FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1998 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.)
1111 S. Paca Street, Baltimore, Maryland 21230 2834
- - ------------------------------------------ ---------------------- ----
(Address of principal executive offices) (zip code) (SIC)
(410) 843-5000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
The number of shares outstanding of each of the issuer's classes of common stock
as of September 30, 1998 and September 30, 1997:
-----------------------------------------
Outstanding at Outstanding at
Class September 30, 1998 September 30, 1997
----- ------------------ ------------------
Class A Common Stock, $.01 par value 5,328,290 5,216,225
Class B Common Stock, $.01 par value -0- -0-
1
Chesapeake Biological Laboratories, Inc.
Table of Contents
Page
----
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets as of
September 30, 1998 and March 31, 1998 . . . . . . . 3
Consolidated Statements of Operations for
the three and six months ended September 30, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statement of Changes in
Stockholders' Equity for the six months
ended September 30, 1998 . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows
for the six months ended September 30, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . 7-10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 11-13
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 13
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 13
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS September 30, 1998 March 31, 1998
(Unaudited) (Audited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,250,610 $ 3,041,705
Restricted cash 350,000 350,000
Accounts receivable, net 851,712 1,259,560
Inventories 675,646 524,996
Prepaid expenses 484,452 404,696
Deferred tax asset 536,145 92,208
Interest receivable 13,555 18,817
------------- --------------
Total current assets 5,162,120 5,691,982
PROPERTY AND EQUIPMENT, net 10,199,963 9,428,831
BOND FUNDS HELD BY TRUSTEE 264,511 778,454
DEFERRED FINANCING COSTS 339,781 344,021
OTHER ASSETS 157,062 69,912
------------- --------------
Total assets $ 16,123,437 $ 16,313,200
------------- --------------
------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 330,850 $ 223,481
Line of credit 219,462 --
Current portion of long term debt 710,227 389,547
Current portion of capital lease obligations 13,082 28,098
Deferred revenue 353,801 177,593
------------- --------------
Total current liabilities 1,627,422 818,719
LONG TERM LIABILITIES:
Long term debt, net of current portion 7,951,212 8,283,102
Capital lease obligations, net of current portion -- 854
Deferred rent 7,489 22,523
Deferred tax liability 124,084 124,084
------------- --------------
Total liabilities 9,710,207 9,249,282
------------- --------------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Class A common stock, par value $.01 per share;
8,000,000 shares authorized; 5,328,290 and
5,276,195 shares issued and outstanding 53,283 52,762
Class B common stock, par value $.01 per share;
2,000,000 shares authorized; no shares issued
and outstanding -- --
Additional paid-in capital 7,383,736 7,369,039
Accumulated deficit (1,023,789) (357,883)
------------- --------------
Total stockholders' equity 6,413,230 7,063,918
------------- --------------
Total liabilities and stockholders' equity $ 16,123,437 $ 16,313,200
------------- --------------
------------- --------------
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 Six Months Ended
September 30, September 30,
------------------ -------------------------
1998 1997 1998 1997
---- ----- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
OPERATING REVENUE $ 2,282,696 $ 1,745,265 $ 3,399,868 $ 3,461,860
COST OF REVENUE 2,018,512 1,328,117 3,184,328 2,674,374
------------- ------------- -------------- -------------
GROSS PROFIT 264,184 417,148 215,540 787,486
OPERATING EXPENSES:
General and administrative 462,896 368,342 834,754 752,343
Selling 211,299 167,956 458,362 294,059
Research and development -- 13,036 -- 39,739
------------- ------------- -------------- -------------
Loss from operations (410,011) (132,186) (1,077,576) (298,655)
OTHER (EXPENSE) INCOME
Interest and other expense (101,075) (38,176) (146,065) (72,954)
Interest and other income 53,967 118,304 113,798 200,013
------------- ------------- -------------- -------------
Loss before benefit from income taxes (457,119) (52,058) (1,109,843) (171,596)
BENEFIT FROM INCOME TAXES 182,848 19,262 443,937 63,491
------------- ------------- -------------- -------------
NET LOSS $ (274,271) $ (32,796) $ (665,906) $ (108,105)
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
LOSS PER COMMON AND COMMON
EQUIVALENT SHARE:
Basic
Net Loss $ (0.05) $ (0.01) $ (0.13) $ (0.02)
Diluted
Net Loss $ (0.05) $ (0.01) $ (0.13) $ (0.02)
WEIGHTED AVERAGE COMMON
COMMON OUTSTANDING
Basic 5,321,500 5,180,217 5,302,100 4,750,573
Diluted 5,321,500 5,180,217 5,302,100 4,750,573
The accompanying notes are an integral part of these consolidated statements
4
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Accumulated
Shares Par Value Paid-In Capital Deficit Total
------------- -------------- --------------- --------------- ---------------
BALANCE, March 31, 1998 5,276,195 $ 52,762 $ 7,369,039 $ (357,883) $ 7,063,918
Issuance of shares pursuant to
exercise of stock options 52,095 521 14,697 -- 15,218
et loss -- -- -- (665,906) (665,906)
---------- -------- ----------- ------------- -----------
BALANCE, September 30, 1998 5,328,290 $ 53,283 $ 7,383,736 $ (1,023,789) $ 6,413,230
---------- -------- ----------- ------------- -----------
---------- -------- ----------- ------------- -----------
The accompanying notes are an integral part of this consolidated statement.
5
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
September 30,
----------------------------
1998 1997
---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (665,906) $ (108,105)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 201,886 177,246
Deferred income taxes (443,937) ---
Decrease (increase) in accounts receivable 407,848 (636,201)
(Increase) decrease in inventories (150,650) 273,609
Increase in prepaid expenses (79,756) (6,987)
Decrease (increase) in interest receivable 5,262 (19,156)
Increase in other assets (87,150) (6,060)
Increase (decrease) in accounts payable
and accrued expenses 107,369 (195,321)
Increase in deferred revenue 176,208 82,692
Decrease in deferred rent (15,034) (15,034)
----------- -------------
Net used in operating activities (543,860) (453, 317)
----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (968,778) (2,781,190)
Decrease in bond funds held by Trustee 513,943 2,419,200
----------- -------------
Net cash used in investing activities (454,835) (361,990)
----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short term borrowings net 219,462 ---
Repayments of long term debt (11,210) (11,210)
Repayments of capital lease obligations (15,870) (14,803)
Net proceeds from sales of stock 15,218 3,374,132
----------- -------------
Net cash provided by financing activities 207,600 3,348,119
----------- -------------
(Decrease) increase in cash and cash equivalents (791,095) 2,532,812
CASH AND CASH EQUIVALENTS,
beginning of period 3,041,705 1,432,944
----------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 2,250,610 $ 3,965,756
----------- -------------
----------- -------------
CASH PAID DURING THE PERIOD FOR:
Interest $ 144,896 $ 55,625
----------- -------------
----------- -------------
Income taxes $ -- $ 1,300
----------- -------------
----------- -------------
The accompanying notes are an integral part of these consolidated statements.
6
CHESAPEAKE BIOLOGICAL LABORATORIES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 90 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 $67,727 and $70,300 as of September 30, 1998 and March 31, 1998,
respectively.
Inventories
Inventories consist of raw materials and work-in-process 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 securities with
maturities 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 First Union National Bank (the
"Bank") as collateral for the Company's obligations under the Letter of
Credit and Reimbursement Agreement with the Bank (see Note 6).
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.
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.
7
CHESAPEAKE BIOLOGICAL LABORATORIES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Option Plans
The Company accounts 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 the grant
only if the current market price of the underlying stock exceeded the
exercise price.
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 differ from
those estimates.
Reclassification
Certain prior period balances have been reclassified to conform with
current period presentation.
3. Concentrations of Credit Risk/Significant Customers:
The Company's customers span the range of the pharmaceutical and medical
device industries. For many 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 Vitrax-TM- originally
expired in February 1997. Subsequent thereto, an agreement was reached
between CBL and Allergan which called for the production of Vitrax-TM-
through December 31, 1997, on modified terms using active ingredients
supplied by Allergan, rather than active ingredients manufactured by
CBL. In addition, Allergan was relieved of any obligation to purchase
Vitrax-TM- exclusively from the Company. In September 1997, the Company
made its final shipment of Vitrax-TM- to Allergan and no further
shipments have been made and no further revenues are expected from
Allergan relative to Vitrax-TM-.
The Company has been actively seeking to increase and diversify its
customer base and has been successful in its diversification efforts,
eleven new customers were added during fiscal year 1998. Fourteen new
customers have been added thus far this fiscal year to CBL's client
portfolio. However, there can be no assurance that the Company's annual
results will not be dependent upon the performance of a few large
projects.
4. Inventories:
Inventories consist of the following:
September 30, 1998 March 31, 1998
------------------ --------------
Raw materials $ 260,431 $ 280,344
Work-in-process 415,215 244,652
--------- ---------
$ 675,646 $ 524,996
--------- ---------
--------- ---------
8
CHESAPEAKE BIOLOGICAL LABORATORIES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Leases:
The Company's Seton Business Park facility is primarily used for
experimental development and 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 renewal terms of
two years each. Related rental payments for the six months ended
September 30, 1998 and 1997, were $118,284 for both periods. The
operating lease agreement for the Seton Business Park facility contains
terms which feature reduced rental payments in the early years and
increased 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. Additionally, during
fiscal years 1997 and 1998, the Company entered into several operating
leases that expire throughout fiscal years 2001 through 2003.
On April 14, 1998, the Company exercised the right to renew the lease of
its Seton facility. The lease now expires on December 31, 2000, and may,
at the Company's option, be renewed again for another two year period
thereafter.
6. 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 has renovated to provide CBL with office,
warehouse and pharmaceutical manufacturing space. The Company
successfully completed the initial FDA general facility inspection on
this commercial production facility in July 1998. The Company is
actively seeking opportunities and customer contracts to utilize these
FDA approved expanded capabilities. The purchase and renovation costs
were financed with 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 Council of Baltimore City by and
through the Department of Housing and Community Development. The loan
from the City of Baltimore has an interest rate which is fixed at 6.5%.
The bonds are variable rate and may be converted to a fixed rate. At
September 30, 1998 the Bonds were tax-exempt.
The Company has also entered into an interest rate agreement with First
Union National Bank 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% as long as the Bonds remain
tax-exempt, 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 (the "Bank"), in amounts up to $7,280,000. A
Letter of Credit fee of 1.125% is paid annually to the Bank. 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, and monthly principal
and interest payments due thereafter through November 2016.
The Company is in the process of converting the $7,000,000 MIDFA Bonds
from a tax-exempt to a taxable bond. This will eliminate the capital
expenditure restriction associated with the tax-exempt bonds. The
increase in the interest rate associated with the Bond conversion will
approximate 1.5% per annum.
Under the documentation applicable to the Bond financing, the Company is
obligated to maintain certain financial ratios and balances, including a
minimum tangible net worth, a liability to net worth ratio, an EBITDA
ratio and a current ratio, all as defined and established in the
applicable documents. The documentation applicable to the Bond financing
includes several additional covenants, including a ceiling on capital
expenditures and a limitation on the incurrence of other indebtedness,
as defined and established therein. During fiscal year 1998, and
subsequent thereto, the Company and the Bank agreed to
9
CHESAPEAKE BIOLOGICAL LABORATORIES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
modify certain ratios and balances provided for under the Bond financing
documentation, and the Bank agreed to waive through April 1, 1999, the
requirement that the Company maintain a certain EBITDA ratio. As of
September 30, 1998, the Company was in compliance with all of the other
ratios and balances required to be maintained under the terms of the
Bond financing documentation, as amended.
Other long term debt as of September 30, 1998, consists of loans for a
truck and various equipment. 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.
7. Earnings per share:
In March 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
per Share." 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 and fully diluted EPS
with a presentation of basic and diluted EPS and requires a
reconciliation of the numerator and denominator of the basic and 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 primary EPS pursuant to APB Opinion No. 15. The adoption of
SFAS 128 did not have a significant impact on the Company for the six
months ended September 30, 1998, because of the Company's net loss.
Earnings per share information for the prior quarter has been restated
to reflect the new requirements.
8. New accounting pronouncements:
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999 and will be
adopted as a cumulative catch-up. Management does not expect the
adoption of this statement to have a material impact on the Company's
financial position or results of operation.
During March 1998, the American Institute of Certified Public
Accountants issues Statement of Position (SOP) 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP
98-1 provides that computer software costs that are incurred in the
preliminary project stage should be expensed as incurred. Once the
capitalization criteria of SOP 98-1 have been met, external direct costs
of materials and services consumed in developing or obtaining
internal-use computer software; payroll and payroll-related costs for
employees who are directly associated with and who devoted time to the
internal-use computer software project (to the extent of the time spent
directly on the project); and the interest costs incurred when
developing computer software for internal use should be capitalized.
Under SOP 98-1, training costs, data conversion costs and internal costs
incurred for upgrades, enhancements and maintenance should be expensed
as incurred. Impairment of capitalized software should be recognized in
accordance with the provision of FASB Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." The SOP is effective for fiscal years beginning after Dec
15, 1998 and is to be adopted prospectively. Management does not believe
that the adoption of SOP 98-1 will have a material affect on the
Company's financial condition or results of operations.
10
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, 1998.
Six months ended September 30, 1998 and 1997.
During 1998, the Company successfully completed the initial cGMP
validation and FDA inspection of the Company's new 71,000 square foot
pharmaceutical manufacturing facility located at the Camden Industrial Park,
Baltimore, Maryland. As a result of the completion, the Company's business
capabilities have expanded significantly to include larger scale commercial
pharmaceutical production at the Camden facility. The services offered at the
new Camden facility complement the process development and smaller scale
pharmaceutical production as historically conducted at the company's 15,000
square foot cGMP facility which continues to operate at the Seton Business Park,
also in Baltimore, Maryland.
Revenues for the second quarter increased 31% to $2,283,000 compared to
$1,745,000 for the second quarter last year. Year to date revenues of
$3,400,000, which do not include any sales to Allergan, were less than 2% under
the revenues as compared to the same period last year. Excluding prior year
sales related to the expired Allergan contract manufacturing agreement between
the Company and Allergan, sales for the second quarter this year reflect a 65%
increase, and year to date sales this year reflect a 37% increase when compared
to the corresponding period last year. Operations of the Company's Seton
Business Park facility accounted for 94% of second quarter and 96% of year to
date revenues, as the expanded capabilities of the Company's new Camden facility
have initially been utilized to only a limited degree.
CBL hired two experienced pharmaceutical sales representatives during
the quarter ended September 30, 1998, and CBL continues to work diligently to
increase and diversify its customer portfolio and to expand its business from
existing customers, particularly in the area of larger scale clinical trial and
commercial pharmaceutical production at the Camden facility. The Company
believes that the decision of ten of its new customers to contract for product
development and smaller scale production at Seton is attributable, at least in
part, to the Company's ability to offer larger scale, commercial manufacturing
capabilities at Camden at a later date, when the customer's product moves from
the development stage into clinical trial and full scale commercial production.
Second quarter results for the Company's product development and smaller
scale pharmaceutical production business conducted at the Seton facility reflect
a gross margin of 38%, as compared to 31% for the comparable period last year.
Due to the expenses incurred in connection with the successful establishment,
validation and FDA cGMP inspection of the Camden facility, the Company's overall
gross profit was $264,000 for the second quarter this year as compared to an
overall gross profit of $417,000 for the corresponding period last year. The
year to date gross margin attributable to Seton operations was also 38% of
revenues, reflecting an increase from 29% for the corresponding period last
year. Again due to the Camden facility start-up expenses, the overall gross
profit for the six month period ended September 30, 1998 was $216,000 as
compared to $788,000 for the comparable period last year.
As also expected, operating expenses during the three and six month
periods ended September 30, 1998 increased, largely as a result in the increase
expenses associated with start-up of the Camden facility. Operating expenses
increased $125,000 for the for the second quarter, with a 67% of the increase
attributable to the establishment, validation, and FDA cGMP inspection of the
Camden facility. Operating expenses increased $207,000 for the six month period
ended September 30, 1998, as compared to the corresponding period last year,
with 91% of the increase attributable to the Camden facility.
Operating income related to the Seton facility of $297,000 was up
$240,000 or 420% for the quarter compared to the prior year. However, due to
expenses related to the Camden facility, CBL experienced an overall operating
loss of $410,000. This loss compares to the total operating loss of $132,000 for
the quarter in the prior year. For the six month period the Seton facility
operating income of $255,000 was 155% over the prior year's six month results.
Overall, CBL incurred an operating loss of $1,077,000 largely as a result of the
expenses associated with the establishment, validation and FDA cGMP inspection
of the
11
Camden facility.
Other expenses were $47,000 for the quarter compared to other income of
$80,000 for the comparable period last year. The change reflects the reduction
in interest income as the bond funds secured in November 1996 were drawn down to
pay the construction and validation costs of the Camden facility.
Financial Condition and Liquidity
On September 30, 1998, CBL had cash and cash equivalents of $2,251,000
compared to $3,042,000 at March 31, 1998. These balances do not include $350,000
held as collateral for the Company's obligations under the Letter of Credit and
Reimbursement Agreement with First Union National Bank, pursuant to which a
letter of credit was issued as credit enhancement for bonds issued by the
Maryland Industrial Development Financing Authority. The proceeds of these bonds
were and are being used by the Company to finance a portion of the purchase
price and the renovation and equipping of the Company's new commercial
production facility located at the Camden Industrial Park, Baltimore, Maryland.
In addition, and not included in the above sums, $265,000 was held at September
30, 1998, by the Bond Trustee, under the Trust Indenture entered into in
connection with the bond financing. These funds were held by the Trustee pending
disbursement, subject and pursuant to the terms of the financing documents, to
defray the continuing costs of renovation and equipping of the Camden Industrial
Park facility. These funds have since been released. The Company is in the
process of converting the $7,000,000 tax-exempt MIDFA Bonds to a taxable bond.
This will eliminate the capital expenditure restriction associated with the
tax-exempt bonds. The increase in the interest associated with the Bond
conversion will approximate 1.5% per annum. The Company continues to maintain a
$750,000 Revolving Line of Credit from the First Union National Bank and there
was an outstanding balance of $219,000 at September 30, 1998.
Net cash used in the operating activities of $544,000 for the six months
ended September 30, 1998, was primarily the result of the net loss for the
period an increase in deferred income taxes which was offset in part by
decreases in accounts receivable. This compares to net cash used in operating
activities for the comparable period in the prior year of $453,000 which was
primarily due to the net loss and an increase in accounts receivable. Net cash
used in investing activities of $455,000 for the six months ended September 30,
1998, was a direct result of the final validation and completion of the FDA
approved Camden production facility offset in part by disbursements from the
bond Trustee. This compares to net cash used in investing activities for the
comparable period in the prior year of $362,000 which was due to purchases of
property and equipment offset by funds released by the trustee. Net cash
provided by financing activities of $208,000 for the six months ended September
30, 1998, was comprised primarily of short term borrowings from the Company's
revolving Line of Credit. This compares to the net cash provided by financing
activities for the comparable period in the prior year of $3,348,000, which was
comprised largely of proceeds from the Company's follow-on public offering of
Class A Common Stock.
New accounting pronouncements:
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999 and will
be adopted as a cumulative catch- up. Management does not expect the adoption of
this statement to have a material impact on the Company's financial position or
results of operation.
Year 2000 Issue
In conjunction with the Company's expansion of its commercial production
capabilities, the Company is upgrading both its computer hardware and software.
Management believes the software upgrade will resolve the Year 2000 (Y2K) issue
for the Company. An independent consultant studied the Company's information
technology status and recommended changes. The study recommended installation of
commercially available software packages. Installation of critical modules is in
process and is expected to be completed by late 1998. The software packages
being installed have been upgraded by the software provider to address the Year
2000 issue. Time-sensitive internal programs have been reviewed and will require
only minor modifications, at nominal cost, to resolve the Year 2000 issue.
12
In addition, CBL has initiated a process of requesting critical
suppliers to report the status of the Y2K compliance of their information
technology systems. Due to the nature of CBL's business it is unlikely that a
customer with a Y2K problem would adversely effect CBL to any significant
degree. Also, CBL does not expect to be dependent on one customer or a small
group of customers which limits CBL's exposure if some customers have not
resolved their Y2K problems. After CBL's current information technology upgrade
is complete the Company plans to assess and address any contingency issues.
Statements Regarding Forward-Looking Disclosure
Certain information contained in this Report includes forward-looking
statements which can be identified by the use of forward-looking terminology
such as "may", "will", "expect", "should", "believes", "anticipates", "intends",
or words of similar import. These statements may involve risks and uncertainties
that could cause actual results to differ materially from those described in the
statements. These risks and uncertainties include (without limitation) general
economic and business conditions, changes in business strategy or development
plans, and others. Given these uncertainties, the reader is cautioned not to
place undo reliance on such forward-looking statements.
Part II. Other Information
Item 1. Legal Proceedings
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
27 - Financial Data Schedule
b. Reports on Form 8-K:
No reports on Form 8-K were filed by the
Registrant during the quarter for which this
report is filed.
13
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 there unto duly authorized.
CHESAPEAKE BIOLOGICAL
LABORATORIES, INC.
------------------
Registrant
DATE: 11/04/98 By: /s/ John C. Weiss, III
-------- ----------------------
John C. Weiss, III
President
DATE: 11/04/98 By: /s/ Robert J. Mello
-------- ----------------------
Robert J. Mello
Secretary
14