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 December 31, 1996- 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 No.)
11412 Cronridge Drive, Owings Mills, MD 21117 2834
- ---------------------------------------- ---------------- ---------------
(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
----- ----
The number of shares outstanding of each of the issuer's classes of common stock
as of December 31, 1996 and December 31, 1995:
Outstanding at Outstanding at
Class December 31, 1996 December 31, 1995
--------- ------------------ --------------------
Class A Common Stock, $.01 par value 4,111,188 3,979,938
Class B Common Stock, $.01 par value -0- -0-
This Form 10-Q consists of 12 pages plus Exhibits
The Exhibit index is set forth on page 11
1
Chesapeake Biological Laboratories, Inc.
Table of Contents
Page
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets as of
December 31, 1996 and March 31, 1996. . . . . 3
Consolidated Statements of Operations for
the three months and nine months ended
December 31, 1996 and 1995 . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows
for the nine months ended December 31, 1996
and 1995 . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 9
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
1996 1996
---- ----
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 1,437,087 $ 240,583
Accounts receivable, net of allowance
for doubtful accounts of $6,650 and
$16,400, respectively 666,429 616,458
Inventories (Notes 1 and 3) 1,364,107 1,687,616
Prepaid expenses 98,251 43,637
Other receivables --- 55,168
Deferred tax asset 87,454 134,639
----------- -----------
Total current assets 3,653,328 2,778,101
PROPERTY AND EQUIPMENT, net (Notes 1 and 4) 4,129,090 1,514,167
BOND FUNDS HELD BY TRUSTEE (Notes 1 and 5) 5,353,901 ---
OTHER ASSETS (Note 5) 399,917 27,690
----------- -----------
Total assets $ 13,536,236 $ 4,319,958
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 482,707 $ 351,742
Current portion of long term debt and
capital lease obligations (Note 4) 49,769 49,769
Deferred revenue (Note 1) 238,570 215,513
----------- -----------
Total current liabilities 771,046 617,024
LONG TERM LIABILITIES:
Long term debt and capital lease obligations, net
of current portion (Notes 4 and 5) 8,566,946 105,668
Other liabilities 60,107 82,657
Deferred tax liability 145,463 130,598
----------- -----------
Total liabilities 9,543,562 935,947
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 2)
STOCKHOLDERS' EQUITY
Class A common stock, par value $.01 per share;
8,000,000 shares authorized; 4,111,188 and
3,979,938 shares issued and outstanding 41,112 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 3,980,869 3,827,182
Accumulated deficit (29,307) (482,970)
----------- -----------
Total stockholders' equity 3,992,674 3,384,011
----------- -----------
Total liabilities and stockholders' equity $ 13,536,236 $ 4,319,958
----------- -----------
----------- -----------
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 Nine Months Ended
December 31, December 31,
1996 1995 1996 1995
---- ---- ---- ----
(unaudited) (unaudited)
OPERATING REVENUE $1,836,779 $1,182,176 $6,416,203 $4,719,732
COST OF SALES 1,091,431 641,361 4,218,315 2,972,310
--------- --------- --------- ---------
GROSS PROFIT 745,348 540,815 2,197,888 1,747,422
--------- --------- --------- ---------
OPERATING EXPENSES
General and administrative 357,464 315,202 1,045,577 938,735
Selling 100,481 99,232 311,713 352,772
Research and development 2,588 15,164 108,477 15,164
--------- --------- --------- ---------
Income from operations 284,815 111,217 732,121 440,751
--------- --------- --------- ---------
OTHER INCOME (EXPENSE)
Interest income 7,423 1,015 10,261 1,923
Interest expense (13,063) (8,439) (22,283) (23,129)
--------- --------- --------- ---------
Total (5,640) (7,424) (12,022) (21,206)
--------- --------- --------- ---------
Income before provision
for income taxes 279,175 103,793 720,099 419,545
PROVISION FOR INCOME TAXES
(Notes 1 and 5) (103,294) (35,202) (266,436) (167,818)
--------- --------- --------- ---------
NET INCOME $ 175,881 $ 68,591 $ 453,663 $ 251,727
--------- --------- --------- ---------
--------- --------- --------- ---------
NET INCOME PER COMMON AND
EQUIVALENT SHARE $ .042 $ .017 $ .110 $ .063
--------- --------- --------- ---------
--------- --------- --------- ---------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 4,160,423 3,979,938 4,120,335 3,979,938
--------- --------- --------- ---------
--------- --------- --------- ---------
The accompanying notes are an integral part of these consolidated statements
4
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
December 31,
----------------------------
1996 1995
---- ----
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 453,663 $ 251,727
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 268,554 236,501
Provision for deferred income taxes 62,050 112,818
(Increase) decrease in accounts receivable (49,971) 388,147
Decrease (increase) in inventories 323,509 (244,940)
(Increase) decrease in prepaid expenses (54,614) 11,976
Decrease in other receivables 55,168 11,358
Increase in deferred revenue 23,057 73,854
Increase (decrease) in accounts payable
and accrued expenses 130,965 (343,761)
Decrease in other liabilities (22,550) (12,598)
---------- ----------
Net cash provided by operating activities 1,189,831 485,082
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,733,477) (155,194)
Increase in bond funds held by Trustee (5,353,901) ---
Net cash (used in) investing activities (8,087,378) (155,194)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of short-term borrowings --- (127,991)
Proceeds from sale of stock 5,000 ---
Proceeds from long-term note and bond 8,500,000 ---
Payment of debt issuance costs (372,227) ---
Repayments of capital lease obligations and debt (38,722) (37,241)
---------- -----------
Net cash provided by (used in) financing activities 8,094,051 (165,232)
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Increase in cash and cash equivalents 1,196,504 164,656
CASH AND CASH EQUIVALENTS,
beginning of period 240,583 160,792
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CASH AND CASH EQUIVALENTS,
end of period $1,437,087 $ 325,448
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---------- -----------
CASH PAID DURING THE PERIOD FOR:
Interest $ 22,283 $ 23,129
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---------- -----------
Income taxes $ 7,733 $ 55,000
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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.
Bond Funds Held by Trustee:
---------------------------
Bond funds held by Trustee include the unused portion of the $7 million
bond used to finance the Company's expansion, which is being retained by
the Trustee in an interest bearing account.
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. Also included are Company funds of $700,000 which are
being held by the Bond Trustee as collateral for the capital expansion now
in process.
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:
December 31, March 31,
1996 1996
---- ----
Raw Materials $ 390,836 $ 371,954
Work-in-Process 968,824 1,288,163
Finished Goods 4,447 27,499
---------- ----------
$1,364,107 $1,687,616
---------- ----------
---------- ----------
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 $108,466 and $111,370 for the 9 months ended December 31,
1996 and December 31, 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 9 months ended
December 31, 1996, and 1995, were $175,642 and $174,860, 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. Long Term Debt:
---------------
In November 1996, the Company completed the acquisition of an approximately
70,000 square foot building on 3.5 acres in Baltimore City, Maryland, which
the Company is now in the process of renovating to provide CBL with office,
warehouse and pharmaceutical manufacturing space. The purchase and
renovation costs were financed with a $7,000,000 Economic Development Bond
issued by the Maryland Industrial Development Financing Authority, and a
$1,500,000 loan from the Mayor and City Counsel of Baltimore City by and
through the
7
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Department of Housing and Community Development. The bonds are variable
rate, which may be converted to a fixed rate, tax exempt and have a maximum
rate of 12%. The loan has an interest rate which is fixed at 61/2%.
The principal portion of the Bonds, and the accrued interest thereon, is
payable from monies drawn under a direct pay Letter of Credit issued by The
First Union National Bank of North Carolina (the "Bank"), in an amount up
to $7,280,000. Interest is payable quarterly, commencing February 1, 1997,
and principal portions of the Bonds are subject to redemption, in part,
commencing November 1998, in accordance with a schedule set forth in the
Bonds. The Maturity Date is August 1, 2018. The loan from the City of
Baltimore requires interest only payments for the first two years, with
monthly principal and interest payments beginning March 1998 with the final
payment due in November 2016.
In connection with the financing the Company incurred costs of $372,000
which will be amortized over the terms of the bond.
8
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 and nine months ended December 31, 1996 and 1995:
Operating revenue was $1,837,000 for the three month period ended December
31, 1996, compared to $1,182,000 for the comparable period last year. For the
nine month period ended December 31, 1996, operating revenues of $6,416,000 were
up 36% versus operating revenues of $4,720,000 for the comparable period of last
year. Operating revenues for both new and existing customers increased over the
prior year in both the quarter and year to date period.
Gross profit on sales was $745,000 for the three month period, and
$2,198,000 for the nine month period, ended December 31, 1996, compared to
$541,000 and $1,747,000 respectively, for the same periods last year. Gross
margin was up 38% and 26% respectively for the three and nine months ended
December 31, 1996. As a percent of revenues, gross margin was 41% and 34%,
respectively, for the quarter and year-to-date ended December 31, 1996, compared
to 46% and 37% in the prior year. The decrease in the gross margin percentage
this quarter primarily reflects a provision for costs related to the move to the
recently purchased facility; and the decrease in gross margin percentage for the
nine month period ended December 31, 1996 is in part a result of the write-off
in an earlier quarter.
Selling, general and administrative expenses of $458,000 for the three
month period ended December 31, 1996, increased $44,000 when compared to the
same period last year, and increased $66,000, to $1,357,000, for the nine month
period ended December 31, 1996, as compared to the same period last year.
Selling, general and administrative expenses decreased to 25% of operating
revenue for the three months ended December 31, 1996, compared to 35% for the
same period last year, and were 21% of operating revenues for nine month period
ended December 31, 1996, versus 27% for the same period last year. Research and
development expenses were $3,000 and $108,000, respectively, for the three and
nine months ended December 31, 1996, versus $15,000 for each of the same periods
last year.
Net income was $176,000 for the three month period ended December 31, 1996,
compared to net income of $69,000 for the same period last year, with net income
of $454,000 for the nine month period ended December 31, 1996, as compared to
$252,000 for the same period last year.
Financial Condition and Liquidity
- ---------------------------------
On December 31, 1996, CBL had cash and cash equivalents of $1,437,000
compared to $241,000 at March 31, 1996. Operating cash was $737,000 plus
$700,000 held as collateral security by First Union National Bank pending an
appraisal of the new facility. Not included is the sum of $5,354,000 being held
by the Bond Trustee for the renovation and equipping of the new facility. The
Company had no balance due under its $750,000 Revolving Line of Credit from the
First Union National Bank at December 31, 1996.
Part II. Other Information
Item 1. Legal Proceedings.
------------------
None
9
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
The Annual Meeting of Stockholders of the Company was held on October 29,
1996. At the Annual Meeting, the entirety of the Board of Directors was
re-elected to serve until the next Annual Meeting of Stockholders and until
their successors shall be duly elected and shall qualify. In addition, the
Stockholders of the Corporation, by a vote of 2,312,688 shares FOR, 72,997
shares AGAINST, and 16,000 shares either abstaining or constituting broker
non-votes, approved the Fourth Incentive Stock Option Plan of the Company at the
Annual Meeting. The Fourth Incentive Stock Option Plan provides for the
issuance by the Company to eligible executives or employees of the Company of
options to purchase up to an aggregate of 800,000 shares of the Class A Common
Stock, $0.01 par value per share, of the Company. A copy of the Fourth
Incentive Stock Option Plan of the Company is being filed contemporaneously
herewith as an Exhibit to this Form 10-Q, and the terms thereof are incorporated
herein fully by this reference.
Item 5. Other Information.
------------------
As described in Form 8-K filed November 21, 1996, the Company has completed
the acquisition of an approximately 70,000 square foot building, located on 3.48
acres of land, in Baltimore City, Maryland, which is to be renovated and
equipped for use as a pharmaceutical manufacturing facility. The purchase price
paid for the land and existing improvements was comprised of $2,150,000 in cash,
and 125,000 shares of the Company's Class A Common Stock, $0.01 par value per
share. Once renovated, the facility will also include office and warehouse
space, as required to support the Company's pharmaceutical manufacturing
operations.
The cash portion of the purchase price for the land and existing building,
as well as the cost of the proposed renovations and a portion of the
pharmaceutical manufacturing equipment and related pharmaceutical facility
build-out, was financed through a $7,000,000 Economic Development Bond, issued
by the Maryland Industrial Development Financing Authority ("MIDFA"), and a
$1,500,000 loan from the Mayor and City Counsel of Baltimore, and through the
Department of Housing and Community Development c/o the City of Baltimore
Development Corporation. A closing occurred in connection with the Bond
issuance and the $1,500,000 loan, concurrent with the purchase of the land and
existing building. The Company also intends to equip the new facility with
approximately $2,900,000 of additional pharmaceutical manufacturing equipment to
be financed through equipment leasing arrangements with others.
The Bonds are variable rate, tax exempt, and are issued pursuant to a Trust
Indenture. The maximum annual interest rate on the Bonds is 12% and, subject to
certain conditions, the Bonds may be converted to fixed-rate at the option of
the Company. The principal portion of the Bonds, and the accrued interest
thereon, is payable from monies drawn under a direct pay Letter of Credit issued
by The First Union National Bank of North Carolina (the "Bank"), in an amount up
to $7,280,000. Interest is payable quarterly, commencing February 1, 1997, and
principal portions of the Bonds are subject to redemption, in part, commencing
November 1998, in accordance with a schedule set forth in the Bonds. The
Maturity Date is August 1, 2018. The Letter of Credit is issued pursuant to a
Letter of Credit and Reimbursement Agreement containing various terms and
covenants applicable to the Company, and the Company's obligations in respect of
the Letter of Credit and the Bonds are secured by substantially all of the
assets of the Company, including the new facility. MIDFA has also provided the
Bank with additional credit support for the Letter of Credit, in the form of a
$1,800,000 deficiency guaranty.
The loan from the City of Baltimore Development Corporation accrues
interest at a fixed rate of 61/2% per annum, amortized over twenty (20) years
with monthly interest only payments due through December 1998, and monthly
payments of principal and interest due thereafter through November 2016.
10
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits:
10(T) Loan Agreement dated as of November 1, 1996, by and
between the Registrant and Maryland Industrial
Development Financing Authority.
10(U) Letter and Credit and Reimbursement Agreement dated
as of November 1, 1996, by and between the Registrant
and First Union National Bank of North Carolina.
10(V) Collateral Pledge Agreement dated as of November 1,
1996, by and between the Registrant and First Union
National Bank of North Carolina.
10(W) Promissory Note dated as of November 21, 1996 from
the Registrant to the Mayor and City of Council of
Baltimore, in the original principal sum of $1,500,000.
10(X) Promissory Note dated as of November 21, 1996 from
the Registrant to the Maryland Industrial Financing
Authority, in the original principal sum of $7,000,000
10(Y) Fourth Incentive Stock Option Plan of the Registrant
b. Reports on Form 8-K:
A Form 8-K was filed November 21, 1996 detailing
the acquisition and related financing of a building
and land in Baltimore City, Maryland.
11
CHESAPEAKE BIOLOGICAL LABORATORIES, INC.
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.
___________________________
Registrant
DATE:___________ By:_____________________________
John C. Weiss, III
President
DATE:___________ By:_______________________________
Thomas C. Mendelsohn
Secretary
12