S-1, Registration No. 333-36429).
|
|
10.3
|
Bioanalytical
Systems, Inc. 1997 Employee Incentive Stock Option Plan, as amended
January 24, 2004 (*) (incorporated by reference to Appendix A to
definitive Proxy Statement filed January 28, 2003 SEC File No. 000-23357).
|
|
10.4
|
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).
|
|
10.5
|
1997
Bioanalytical Systems, Inc. Outside Director Stock Option Plan, as
amended
January 24, 2004 (*) (incorporated by reference to Appendix B to
definitive Proxy Statement filed January 28, 2003 SEC File No. 000-23357).
|
|
10.6
|
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).
|
57
|
Number
|
Description
of Exhibits
|
|
10.7
|
Loan
Agreement between Bioanalytical Systems, Inc. and Regions Bank dated
December 18, 2007 (filed herewith).
|
|
10.8
|
Amended
and Restated Credit Agreement by and between Bioanalytical Systems,
Inc.,
and National City Bank, executed January 4, 2005 (incorporated by
reference to Exhibit 10.5 of Form 8-K filed January 10, 2005).
|
|
10.9
|
Amended
and Restated General Security Agreement by and between Bioanalytical
Systems, Inc. and National City Bank executed January 4, 2005
(incorporated by reference to Exhibit 10.7 of Form 8-K filed January
10,
2005).
|
|
10.10
|
Letter
agreement between Bioanalytical Systems, Inc. and Ronald E. Shoup,
Ph.D.
dated June 19, 2003 (incorporated by reference to Exhibit 10.1 of
Form 8-K filed July 24, 2007).
|
|
10.11
|
Replacement
Promissory Note by and between Bioanalytical Systems, Inc. and National
City Bank, executed January 4, 2005 (incorporated by reference to
Exhibit
10.6 of Form 8-K filed January 10, 2005).
|
|
10.12
|
Loan
Agreement between Bioanalytical Systems, Inc. and Union Planters
Bank,
dated October 29, 2002 (incorporated by reference to Exhibit 10.15
of Form
10-K for the fiscal year ended September 30, 2002).
|
|
10.13
|
Real
Estate Mortgage and Security Agreement between Bioanalytical Systems,
Inc.
and Union Planters Bank, dated October 29, 2002 (incorporated by
reference
to Exhibit 10.16 of Form 10-K for the fiscal year ended September
30,
2002).
|
|
10.14
|
Real
Estate Mortgage and Security Agreement between Bioanalytical Systems,
Inc.
and Union Planters Bank, dated October 29, 2002 (incorporated by
reference
to Exhibit 10.17 of Form 10-K for the fiscal year ended September
30,
2002).
|
|
10.15
|
Term
Loan Promissory Note made by Bioanalytical Systems, Inc. in favor
of Union
Planters Bank, dated October 29, 2002 (incorporated by reference
to
Exhibit 10.18 of Form 10-K for the fiscal year ended September 30,
2002).
|
|
10.16
|
Promissory
Note made by Bioanalytical Systems, Inc. in favor of Union Planters
Bank,
dated October 29, 2002 (incorporated by reference to Exhibit 10.19
of Form
10-K for the fiscal year ended September 30, 2002).
|
|
10.17
|
Purchase
and Sale Agreement between BASi Maryland, Inc. and 300 W. Fayette,
LLC,
closed January 5, 2005 (incorporated by reference to Exhibit 10.1
of Form
8-K filed January 10, 2005).
|
|
10.18
|
First
Amendment to the Purchase and Sale Agreement dated September
7, 2004
(incorporated by reference to Exhibit 10.20 to Form 10-K for the
fiscal year ended September 30, 2004).
|
|
10.19
|
Second
Amendment to the Purchase and Sale Agreement dated on or about
November
11, 2004 (incorporated by reference to Exhibit 10.21 to Form 10-K for
the fiscal year ended September 30, 2004).
|
|
10.20
|
Office
Lease by and between BASi Maryland, Inc. and 300 W. Fayette Street,
LLC,
dated on or about January 5, 2004 (incorporated by reference
to Exhibit
10.22 to Form 10-K for the fiscal year ended September 30, 2004).
|
58
|
Number
|
Description
of Exhibits
|
|
10.21
|
Employment
Agreement by and between Bioanalytical Systems, Inc. and Edward M.
Chait
dated August 1, 2005 (*) (incorporated by reference to Exhibit 10.1
to
Form 8-K filed August 5, 2005).
|
|
10.22
|
Form
of Grant of non-qualified stock options dated August 1, 2005 to Edward
M.
Chait (*) (incorporated by reference to Exhibit 10.24 to Form 10-K
for the fiscal year ended September 30, 2005).
|
|
10.23
|
Form
of Grant of non-qualified stock options dated April 1, 2004 to Michael
R.
Cox (*) (incorporated by reference to Exhibit 10.3 to Form 10-Q for
the fiscal year ended March 31, 2004).
|
|
10.24
|
Severance
Agreement and Release of All Claims with Michael P. Silvon, dated
July 17,
2006 (*) (incorporated by reference to Exhibit 10.1 to Form 8-K filed
July
31, 2006).
|
|
10.25
|
Employment
Agreement by and among Bioanalytical Systems, Inc. and Richard M.
Shepperd, entered into on May 18, 2007 (*) (incorporated by reference
to
Exhibit 10.1 to Form 10-Q for the fiscal quarter ended June 30, 2007).
|
|
10.26
|
Option
Agreement by and among Bioanalytical Systems, Inc. and Richard M.
Shepperd, entered into on May 18, 2007 (*) (incorporated by reference
to
Exhibit 10.2 to Form 10-Q for the fiscal quarter ended June 30,
2007).
|
|
10.27
|
First
Amendment to Lease by and between 300 W. Fayette Street, LLC and
Bioanalytical Systems, Inc., entered into on May 20, 2007 (incorporated
by
reference to Exhibit 10.3 to Form 10-Q for the fiscal quarter ended
June
30, 2007).
|
|
|
10.28
|
Lease
Agreement by and between 300 W. Fayette Street, LLC and Bioanalytical
Systems, Inc., entered into on May 20, 2007 (incorporated by reference
to
Exhibit 10.4 to Form 10-Q for the fiscal quarter ended June 30, 2007).
|
|
10.29
|
Severance
Agreement and Release of All Claims, dated September 28, 2007, between
Candice B. Kissinger and Bioanalytical Systems, Inc. (*) (incorporated
by
reference to Exhibit 10.1 to Form 8-K filed October 4, 2007)
|
|
10.30
|
Severance
Agreement and Release of All Claims, dated September 28, 2007, between
Peter T. Kissinger, PhD. and Bioanalytical Systems, Inc. (*) (incorporated
by reference to Exhibit 10.2 to Form 8-K filed October 4, 2007)
|
|
10.31
|
License
Agreement, dated September 28, 2007, between Phlebotics, Inc. and
Bioanalytical Systems, Inc. (incorporated by reference to Exhibit
10.3 to
Form 8-K filed October 4, 2007).
|
|
|
10.32
|
Agreement
for Lease, by and among Bioanalytical Systems, Inc., Bioanalytical
Systems
Limited and Pettifer Estates Limited, dated October 11, 2007 (incorporated
by reference to Exhibit 10.1 to Form 8-K filed October 17, 2007).
|
|
10.33
|
Form
of Lease, by and among Bioanalytical Systems, Inc., Bioanalytical
Systems
Limited and Pettifer Estates Limited (incorporated by reference
to Exhibit
10.2 to Form 8-K filed October 17, 2007).
|
|
|
10.34
|
Employment
Agreement between Michael R. Cox and Bioanalytical Systems, Inc.,
dated
November 6, 2007 (incorporated by reference to Exhibit 10.1 to
Form 8-K
filed November 13, 2007).
|
59
|
Number
|
Description
of Exhibits
|
|
10.35
|
Employee
Incentive Stock Option Agreement between Michael R. Cox and Bioanalytical
Systems, Inc., dated November 6, 2007 (incorporated by reference
to
Exhibit 10.2 to Form 8-K filed November 13, 2007).
|
|
|
10.36
|
Nonqualified
option letter agreement between Michael R. Cox and Bioanalytical
Systems,
Inc., dated November 6, 2007 (incorporated by reference to Exhibit
10.3 to
Form 8-K filed November 13, 2007).
|
|
|
10.37
|
Employment
Agreement between Edward M. Chait and Bioanalytical Systems, Inc.,
dated
November 6, 2007 (incorporated by reference to Exhibit 10.4 to Form
8-K
filed November 13, 2007).
|
|
|
10.38
|
Employee
Incentive Stock Option Agreement between Edward M. Chait and Bioanalytical
Systems, Inc., dated November 6, 2007 (incorporated by reference
to
Exhibit 10.5 to Form 8-K filed November 13, 2007).
|
|
|
10.39
|
Nonqualified
option letter agreement between Edward M. Chait and Bioanalytical
Systems,
Inc., dated November 6, 2007 (incorporated by reference to Exhibit
10.6 to
Form 8-K filed November 13, 2007).
|
|
(14)
|
14
|
Code
of Ethics (incorporated
by reference to Exhibit 14 to Form 10-K for the fiscal year ended
September 30, 2006).
|
|
(18)
|
18
|
Letter
re: Change in Accounting Principles regarding the change in accounting
for
certain inventories (filed herewith).
|
|
(21)
|
21.1
|
Subsidiaries
of the Registrant (incorporated by reference to Exhibit 21.1 to Form
10-K
for the fiscal year ended September 30, 2005).
|
|
(23)
|
23.1
|
Consent
of Independent Registered Public Accounting Firm Crowe Chizek and
Company
LLC (filed herewith).
|
|
23.2
|
Consent
of Independent Registered Public Accounting Firm KPMG LLP (filed
herewith).
|
|
(31)
|
31.1
|
Certification
of Chief Executive Officer (filed
herewith).
|
|
31.2
|
Certification
of Chief Financial Officer (filed
herewith).
|
|
(32)
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (filed herewith).
|
|
32.2
|
Certification
of Executive Vice President, Chief Financial Officer pursuant to
Section
906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
*
Management contract or compensatory plan or arrangement.
60
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.
|
Date: December
27, 2007
Date: December
27, 2007
|
BIOANALYTICAL
SYSTEMS, INC.
(Registrant)
By: /s/ Richard
M. Shepperd
Richard
M. Shepperd
President
and Chief Executive Officer
By: /s/ Michael
R. Cox
Michael R. Cox Vice
President, Finance and Administration, Chief Financial Officer
and
Treasurer
|
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/ Richard
M. Shepperd
Richard
M. Shepperd
|
President and Chief Executive Officer
(Principal
Executive Officer)
|
December
27, 2007
|
|
/s/ Michael
R. Cox
Michael
R. Cox
|
Vice
President, Finance and Administration, Chief Financial Officer
and
Treasurer (Principal Financial and Accounting Officer)
|
December
27, 2007
|
|
/s/ William
E. Baitinger
William
E. Baitinger
|
Director
|
December
27, 2007
|
|
/s/
David W. Crabb
David
W. Crabb
|
Director
|
December
27, 2007
|
|
/s/
Leslie B. Daniels
Leslie
B. Daniels
|
Director
|
December
27, 2007
|
|
/s/
Larry
S. Boulet
Larry
S. Boulet
|
Director
|
December
27, 2007
|
61