SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
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 (I.R.S. Employer)
of Incorporation or Organization) Identification No.
1111 S. Paca Street, Baltimore, MD 21230
(Address of Principal Executive Offices (Zip Code)
Registrant's telephone number, including area code: (410) 843-5000
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Class A Common Stock, par value
$.01 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None at March 31, 1997 (as of May 27, 1997: Title of Each Class: Class A
Common Stock, $.01 par value per share)
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
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
[Cover page 1 of 2 pages]
As of June 17, 1997 the aggregate market value of the outstanding shares of
the Registrant's Class A Common Stock, par value $.01 per share, held by
non-affiliates of the Registrant was approximately $19,198,000 based on the
closing sale price of the Class A Common Stock on June 17, 1997.
The number of shares outstanding of each of the Registrant's classes of
common stock, as of June 17, 1997:
Class A Common Stock, $.01 per share--5,119,558 shares
Class B Common Stock, $.01 per share-- none
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on August 12, 1997 are incorporated by reference into
Part III of this Form 10-K.
This Form 10-K consists of 31 pages. The index to exhibits is set forth on
page 13.
[Cover page 2 of 2 pages]
PART I
ITEM 1. BUSINESS
GENERAL OVERVIEW
Chesapeake Biological Laboratories, Inc. ("CBL" or the "Company") is an
established provider of pharmaceutical and biopharmaceutical product development
and production services. The Company serves a broad range of customers, from
major international pharmaceutical firms to emerging biotechnology companies.
Since 1990, the Company has provided services on a contract basis to more than
80 pharmaceutical and biotechnology companies and has contributed to the
development and production of more than 100 therapeutic products. Customers
contract with the Company to produce development stage products for use in FDA
clinical trials and to produce and manufacture United States Food and Drug
Administration ("FDA") approved products for commercial sale.
The Company has particular experience and expertise in providing development
services and producing sterile, process-sensitive biopharmaceutical products.
Biopharmaceutical products are derived from biological materials and typically
involve larger, more complex molecules than traditional pharmaceutical products,
which generally are based upon smaller, more stable, synthetic organic
molecules. The complexity, inherent instability and process-sensitivity of
biopharmaceutical products require the application of specialized technology and
expertise in their development, production and analysis.
The specialized development services provided by the Company include
research and development on sterile product formulations; test method
development and validation; process design and manufacturing validations;
regulatory and compliance consulting; preparation of clinical trial materials;
container-closure system design; and accelerated and ongoing stability studies.
In June 1996, the Company received ISO (International Organization for
Standardization) 9001 certification, demonstrating CBL's conformance with the
established international quality management standards for product design,
development, production, inspection and testing. CBL believes that ISO 9001
certification gives it a competitive advantage in attracting domestic and
international customers.
The Company's objective is to accelerate its growth and profitability by
expanding its share of the market for product development and production
services for the pharmaceutical and biotechnology industries. CBL's strategy to
achieve this objective is to capitalize on outsourcing trends in those
industries by increasing its development and production capabilities. As part of
this strategy, in November 1996, CBL acquired a building in Baltimore, Maryland
that is currently being improved and equipped as a laboratory and pharmaceutical
production facility. The Company anticipates that this additional facility will
be fully operational in early 1998, and will increase its production capacity
severalfold.
CBL believes its established experience and expertise, ISO 9001
certification, anticipated increase in capacity, and ability to offer a broad
range of drug development and production services, will enable it to provide
competitive, cost-effective solutions to the pharmaceutical and
biopharmaceutical industries.
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STRATEGY
CBL's objective is to accelerate its growth and profitability by expanding
its share of the market for product development and production services for the
pharmaceutical and biotechnology industries. CBL's strategies to achieve this
objective include the following:
EXPAND PRODUCTION AND DEVELOPMENT SERVICES CAPABILITIES. The Company is
implementing this strategy by improving and equipping its newly acquired
building as a state-of-the-art laboratory and pharmaceutical production
facility. This additional facility will significantly increase the Company's
production capacity when operational, which is expected to occur in early 1998.
This increase in production capacity will enable the Company to continue to meet
its customers' increasing volume requirements, pursue larger scale, long-term
commercial contracts and capture greater market share.
CAPITALIZING ON OUTSOURCING TREND. The Company is tailoring its
capabilities to effectively meet the increasing preference of pharmaceutical and
biotechnology companies to outsource development and production functions. As
part of this effort, the Company plans to expand its scientific and engineering
staff to meet the challenges of developing and producing increasingly complex
biologically-derived drug products. The Company also plans to enhance its data
management expertise to enable it to better support its customer's regulatory
needs. CBL is increasing its marketing staff to better communicate its
capabilities to the pharmaceutical and biotechnology industries.
FOCUS ON DEVELOPMENT OF CUSTOMERS' PRODUCTS. The Company believes that many
pharmaceutical and biotechnology companies prefer to outsource development
services to companies that do not manufacture, market and distribute potentially
competitive proprietary products. CBL focuses substantially all of its resources
on product development and production services for others and does not pursue
research in competition with its customers.
COMPETITION
The Company directly competes with several pharmaceutical product
development organizations, contract manufacturers of biopharmaceutical products
and university research laboratories. Although many of these pharmaceutical
product development organizations, contract manufacturers and university
research laboratories do not offer the full range of services offered by the
Company, they can and do compete effectively against certain segments of the
Company's business, including its pharmaceutical production capabilities. The
Company also competes with in-house research, development and support service
departments of pharmaceutical and biotechnology companies. Certain of these
competitors, particularly large pharmaceutical and biotechnology companies, may
have significantly greater resources than the Company.
Competitive factors include reliability, turnaround time, reputation for
innovation and quality performance, capacity to perform numerous required
services, financial strength, and price. The Company believes that it competes
favorably in these areas. In addition, the Company's strategy is to complement
its customers by not pursuing research and development, or production, of
products of its own. The Company believes that its customers will prefer it to
others that offer the same services, but which also manufacture and sell their
own products in competition with those of the customer.
4
EMPLOYEES
At March 31, 1997, the Company had 56 full-time equivalent employees, of
which six hold Ph.D. degrees, six hold master's degrees and seven hold other
professional certifications. Thirty of CBL's employees perform scientific or
engineering functions. The Company believes that its relations with its
employees are good.
GOVERNMENTAL REGULATIONS
The services performed by the Company are subject to various regulatory
requirements designed to ensure the quality and integrity of pharmaceutical
products, primarily under the Federal Food, Drug and Cosmetic Act and FDA
administered Current Good Manufacturing Practices ("cGMP") regulations. Although
the Company has successfully operated in this stringent regulatory environment
since the early 1980's and believes such experience is an advantage over certain
of its competitors, compliance with these regulations is a continuous process.
These regulations apply to all phases of drug manufacturing, testing and record
keeping, including personnel, facilities, equipment, control of materials,
processes and laboratories, packaging, labeling and distribution. Noncompliance
with cGMP by the Company could result in disqualification of data collected by
the Company. Material violation of cGMP requirements could result in additional
regulatory sanctions, and in severe cases could result in a mandated closing of
the Company's facilities which would materially and adversely affect the
Company's business.
To help assure compliance with applicable regulations, the Company has
established quality assurance controls at its facilities that monitor on-going
compliance by auditing test data and regularly inspecting facilities, procedures
and other cGMP compliance parameters. In addition, FDA regulations and
guidelines serve as a basis for the Company's standard operating procedures.
ADDITIONAL INFORMATION
No portion of the Company's business is subject to renegotiation of profits
or termination of contracts or subcontracts at the election of the United States
Government.
ITEM 2. PROPERTIES
The Company's executive offices, pharmaceutical manufacturing facilities and
warehouse operations are located at two sites in Baltimore, Maryland. Since
1988, the Company has leased 15,000 square feet at the Seton Business Park which
the Company has operated as a multi-customer pharmaceutical production facility
in accordance with cGMP regulations. The current lease term for this facility
expires on December 31, 1998, with two, two-year renewal options thereafter.
In November 1996, the Company acquired an approximately 70,000 square foot
building, located on 3.48 acres of land in the Carroll/Camden Industrial Park in
Baltimore, Maryland to improve and equip as a pharmaceutical production facility
and to house the Company's administrative offices and warehouse operations. The
Company has retained The Whiting-Turner Contracting Company, believed by the
Company to be among the more highly regarded construction and engineering firms
in the mid-Atlantic region, as construction manager for the new facility.
Substantial completion of the office and warehouse space renovations occurred in
February 1997, and completion of the pharmaceutical build-out is anticipated to
occur in early 1998. The Company believes that,
5
upon completion of the new facility, its facilities will be adequate for the
Company's operations and that suitable additional space will be available
when needed.
Through May 31, 1997, the Company had leased 19,200 square feet of space in
Owings Mills, Maryland, which previously housed the Company's corporate
headquarters, warehouse facilities and shipping and receiving operations prior
to the relocation of those operations to the Carroll/Camden Industrial Park
facility in February 1997. The Owings Mills facility lease had provided for an
expiration date of December 31, 1998, with the Company responsible for annual
rental payments of $134,400 and all operating and maintenance costs under this
lease through that date. However, as of June 1, 1997, the Company negotiated the
termination of the Owings Mills facility lease obligation and has agreed to pay
a $30,200 termination fee.
ITEM 3. LEGAL PROCEEDINGS
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
a) As of March 31, 1997, the Company's Class A Common Stock was listed on
the American Stock Exchange--Emerging Company Marketplace (AMEX-ECM) under the
trading symbol "PHD.EC."
The price range of the Company's Class A Common Stock on AMEX-EC from April
1, 1996 to March 31, 1997, was:
HIGH LOW
--------- ---------
Closing price................................ $ 6.75 $ 1.25
On May 27, 1997, the Company's Class A Common Stock was listed on the Nasdaq
Stock Market's National Market (the "Nasdaq National Market") under the trading
symbol "CBLI," and trading of the Class A Common Stock on the AMEX-EC terminated
as of the close of trading on May 23, 1997. Subsequent to March 31, 1997, and
through May 23, 1997, the Company's stock traded at a high of $5.25 and at a low
of $4.44 on the AMEX-EC; and, subsequent to May 27, 1997, and through June 11,
1997, the high and low sales prices of the Class A Common Stock on the Nasdaq
National Market were $4.50 and $3.75, respectively.
b) As of June 18, 1997, there were approximately 246 record holders of
the Company's Class A Common Stock.
c) The Company has never declared or paid a cash dividend on its Class A
Common Stock. Earnings, if any, are expected to be retained to finance the
development of the Company's business.
d) In connection with the listing by the Company of its Class A Common
Stock on the Nasdaq National Market, the Company filed on May 22, 1997, a
Registration Statement on Form 8-A with the United States Securities and
Exchange Commission, in order to register the Class A Common Stock pursuant
to Section 12(g) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Registration Statement on Form 8-A was declared
6
effective on May 27, 1997. The Class A Common Stock continues to remain
registered pursuant to Section 12 (d) of the Exchange Act, pending completion
of the de-listing process of the Class A Common Stock from the AMEX-EC.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SUMMARY OF OPERATIONS
YEAR ENDED MARCH 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Operating Revenue................................................ $ 8,654 $ 6,174 $ 6,982 $ 5,213 $ 3,453
Total Operating Expenses......................................... $ 7,863 $ 5,637 $ 6,617 $ 4,649 $ 3,139
Income (Loss) from Operations.................................... $ 791 $ 537 $ 365 $ 564 $ 314
Gain from Extraordinary Items.................................... $ -- $ -- $ -- $ 1,055 $ 42
Net Income (Loss)................................................ $ 504 $ 309 $ 566 $ 1,563 $ 257
Earnings Per Common Share........................................ $ .116 $ .078 $ .144 $ .393 $ .069
CONSOLIDATED BALANCE SHEET DATA
YEAR ENDED MARCH 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Working Capital................................................. $ 2,794 $ 2,161 $ 1,822 $ 1,493 $ 1,139
Total Assets.................................................... $ 13,445 $ 4,320 $ 4,138 $ 3,587 $ 2,264
Long Term Obligations........................................... $ 8,715 $ 319 $ 290 $ 176 $ 911
Stockholders' Equity............................................ $ 4,043 $ 3,384 $ 3,075 $ 2,493 $ 875
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company's operating revenues are derived from two principal
sources--product development services and commercial production. The Company
provides its customers in the pharmaceutical and biotechnology industries with
product development services, including producing experimental products for use
in clinical trials, and manufacturing services for FDA approved commercial drugs
and medical devices on a contractual basis. The Company has particular
experience and expertise in the development and production of sterile,
process-sensitive biopharmaceutical products.
The Company's scientific and engineering staff performs multiple product
development functions for CBL's customers, including research and development of
sterile product formulations; test method development and validation; process
design and manufacturing validations; regulatory and compliance consulting;
preparation of clinical trial materials; container-closure system design; and
accelerated and on-going product stability studies. Following final development
of a stable formulation of the pharmaceutical product and validation of the
manufacturing process, the Company's production expertise is typically called
upon to produce the development stage product for use in clinical trials or
investigations, as part of the FDA approval process.
CBL produces and manufactures FDA approved products for commercial sale by
others. These products have included VitraxTM, an HA-based product developed by
the Company for use
7
in human ophthalmic surgery, and manufactured by the Company for Allergan
Botox, Ltd., a subsidiary of Allergan, Inc. ("Allergan"), and EquronTM
("Equron"), an HA-based product for use in treatment of equine joint disease,
manufactured by the Company for Solvay Veterinary, Inc., a subsidiary of
Solvay & Cie, S.A., a major European chemical company.
The contract manufacturing agreement for the manufacture of VitraxTM for
Allergan expired in February 1997. In April 1997, however, the agreement was
extended on modified terms until December 1997.
RESULTS OF OPERATIONS
Fiscal Year Ended March 31, 1997 Compared to Fiscal Year Ended March 31, 1996
Revenues for the fiscal year ended March 31, 1997, were $8.7 million
compared to $6.2 million for fiscal year 1996, an increase of approximately 40%.
The strong growth in revenues for fiscal year 1997 was due to a 72% increase in
sales of VitraxTM to Allergan and an 81% increase in sales of product
development services to new and existing customers. This increase in total
revenues occurred notwithstanding an 85% decrease in sales of EquronTM to
Solvay, which sold the related business unit to a third party. Sales of VitraxTM
to Allergan represented 47% of the Company's total revenue for fiscal year 1997
compared to 39% in fiscal year 1996.
Gross margin for fiscal year 1997 was 32% of revenues compared to 36% in
fiscal year 1996. The decrease is due to expenses related to the expansion and
relocation of the Company's executive and administrative offices and warehouse
to the new facility and the increased proportion of sales of VitraxTM, which
historically has a low margin.
Operating expenses for fiscal year 1997 were $2.0 million compared to $1.7
million in fiscal year 1996, an increase of approximately 15%. This increase is
due to a full year of research and development expenses in fiscal 1997 for a
program that had been initiated in the second half of fiscal year 1996, the
salary of an additional executive officer hired in the first quarter of fiscal
1997 and an increase in professional fees. As a percentage of revenues,
operating expenses decreased to 23% in fiscal year 1997 from 28% in fiscal year
1996.
Interest income was $9,000 in fiscal year 1997 compared to a $23,000
interest expense in fiscal year 1996. This improvement is due primarily to the
increase in cash flow from operations which eliminated the Company's need to
utilize available bank credit.
The effective tax rate in fiscal year 1997 was 37% compared to 40% in fiscal
year 1996 due to the utilization of tax credit carryforwards. During fiscal year
1997, the Company's net operating loss carryforward was fully utilized due to
earnings during the last five years.
Net income for fiscal year 1997 was $504,000 compared to $309,000 for fiscal
year 1996, an increase of approximately 63%. Earnings per share were $0.12 for
fiscal year 1997 compared to $0.08 in fiscal year 1996.
Fiscal Year Ended March 31, 1996 Compared to Fiscal Year Ended March 31, 1995
Revenues for the year ended March 31, 1996, were $6.2 million compared to
$7.0 million in fiscal year 1995, a decrease of approximately 12%. The decrease
is attributable to a 30% decline in sales of VitraxTM to Allergan, which
instituted an inventory reduction program. In addition, a change in contract
terms reduced development services revenue from Cel-Sci Corporation by 60%.
However, this reduction in revenues was partially offset by sales of product
development services to new and existing customers, which increased by 43%.
VitraxTM sales to
8
Allergan and development services performed for Cel-Sci Corporation
represented 39% and 8% of total revenues in fiscal year 1996 compared to 49%
and 17% in fiscal year 1995, respectively.
Gross margin for fiscal year 1996 was 36% of revenues compared to 27% in
fiscal year 1995. The increase is attributable to improved manufacturing
operations and a lower percentage of total sales of VitraxTM, which historically
has a low margin. In addition, the change in contract terms related to Cel-Sci
Corporation had a positive effect on gross margin.
Operating expenses for fiscal year 1996 were $1.7 million compared to $1.5
million in fiscal year 1995, an increase of approximately 11%. The increase is
due to commissions paid to field representatives and the full year cost of a
manager hired in the fourth quarter of fiscal year 1995. In addition, the
Company initiated a new research and development program for one of its
customer's products in the third quarter of fiscal year 1996 resulting in
expenses of $44,000 in fiscal year 1996.
Interest expense was $23,000 in fiscal year 1996 compared to $8,000 in
fiscal year 1995. This increase is due to a longer duration of borrowing under
the Company's line of credit.
The effective tax rate for fiscal year 1996 was 40%. In fiscal year 1995,
the Company recorded a deferred tax asset, net of a deferred tax liability, of
$210,000 to recognize the future benefit of its remaining net operating loss
carryforwards for income tax purposes. Net operating loss carryforwards in an
aggregate amount to $2.8 million as of March 31, 1992, were reduced to $121,000
as of March 31, 1996, due to profitable operations.
Net income and earnings per share for fiscal year 1996 were $309,000 and
$0.08 compared to $566,000 and $0.14 for fiscal year 1995, respectively.
Capital Resources
In November 1996, the Company acquired an approximately 70,000 square foot
building, located on 3.48 acres of land in the Carroll/Camden Industrial Park,
Baltimore, Maryland to renovate and equip as a pharmaceutical manufacturing
facility and to house its administrative offices and warehouse operations. The
Company paid $2,150,000 in cash and 125,000 shares of Class A Common Stock for
the land and existing improvements.
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 the issuance of $7,000,000 variable rate
economic development demand revenue bonds by Maryland Industrial Development
Financing Authority ("MIDFA"), and a $1,500,000 loan from the Mayor and City
Council of Baltimore, acting through the Department of Housing and Community
Development c/o the City of Baltimore Development Corporation. The Company also
intends to equip the new facility with approximately $2,900,000 of additional
pharmaceutical manufacturing equipment to be financed through equipment
operating leases. As of March 31, 1997, the Company has received commitments
from several equipment leasing companies, including leasing companies affiliated
with NationsBank, American Equipment Leasing (a unit of European American Bank),
BancBoston and CoreStates, to supply over $4,000,000 in equipment through
operating lease arrangements, for installation and validation at the new
facility. Although actual leases
have not been executed, the Company anticipates that it will be able to
establish equipment lease financing arrangements as necessary to enable the
Company to complete the pharmaceutical build-out of the newly acquired facility.
The bonds issued by MIDFA are variable rate, tax-exempt, and are issued
pursuant to a
9
Trust Indenture. The maximum annual interest rate provided for under the
terms of the bonds is 12% and, subject to certain conditions, the bonds may
be converted to fixed-rate at the option of the Company. However, the Company
has entered into an interest rate swap agreement and, as a result, the
interest rate applicable to the bonds through November 2003 is capped at
5.51%. As of April 24, 1997, the interest rate was 5.105%. 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 First Union
National Bank of North Carolina (the "Bank"), in amounts 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. 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 6 1/2% per annum, amortized over twenty (20) years with
monthly interest only payments due through November 1998, and monthly payments
of principal and interest due thereafter through November 2016.
The terms of the MIDFA bond financing and applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code") and corresponding
regulations limit to $10,000,000 the aggregate amount of capital expenditures
incurred by or attributable to the Company within the City of Baltimore
during the six year period from November 1993 to November 1999. The Code and
corresponding regulations provide that capital expenditures made by others at
the Seton Business Park facility, including the landlord and other facility
tenants, may accrue against the Company's capital expenditure limit. The
Company intends to manage its anticipated growth to avoid making capital
expenditures which would cause the Company to exceed the imposed limit. For
example, equipment obtained by the Company through operating leases, which
are not capital expenditures, would not accrue against the limit, nor would
capital expenditures by the Company on facilities outside of the
jurisdictional limits of the City of Baltimore. Nevertheless, the Company may
exceed the capital expenditure limit inadvertently or because it determines
that to do so is in the best interest of the Company. In the event that the
capital expenditure limit is exceeded, the Company would be required to
refinance the existing indebtedness through a taxable bond issue,
conventional debt financing, or other means.
Management of the Company believes that it has sufficient cash and borrowing
capacity to fund its current operations and capital needs.
Financial Condition and Liquidity
On March 31, 1997, the Company had cash and cash equivalents of $1,783,000
compared to $241,000 at March 31, 1996. Cash available to fund operations was
$1,433,000 at March 31, 1997, and $350,000 was held as collateral for the
Company's obligations under the Letter of Credit and Reimbursement Agreement
with the Bank. In addition, and not included in the above sums, $4,683,000 was
held by the bond trustee under the Trust Indenture at March 31, 1997, for the
renovation and equipping of the new facility. The Company also maintains a
$750,000 Revolving Line of Credit with First Union National Bank of Maryland
under which there was no outstanding balance at March 31, 1997.
10
Subsequent Events
As described above, in April 1997, the Contract Manufacturing Agreement
between the Company and Allergan, which had expired in February 1997, was
extended until December 1997, on modified terms. The modified terms provide for
the production of VitraxTM using active ingredient supplied by Allergan, rather
than active ingredient manufactured by CBL. In addition, Allergan is seeking FDA
approval to manufacture VitraxTM at its own facility in Ireland, and the
modified terms relieve Allergan of any obligation to purchase VitraxTM
exclusively from the Company.
On April 25, 1997, the Company filed a Registration Statement on Form S-2
(No. 333-25903), with the United States Securities and Exchange Commission,
pursuant to the Securities Act of 1933, as amended, with respect to the offering
and sale by the Company of 1,000,000 shares of its Class A Common Stock,
together with another 150,000 shares to cover over-allotments. On June 11, 1997,
the Company entered into an Underwriting Agreement with Ferris, Baker Watts,
Incorporated, pursuant to which Ferris, Baker Watts, Incorporated agreed to
underwrite, on a firm commitment basis, the offering and sale of 1,000,000 of
the shares covered by the Registration Statement. On June 16, 1997, the initial
closing occurred pursuant to the Underwriting Agreement and the Company sold to
the Underwriter 1,000,000 shares of Class A Common Stock in exchange for net
proceeds (after Underwriter's commissions and Underwriter's expense allowance)
of approximately $3.5 million dollars. The proceeds of the offering are to be
used by the Company for working capital and other general corporate purposes to
fund the Company's continued growth.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are contained on pages 18 through 21 of this
report.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES NONE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the Company's definitive proxy statement to be
filed pursuant to Regulation 14A within 120 days after March 31, 1997.
ITEM 11. EXECUTIVE COMPENSATION AND RELATED INFORMATION
Incorporated by reference to the Company's definitive proxy statement to be
filed pursuant to Regulation 14A within 120 days after March 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Company's definitive proxy statement to be
filed pursuant to Regulation 14A within 120 days after March 31, 1997.
11
PART IV
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1). Financial Statements
PAGE NUMBER
-----------------
Report of Independent Public Accountants.................................. 17
Consolidated Balance Sheets--March 31, 1997
and 1996................................................................ 18
Consolidated Statements of Income-- Years
Ended March 31, 1997, 1996 and 1995..................................... 19
Consolidated Statements of Changes in Stockholders'
Equity-- Years Ended March 31, 1997,
1996 and 1995........................................................... 20
Consolidated Statements of Cash Flows -
Years Ended March 31, 1997, 1996 and 1995............................... 21
Notes to Consolidated Financial Statements................................ 22
(a)(2). Schedules
SCHEDULE NUMBER DESCRIPTION PAGE NUMBER
- - --------------------------------------- --------------------------------------- -----------------
II..................................... Valuation and Qualifying Accounts 31
12
(a)(3) Exhibits
H 3(a) Articles of Restatement.
D 3(b) Amended and Restated By-Laws of the Registrant
H 4 Article Fifth of the Articles of Restatement. See
Exhibit 3(a) above.
A 10(a) Assignment and Agreement, dated March 8, 1980, between
William P. Tew, Ph.D., and the Registrant.
A 10(b) Incentive Stock Option Plan of the Registrant.
A 10(c) Second Incentive Stock Option plan of the Registrant.
A 10(d) Third Incentive Stock Option Plan of the Registrant.
A 10(e) Director's Agreement dated May 5, 1986, between John C.
Weiss, III and the Registrant.
A 10(f) Lease, dated December 26, 1986, between
Centennial/Warren Technology Associates Limited
Partnership, as predecessor of Jiffy Lube International
of Maryland, Inc., and the Registrant.
A 10(i) Agreement, dated May 16, 1983 between E.R. Squibb &
Sons, Inc. and the Registrant, and notice and consent to
assignment dated October 10, 1985, among Squibb, Solvay
Veterinary, Inc. and the Registrant.
A 10(j) Agreements, dated December 7, 1987 between Solvay
Veterinary, Inc., and the Company.
C 10(k) Lease Agreement dated October 6, 1993 by and between the
Company and Crondall Lane Limited Partnership.
B 10(l) Contract Manufacturing Agreement, dated January 1, 1991,
by and between the Registrant and Allergan
Pharmaceuticals (Ireland), Ltd., Inc.
B 10(m) Loan and Security Agreement, dated September 2, 1994, by
and between the Registrant and the Bank of Baltimore
Bancorp Leasing and Financial, Inc., both now known as
First Union National Bank of Maryland.
E 10(n) Employment Agreement dated as of July 1, 1995 by and
between the Registrant and William P. Tew, Ph.D.
E 10(o) Employment Agreement dated as of July 1, 1995 by and
between the Registrant and Narlin B. Beaty, Ph.D.
E 10(p) Employment Agreement dated as of July 1, 1995 by and
between the Registrant and Thomas C. Mendelsohn.
E 10(q) Employment Agreement dated as of July 1, 1995 by and
between the Registrant and John T. Janssen.
E 10(r) Employment Agreement dated as of July 1, 1995 by and
between the Registrant and Robert J. Mello, Ph.D.
13
(a)(3) Exhibits, Continued
F 10(s) Employment Agreement dated as of May 16, 1996 by and
between the Registrant and John C. Weiss, III.
G 10(t) Loan Agreement dated as of November 1, 1996, by and
between the Registrant and Maryland Industrial
Development Financing Authority
G 10(u) Letter of Credit and Reimbursement Agreement dated as of
November 1, 1996, by and between the Registrant and
First Union National Bank of North Carolina.
G 10(v) Collateral Pledge Agreement dated as of November 1,
1996, by and between the Registrant and First Union
National Bank of North Carolina.
G 10(w) Promissory Note dated as of November 21, 1996 from the
Registrant to the Mayor and City Council of Baltimore,
in the original principal sum of $1,500,000.
G 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.
E 10(y) Fourth Incentive Stock Option Plan of the Registrant.
H 10(z) Letter Agreement dated November 21, 1996, by and between
Registrant and William P. Tew, Ph.D.
H 10(aa) Letter Agreement dated November 21, 1996, by and between
Registrant and Narlin B. Beaty, Ph.D.
H 10(bb) Letter Agreement dated November 21, 1996, by and between
Registrant and John C. Weiss, III.
H 10(cc) Letter Agreement dated November 21, 1996, by and between
Registrant and Thomas C. Mendelsohn.
H 10(dd) Letter Agreement dated November 21, 1996, by and between
Registrant and John T. Janssen.
H 10(ee) Letter Agreement dated November 21, 1996, by and between
Registrant and Robert J. Mello, Ph.D.
H 10(ff) 1997 Directors' Stock Option Plan of the Registrant
A22 Subsidiary of the Registrant.
- - -----------------------
A Incorporated by reference to Exhibits to Company's Registration Statement on
Form S-18 (No. 33-17655).
B Incorporated by reference to Exhibits to Company's Annual Report on Form
10-K for Fiscal Year Ended March 31, 1994.
C Incorporated by reference to Company's Form 10-K/A, Amendment No.1 to Annual
Report on Form 10-K for Fiscal Year Ended March 31, 1994.
D Incorporated by reference to Company's Quarterly Report on Form 10-Q for
fiscal quarter ended September 30, 1994.
E Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
fiscal quarter ended June 30, 1995.
14
(a)(3) Exhibits, Continued
- - ---------------
Footnotes continued from previous page:
F Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
fiscal quarter ended June 30, 1996.
G Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
fiscal quarter ended December 31, 1996.
H Incorporated by reference to Exhibits to the Company's Registration
Statement on Form S-2 (No. 333-35903)
(b) Reports on Form 8-K
The Registrant filed a current Report on Form 8-K on
March 4, 1997, reporting an Item 5 event (the appointment of
Mr. Thomas P. Rice to the Board of Directors).
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ John C. Weiss, III/
-----------------------------
JOHN C. WEISS, III, PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- - ------------------------------ --------------------------- -------------------
/s/ WILLIAM P. TEW, Ph.D./ Chief Executive Officer June 26, 1997
- - ------------------------------ Chairman of the Board and
William P. Tew, Ph.d. Director
/s/ JOHN C. WEISS, III/ President and Director June 26, 1997
- - ------------------------------
John C. Weiss, III
/s/ JOHN T. JANSSEN/ Chief Financial Officer June 26, 1997
- - ------------------------------ and Treasurer
John T. Janssen
/s/ NARLIN B. BEATY, PH.D./ Chief Technical Officer June 26, 1997
- - ------------------------------ and Director
Narlin B. Beaty, Ph.d.
/s/ THOMAS C. MENDELSOHN/ Vice President, Secretary June 26, 1997
- - ------------------------------ and Director
Thomas C. Mendelsohn
/s/ REGIS F. BURKE/ Director June 26, 1997
- - ------------------------------
Regis F. Burke
/s/ HARVEY L. MILLER/ Director June 26, 1997
- - ------------------------------
Harvey L. Miller
/s/ THOMAS P. RICE/ Director June 26, 1997
- - ------------------------------
Thomas P. Rice
16
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Chesapeake Biological Laboratories, Inc.:
We have audited the accompanying consolidated balance sheets of
Chesapeake Biological Laboratories, Inc. (a Maryland corporation) and
subsidiary as of March 31, 1997 and 1996, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for the
years ended March 31, 1997, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Chesapeake
Biological Laboratories, Inc. and subsidiary as of March 31, 1997 and 1996,
and the results of their operations and their cash flows for the years ended
March 31, 1997, 1996 and 1995, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule II is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic consolidated financial statements. This schedule
has been subjected to the auditing procedures applied in the audit of the
basic consolidated financial statements, and, in our opinion, fairly states,
in all material respects the financial data required to be set forth therein
in relation to the basic consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP
Baltimore, Maryland,
April 25, 1997
17
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1997 AND 1996
ASSETS 1997 1996
------------- ------------
CURRENT ASSETS:
Cash and cash equivalents (Note 2).............................. $ 1,432,944 $ 240,583
Restricted cash (Note 2)........................................ 350,000 --
Accounts receivable, net (Note 2)............................... 714,793 671,626
Inventories (Notes 2 and 4)..................................... 760,075 1,687,616
Prepaid expenses................................................ 140,160 43,637
Deferred tax asset (Note 11).................................... 50,540 134,639
Interest receivable............................................. 32,616 --
------------- ------------
Total current assets........................................... 3,481,128 2,778,101
PROPERTY AND EQUIPMENT, net (Notes 2 and 5)...................... 4,857,664 1,514,167
BOND FUNDS HELD BY TRUSTEE (Notes 2 and 7)....................... 4,682,998 --
DEFERRED FINANCING COSTS (Note 7)................................ 395,138 --
OTHER ASSETS..................................................... 27,690 27,690
------------- ------------
Total assets
$ 13,444,618 $ 4,319,958
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses........................... $ 551,112 $ 351,742
Current portion of long term debt and capital lease obligations
(Notes 7 and 8)................................................ 49,769 49,769
Deferred revenue (Note 2)....................................... 85,887 215,513
------------- ------------
Total current liabilities...................................... 686,768 617,024
LONG TERM LIABILITIES:
Long term debt and capital lease obligations, net of current
portion (Notes 7 and 8)........................................ 8,553,985 105,668
Deferred rent (Note 8).......................................... 52,590 82,657
Deferred tax liability (Note 11)................................ 108,549 130,598
------------- ------------
Total liabilities.............................................. 9,401,892 935,947
------------- ------------
COMMITMENTS AND CONTINGENCIES (Notes 3, 8, and 9)
STOCKHOLDERS' EQUITY:
Class A common stock, par value $.01 per share;
8,000,000 shares authorized; 4,114,558 and 3,979,938
shares issued and outstanding.................................. 41,145 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....................................... 3,980,836 3,827,182
Retained earnings (accumulated deficit).......................... 20,745 (482,970)
------------- ------------
Total stockholders' equity (Note 10)............................ 4,042,726 3,384,011
------------- ------------
Total liabilities and stockholders' equity..................... $ 13,444,618 $ 4,319,958
------------- ------------
------------- ------------
The accompanying notes are an integral part of these consolidated balance
sheets.
18
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
1997 1996 1995
------------ ------------ ------------
OPERATING REVENUE (Note 2).............................................. $ 8,653,793 $ 6,174,148 $ 6,981,788
COST OF REVENUE......................................................... 5,895,479 3,927,331 5,077,688
------------ ------------ ------------
GROSS PROFIT............................................................ 2,758,314 2,246,817 1,904,100
OPERATING EXPENSES:
General and administrative............................................. 1,430,976 1,210,093 1,230,076
Selling................................................................ 413,136 454,934 308,612
Research and development............................................... 123,482 44,313 --
Income from operations................................................. 790,720 537,477 365,412
------------ ------------ ------------
INTEREST INCOME (EXPENSE), net (Notes 6, 7 and 8)....................... 8,828 (22,580) (8,473)
------------ ------------ ------------
Income before provision (benefit) for income taxes..................... 799,548 514,897 356,939
PROVISION (BENEFIT) FOR INCOME TAXES (Notes 2 and 11)................... 295,833 205,959 (208,955)
------------ ------------ ------------
NET INCOME.............................................................. $ 503,715 $ 308,938 $ 565,894
------------ ------------ ------------
------------ ------------ ------------
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
Primary
Net Income........................................................... $ 0.12 $ 0.08 $ 0.14
------------ ------------ ------------
------------ ------------ ------------
Fully diluted
Net Income........................................................... $ 0.12 $ 0.08 $ 0.14
------------ ------------ ------------
------------ ------------ ------------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (Note
2)
Primary................................................................ 4,190,767 3,993,064 4,051,950
------------ ------------ ------------
------------ ------------ ------------
Fully diluted.......................................................... 4,281,723 3,993,064 4,052,551
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these consolidated statements.
19
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
RETAINED
ADDITIONAL EARNINGS
PAID-IN (ACCUMULATED
SHARES PAR VALUE CAPITAL DEFICIT) TOTAL
---------- ----------- -------------- ------------- ------------
BALANCE, March 31, 1994..................... 3,890,052 $ 38,900 $ 3,811,992 $ (1,357,802) $ 2,493,090
Issuance of shares pursuant to exercise of
stock options............................. 89,886 899 15,190 -- 16,089
Net income.................................. -- -- -- 565,894 565,894
---------- ----------- -------------- ------------- ------------
BALANCE, March 31, 1995..................... 3,979,938 39,799 3,827,182 (791,908) 3,075,073
Net income.................................. -- -- -- 308,938 308,938
---------- ----------- -------------- ------------- ------------
BALANCE, March 31, 1996..................... 3,979,938 39,799 3,827,182 (482,970) 3,384,011
Issuance of shares pursuant to purchase of
building.................................. 125,000 1,250 148,750 -- 150,000
Issuance of shares pursuant to exercise of
stock options............................. 9,620 96 4,904 -- 5,000
Net income.................................. -- -- -- 503,715 503,715
---------- ----------- -------------- ------------- ------------
BALANCE, March 31, 1997..................... 4,114,558 $ 41,145 $ 3,980,836 $ 20,745 $ 4,042,726
---------- ----------- -------------- ------------- ------------
---------- ----------- -------------- ------------- ------------
The accompanying notes are an integral part of these consolidated statements.
20
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
1997 1996 1995
----------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................. $ 503,715 $ 308,938 $ 565,894
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization............................................... 360,922 319,827 274,115
Provision (benefit) for deferred income taxes............................... 62,050 205,959 (210,000)
(Increase) decrease in accounts receivable.................................. (43,167) 19,780 (249,716)
Decrease (increase) in inventories.......................................... 927,541 (236,896) (134,593)
(Increase) decrease in prepaid expenses..................................... (96,523) 5,069 (30,397)
Increase in interest receivable............................................. (32,616) -- --
Decrease in inventory due Allergan.......................................... -- -- (300,000)
Increase (decrease) in accounts payable and accruals........................ 199,370 (113,858) 96,728
(Decrease) increase in deferred revenue..................................... (129,626) 87,530 (60,225)
(Decrease) increase in deferred rent........................................ (30,067) (20,114) 9,744
----------- ---------- ----------
Net cash provided by (used in) operating activities......................... 1,721,599 576,235 (38,450)
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................................... (3,554,419) (318,355) (578,493)
Increase in bond funds held by Trustee...................................... (4,682,998) -- --
----------- ---------- ----------
Purchase of property and equipment.......................................... (8,237,417) (318,355) (578,493
----------- ---------- ----------)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) of/proceeds from short term borrowings--net.................... -- (127,991) 127,991
Proceeds from long-term debt................................................ 8,500,000 -- 70,297
Repayments of long-term debt................................................ (22,419) (21,231) (44,910)
Repayments of capital lease obligations..................................... (29,264) (28,867) (26,123)
Payment of debt issuance costs.............................................. (395,138) -- --
Increase in restricted cash................................................. (350,000) -- --
Net proceeds from sale of stock............................................. 5,000 -- 16,089
----------- ---------- ----------
Net cash provided by (used in) financing.................................... 7,708,179 (178,089) 143,344
----------- ---------- ----------
Increase (decrease) in cash and cash equivalents............................ 1,192,361 79,791 (473,599)
CASH AND CASH EQUIVALENTS, beginning of period.............................. 240,583 160,792 634,391
----------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period.................................... $ 1,432,944 $ 240,583 $ 160,792
----------- ---------- ----------
----------- ---------- ----------
CASH PAID DURING THE YEAR FOR:
Interest.................................................................... $ 27,315 $ 27,180 $ 14,538
----------- ---------- ----------
----------- ---------- ----------
Income taxes................................................................ $ 7,733 $ 55,000 $ 12,593
----------- ---------- ----------
----------- ---------- ----------
Non-Cash Transactions:
Acquisitions of property and equipment under capital lease obligations...... $ -- $ -- $ 62,474
----------- ---------- ----------
----------- ---------- ----------
Issuance of stock pursuant to purchase of building.......................... $ 150,000 $ -- $ --
----------- ---------- ----------
----------- ---------- ----------
The accompanying notes are an integral part of these consolidated statements.
21
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED MARCH 31, 1997, 1996 AND 1995
1. ORGANIZATION:
Chesapeake Biological Laboratories, Inc. ("CBL" or "the Company") is an
established provider of pharmaceutical and biopharmaceutical 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 product
development services to more than 80 pharmaceutical and biotechnology
companies and has contributed to the development and production of more
than 100 therapeutic products intended for human clinical trials.
Customers contract with the Company to produce development stage products
for use in Food and Drug Administration ("FDA") clinical trials and to
produce and manufacture FDA approved 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 facility operates under the current Good Manufacturing
Practices ("cGMP") established and regulated by the FDA.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
CBL and its wholly-owned subsidiary, CBL Development Corp.
Accounts Receivable
Accounts receivable are stated net of allowances for doubtful accounts of
$10,300 and $16,400 as of March 31, 1997 and 1996, respectively.
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 estimated
useful lives of three to ten years. The building is depreciated over an
estimated useful life of thirty years. Leasehold improvements are
amortized over the term of the lease.
Cash and Cash Equivalents
Cash and cash equivalents include amounts invested in accounts with a
maturity of three months or less which are readily convertible to known
amounts of cash. Included in restricted cash are Company funds of
$350,000 which are being held by the Bond Trustee as collateral for the
Company's obligations under the Letter of Credit and Reimbursement
Agreement with First Union National Bank of North Carolina (see Note 7).
Revenue Recognition
The Company recognizes income when product is shipped or the service has
been provided to the customer. Deferred revenues represent deposits
normally required of customers with development products.
22
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued:
Income Taxes
Deferred income taxes are computed using the liability method, which
provides that deferred tax assets and liabilities are recorded based on the
differences between the tax bases of assets and liabilities and their
carrying amounts for financial reporting purposes (see Note 11).
Stock Option Plans
Prior to April 1, 1996, the Company accounted for its stock-option plans in
accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On April 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), which permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net earnings and pro forma earnings per share
disclosures for employee stock option grants made in fiscal 1996 and
future years as if the fair-value-based method defined in SFAS 123 had
been applied. The Company has elected to continue to apply the provisions
of APB Opinion No. 25 and provide the pro forma disclosure provisions of
SFAS 123 (see Note 10).
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
options at period end based on the Company's stock price on the AMEX
Emerging Company Marketplace.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could significantly differ
from those estimates.
Reclassifications
Certain prior year balances have been reclassified to conform with current
year presentation.
3. CONCENTRATIONS OF CREDIT RISK/SIGNIFICANT CUSTOMERS:
The Company's customers span the range of the pharmaceutical and medical
device industries. For most customers, the Company requires an up-front
payment on orders. There are some recurring customers, however, for which
CBL has waived that practice.
The contract manufacturing agreement between the Company and Allergan
Botox, Ltd. ("Allergan") for the production of VitraxTM originally expired
in February 1997. Subsequent to year-end, an agreement was reached between
CBL and Allergan which calls for the production of VitraxTM through
December 31, 1997, on modified terms providing for the production of
VitraxTM using active ingredients supplied by Allergan, rather than active
ingredients manufactured by CBL. In
23
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,continued
3. CONCENTRATIONS OF CREDIT RISK/SIGNIFICANT CUSTOMERS, Continued:
addition, Allergan has been relieved of any obligation to purchase
VitraxTM exclusively from the Company. During the years ended
March 31, 1997, 1996 and 1995, approximately 49%, 41% and 51%,
respectively, of CBL's sales were to Allergan. During the years ended
March 31, 1997, 1996 and 1995, sales to the second largest customer, which
was a different customer each year, were 8%, 14% and 18% of CBL's sales,
respectively. The Company has been actively seeking to increase and
diversify its customer base and has been successful in its diversification
efforts. However, there can be no assurance that the Company's business
will not continue to be dependent on certain customers or that annual
results will not be dependent upon the performance of a few large projects.
4. INVENTORIES:
Inventories consisted of the following at March 31, 1997 and 1996:
1997 1996
---------- ------------
Raw materials....................................................... $ 324,417 $ 371,954
Work-in-process..................................................... 433,454 1,288,163
Finished goods...................................................... 2,204 27,499
---------- ------------
$ 760,075 $ 1,687,616
---------- ------------
---------- ------------
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at March 31, 1997 and
1996:
1997 1996
----------- -----------
Land............................................................... $ 245,000 $ --
Building........................................................... 2,137,265 --
Construction in progress........................................... 1,324,619 68,741
Laboratory equipment............................................... 2,189,512 2,133,800
Furniture and fixtures............................................. 384,130 352,792
Leasehold improvements............................................. 435,582 456,356
----------- -----------
6,716,108 3,011,689
Less: Accumulated depreciation..................................... (1,858,444) (1,497,522)
----------- -----------
$ 4,857,664 $ 1,514,167
----------- -----------
----------- -----------
Depreciation and amortization expense for the years ended March 31, 1997,
1996 and 1995 was $360,922, $319,827, and $274,115, respectively.
6. BANK FINANCING ARRANGEMENTS:
During fiscal 1995, the Company obtained a $750,000 Revolving Line of
Credit Facility and a $2,000,000 Equipment Leasing/Financing Credit
Facility, secured by the Company's inventory and accounts receivable,
and by the equipment acquired by the Company. The Revolving Credit
Facility, which is used to fund operating requirements, provides for
interest at 0.5% over the prime rate. The aggregate outstanding balance
on the Revolving Credit Facility was $128,000 as of March 31, 1995, with
no balances as of March 31, 1997 and 1996. The average outstanding
24
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,continued
6. BANK FINANCING ARRANGEMENT, CONTINUED:
balance on the Revolving Credit Facility for fiscal years 1997, 1996
and 1995, was $21,000, $86,000 and $64,000, respectively. The average
interest rate on the Revolving Credit Facility for fiscal years 1997,
1996 and 1995, was 8.75%, 9.0% and 9.5%, respectively. In connection with
the bond issuance described below, no further funds are available under
the Equipment Leasing/Financing Credit Facility; however, the Revolving
Line of Credit Facility remains in effect, secured by inventory and
accounts receivable.
7. LONG TERM DEBT:
In November 1996, the Company completed the acquisition of an approximately
70,000 square foot building on 3.48 acres in Baltimore, Maryland, which the
Company is now in the process of renovating to provide CBL with office,
warehouse and pharmaceutical manufacturing space. The Company is actively
seeking opportunities and customer contracts to utilize these expanded
capabilities. However, as of March 31, 1997, the Company has not entered
into any definitive customer contracts for the new facility. 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 Council of Baltimore City by
and through the Department of Housing and Community Development. The loan
has an interest rate which is fixed at 6.5%. The bonds are tax exempt and
variable rate and may be converted to a fixed rate.
The Company has also entered into an interest rate agreement with First
Union National Bank of North Carolina to reduce the potential impact of
the variable interest rates on the bonds. This agreement results in a
maximum interest rate on the bonds of 5.51%, and relates to $6 million of
the outstanding bonds. The agreement became effective in November 1996 and
will expire in November 2003.
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
First Union National Bank of North Carolina (the "Bank"), in amounts 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 November 1998 with the
final payment due in November 2016.
There are certain covenants contained in the debt financing, which include
ratios and balances as to minimum tangible net worth, liability to net
worth ratio, EBITDA ratio, and current ratio (all as defined). Other
covenants include a ceiling on capital expenditures and on the incurrence
of other indebtedness (as defined). The Company was in compliance with all
such covenants as of March 31, 1997.
In connection with the financing, the Company incurred costs of $395,000
which will be amortized over the term of the bonds. The Company has also
capitalized $58,000 of net construction period interest costs through
March 31, 1997, which will be expensed over the useful life of the
building.
The Company's other long term debt as of March 31, 1997 consists of a truck
and an equipment loan. The truck loan bears interest at 6.9% and is
repayable through December 8, 1998, in equal monthly installments. The
equipment loan bears interest at 8.5% and is repayable through April 1,
1999 in variable monthly installments.
25
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,continued
7. LONG TERM DEBT, CONTINUED:
The remaining principal payments on the Company's long term debt as of
March 31, 1997, are as follows:
YEAR ENDED
MARCH 31, AMOUNT
----------- --------
1998.................. $ 20,960
1999.................. 347,464
2000.................. 667,869
2001.................. 669,519
2002 and thereafter... 6,839,257
-----------
$ 8,545,069
-----------
-----------
Based on the borrowing rates currently available to the Company, the fair
value of long-term debt, exclusive of capital lease obligations, as of
March 31, 1997, is approximately $8,522,000.
8. 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 functions. The lease expires
December 31, 1998, with two, two-year renewal terms. The rent expense
under the lease agreement was $143,948, $147,002, and $139,186 for the
years ended March 31, 1997, 1996 and 1995, respectively. The Company is
currently in the process of subletting the facility for the remainder of
the lease term and management believes sublease revenues will approximate
the future rental commitment obligation.
The Company's original facility will be 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 and two
renewable terms of two years each. Related rental payments for the years
ended March 31, 1997, 1996 and 1995, were $234,784, $232,782, and
$228,683, 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.
During previous years, the Company entered into several non-cancelable
capital lease obligations for various pieces of laboratory equipment and
furniture that expire during fiscal year 1999. In addition, in fiscal year
1997 the Company entered into several operating leases that expire during
fiscal year 2001.
26
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,continued
8. LEASES, Continued:
At March 31, 1997 the aggregate minimum annual lease payments were as
follows:
YEAR ENDED CAPITAL OPERATING
MARCH 31 LEASES LEASES
----------- ---------- ----------
1998 $ 38,909 $ 273,306
1999 36,245 217,768
2000 1,123 29,541
2001 -- 15,904
---------- ----------
76,277 $ 536,519
Less interest........ (17,592) ==========
----------
Present value of future
minimum lease payments $ 58,685
-----------
-----------
9. CONTINGENCIES:
In the ordinary course of business, the Company could be exposed to a risk
of liability as a result of the products that it has produced or developed
for others. The Company attempts to limit its exposure to liability through
contractual agreements with its customers and insurance coverage. Clinical
trial materials are produced by the Company for use by its customers in
studies that are strictly regulated by the FDA. During fiscal 1997, 1996
and 1995, there were no legal proceedings to which the Company was a party.
10. STOCK OPTION PLANS:
The Company has adopted four incentive stock option plans for employees
(the "Option Plans") and a separate plan for Directors. The Option Plans
provide for the granting of incentive stock options within the meaning of
Section 422A of the Internal Revenue Code of 1986, as amended. The
exercise price of all options granted under the Option Plans must be at
least equal to the fair market value of such shares on the date of the
grant (110% in the case of an optionee who is an owner of more than 10%
of the Company's Common Stock), and the maximum term of the options range
from five to ten years.
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans, under which no compensation expense has been
recognized. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant
dates for awards under those plans consistent with the method of SFAS 123,
the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
27
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
10. STOCK OPTION PLANS, Continued:
YEAR ENDED YEAR ENDED
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
Net income:
As reported.................................................. $ 503,715 $ 308,938
Pro forma.................................................... $ 364,955 $ 286,233
Primary earnings per share:
As reported.................................................. 0.12 0.08
Pro forma.................................................... 0.09 0.07
Fully diluted earnings per share:
As reported.................................................. 0.12 0.08
Pro forma.................................................... 0.09 0.07
10. STOCK OPTION PLANS: (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
YEAR ENDED YEAR ENDED
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
Expected volatility.......................................... 82.2% 82.2%
Risk-free interest rates..................................... 5.9--6.0% 6.5--6.7%
Expected lives............................................... 4-5 years 4-5 years
A summary of option transactions for the years ended March 31, 1997, 1996
and 1995 is as follows:
1997 1996 1995
-------------------- -------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- -----------
Outstanding, beginning of year........................... 366,750 $ 2.16 256,250 $ 2.43 386,250 $ 1.80
Granted.................................................. 300,000 2.98 130,500 1.50 -- --
Exercised................................................ (11,250) 1.28 -- -- (98,996) 0.54
Expired or cancelled..................................... (83,600) 3.80 (20,000) 1.25 (31,004) 0.62
--------- --------- --------- --------- --------- -----
Outstanding, end of year................................. 571,900 $ 2.37 366,750 $ 2.16 256,250 $ 2.43
--------- --------- --------- --------- --------- -----
--------- --------- --------- --------- --------- -----
Shares available for future grant........................ 531,550 43,497 132,997
--------- --------- ---------
--------- --------- ---------
Options exercisable at end of period..................... 105,000 108,750 45,000
--------- --------- ---------
--------- --------- ---------
Weighted average fair value of options granted........... $ 2.24 $ 1.03 --
--------- --------- ---------
--------- --------- ---------
The weighted average remaining contractual life of options outstanding at
March 31, 1997, is 5.6 years.
28
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
11. INCOME TAXES:
The provision (benefit) for income taxes was comprised of the following for
the years ended March 31, 1997, 1996 and 1995:
1997 1996 1995
---------- ---------- -----------
Federal:
Current.......................................... $ 198,716 $ -- $ 1,045
Deferred......................................... 52,743 175,065 (178,657)
State:
Current.......................................... 35,067 -- --
Deferred......................................... 9,307 30,894 (31,343)
---------- ---------- -----------
Provision (benefit) for income taxes................ $ 295,833 $ 205,959 $ (208,955)
---------- ---------- -----------
---------- ---------- -----------
The following table reconciles income taxes at the federal statutory rate to
the provision for income taxes in the accompanying consolidated statements of
income for the years ended March 31, 1997, 1996 and 1995.
1997 1996 1995
---------- ---------- -----------
Income tax at federal statutory rate........................................ $ 271,846 $ 175,065 $ 121,359
State tax, net of federal benefit......................................... 36,939 30,894 28,295
Alternative minimum tax................................................... -- -- 1,045
Utilization of net operating loss carryforwards........................... -- -- (149,654)
Recognition of cumulative benefit for deferred income tax................. -- -- (210,000)
Other..................................................................... (12,952) -- --
---------- ---------- -----------
Provision (benefit) for income taxes...................................... $ 295,833 $ 205,959 $ (208,955)
---------- ---------- -----------
---------- ---------- -----------
As of March 31, 1997, CBL had no operating loss carryforwards for income tax
purposes.
Total deferred tax liabilities and deferred tax assets as of March 31, 1997
and 1996, and the sources of the differences between financial accounting and
tax basis of the Company's assets and liabilities which give rise to the
deferred tax liabilities and deferred tax assets and the tax effects of each are
as follows.
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
Deferred tax assets:
Inventory.................................................... $ 32,251 $ 71,609
Accruals and reserves........................................ 18,289 15,845
Net operating loss and credit carryforwards.................. -- 47,185
-------------- --------------
$ 50,540 $ 134,639
-------------- --------------
-------------- --------------
Deferred tax liability:
Property and equipment....................................... $ 108,549 $ 130,598
-------------- --------------
-------------- --------------
29
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
12. PROFIT SHARING PLAN:
During the year ended March 31, 1994, the Company established a 401K-Profit
Sharing Plan ("the Plan") for all full-time employees with at least six
months of service with the Company. Employees may contribute up to 10% of
their salary to the Plan and the Company may match the first 3% of salary
that the employee contributes to the Plan. The original entry date in the
Plan for eligible employees was October 1, 1993. The Company suspended the
matching of employee contributions as of July 31, 1994. The Company's cost
to match employee contributions was $16,857 for the year ended March 31,
1995.
13. NEW ACCOUNTING PRONOUNCEMENTS:
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("SFAS 121"). SFAS 121 requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity
be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. SFAS
121 is effective for financial statements with fiscal years beginning
after December 15, 1995. The adoption of SFAS 121 as of April 1, 1996 had no
impact on the Company's financial position or results of operations.
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share" ("SFAS 128"). SFAS 128 simplifies the standards for
computing earnings per share ("EPS") previously found in APB Opinion No. 15,
"Earnings per Share". It replaces the presentation of primary EPS with a
presentation of basic EPS and requires a reconciliation of the numerator and
denominator of the diluted EPS calculation. Basic EPS excludes dilution and
is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
EPS is computed similarly to fully diluted EPS pursuant to APB Opinion No.
15. SFAS 128 is effective for fiscal years ending after December 15, 1997,
and early adoption is not permitted. When adopted, it will require
restatement of prior years' EPS. When adopted for the year ending March 31,
1998, the Company will report basic EPS instead of primary EPS. Basic EPS
for the years ended March 31, 1997, 1996 and 1995 is $0.13, $0.08 and $0.14,
respectively.
14. SUBSEQUENT EVENT:
On April 25, 1997, the Company filed a Registration Statement on Form S-2
with the Securities and Exchange Commission for the purpose of issuing
1,000,000 shares of its Class A Common Stock. At the current market price,
the net proceeds to the Company from this offering are expected to be
approximately $4,375,000, if the offering is successfully completed.
30
SCHEDULE II
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
Valuation and Qualifying Accounts
For the Years Ended March 31, 1997, 1996 and 1995
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES WRITE-OFFS PERIOD
----------- ----------- ----------- -----------
Allowances for
Doubtful Accounts:
For Fiscal Year Ended March 31, 1995:........................... $ 1,489 $ 17,520 $ 15,009 $ 4,000
For Fiscal Year Ended March 31, 1996:........................... $ 4,000 $ 33,900 $ 21,500 $ 16,400
For Fiscal Year Ended March 31, 1997:........................... $ 16,400 $ 15,000 $ 21,100 $ 10,300
31