FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1996 Commission File Number: 1-12748
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CHESAPEAKE BIOLOGICAL LABORATORIES, INC.
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(Exact name of registrant as specified in its charter)
Maryland 52-1176514
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11412 Cronridge Drive, Owings Mills, MD 21117 2834
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(Address of principal executive offices) (zip code) (SIC)
(410) 998-9800
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(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
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The number of shares outstanding of each of the issuer's classes of common
stock as of June 30, 1996 and June 30, 1995:
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Outstanding at Outstanding at
Class June 30, 1996 June 30, 1995
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Class A Common Stock, $.01 par value 3,986,188 3,979,938
Class B Common Stock, $.01 par value -0- -0-
Page 1 of 22
This Form 10Q consists of 22 pages (including Exhibits). The Exhibit Index
is set forth on page 9.
1
Chesapeake Biological Laboratories, Inc.
Table of Contents
Page
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets as of
June 30, 1996 and March 31, 1996 . . . . . . . . . 3
Consolidated Statements of Operations for
the three months ended June 30, 1996 and
1995 . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows
for the three months ended June 30, 1996
and 1995 . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . 8
Part II. Other Information
Item 5. Employment Agreement . . . . . . . . . . . . . . . . 8
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 9
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
1996 1996
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(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 88,344 $ 240,583
Accounts receivable, net of allowance
for doubtful accounts of $20,150 and
$16,400, respectively 565,571 616,458
Inventories (Notes 1 and 3) 1,560,512 1,687,616
Prepaid expenses 55,473 43,637
Other receivables 55,535 55,168
Deferred tax asset (Note 5) 185,464 134,639
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TOTAL CURRENT ASSETS 2,510,899 2,778,101
PROPERTY AND EQUIPMENT, net (Notes 1 and 4) 1,530,886 1,514,167
OTHER ASSETS 27,690 27,690
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TOTAL ASSETS $ 4,069,475 $ 4,319,958
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 314,616 $ 351,742
Short term borrowings 1,391 ---
Current portion of long term debt and
capital lease obligations (Notes 2 and 4) 49,769 49,769
Deferred revenue (Note 1) 102,703 215,513
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TOTAL CURRENT LIABILITIES 468,479 617,024
LONG TERM LIABILITIES:
Long term debt and capital lease obligations, net
of current portion (Notes 2 and 4) 92,787 105,668
Other liabilities 75,140 82,657
Deferred tax liability (Note 5) 130,598 130,598
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TOTAL LIABILITIES 767,004 935,947
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COMMITMENTS AND CONTINGENCIES (NOTE 2)
STOCKHOLDERS' EQUITY
Class A common stock, par value $.01 per share;
8,000,000 shares authorized; 3,986,188 and
3,979,938 shares issued and outstanding 39,862 39,799
Class B common stock, par value $.01 per
share; 2,000,000 shares authorized; no
shares issued and outstanding --- ---
Additional paid-in capital 3,832,119 3,827,182
Accumulated deficit (569,510) (482,970)
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TOTAL STOCKHOLDERS' EQUITY 3,302,471 3,384,011
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,069,475 $ 4,319,958
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The accompanying notes are an integral part of these
consolidated balance sheets.
3
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
June 30,
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1996 1996
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(unaudited) (unaudited)
OPERATING REVENUE $ 1,564,099 $ 1,860,576
COST OF SALES 1,206,358 1,243,166
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GROSS PROFIT 357,741 617,410
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OPERATING EXPENSES
General and administrative 312,505 320,766
Selling 112,908 146,410
Research and development 67,907 ---
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(LOSS) INCOME FROM OPERATIONS (135,579) 150,234
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OTHER INCOME (EXPENSE)
Interest income 2,074 489
Interest expense (3,860) (5,642)
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Total (1,786) (5,153)
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(LOSS) INCOME BEFORE (BENEFIT FROM) PROVISION
FOR INCOME TAXES (137,365) 145,081
(BENEFIT FROM) PROVISION FOR INCOME
TAXES (NOTE 1) (50,825) 60,934
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NET (LOSS) INCOME $ (86,540) $ 84,147
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PER COMMON AND EQUIVALENT SHARE $ (.022) $ .021
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WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 3,980,007 3,979,938
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The accompanying notes are an integral part of these
consolidated statements.
4
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
June 30,
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1996 1996
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(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (86,540) $ 84,147
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 90,377 77,120
Deferred income taxes (50,825) 60,934
Decrease (increase) in accounts receivable 50,887 (101,605)
Decrease (increase) in inventories 127,104 (130,055)
(Increase) decrease in prepaid expenses (11,836) 18,818
(Increase) decrease in other receivables (367) 4,042
(Decrease) increase in accounts payable
and accrued expenses (37,126) 8,217
(Decrease) increase in deferred revenue (112,810) 8,449
(Decrease) increase in other liabilities (7,517) 2,436
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NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (38,653) 32,503
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (107,096) (80,238)
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NET CASH USED IN INVESTING ACTIVITIES (107,096) (80,238)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayments) of short term borrowings 1,391 (14,772)
Repayments of long term debt (5,604) (4,416)
Repayments of capital lease obligations (7,277) (7,183)
Net proceeds from sale of stock 5,000 ---
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NET CASH USED IN FINANCING ACTIVITIES (6,490) (26,371)
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DECREASE IN CASH AND CASH EQUIVALENTS (152,239) (74,106)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 240,583 160,792
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CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 88,344 $ 86,686
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CASH PAID DURING THE PERIOD FOR:
INTEREST $ 3,860 $ 5,642
INCOME TAXES $ --- $ ---
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The accompanying notes are an integral part of these
consolidated statements.
5
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES:
The consolidated financial statements included herein for Chesapeake
Biological Laboratories, Inc. (the "Company" or "Registrant") and its
wholly owned subsidiary, CBL Development Corp. (the "Subsidiary"), have
been prepared from the records of the Company without audit and include,
in management's opinion, all adjustments necessary for a fair
presentation. All such adjustments were of a normal recurring nature. The
results for an interim period are not necessarily indicative of results
to be expected for a full fiscal year. The financial statements have been
prepared in conformity with the accounting principles described in Note 1
to the Financial Statements included in the Company's 1996 Annual Report
on Form 10-K.
INVENTORIES:
Inventories consist of raw materials, work-in-process and finished goods
which are stated at the lower of cost or market, determined under the
first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost less accumulated depreciation.
Equipment is depreciated using the straight-line method over the
estimated useful lives of three to ten years. Leasehold improvements are
amortized over the term of the lease.
REVENUE RECOGNITION:
The Company recognizes income when product is shipped or services have
been provided to the customer. Deferred revenue represents deposits
normally required of development customers.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include amounts invested in accounts which are
readily convertible to known amounts of cash with a maturity of three
months or less.
INCOME TAXES:
The Company has adopted the provisions of Statement No. 109, "Accounting
for Income Taxes", which was issued by the Financial Accounting Standards
Board in February 1992.
PER SHARE INFORMATION:
Per share information is based on the weighted average number of shares
of common and common equivalent shares outstanding. The Company uses the
Treasury Stock method to calculate the dilutive effect of outstanding
warrants and options at period end based on the Company's stock price on
the AMEX Emerging Company Marketplace.
6
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. STRATEGIC ALLIANCES:
As a result of negotiations during fiscal 1994, Allergan, a major
customer, has forgiven all of the indebtedness outstanding from CBL to
Allergan. Allergan remains obligated to purchase up to 240,000 units per
year of their VitraxTM requirements which are to be resold in the United
States, exclusively from CBL until February 1997. Allergan may now
purchase the United States requirements for VitraxTM in excess of
240,000 units per year and all of its requirements for VitraxTM for
resale outside of the United States from CBL or elsewhere.
3. INVENTORIES:
Inventories consist of the following:
June 30, March 31,
1996 1996
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Raw Materials $ 418,081 $ 371,954
Work-in-Process 1,123,264 1,288,163
Finished Goods 19,167 27,499
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$ 1,560,512 $ 1,687,616
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4. LEASES:
In December 1993, the Company entered into a non-cancelable operating
lease agreement for a second facility to house its corporate offices,
warehousing, shipping and receiving. The lease expires December 31,
1998, with two renewal terms of two years each. The rent expense under
the lease agreement was $35,477 and $38,834 for the 3 months ended June
30, 1996 and June 30, 1995, respectively.
The Company's original facility is primarily used for production and is
occupied under a non-cancelable operating lease agreement with an initial
six and one-half year term, expiring December 31, 1998, with two renewal
terms of two years each. Related rental payments for the 3 months ended
June 30, 1996, and 1995, were $57,922 and $57,583, respectively. The
operating lease agreement contains terms which feature reduced rental
payments in the early years and accelerated payments toward the end of
the lease term. For financial reporting purposes, rental expense
represents an average of the minimum annual rental payments over the
initial six and one-half year term. On an annual basis, this expense is
approximately $192,000.
The Company has also entered into several non-cancelable capital lease
obligations for various pieces of laboratory equipment and furniture that
expire during fiscal year 1999.
5. INCOME TAXES:
As of March 31, 1996, CBL had net operating loss carryforwards of
approximately $121,000 for income tax purposes. These carryforwards
begin to expire in 2004.
7
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
MANAGEMENT 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, 1996.
Three months ended June 30, 1996 and 1995:
Operating revenue was $1,564,000 for the quarter compared to $1,861,000
for the comparable quarter of the prior year. The decrease was due primarily
to one less Vitrax-TM- shipment to Allergan this quarter than in the first
quarter last year. Assuming the delivery of purchase orders already received
from Allergan, Vitrax-TM- shipments for the balance of this fiscal year are
expected to exceed that of last year.
Gross profit on sales was $358,000 for the quarter, compared to $617,000
for the comparable quarter last year, or 23% and 33% of operating revenues
respectively. Gross profits were adversely affected by scheduling
difficulties which caused temporary and abnormally high material and labor
costs for Vitrax-TM-.
Sales and marketing expenses decreased $33,000 to $113,000 this quarter
compared to the first quarter of last year. Research and development
expenses were $68,000 for the quarter. This function was launched in the
second half of the last fiscal year. Work is being done related to specific
products identified by CBL or customers as having market potential.
The above factors resulted in an operating loss for the quarter ended
June 30, 1996 of $136,000 compared to an operating profit of $150,000 for the
same period last year.
FINANCIAL CONDITION AND LIQUIDITY
On June 30, 1996, CBL had cash and cash equivalents of $88,000 compared
to $241,000 at March 31, 1996. The major reasons for the decrease in the
cash position are the net loss for the quarter, a decrease in deferred
revenues and $107,000 capital expenditures offset in part by depreciation.
As of June 30, 1996, the Company had borrowed $1,000 from the $750,000
Revolving Line of Credit from the First Union National Bank.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 5. OTHER INFORMATION.
The Company entered into an employment agreement effective as of
May 16, 1996, with John C. Weiss, III who was appointed CBL President as of
June 17, 1996. The agreement is listed in Item 6 below.
8
CHESAPEAKE BIOLOGICAL LABORATORIES, INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K PAGE NO.
A. EXHIBITS:
10(s) Employment Agreement dated as of May 16, 1996 10
by and between the Registrant and John C. Weiss, III.
B. REPORTS ON FORM 8-K:
No reports on Form 8-K were filed by the Registrant during
the quarter for which this report is filed.
SIGNATURES
Pursuant to the requirements 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.
/s/ John C. Weiss, III
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Registrant
DATE: 8/5/96 By: /s/ John C. Weiss, III
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John C. Weiss, III
President
DATE: 8/5/96 By: /s/ Thomas C. Mendelsohn
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Thomas C. Mendelsohn
Secretary
9