SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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, 1999 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ________ to ___________
Commission File Number: 1-12748
CHESAPEAKE BIOLOGICAL LABORATORIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-1176514
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
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)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
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 ]
As of June 8, 1999 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 $16,100,000 based on the
closing sale price of the Class A Common Stock on June 8, 1999.
The number of shares outstanding of each of the Registrant's classes of common
stock, as of June 8, 1999:
Class A Common Stock, $.01 per share - 5,590,101 shares
Class B Common Stock, $.01 per share - none
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the part of
the Form 10-K into which the document is incorporated NONE
This Form 10-K consists of 38 pages. The index to exhibits is set forth on
page 19.
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 for parenteral and other sterile
products. 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 100 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 U.S. Food and Drug Administration ("FDA") required toxicology
studies, clinical trials and to produce and manufacture FDA approved
products for commercial sale.
The Company has particular experience and expertise in providing
product development services and producing sterile, process-sensitive
biopharmaceutical parenteral 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 and
toxicology 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 has been a positive factor 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 parenteral 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. The Company renovated a 70,000 square foot building purchased
in November 1996 into a sterile pharmaceutical production facility. The
pharmaceutical production operation was mechanically completed in December
1997. The FDA initial general facility inspection was completed in July
1998.
CBL believes its established experience and expertise, ISO 9001
certification, plus the increase in capacity provided by the new facility
and ability to offer a broad range of drug development and production
services, will enable it to provide competitive, cost-effective contract
services to the pharmaceutical and biopharmaceutical industries.
STRATEGY
The Company's strategy is to accelerate its revenue growth and return
to profitability by achieving a greater share of the market for contract
services relating to the product development and production services for
the pharmaceutical and biotechnology industries.
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EXPAND PRODUCTION AND DEVELOPMENT SERVICES CAPABILITIES.
The acquisition, renovation, validation and start-up of the Company's
new laboratory and production facility has significantly increased CBL's
capacity. This increase in production capacity will enable the Company to
continue to meet current and future customers' increasing volume
requirements, pursue larger scale, long-term commercial contracts and
achieve a greater market share. While the Company has increased it's
capacity to include larger scale production, the equipment acquired for the
Camden facility in fiscal year 1999 was designed to meet the needs of
biotechnology firms whose production lot sizes are in the range of 30 to
50 thousand units per run. The Company needs to acquire manufacturing
equipment that can provide larger production runs in order to produce
product for customers who are seeking more efficient, larger production
lots.
OUTSOURCING TREND/SALES MARKETING.
The Company is expanding 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 has expanded its scientific staff to meet the challenges of
developing and producing increasingly complex biologically-derived drug
products. In addition, the Company hired two sales representatives. These
sales representatives have increased CBL's presence in the market with
direct sales calls on new and existing customers and have been in
attendance at industry trade shows and exhibits. The Company's sales
strategy is to match the Company's capabilities with the needs of
prospective customers. At present, the Company has a limited range of types
and size of production equipment which may effect the Company's ability to
meet its sales objectives.
FOCUS ON DEVELOPMENT OF CUSTOMERS' PRODUCTS.
The Company believes that many pharmaceutical and biotechnology
companies prefer to out source 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
or product development in direct competition with its customers.
CONTRACTS AND CUSTOMERS
Substantially all of the Company's current customers are engaged in
early phase of clinical development, accordingly, only a limited amount of
the Company's fiscal year 1999 revenue is from the manufacture of
commercial products. This product mix is anticipated to continue for fiscal
year 2000. Generally, all non-commercial, early phase clinical work is
performed under purchase orders provided by its customers. The Company
presently is not manufacturing commercial products under long-term
agreements. Customers provide purchase orders within 30-60 days of
commencement of work, therefore, the Company's backlog averages
approximately two months of future revenues.
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 established pharmaceutical and biotechnology companies,
may have significantly greater resources than the Company.
3
Competitive factors include reliability, turnaround time, reputation
for innovation and quality performance, capacity to perform numerous
required services, financial and regulatory strength and price. The Company
believes that it can compete 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 customers prefer CBL to others that offer contract
manufacturing, but which also produce and sell their own products in direct
competition with those of the customer.
EMPLOYEES
At March 31, 1999, the Company had 81 full-time equivalent employees,
of which six hold Ph.D. degrees, five hold master's degrees and 11 hold
professional certifications. Thirty of CBL's employees perform scientific,
regulatory 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 U.S. 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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-K or in documents
incorporated herein by reference, including without limitation, statements
including the word "BELIEVES," "ANTICIPATES," "INTENDS," "EXPECTS," or
words of similar import, constitute "FORWARD-LOOKING STATEMENTS" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or
achievements of the Company expressed or implied by such forward-looking
statements. Such factors include, among others, general economic and
business conditions, changes in business strategy or development plans, the
Company's ability to market and sell its products and services, the
Company's ability to successfully operate and maintain the new production
facility in a manner compliant with applicable regulations and standards,
and other factors referenced in this Form 10-K including, without
limitation, under the headings "Business", "Properties", "Market for
Registrant's Common Equity and Related Stockholder
4
Matters", "Management's Discussion and Analysis of Financial Condition and
Results of Operations", and "Financial Statements and Supplementary Data".
For an explanation of certain risk factors which may effect the Company the
reader should review the Registration Statement on Form S-2 (No. 333-
25903) filed with the United States Securities and Exchange Commission
April 25, 1997.
ITEM 2. PROPERTIES
Since 1986, 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. In
April 1998, the lease term for this facility was extended to December 31,
2000, with one, two-year renewal option thereafter. The Company plans to
consolidate the functions of the Seton facility into the new Camden
facility. The Company's pharmaceutical manufacturing and warehouse
operations are located at two sites in Baltimore, Maryland.
In November 1996, the Company acquired a 70,000 square foot building,
located on 3.48 acres of land in the Camden Industrial Park in Baltimore,
Maryland. The Company has completed the renovation which included office,
warehouse and several laboratories in addition to the production area
build-out and installation of production support and processing equipment.
In July 1998, the FDA completed their initial general facility inspection
which made the facility operational for customer use.
In October 1998, the Company entered into a lease for a 7,700 square
foot building at 730 W. West Street and a vacant lot at 1200 South Paca
Street. The building is adjacent to CBL's property at 1111 South Paca
Street. The Company expects to utilize the building for expanded laboratory
space or a future customer who would best be serviced with a separate
dedicated facility.
Through May 31, 1997, the Company had leased 19,200 square feet of
space in Owings Mills, Maryland, which housed the Company's corporate
headquarters, warehouse facilities and shipping and receiving operations
prior to the relocation of those operations to the Camden Industrial Park
facility in February 1997. As of June 1, 1997, the Company negotiated the
termination of the Owings Mills facility lease obligation and paid 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, 1999, the Company's Class A Common Stock traded on the
Nasdaq Stock Market's National Market under the symbol CBLI.
5
The price range of the Company's Class A Common Stock during the fiscal
year ended March 31, 1999, was:
Stock Trading Price
- -----------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1999 1998
HIGH LOW HIGH LOW
PRICE RANGE OF COMMON STOCK:
- -----------------------------------------------------------------------------------------------------
First quarter $7.625 $6.625 $5.250 $4.125
Second quarter 8.500 5.500 6.500 $3.750
Third quarter 5.625 3.625 6.375 $5.000
Fourth quarter 4.500 1.750 7.750 $5.500
- -----------------------------------------------------------------------------------------------------
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 American Stock
Exchange Emerging Company Market Place, (the "AMEX-EC", where the Class A Common
Stock had previously traded), terminated as of the close of trading on May 23,
1997.
a. As of June 8, 1999, there were approximately 253 holders of record of
the Company's Class A Common Stock.
b. 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.
c. 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 effective on May 27, 1997.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following data has been derived from the audited consolidated financial
statements of the Company and should be read in conjunction with those
statements, which for fiscal years 1999, 1998, and 1997 are included in this
report.
SUMMARY OF OPERATIONS For the year ended March 31,
------------------------------------------------
1999 1998 1997 1996 1995
( $ in thousands, except per share amounts)
Revenues $6,747 $7,016 $8,654 $6,174 $6,982
Gross (loss) profit (676) 1,658 2,635 2,203 1,904
Operating expenses 2,930 2,276 1,844 1,665 1,539
Restructuring charge 1,240 -- -- -- --
(Loss) income from operations (4,846) (619) 791 537 365
Extraordinary loss on refinancing (265) -- -- -- --
Net (loss) income (5,414) (379) 504 309 566
Net (loss) earnings per share (1.02) (.08) .12 .08 .14
CONSOLIDATED BALANCE SHEET DATA At March 31,
------------------------------------------------
1999 1998 1997 1996 1995
( $ in thousands)
Working capital $(99) $4,873 $2,794 $2,161 $1,822
Total assets 13,241 16,493 13,445 4,320 4,138
Long term obligations 8,280 8,431 8,715 319 290
Stockholders' equity 1,895 7,064 4,043 3,384 3,075
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company's revenues are derived from two sources -- product development
services, which includes filling of clinical lots for testing and commercial
production of parenteral and other sterile product presentations. The Company
provides its customers in the pharmaceutical and biotechnology industries with
product development services, experimental products for use in clinical trials
and manufacturing services for FDA approved commercial drugs and medical
devices. The Company has particular experience and expertise in the development
and production of sterile, process-sensitive biopharmaceutical products. The
Company is ISO 9001 certified.
The Company's scientific, regulatory and engineering staff perform multiple
product development functions for CBL's customers, including regulatory research
and development of sterile product formulations, test method development and
validation, container-closure system design, accelerated and on-going product
stability studies, process design and manufacturing validations, and regulatory
and compliance consulting. 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.
During fiscal year ended March 31, 1999, the Company completed the
build-out and validation of its 70,000 square foot commercial production Camden
facility purchased by the Company in November 1996. The Company moved its
executive and administrative staff and warehouse operation into the building in
February 1997, during the renovation of the pharmaceutical production area. The
pharmaceutical production facility was mechanically completed in December 1997.
After a successful FDA inspection in July 1998, the Company initiated a
comprehensive sales and marketing program for the new facility. This included
hiring two experienced pharmaceutical sales people. During the year the Company
had 49 quality assurance audits/visits by potential and current customers, 40 of
which were after the successful FDA facility inspection. The audit visits are an
essential preliminary step in securing development and commercial business.
During the current year, the Company had 47 active customers as compared to 40
in the prior year.
In the fourth quarter of fiscal 1999, the Company implemented a management
realignment and workforce reduction program. In addition, the decision was made
to close the Seton facility and consolidate operations in the Camden facility as
soon as feasible, consistent with the Company's contractual obligations. This
consolidation is expected to provide the Company with operational efficiencies.
These decisions resulted in a restructuring charge of $1.2 million in the
current year.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1998
Revenues for the year ended March 31, 1999 were $6.7 million, down $300,000
or 4% from fiscal year 1998. Due to the expiration of the Allergan contract in
fiscal year 1998, there were no sales to Allergan in fiscal year 1999 compared
to sales of $900,000 in fiscal year 1998. Allergan, as a percentage of total
sales for fiscal years 1999, 1998 and 1997 was 0%, 14% and 47%, respectively.
The Company had 47 active customers in fiscal year 1999 as compared to 40 in
fiscal year 1998. CBL received FDA approval of its new facility in August 1998
and initiated a sales promotion program subsequent to the facility's approval.
While a portion of the revenues were generated at the Camden facility,
approximately 85% of revenues were generated at CBL's original Seton facility
during fiscal year 1999.
7
Although revenues were primarily associated with the Seton facility, the
fiscal year includes $2.2 million of operating costs associated with the Camden
facility. This resulted in a loss at the gross margin line as compared to a 24%
gross margin on fiscal year 1998 sales. These costs primarily include the
trained personnel needed to validate, start-up, maintain and operate the
facility, as well as fixed cost associated with the facility during a period of
limited revenues.
Operating expenses increased $654,000 to $2,930,000 for the fiscal year
1999. Primary factors for the expense increase include costs related to a sales
and marketing program initiated after the FDA approval of the Camden facility.
The program included the addition of two sales representatives and an increase
in CBL's advertising expenditures. Another factor in the increase was the
management reorganization costs which were not considered restructuring charges.
In January 1999, Mr. Thomas P. Rice was appointed President and Chief
Executive Officer. During the fourth quarter of the current fiscal year, CBL
initiated a workforce reduction program and made a decision to close the Seton
facility and consolidate all of its operations at the new Camden facility. The
Company recorded a provision of $1.2 million for restructuring costs associated
with these actions. On his appointment as President and CEO, Mr. Rice was
granted 200,000 non-qualified options to purchase CBL common stock at $1.00 per
share which was below the then current market price of $2.50 per share. The
Company recorded the expense of $150,000 for the vested portion of 100,000
options in general and administrative expense.
In summary, the fiscal year 1999 operating loss from operations of $4.8
million compared to the $619,000 loss in fiscal year 1998 primarily resulted
from the cost to operate, validate and maintain the new Camden facility during
the current fiscal year against limited revenues, restructuring costs,
implementation of a sales and marketing program for the new facility and other
costs related to the management realignment.
Interest income and other, net decreased during fiscal year 1999 compared
to fiscal year 1998 as the Company used the remaining bond funds received in
November 1996 and the proceeds of the June 1997 follow-on public offering for
the validation, start-up, and transitional costs of the new facility and general
corporate purposes. Interest expense increased in fiscal year 1999 compared to
fiscal year 1998 as the Company began recording the full interest expense,
following the FDA approval in August 1998 which allowed the new facility to be
operational. During the facility renovation, the Company capitalized a portion
of the interest related to the bond funds.
Due to the recent operating results and uncertainties related to the timing
of significant commercial production at the new Camden facility, the Company
established a valuation reserve for the tax benefit associated with the 1999
fiscal year loss. The valuation reserve associated with the tax benefit at March
31, 1999 approximates $2.0 million. The Company's effective income tax rate in
fiscal years 1999 and 1998 was 0% and 37%, respectively. As of March 31, 1999,
the Company had generated a net operating loss carry forwards available for
federal income tax purposes of $3.9 million .
Net loss for fiscal year 1999 was $5.4 million compared to a net loss of
$379,000 for fiscal year 1998. Earnings per share reflect a net loss of $1.02
for fiscal year 1999, compared to net loss of $0.08 per share in fiscal year
1998.
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1997
Revenues for the fiscal year ended March 31, 1998, were $7.0 million
compared to $8.7 million for fiscal year 1997. Fiscal year 1998 revenues reflect
an anticipated reduction in sales of Vitrax-TM- to Allergan, which amounted to
77%, but this reduction was partially offset by a 38% increase in sales to other
customers. Vitrax-TM- sales to Allergan as a percentage of total sales were 14%
and 47% for fiscal years 1998 and 1997, respectively. The Company secured 11 new
customers, accounting for sales of approximately $2.0 million during the fiscal
year. All operating revenues were generated by the Company's existing
experimental products facility, as the new pharmaceutical production facility
was under renovation throughout fiscal year 1998.
8
Gross margin was 24% of revenue for the fiscal year compared to 32% for
fiscal year 1997. The decrease was primarily the result of costs related to the
new facility, including the $550,000 in operating expenses. In addition, in
January 1998, additional personnel were hired initially to assist in start-up
and quality control testing associated with the new facility. These expenses
were necessary due to the Company's anticipated future need for trained and
experienced pharmaceutical personnel, although the effort of these personnel did
not contribute toward revenues in the current fiscal year.
Operating expenses for fiscal year 1998 were $2.3 million compared to $2.0
million in fiscal year 1997. The increase is attributed to the addition of a
marketing executive, plus the development of a multi-faceted marketing,
advertising and promotion program. With more aggressive marketing, advertising
and promotion, the Company seeks to continue to expand its customer base. In the
past, the Company has incurred minimal expenses related to uncollected accounts
receivable. However, as the Company pursues opportunities for significant
growth, management recognizes that receivable risks are increasing, and
consequently has increased its reserve for doubtful accounts above historical
levels as of March 31, 1998. Due to the compound effect of the increase in
expenses and the decrease in total revenues, operating expenses were 32% of
revenues in fiscal year 1998, compared to 23% in fiscal year 1997.
In summary, the operating loss in fiscal 1998 was a direct result of the
costs associated with the Company's production capacity expansion and its
increased marketing, advertising and promotion activities. Both of these
undertakings are integral to the achievement by the Company of its objective of
returning to profitability by expanding its share of the market for product
development and production services for the pharmaceutical and biotechnology
industries.
Interest income and other, net includes interest income on the $3,300,000
of net proceeds to the Company from the follow-on public offering of Class A
Common Stock, completed in June 1997. Interest expense of $150,000 relates to
the November 1996 loans to build-out the new commercial production facility.
The Company's effective income tax rate in fiscal years 1998 and 1997 was
37%. During fiscal year 1997, the Company fully utilized its remaining net
operating loss carry forward.
Net loss for fiscal year 1998 was $379,000 compared to a net profit of
$504,000 for fiscal year 1997. Earnings per share reflect a loss of $0.08 for
fiscal year 1998, compared to earnings of $0.12 per share in fiscal year 1997.
CAPITAL RESOURCES
In November 1996, the Company acquired its Camden facility in 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. Renovations to convert the building to a commercial
pharmaceutical production facility were completed in December 1997 and a FDA
general facility inspection was completed in July 1998.
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 the 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 and the City of Baltimore Development Corporation. In addition,
approximately $3,400,000 of pharmaceutical manufacturing equipment was financed
through equipment operating leases from companies affiliated with NationsBank,
American Equipment Leasing, BancBoston and CoreStates (now First Union National
Bank).
9
The loan from the City of Baltimore Development Corporation accrues
interest at a fixed rate of 6.5% per annum, amortized over 20 years. Monthly
interest only payments were due through November 1998 and monthly payments of
principal and interest are due thereafter through November 2016.
The bonds issued in November 1996 by MIDFA were variable rate, tax-exempt,
and issued pursuant to a Trust Indenture. The maximum annual interest rate
provided for under the terms of the bonds was 12% and, subject to certain
conditions, the bonds could be converted to fixed-rate at the option of the
Company. The Company entered into an interest rate swap agreement and, as a
result, the interest rate applicable to the bonds through November 2003 was
capped at 5.51%. 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, as of February 1, 1997, and principal
portions of the bonds are subject to redemption, 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 with respect to 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.
Due to capital expenditure restrictions on the tax-exempt bonds, the
Company converted the bonds to a taxable status in November 1998. These
restrictions could have hindered CBL's ability to effectively satisfy the needs
of new customers who would require additional capital expenditures for product
manufacturing purposes. In conjunction with the conversion, CBL entered into a
variable interest rate swap agreement on the taxable bonds with a maximum rate
of 6.99% through November 1, 2005. As of March 31, 1999, the interest rate was
5.99%.
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. As of
March 31, 1999, the Company was not in compliance on three covenants due to the
fiscal year operating loss. The EBITDA ratio covenant had been waived at March
31, 1998 through fiscal year 1999. Subsequent to March 31, 1999, the Bank
modified all the covenants as of March 31, 1999 and for the fiscal year ending
March 31, 2000. As of March 31, 1999, the Company was in compliance with the
modified covenants. In return for the covenant modifications, the Company agreed
to issue warrants for 75,000 shares of Class A Common stock at $2.25 per share,
which was the market price at the date of the agreement.
FINANCIAL CONDITION AND LIQUIDITY
On March 31, 1999, CBL had cash and cash equivalents of $411,000 compared
to $3.0 million 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 the Bank, pursuant to which a letter of credit was
issued as
10
credit enhancement for the bonds issued by the MIDFA. The proceeds of these
bonds were used by the Company to finance a portion of the purchase price, plus
the renovation and equipping of the Camden Industrial Park facility. The Company
continues to maintain a $750,000 Revolving Line of Credit from the First Union
National Bank of North Carolina, under which there was an outstanding balance of
$644,000 at March 31, 1999. Revolving line of Credit has the same ratio and
balance requirements discussed in relation to the MIDFA bonds. Not reflected in
cash and cash equivalents at March 31, 1999 is the $1.9 million private
placement, of convertible preferred shares and common stock which was completed
in May 1999.
The decrease in cash and cash equivalents of $2.6 million was due primarily
to the operating loss for the current fiscal year, which resulted in a use of
cash from operating activities totaling $2.4 million. The Company also invested
$1.3 million in property and equipment related primarily to the new Camden
facility of which $778,000 was provided from the bond financing of November
1996. CBL repaid $391,000 of debt primarily relating to the MIDFA bond and the
loan from the City of Baltimore Development Corporation. In addition, the
Company utilized $644,000 from its revolving line of credit with the Bank.
During the fiscal year ended March 31, 1999, the Company successfully validated
and completed the FDA initial inspection of the new Camden production facility,
and reorganized and expanded the sales and marketing organization to utilize the
additional capacity now available to the Company. The Company also initiated a
management reorganization, including hiring a new President and Chief Executive
Officer, implemented a workforce reduction and began to consolidate all
production into the Camden facility. These actions were taken to address the
Company's recent significant operating losses which resulted from costs
associated with the start-up of the new Camden facility and the related delay in
the new sales and marketing programs. The implementation of these plans have
resulted in a positive sales trend from February to May 1999 and the recent
signing of new customer agreements.
Subsequent to the March 31, 1999 fiscal year end, the Company raised
$1.9 million, net of related costs of approximately $100,000, with private
placements of convertible preferred shares and common stock. The Company, has
implemented a workforce reduction to reduce its operating expenses from
fiscal year 1999. These actions were taken to address the Company's recent
operating losses which resulted from costs associated with the start-up of
the new Camden facility and the related delay in the new sales and marketing
programs. The implementation of these plans have resulted in a positive sales
trend from February to May 1999 and the recent signing of new customer
agreements. During June 1999, the Company also negotiated revised loan
covenants with its primary lender allowing the Company to be in compliance at
March 31, 1999. The Company is required to achieve substantial growth in
revenues and improvement in operating results in order to meet these
covenants and its obligations through March 31, 2000. Management believes its
plans will generate sufficient cash resources to meet its covenants and cash
needs through at least April 2000. However, there can be no assurance this
will occur.
YEAR 2000 ISSUE
The year 2000 issue, (Y2K), refers to computer applications using only the
last two digits to refer to a year rather than all four digits. As a result,
some applications could fail or create incorrect results if they interpret "00"
as the year 1900 rather than 2000. The Company addressed the Y2K situation
during the construction the Camden facility.
In conjunction with the Company's expansion of its commercial production
capabilities, the Company has upgraded both its computer hardware and software.
Management believes the software upgrade will resolve the Y2K issue for the
Company. An independent consultant studied the Company's information technology
status and recommended changes, including the installation of commercially
available software packages. Installation of critical modules, which are Y2K
compliant, was completed by late calender year 1998. Time-sensitive internal
programs have been reviewed and require only minor modifications, at nominal
cost, to resolve the Year 2000 issue. The equipment installed in the Company's
new commercial production facility over the past two years is certified by the
suppliers as Y2K compliant.
CBL has requested critical suppliers to report the status of the Y2K
compliance of their information technology systems. Fifty-seven suppliers,
including CBL's major suppliers, have responded to CBL's questionnaire that they
are Y2K compliant. CBL is currently following up with suppliers that have not
responded to the questionnaire or who stated that they are working on Y2K
compliance. 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. 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. The Company is working on contingency plans which include increasing
inventory levels and potential staff adjustments. There can be no assurances
that these contingency plans will be successful.
11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are contained on pages 24 through 38 of this report.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
NAME AGE POSITION(S) WITH THE COMPANY
---- --- ----------------------------
William P. Tew, Ph.D. (1) 52 Chairman and Director
Thomas P. Rice 49 President, Chief Executive Officer and
Director
Narlin B. Beaty, Ph.D. 49 Chief Technical Officer and Director
John T. Janssen 60 Chief Financial Officer and Treasurer
Robert J. Mello, Ph.D. 48 Vice President and Secretary
Regis F. Burke (2) (3) 51 Director
Harvey L. Miller (2) (4) 59 Director
(1) Resigned as Chairman and Board member effective June 30, 1999.
(2) Member of Compensation, Stock Option and Audit Committees.
(3) Chairman of the Audit Committee.
(4) Chairman of the Stock Option and Compensation Committees.
WILLIAM P. TEW, PH.D., age 52, is a founder of the Company. He resigned as
Chief Executive Officer in January 1999 and as Director in June 1999. He was a
Director and Chairman of the Board of the Company since operations began in
1980, and was Chief Executive Officer from 1988 until January 1999. Dr. Tew also
holds an appointment as Research Associate in the Department of Biological
Chemistry at The Johns Hopkins University School of Medicine.
THOMAS P. RICE, age 49, was elected a Director in 1997 and was appointed
President and Chief Executive Officer as of January 11, 1999. Mr. Rice is a
Certified Public Accountant. In 1996, Mr. Rice founded Columbia Investments, LLC
which made selective investments, primarily in the health care industry. From
1993 to 1996, Mr. Rice was Executive Vice President, Chief Operating and
Financial Officer, and a member of the Board of Directors of Circa
Pharmaceuticals, Inc., a publicly-traded pharmaceutical firm. From 1991 to 1993,
Mr. Rice was a principal of Competitive Advantage, a Baltimore-based management
consulting firm. From 1985 to 1990, Mr. Rice was Vice President of
Administration and Finance of PharmaKinetics Laboratories, Inc., Baltimore,
Maryland.
NARLIN B. BEATY, PH.D., age 49, joined the Company in 1983 and currently
serves as Chief Technical Officer. He served as President of the Company from
1991 until May 1996, and has been a Director of the Company since 1989. Dr.
Beaty also served as Acting President of the Company from 1989 to 1991 and as
Director of Development for the Company from 1985 to 1988.
JOHN T. JANSSEN, age 60, a Certified Public Accountant, has over 35 years
of diversified financial management experience and, during the 12 years prior to
joining the Company, was a member of the Board of Directors and was Chief
Financial Officer of both Barre-National, Inc. of Baltimore, Maryland, and
Genesee Brewing Co. of Rochester, New York.
12
ROBERT J. MELLO, PH.D., age 48, has served as Vice-President of Quality and
Regulatory Affairs since 1994 and was appointed Secretary in 1998. He had been
with the Company for ten (10) years prior to spending 1992 to 1994 with Lederle
Laboratories as Manager, Validation Services where he established, coordinated
and monitored validation programs at four sites.
REGIS F. BURKE, age 51, was elected a Director of the Company in 1995. Mr.
Burke is a Certified Public Accountant in private practice, since 1988. Mr.
Burke specializes in corporate transaction consulting, business planning,
business valuation and litigation support services. Mr. Burke currently serves
as an outside director to several companies located in Maryland and
Pennsylvania. Prior to 1988, Mr. Burke was a partner with Touche Ross & Co., an
international accounting firm.
HARVEY L. MILLER, age 59, was elected a Director in 1996. Since 1980, Mr.
Miller has been Chairman of GSI Corporation, a manufacturer of high-tech wire
assemblies. Since 1986, Mr. Miller has been president of DM Realty Corporation,
a developer of commercial real estate sites. Mr. Miller was elected a Director
of Maryland Midland Railway, Inc. in March 1997.
BOARD COMMITTEES AND MEETINGS
The Board of Directors has three standing committees: a Compensation
Committee, an Audit Committee and a Stock Option Committee. The current members
of each committee are Messrs. Burke and Miller. The Compensation Committee makes
recommendations concerning salaries and incentive compensation for employees of
and consultants to the Company. The Audit Committee reviews the results and
scope of the audit and other services provided by the Company's independent
public accountants. The Stock Option Committee administers and grants stock
options and awards pursuant to the Company's Incentive Stock Option Plans.
The Audit Committee, which includes the outside directors, met with the
Company's independent public accountants, both before and after the year-end
audit.
During the fiscal year ended March 31, 1999, the Board of Directors held
six formal meetings. All directors attended at least 80% of the meetings.
13
ITEM 11. EXECUTIVE COMPENSATION AND RELATED INFORMATION
SUMMARY OF COMPENSATION
The following table sets forth the compensation earned by the Company's
Chief Executive Officer and the Company's four other highest compensated
executive officers for services rendered in all capacities to the Company for
the fiscal years ended March 31, 1999, 1998, and 1997.
SUMMARY COMPENSATION
-----------------------------------------------------------------------------
ANNUAL COMPENSATION
----------------------------------------
SALARY AND INCENTIVE LONG TERM COMPENSATION
COMPENSATION --------------------------------
---------------------------------------- OTHER ANNUAL STOCK
YEAR ($) BONUS($) COMPENSATION($) OPTIONS(#)
---- -------------- -------- --------------- ----------
William P. Tew, Ph.D.......................... 1999 $174,818 $51,353(4)(1) 154,089
Chairman (A) 1998 $194,428 $ 849(1) 30,130
1997 $187,219 $ 270(1) 75,000
Thomas P. Rice................................ 1999 $ 34,134(2)(6) $ 7,200(3) 253,000(5)
President and Chief 1998 -- $ 9,600( 3) 3,000(3)
Executive Officer 1997 -- $ 1,600( 3) 8,000(3)
Narlin B. Beaty, Ph.D......................... 1999 $143,601 -- --
Chief Technical Officer 1998 $150,053 -- 13,786
1997 $145,434 -- 30,000
John T. Janssen............................... 1999 $141,521 -- --
Chief Financial Officer and Treasurer 1998 $147,880 $4,000 -- 13,786
1997 $141,299 -- 20,000
Robert J. Mello, Ph.D......................... 1999 $138,566 -- --
Secretary and Vice President 1998 $144,792 -- 13,786
Quality and Regulatory Affairs 1997 $138,698 -- 30,000
- -----------------------------
(A) Dr. Tew resigned as Chairman effective June 30, 1999.
(1) Represents amounts paid by the Company for life insurance premiums on
behalf of Dr. Tew.
(2) Represents a partial fiscal year. Mr. Rice was appointed President of the
Company in January 1999, after a two-year tenure on the Board of Directors.
(3) Represents fees and options given to Mr. Rice as a non-employee director.
(4) Includes $50,000 paid in January 1999 as part of management realignment.
(5) Includes 3,000 options given Mr. Rice as an outside director and 250,000
upon joining CBL.
(6) Includes $17,067 of deferred compensation.
EMPLOYMENT AGREEMENT
William P. Tew, Ph.D., modified his employment agreement of November 1996
as a result of the January 1999 management realignment. In exchange for Dr. Tew
canceling his employment agreement he was retained as Chairman through June 30,
1999, at a monthly salary of $10,416. Beginning July 1, 1999 through June 30,
2000, Dr. Tew will serve as a consultant to the Company at a monthly retainer of
$20,416 through December 31, 1999 and $20,000 per month through June 30, 2000.
Dr. Tew also received a non-qualified stock option to purchase 125,000 shares at
an exercise price of $3.8125 per share, which expires in December 2008.
14
Mr. Rice entered into an agreement with the Company on January 11, 1999.
Upon joining the Company as President and Chief Executive Officer, Mr. Rice will
receive an annual salary of $150,000 of which $75,000 is deferred until January
2000. The agreement continues through December 31, 2000 and is automatically
renewed for one year periods unless Mr. Rice or the Company give 90 day written
notice of non-renewal. Mr. Rice was granted qualified stock options for 50,000
shares which were vested upon grant and had an exercise price of $3.75 per
share, which was the market at the day of the grant. Mr. Rice also received
non-qualified stock options for 200,000 shares at $1.00 per share, which was
below the then $2.50 market price. 100,000 of these shares vested upon grant.
The vesting of the remaining shares vest at 20,000 shares per year over the next
five years or based upon the achievement of certain milestones, which if
achieved would result in accelerated vesting.
The Company has also entered into employment agreements with Dr. Beaty, Mr.
Janssen and Dr. Mello. These agreements generally provide for payment of a base
salary, together with incentive compensation in an amount to be determined by
the Board of Directors or Compensation Committee from time to time. Base
salaries established in the employment agreements for Dr. Beaty, Mr. Janssen and
Dr. Mello are $131,200, $129,300, and $126,000, respectively. The base salary
applicable to any executive officer may be changed through action of the
Compensation Committee or Board of Directors.
The employment agreements provide, in the case of Dr. Beaty, for an initial
term of three years, with successive three-year renewal terms; and, in the case
of Mr. Janssen and Dr. Mello, for an initial term of two years, with successive
two-year renewal terms. The initial term of each employment agreement commenced
July 1, 1995. Pursuant to the employment agreements, each of the executive
officers is required to devote substantially all of his business time to Company
related matters and has agreed not to solicit clients or customers of the
Company for a period following termination of employment.
The employment agreements also provide for severance payments to the
executive officers of the Company in certain circumstances. Drs. Beaty and Mello
and Mr. Janssen are each entitled to receipt of severance payments in an amount
equal to approximately one-half of their respective annual compensation upon
termination of their employment following a breach by the Company of their
respective employment agreements or for good reason by the employee.
STOCK OPTION GRANTS
Stock options were granted during the fiscal year to the officers listed
below:
Potential Realizable
Value At
Assumed Annual
% of Total Appreciation
Options Exercise For Option Term (4)
Shares Granted Price Expiration ---------------------------
Granted in fiscal 99 Per Share Date 5%($) 10%($)
------- ------------ --------- -------------- ----------- ---------
William P. Tew 29,098(1) 5.8% $7.750 07/09/08 $145,900 $384,900
125,000(1) 24.9% $3.813 12/22/08 $313,800 $827,900
Thomas P. Rice 50,000(1) 10.0% $3.750 01/11/09 $121,300 $320,062
200,000(2) 39.8% $1.000 12/31/08 $323,500 $863,500
3,000(3) 0.6% $8.125 07/09/08 $ 15,800 $ 41,600
(1) Options were fully exercisable when granted.
(2) Non-qualified options. 100,000 were vested upon grant and were issued at
$1.00 compared to $2.50 market on date of grant. The balance of the shares
vest over a five year period or upon a qualifying event.
(3) Granted as an outside director prior to becoming an officer.
(4) Amounts represent hypothetical gains that could be achieved for the
respective options at the end of the ten-year option term. The assumed 5%
and 10% rates of stock appreciation are mandated by rules of the Securities
and Exchange Commission and do not represent the Company's estimate of the
future market price of the Common Stock.
15
STOCK OPTION EXERCISES AND HOLDINGS
The table below sets forth information concerning the exercise of options
during the 1999 fiscal year and unexercised options held as of the end of the
fiscal year by the Company's Chief Executive Officer and the Company's four
other most highly compensated executive officers.
AGGREGATED OPTION EXERCISES IN THE 1999 FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
SHARES AT FISCAL AT FISCAL
ACQUIRED VALUE YEAR-END (#) YEAR-END ($) (1)
ON EXERCISE REALIZED EXERCISABLE (E)/ EXERCISABLE (E)/
NAME (#) ($) UNEXERCISABLE (U) UNEXERCISABLE (U)
- ---- ----------- --------- ----------------- ----------------
William P. Tew, Ph.D. -- -- 202,969 (E) --
-- -- 56,250 (U) --
Thomas P. Rice -- -- 107,000 (E) $87,500 (E)
-- -- 157,000 (U) $87,500 (U)
Narlin B. Beaty, Ph.D. -- -- 36,286 (E) $ 5,625 (E)
27,500 (U) $ 1,875 (U)
John T. Janssen -- -- 23,786 (E) $ 1,875 (E)
-- -- 25,000 (U) $ 3,750 (U)
Robert J. Mello, Ph.D. 5,000 $28,125 26,286 (E) $ 2,187 (E)
32,500 (U) $ 4,687 (U)
- -------------------------
(1) Assumes, for all unexercised in-the-money options, the difference between
fair market value and the exercise price. The fair market value on March 31,
1999 was $1.875 per share.
Robert J. Mello, Ph.D., Secretary and Vice President of Quality and
Regulatory Affairs exercised options on April 21, 1998 to purchase 5,000 shares
at $1.50 which had been granted November 30, 1995.
COMPENSATION OF BOARD OF DIRECTORS
Executive Officers of the Company who also serve on the Board of Directors
receive no additional compensation for their service as such. Members of the
Board of Directors who are not also employed by the Company receive annual
compensation of $9,600 per year for their service on the Board of Directors. In
addition, the Company grants to each director, upon that individual's initial
appointment or election to the Board of Directors, an option to purchase 8,000
shares of Common Stock at the then current market price. Accordingly, Mr. Burke
was granted an option to purchase 8,000 shares of Common Stock at $1.50 per
share in November 1995, Mr. Miller was granted an option to purchase 8,000
shares of Common Stock at $3.125 per share in November 1996, and Mr. Rice was
granted an option to purchase 8,000 shares of Common Stock at an exercise price
of $5.1875 per share in March 1997. Each of these respective options is
evidenced by a Director's Agreement and a related Option Agreement by and
between the Company and the director and becomes exercisable based on a vesting
schedule over a four-year period measured from the date of grant.
16
In addition, in March 1997, the Board of Directors approved the 1997
Directors' Stock Option Plan of the Company (the "Directors' Plan"). The
Directors' Plan provides for the issuance of a qualified stock option to
purchase 3,000 shares of Common Stock to each director of the Company who is not
an officer and who is serving as chairperson of any standing committee of the
Board of Directors at the date of grant. Options under the Directors' Plan are
automatically granted annually at the first meeting of the Board of Directors
following the Annual Meeting of the Stockholders at an exercise price equal to
the then current market price of the Common Stock. Accordingly, on August 12,
1997, options to purchase 3,000 shares each were granted to Messrs. Burke,
Miller and Rice, exercisable at the then current market price of $6.00 per
share. Options granted under the Directors' Plan generally vest on the first
anniversary of the date of grant, provided that the director is deemed under the
Directors' Plan to have served as chairperson. In accordance with the 1997
Directors' Stock Option Plan on July 9, 1998, options to purchase 3,000 shares
each were issued to Messrs. Burke, Miller and Rice exercisable at $8.125, the
then current market price.
17
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of June 1, 1999, with respect
to the number of shares owned by each person who is known by the Company to own
beneficially 5% or more of its Class A Common Stock, each director of the
Company and all directors and officers of the Company as a group.
NAME AND ADDRESS OF SHARES BENEFICIALLY PERCENTAGE BENEFICIALLY
BENEFICIAL OWNER OWNED(1) OWNED
- ---------------------- ------------------- -----------------------
William P. Tew, Ph.D. 559,907(2) 7.9%
1111 South Paca Street
Baltimore, MD 21230
Regis F. Burke 63,200(3) .9%
6 Kincaid Court
Baldwin, MD 21013
Harvey L. Miller 92,500(4) 1.3%
200 Village Square
Cross Keys
Baltimore, MD 21210
Thomas P. Rice 162,500(5) 2.3%
4209 Buckskin Wood Drive
Ellicott City, MD 21042
Narlin B. Beaty, Ph.D. 167,791(6) 2.4%
13406 Blythenia Road
Phoenix, MD 21131
Corporate Opportunities Fund (Institutional) L.P. 798,458(8) 11.2%
126 East 56th Street
New York, NY 10022
Corporate Opportunities Fund L.P. 147,427(9) 2.1%
126 East 56th Street
New York, NY 10022
All directors and officers as a group 1,223,131(7) 17.2%
(7 persons)
- ------------------------------------
(1) Unless otherwise noted, all shares indicated are held with sole voting and
sole investment power.
(2) Includes 202,969 shares purchasable under option exercisable within 60 days
of June 1, 1999; does not include 10,000 shares owned by Pamela Maupin,
wife of Dr. Tew, with respect to which shares Dr. Tew disclaims beneficial
ownership.
(3) Includes 12,000 shares purchasable under option exercisable within 60 days
of June 1, 1999.
(4) Includes 10,000 shares purchasable under option exercisable within 60 days
of June 1, 1999.
(5) Includes 110,000 shares purchasable under option exercisable within 60 days
of June 1, 1999.
(6) Includes 36,286 shares purchasable under option exercisable within 60 days
of June 1, 1999.
(7) Includes 475,827 shares purchasable under option exercisable within 60 days
of June 1, 1999.
(8) Includes the common stock equivalent of Series A Preferred Stock purchased
May 20, 1999.
(9) Includes the common stock equivalent of Series A Preferred Stock purchased
May 20, 1999.
18
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..................................... 23
Consolidated Balance Sheets - March 31, 1999
and 1998...................................................... 24
Consolidated Statements of Operations - Years
Ended March 31, 1999, 1998 and 1997............................ 25
Consolidated Statements of Changes in Stockholders'
Equity - Years Ended March 31, 1999,
1998 and 1997.................................................. 26
Consolidated Statements of Cash Flows -
Years Ended March 31, 1999, 1998 and 1997...................... 27
Notes to Consolidated Financial Statements................................... 28-36
(a)(2). Schedules
---------
Schedule Number Description Page Number
- --------------- ----------- -----------
II Valuation and Qualifying Accounts 37
Exhibit Description Page Number
- ------- ----------- -----------
23.1 Consent of Independent Public Accountant 38
(a)(3). Exhibits
-------
F 3.01 Articles of Restatement.
C 3.02 Amended and Restated By-Laws of the Registrant
A 10.01 Second Incentive Stock Option plan of the Registrant.
A 10.02 Third Incentive Stock Option Plan of the Registrant.
A 10.03 Lease, dated December 26, 1986, between Centennial/Warren
Technology Associates Limited Partnership, as predecessor of
Jiffy Lube International of Maryland, Inc., and the Registrant.
B 10.04 Loan and Security Agreement, dated September 2, 1994, by and
between the Registrant and the Bank of Baltimore Bancorp Leasing
and Financial Inc., now known as First Union National Bank of
Maryland.
D 10.05 Employment Agreement dated as of July 1, 1995 by and between the
Registrant and William P. Tew, Ph.D.
D 10.06 Employment Agreement dated as of July 1, 1995 by and between the
Registrant and Narlin B. Beaty, Ph.D.
D 10.07 Employment Agreement dated as of July 1, 1995 by and between the
Registrant and John T. Janssen.
19
D 10.08 Employment Agreement dated as of July 1, 1995 by and between the
Registrant and Robert J. Mello, Ph.D.
E 10.09 Loan Agreement dated as of November 1, 1996, by and between the
Registrant and Maryland Industrial Development Financing
Authority
E 10.10 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.
E 10.11 Collateral Pledge Agreement dated as of November 1, 1996, by and
between the Registrant and First Union National Bank of North
Carolina.
E 10.12 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.
E 10.13 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.
D 10.14 Fourth Incentive Stock Option Plan of the Registrant.
F 10.15 Letter Agreement dated November 21, 1996, by and between
Registrant and William P. Tew, Ph.D.
F 10.16 Letter Agreement dated November 21, 1996, by and between
Registrant and Narlin B. Beaty, Ph.D.
F 10.17 Letter Agreement dated November 21, 1996, by and between
Registrant and John T. Janssen.
F 10.18 Letter Agreement dated November 21, 1996, by and between
Registrant and Robert J. Mello, Ph.D.
F 10.19 1997 Directors' Stock Option Plan of the Registrant
G 10.20 Letter Agreement dated February 10, 1999, by and between
Registrant and William P. Tew, Ph.D.
H 10.21 Employment Agreement dated as of January 11, 1999 by and between
the Registrant and Thomas P. Rice.
A22 Subsidiary of the Registrant.
A23.1 Consent of Independent Public Accountants
A27 Financial Data Schedule
- -------------------
A Incorporated by reference to Exhibits to Company's Registration
Statement on Form S-1 (No. 333-17655).
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 the Company's Quarterly Report on
Form 10-Q for fiscal quarter ended September 30, 1994.
D Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for fiscal quarter ended June 30, 1995.
E Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for fiscal quarter ended December 31, 1996.
20
F Incorporated by reference to Exhibits to the Company's
Registration Statement on Form S-2 (No. 333-25903).
G Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for fiscal quarter ended December 31, 1998.
H Incorporated by reference to Exhibits to Company's Annual Report
on Form 10-K for Fiscal Year Ended March 31, 1999.
(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).
The Registrant filed a current Report on Form 8-K on May 24,
1999, reporting an Item 5 event (the private placements of
Convertible Preferred and Common Stock)
21
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/Thomas P. Rice By: /s/ John T. Janssen
--------------------------------- ----------------------------
Thomas P. Rice John T. Janssen
President and Chief Executive Treasurer and Chief Financial
Officer Officer
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/Thomas P. Rice President, Chief June 28, 1999
- ------------------------- Executive Officer and
Thomas P. Rice Director
/s/Narlin B. Beaty, Ph.D. Chief Technical Officer June 28, 1999
- ------------------------- and Director
Narlin B. Beaty, Ph.D.
/s/Regis F. Burke Director June 28, 1999
- -------------------------
Regis F. Burke
/s/Harvey L. Miller Director June 28, 1999
- -------------------------
Harvey L. Miller
22
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, 1999 and 1998, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the years ended March 31,
1999, 1998 and 1997. 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, 1999 and 1998, and the results
of their operations and their cash flows for the years ended March 31, 1999,
1998 and 1997, 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,
June 11, 1999
23
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS MARCH 31, 1999 MARCH 31, 1998
CURRENT ASSETS
Cash and cash equivalents $410,595 $3,041,705
Restricted cash 350,000 350,000
Accounts receivable, net 1,114,674 1,259,560
Inventories 491,177 524,996
Prepaid expenses and other assets 477,319 603,404
Deferred tax asset 124,084 92,208
----------- -----------
TOTAL CURRENT ASSETS 2,967,849 5,871,873
Property and equipment, net 10,171,932 9,428,831
Bond funds held by the trustee -- 778,454
Deferred financing costs and other assets 101,375 413,933
----------- -----------
TOTAL ASSETS $13,241,156 $16,493,091
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $799,089 $403,372
Line of credit 644,445 --
Current portion of long term debt 717,369 389,547
Current portion of capital lease obligations 853 28,098
Current portion of accrued restructuring costs 523,094 --
Deferred revenue 382,208 177,593
----------- -----------
TOTAL CURRENT LIABILITIES 3,067,058 998,610
Long term debt, net of current portion 7,564,276 8,283,102
Capital lease obligations, net of current portion -- 854
Accrued restructuring costs, net of current portion 561,215 --
Other liabilities 30,000 22,523
Deferred tax liability 124,084 124,084
----------- -----------
TOTAL LIABILITIES 11,346,633 9,429,173
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Class A common stock, par value $.01 per share;
8,000,000 shares authorized; 5,365,101 and
5,276,195 shares issued and outstanding 53,651 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 7,613,014 7,369,039
Accumulated deficit (5,772,142) (357,883)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,894,523 7,063,918
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $13,241,156 $16,493,091
----------- -----------
----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE
SHEETS.
24
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31,
1999 1998 1997
---- ---- ----
REVENUES $6,747,045 $7,015,858 $8,653,793
Cost of sales 7,423,073 5,357,953 6,018,961
----------- ----------- -----------
GROSS (LOSS) PROFIT (676,028) 1,657,905 2,634,832
OPERATING EXPENSES:
General and administrative 1,889,185 1,533,388 1,430,976
Selling 1,040,708 743,095 413,136
Restructuring charges 1,239,577 -- --
----------- ----------- -----------
(LOSS) INCOME FROM OPERATIONS (4,845,498) (618,578) 790,720
Interest expense (453,108) (203,864) (27,315)
Interest income and other, net 149,031 221,445 36,143
----------- ----------- -----------
(LOSS) INCOME FROM OPERATIONS BEFORE TAXES
AND EXTRAORDINARY ITEM (5,149,575) (600,997) 799,548
Benefit from (provision for) taxes -- 222,369 (295,833)
----------- ----------- -----------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM (5,149,575) (378,628) 503,715
EXTRAORDINARY LOSS ON REFINANCING 264,684 -- --
----------- ----------- -----------
NET (LOSS) INCOME $(5,414,259) $(378,628) $503,715
----------- ----------- -----------
----------- ----------- -----------
(LOSS) INCOME PER COMMON SHARE:
Basic -
(Loss) income before extraordinary item $(0.97) $(0.08) $0.12
----------- ----------- -----------
----------- ----------- -----------
Net (loss) income $(1.02) $(0.08) $0.12
----------- ----------- -----------
----------- ----------- -----------
Diluted -
(Loss) income before extraordinary item $(0.97) $(0.08) $0.12
----------- ----------- -----------
----------- ----------- -----------
Net (loss) income $(1.02) $(0.08) $0.12
----------- ----------- -----------
----------- ----------- -----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 5,323,806 4,991,251 4,030,832
----------- ----------- -----------
----------- ----------- -----------
Diluted 5,323,806 4,991,251 4,190,767
----------- ----------- -----------
----------- ----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
25
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK TOTAL
---------------------------- ADDITIONAL ACCUMULATED STOCKHOLDERS'
SHARES PAR VALUE PAID-IN CAPITAL EARNINGS/(DEFICIT) EQUITY
------ --------- --------------- ------------------ -------------
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
Issuance of shares pursuant
to follow-on public offering 1,034,793 10,348 3,276,693 -- 3,287,041
Issuance of shares pursuant to
exercise of stock options 126,844 1,269 111,510 -- 112,779
Net loss -- -- -- (378,628) (378,628)
---------- ----------- ----------- ----------- ----------
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 88,906 889 15,850 -- 16,739
Vesting of below market
stock options grants -- -- 228,125 -- 228,125
Net loss -- -- -- (5,414,259) (5,414,259)
---------- ----------- ----------- ----------- ----------
BALANCE, MARCH 31, 1999 5,365,101 $53,651 $7,613,014 $(5,772,142) $1,894,523
---------- ----------- ----------- ----------- ----------
---------- ----------- ----------- ----------- ----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
26
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31,
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(5,414,259) $(378,628) $503,715
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Extraordinary item 264,684 -- --
Depreciation 509,548 346,994 360,922
Non-cash compensation expense 228,125 -- --
Deferred income taxes -- (26,133) 62,050
Decrease (increase) in accounts receivable 144,886 (544,767) (43,167)
Decrease in inventories 33,819 235,079 927,541
Decrease (increase) in prepaid expenses and other assets 94,209 (280,628) (129,139)
Decrease (increase) in other assets 53,422 (42,222) --
Increase (decrease) in accounts payable
and accrued expenses 395,717 (147,740) 199,370
Increase in accrued restructuring costs 1,084,309 -- --
Increase (decrease) in deferred revenue 204,615 91,706 (129,626)
Increase (decrease) in other liabilities 7,477 (30,067) (30,067)
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (2,393,448) (776,406) 1,721,599
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,252,649) (4,859,980) (3,612,600)
Decrease in bond funds held by trustee 778,454 3,904,543 (4,682,998)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (474,195) (955,437) (8,295,598)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short term borrowings, net 644,445 -- --
Repayments of long-term debt (391,004) (23,129) (22,419)
Repayments of capital lease obligations (28,099) (29,022) (29,264)
Net proceeds from sale of stock 16,739 3,399,819 5,000
Payment of debt issuance costs (5,548) (7,064) (336,957)
Increase in restricted cash -- -- (350,000)
Proceeds from long-term note and bond -- -- 8,500,000
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 236,533 3,340,604 7,766,360
----------- ----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,631,110) 1,608,761 1,192,361
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,041,705 1,432,944 240,583
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $410,595 $3,041,705 $1,432,944
----------- ----------- -----------
----------- ----------- -----------
CASH PAID DURING THE YEAR FOR:
Interest $453,108 $203,865 $27,315
----------- ----------- -----------
----------- ----------- -----------
Income taxes $ -- $153,800 $7,733
----------- ----------- -----------
----------- ----------- -----------
NON-CASH TRANSACTIONS:
Note payable - maintenance agreement $ -- $150,000 $ --
----------- ----------- -----------
----------- ----------- -----------
Issuance of stock pursuant to purchase of building $ -- $ -- $150,000
----------- ----------- -----------
----------- ----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
27
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
1. ORGANIZATION
Chesapeake Biological Laboratories, Inc. ("CBL" or the "Company") is a
provider of pharmaceutical and biopharmaceutical parenteral product
development and production services on a contract basis for a broad range
of customers, from major international pharmaceutical firms to emerging
biotechnology companies. Since 1990, CBL has provided its parenteral
product development services to more than 100 pharmaceutical and
biotechnology companies and has contributed to the development and
production of more than 100 therapeutic products intended for human
clinical trials. Customers contract with the Company to produce development
stage products for use in U.S. Food and Drug Administration ("FDA")
clinical trials and to produce and manufacture FDA approved parenteral
products for commercial sale. The Company's business depends in part on
strict government regulation of the drug development process, especially in
the United States. CBL's production facilities operate under the current
Good Manufacturing Practices ("cGMP") established and regulated by the FDA.
The Company's operations are treated as one operating segment,
pharmaceutical and biopharmaceutical product development and production
services, as it only reports profit and loss information on an aggregate
basis to operating management of the Company.
During the fiscal year ended March 31, 1999, the Company successfully
validated and completed the FDA initial inspection of the new Camden
production facility, and reorganized and expanded the sales and marketing
organization to utilize the additional capacity now available to the
Company. The Company also initiated a management reorganization, including
hiring a new President and Chief Executive Officer, implemented a workforce
reduction and began to consolidate all production into the Camden facility.
These actions were taken to address the Company's recent significant
operating losses which resulted from costs associated with the start-up of
the new Camden facility and the related delay in the new sales and
marketing programs. The implementation of these plans have resulted in a
positive sales trend from February to May 1999 and the recent signing of
new customer agreements. Additionally as described below, in May 1999, the
Company raised $1.9 million, net of related fees of $100,000, in private
placements of common and convertible preferred stock. During June 1999, the
Company also negotiated revised loan covenants with its primary lender
allowing the Company to be in compliance at March 31, 1999 (see Note 8).
The Company is required to achieve substantial growth in revenues and
improvement in operating results in order to meet these covenants and its
obligations through March 31, 2000. Management believes its plans will
generate sufficient cash resources to meet its covenants and cash needs
through at least April 2000. However, there can be no assurance this will
occur.
In May 1999, the Company raised $450,000 through the private placement sale
of 225,000 shares of its Common Stock to eight investors. The investors
include board members Thomas P. Rice, Harvey L. Miller, Regis F. Burke, and
Narlin B. Beaty. The proceeds from the sale will be used for general
corporate purposes.
In May 1999, the Company also raised $1,451,000, net of related costs of
approximately $100,000, through the sale of 15,510 shares of its Series A
convertible Preferred Stock (the "Preferred Stock") together with warrants
to purchase an aggregate of 51,700 shares of the Company's Common Stock at
an exercise price of $1.50 per share. The Preferred Stock is convertible
into the Company's Common Stock at $1.50 per share. Under the terms of the
Preferred Stock, the investors are permitted, as a separate class, to elect
one person to the Company's Board of Directors. The proceeds from the sale
will be used for general corporate purposes.
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 Corporation.
Significant intercompany accounts have been eliminated in consolidation.
28
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
ACCOUNTS RECEIVABLE
Accounts receivable are stated net of allowance for doubtful accounts of
$55,490 and $70,300 as of March 31, 1999 and 1998, respectively.
INVENTORIES
Inventories consist of raw materials and work-in-process, which are stated
at the lower of cost or market. Cost is determined using the first-in,
first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Equipment, furniture and fixtures are 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. Assets under
construction are not depreciated until placed into service. Interest and
construction overhead costs incurred during the construction period are
capitalized.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include amounts held in bank accounts and amounts
invested in accounts with an a original 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 8).
REVENUE RECOGNITION
The Company recognizes income when product is shipped or the service has
been provided to the customer. Deferred revenue 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 (see Note 12).
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 the
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 many customers, the Company requires an up-front
payment on orders. There are several 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 thereto, an agreement was reached between CBL
and Allergan which called for the production of VitraxTM 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 VitraxTM exclusively from the
Company.
29
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In September 1997, the Company made its final shipment of VitraxTM to
Allergan and no further shipments have been made and no further revenues
are expected from Allergan relative to VitraxTM.
There were no sales to Allergan in fiscal year 1999. During the years ended
March 31, 1998 and 1997, approximately 14% and 49% of CBL's sales were to
Allergan, respectively. During the years ended March 31, 1999, 1998 and
1997, sales to the largest customer, exclusive of Allergan, which was a
different customer each year, were 13%, 6% and 8%, of CBL's sales,
respectively.
4. INVENTORIES
Inventories consisted of the following at March 31, 1999 and 1998:
1999 1998
---- ----
Raw materials $ 273,506 $ 280,344
Work-in-process 217,671 244,652
------- -------
$ 491,177 $ 524,996
------- -------
------- -------
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at March 31, 1999 and
1998:
1999 1998
---- ----
Land $ 253,763 $ 253,763
Building 9,075,034 2,131,538
Construction in progress -- 6,119,240
Laboratory equipment 2,478,034 2,173,321
Furniture and fixtures 555,695 432,015
Leasehold improvements 446,992 446,992
----------- -----------
12,809,518 11,556,869
Less: Accumulated depreciation and
amortization (2,637,586) (2,128,038)
----------- -----------
$10,171,932 $9,428,831
----------- -----------
----------- -----------
Depreciation and amortization expense for the years ended March 31, 1999,
1998 and 1997 was $509,548, $346,994 and $360,922, respectively.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at March 31, 1999 and 1998 are
summarized as follows:
1999 1998
---- ----
Accounts payable, trade $ 449,257 $ 250,016
Accrued expenses 286,048 100,661
Accrued vacation payable 63,784 52,695
---------- ---------
$ 799,089 $ 403,372
---------- ---------
---------- ---------
7. BANK FINANCING ARRANGEMENTS
During fiscal 1995, the Company obtained a $750,000 Revolving Line of
Credit Facility secured by the Company's inventory and accounts receivable,
and by equipment acquired by the Company. The Revolving Line of Credit
Facility, which is used to fund operating requirements, provides for
interest at 3.00% over the LIBOR Market Index Rate. The balance outstanding
on the Revolving Line of Credit Facility as of March 31, 1999 was $644,445
and there were no balances outstanding on the Revolving Line of Credit
Facility as of March 31, 1998 and 1997.
The average outstanding balance on the Revolving Line of Credit Facility
for fiscal years 1999, 1998 and 1997 was $370,000, $24,000 and $21,000,
respectively. The average interest rate on the Revolving Line of Credit
Facility for fiscal years 1999, 1998 and 1997 was 7.96%, 8.69% and 8.75%,
respectively.
30
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
There are certain covenants contained in the Revolving Line of Credit
Facility. During 1999, certain covenant violations were waived and the
covenants were amended going forward, effective March 31, 1999. As of
March 31, 1999, the Company is in compliance with all amended covenants.
8. 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 now completed renovating in order to provide office, warehouse
and pharmaceutical manufacturing space.
The purchase and renovation costs for this building were financed with a
$7,000,000 Economic Development Bond issued by the Maryland Industrial
Development Financing Authority (the "MIDFA Bonds"), and a $1,500,000 loan
from the Mayor and City Council of Baltimore acting through the Department
of Housing and Community Development and the City of Baltimore Development
Corporation (the "Loan"). The bonds were tax exempt and originally carried
a variable rate with an option to be converted to a fixed rate.
Also in November 1996, the Company 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 resulted
in a maximum interest rate of 5.51% on $6,000,000 of the outstanding bonds.
The agreement originally expired in November 2003.
During November 1998, the Company converted the $7,000,000 MIDFA Bonds from
tax-exempt to taxable bonds in order to eliminate the capital expenditure
restriction associated with the tax-exempt bonds. In connection with the
conversion, the Company also amended the 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 amended agreement results in a
maximum interest rate of 6.99% on all of the outstanding bonds. This
amended agreement will expire in November 2005. The fair value of the
interest rate agreement at March 31,1999 was approximately $145,000.
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, and principal portions of the
bonds are subject to redemption, in part, commencing November 1998. The
maturity date is August 1, 2018.
In connection with the conversion of the bonds from tax-exempt to
taxable, the Company incurred costs of approximately $87,000 which have
been capitalized as deferred financing costs in the accompanying
consolidated balance sheet as of March 31, 1999. These cost will be
amortized over the remaining term of the bonds. The remaining unamortized
deferred financing costs associated with the initial financing of
$264,684, was accounted for as an extinguishment of debt and is presented
in the consolidated statement of operations as extraordinary loss on
refinancing, net of tax.
There are certain covenants contained in the debt agreement. During 1999,
certain covenant violations were waived and the covenants were amended
going forward, effective March 31, 1999. As of March 31, 1999, the Company
is in compliance with all amended covenants.
The Loan from the City of Baltimore has an interest rate which is fixed at
6.5%. The Loan required interest only payments for the first two years and,
beginning November 1998, monthly principal and interest payments which
expire in November 2016.
In connection with the financing, the Company has capitalized net
construction period interest costs of $217,000 and $337,000 in fiscal years
1999 and 1998 respectively, which is being amortized over the useful life
of the building. The Company's other long term debt as of March 31, 1999 is
an equipment loan which bears interest at 8.5% and is repayable through
April 1, 1999 in variable monthly installments.
31
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The remaining principal payments on the Company's long term debt as of
March 31, 1999, are as follows:
Year Ending March 31,
---------------------
2000 $717,369
2001 728,019
2002 672,834
2003 671,373
2004 and thereafter 5,492,050
----------
$8,281,645
----------
----------
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, 1999, is approximately $8,383,168.
9. LEASES:
In December 1993, the Company entered into a non-cancelable operating lease
agreement for a facility in Owings Mills, Maryland, to house its corporate
offices, warehousing, shipping and receiving functions. The lease terms had
provided for an initial expiration date of December 31, 1998. However, as
of June 1, 1997, the Company negotiated termination of the Owings Mills
facility lease, effective June 1, 1997, in exchange for a termination fee
of $30,200 paid by the Company, resulting in net savings to the Company of
approximately $200,000 over the remaining term of the lease. The rent
expense to the Company under the lease agreement was $0, $59,378 and
$143,948 for years ended March 31, 1999, 1998 and 1997, respectively.
The Company's original facility ("Seton") is primarily used for production
and is occupied under a non-cancelable operating lease agreement with an
initial six and one-half year term, expiring December 31, 1998 and two
renewable terms of two years each. On April 14, 1998, the Company exercised
the right to renew the Seton lease. The lease now expires on December 31,
2000 and may, at the Company's option, be renewed again for another two
year period. Related rental payments for the years ended March 31, 1999,
1998 and 1997, were $250,163, $243,067 and $232,784, respectively.
In previous years, the Company entered into several non-cancelable capital
lease obligations for various pieces of laboratory equipment and furniture
that expire during next fiscal year. In addition, the Company entered into
several operating leases in fiscal year 1999, 1998 and 1997 that expire
during fiscal years 2001 through 2004.
At March 31, 1999 the aggregate future minimum annual lease payments were
as follows:
Year Ended March 31 Capital Leases Operating Leases
------------------- -------------- ----------------
2000 $ 1,123 $ 1,035,046
2001 -- 987,094
2002 -- 817,440
2003 -- 618,631
-------- -----------
Total payments 1,123 $ 3,458,211
-----------
-----------
Less: interest (270)
--------
Present value of future minimum lease payments $ 853
--------
--------
10. CONTINGENCIES
In the ordinary course of business, the Company could be exposed to a risk
of liability as a result of the
32
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 1999, 1998 and 1997, there were no legal
proceedings to which the Company was a party.
11. 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 and the
maximum term of the options range from five to ten years.
In fiscal year 1999, the Company granted non-qualified stock options to two
executive officers to purchase up to 325,000 shares of the Company's common
stock, valid for 10 years from issuance, with an exercise price of $1.00
per share. Vesting periods are based on either the passage of time or based
upon the achievement of certain milestones, which if achieved would result
in accelerated vesting of up to 162,500 shares of the aforementioned
options for the key employees. In fiscal year 1999, the Company recognized
$228,125 in non-cash compensation expense, in accordance with APB Opinion
No. 25, relating to the value of such immediately vesting options and it
expects to charge varying amounts of non-cash compensation expense to
operations through 2004 relating to such agreements.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans, under which no compensation expense has been
recognized, except as noted above. 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 "Accounting for Stock-Based Compensation", the Company's net loss
and earnings per share would have been reduced to the pro forma amounts
indicated below:
Year Ended Year Ended
March 31, 1999 March 31, 1998
-------------- --------------
Net loss:
As reported $(5,414,259) $ (378,628)
Pro forma (6,654,039) (660,876)
Basic earnings per share:
As reported (1.02) (0.08)
Pro forma (1.25) (0.13)
Diluted earnings per share:
As reported (1.02) (0.08)
Pro forma (1.25) (0.13)
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, 1999 March 31, 1998
-------------- --------------
Expected volatility 119.0% 75.0%
Risk-free interest rates 4.5 - 5.4% 5.5 - 6.4%
Expected lives 5 years 5 years
33
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
A summary of qualified option transactions for the years ended March 31,
1999, 1998 and 1997 is as follows:
1999 1998 1997
------------------------- --------------------------- ---------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding, beginning of year 610,887 $3.10 571,900 $2.37 366,750 $2.16
Granted 271,889 4.97 202,361 4.22 300,000 2.98
Exercised (165,926) 2.66 (160,484) 1.94 (11,250) 1.28
Expired or canceled (59,750) 5.03 (2,890) 1.40 (83,600) 3.80
--------- ----- --------- ----- --------- -----
Outstanding, end of year 657,100 $3.81 610,887 $3.10 571,900 $2.37
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
Shares available for future grant 129,350 324,239 531,550
--------- --------- ---------
--------- --------- ---------
Options exercisable at end of period 409,450 166,787 105,000
--------- --------- ---------
--------- --------- ---------
Weighted average fair value
of qualified options granted $ 2.49 $ 2.78 $ 2.24
--------- --------- ---------
--------- --------- ---------
The following table summarizes information about qualified stock options
outstanding and exercisable at March 31, 1999:
Options Outstanding Options Exercisable
------------------- -------------------
Number Average Weighted Number Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise Prices March 31, 1999 Contractual Life Exercise Price March 31, 1999 Exercise Price
-----------------------------------------------------------------------------------------------------------------
$1.50-$3.00 101,975 6.8 years $1.55 47,700 $1.53
$3.00-$5.00 426,536 8.6 years 3.60 306,286 3.73
$5.00-$8.125 128,589 9.0 years 6.31 55,464 6.76
------- --------- ----- ------- -----
657,100 8.4 years $3.81 409,450 $3.89
------- --------- ----- ------- -----
------- --------- ----- ------- -----
12. INCOME TAXES
The (benefit) provision for income taxes was comprised of the following for
the years ended March 31, 1999, 1998 and 1997:
1999 1998 1997
---- ---- ----
Federal:
Current $ -- $(180,325) $ 198,716
Deferred (1,765,915) (24,014) 52,743
State:
Current -- (15,911) 35,067
Deferred (240,806) (2,119) 9,307
------------ -------- --------
(Benefit) provision for income taxes (2,006,721) (222,369) 295,833
Less: valuation allowance 2,006,721 -- --
------------ -------- --------
$ -- $222,369 $295,833
------------ -------- --------
------------ -------- --------
The following table reconciles income taxes at the federal statutory rate
to the provision for income taxes in the
34
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
accompanying consolidated statements of income for the years ended
March 31, 1999, 1998 and 1997.
1999 1998 1997
---- ---- ----
Income tax at federal statutory rate $(1,840,848) $(204,339) $271,846
State tax, net of federal benefit (240,806) (18,030) 36,939
Other 74,933 -- (12,952)
Increase in valuation allowance 2,006,721 -- --
----------- --------- --------
(Benefit) provision for income taxes $ -- $(222,369) $295,833
----------- --------- --------
----------- --------- --------
As of March 31, 1999, the Company had net operating loss ("NOL") carry
forwards available for federal income tax purposes of $3,866,394, which
expires in 2019. NOL carry forwards are subject to ownership limitations
and may also be subject to various other limitations on the amounts to be
utilized. As of March 31, 1999, the Company had certain other tax credits
of approximately $54,400, the majority of which will begin to expire in
2013. Realization of net deferred tax assets related to the Company's NOL
carry forwards and other items is dependent on future earnings, which are
uncertain. Accordingly, a valuation allowance has been established equal to
the net deferred tax asset which are uncertain to be realized in the
future, resulting in a net deferred tax assets of approximately $0 at March
31, 1999. The amount charged to the valuation reserve in 1999 was
$2,006,721.
Deferred tax liabilities and deferred tax assets as of March 31, 1999 and
1998, 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, 1999 March 31, 1998
-------------- --------------
Net current deferred tax assets/ (deferred tax
liabilities):
Inventory $ 81,928 $ 41,359
Accruals and reserves 399,112 50,849
Valuation allowance (356,956) --
---------- ---------
$ 124,084 $ 92,208
---------- ---------
---------- ---------
Net long term deferred tax assets/ (deferred tax
liabilities):
Credit carry forwards $ 54,400 $ 17,537
Property and equipment (29,107) (134,490)
Consulting costs (7,506) ( 7,131)
Net operating loss 1,507,894 --
Valuation allowance (1,649,765) --
---------- ---------
$ (124,084) $(124,084)
---------- ---------
---------- ---------
13. PROFIT SHARING PLAN
During the year ended March 31, 1994, the Company established a
401(k)-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 Company suspended
the matching of employee contributions as of July 31, 1994.
14. EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board, (FASB), issued a
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 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
35
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 years ended March 31, 1999 and
1998 respectively, because of the Company's net loss. Earnings per share
information for prior years has been restated to reflect the new
requirements.
The dilutive effect of all options outstanding has been determined using
the treasury stock method. The weighted average shares outstanding is
calculated as follows:
1999 1998 1997
---- ---- ----
Basic weighted average shares outstanding 5,323,806 4,991,251 4,030,832
Effect of dilutive common equivalent shares -- -- 159,935
--------- --------- ---------
Diluted weighted average shares outstanding 5,323,806 4,991,251 4,190,767
--------- --------- ---------
--------- --------- ---------
Qualified options to purchase 657,100 shares of common stock at a weighted
average exercise price of $3.81 per share and non-qualified options to
purchase 325,000 shares of common stock at a weighted average exercise
price of $1.00 per share were outstanding at March 31, 1999, but were not
included in the computation of diluted earnings per share because the
Company had a net loss for the year, and, therefore, the effect would be
antidilutive.
15. RESTRUCTURING CHARGES
In the fourth quarter of fiscal year 1999, the Company implemented a
realignment of management, a workforce reduction and decided to close its
Seton experimental facility and consolidate its operation into the new
Camden facility. The workforce reduction resulted in the termination of 15
people including full time and temporary employees. This action in addition
to other non-personnel cost reductions resulted in a restructuring charge
of $1.2 million in the accompanying consolidated statement of operations.
The realignment and the workforce reduction resulted in a charge of
$692,577 in fiscal year 1999 and $548,000 was provided for the closing of
the Seton facility for a total restructuring charge of $1.2 million.
Expenses totaling $155,268 of the restructuring were charged against the
accrual in fiscal year 1999. Of the remaining accrual balance of $1.1
million, $523,094 is classified in current liabilities as accrued
restructuring and is expected to be paid in the next fiscal year, with the
remaining balance of $561,215 recorded as a noncurrent liability
16. NEW ACCOUNTING PRONOUNCEMENTS
During March 1998, the American Institute of Certified Public Accountants
issued 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
December 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.
36
SCHEDULE II
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31,
1999 1998 1997
----------- ------- --------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at beginning of period $70,300 $10,300 $16,400
Provision for bad debts 40,000 60,000 15,000
Write-offs (54,810) -- (21,100)
----------- ------- --------
Balance at end of period $55,490 $70,300 $10,300
----------- ------- --------
----------- ------- --------
RESTRUCTURING CHARGES
Balance at beginning of period $ -- $ -- $ --
New restructuring charge 1,239,577 -- --
Amounts charged against accrual (155,268) -- --
----------- ------- --------
Balance at end of period $1,084,309 $ -- $ --
----------- ------- --------
----------- ------- --------
37