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, 2002
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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)
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, and (2) has been subject to such filing requirements
for the past 90 days.
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 April 10, 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, February 28, 2002
and May 31, 2001 ......................................... 2
Unaudited Consolidated Statements of Operations for
the Three Months Ended February 28, 2002 and
February 28, 2001 ........................................ 3
Unaudited Consolidated Statements of Operations for
the Nine Months Ended February 28, 2002 and
February 28, 2001 ........................................ 4
Unaudited Consolidated Statements of Cash Flows
for the Nine Months Ended February 28, 2002 and
February 28, 2001 ........................................ 5
Notes to Financial Statements .............................. 6
Item 2. Management's Discussion and Analysis ..................... 7
Item 6. Exhibits and Reports on Form 8-K ......................... 10
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BIOQUAL, INC. AND SUBSIDIARY
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UNAUDITED CONSOLIDATED BALANCE SHEETS, FEBRUARY 28, 2002 AND MAY 31, 2001
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ASSETS FEBRUARY 28, 2002 MAY 31, 2001
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CURRENT ASSETS:
Cash and cash equivalents $ 77,712 $ 76,061
Accounts receivable:
Trade 2,029,026 1,412,478
Unbilled - current 183,003 309,686
Other 13,686 17,027
Prepaid expenses 111,941 76,241
Inventories 134,386 180,922
Deferred income taxes - current 101,100 183,700
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Total current assets 2,650,854 2,256,115
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FIXED ASSETS:
Leasehold improvements 1,044,762 995,837
Furniture, fixtures and equipment 3,985,551 3,688,799
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Total 5,030,313 4,684,636
Less accumulated depreciation and amortization 3,502,953 3,271,154
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Fixed assets, net 1,527,360 1,413,482
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Deferred income taxes - noncurrent 109,600 199,000
Unbilled accounts receivable - noncurrent 400,891 664,113
Other noncurrent assets 20,000
Cash value of officers' life insurance policies 341,695 341,695
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TOTAL $ 5,050,400 $ 4,874,405
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LIABILITIES
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CURRENT LIABILITIES:
Borrowings under line of credit $ 267,039 $ 194,681
Current maturities of long-term debt 97,023 107,031
Accounts payable 197,130 168,248
Accrued compensation and related costs 368,129 486,932
Other accrued liabilities 56,016 5,098
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Total current liabilities 985,337 961,990
Long-term debt 9,749 83,167
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Total liabilities 995,086 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; February 28, 2002,
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 (2,749,152) (2,971,435)
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Total 4,745,719 4,521,146
Less - treasury stock February 28, 2002, 717,816 shares, May 31, 2001, 719,483
shares, at cost (690,405) (691,898)
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Total stockholders' equity 4,055,314 3,829,248
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TOTAL $ 5,050,400 $ 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 FEBRUARY 28,
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2002 2001
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REVENUES AND SALES:
Contract revenues $ 3,074,635 $ 3,005,642
Product sales 35,223 48,964
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Total Revenues and Sales 3,109,858 3,054,606
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OPERATING EXPENSES:
Contract 2,338,751 2,231,597
Cost of goods sold 29,601 42,262
Research and development 2,944
General and administrative 589,617 684,224
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Total 2,957,969 2,961,027
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OPERATING INCOME 151,889 93,579
INTEREST INCOME 364 1,125
INTEREST EXPENSE (6,221) (16,143)
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INCOME BEFORE INCOME TAX 146,032 78,561
PROVISION FOR INCOME TAX 58,500 31,000
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NET INCOME $ 87,532 $ 47,561
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BASIC EARNINGS PER SHARE $ 0.10 $ 0.05
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DILUTED EARNINGS PER SHARE $ 0.10 $ 0.05
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WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING FOR BASIC
EARNINGS PER SHARE 882,592 880,425
EFFECT OF DILUTIVE SECURITIES - OPTIONS 7,843 8,061
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WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING OPTIONS FOR
DILUTED EARNINGS PER SHARE 890,435 888,486
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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,
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2002 2001
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REVENUES AND SALES:
Contract revenues $ 9,208,496 $ 9,008,572
Product sales 62,978 60,798
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Total Revenues and Sales 9,271,474 9,069,370
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OPERATING EXPENSES:
Contract 7,051,553 6,950,562
Cost of goods sold 52,221 52,925
Research and development 34,454
General and administrative 1,716,976 1,713,357
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Total 8,820,750 8,751,298
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OPERATING INCOME 450,724 318,072
INTEREST INCOME 1,664 3,433
INTEREST EXPENSE (22,801) (43,495)
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INCOME BEFORE INCOME TAX 429,587 278,010
PROVISION FOR INCOME TAX 172,000 111,000
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NET INCOME $ 257,587 $ 167,010
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BASIC EARNINGS PER SHARE $ 0.29 $ 0.19
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DILUTED EARNINGS PER SHARE $ 0.29 $ 0.19
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WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING FOR BASIC
EARNINGS PER SHARE 882,238 880,223
EFFECT OF DILUTIVE SECURITIES - OPTIONS 9,258 10,550
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WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING OPTIONS FOR
DILUTIVE EARNINGS PER SHARE 891,496 890,773
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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,
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2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 257,587 $ 167,010
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Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 231,799 301,700
Deferred income taxes 172,000 111,000
(Increase) decrease in accounts receivable (223,302) 62,332
Increase in prepaid expenses (35,700) (21,301)
Decrease in inventories 46,536 3,470
Increase in other assets (20,000) (30,000)
Decrease in accounts payable and accrued expenses (39,002) (197,542)
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Total Adjustments 132,331 229,659
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NET CASH PROVIDED BY OPERATING ACTIVITIES 389,918 396,669
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (345,677) (107,584)
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NET CASH USED FOR INVESTING ACTIVITIES (345,677) (107,584)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) under line-of-credit agreement 72,358 (166,279)
Dividend paid (35,304) (26,401)
Proceeds from exercise of stock options 3,782 581
Principal payments on long-term debt (83,426) (93,805)
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NET CASH USED FOR FINANCING ACTIVITIES (42,590) (285,904)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 1,651 3,181
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 76,061 72,099
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 77,712 $ 75,280
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 24,281 $ 44,734
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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 and the nine 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 was required to be applied starting with fiscal
years beginning after December 15, 2001. The Company adopted this new Standard
with its fiscal year beginning June 1, 2001. The Company has no goodwill or
other intangible assets as of February 28, 2002 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 long-lived asset. The Standard
requires that the liability be
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discounted and accretion expense be recognized. SFAS No. 143 was 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 February 28, 2002 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 third quarter of fiscal year 2002 ended February 28, 2002, BIOQUAL, Inc.
("BIOQUAL" or the "Company") realized net income of $87,532. Net income for the
nine months of fiscal year 2002 totaled $257,587.
On January 18, 2002, the Company was notified by the National Institute of Child
Health and Human Development (NICHD) of the renewal of its contract to support
NICHD researchers. The contract entitled "Biological Testing Facility" for broad
spectrum research in contraception and reproductive health is for five years and
totals $21,195,867.
Results of Operations
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Three Month Comparison
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For the three months of operations ended February 28, 2002 (the Company's third
quarter), contract revenues increased by 2.3% or $68,993 to $3,074,635 compared
to $3,005,642 in the third quarter of fiscal year 2001. This increase in
government contract revenues compared to the third quarter of fiscal year 2001
is primarily due to an increase in contract activity. Product sales decreased to
$35,223 for the third quarter of fiscal year 2002 compared to $48,964 for the
third quarter of fiscal year 2001. Contract operating expenses increased 4.8% or
$107,154 to $2,338,751 for the third quarter of fiscal year 2002 compared to the
third quarter of fiscal year 2001 primarily due to increased government contract
expenses. Cost of goods sold decreased to $29,601 from $42,262 in the third
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 $2,944 in the third
quarter of fiscal year 2001. General and administrative expenses decreased 13.8%
compared to the third quarter of fiscal year 2001 primarily due to a decrease in
administrative salaries and associated fringe benefits. Total operating expenses
decreased 0.1% due to the above.
Operating income increased to $151,889 compared to $93,579 in the same quarter
of the prior fiscal year. The increase is primarily due to the increase in total
revenues exceeding the relatively level amounts in operating expenses.
For this quarter, BIOQUAL had interest expense of $6,221 compared to interest
expense of $16,143 in the prior year.
In accordance with SFAS No. 109, "Accounting for Income Taxes", the
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Company reported a deferred federal and state income tax expense of $58,500 for
the three months ended February 28, 2002. 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
29,335 shares of common stock at prices ranging from $2.8875 per share to $3.375
per share were outstanding on February 28, 2002 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 29,335 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.
Nine Month Comparison
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For the nine months of operations ended February 28, 2002, contract revenues
increased by 2.2% or $199,924 to $9,208,496 compared to $9,008,572 in the first
nine months of fiscal year 2001. This increase is primarily due to an increase
in contract activity. Product sales increased to $62,978 compared to $60,798 in
fiscal year 2001. Contract operating expenses increased 1.5% or $100,991
compared to the first nine months of fiscal year 2001 primarily due to increased
government contract activity offset by decreases in overhead expenses associated
with the Equine IgG production facility. Cost of goods sold was relatively the
same, $52,221 compared to $52,925 for the first nine months 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 nine month period compared to $34,454 in the same period of fiscal
year 2001. General and administrative expenses increased .2% compared to the
first nine months of fiscal year 2001 primarily due to increases in contract
activity offset by a decrease in administrative salaries and associated fringe
benefits. Total operating expenses increased .8% due to the above.
Operating income increased to $450,724 compared to $318,072 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 nine month period, BIOQUAL had interest expense of $22,801 compared to
interest expense of $43,495 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 $172,000 for the
nine months ended February 28, 2002. 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.
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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, 2002 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 29,335 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.
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. As stated on the Consolidated Balance Sheet
(page 2), total assets increased $175,995 from $4,874,405 at May 31, 2001 to
$5,050,400 at February 28, 2002. This amount was primarily attributable to an
increase to accounts receivable of $223,302 consisting mainly of 1) an increase
of $616,548 in trade accounts receivable reflecting higher billings and a slower
collection rate compared to the previous fiscal year end, 2) a $389,905 decrease
in unbilled accounts receivable (current plus noncurrent) primarily resulting
from a $173,256 decrease in reimbursable indirect rate variances for the current
fiscal year, a net $216,649 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 $3,341 decrease in other accounts receivable. Fixed assets,
net of accumulated depreciation and amortization, increased $113,878 reflecting
fixed asset purchases of $345,677 (mainly nonhuman primate enclosures,
laboratory equipment and facility improvements) offset by depreciation and
amortization of $231,799. Prepaid expenses increased $35,700 primarily due to
the prepayment of business liability and life insurance premiums, and real
estate and personal property taxes. Other noncurrent assets increased $20,000
reflecting a deposit on the fabrication of nonhuman primate enclosures.
The increase above is partially offset by 1) a decrease in inventories of
$46,536 and 2) a decrease in deferred income taxes of $172,000 as a result of
utilizing a portion of federal and state income tax loss carryforwards.
Liabilities
In the first nine months of operation in fiscal year 2002, total liabilities
decreased $50,071 from $1,045,157 at May 31, 2001 to $995,086 at February 28,
2002. This decrease is primarily attributable to 1) a decrease in accrued
compensation and related costs of $118,803 reflecting the payment of accrued
bonuses from fiscal year 2001 during the first quarter of fiscal year 2002, and
2) payments totaling $83,426 on capital leases and notes payable reducing
long-term debt.
The decrease above is partially offset by 1) an increase to borrowings under
line-of-credit of $72,358 reflecting the slower collection of trade accounts
receivable, 2) an increase in accounts payable of
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$28,882, and 3) a $50,918 increase in other accrued liabilities. This increase
reflects an over-collection of $45,000 of an invoice which is expected to be
repaid next quarter.
Stockholders' Equity
In the first nine months of operation in fiscal year 2002, stockholders' equity
increased $226,066 primarily due to the Company realizing $257,587 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 provided by a
$1,000,000 line of credit with Allfirst Bank 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 Statements
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 of the Company 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).
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
On February 14, 2002, the Company filed a Form 8-K with the Securities and
Exchange Commission. The 8-K stated, under Item 5. Other Events, the Company
applied with the Chicago Stock Exchange ("Exchange") for the withdrawal of the
listing of its common stock on the Exchange. Upon approval of its delisting
application by the Exchange and the Securities and Exchange Commission, the
Company intends to file with the Securities and Exchange Commission its
certification and notice of termination of registration under Section 12(g) and
15(d) of the Securities Exchange Act of 1934.
There were no financial statements filed with the 8-K.
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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 April 10, 2002 /s/ John C. Landon
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Chairman of the Board,
President and Chief Executive
Officer
DATE April 10, 2002 /s/ Michael P. O'Flaherty
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Chief Operating Officer and
Secretary
DATE April 10, 2002 /s/ David A. Newcomer
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Chief Financial Officer
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