<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
[ ] 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 000-21281
CN BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0509785
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10394 PACIFIC CENTER COURT, SAN DIEGO, CA 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 450-5500
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securitites 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 the number of shares of each of the issuer's classes of common
stock, as of the latest practicable date:
Class May 7, 1997
----- -----------
Common Stock, $.01 Par Value 5,413,833
<PAGE> 2
CN BIOSCIENCES, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1997 (unaudited)
and December 31, 1996 3
Condensed Consolidated Statements of Income for the Three Months Ended
March 31, 1997 and 1996 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1997 and 1996 (unaudited) 5
Notes to Interim Condensed Consolidated Financial Statements
(unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
SIGNATURES
INDEX OF EXHIBITS
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CN BIOSCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
(UNAUDITED) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and short-term
investments $ 14,020,000 $ 14,704,000
Accounts receivable, net 5,405,000 4,487,000
Inventories 14,742,000 14,733,000
Other current assets 2,400,000 2,436,000
------------ ------------
Total current assets 36,567,000 36,360,000
Property and equipment, net 3,684,000 3,688,000
Intangible assets, net 4,740,000 4,836,000
Other assets 1,255,000 1,378,000
------------ ------------
Total assets $ 46,246,000 $ 46,262,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 2,244,000 $ 2,303,000
Accrued expenses 1,836,000 1,906,000
Other current liabilities 1,838,000 1,920,000
------------ ------------
Total current liabilities 5,918,000 6,129,000
Other liabilities 1,201,000 1,233,000
Stockholders' equity:
Common stock 52,000 52,000
Additional paid-in capital 38,751,000 38,736,000
Accumulated earnings (deficit) 747,000 (63,000)
Foreign currency translation adjustment (327,000) 271,000
Notes receivable from common
stockholder (96,000) (96,000)
------------ ------------
Total stockholders' equity 39,127,000 38,900,000
------------ ------------
Total liabilities and stockholders'
equity $ 46,246,000 $ 46,262,000
============ ============
</TABLE>
See accompanying notes.
Note: The balance sheet at December 31, 1996 has been derived from the
audited consolidated financial statements at that date, but does not
include all of the disclosures required by generally accepted
accounting principles.
3
<PAGE> 4
CN BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Sales $ 9,585,000 $ 8,218,000
Cost of sales 4,360,000 3,794,000
------------ ------------
Gross profit 5,225,000 4,424,000
Operating expenses:
Selling, general and
administrative 3,471,000 3,015,000
Research and development 622,000 541,000
------------ ------------
Total operating expenses 4,093,000 3,556,000
------------ ------------
Income from operations 1,132,000 868,000
Interest income (expense), net 116,000 (206,000)
------------ ------------
Income before income taxes 1,248,000 662,000
Provision for income taxes 438,000 198,000
------------ ------------
Net income $ 810,000 $ 464,000
============ ============
Net income per share $ .15 $ .13
============ ============
Shares used in per share
computations 5,525,000 3,477,000
============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
CN BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 810,000 $ 464,000
Adjustments to reconcile net income to net
cash (used in) provided by operations:
Depreciation and amortization 546,000 433,000
Additions to inventory reserve 105,000 94,000
Changes in assets and liabilities:
Accounts receivable, trade (1,194,000) (1,129,000)
Inventories (455,000) 200,000
Other current assets 180,000 (411,000)
Other assets (333,000) (125,000)
Accounts payable, trade 182,000 687,000
Accrued expenses (61,000) (56,000)
Other current liabilities (42,000) 538,000
Other liabilities (107,000) (395,000)
------------ ------------
Net cash (used in) provided by operating activities (369,000) 300,000
INVESTING ACTIVITIES
Purchases of property and equipment (248,000) (59,000)
Other -- --
------------ ------------
Net cash used in investing activities (248,000) (59,000)
FINANCING ACTIVITIES
Proceeds from lines of credit -- 200,000
Payments on long-term debt -- (249,000)
Proceeds from the sale of common stock 15,000 --
------------ ------------
Net cash provided by (used in) financing activities 15,000 (49,000)
Effect of exchange rate changes on cash (82,000) (16,000)
------------ ------------
Net increase in cash and cash equivalents (684,000) 176,000
Balance at beginning of period 14,704,000 1,203,000
------------ ------------
Balance at end of period $ 14,020,000 $ 1,379,000
============ ============
Supplemental cash flow information:
Interest paid during the period $ 34,000 $ 213,000
============ ============
Income taxes paid during the period $ 488,000 --
============ ============
</TABLE>
See accompanying notes.
5
<PAGE> 6
CN BIOSCIENCES, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The interim unaudited condensed consolidated financial statements of CN
Biosciences, Inc. (the "Company") contained herein have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. These consolidated financial statements should be read in
conjunction with the consolidated finanical statements and notes thereto for the
year ended December 31, 1996 included in the Company's Annual Report on Form
10-K filed with the Securities and Exchange Commission. In management's opinion,
the unaudited information includes all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
position, results of operations and cash flows for the periods presented.
Interim results are not necessarily indicative of results to be expected for the
full year.
2. NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share ("Statement 128"), which is required to be
adopted on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. The impact is
expected to result in an increase in primary earnings per share for the quarters
ended March 31, 1997 and March 31, 1996 to $.16 and $.14 per share,
respectively. The impact of Statement 128 on the calculation of fully diluted
earnings per share, if applicable, for these quarters is not expected to be
material.
3. PUBLIC OFFERING
In April 1997, the Company effected a public offering of 1,150,000
shares of common stock, par value $.01 per share, at $13.50 per share. The
offering consisted of 910,190 shares sold by one of the Company's founding
stockholders and 239,810 newly issued shares sold by the Company. The Company
raised gross proceeds of $3,237,000 before underwriters' commissions and
expenses. Proceeds from the offering will be used for general corporate purposes
and possible future acquisitions. Pending such uses, proceeds will be invested
in high-quality investment-grade securities of short maturity consistent with
the Company's investment policy.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Finished products $ 13,743,000 $ 13,777,000
Semi-finished products, raw materials
and supplies 4,025,000 4,131,000
Work-in-progress 631,000 525,000
------------ ------------
18,399,000 18,433,000
Reserves for excess materials (3,657,000) (3,700,000)
------------ ------------
Total $ 14,742,000 $ 14,733,000
============ ============
</TABLE>
6
<PAGE> 7
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was formed in 1992 with the purchase of the Company's
subsidiaries, including the Calbiochem biochemical and immunochemical operations
headquartered in San Diego, California, and the Novabiochem peptide operations
headquartered in Laufelfingen, Switzerland, from Biodor Holding AG, Ixora
Holding AG and Biodor US Holding Corporation. During 1993, the Company hired its
current Chief Executive Officer and reorganized its worldwide operations to
better focus its business and corporate strategy on core products. In 1993, the
Company recorded a one-time charge of approximately $2.0 million principally
related to its European operations to reserve for costs of facilities no longer
required, impaired inventory and costs of terminating employees. From 1993 to
1995, the Company invested in excess of $3.2 million for capital expenditures,
principally for infrastructure upgrades to its facilities, automated fulfillment
systems and computer information systems. The Company also hired additional
scientific personnel, particularly employees holding Ph.D.s, to enable it to
expand its internal development and manufacturing capabilities. These
initiatives contributed to improved operating results, and in 1994 the Company
commenced its niche research market strategy with the introduction of the Signal
Transduction specialty catalog.
In August 1995, the Company expanded its immunochemical and molecular
biology capabilities with the purchase of the Oncogene Research Products
business from Oncogene Science, Inc. ("OSI") for $6.2 million cash, which was
funded by bank debt. Assets acquired included primarily inventory and property
and equipment. Approximately 30 employees, including four holding Ph.D.s, all of
whom were previously employed by OSI in the Oncogene Research Products business,
joined the Company upon the consummation of the acquisition. The acquisition and
successful integration of this business enhanced the depth and breadth of the
Company's scientific resources, while providing a complementary base of products
and customers.
The Company uses general and specialty catalogs to market a broad range
of brand-name research products to life sciences researchers worldwide at
pharmaceutical and biotechnology companies, academic institutions and government
laboratories. The Company invests significantly in producing each of its
catalogs, and associated costs are capitalized and amortized over the estimated
useful life of the catalog, generally 12 to 24 months.
Since 1993, the Company has increasingly focused its strategy on its
higher margin core business of providing standard laboratory quantity sizes of
products (generally ranging from 100 nanograms to 100 grams), and has reduced
the focus on its bulk business. Bulk quantities (generally up to ten kilograms)
are generally offered at discounts to catalog prices, and bulk sales are
characterized as relatively high dollar sales made to a limited number of
customers. Thus, the absence or presence of bulk sales has had and could have a
material impact on results of operations in any individual period.
The Company maintains significant levels of inventory relative to its
net sales in order to meet short delivery times required by researchers. In
addition, products manufactured internally are made in economic batch sizes
which often represent quantities sufficient to supply more than one year of
sales. The Company's products generally have a relatively long shelf life, often
in excess of five years, and quality and storage conditions are continually
monitored to ensure that quality products are delivered to customers. The
Company regularly evaluates the level and composition of inventory through the
analysis of recent sales history and forecasted product demand to ensure that
inventory reserve levels are adequate to properly reflect their net realizable
value. Fluctuations in inventory reserve levels, other than those related to
reserves recorded in 1993 for impaired inventory described above, have not been
material to the Company's financial position or results of operations.
7
<PAGE> 8
The Company's reporting currency is the U.S. dollar. Historically, a
majority of the Company's sales have been denominated in U.S. dollars, with the
balance denominated in foreign currencies. These foreign currency sales have
been effected principally by the Company's international subsidiaries. In
accordance with U.S. accounting requirements, sales denominated in foreign
currencies are translated into the local functional currency and then into U.S.
dollars, at an average exchange rate in effect during the period. In addition,
the Company incurs manufacturing costs in Swiss Francs in connection with its
Swiss operations and also incurs operating expenses in local currencies at each
of its other international locations. Thus, changes from reporting period to
reporting period in the exchange rates between various foreign currencies and
the U.S. dollar have had, and will in the future continue to have, an impact on
revenues and expenses reported by the Company, and such effect may be material
in any individual reporting period.
To the extent that the Company incurs operating expenses in local
currencies at its foreign subsidiaries, the Company has a natural hedge against
a portion of the possible fluctuation in foreign currency exchange rates of
billings in such currencies. Although the Company does not engage in significant
amounts of foreign currency hedging transactions, the Company has, from time to
time, entered into forward contracts to hedge certain of its foreign currency
exposures, principally related to fixed expense commitments of its Japanese
subsidiary.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, items from
the Company's Consolidated Statements of Operations expressed as a percentage of
sales.
<TABLE>
<CAPTION>
PERCENTAGE OF SALES
THREE MONTHS
ENDED MARCH 31,
1997 1996
----- -----
<S> <C> <C>
Sales:
Core 83.5% 80.3%
Bulk 16.5 19.7
----- -----
Total sales 100.0 100.0
Cost of sales 45.5 46.2
----- -----
Gross profit 54.5 53.8
Selling, general and administrative expenses 36.2 36.7
Research and development 6.5 6.6
----- -----
Income from operations 11.8 10.6
Interest income (expense), net 1.2 (2.5)
----- -----
Income before income taxes 13.0 8.1
Provision for income taxes 4.6 2.4
----- -----
Net income 8.5% 5.6%
===== =====
</TABLE>
8
<PAGE> 9
Three Months Ended March 31, 1997 Compared to the Three Months Ended
March 31, 1996
Sales. Sales increased 16.6% to $9.6 million for the three-month period
ended March 31, 1997 from $8.2 million for the comparable period in 1996. This
increase resulted primarily from a 21.3% increase in core product sales, offset
by a decrease in bulk sales of 2.5%. These gains in sales were made despite the
general strengthening of the U.S. dollar which had the effect of decreasing the
dollar value of sales denominated in foreign currencies recorded in the
three-month period ended March 31, 1997. Additional factors which management
believes contributed to the increase in sales during the period included
increased orders from the Company's specialty catalogs, and other marketing
initiatives, including advertising in various publications.
Gross Profit. The Company's gross profit percentage increased to 54.5%
for the three-month period ended March 31, 1997 from 53.8% for the comparable
period in 1996. This increase resulted primarily from an increase in sales of
higher margin core products, and a decrease in sales of lower margin bulk
products. Management believes that additional factors which contributed to
improvements in gross margins include continued improved operating efficiencies
from increased volume, and selected price increases
Selling, General and Administrative. Selling, general and
administrative expenses increased 15.1% to $3.5 million for the three-month
period ended March 31, 1997 from $3.0 million for the comparable period in 1996,
and decreased to 36.2% of sales for the period from 36.7% for the comparable
period in 1996. The dollar increase in selling, general and administrative
expenses resulted from increased selling costs related to advertising programs
and catalogs, and additional administrative expenses related to reporting
obligations and investor relations activities as a public company. The decrease
in selling, general and administrative expenses as a percentage of sales was
attributable to the increased level of sales.
Research and Development. Research and development expenses increased
15% to $622,000 for the three-month period ended March 31, 1997 from $541,000
for the comparable period in 1996, and increased to 6.6% of sales for the period
from 6.5% for the comparable period in 1996. This increase resulted from
development activity related to Oncogene Research Products brand products, and
increased research in the area of glycobiology and neurosciences, which is
expected to continue.
Interest income (expense), net. Interest income (expense), net
increased to interest income of $116,000 for the three-month period ended March
31, 1997 from interest expense of $206,000 for the comparable period in 1996.
The increase resulted from increased cash balances and reduced debt levels as a
result of the completion of the Company's initial public offering of common
stock in October 1996.
Income Taxes. Income tax expense increased to $438,000 for the
three-month period ended March 31, 1997 from $198,000 for the comparable period
in 1996 as a result of increased profitability and increased estimated tax rates
due to utilization of certain operating loss carryforwards in prior years.
Net Income. As a result of the above factors, net income increased
74.6% to $810,000 for the three-month period ended March 31, 1997 from $464,000
for the comparable period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company used $369,000 of cash in operating activities in the three
months ended March 31, 1997 which was a $669,000 increase from the comparable
prior period. Operating activities required cash for the three-month period
ended March 31, 1997, primarily to support increases in accounts receivable and
inventory resulting from the growth in core product sales. Cash provided from
operating activities in the comparable prior period in 1996 resulted primarily
from positive operating results.
9
<PAGE> 10
Net cash used in investing activities was $248,000 in the three-month
period ended March 31, 1997, as compared to $59,000 in the comparable period in
1996. Cash used in investing activities during both periods consisted of capital
expenditures for property and equipment.
In October 1996, the Company completed the initial public offering of
1,840,000 shares of Common Stock at $12.50 per share. In April 1997, the Company
completed a public offering of 1,150,000 shares of Common Stock (including
910,190 shares sold by a founding stockholder of the Company) at $13.50 per
share.
The Company is a holding company, the principal assets of which are the
capital stock of its subsidiaries, and has no independent means of generating
revenues. As a holding company, the Company depends on dividends and other
permitted payments from its subsidiaries, including its international
subsidiaries, to meet its cash needs. The Company maintains cash balances at its
various subsidiaries based upon local results of operations. The amount of
foreign-sourced earnings to be repatriated to the United States is determined
based upon foreign entity capitalization, local cash needs, local and U.S. tax
implications and requirements for cash in the U.S. operations.
At March 31, 1997, the Company had cash, cash-equivalents and short
term investments of $14.0 million and working capital of $30.6 million. At March
31, 1997, $5.0 million was available under a Credit Facility with a commercial
bank which expires in June 1998.
The Company believes that its existing capital resources will be
sufficient to fund its operations through at least 1998. If, however, the
Company were to undertake a significant acquisition or if working capital or
other capital requirements are greater than currently anticipated, the Company
could be required to seek additional funds through sales of equity, debt or
convertible securities or increased credit facilities. There can be no assurance
that additional financing will be available or that, if available, the financing
will be on terms favorable to the Company and its stockholders.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements,
which involve risks and uncertainties. The Company's actual results in the
future could differ significantly from the results discussed in such
forward-looking statements. Factors that could cause or contribute to such a
difference include, but are not limited to, those set forth under the captions
Risk Factors and Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RISK FACTORS
Dependence on Research and Development Budgets and Government Research
Funding. The Company's customers include research scientists at pharmaceutical
and biotechnology companies, academic institutions and government and private
research laboratories. Fluctuations in the research and development budgets of
these companies and institutions can have a significant effect on the demand for
the Company's products. Such budgets are based on a wide variety of factors
including the resources available to make such expenditures, the spending
priorities among various types of research and the policies regarding such
expenditures during recessionary periods. Any decrease in life sciences research
and development expenditures by such companies and institutions could have a
material adverse effect on the Company's business, financial condition and
results of operations.
A significant portion of the Company's sales have been to research
scientists, universities, government research laboratories, private foundations
and other institutions whose funding is dependent on grants from government
agencies such as the U.S. National Institutes of Health ("NIH") and similar
domestic and international agencies. The funding associated with approved NIH
grants generally becomes available at particular times of the year, as
determined by the federal government, and may result in fluctuations in the
Company's operating results. Although research funding has increased during the
past several years, grants
10
<PAGE> 11
have, in the past, been frozen for extended periods or have otherwise become
unavailable to various institutions, sometimes without advance notice.
Furthermore, recent government proposals aiming to reduce or eliminate budgetary
deficits have included reduced allocations to the NIH and the other government
agencies that fund research and development activities. If government funding,
especially NIH grants, were to become unavailable to researchers for any
extended period of time or if overall research funding were to decrease, there
could be a material adverse effect on the Company's business, financial
condition and results of operations.
Risks Inherent in Growth, Expansion and Acquisition Strategy. The
Company has sought and will continue to seek growth in sales and profitability
primarily through the internal development and acquisition of new product lines,
additional customers and new businesses. A significant portion of the Company's
historical revenue growth is attributable to internal product development,
sourcing of third-party products and, more recently, from its acquisition of the
Oncogene Research Products business from Oncogene Science, Inc., a
biopharmaceutical company. The ability of the Company to achieve its expansion
objectives and to manage its growth effectively depends upon a variety of
factors, including (i) the ability to internally develop products, (ii) the
ability to identify and license products sourced from third parties, (iii) the
ability to successfully position and market its products, (iv) the ability to
identify and consummate attractive acquisitions and (v) the ability to integrate
new businesses, facilities and personnel into existing operations. If the
Company is unable to manage growth effectively, there could be a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company competes for acquisition and expansion opportunities with
other companies that have significantly greater financial and other resources
than those of the Company. There can be no assurance that suitable acquisition
or investment opportunities will be identified, consummated, or, if consummated,
integrated successfully and profitably into the Company's operations. Moreover,
there can be no assurance that the Company's historic rate of growth or
expansion will continue, or that further growth or expansion will result in
continued profitability.
Reliance on Niche Research Market Strategy. Key elements of the
Company's strategy include the targeting and penetration of emerging life
sciences niche research markets and the continued development of the niche
research markets currently served by the Company. If the Company is unable to
successfully target and penetrate these niche research markets or is unable to
continue developing the niche research markets currently served or if the
Company's new products are not accepted by research scientists, there could be a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company currently benefits from its
participation in emerging niche research markets which, as they expand, may
attract the attention of the Company's competitors. Further, as these niche
research markets mature, products that were once innovative, thus commanding
higher margins, may become commodities.
Dependence on New Products; Rapid Technological Change. The life
sciences research products market is characterized by rapid technological change
and frequent product introductions. The Company's future success will depend, in
part, on its ability to develop and introduce, on a timely basis, products that
address the evolving needs of its customers. There can be no assurance that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of products. The Company has
experienced, and may in the future experience, delays in the development and
introduction of products, and there can be no assurance that the Company will
keep pace with the rapid rate of change in life sciences research, and will not
experience additional delays in the future. In addition, there can be no
assurance that new products will adequately meet the requirements of the
marketplace or achieve market acceptance. Factors affecting whether such
products will be accepted by the market include use of the product by research
scientists, citation of the product in published research, the timing of market
entry of the product relative to competitive products and general trends in life
sciences research. If the Company is unable, for technological or other reasons,
to develop and introduce products in a timely manner in response to changing
market environments or customer requirements, there could be a material adverse
effect on the Company's business, financial condition and results of operations.
Dependence on Licensing as a Source of Products. Many of the Company's
products are manufactured
11
<PAGE> 12
or sold pursuant to license agreements under which the Company pays royalties to
the patent holder based upon a percentage of the product's sales. There can be
no assurance that the Company will be able to continue to successfully identify
new products developed by others, and if identified, to negotiate license
agreements on favorable terms. Additionally, there can be no assurance that the
Company will be able to renew any existing license agreements upon their
expiration.
Highly Competitive Market. The market for the Company's products is
highly competitive, and the Company expects competition to increase.
Furthermore, although the life sciences research products market continues to
grow, its rate of growth in recent years has been declining and may continue to
decline. The Company competes with many other life sciences research products
suppliers, both larger and smaller than the Company. Some of the Company's
competitors, including two of its largest competitors, Sigma-Aldrich Corporation
and Boehringer Mannheim GmbH, offer a broad range of equipment, laboratory
supplies and other products, including many of the research products offered by
the Company. To the extent that researchers exhibit loyalty to the supplier that
first supplies them with a particular research product, the Company's
competitors may have an advantage over the Company with respect to products
first developed by such competitors. In addition, many of the Company's
competitors have significantly greater research and development, marketing,
financial and other resources than the Company, and therefore represent and will
continue to represent significant competition in the Company's existing and
future markets. Because of their size and the breadth of their product
offerings, certain of these companies have been able to establish managed
accounts by which, through a combination of direct computer links and volume
discounts, they seek to gain a disproportionate share of orders for research
products from particular academic institutions or pharmaceutical or
biotechnology companies. Such managed accounts raise significant competitive
barriers for the Company. The Company currently benefits from its participation
in emerging niche research markets which, as they expand, may attract the
attention of the Company's competitors.
Reliance on Catalogs, Distributors and Direct Marketing Efforts;
Limited Sales Force. The Company sells its products principally through catalogs
distributed to research scientists and laboratories, and uses only a very
limited number of salespeople in certain of its markets. There can be no
assurance that the Company would be able to successfully establish other methods
of marketing and sales of its products should it become necessary or desirable
in the future. Additionally, the Company's catalogs are generally reissued every
12 to 24 months and price adjustments between catalog publication dates have
historically been infrequent. A significant portion of the Company's
international sales are made through independent distributors over which the
Company has no control and who also represent products of other companies.
Additionally, the Company recently entered into a joint distribution agreement
relating to its Apoptosis specialty catalog. The loss of any of these
distribution methods could have a material adverse effect on the Company's
business, financial condition and results of operations.
Volatility of Bulk Sales Business. In addition to sales of its core
products in standard laboratory quantity sizes (generally ranging from 100
nanograms to 100 grams), the Company offers certain products in bulk quantities
(generally up to ten kilograms) at discounts from catalog prices. Bulk sales,
which represented 18.1% of net sales in 1996, are generally characterized as
relatively high dollar sales made to a limited number of customers. Thus, the
absence or presence of a bulk sale could have a material impact on quarterly
results. Furthermore, the Company's bulk sales business fluctuates more and is
less predictable than its core business, and the uncertain timing and volatility
of bulk sales has in the past and may continue in the future to materially
affect the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Significant Fluctuations in Quarterly Earnings. The Company's quarterly
operating results may vary significantly from quarter to quarter as a result of
a number of factors including new editions of existing catalogs, introduction of
additional specialty catalogs and bulk sales of the Company's products. Other
factors which may affect quarterly operating results include the timing of the
U.S. Government approval of the NIH budget, lower European and academic sales
during the summer months and various holiday breaks and fluctuations in weather.
The Company's current and planned expense levels are based in part upon its
expectations as to future revenues. Consequently, if revenues in a particular
quarter do not meet expectations, the Company may not be able to adequately
adjust operating expenses to compensate for the shortfall. Operating results may
therefore vary significantly from quarter to quarter and will not necessarily
12
<PAGE> 13
be indicative of results in subsequent periods. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Uncertainty of Future Operating Results. Although the Company has had
net income for the past two years, the Company incurred net losses for the
period from its inception (March 11, 1992) through December 31, 1992 and the
years ended December 31, 1993 and 1994. Future operating results will depend on
many factors, including demand for the Company's products, the levels and timing
of government and private sector funding of life sciences research and
development activities, the timing of the introduction of products and catalogs
by the Company or its competitors, and the Company's ability to control costs.
Furthermore, the Company's gross margins can be significantly affected by the
presence or absence of bulk sales during any particular period and quarterly
fluctuations in sales relative to operating expenses. There can be no assurance
that the Company will be able to grow in future periods or remain profitable.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Risks Relating to International Sales and Operations. Historically,
product sales to customers outside the United States have accounted for
approximately 50% of the Company's net sales, and the Company expects that
international sales will continue to account for a significant percentage of
revenues in the future. International sales and operations may be materially
adversely affected by trade restrictions, changes in tariffs and taxes, export
license requirements, difficulties in staffing and managing international
operations, problems in establishing or managing distributor relationships and
general economic conditions.
A majority of the Company's sales are denominated in U.S. dollars, with
the balance denominated in foreign currencies. Additionally, the Company
publishes a number of its catalogs priced in foreign currencies and price
adjustments between catalog publication dates to reflect fluctuations in the
value of foreign currencies relative to the U.S. dollar have historically been
infrequent. Consequently, fluctuations in the value of foreign currencies
relative to the U.S. dollar could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Risk of Patent Infringement. Because of the breadth of the Company's
product offerings and ambiguities in intellectual property law, the Company
periodically receives in the ordinary course of business notices of potential
infringement of patents held by others. Although the Company historically has
been able to satisfactorily resolve such claims and believes that any
outstanding claims will be satisfactorily resolved, there can be no assurance
that the Company may not be forced to discontinue the sale of one or more of its
products, some or all of which could be material. As the Company develops
product offerings focused on certain niche research markets, intellectual
property rights of the Company or others related to such markets may become
increasingly important, and the Company's failure to obtain and retain such
rights may have a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence on Key Personnel. The Company's future success depends in
significant part on the continued service of, and on the Company's continuing
ability to attract and retain, highly qualified technical, managerial and sales
personnel. Competition for such personnel is intense in the Company's industry
and geographic locations, and there can be no assurance that the Company will be
able to retain or attract such employees in the future. The loss of key
personnel or the inability to hire or retain qualified personnel could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company has entered into employment agreements with
Stelios B. Papadopoulos, its Chairman, Chief Executive Officer and President,
and Ben Matzilevich, its Vice President, Market Development -- Niche
Applications.
Risk Relating to the Influence of the Internet on Marketing and
Catalogs. The Internet has begun to change marketing patterns in a wide variety
of industries. The high degree of personal computer usage within scientific
research organizations may lead to entirely new methods of marketing and sales
of research products. While the Company has established home pages on the
Internet for the Calbiochem, Novabiochem and Oncogene Research Products brands,
the Company may not be able to keep pace with the rate of change in its markets
brought about by the Internet and may invest in catalogs or Internet-based
13
<PAGE> 14
projects which future changes may render obsolete.
Compliance with Government and Environmental Regulations. The Company
is subject to various forms of government regulations, including environmental
and safety laws and regulations and laws governing use and storage of hazardous
materials. The Company has in the past been notified of minor violations of
government and environmental regulations. The Company has promptly corrected
such violations without any material impact on the Company's operations. Any
future violation of, and the cost of compliance with, these laws and regulations
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Because of the nature of its operations and the use of hazardous
substances in its ongoing manufacturing and research and development activities,
the Company is subject to stringent federal, state and local laws, rules,
regulations and policies governing the use, generation, manufacturing, storage,
air emission, effluent discharge, handling and disposal of certain materials and
wastes. Prior to the Company's inception, its U.S. subsidiary, at the time it
was owned by its former owners, was involved in two separate incidents related
to the release of hazardous materials into the environment at a leased facility
which is no longer occupied by the Company. The Company believes from a review
of correspondence from various regulatory agencies that these incidents were
investigated and remediated by the U.S. subsidiary's former owners. Although the
Company believes it is in material compliance with all applicable government and
environmental laws, rules, regulations, and policies, there can be no assurance
that the Company's business, financial condition and results of operations will
not be materially adversely affected by current or future environmental laws,
rules, regulations and policies or by liability arising out of any past or
future releases or discharges of materials that could be hazardous.
Product Liability Risk; Limited Insurance Coverage. Although the
Company does not sell products intended for use in humans, or, with the
exception of its Clinalfa products, sell products intended for use in human
clinical trials, the Company's business could expose it to potential liability
risks. The Company currently has only limited product liability insurance, and
there can be no assurance that it will be able to maintain such insurance or
obtain additional insurance on acceptable terms or that insurance will provide
adequate coverage against potential liabilities. A successful product liability
claim or a series of claims brought against the Company in excess of its
insurance coverage limits could have a material adverse effect on the Company's
business, financial condition and results of operations.
Holding Company Structure. The Company is a holding company, the
principal assets of which are the capital stock of its subsidiaries, and has no
independent means of generating operating revenues. As a holding company, the
Company depends on dividends and other permitted payments from its subsidiaries,
including its international subsidiaries, to meet its cash needs. The Company
maintains cash balances at its various subsidiaries adequate to support local
operations. The amount of foreign-sourced earnings to be repatriated to the
United States is determined based upon foreign entity capitalization, local cash
needs, local and U.S. tax implications and requirements for cash in the U.S.
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Substantial Influence of Principal Stockholder. The Company's principal
stockholder, Warburg, Pincus Investors, L.P. ("Warburg") beneficially owned
approximately 41.5% of the Company's Common Stock, par value $.01 per share (the
"Common Stock"), as of May 7, 1997. Because of such ownership, Warburg has
substantial infludence over the election of all members of the Board of
Directors and corporate actions requiring stockholder approval. Additionally,
pursuant to an agreement with the Company, Warburg has certain rights to
nominate directors as long as it continues to own specified percentages of the
outstanding shares of Common Stock.
Anti-Takeover Provisions. Under the Company's Amended and Restated
Certificate of Incorporation (the "Certificate of Incorporation"), the Company's
Board of Directors has the authority to issue up to 5,000,000 shares of
Preferred Stock and to determine the price, rights, preferences and privileges
of those shares without any further vote or action by the stockholders. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future. The issuance of Preferred Stock, while providing desirable
flexibility in
14
<PAGE> 15
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company. The Company has no present plans
to issue shares of Preferred Stock. The Company is also subject to the
provisions of Section 203 of the Delaware General Corporation Law, an
anti-takeover law. Additionally, the Company has entered into severance
arrangements with each of its executive officers which provide, among other
things, for severance payments if, within 90 days of a "change in control" of
the Company (as defined in the applicable agreements), the executive's
employment is terminated other than for cause or the executive resigns. Such
arrangements could have an anti-takeover effect.
15
<PAGE> 16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
3(a) Amended and Restated Certificate of Incorporation*
3(b) Amended and Restated By-Laws*
10(n)(xix) Amendment to Loan Agreement, dated April 4,
1997, by and between Silicon Valley Bank and
Calbiochem-Novabiochem Corporation.
11 Statement re computation of per share earnings
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the
three months ended March 31, 1997.
- ---------------------
* Incorporated by reference from the Registrant's Form 10-Q for the
quarterly period ended September 30, 1996 (File No. 000-21281)
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CN BIOSCIENCES, INC.
May 12, 1997 /s/ Stelios B. Papadopoulos
-----------------------------------
Stelios B. Papadopoulos
Chief Executive Officer, Chairman
and President
(duly authorized officer)
May 12, 1997 /s/ James G. Stewart
-----------------------------------
James G. Stewart
Vice President, Chief Financial Officer
and Secretary
(principal financial officer)
17
<PAGE> 18
INDEX OF EXHIBITS
Exhibit Number Description
- -------------- -----------
3(a) Amended and Restated Certificate of Incorporation*
3(b) Amended and Restated By-Laws*
10(n)(xix) Amendment to Loan Agreement, dated April 4, 1997, by and
between Silicon Valley Bank and Calbiochem Novabiochem
Corporation.
11 Statement re computation of per share earnings
27 Financial Data Schedule
- ---------------------
* Incorporated by reference from the Registrant's Form 10-Q for the
quarterly period ended September 30, 1996 (File No. 000-21281)
18
<PAGE> 1
Exhibit 10(n)(xix)
[Silicon Valley Bank Logo]
Amendment to Loan Agreement
Borrower: Calbiochem-Novabiochem Corporation
Address: 10394 Pacific Center Court
San Diego, California 92121
Date: April 4, 1997
THIS AMENDMENT TO LOAN DOCUMENTS is entered into between SILICON VALLEY BANK
("Silicon"), on the one side, and the borrower named above (the "Borrower") and
CN Biosciences, Inc. ("Parent"), on the other side..
The Borrower and Silicon agree to amend, effective as of the date
hereof, the Loan and Security Agreement between them dated July 28, 1995, as
amended by that Amendment to Loan Agreement dated November 22, 1995, effective
as September 30, 1995, as amended by that Amendment to Loan Agreement dated
January 24, 1996, as amended by that Amendment to Loan Agreement dated June 27,
1996, as modified by that Consent and Waiver dated August 23, 1996, as amended
by that Amendment to Loan Agreement dated September 30, 1996, and as amended by
that Amendment to Loan Documents dated October 2, 1996 (as so amended and as
otherwise amended from time to time being the "Loan Agreement"). (Capitalized
terms used but not defined in this Amendment, shall have the meanings set forth
in the Loan Agreement.)
1. MODIFICATION TO SECTION 3.7. Section 3.7 of the Loan
Agreement is hereby amended to read as follows:
"3.7 FINANCIAL CONDITION AND STATEMENTS. All financial
statements now or in the future delivered to Silicon have been, and
will be, prepared in conformity with generally accepted accounting
principles and now and in the future will completely and accurately
reflect the financial condition of the Borrower, at the times and for
the periods therein stated. Since the last date covered by and such
statement, there has been no material adverse change in the financial
condition or business of the Borrower. The Borrower is now and will
continue to be solvent. The Borrower will provide Silicon: (i) Within 5
days after the earlier of the date the report 10-Q (regarding CN
Biosciences, Inc.) is filed or is required to be filed with the
Securities Exchange Commission, such 10-Q report, a quarterly
consolidating and consolidated financial statement regarding CN
Biosciences, Inc. and the Borrower, and a Compliance Certificate in
such form as Silicon shall reasonably specify, signed by the Chief
Financial Officer of the Borrower, certifying that throughout such
quarter the Borrower was in full compliance with all of the terms and
conditions of this Agreement, and setting forth calculations showing
compliance with the financial covenants set forth on the Schedule and
such other information as Silicon shall reasonably request (the
"Compliance Certificate"); and (ii) within 5 days after the earlier of
the date the report 10-K (regarding CN Biosciences, Inc.) is filed or
is required to filed with the Securities Exchange Commission, such 10-K
report, complete annual consolidating and consolidated financial
statements, certified by indpendent certified public accountants
acceptable to silicon, and a Compliance Certificate for the quarter
then ended."
<PAGE> 2
SILICON VALLEY BANK AMENDMENT TO LOAN AGREEMENT
2. QUARTERLY FINANCIAL COVENANT COMPLIANCE. The paragraph at
the beginning of the section of the Schedule to the Loan Agreement
entitled "Financial Covenants (Section 4.1)" that now reads "Borrower
shall cause the Parent to comply with all of the following covenants on
a consolidated basis effective with the month ending March 31, 1996.
Compliance shall be determined as of the end of each month, except as
otherwise specifically provided below:" is hereby amended to read as
follows:
"Borrower shall cause the Parent to comply with all of the
following covenants on a consolidated basis. Compliance shall
be determined as of the end of each quarter, except as
otherwise specifically provided below:"
3. GENERAL PROVISIONS. This Amendment, the Loan Agreement, any
prior written amendments to the Loan agreement signed by Silicon and
the Borrower and the other written documents and agreements between
such parties set forth in full all of the representations and
agreements of the parties with respect to the subject matter hereof and
supersede all prior discussions, representations, agreements and
understandings between the parties with respect to the subject hereof.
Except as herein expressly amended, all of the terms and provisions of
the Loan Agreement, an all other documents and agreements between
Silicon and the Borrower shall continue in full force and effect and
the same are hereby ratified and confirmed.
BORROWER: SILICON:
CALBIOCHEM-NOVABIOCHEM SILICON VALLEY BANK
CORPORATION
BY /S/ LINDA LEBEAU
----------------------------
TITLE SVP
-------------------------
BY /S/ JAMES G. STEWART
--------------------------------
PRESIDENT OR VICE PRESIDENT
BY /S/ ARTHUR E. ROKE
--------------------------------
SECRETARY OR ASS'T SECRETARY
<PAGE> 3
SILICON VALLEY BANK AMENDMENT TO LOAN AGREEMENT
CONSENT
The undersigned guarantors acknowledge that their consent to the
foregoing Amendment is not required, but the undersigned nevertheless do hereby
consent to the foregoing Amendment and to the documents and agreements referred
to therein and to all future modifications and amendments thereto, and to any
and all other present and future documents and agreements between or among the
foregoing parties. Nothing herein shall in any way limit any of the terms or
provisions of the Guaranties executed by the undersigned in favor of Silicon,
all of which are hereby ratified and affirmed and shall continue in full force
and effect.
CN BIOSCIENCES, INC. CALBIOCHEM-NOVABIOCHEM AG
BY: /S/ JAMES G. STEWART BY: /S/ STELIOS B. PAPADOPOULOS
------------------------------- --------------------------------
TITLE: VICE PRES, SECTY & CFO TITLE: DIRECTOR
---------------------------- -----------------------------
<PAGE> 1
Exhibit 11
CN BIOSCIENCES, INC.
COMPUTATION OF EARNINGS PER SHARE
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
---------------------
1997 1996
-------- --------
<S> <C> <C>
Net income (loss) 810 464
Average common shares outstanding 5,161 1,848
Net effect of dilutive common share equivalents
based on the treasure stock method 364 199
Adjustments to reflect requirements of the
Securities and Exchange Commission (Effect
of SAB 83) -- 50
-------- --------
Adjusted shares outstanding 5,525 2,097
-------- --------
Historical net income (loss) per share reflecting
requirements of the SEC $ 0.15 $ 0.22
-------- --------
Effect of assumed conversion of preferred
shares from date of issuance -- 1,380
-------- --------
Adjusted shares outstanding 5,525 3,477
-------- --------
Pro Forma net income (loss) per share $ 0.15 $ 0.13
-------- --------
</TABLE>
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE THREE
MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 14,020
<SECURITIES> 0
<RECEIVABLES> 5,405
<ALLOWANCES> 0
<INVENTORY> 14,742
<CURRENT-ASSETS> 36,567
<PP&E> 3,684
<DEPRECIATION> 0
<TOTAL-ASSETS> 46,246
<CURRENT-LIABILITIES> 5,918
<BONDS> 0
0
0
<COMMON> 52
<OTHER-SE> 39,075
<TOTAL-LIABILITY-AND-EQUITY> 46,246
<SALES> 9,585
<TOTAL-REVENUES> 9,585
<CGS> 4,360
<TOTAL-COSTS> 4,093
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,248
<INCOME-TAX> 438
<INCOME-CONTINUING> 810
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 810
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
