SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to ___________
Commission File Number: 1-12748
CHESAPEAKE BIOLOGICAL LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 52-1176514
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1111 S. PACA STREET, BALTIMORE, MARYLAND 21230 2834
(Address of principal executive offices) (Zip Code) (SIC)
(410) 843-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
The number of shares outstanding of each of the Registrant's classes of common
stock, as of June 30, 2000: Class A Common Stock, $.01 per share - 5,681,156
shares
CHESAPEAKE BIOLOGICAL LABORATORIES, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2000 and March 31, 2000 ..................... 3
Consolidated Statements of Operations
for the three months ended June 30, 2000 and 1999 .................................. 4
Consolidated Statement of Changes in Stockholders' Equity
for the three months ended June 30, 2000 ........................................... 5
Consolidated Statements of Cash Flows
for the three months ended June 30, 2000 and 1999 .................................. 6
Notes to Consolidated Financial Statements ......................................... 7-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................................... 11-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................................. 12
Item 5. Other Information .............................................................. 12
Item 6. Exhibits and Reports on Form 8-K ............................................... 12
SIGNATURES .................................................................................. 13
2
PART I. FINANCIAL INFORMATION
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, MARCH 31
2000 2000
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 71,539 $ 595,140
Restricted cash 350,000 350,000
Accounts receivable, net 2,019,119 1,832,047
Inventories 2,012,588 1,636,598
Prepaid expenses 201,844 360,579
Deferred tax asset 668,748 668,748
------------ ------------
TOTAL CURRENT ASSETS 5,323,838 5,443,112
PROPERTY, PLANT AND EQUIPMENT, NET 10,388,062 10,179,913
DEFERRED TAX ASSET 1,233,965 1,233,965
DEFERRED FINANCING COSTS AND OTHER ASSETS 349,119 353,827
------------ ------------
TOTAL ASSETS $ 17,294,984 $ 17,210,817
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 969,377 $ 1,232,133
Current portion of long term debt 727,487 725,018
Current portion of capital lease obligations 17,504 17,072
Current portion of accrued restructuring costs 470,404 591,644
Deferred revenue 1,775,518 1,179,736
------------ ------------
TOTAL CURRENT LIABILITIES 3,960,290 3,745,603
LONG TERM LIABILITIES:
Long term debt, net of current portion 6,671,368 6,839,257
Capital lease obligations, net of current portion 59,988 64,529
Accrued restructuring costs, net of current portion 31,686 37,479
------------ ------------
TOTAL LIABILITIES 10,723,332 10,686,868
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A-1 convertible preferred stock, par value $.01 per share; liquidation
preference $1,451,100 6% cumulative dividends, accruing beginning May 31,
2000, 15,510 shares authorized, 14,511 issued and outstanding 145 145
Class A common stock, par value $.01 per share;
14,984,490 shares authorized; 5,681,156 and
5,677,781 shares issued and outstanding 56,812 56,778
Additional paid-in capital 10,358,468 10,338,049
Accumulated deficit (3,843,773) (3,871,023)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 6,571,652 6,523,949
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,294,984 $ 17,210,817
============ ============
See accompanying notes to financial statements.
3
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999
---- ----
Revenues $ 2,767,363 $ 2,449,194
Cost of sales 2,018,149 1,763,766
----------- -----------
GROSS PROFIT 749,214 685,428
OPERATING EXPENSES:
General and administrative 355,986 302,868
Selling 192,233 140,931
----------- -----------
PROFIT FROM OPERATIONS 200,995 241,629
Interest expense (151,158) (154,820)
Interest income and other, net 6,705 24,969
----------- -----------
INCOME BEFORE TAXES 56,542 111,778
Provision for taxes 22,037 ---
-----------
NET INCOME $ 34,505 $ 111,778
=========== ===========
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 27,250 $ (405,222)
=========== ===========
INCOME (LOSS) PER COMMON SHARE:
Basic
Net income (loss) available to common stockholders $ 0.00 $ (0.07)
=========== ===========
Diluted
Net income (loss) available to common stockholders $ 0.00 $ (0.07)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 5,679,928 5,570,365
========= =========
Diluted 6,784,835 5,570,365
========= =========
See accompanying notes to financial statements.
4
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK
--------------- ------------ ADDITIONAL
SHARES PAR VALUE SHARES PAR VALUE PAID-IN CAPITAL
------ --------- ------ --------- ---------------
BALANCE AT MARCH 31, 2000 14,511 $ 145 5,677,781 $ 56,778 $10,338,049
Vesting of below market stock option grants -- -- -- -- 12,656
Issuance of shares pursuant to
Exercise of stock options -- -- 3,375 34 7,763
Dividend payable on preferred stock
Net income -- -- -- -- --
------ ----------- --------- ----------- -----------
BALANCE AT JUNE 30, 2000 14,511 $ 145 5,681,156 $ 56,812 $10,358,468
====== =========== ========= =========== ===========
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------- ------
BALANCE AT MARCH 31, 2000 $(3,871,023) $ 6,523,949
Vesting of below market stock option grants -- 12,656
Issuance of shares pursuant to
Exercise of stock options -- 7,797
Dividend payable on preferred stock (7,255) (7,255)
Net income 34,505 34,505
----------- -----------
BALANCE AT JUNE 30, 2000 $(3,843,773) $ 6,571,652
=========== ===========
See accompanying notes to financial statements.
5
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
JUNE 30,
--------
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 34,505 $ 111,777
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 165,985 161,790
Deferred financing costs 4,708 --
Non-cash compensation expense 12,656 13,800
Increase in accounts receivable (187,072) (299,818)
Increase in inventories (375,990) (147,785)
Decrease in prepaid expenses and other assets 58,235 161,645
Decrease in accounts payable and accrued expenses (270,011) (109,894)
Decrease in accrued restructuring costs (127,033) (129,934)
Increase in deferred revenue 595,781 49,434
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (88,236) (188,985)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (273,634) (143,099)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (273,634) (143,099)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short term borrowings, net -- (644,445)
Repayments of long term debt (165,420) (167,960)
Payments of capital lease obligations (4,108) 92,214
Net proceeds from exercise of stock options 7,797 1,863,966
Deferred financing costs
-- (1,298)
----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (161,731) 1,142,477
----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (523,601) 810,393
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 595,140 410,595
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 71,539 $ 1,220,988
=========== ===========
CASH PAID DURING THE PERIOD FOR:
Interest $ 151,158 $ 154,820
=========== ===========
Income taxes $ -- $ --
=========== ===========
See accompanying notes to financial statements.
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CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
1. ORGANIZATION
Chesapeake Biological Laboratories, Inc. ("CBL" or the "Company") is a
provider of pharmaceutical and biopharmaceutical parenteral product
development and production services on a contract basis for a broad range
of customers, from major international pharmaceutical firms to emerging
biotechnology companies. Since 1990, CBL has provided its parenteral
product development services to more than 100 pharmaceutical and
biotechnology companies and has contributed to the development and
production of more than 125 therapeutic products intended for human
clinical trials. Customers contract with the Company for services to
produce development stage products for use in U.S. Food and Drug
Administration ("FDA") clinical trials and to produce and manufacture FDA
approved parenteral products for commercial sale. The Company's business
depends in part on strict government regulation of the drug development
process, especially in the United States. CBL's production facilities
operate under the current Good Manufacturing Practices ("cGMP") established
and regulated by the FDA.
The Company's operations are treated as one operating segment,
pharmaceutical and biopharmaceutical product development and production
services, as it only reports profit and loss information on an aggregate
basis to operating management of the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of
Chesapeake Biological Laboratories, Inc. and its wholly owned subsidiary
(the "Company"). The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information. The consolidated
balance sheet as of June 30, 2000, consolidated statements of operations
for the three months ended June 30, 2000 and 1999 and the consolidated
statements of cash flows for the three months ended June 30, 2000 and 1999
are unaudited, but include all adjustments (consisting of normal recurring
adjustments) which the Company considers necessary for a fair presentation
of the financial position, operating results and cash flows for the periods
presented. Although the Company believes that the disclosures in these
financial statements are adequate to make the information presented not
misleading, certain information and footnote information normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules
and regulations of the Securities and Exchange Commission.
Results for any interim period are not necessarily indicative of results
for any future interim period or for the entire year. The accompanying
unaudited consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended March 31, 2000.
ACCOUNTS RECEIVABLE
Accounts receivable are stated net of allowance for doubtful accounts of
$83,000 and $75,000 as of June 30, 2000 and March 31, 2000, respectively.
7
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 (CONTINUED)
INVENTORIES
Inventories consist of raw materials, work-in-process and finished goods,
which are stated at the lower of cost or market. Finished goods represent
materials filled and labor incurred for filled vials and relate to services
completed, invoiced and paid within terms by the customer for their
product, which was recently approved by the FDA. These filled vials require
FDA approved labels, which were not available when the filling services
were performed. When the vials are labeled and the product is shipped,
inventory will be relieved. Cost is determined using the first-in,
first-out (FIFO) method.
REVENUE RECOGNITION
The Company recognizes revenue for its product development services once
the services have been provided to the customer. CBL also provides
commercial production services of parenteral and other sterile product
presentations and recognizes revenue when a product has been shipped or
when the terms of the agreement with the customer are completed.
Deferred revenue represents deposits normally required of customers with
development products and revenue for services performed for finished good
deferred until product shipment.
Deferred revenue at June 30, 2000 relating to filling services completed
with the related units not shipped of commercial product totaled
$1.3 million. Related costs of $0.9 million were classified as finished
goods in inventory. The corresponding $0.4 million in gross profit will be
recognized as the units are shipped.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' financial
statements to conform with the current year presentation.
3. INVENTORIES
Inventories consisted of the following at:
JUNE 30, 2000 MARCH 31, 2000
------------- --------------
Raw materials $ 666,433 $ 718,338
Work-in-process 436,613 440,980
Finished goods 909,542 477,280
---------- ----------
$2,012,588 $1,636,598
========== ==========
4. LONG TERM DEBT
Under the documentation applicable to the bond financing, the Company is
obligated to maintain certain financial ratios and balances, including a
minimum tangible net worth, a liability to net worth ration, and EBITDA
ratio and current ratio, all as defined and established in the applicable
documents. Subsequent to March 31, 1999, the Bank modified the covenants as
of March 31, 1999 and for the fiscal year ending March 31, 2000. As of
March 31, 2000, the Company was in compliance with the modified covenants.
As of June 30, 2000, the Company was in compliance with, or had obtained
waivers for, all modified covenants.
8
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 (CONTINUED)
In return for the covenant modifications, the Company issued warrants for
75,000 shares of Class A Common stock at $2.25 per share, which was the
market price at the date of the agreement. Using the Black-Scholes option
pricing model, these warrants have a fair value of $268,952 and are
included as Additional Paid-in-Capital in the accompanying balance sheet at
June 30, 2000 and 1999. These debt issuance costs represent deferred
financing costs, which are being amortized as interest expense over the
life of the related debt
5. EARNINGS PER SHARE
Income per common share is computed by dividing income applicable to common
stockholders by the weighted-average number of common shares outstanding.
Earnings per common share, assuming dilution is computed based on the
weighted-average number of common shares outstanding after consideration of
the dilutive effect of stock options and the assumed conversion of the
preferred stock at the stated rate.
The computations of earnings per common share and earnings per common
share, assuming dilution, for the three months ended June 30, 2000 and June
30, 1999, are as follows:
2000 1999
---- ----
Weighted average number of common shares 5,679,928 5,570,365
Diluted effect of outstanding stock options and warrants 529,367 --
Diluted effect of conversion of preferred shares 575,540 --
----------- -----------
Weighted average number of common and common
equivalent shares outstanding 6,784,835 5,570,365
Net income $ 34,505 $ 111,778
Beneficial conversion feature --
(517,000)
Preferred stock dividend payable 7,255 --
----------- -----------
Net income available to common stockholders $ 27,250 $ (405,222)
=========== ===========
Basic earnings per share:
Net income available to common stockholders $ 0.00 $ (0.07)
=========== ===========
Diluted earnings per share:
Net income available to common stockholders $ 0.00 $ (0.07)
=========== ===========
6. RESTRUCTURING CHARGES
In the fourth quarter of fiscal year 1999, the Company implemented a
realignment of management, a workforce reduction and decided to close its
Seton experimental facility and consolidate its operation into the new
Camden facility. The workforce reduction resulted in the termination of
full time and temporary employees. This action in addition to other
non-personnel cost reductions resulted in a restructuring charge of $1.2
million in fiscal 1999. The realignment and the workforce reduction
resulted in a charge of $693,000 in fiscal year 1999 and $548,000 was
provided for the closing of the Seton facility.
Expenses totaling $127,033 of the restructuring were charged against the
accrual in current fiscal quarter. Of the remaining accrual balance of
$502,090, $470,404 is classified in current liabilities as accrued
restructuring and is expected to be paid over the next 12 months, with the
remaining balance of $31,686 recorded as a non-current liability.
9
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 (CONTINUED)
7. SUBSEQUENT EVENTS
In July 2000, the Company executed stock purchase agreements with Messrs.
Rice and Botek in connection with their new employment agreements. Messrs.
Rice and Botek purchased 100,000 restricted shares and 75,000 restricted
shares, respectively, subject to forfeiture, under the Company's Fifth
Stock Incentive Plan, for $2.50 per share, the fair market value on the
date of agreement. Messrs. Rice and Botek each signed a promissory note to
the Company for the purchase price for the shares.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The management discussion below should be read in conjunction with the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 2000.
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Operating revenues were $2,767,000 for the three months ended June 30, 2000
compared to $2,449,000 for the comparable period in the previous fiscal year.
Revenues for the first quarter were primarily from non-commercial development
and production of FDA clinical trial supplies, although the commercial
production is a larger segment of revenues than in prior periods. Revenues do
not include $1,047,000 of deferred revenue related to filling services completed
and invoiced during the first quarter to a customer who expects to introduce the
approved product during CBL's second quarter.
Gross profit for the three months ended June 30, 2000 was $749,000 compared to
$685,000 for the comparable period last year. The primary factor in the gross
profit improvement is the overall increase in revenues for the Company. The
gross profit does not include $342,000 which will be realized when the deferred
revenues for completed filling services are recorded.
Selling expenses were $192,000 for the three months ended June 30, 2000, an
increase of $51,000 over the comparable period in the previous fiscal year.
Increased advertising expenditures and provision for sales and marketing
incentive plans based on revenue increases were the primary factors in the cost
increase. General and administrative costs increased $53,000 to $356,000 for the
quarter due primarily to consulting costs related to the management
reorganization with the former Chairman and Chief Executive Officer which was
effective at June 30, 1999.
As a result of the increased operating revenues being offset by cost increases
in Selling, General and Administrative expenses, operating income for the
quarter was $201,000 compared to the quarterly operating income of $242,000 for
the three months in the previous fiscal year.
Interest expense for the three months ended June 30, 2000 was $151,000 in the
current year compared to $155,000 for the comparable period in the previous
fiscal year.
Income before taxes was $57,000 for the three months ended June 30, 2000
compared to $112,000 for the comparable period in the previous fiscal year. The
Company recorded a provision for taxes of $22,000, although due to a net
operating loss carryforward, taxes will not be paid. Due to the net operating
losses generated during the fiscal year ended March 31, 1999, no tax liability
was accrued related to the income for the three months ended June 30, 1999
resulting in $112,000 of net income for that period.
FINANCIAL CONDITION AND LIQUIDITY
On June 30, 2000 CBL had cash and cash equivalents of $72,000 compared to
$595,000 at March 31, 2000. These balances do not include $350,000 held as
collateral for the Company's obligation under the Letter of Credit and
Reimbursement Agreement with First Union National Bank of North Carolina,
pursuant to which, a letter of credit was issued as credit enhancement for bonds
issued by the Maryland Industrial Development Financing Authority. The proceeds
of these bonds were used by the Company to finance a portion of the purchase
price, renovation and equipping of the Camden production facility.
11
The Company continues to maintain a $750,000 Revolving Line of Credit from First
Union National Bank of Maryland. There was no outstanding balance as of June 30,
2000 or as of March 31, 2000.
The $523,000 decrease in the cash position during the three months ended June
30, 2000 was primarily the result of several factors needed to support the
increases in operating revenues, primarily growth in the accounts receivable and
inventory levels. Management believes that based on the current financial
position, its operating plan will generate sufficient cash resources to meet its
cash needs through at least April 2001. However there can be no assurance this
will occur. Due to the increase in deferred revenues for services provided and
invoiced but not recognized as revenue for the three months ended June 30, 2000
it was necessary for the Company to obtain a waiver related to the Cash Flow
Covenant at June 30, 2000.
STATEMENTS REGARDING FORWARD-LOOKING DISCLOSURE
Certain information contained in this Report includes forward-looking statements
which can be identified by the use of forward-looking terminology such as "may",
"will", "expect", "should", "believes", "anticipates", "intends", or words of
similar import. These statements may involve risks and uncertainties, as
outlined in Item 1 of the Company's March 31, 2000 Form 10-K that could cause
actual results to differ materially from those described in the statements. The
risks and uncertainties include (without limitation) general economic and
business conditions, changes in business strategy or development plans, and
others. Given these uncertainties, the reader is cautioned to place undo
reliance on such forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the reported market risks since March 31,
2000.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not presently a party to any material litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
12
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHESAPEAKE BIOLOGICAL LABORATORIES, INC.
By: /s/THOMAS P. RICE By: /s/JOHN T. JANSSEN
----------------------------- --------------------------
Thomas P. Rice John T. Janssen
President and Chief Executive Treasurer and Chief Financial
Officer Officer
Dated: August 11, 2000
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