<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 SEPTEMBER 30, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 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
N/A
(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 November 6, 1997
----- ----------------
Common Stock, $.01 Par Value 5,593,616
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CN BIOSCIENCES, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1997
(unaudited) and December 31, 1996 3
Condensed Consolidated Statements of Income for the Three
Months and Nine Months Ended September 30, 1997 and 1996
(unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 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
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES
INDEX OF EXHIBITS
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CN BIOSCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
(UNAUDITED) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and short-term investments $ 17,416,000 $ 14,704,000
Accounts receivable, net 5,668,000 4,487,000
Inventories 16,619,000 14,733,000
Other current assets 2,223,000 2,436,000
------------- -------------
Total current assets 41,926,000 36,360,000
Property and equipment, net 4,135,000 3,688,000
Intangible assets, net 4,552,000 4,836,000
Other assets 1,165,000 1,378,000
------------- -------------
Total assets $ 51,778,000 $ 46,262,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 2,461,000 $ 2,303,000
Accrued expenses 2,409,000 1,906,000
Other current liabilities 1,177,000 1,920,000
------------- -------------
Total current liabilities 6,047,000 6,129,000
Other liabilities 1,021,000 1,233,000
Stockholders' equity:
Common stock 58,000 52,000
Additional paid-in capital 42,292,000 38,736,000
Retained earnings (accumulated deficit) 2,773,000 (63,000)
Foreign currency translation adjustment (317,000) 271,000
Note receivable from stockholder (96,000) (96,000)
------------- -------------
Total stockholders' equity 44,710,000 38,900,000
------------- -------------
Total liabilities and stockholders' equity $ 51,778,000 $ 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
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CN BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 9,630,000 $ 8,835,000 $ 29,421,000 $ 25,400,000
Cost of sales 4,319,000 4,065,000 13,209,000 11,667,000
------------ ------------ ------------ ------------
Gross profit 5,311,000 4,770,000 16,212,000 13,733,000
Operating expenses:
Selling, general and administrative 3,399,000 3,245,000 10,448,000 9,430,000
Research and development 650,000 590,000 1,886,000 1,655,000
------------ ------------ ------------ ------------
Total operating expenses 4,049,000 3,835,000 12,334,000 11,085,000
------------ ------------ ------------ ------------
Income from operations 1,262,000 935,000 3,878,000 2,648,000
Interest income (expense), net 176,000 (219,000) 420,000 (613,000)
------------ ------------ ------------ ------------
Income before income taxes 1,438,000 716,000 4,298,000 2,035,000
Provision for income taxes 474,000 250,000 1,462,000 712,000
------------ ------------ ------------ ------------
Net income $ 964,000 $ 466,000 $ 2,836,000 $ 1,323,000
============ ============ ============ ============
Net income per share $ .17 $ .13 $ .50 $ .38
============ ============ ============ ============
Shares used in per share
computations 5,828,000 3,532,000 5,693,000 3,495,000
============ ============ ============ ============
</TABLE>
See accompanying notes.
4
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CN BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,836,000 $ 1,323,000
Adjustments to reconcile net income to net
cash provided by operations:
Depreciation and amortization 1,809,000 1,177,000
Additions to inventory reserve 285,000 155,000
Additions to allowance for doubtful accounts -- 1,000
Loss on disposal of property and equipment 5,000 5,000
Changes in assets and liabilities:
Accounts receivable, trade (1,474,000) (1,127,000)
Inventories (2,520,000) (506,000)
Other current assets 359,000 (550,000)
Other assets (832,000) (656,000)
Accounts payable, trade 474,000 203,000
Accrued expenses 515,000 226,000
Other current liabilities (704,000) 1,067,000
Other liabilities (220,000) (679,000)
-------------- --------------
Net cash provided by operating activities 533,000 639,000
INVESTING ACTIVITIES
Purchases of property and equipment (1,238,000) (387,000)
Other -- 17,000
-------------- --------------
Net cash used in investing activities (1,238,000) (370,000)
FINANCING ACTIVITIES
Proceeds from lines of credit -- 900,000
Payments on lines of credit -- (200,000)
Payments on long-term debt -- (789,000)
Proceeds from the sale of common stock 3,562,000 --
-------------- --------------
Net cash provided by (used in) financing activities 3,562,000 (89,000)
Effect of exchange rate changes on cash (145,000) (17,000)
-------------- --------------
Net increase in cash and cash equivalents 2,712,000 163,000
Balance at beginning of period 14,704,000 1,203,000
-------------- --------------
Balance at end of period $ 17,416,000 $ 1,366,000
============== ==============
Supplemental cash flow information:
Interest paid during the period $ 99,000 $ 618,000
============== ==============
Income taxes paid during the period $ 1,080,000 $ 50,000
============== ==============
</TABLE>
See accompanying notes.
5
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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 financial 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 effective for both
interim and annual financial statements for periods ending after December 15,
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 and other common stock equivalents will be excluded. The impact
is expected to result in no change to primary earnings per share for the quarter
ended September 30, 1997, and a change in primary earnings per share to $.14 per
share for the quarter ended September 30, 1996. 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 239,810 shares of
common stock, par value $.01 per share, at $13.50 per share. The offering also
included 910,190 shares sold by one of the Company's founding stockholders. The
Company raised net proceeds of $2,593,000 after deducting 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>
September 30, December 31,
1997 1996
------------- -------------
<S> <C> <C>
Finished products $ 14,661,000 $ 13,777,000
Semi-finished products, raw materials
and supplies 5,147,000 4,131,000
Work-in-progress 618,000 525,000
------------- -------------
20,426,000 18,433,000
Reserves for excess materials (3,807,000) (3,700,000)
------------- -------------
Total $ 16,619,000 $ 14,733,000
============= =============
</TABLE>
6
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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.
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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 revenues 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.
Additionally, the balance sheets of the Company's international
subsidiaries are translated into U.S. Dollars and consolidated with the balance
sheets of the Company's domestic entities in accordance with U.S. accounting
requirements. Changes in the U.S. dollar value of the foreign currency
denominated assets are accounted for as an adjustment to stockholders' equity.
Therefore, changes from reporting period to reporting period in the exchange
rates between various foreign currencies and the U.S. dollar have had, and will
continue to have an impact on the foreign currency translation component of
stockholders' equity reported by the Company, and such effect may be material in
any individual reporting period.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, items from the
Company's Condensed Consolidated Statements of Income expressed as a percentage
of sales.
<TABLE>
<CAPTION>
PERCENTAGE OF SALES
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales:
Core 83.1% 80.6% 83.0% 81.4%
Bulk 16.9 19.4 17.0 18.6
-------- -------- -------- --------
Total sales 100.0 100.0 100.0 100.0
Cost of sales 44.8 46.0 44.9 45.9
-------- -------- -------- --------
Gross profit 55.2 54.0 55.1 54.1
Selling, general and administrative 35.3 36.7 35.5 37.1
Research and development 6.7 6.7 6.4 6.5
-------- -------- -------- --------
Income from operations 13.2 10.6 13.2 10.4
Interest income (expense), net 1.8 2.5 1.4 2.4
-------- -------- -------- --------
Income before income taxes 15.0 8.1 14.6 8.0
Provision for income taxes 4.9 2.8 5.0 2.8
-------- -------- -------- --------
Net income 10.1% 5.3% 9.6% 5.2%
======== ======== ======== ========
</TABLE>
8
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Three Months Ended September 30, 1997 Compared to the Three Months Ended
September 30, 1996
Sales. Sales increased 9.0% to $9.6 million for the three-month period
ended September 30, 1997 from $8.8 million for the comparable period in 1996.
This increase resulted from a 12.4% increase in core product sales, offset by a
decrease in bulk sales of 5.2%. 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 September 30, 1997. Additional factors which management
believes contributed to the increase in sales during the period include
increased marketing initiatives and advertising resulting in additional orders
from the Company's general and specialty catalogs.
Gross Profit. The Company's gross profit percentage increased to 55.2% for
the three-month period ended September 30, 1997 from 54.0% for the comparable
period in 1996. This increase resulted primarily from an increase in sales of
higher margin core products. Management believes that additional factors
contributing to improvements in gross margins included continued improved
operating efficiencies from increased volume, and selected price increases.
Selling, General and Administrative. Selling, general and administrative
expenses increased 4.7% to $3.4 million for the three-month period ended
September 30, 1997 from $3.2 million for the comparable period in 1996, but
decreased to 35.3% 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 10.2%
to $650,000 for the three-month period ended September 30, 1997 from $590,000
for the comparable period in 1996, but remained consistent with the comparable
prior period in 1996 at 6.7% of sales. The dollar increase in research and
development expenses 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 $176,000 for the three-month period ended September 30, 1997
from interest expense of $219,000 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 and follow-on offerings
of common stock in October 1996 and April 1997, respectively.
Income Taxes. Income tax expense increased to $474,000 for the three-month
period ended September 30, 1997 from $250,000 for the comparable period in 1996.
The increase resulted primarily from increased profitability and increased
estimated tax rates in 1997 due to a decrease in available operating loss
carryforwards, certain of which were used in prior years.
Net Income. As a result of the above factors, net income increased 106.9%
to $964,000 for the three-month period ended September 30, 1997 from $466,000
for the comparable period in 1996.
Nine months Ended September 30, 1997 Compared to the Nine months Ended
September 30, 1996
Sales. Sales increased 15.8% to $29.4 million for the nine-month period
ended September 30, 1997 from $25.4 million for the comparable period in 1996.
This increase resulted primarily from an 18.2% increase in core product sales,
enhanced by a moderate increase in bulk sales of 5.6%. 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 nine-month period ended September 30, 1997. Additional factors
which management believes contributed to the increase in sales during the period
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include increased marketing initiatives and advertising resulting in additional
orders from the Company's catalogs.
Gross Profit. The Company's gross profit percentage increased to 55.1% for
the nine-month period ended September 30, 1997 from 54.1% for the comparable
period in 1996. This increase resulted primarily from an increase in sales of
higher margin core products. Management believes that additional factors
contributing to improvements in gross margins included continued improved
operating efficiencies from increased volume, and selected price increases.
Selling, General and Administrative. Selling, general and administrative
expenses increased 10.8% to $10.4 million for the nine-month period ended
September 30, 1997 from $9.4 million for the comparable period in 1996, but
decreased to 35.5% of sales for the period from 37.1% 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 14%
to $1.9 million for the nine-month period ended September 30, 1997 from $1.6
million for the comparable period in 1996, but decreased to 6.4% of sales for
the period from 6.5% for the comparable period in 1996. The dollar increase in
research and development expenses 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. The decrease in
research and development expenses as a percentage of sales was attributable to
the increased level of sales.
Interest income (expense), net. Interest income (expense), net increased to
interest income of $420,000 for the nine-month period ended September 30, 1997
from interest expense of $613,000 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 and follow-on offerings
of common stock in October 1996 and April 1997, respectively.
Income Taxes. Income tax expense increased to $1.5 million for the
nine-month period ended September 30, 1997 from $712,000 for the comparable
period in 1996. The increase resulted primarily from increased profitability and
increased estimated tax rates in 1997 due to a decrease in available operating
loss carryforwards, certain of which were used in prior years.
Net Income. As a result of the above factors, net income increased 114.4%
to $2.8 million for the nine-month period ended September 30, 1997 from $1.3
million for the comparable period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company provided $533,000 of cash from operating activities in the
nine-months ended September 30, 1997, as compared to $639,000 of cash provided
by operating activities in the comparable prior period. Cash provided from
operating activities was less than net income for the nine-month periods ended
September 30, 1997 and September 30, 1996 primarily to support increases in
accounts receivable and inventory resulting from growth in core product sales.
Net cash used in investing activities was $1,238,000 in the nine-month
period ended September 30, 1997, as compared to $370,000 in the comparable
period in 1996. Cash used in investing activities during both periods consisted
of capital expenditures for property and equipment. In 1997, these expenditures
related primarily to improvements to manufacturing and distribution capabilities
in various locations.
In October 1996, the Company completed an initial public offering of
1,840,000 shares of Common Stock at $12.50 per share. In April 1997, the Company
completed a follow-on public offering of 239,810 shares of Common Stock at
$13.50 per share. The follow-on offering also included 910,190 shares sold by
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a founding stockholder of the Company. The net proceeds from these offerings
were $20,140,000 and $2,593,000, respectively.
During the nine-month period ended September 30, 1997, the Company's
foreign currency translation account reduced stockholders' equity by $588,000 as
a result of the translation of the Company's international subsidiaries balance
sheets into U.S. Dollars. Such changes would not be realized through the
Company's income statement unless the underlying foreign-currency denominated
assets were liquidated.
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 September 30, 1997, the Company had cash, cash-equivalents, and
short-term investments of $17.4 million and working capital of $35.9 million. At
September 30, 1997, $5.0 million was available under a Credit Facility with a
commercial bank, which will expire in June 1999.
The Company believes that its existing capital resources will be adequate
to fund its operations. 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 have, in the past, been frozen for extended periods
or have otherwise become unavailable to various
11
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institutions, sometimes without advance notice. Furthermore, 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 OSI Pharmaceuticals, Inc., (formerly
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.
12
<PAGE> 13
Dependence on Licensing as a Source of Products. Many of the Company's
products are manufactured 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 (which has entered into an agreement to be acquired by
F. Hoffman-La Roche AG in May 1997), 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 17.0% of net sales during the nine months ended September 30,
1997, 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
13
<PAGE> 14
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 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
14
<PAGE> 15
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
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 40.2% of the Company's Common Stock, par value $.01 per share (the
"Common Stock"), as of November 6, 1997. Because of such ownership, Warburg has
substantial influence 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
15
<PAGE> 16
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 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.
16
<PAGE> 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required.
17
<PAGE> 18
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*
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 September 30, 1997.
- ---------------------
* Incorporated by reference from the Registrant's Form 10-Q for the quarterly
period ended September 30, 1996 (File No. 000-21281)
18
<PAGE> 19
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.
November 11, 1997 /s/ Stelios B. Papadopoulos
-----------------------------------
Stelios B. Papadopoulos
Chief Executive Officer, Chairman
and President
(duly authorized officer)
November 11, 1997 /s/ James G. Stewart
-----------------------------------
James G. Stewart
Vice President, Chief Financial Officer
and Secretary
(principal financial officer)
19
<PAGE> 20
INDEX OF EXHIBITS
Exhibit Number Description
- -------------- -----------
3(a) Amended and Restated Certificate of Incorporation*
3(b) Amended and Restated By-Laws*
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)
20
<PAGE> 1
Exhibit 11.1
CN BIOSCIENCES, INC.
COMPUTATION OF EARNINGS PER SHARE
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) 964 466 2,836 1,323
Average common shares outstanding 5,562 1,059 5,386 1,059
Net effect of dilutive common share equivalents
based on the treasury stock method 266 988 307 988
Adjustments to reflect requirements of the
Securities and Exchange Commission (Effect
of SAB 83 -- 50 -- 50
------------ ------------ ------------ ------------
Adjusted shares outstanding 5,828 2,097 5,693 2,097
------------ ------------ ------------ ------------
Historical net income (loss) per share reflecting
requirements of the SEC $ 0.17 $ 0.22 $ 0.50 $ 0.63
------------ ------------ ------------ ------------
Effect of assumed conversion of preferred
shares from date of issuance -- 1,435 -- 1,398
------------ ------------ ------------ ------------
Adjusted shares outstanding 5,828 3,532 5,693 3,495
------------ ------------ ------------ ------------
Pro Forma net income (loss) per share $ 0.17 $ 0.13 $ 0.50 $ 0.38
------------ ------------ ------------ ------------
</TABLE>
21
<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 NINE
MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 17,416
<SECURITIES> 0
<RECEIVABLES> 5,668
<ALLOWANCES> 0
<INVENTORY> 16,619
<CURRENT-ASSETS> 41,926
<PP&E> 4,135
<DEPRECIATION> 0
<TOTAL-ASSETS> 51,778
<CURRENT-LIABILITIES> 6,047
<BONDS> 0
<COMMON> 0
0
58
<OTHER-SE> 44,652
<TOTAL-LIABILITY-AND-EQUITY> 51,778
<SALES> 29,421
<TOTAL-REVENUES> 29,421
<CGS> 13,209
<TOTAL-COSTS> 12,334
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,298
<INCOME-TAX> 1,462
<INCOME-CONTINUING> 2,836
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,836
<EPS-PRIMARY> 0.50
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