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 November 30, 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 January 9, 2002.
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
November 30, 2001 .................................................. 2
Unaudited Consolidated Statements of Operations for
the Three Months Ended November 30, 2001 and
November 30, 2000 .................................................. 3
Unaudited Consolidated Statements of Operations for
the Six Months Ended November 30, 2001 and
November 30, 2000 .................................................. 4
Unaudited Consolidated Statements of Cash Flows
for the Six Months Ended November 30, 2001 and
November 30, 2000 .................................................. 5
Notes to Financial Statements ........................................ 6
Item 2. Management's Discussion and Analysis ........................... 7
Part II. Other Information
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Item 4. Submission of Matters to a Vote of
Security Holders ............................................. 11
1
BIOQUAL, INC. AND SUBSIDIARY
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UNAUDITED CONSOLIDATED BALANCE SHEETS, MAY 31, 2001 AND NOVEMBER 30, 2001
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ASSETS NOVEMBER 30, 2001 MAY 31, 2001
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CURRENT ASSETS:
Cash and cash equivalents $ 77,304 $ 76,061
Accounts receivable:
Trade 2,015,030 1,412,478
Unbilled - current 32,177 309,686
Other 13,192 17,027
Prepaid expenses 163,115 76,241
Inventories 158,302 180,922
Deferred income taxes - current 70,200 183,700
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Total current assets 2,529,320 2,256,115
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FIXED ASSETS:
Leasehold improvements 1,052,212 995,837
Furniture, fixtures and equipment 3,907,232 3,688,799
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Total 4,959,444 4,684,636
Less accumulated depreciation and amortization 3,443,214 3,271,154
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Fixed assets, net 1,516,230 1,413,482
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Deferred income taxes - noncurrent 199,000 199,000
Unbilled accounts receivable - noncurrent 426,962 664,113
Cash value of officers' life insurance policies 341,695 341,695
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TOTAL $ 5,013,207 $ 4,874,405
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LIABILITIES
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CURRENT LIABILITIES:
Borrowings under line of credit $ 372,200 $ 194,681
Current maturities of long-term debt 107,031 107,031
Accounts payable 209,915 168,248
Accrued compensation and related costs 283,613 486,932
Other accrued liabilities 50,232 5,098
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Total current liabilities 1,022,991 961,990
Long-term debt 22,434 83,167
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Total liabilities 1,045,425 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; November 30, 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 (2,836,684) (2,971,435)
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Total 4,658,187 4,521,146
Less - treasury stock November 30, 2001, 717,816 shares, May
31, 2001, 719,483 shares, at cost (690,405) (691,898)
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Total stockholders' equity 3,967,782 3,829,248
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TOTAL $ 5,013,207 $ 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 NOVEMBER 30,
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2001 2000
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REVENUES AND SALES:
Contract revenues $ 3,072,653 $ 2,930,652
Product sales 1,838 8,577
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Total Revenues and Sales 3,074,491 2,939,229
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OPERATING EXPENSES:
Contract 2,382,145 2,260,600
Cost of goods sold 1,979 8,070
Research and development 14,078
General and administrative 558,308 523,523
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Total 2,942,432 2,806,271
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OPERATING INCOME 132,059 132,958
INTEREST INCOME 567 1,127
INTEREST EXPENSE (8,798) (14,035)
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INCOME BEFORE INCOME TAX 123,828 120,050
PROVISION FOR INCOME TAX 49,500 48,000
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NET INCOME $ 74,328 $ 72,050
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BASIC EARNINGS PER SHARE $ 0.08 $ 0.08
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DILUTED EARNINGS PER SHARE $ 0.08 $ 0.08
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WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING FOR BASIC EARNINGS
PER SHARE 882,592 880,157
EFFECT OF DILUTIVE SECURITIES -
OPTIONS 8,000 12,197
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WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING OPTIONS FOR DILUTED
EARNINGS PER SHARE 890,592 892,354
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See notes to financial statements.
3
BIOQUAL, INC. AND SUBSIDIARY
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UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
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FOR THE SIX MONTHS ENDED NOVEMBER 30,
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2001 2000
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REVENUES AND SALES:
Contract revenues $ 6,133,861 $ 6,002,930
Product sales 27,755 11,837
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Total Revenues and Sales 6,161,616 6,014,767
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OPERATING EXPENSES:
Contract 4,712,802 4,718,965
Cost of goods sold 22,620 10,663
Research and development 31,510
General and administrative 1,127,359 1,029,133
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Total 5,862,781 5,790,271
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OPERATING INCOME 298,835 224,496
INTEREST INCOME 1,300 2,308
INTEREST EXPENSE (16,580) (27,352)
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INCOME BEFORE INCOME TAX 283,555 199,452
PROVISION FOR INCOME TAX 113,500 80,000
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NET INCOME $ 170,055 $ 119,452
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BASIC EARNINGS PER SHARE $ 0.19 $ 0.14
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DILUTED EARNINGS PER SHARE $ 0.19 $ 0.13
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WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING FOR BASIC EARNINGS
PER SHARE 882,062 880,124
EFFECT OF DILUTIVE SECURITIES -
OPTIONS 9,965 11,795
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WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING OPTIONS FOR DILUTIVE
EARNINGS PER SHARE 892,027 891,919
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See notes to financial statements.
4
BIOQUAL, INC. AND SUBSIDIARY
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UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
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FOR THE SIX MONTHS ENDED NOVEMBER 30,
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2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 170,055 $ 119,452
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Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 172,060 203,972
Deferred income taxes 113,500 80,000
(Increase) decrease in accounts receivable (84,057) 424,408
Increase in prepaid expenses (86,874) (26,341)
Decrease (increase) in inventories 22,620 (17,330)
Decrease in other assets 20,000
Decrease in accounts payable and accrued expenses (116,517) (196,844)
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Total Adjustments 20,732 487,865
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NET CASH PROVIDED BY OPERATING ACTIVITIES 190,787 607,317
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (274,808) (104,595)
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NET CASH USED FOR INVESTING ACTIVITIES (274,808) (104,595)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) under line-of-credit agreement 177,519 (409,373)
Dividend paid (35,304) (26,401)
Proceeds from exercise of stock options 3,782 581
Principal payments on long-term debt (60,733) (65,408)
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NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 85,264 (500,601)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 1,243 2,121
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 76,061 72,099
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 77,304 $ 74,220
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 16,969 $ 30,663
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See notes to financial statements.
5
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 and the six month period 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 has
adopted this new Standard with its fiscal year beginning June 1, 2001. The
Company has no goodwill or other intangible assets as of November 30, 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 November 30, 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 second quarter of fiscal year 2002, BIOQUAL, Inc. ("BIOQUAL" or the
"Company") realized net income of $74,328. Net income for the six months of
fiscal year 2002 totaled $170,055.
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.
On October 31, 2001, the Company was notified by the National Cancer Institute
(NCI) of the renewal of its contract to support NCI researchers. The contract
entitled "Facility for Breeding, Housing, and Handling Virus Infected Mice,
Genetically Manipulated Mice, and Chimeric Mice" is for a base year and four
option years totaling $13,740,310.
The National Institute of Child Health and Human Development approved an
extension of its contract entitled "Biological Testing Facility" from December
31, 2001 to January 18, 2002,while it continues to review BIOQUAL's proposal for
the renewal contract.
Results of Operations
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Three Month Comparison
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For the three months of operations ended November 30, 2001 (the Company's second
quarter), contract revenues increased by 4.8% or $142,001 to $3,072,653 compared
to $2,930,652 in the second quarter of fiscal year 2001. This increase in
government contract revenues compared to the second quarter of fiscal year 2001
is primarily due to an increase in contract activity. Product sales decreased to
$1,838 for the second quarter of fiscal year 2002 compared to $8,577 for the
second quarter of fiscal year 2001. Contract operating expenses increased 5.4%
or $121,545 for the second quarter of fiscal year 2002 compared to the second
quarter of fiscal year 2001 primarily due to increased government contract
expenses partially offset by an increase in the allocation of fringe benefit
costs from contract expenses to general and administrative (G&A) expenses that
was previously reported and affected the first and second quarter of fiscal year
2001. Cost of goods sold decreased to $1,979 from $8,070 in the second quarter
of fiscal year 2001. As previously reported, the Company has ceased all Research
and development (R&D) activities, consequently, the Company did not incur any
R&D expenses during this quarter compared to $14,078 in the second quarter of
fiscal year 2001. General and administrative
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expenses increased 6.6% compared to the second quarter of fiscal year 2001
primarily due to increases in the fringe benefits allocation from contract
expenses to G&A expenses as mentioned above. Total operating expenses increased
4.9% due to the above.
Operating income was level this quarter, $132,059 compared to $132,958 in the
same quarter of the prior fiscal year. The increase in total revenues and sales
was relatively the same and the increase in operating expenses resulting in
relatively the same gross margin percentage during the second quarter of fiscal
year 2002.
For this quarter, BIOQUAL had interest expense of $8,798 compared to interest
expense of $14,035 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 $49,500 for the
three months ended November 30, 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
30,335 shares of common stock at prices ranging from $2.625 per share to $3.375
per share were outstanding at November 30, 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 38,670 shares of common
stock at prices ranging from $2.52 per share to $3.375 per share were
outstanding at November 30, 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.
Six Month Comparison
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For the six months of operations ended November 30, 2001, contract revenues
increased by 2.2% or $130,931 to $6,133,861 compared to $6,002,930 in the first
six months of fiscal year 2001. This increase is primarily due to an increase in
contract activity. Product sales increased to $27,755 compared to $11,837 in
fiscal year 2001. Contract operating expenses decreased .1% or $6,163 compared
to the first six months of fiscal year 2001 primarily due to an increase in the
allocation of fringe benefit costs from contract expenses to general and
administrative (G&A) expenses (that was previously reported and affected the
first and second quarter of fiscal year 2001) offset by increased government
contract expenses. Cost of goods sold increased to $22,620 from $10,663 in the
first six months of fiscal year 2001. This increase was primarily due to the
increase in units of products sold during this fiscal year. As previously
reported, the Company has ceased all research and development (R&D) activities,
consequently, the Company did not incur any R&D expenses during this six month
period compared to $31,510 in the same period of fiscal year 2001. General and
administrative expenses increased 9.5% compared to the first six months of
fiscal year 2001 primarily due to increases in the fringe benefits allocation
from contract expenses to G&A expenses as mentioned above. Total operating
expenses increased 1.3% due to the above.
8
Operating income increased to $298,835 compared to $224,496 in the same period
of the prior fiscal year. The increase is primarily due to 1) the decrease in
R&D expenses, 2) the increase in total revenues exceeding the increase in
operating expenses resulting in an increase in the gross margin percentage, and
3) a decrease in the overhead expenses supporting the equine IgG production
facility.
For this six month period, BIOQUAL had interest expense of $16,580 compared to
interest expense of $27,352 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 $113,500 for the six
months ended November 30, 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 six month comparison, options to purchase
30,335 shares of common stock at prices ranging from $2.625 per share to $3.375
per share were outstanding at November 30, 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 38,670 shares of common
stock at prices ranging from $2.52 per share to $3.375 per share were
outstanding at November 30, 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 5. Total assets increased $138,802 from
$4,874,405 at May 31, 2001 to $5,013,207 at November 30, 2001. This amount was
primarily attributable to an increase to accounts receivable of $84,057
consisting mainly of 1) an increase of $602,552 in trade accounts receivable
reflecting higher billings and a slower collection rate compared to the previous
fiscal year end, 2) a $514,660 decrease in unbilled accounts receivable (current
plus noncurrent) primarily resulting from a $237,151 decrease in reimbursable
indirect rate variances for the current fiscal year, a net $277,509 decrease in
month end accrued sales on accrued direct labor comparing the current period (no
accrual needed as the pay period ended on November 30, 2001) and the accrual at
the end of fiscal year 2001, and 3) a $3,835 decrease in other accounts
receivable. Fixed assets, net of accumulated depreciation and amortization,
increased $102,748 reflecting fixed asset purchases of $274,808 (mainly nonhuman
primate enclosures, laboratory equipment and facility improvements) offset by
depreciation and amortization of $172,060. Prepaid expenses increased $86,874
primarily due to the prepayment of business liability and life insurance
premiums, and real estate and personal property taxes.
The increase above is partially offset by 1) a decrease in inventories of
$22,620 and 2) a decrease in deferred income taxes of $113,500 as a result of
utilizing a portion of federal and state income tax loss
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carryforwards.
Liabilities
In the first six months of operation in fiscal year 2002, total liabilities
increased $268 from $1,045,157 at May 31, 2001 to $1,045,425 at November 30,
2001. This increase is primarily attributable to 1) an increase to borrowings
under line-of-credit of $177,519 reflecting the slower collection of trade
accounts receivable, 2) an increase in accounts payable of $41,667, and 3) a
$45,134 increase in other accrued liabilities. This increase reflects an
overpayment of $45,000 on an invoice which will be repaid next quarter.
The increase above is partially offset by 1) a decrease in accrued compensation
and related costs of $203,319 reflecting a shorter accrual period this six month
period when compared to the prior year end and the payment of accrued bonuses
from fiscal year 2001 during the first quarter of fiscal year 2002, and 2)
payments totaling $60,733 on capital leases and notes payable reducing long-term
debt.
Stockholders' Equity
In the first six months of operation in fiscal year 2002, stockholders' equity
increased $138,534 primarily due to the Company realizing $170,055 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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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Annual Meeting - October 23, 2001
Election of Directors
Four directors were elected:
For Withheld
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J. Thomas August, M.D. 676,577 818
Charles C. Francisco 676,577 818
Charles F. Gauvin 676,577 818
John C. Landon, Ph.D. 676,544 851
There were no other directors whose term of office as a director continued after
the meeting.
Other Matters Voted Upon at the Meeting
Proposal 2 To ratify the selection of Aronson, Fetridge and Weigle as the
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Company's independent auditors.
Affirmative Votes 677,175
Negative Votes 53
Abstain 167
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SIGNATURES
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 January 10, 2002 /s/ John C. Landon
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Chairman of the Board,
President and Chief Executive
Officer
DATE January 10, 2002 /s/ Michael P. O'Flaherty
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Chief Operating Officer and
Secretary
DATE January 10, 2002 /s/ David A. Newcomer
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Chief Financial Officer
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