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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, 1998
[ ] 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.
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(Exact name of registrant as specified in its charter)
DELAWARE 33-0509785
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(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 8, 1997
- ----- -----------
Common Stock, $.01 Par Value 5,674,229
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CN BIOSCIENCES, INC.
INDEX TO FORM 10-Q
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1998
(unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Income for the Three Months
Ended March 31, 1998 and 1997 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997 (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 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES
INDEX OF EXHIBITS
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CN BIOSCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
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(UNAUDITED) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and short-term investments $ 5,027,000 $ 17,692,000
Accounts receivable, net 8,087,000 5,914,000
Inventories 19,416,000 18,309,000
Other current assets 3,008,000 2,800,000
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Total current assets 35,538,000 44,715,000
Property and equipment, net 4,566,000 4,528,000
Intangible assets, net 10,105,000 10,330,000
Other assets 1,589,000 838,000
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Total assets $ 51,798,000 $ 60,411,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 2,746,000 $ 2,505,000
Liability for purchase of business -- 10,500,000
Accrued expenses 3,742,000 3,898,000
Other current liabilities 1,238,000 837,000
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Total current liabilities 7,726,000 17,740,000
Other liabilities 3,526,000 3,565,000
Stockholders' equity:
Common stock 57,000 56,000
Additional paid-in capital 43,025,000 42,481,000
Accumulated deficit (1,896,000) (3,043,000)
Foreign currency translation adjustment (640,000) (388,000)
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Total stockholders' equity 40,546,000 39,106,000
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Total liabilities and stockholders' equity $ 51,798,000 $ 60,411,000
============ ============
</TABLE>
See accompanying notes.
Note: The balance sheet at December 31, 1997 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.
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CN BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------
1998 1997
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<S> <C> <C>
Sales $12,482,000 $ 9,585,000
Cost of sales 5,645,000 4,360,000
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Gross profit 6,837,000 5,225,000
Operating expenses:
Selling, general and
administrative 4,213,000 3,471,000
Research and development 850,000 622,000
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Total operating expenses 5,063,000 4,093,000
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Income from operations 1,774,000 1,132,000
Interest income 45,000 116,000
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Income before income taxes 1,819,000 1,248,000
Provision for income taxes 672,000 438,000
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Net income $ 1,147,000 $ 810,000
=========== ===========
Net income per share
Basic $ .20 $ .16
=========== ===========
Diluted $ .20 $ .15
=========== ===========
Shares used in per share
computations
Basic 5,652,000 5,161,000
=========== ===========
Diluted 5,862,000 5,525,000
=========== ===========
</TABLE>
See accompanying notes.
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CN BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,147,000 $ 810,000
Adjustments to reconcile net income to net
cash used in operations:
Depreciation and amortization 770,000 546,000
Additions to inventory reserve 105,000 105,000
Changes in assets and liabilities:
Accounts receivable, trade (2,329,000) (1,194,000)
Inventories (1,422,000) (455,000)
Other current assets (229,000) 180,000
Other assets (1,507,000) (333,000)
Accounts payable, trade 299,000 182,000
Accrued expenses 16,000 (61,000)
Other current liabilities 429,000 (42,000)
Other liabilities (32,000) (107,000)
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Net cash used in operating activities (2,753,000) (369,000)
INVESTING ACTIVITIES
Purchases of property and equipment (284,000) (248,000)
Purchase of business (10,500,000) --
Other (300,000) --
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Net cash used in investing activities (11,084,000) (248,000)
FINANCING ACTIVITIES
Proceeds from lines of credit -- --
Payments on long-term debt -- --
Proceeds from the sale of common stock 1,204,000 15,000
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Net cash provided by financing activities 1,204,000 15,000
Effect of exchange rate changes on cash (32,000) (82,000)
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Net decrease in cash and cash equivalents (12,665,000) (684,000)
Balance at beginning of period 17,692,000 14,704,000
------------ ------------
Balance at end of period $ 5,027,000 $ 14,020,000
============ ============
Supplemental cash flow information:
Interest paid during the period
$ 15,000 $ 34,000
============ ============
Income taxes paid during the period $ 29,000 $ 488,000
============ ============
</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 finanical statements and notes thereto for the
year ended December 31, 1997 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 STANDARDS
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement No. 130, Comprehensive Income, ("SFAS 130"), and
Statement No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131"). SFAS 130 establishes new rules for the reporting and
display of comprehensive income and its components, however, the adoption of
SFAS 130 had no impact on the Company's net income or stockholder's equity. SFAS
130 requires the change in the foreign currency translation adjustment be
included in comprehensive income. As adjusted for this item, comprehensive
income for the three month periods ended March 31, 1998 and 1997 are $993,000
and $421,000, respectively. SFAS 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. SFAS 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The adoption of SFAS 131 did not affect
results of operations or financial position, and did not affect the disclosure
of segment information because SFAS 131 is not required to be applied to interim
financial statements in the initial year of adoption.
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, 1998 December 31, 1997
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<S> <C> <C>
Finished products $ 15,236,000 $ 15,542,000
Semi-finished products, raw materials
and supplies 7,203,000 6,056,000
Work-in-progress 637,000 517,000
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23,076,000 22,115,000
Reserves for excess materials (3,660,000) (3,806,000)
------------ ------------
Total $ 19,416,000 $ 18,309,000
============ ============
</TABLE>
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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.
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. (now know as OSI Pharmaceuticals, 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.
In December 1997, the Company expanded its molecular biology
capabilities with the purchase of all of the outstanding capital stock of
Novagen, Inc. ("Novagen"), a privately owned company, together with all of the
outstanding capital stock of its parent holding company, for a purchase price of
$10.5 million cash. Assets acquired included receivables and inventory, and
intangible assets including in-process technology valued at $6.8 million, which
was written off effective as of the purchase date. The acquisition of this
business further broadened the Company's product line and added an important
brand identity in molecular biology.
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. Recent fluctuations in inventory reserve levels have not been material to
the Company's financial position or results of operations.
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
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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. 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 Consolidated Statements of Operations expressed as a percentage of
sales.
<TABLE>
<CAPTION>
PERCENTAGE OF SALES
THREE MONTHS
ENDED MARCH 31,
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1998 1997
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<S> <C> <C>
Sales:
Core 83.3% 83.5%
Bulk 16.7 16.5
---- ----
Total sales 100.0 100.0
Cost of sales 45.2 45.5
---- ----
Gross profit 54.8 54.5
Selling, general and administrative expenses 33.8 36.2
Research and development 6.8 6.5
---- ----
Income from operations 14.2 11.8
Interest income 0.4 1.2
---- ----
Income before income taxes 14.6 13.0
Provision for income taxes 5.4 4.6
---- ----
Net income 9.2% 8.5%
</TABLE>
Three Months Ended March 31, 1998 Compared to the Three Months Ended
March 31, 1997
Sales. Sales increased 30.2% to $12.5 million for the three-month period
ended March 31, 1998, from $9.6 million for the comparable period in 1997. This
increase resulted from a 29.9% increase in core product sales, and an increase
in bulk sales of 31.8%. 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. The increase in core
product sales included the sales of Novagen, Inc., which was acquired in
December, 1997. Additional factors which management believes contributed to the
increase in sales during the period included increased orders from the Company's
recently introduced
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specialty catalogs and updated general catalogs, and other marketing
initiatives, including advertising in various publications.
Gross Profit. The Company's gross profit percentage increased to 54.8%
for the three-month period ended March 31, 1998 from 54.5% for the comparable
period in 1997. This increase resulted primarily from an increase in sales of
higher margin core products including the Novagen products, which were offset by
increased 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 21.4% to $4.2 million for the three-month period ended March
31, 1998 from $3.5 million for the comparable period in 1997, and decreased to
33.8% of sales for the three-month period ended March 31, 1998, from 36.2% for
the comparable period in 1997. The dollar increase in selling, general and
administrative expenses was primarily the result of incremental operational
costs relating to the Novagen business, increased administrative salaries and
selling costs related to expanded advertising programs and additional general
and specialty catalogs. 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
36.7% to $850,000 for the three-month period ended March 31, 1998, from $622,000
for the comparable period in 1997, and increased to 6.8% of sales for the
three-month period ended March 31, 1998 from 6.5% for the comparable period in
1997. The dollar increase in research and development expenses was primarily the
result of incremental operational costs relating to the Novagen business, and
increased research in the niche areas of neurosciences and glycobiology.
Interest income. Interest income decreased to $45,000 for the
three-month period ended March 31, 1998 from $116,000 for the comparable period
in 1997. The decrease resulted from decreased cash balances as a result of the
completion of the Novagen acquisition.
Income Taxes. Income tax expense increased to $672,000 for the
three-month period ended March 31, 1998 from $438,000 for the comparable period
in 1997 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 41.6%
to $1,147,000 for the three-month period ended March 31, 1998 from $810,000 for
the comparable period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company used $2.7 million of cash in operating activities in the
three months ended March 31, 1998, as compared to $369,000 in the comparable
prior period. Operating activities for both periods required cash primarily to
support increases in accounts receivable and inventory resulting from the growth
in product sales.
Net cash used in investing activities was $11.1 million in the
three-month period ended March 31, 1998, as compared to $248,000 in the
comparable prior period. Cash used in investing activities during the
three-month period ended March 31, 1998 included the funding of the purchase of
Novagen Inc., and capital expenditures related to replacements. Cash used in
investing activities during the prior period related primarily to improvements
to manufacturing and distribution capabilities in various locations.
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.
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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, 1998, the Company had cash, cash-equivalents and short term
investments of $5.0 million and working capital of $27.8 million. At March 31,
1998, $5.0 million was available under a Credit Facility with a commercial bank
which expires 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, will be on terms favorable to the
Company and its stockholders.
IMPACT OF YEAR 2000
During 1997, the Company developed a plan, and installed new operating
systems software and computer hardware, to address anticipated Year 2000 issues
in connection with its information systems and business relationships. It is
currently estimated that the net cost for review, analysis, modification and
testing of existing computer programs for both internal and external software
will be between $300,000 and $500,000. The Company has incurred a portion of
such expenses in the current and prior fiscal years and it is anticipated that a
substantial portion of the remaining estimated cost will be incurred during the
remainder of this year and next year. In accordance with generally accepted
accounting principles, these costs are expensed as incurred.
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
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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 institutions, sometimes without
advance notice. Furthermore, government proposals aiming to reduce or eliminate
budgetary deficits have in the past 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
Novagen, Inc. 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. The Company successfully completed the purchase of
Novagen, Inc. in December 1997. Although management expects to be able to
integrate the business activities of Novagen into its existing marketing and
distribution facilities and to gain synergies and growth, there can be no
assurance that such integration will be successful or that sales and profits
will increase. If the Company is unable to integrate Novagen, there could be a
material adverse effect on the Company's business financial condition and
results of operations.
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
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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 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 Roche Molecular Biochemicals, 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. 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 16.7% of net sales during the quarter ended March 31, 1998,
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.
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
12
<PAGE> 13
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 be
indicative of results in subsequent periods.
Uncertainty of Future Operating Results. Although the Company had net
income for 1995, 1996 and the first quarter of 1998, the Company incurred a net
loss for the year ended December 31, 1997 due to a one time write-off of
in-process technology associated with the acquisition of Novagen, Inc. 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.
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.
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. Additionally, the Company
believes that the molecular biology area, in which Novagen, its newly acquired
brand, competes, has a higher incidence of involvement in patent disputes. 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.
13
<PAGE> 14
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, Oncogene Research Products and Novagen
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 certain cash balances and the capital stock of its
subsidiaries, and has no independent means of generating operating revenues. As
a holding company, the Company depends primarily 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.
Substantial Influence of Principal Stockholder. The Company's principal
stockholder, Warburg, Pincus Investors, L.P. ("Warburg") beneficially owns
approximately 40% of the Company's Common Stock, par value $.01 per share (the
"Common Stock"). 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.
14
<PAGE> 15
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 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required.
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)(xxiii) Amendment to Loan Agreement, dated April 10, 1998, 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 14, 1998 /s/ Stelios B. Papadopoulos
----------------------------------------
Stelios B. Papadopoulos
Chief Executive Officer, Chairman
and President
(duly authorized officer)
May 14, 1998 /s/ James G. Stewart
----------------------------------------
James G. Stewart
Vice President, Chief Financial Officer
and Secretary
(principal financial officer)
17
<PAGE> 18
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
3(a) Amended and Restated Certificate of Incorporation*
3(b) Amended and Restated By-Laws*
10(n)(xxiii) Amendment to Loan Agreement, dated April 10, 1998, by and
between Silicon Valley Bank and Calbiochem-Novabiochem
Corporation.
11 Statement re computation of per share earnings
27 Financial Data Schedule
</TABLE>
- ---------------------
* 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)(xxiii)
- --------------------------------------------------------------------------------
SILICON VALLEY BANK
AMENDMENT TO LOAN AGREEMENT
BORROWER: CALBIOCHEM-NOVABIOCHEM CORPORATION
ADDRESS: 10394 PACIFIC CENTER COURT
SAN DIEGO, CALIFORNIA 92122
DATE: APRIL 10, 1998
THIS AMENDMENT TO LOAN AGREEMENT is entered into between SILICON VALLEY
BANK ("Silicon") and the borrower named above (the "Borrower").
The Parties 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 of September
30, 1995, as amended by that Amendment to Loan Agreement dated January 24, 1996,
as amended by that Amendment to Loan Agreement dated May 27, 1997, as amended by
that Amendment to Loan Agreement dated June 27, 1997 and as amended by that
Amendment to Loan Agreement dated December 22, 1997 (as so amended and as
otherwise amended from time to time, the "Loan Agreement") as follows:
(Capitalized terms used but not defined in this Amendment, shall have the
meanings set forth in the Loan Agreement.)
1. LIMITED WAIVER. Silicon and Borrower hereby agree the compliance with
the Quick Ratio financial covenant, as set forth in the section of the Schedule
to the Loan Agreement entitled "Financial Covenants (Section 4.1), is hereby
waived for the period ending December 31, 1997, provided that the parties hereto
understand and agree that such waiver does not mean or imply a waiver of this
provision in the future or any other term of provision of the Loan Agreement,
all of which, as modified by this Agreement, shall remain in full force and
effect.
2. MODIFICATION TO FINANCIAL COVENANT. The Quick Ratio financial
covenant set forth in the section of the Schedule to the Loan Agreement entitled
"Financial Covenants (Section 4.1)" is hereby amended to read as follows:
"QUICK ASSET RATIO: Parent shall maintain a ratio of "Quick Assets" to
current liabilities of not less than 1.25 to 1 for
each of the periods ending March 31, 1998 and June
30, 1998. Thereafter, Parent shall maintain a
ratio of "Quick Assets" to current liabilities of
not less than 1.75 to 1."
3. REPRESENTATIONS TRUE. Borrower represents and warrants to Silicon
that All representations and warranties set forth in the Loan Agreement, as
amended hereby, are true and correct.
4. 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 Silicon and the Borrower set
forth in full all of the
<PAGE> 2
SILICON VALLEY BANK AMENDMENT TO LOAN AGREEMENT
- --------------------------------------------------------------------------------
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,
and 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.
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: STELIOS B. PAPADOPOULOS
-------------------------- -------------------------------
TITLE: V.P. 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
------------------
1998 1997
----- -----
<S> <C> <C>
Net income (loss) 1,147 810
Average common shares outstanding 5,652 5,161
Net effect of dilutive common share equivalents
based on the treasure stock method 210 364
Adjustments to reflect requirements of the
Securities and Exchange Commission (Effect
of SAB 83) -- --
----- -----
Adjusted shares outstanding 5,862 5,525
----- -----
Historical net income (loss) per share reflecting
requirements of the SEC $0.20 $0.15
===== =====
Effect of assumed conversion of preferred
shares from date of issuance -- --
----- -----
Adjusted shares outstanding 5,862 5,525
----- -----
Pro Forma net income (loss) per share $0.20 $0.15
===== =====
</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, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,027
<SECURITIES> 0
<RECEIVABLES> 8,087
<ALLOWANCES> 0
<INVENTORY> 19,416
<CURRENT-ASSETS> 35,538
<PP&E> 4,566
<DEPRECIATION> 0
<TOTAL-ASSETS> 51,798
<CURRENT-LIABILITIES> 7,726
<BONDS> 0
0
0
<COMMON> 57
<OTHER-SE> 43,025
<TOTAL-LIABILITY-AND-EQUITY> 51,798
<SALES> 12,482
<TOTAL-REVENUES> 12,482
<CGS> 5,645
<TOTAL-COSTS> 5,063
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,819
<INCOME-TAX> 45
<INCOME-CONTINUING> 1,147
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,147
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
