U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2001
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Commission file number 1-13527
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BIOQUAL, INC.
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State of Delaware 13-3078199
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9600 Medical Center Drive, Rockville, Maryland 20850
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(Address of principal executive office) (Zip Code)
Issuer's telephone number, including area code (301) 251-2801
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Check whether the registrant filed all documents required to be filed by Section
12, 13 or 15(d) of the Exchange Act after the distribution of securities under a
plan confirmed by a court.
Yes X No ___
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Common Stock, $.01 par value per share; authorized 25,000,000 shares; 882,592
shares outstanding as of October 10, 2001.
Transitional Small Business Disclosure Format (Check one): Yes ___ No X
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BIOQUAL, INC.
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INDEX
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Part I. Financial Information Page
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Item 1. Financial Statements.
Unaudited Consolidated Balance Sheets, May 31, 2001 and
August 31, 2001.................................................... 2
Unaudited Consolidated Statements of Operations for
the Three Months Ended August 31, 2001 and
August 31, 2000 ................................................... 3
Unaudited Consolidated Statements of Cash Flows
for the Three Months Ended August 31, 2001 and
August 31, 2000 ................................................... 4
Notes to Financial Statements ....................................... 5
Item 2. Management's Discussion and Analysis ........................... 6
1
BIOQUAL, INC. AND SUBSIDIARY
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UNAUDITED CONSOLIDATED BALANCE SHEETS, MAY 31, 2001 AND AUGUST 31, 2001
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ASSETS AUGUST 31, 2001 MAY 31, 2001
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CURRENT ASSETS:
Cash and cash equivalents $ 76,766 $ 76,061
Accounts receivable:
Trade 1,725,887 1,412,478
Unbilled - current 196,620 309,686
Other 12,765 17,027
Prepaid expenses 189,186 76,241
Inventories 160,282 180,922
Deferred income taxes - current 119,700 183,700
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Total current assets 2,481,206 2,256,115
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FIXED ASSETS:
Leasehold improvements 1,026,508 995,837
Furniture, fixtures and equipment 3,795,570 3,688,799
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Total 4,822,078 4,684,636
Less accumulated depreciation and amortization 3,355,873 3,271,154
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Fixed assets, net 1,466,205 1,413,482
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Deferred income taxes - noncurrent 199,000 199,000
Unbilled accounts receivable - noncurrent 548,099 664,113
Cash value of officers' life insurance policies 341,695 341,695
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TOTAL $ 5,036,205 $ 4,874,405
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LIABILITIES
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CURRENT LIABILITIES:
Borrowings under line of credit $ 271,952 $ 194,681
Current maturities of long-term debt 107,031 107,031
Accounts payable 326,452 168,248
Accrued compensation and related costs 345,173 486,932
Other accrued liabilities 38,737 5,098
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Total current liabilities 1,089,345 961,990
Long-term debt 53,407 83,167
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Total liabilities 1,142,752 1,045,157
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STOCKHOLDERS' EQUITY
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Preferred stock - par value of $1.00 per share, 500,000 shares
authorized; no shares issued and outstanding
Common stock - par value of $.01 per share; 25,000,000 shares
authorized; 1,600,408 shares issued; August 31, 2001, 882,592
shares, May 31, 2001, 880,925 shares outstanding 16,004 16,004
Additional paid-in capital 7,478,867 7,476,577
Accumulated deficit (2,911,013) (2,971,435)
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Total 4,583,858 4,521,146
Less - treasury stock August 31, 2001, 717,816 shares, May 31,
2001, 719,483 shares, at cost (690,405) (691,898)
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Total stockholders' equity 3,893,453 3,829,248
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TOTAL $ 5,036,205 $ 4,874,405
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See notes to financial statements.
2
BIOQUAL, INC. AND SUBSIDIARY
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UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
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FOR THE THREE MONTHS ENDED AUGUST 31,
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2001 2000
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REVENUES AND SALES:
Contract revenues $ 3,061,208 $ 3,072,278
Product sales 25,917 3,260
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Total Revenues and Sales 3,087,125 3,075,538
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OPERATING EXPENSES:
Contract 2,330,657 2,458,364
Cost of goods sold 20,641 2,593
Research and development 17,432
General and administrative 569,051 505,611
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Total 2,920,349 2,984,000
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OPERATING INCOME 166,776 91,538
INTEREST INCOME 733 1,181
INTEREST EXPENSE (7,782) (13,317)
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INCOME BEFORE INCOME TAX 159,727 79,402
PROVISION FOR INCOME TAX 64,000 32,000
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NET INCOME $ 95,727 $ 47,402
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BASIC EARNINGS PER SHARE $ 0.11 $ 0.05
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DILUTED EARNINGS PER SHARE $ 0.11 $ 0.05
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WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING FOR BASIC EARNINGS
PER SHARE 881,541 880,091
EFFECT OF DILUTIVE SECURITIES -
OPTIONS 11,931 11,392
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WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING OPTIONS FOR DILUTED
EARNINGS PER SHARE 893,472 891,483
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See notes to financial statements.
3
BIOQUAL, INC. AND SUBSIDIARY
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UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
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FOR THE THREE MONTHS ENDED AUGUST 31,
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2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 95,727 $ 47,402
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Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 84,719 86,108
Deferred income taxes 64,000 32,000
(Increase) decrease in accounts receivable (80,067) 476,963
Increase in prepaid expenses (112,945) (24,289)
Decrease (increase) in inventories 20,640 (25,400)
Decrease in other assets 20,000
Increase (decrease) in accounts payable and
accrued expenses 50,084 (145,462)
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Total Adjustments 26,431 419,920
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NET CASH PROVIDED BY OPERATING ACTIVITIES 122,158 467,322
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (137,442) (76,274)
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NET CASH USED FOR INVESTING ACTIVITIES (137,442) (76,274)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) under line-of-credit agreement 77,271 (328,644)
Dividend paid (35,304) (26,403)
Proceeds from exercise of stock options 3,782
Principal payments on long-term debt (29,760) (34,963)
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NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 15,989 (390,010)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 705 1,038
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 76,061 72,099
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 76,766 $ 73,137
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 9,027 $ 16,650
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See notes to financial statements.
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NOTES TO FINANCIAL STATEMENTS
Interim Financial Statements
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In the opinion of management, all adjustments consisting only of normal
recurring accruals necessary for a fair presentation of such amounts have been
included. The results of operations for the quarter are not necessarily
indicative of results for the year.
Inventories
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Inventories are stated at the lower of cost or market using the average cost
method.
Recent Accounting Pronouncements
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SFAS No. 141 eliminates the use of the pooling-of-interests method of accounting
for business combinations and requires that all such transactions be accounted
for by the purchase method. In addition, SFAS No. 141 requires that intangible
assets be recognized as assets apart from goodwill and that they meet specific
criteria described in the Standard. This Standard is applicable to all business
combinations initiated after June 30, 2001 and all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001 or later. Management will follow the Standard in accounting for all
future business combinations and does not believe that adoption will have any
significant impact on the Company's financial statements.
SFAS No. 142 eliminates the requirement to amortize goodwill and requires that
other intangible assets be separated into assets that have a finite useful life
and those with an indefinite useful life. Intangible assets with a finite useful
life are to be amortized over that useful life. Intangible assets with an
indefinite life are to be measured for impairment annually, or more frequently
if circumstances indicate impairment may have occurred. With respect to
goodwill, the Standard requires that it be measured annually for impairment
under a defined two-step process that begins with an estimation of the fair
value of a "reporting unit," which is defined in the Standard. The first step in
the process is a screening for impairment and the second step measures the
amount of impairment, if any. Upon initial adoption of SFAS No. 142, the change
is to be reported on the financial statements as a change in accounting
principle with the cumulative effect reported in the statement of income in the
period of adoption. The Standard is required to be applied starting with fiscal
years beginning after December 15, 2001, with early application permitted for
entities with fiscal years beginning after March 15, 2001. The Company expects
to adopt this new Standard with its fiscal year beginning June 1, 2001. The
Company has no goodwill or other intangible assets as of August 31, 2001 and,
therefore, does not believe that adoption of the Standard will have any impact
on its financial statements.
SFAS No. 143 requires that asset retirement obligations be recognized as a
liability in the period in which they are incurred at their fair value if a
reasonable estimate can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the
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long-lived asset. The Standard requires that the liability be discounted and
accretion expense be recognized. SFAS No. 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2001, with earlier
application permitted. The Company does not have any asset retirements
obligations as of August 31, 2001 and, therefore, does not believe that this new
Standard will have any impact upon its financial statements when adopted.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Summary Analysis
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In this first quarter of fiscal year 2002, BIOQUAL, Inc. ("BIOQUAL" or the
"Company") realized net income of $95,727.
On August 8, 2001, the Board of Directors declared a cash dividend of $0.04 per
share for shareholders of record on September 7, 2001. The dividend was paid on
September 26, 2001.
On September 21, 2001, the Company was notified by the National Institute on
Aging of the award of the Phase II Small Business Innovation Research (SBIR)
grant entitled "Comparative DNA Sequence Variation in Alzheimer Genes". This two
year grant began on September 30, 2001 and totals $738,847.
The Company has submitted a Final Proposal Revision of its proposal for the
renewal competition of the National Cancer Institute contract entitled "Facility
for Breeding, Housing, and Handling Virus Infected Mice, Genetically Manipulated
Mice, and Chimeric Mice". The current contract expires October 31, 2001.
The Company has submitted a proposal for the renewal competition of the National
Institute of Child Health and Human Development contract entitled "Biological
Testing Facility". The current contract expires on December 31, 2001.
Results of Operations
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For the three months of operations ended August 31, 2001 (the Company's first
quarter), contract revenues decreased by .4% or $11,070 to $3,061,208 compared
to $3,072,278 in the first quarter of fiscal year 2001. This decrease in
government contract revenues compared to the first quarter of fiscal year 2001
is primarily due to a decrease in contract activity. Product sales increased to
$25,917 compared to $3,260 in fiscal year 2001. Contract operating expenses
decreased 5.2% or $127,707 compared to the first quarter of fiscal year 2001
primarily due to decreased government contract expenses and an increase in the
allocation of fringe benefit costs from contract expenses to general and
administrative expenses (G&A). Cost of goods sold increased to $20,641 from
$2,593 in the first quarter of fiscal year 2001. This increase was primarily due
to the increase in units of products sold during this fiscal year. The Company
did not incur any research and development (R&D) expenses during this quarter
compared to $17,432 in the first quarter of fiscal year 2001. Currently, there
are no R&D activities on going in the Company's Department of Discovery
Research. General and administrative expenses increased 12.5% compared to the
first quarter of fiscal year 2001 primarily due to increases in the
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fringe benefits allocation from contract expenses to G&A expenses as mentioned
above. Total operating expenses decreased 2.1% due to the above.
Operating income increased to $166,776 compared to $91,538 in the same quarter
of the prior fiscal year. The increase is primarily due to 1) the decrease in
R&D expenses, 2) the decrease in contract expenses exceeding the decrease in
contract revenues resulting in an increase in the gross margin percentage on
contracts during the first quarter of fiscal year 2002, and 3) a decrease in the
overhead expenses supporting the equine IgG production facility.
For this quarter, BIOQUAL had interest expense of $7,782 compared to interest
expense of $13,317 in the prior year.
In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company
reported a deferred federal and state income tax expense of $64,000 for the
three months ended August 31, 2001. The Company will utilize available federal
and state net operating loss ("NOL") carryforwards to offset future taxable
income. The operating loss carryforwards expire in fiscal year 2002 for federal
tax purposes and fiscal year 2002 to 2014 for state tax purposes.
Earnings Per Share (EPS) - For the three month comparison, options to purchase
5,335 shares of common stock at a price of $3.375 per share were outstanding at
August 31, 2001 but were not included in the computation of diluted EPS because
the exercise prices were greater than the market price of the common shares.
Options to purchase 5,502 shares of common stock at a price of $3.375 per share
were outstanding at August 31, 2000 but were not included in the computation of
diluted EPS because the exercise prices were greater than the market price of
the common shares.
Liquidity and Capital Resources
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Assets
The changes in cash and cash equivalents are detailed in the Statements of
Consolidated Cash Flows on page 4. Total assets increased $161,800 from
$4,874,405 at May 31, 2001 to $5,036,205 at August 31, 2001. This amount was
primarily attributable to an increase to accounts receivable of $80,067
consisting mainly of 1) an increase of $313,409 in trade accounts receivable
reflecting a slower collection rate compared to the previous fiscal year end, 2)
a $229,080 decrease in unbilled accounts receivable (current plus noncurrent)
primarily resulting from a $116,014 decrease in reimbursable indirect rate
variances for the current fiscal year, a net $113,066 decrease in month end
accrued sales on accrued direct labor comparing the current period and the
accrual at the end of fiscal year 2001, and 3) a $4,262 decrease in other
accounts receivable. Fixed assets, net of accumulated depreciation and
amortization increased $52,723 reflecting fixed asset purchases of $137,442
(mainly nonhuman primate enclosures, laboratory equipment and facility
improvements) offset by depreciation and amortization of $84,719. Prepaid
expenses increased $112,945 primarily due to the prepayment of business
liability and life insurance premiums, and real estate and personal property
taxes.
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The increase above is partially offset by 1) a decrease in inventories of
$20,640 and 2) a decrease in deferred income taxes of $64,000 as a result of
utilizing a portion of federal and state income tax loss carryforwards.
Liabilities
In the first three months of operation in fiscal year 2002, total liabilities
increased $97,595 from $1,045,157 at May 31, 2001 to $1,142,752 at August 31,
2001. This increase is primarily attributable to 1) an increase to borrowings
under line-of-credit of $77,271 reflecting the slower collection of trade
accounts receivable, 2) an increase in accounts payable of $158,204 due to the
receipt of personal property and real estate tax bills, audit fee invoices and
an invoice for the balance of a nonhuman primate enclosure purchase, and 3) a
$33,639 increase in other accrued liabilities. This increase is primarily due to
a $35,304 accrual of the cash dividend declared on August 8, 2001 and paid on
September 26, 2001.
The increase above is partially offset by 1) a decrease in accrued compensation
and related costs of $141,759 reflecting a shorter accrual period this quarter
when compared to the prior year end and the payment of accrued bonuses from
fiscal year 2001 during this quarter, and 2) payments totaling $29,760 on
capital leases and notes payable reducing long-term debt.
Stockholders' Equity
In the first three months of operation in fiscal year 2002, stockholders' equity
increased $64,205 primarily due to the Company realizing $95,727 of net income
offset by the $35,304 cash dividend declared on August 8, 2001.
Capital Resources
The Company believes it has sufficient cash and financing sources to provide for
its ongoing operations and the Company continues to believe that the impact of
inflation, or the absence of it, will have no significant effect on its
operations.
Forward Looking Information
Statements herein that are not descriptions of historical facts are
forward-looking and subject to risk and uncertainties. Actual results could
differ materially from those currently anticipated due to a number of factors
including those set forth in BIOQUAL's Securities and Exchange Commission
filings under "Risk Factors", including risks relating to the early stage of
products under development; the ability to continue to extend its government
contracts and obtain new contracts; uncertainties relating to clinical trials;
dependence on third parties' future capital needs; and risks relating to the
commercialization, if any, of BIOQUAL's proposed products (such as marketing,
safety, regulatory, patent, product liability, supply, competition and other
risks).
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
BIOQUAL, INC.
DATE October 10, 2001 /s/ John C. Landon
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Chairman of the Board,
President and Chief Executive
Officer
DATE October 10, 2001 /s/ Michael P. O'Flaherty
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Chief Operating Officer and
Secretary
DATE October 10, 2001 /s/ David A. Newcomer
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Chief Financial Officer
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