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 February 28, 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; 880,425
shares outstanding as of April 9, 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, 2000 and
February 28, 2001......................................... 2
Unaudited Consolidated Statements of Operations for
the Three Months Ended February 28, 2001 and
February 29, 2000......................................... 3
Unaudited Consolidated Statements of Operations for
the Nine Months Ended February 28, 2001 and
February 29, 2000......................................... 4
Unaudited Consolidated Statements of Cash Flows
for the Nine Months Ended February 28, 2001 and
February 29, 2000......................................... 5
Notes to Financial Statements............................... 6
Item 2. Management's Discussion and Analysis................. 6
Part II. Other Information
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Item 6. Exhibits............................................. 10
1
BIOQUAL, INC. AND SUBSIDIARY
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UNAUDITED CONSOLIDATED BALANCE SHEETS, MAY 31, 2000 AND FEBRUARY 28, 2001
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ASSETS FEBRUARY 28, 2001 MAY 31, 2000
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CURRENT ASSETS:
Cash and cash equivalents $ 75,280 $ 72,099
Accounts receivable:
Trade 1,662,422 1,633,110
Unbilled - current 147,379 317,296
Other 6,596 19,817
Prepaid expenses 116,370 95,069
Inventories 222,371 225,841
Deferred income taxes - current 5,800 116,800
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Total current assets 2,236,218 2,480,032
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FIXED ASSETS:
Leasehold improvements 992,627 1,007,976
Furniture, fixtures and equipment 3,610,636 3,545,423
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Total 4,603,263 4,553,399
Less accumulated depreciation and amortization 3,190,679 2,946,699
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Fixed assets, net 1,412,584 1,606,700
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DEFERRED INCOME TAXES - NONCURRENT 497,900 497,900
UNBILLED ACCOUNTS RECEIVABLE - NONCURRENT 532,181 440,687
OTHER NONCURRENT ASSETS 50,000 20,000
CASH VALUE OF OFFICERS' LIFE INSURANCE POLICIES 280,755 280,755
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TOTAL $ 5,009,638 $ 5,326,074
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LIABILITIES
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CURRENT LIABILITIES:
Borrowings under line of credit $ 521,904 $ 688,183
Current maturities of long-term debt 123,114 123,114
Accounts payable 209,284 201,254
Accrued compensation and related costs 342,491 469,361
Other accrued liabilities 7,056 85,759
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Total current liabilities 1,203,849 1,567,671
LONG-TERM DEBT 96,339 190,144
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Total liabilities 1,300,188 1,757,815
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STOCKHOLDERS' EQUITY
Convertible 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; February 28,
2001, 880,425 shares, May 31, 2000, 880,091 shares outstanding 16,004 16,004
Additional paid-in capital 7,475,035 7,475,035
Accumulated deficit (3,089,526) (3,230,136)
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Total 4,401,513 4,260,903
Less - treasury stock February 28, 2001, 719,983 shares, May 31, 2000, 720,317
shares, at cost (692,063) (692,644)
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Total stockholders' equity 3,709,450 3,568,259
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TOTAL $ 5,009,638 $ 5,326,074
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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 FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
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FEBRUARY 28, FEBRUARY 29,
2001 2000
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REVENUES AND SALES:
Contract revenues $ 3,005,642 $ 2,867,429
Product sales 48,964 55,299
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Total Revenues and Sales 3,054,606 2,922,728
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OPERATING EXPENSES:
Contract 2,231,597 2,272,950
Cost of goods sold 42,262 40,892
Research and development 2,944 33,947
General and administrative 684,224 544,550
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Total 2,961,027 2,892,339
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OPERATING INCOME 93,579 30,389
INTEREST INCOME 1,125 1,151
INTEREST EXPENSE (16,143) (14,387)
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INCOME BEFORE INCOME TAX 78,561 17,153
PROVISION FOR INCOME TAX 31,000 7,000
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NET INCOME $ 47,561 $ 10,153
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BASIC EARNINGS PER SHARE $ 0.05 $ 0.01
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DILUTED EARNINGS PER SHARE $ 0.05 $ 0.01
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WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING FOR BASIC
EARNINGS PER SHARE 880,425 872,083
EFFECT OF DILUTIVE SECURITIES - OPTIONS 8,061 9,381
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WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING OPTIONS FOR
DILUTIVE EARNINGS PER SHARE 888,486 881,464
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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 NINE MONTHS ENDED FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
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FEBRUARY 28, FEBRUARY 29,
2001 2000
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REVENUES AND SALES:
Contract revenues $ 9,008,572 $ 8,564,407
Product sales 60,798 94,809
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Total Revenues and Sales 9,069,370 8,659,216
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OPERATING EXPENSES:
Contract 6,950,562 6,814,748
Cost of goods sold 52,925 76,932
Research and development 34,454 134,818
General and administrative 1,713,357 1,517,040
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Total 8,751,298 8,543,538
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OPERATING INCOME 318,072 115,678
INTEREST INCOME 3,433 2,771
INTEREST EXPENSE (43,495) (41,994)
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INCOME BEFORE INCOME TAX 278,010 76,455
PROVISION FOR INCOME TAX 111,000 31,000
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NET INCOME $ 167,010 $ 45,455
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BASIC EARNINGS PER SHARE $ 0.19 $ 0.05
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DILUTED EARNINGS PER SHARE $ 0.19 $ 0.05
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WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING FOR BASIC
EARNINGS PER SHARE 880,223 870,624
EFFECT OF DILUTIVE SECURITIES - OPTIONS 10,550 9,381
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WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING OPTIONS FOR
DILUTIVE EARNINGS PER SHARE 890,773 880,005
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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 NINE MONTHS ENDED FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
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FEBRUARY 28, 2001 FEBRUARY 29, 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 167,010 $ 45,455
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Adjustments to reconcile net income to net cash provided by (used
for) operating activities:
Depreciation and amortization 301,700 223,157
Deferred income taxes 111,000 9,000
Decrease (increase) in accounts receivable 62,332 (188,636)
Increase in prepaid expenses (21,301) (7,535)
Decrease in inventories 3,470 30,806
Increase in other assets (30,000)
Decrease in accounts payable and accrued expenses (197,542) (217,769)
Common stock gifted to employees 9,392
Decrease in income taxes payable (24,281)
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Total Adjustments 229,659 (165,866)
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NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 396,669 (120,411)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (107,584) (367,234)
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NET CASH USED FOR INVESTING ACTIVITIES (107,584) (367,234)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) proceeds under line-of-credit agreement (166,279) 549,847
Net proceeds from exercise of stock options 581 9,131
Dividend paid (26,401) (17,363)
Principal payments under notes payable and capital lease obligations
(93,805) (51,553)
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NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (285,904) 490,062
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NET INCREASE IN CASH AND CASH EQUIVALENTS 3,181 2,417
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 72,099 68,768
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 75,280 $ 71,185
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 44,734 $ 40,857
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Income taxes $ 58,725
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SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Treasury stock received for payment of loans to officer $ 32,906
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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 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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Summary Analysis
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In this third quarter of fiscal year 2001, BIOQUAL, Inc. ("BIOQUAL") realized
net income of $47,561. Net income for the nine months of fiscal year 2001
totaled $167,010.
On December 18, 2000, BIOQUAL won a renewal competition for a National Cancer
Institute (NCI) contract to support the Institute's AIDS researchers. The
contract entitled "Nonhuman Primate Models of AIDS: Prophylactic and Therapeutic
Studies" totals $4,628,783 and extends for five years to December 2005.
On March 1, 2001, BIOQUAL won and began work on a contract to support the
recently established National Institutes of Health Vaccine Research Center. The
contract entitled "Housing and Maintenance of Nonhuman Primates for the Vaccine
Research Center" totals $8,230,253 and extends for seven years to February 2008.
Results of Operations
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Three Month Comparison
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For the three months of operations ended February 28, 2001 (BIOQUAL's third
quarter), contract revenues increased by 4.8% or $138,213 to $3,005,642 compared
to $2,867,429 in the third quarter of fiscal year 2000. This increase is
primarily due to an increase in government contract activity. Product sales
decreased to $48,964 compared to $55,299 in fiscal year 2000. This decrease was
primarily due to two factors, 1) an increase in the number of units of Immunogam
sold (267 units) at a temporarily reduced price compared to the same quarter in
fiscal year 2000 and 2) a reduction in number of units sold (approximately 200
units) of Eqstend compared to the previous year. Contract operating expenses
decreased 1.8% or $41,353 compared to the third quarter of fiscal year 2000
primarily due to 1) the effect of a one-time retroactive adjustment of
reallocating certain fringe benefit costs (totaling $86,620) from contract
expenses to general and administrative expenses, and 2) a decrease in overhead
costs of approximately $27,000 supporting the equine production facility as
compared to the third quarter of fiscal year 2000. An increase in government
contract activity partially offset the above net decrease. Cost of goods sold
increased to $42,262 from $40,892 in the third
6
quarter of fiscal year 2000. Research and development (R&D) expenses decreased
to $2,944 compared to $33,947 in the third quarter of fiscal year 2000. This
decrease is primarily due to a voluntary reduction in staffing in BIOQUAL's
Department of Discovery Research. General and administrative expenses increased
25.6% compared to the third quarter of fiscal year 2000 primarily due to
inflationary increases in several items of expense and additional indirect labor
costs incurred by senior technical staff, and the effect of a one-time
retroactive adjustment of reallocating certain fringe benefit costs (totaling
$86,620) from contract expenses to general and administrative expenses as
mentioned above. Total operating expenses increased 2.4% due to the above.
Operating income increased to $93,579 compared to $30,389 in the same quarter of
the prior fiscal year. The increase is primarily due to 1) the decrease in R&D
expenses, and 2) the decrease in overhead expenses supporting the equine
production facility.
For this quarter, BIOQUAL had interest expense of $16,143 compared to interest
expense of $14,387 in the prior year.
In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company
reported a deferred federal income tax expense of $31,000 for the three months
ended February 28, 2001. The Company will utilize available state net operating
loss ("NOL") carryforwards to offset state income tax. The state NOL
carryforwards became available for use as a result of the December 31, 1999
merger between Diagnon Corporation and its wholly owned subsidiary, BIOQUAL,
Inc.
Earnings Per Share (EPS) - For the three month comparison, options to purchase
29,335 shares of common stock at prices ranging from $2.8875 per share to $3.375
per share were outstanding on February 28, 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 29,502 shares of common
stock at prices ranging from $2.8875 per share to $3.375 per share were
outstanding on February 29, 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.
Nine Month Comparison
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For the nine months of operations ended February 28, 2001, contract revenues
increased by 5.2% or $444,165 compared to the first nine months of fiscal year
2000. This increase was primarily due to 1) increased government contract
activity, 2) the fiscal year 2000 reserve of $50,000 loss due to an indirect
cost overrun on a contract that expired on December 27, 1999, and 3) the funding
in fiscal year 2001 of a $25,858 indirect rate variance cost overrun of a
contract that expired in fiscal year 1996 (the contract was administratively
closed out on August 24, 2000). Product sales decreased to $60,798 compared to
$94,809 in fiscal year 2000. This decrease was primarily due to a decrease in
units sold during the current fiscal year and two factors which occurred during
the third quarter of fiscal year 2001, 1) an increase in the number of units of
Immunogam sold (267 units) at a temporarily reduced price compared to the third
quarter in fiscal year 2000 and 2) a reduction in number of units sold
(approximately 200 units) of Eqstend compared to the previous year. Contract
operating expenses increased 2.0% or $135,814 compared to the first nine months
of fiscal year 2000 primarily due to increased
7
government contract activity, offset by a decrease in contract overhead expenses
as a percentage of contract sales and a decrease in overhead expenses of
approximately $67,000 in support of the equine production facility compared to
the first nine months in fiscal year 2000. Cost of goods sold decreased to
$52,925 from $76,932 in the first nine months of fiscal year 2000. This decrease
was primarily due to the decrease in units sold during this fiscal year.
Research and development (R&D) expenses decreased to $34,454 compared to
$134,818 in the first nine months of fiscal year 2000. This decrease is
primarily due to a voluntary reduction in staffing in BIOQUAL's Department of
Discovery Research. General and administrative expenses increased 12.9% compared
to the first nine months of fiscal year 2000 primarily due to inflationary
increases in several items of expense and additional indirect labor costs
incurred by senior technical staff. Total operating expenses increased 2.4% due
to the above.
Operating income increased to $318,072 compared to $115,678 in the same period
of the prior fiscal year. The increase is primarily due to 1) the funding in
fiscal year 2001 of a $25,858 indirect rate variance cost overrun of a contract
that expired in fiscal year 1996 as mentioned above, 2) the decrease in R&D
expenses, 3) the decrease in overhead expenses supporting the equine production
facility, 4) the fiscal year 2000 reserve for a $50,000 loss due to an indirect
cost overrun on a contract that ended on December 27, 1999, and 5) increased
government contract activity.
For the nine months of this fiscal year, the Company had interest expense of
$43,495 compared to interest expense of $41,994 in the prior year.
In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company
reported a deferred federal income tax expense of $111,000 for the nine months
ended February 28, 2001. The Company will utilize available state net operating
loss ("NOL") carryforwards to offset state income tax. The state NOL
carryforwards became available for use as a result of the December 31, 1999
merger between Diagnon Corporation and its wholly owned subsidiary, BIOQUAL,
Inc.
Earnings Per Share (EPS) - For the nine month comparison, options to purchase
29,335 shares of common stock at prices ranging from $2.8875 per share to $3.375
per share were outstanding on February 28, 2001 but were not included in the
computation of diluted EPS because the option exercise prices were greater than
the market price of the common shares. Options to purchase 29,502 shares of
common stock at prices ranging from $2.8875 per share to $3.375 per share were
outstanding on February 29, 2000 but were not included in the computation of
diluted EPS because the option 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 decreased $316,436. This amount
was primarily attributable to a decrease in accounts receivable of $62,332
consisting mainly of 1) a $78,423 decrease in
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unbilled accounts receivable (current plus noncurrent) primarily resulting from
a $91,494 increase in reimbursable indirect rate variances for the current
fiscal year, a net $164,634 decrease in month end accrued sales on accrued
direct labor comparing the current period with the accrual at the end of fiscal
year 2000, and a $5,283 decrease in prior year rate variance billed this nine
month period, 2) a $13,221 decrease in other accounts receivable and 3) an
increase of $29,312 in trade accounts receivable reflecting a slower collection
rate compared to the previous fiscal year end. Deferred income taxes decreased
by $111,000 as a result of utilizing a portion of the federal income tax loss
carryforward. Fixed assets, net of accumulated depreciation and amortization
decreased $194,116 reflecting depreciation and amortization of $301,700 reduced
by a $57,720 fully amortized facility improvement write off and disposal during
the first nine months of fiscal year 2001 offset by fixed asset purchases of
$107,584 (mainly laboratory equipment and facility improvements) reduced by the
$57,720 fully amortized facility improvement write off. Inventories decreased
$3,470.
The decrease in total assets above is partially offset by 1) an increase in
prepaid expenses of $21,301 primarily due to the prepayment of business
liability insurance premiums and personal property and real estate taxes and 2)
a $30,000 increase to other noncurrent assets reflecting a $50,000 deposit on a
nonhuman primate housing unit order offset by a $20,000 final payment on a
nonhuman primate housing unit order from the previous fiscal year end. The
balance of the decrease was due to other miscellaneous factors.
Liabilities
In the first nine months of operations, total liabilities decreased $457,627
from $1,757,815 at May 31, 2000 to $1,300,188 at February 28, 2001. This
decrease is primarily attributable to 1) a decrease to borrowings under
line-of-credit of $166,279 reflecting reduced spending for research and
development, 2) a decrease in accrued compensation and related costs of $126,870
reflecting the payment of accrued bonuses from fiscal year 2000 during the first
quarter of fiscal year 2001 and a shorter accrual period at the end of February
2001 compared to the end of the previous fiscal year, 3) payments totaling
$93,805 on capital leases and notes payable reducing long-term debt, and 4) a
decrease in other accrued liabilities of $78,703 reflecting the third quarter
reimbursement of an errant payment ($77,243) from the National Institutes of
Health from fiscal year 2000. The balance of the decrease was due to other
miscellaneous factors.
Stockholders' Equity
In the first nine months of operation in fiscal year 2001, stockholders' equity
increased $141,191 primarily due to the Company realizing $167,010 of net income
offset by the $26,401 cash dividend declared on July 12, 2000.
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.
9
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; 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).
Item 6. EXHIBITS
Exhibits filed
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(10) Government Contracts.
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1. Title: Non Human Primate Model of AIDS:
Prophylactic and Therapeutic Studies.
Institute: National Cancer Institute
Contract Period: 12/19/2000 - 12/18/2005
2. Title: Housing and Maintenance of Non-Human
Primates for VRC.
Institute: National Institute of Allergy and Infectious
Diseases
Contract Period: 3/1/2001 - 2/28/2008
10
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 April 10, 2001 /s/ John C. Landon
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Chairman of the Board,
President and Chief Executive
Officer
DATE April 10, 2001 /s/ Michael P. O'Flaherty
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Chief Operating Officer and
Secretary
DATE April 10, 2001 /s/ David A. Newcomer
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Chief Financial Officer
11