<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 1996 Commission File Number 1-12748
CHESAPEAKE BIOLOGICAL LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1176514
(State of incorporation) (IRS Employer Identification No.)
11412 Cronridge Drive, Owings Mills, MD 21117 2834
(Address of principal executive offices) (zip code) (SIC)
(410) 998-9800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
-------------------
Class A Common Stock, par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve 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
--- ---
As of May 15, 1996 the aggregate market value of the outstanding shares of
the Registrant's Class A Common Stock, par value $.01 per share, held by non-
affiliates of the Registrant was approximately $6,467,000 based on the closing
bid price of the Class A Common Stock on May 15, 1996.
Number of shares outstanding of each of the Registrant's classes of common
stock, as of May 15, 1996.
Class A Common Stock, par value $.01 per share - 3,979,938 shares
- - --------------------------------------------------------------------------------
This form 10-K consists of 32 pages. The index to exhibits is set forth on
page 18.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation 5-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K.
[ ]
1
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL OVERVIEW AND STRATEGY
Chesapeake Biological Laboratories, Inc. (CBL) is a Baltimore based
specialty pharmaceutical and medical device manufacturer with emphasis on the
formulation, filling, and packaging of small volume sterile liquid products.
Capabilities include Class 100 aseptic filling of vials and syringes, sterile
filtrations, aseptic packaging and terminal sterilizations. Finished product
packaging capability include unit carton, formed tray, Tyvek lid and pouch
sealing. In addition, CBL offers a wide range of product and process development
services encompassing stable formulation development, package and label design,
and process validations of formulation, filling, sterilization, lyophilization,
and packaging procedures. In this regard, CBL has developed special skills in
handling unique and process sensitive biologically derived products, such as
genetically engineered proteins, enzymes and antibodies.
CBL's customers span the range of the pharmaceutical and medical device
industry, from major pharmaceutical firms to small emerging biotechnology
companies. The larger firms typically contract with CBL to prepare experimental
products for human clinical trials, as well as to manufacture small commercial
lots of pharmaceuticals or medical devices no longer suited for large scale
production. The smaller biotechnology firms, more often, request considerable
product and process development prior to the manufacture of their products.
Presently, CBL's operating revenues are derived from two principal sources:
commercial manufacturing and developmental services.
COMMERCIAL MANUFACTURING
CBL provides manufacturing services on a contractual basis for Food and
Drug Administration (FDA) approved commercial drugs and medical devices as well
as experimental products for human clinical trials. All products manufactured
by the Company are made in strict compliance with the FDA's Good Manufacturing
Practice regulation. The Company's largest manufacturing contracts are with
Allergan Botox Ltd., ("Allergan") for the manufacture of VITRAX-TM-, and Solvay
Veterinary, Inc. ("Solvay") for the manufacture of EQURON.
DEVELOPMENTAL SERVICES
The Company offers a wide range of services to other companies to assist in
the development of new pharmaceuticals and medical devices. Due to the scope of
CBL's developmental services, the Company occupies a unique niche in the support
of emerging biotechnology companies. The Company's scientific staff will
undertake research and development for a customer which includes research on
stable formulations, test method development and validations, and process design
and manufacturing validations. In addition, the Company will help the customer
select appropriate packaging components, develop stability protocols and conduct
accelerated and on-going stability testing. Once a stable formulation is
developed and the manufacturing process validated, the product is turned over to
CBL's manufacturing group to produce the product for clinical investigations.
2
<PAGE>
MANUFACTURING FACILITIES AND RAW MATERIALS
CBL's corporate headquarters are in a 19,200 square foot facility in the
Crondall Business Park in Owings Mills, a suburb of Baltimore, Maryland. The
Company's production operations are located in a 15,000 square foot facility in
the Seton Industrial Park, in northwest Baltimore. The Crondall facility houses
the Company's executive and administrative offices, Good Manufacturing Practices
("GMP") warehouse facilities and shipping and receiving operations. All of the
Company's manufacturing and laboratory operations occur at the Seton facility.
The Company's production facility is required by law to operate under GMPs,
established by the FDA for pharmaceutical manufacturing facilities. GMP
regulations establish standards for personnel, equipment, production, quality
control, record keeping and other related requirements. In order for any new
process or process modification to be implemented, an internal validation to
assure reproducibility and testing accuracy must be performed by the Company.
This validation effort is periodically checked by FDA inspectors, and failure to
comply fully with the FDA findings of irregularity can ultimately result in
product recall and/or process shut down.
The Company has an adequate supply of raw materials for all of its
products. No difficulty has been experienced to date in acquiring sufficient
quantities of raw materials. All other materials required for manufacturing
processes are readily available.
PATENTS AND PROPRIETARY RIGHTS
Patent and proprietary rights issues play an important role in the
pharmaceutical and medical device industries. The Company typically has little
involvement with respect to patent and proprietary matters relating to products
or compounds manufactured by the Company but developed and owned by others.
However, in the event that any of these products are found to infringe the
patent or proprietary rights of third parties, the Company could be precluded
from continuing to manufacture these products, resulting in a loss of
manufacturing revenues.
In respect to the sodium hyaluronate (HA) based products developed by the
Company, including Vitrax-TM-, now owned by Allergan, the Company relies
primarily upon trade secrets and proprietary know-how to maintain its
competitive position. While management believes that the Company's process for
producing HA may in certain respects be patentable, management has determined
that enforcement of such a patent would be difficult and have opted to focus
instead on protection of the process as a trade secret.
HA and HA-based products have on several occasions been the subject of
patent infringement litigation, sometimes involving the Company. A United
States patent entitled "Ultra Pure Hyaluronic Acid and Use Thereof", U.S. Patent
Number 4,141,973 was issued to Endre A. Balazs on February 27, 1979 and expired
in February 1996.
While the Company has been a party to two previous lawsuits involving the
since expired Balazs patent, both were dismissed without prejudice and without
any judicial determination as to whether the activities of the Company with
regard to HA-based products, including Vitrax-TM-, infringed the Balazs patent.
3
<PAGE>
COMPETITION
In general, the competition in the human and veterinary healthcare products
industry for the manufacturing and marketing of products is intense.
Consequently, CBL chooses to invest its efforts in supporting these firms rather
than competing with them. CBL is in a unique position as a supplier of a broad
range of manufacturing and developmental services and is thereby insulated, to
some extent, from direct competition. The direct competition normally
associated with the industry is between biotechnology firms, pharmaceutical,
chemical and consumer product companies, any of which could be potential CBL
clients.
CBL's direct competition is limited to a few contract manufacturers and
several universities. Many of these do not offer the full range of services
available at CBL. However, there are some that can and do effectively compete
against specific segments of CBL's range of services.
EMPLOYEES
As of March 31, 1996, the Company had 48 full-time and 3 part-time
employees engaged in manufacturing and distribution, marketing and sales, plus
administration and finance. The Company's professional staff includes 5 persons
holding doctorate degrees in chemistry or biochemistry.
GOVERNMENTAL REGULATIONS
As a registered manufacturer of sterile pharmaceuticals and medical
devices, CBL's production facility is required to operate under the GMP
established by the FDA. The FDA has broad authority to inspect for compliance
with GMP regulations and to suspend manufacturing operations and order product
recalls if the Company is found to be out of compliance with GMP standards.
ADDITIONAL INFORMATION
No portion of the Company's business is subject to renegotiation of profits
or termination of contracts or subcontracts at the election of the United States
Government.
ITEM 2. PROPERTIES
The Company's corporate headquarters, warehouse facility and shipping and
receiving operations occupy 19,200 square feet in Owings Mills, Maryland. The
Company signed a lease dated October 6, 1993, for the facility with the Crondall
Lane Limited Partnership. The initial term of the lease expires December 31,
1998 with two, two-year renewal options. The annual rental payments are $147,000
with CBL responsible for all operating and maintenance costs.
The Company's production facility occupies approximately 15,000 square feet
of space in the Seton Industrial Park in Baltimore, Maryland. The Company leases
its corporate headquarters pursuant to the terms of a lease agreement with Jiffy
Lube International of Maryland, Inc. The lease has an initial term of 6 1/2
years, ending December 31, 1998, with two, two-year renewal options. The
operating lease has reduced rental payments in the early years with accelerated
payments toward the end of the lease
4
<PAGE>
term. The average rental expense of the minimum annual rental payments over the
initial 6 1/2 year term is $192,084 per year. CBL is responsible for all
administrative, operating and maintenance costs relating to its leased premises.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
a) The Company's Class A Common Stock is listed on the American Stock
Exchange - Emerging Company Marketplace (AMEX-ECM) under the trading symbol
"PHD.EC".
The price range of the Company's Class A Common Stock from April 1, 1995 to
March 31, 1996 was:
High Low
---- ---
Closing price $2.75 $1.375
Subsequent to March 31, 1996 and through May 15, 1996, the Company's stock has
traded at a low of $1.25.
b) As of May 15, 1996 there were approximately 270 record holders of the
Company's Class A Common Stock.
c) The Company has never declared or paid a cash dividend on its Class A
Common Stock. Earnings, if any, are expected to be retained to finance the
development of the Company's business.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
(in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Operating Revenue $6,174 $6,982 $5,213 $3,453 $2,263
Total Operating Expenses $5,637 $6,617 $4,649 $3,139 $2,378
Income (Loss) from Operations $ 537 $ 365 $ 564 $ 314 $ (114)
Gain from Extraordinary Items $ --- $ --- $1,055 $42 $ 138
Net Income (Loss) $ 309 $ 566 $1,563 $ 257 $ (8)
Earnings Per Common Share $ .078 $ .144 $ .393 $ .069 $(.002)
</TABLE>
5
<PAGE>
CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
(in thousands)
<S> <C> <C> <C> <C> <C>
Working Capital $2,161 $1,822 $1,493 $1,139 $ 416
Total Assets $4,320 $4,138 $3,587 $2,264 $1,416
Long Term Obligations $ 319 $ 290 $ 176 $ 911 $ 877
Stockholders' Equity $3,384 $3,075 $2,493 $ 875 $ 87
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues for the year ended March 31, 1996 decreased $808,000 or 12%
compared to a 34% increase at March 31, 1995 compared to fiscal year 1994.
Vitrax-TM- sales to Allergan decreased to $2.4 million from $3.4 million in
fiscal 1995 due to Allergan's reduction of its inventory levels. In addition, a
change in the invoicing procedure to Cel-Sci reduced revenues by $738,000 but
had only a minimal effect on CBL margins. Sales to customers other than
Allergan and Cel-Sci increased by 43% for the year compared to a 3% decrease for
the year ended March 31, 1995. During fiscal year 1996, the Company entered
into a strategic alliance with Pasadena Research Laboratories, Inc. (PRL), a
privately held development, marketing and distribution organization. The
Company will develop, and after FDA approval, manufacture the developed products
and PRL will sell the specialty generic products. The Company recorded $161,000
in revenue related to this alliance based upon services provided in the current
year. Sales to new customers other than the alliance in fiscal year 1996
totalled $532,000.
Cost of revenues which includes material, labor and overhead as a percent
of revenues were 64%, 73% and 64% for the fiscal years 1996, 1995 and 1994,
respectively. The gross margins were 36%, 27% and 36%, respectively for the
fiscal years 1996, 1995 and 1994. In addition, the actual gross margin on sales
to Allergan increased due to improved manufacturing operations in fiscal year
1996 compared to fiscal year 1995. The fact that Vitrax-TM-, with its improved
but still relatively low margin, was a lower percent of overall sales in fiscal
year 1996 than in fiscal year 1995 contributed to the overall increase in gross
margin as a percentage of revenues. The change in the invoicing procedure to
Cel-Sci, while it had little effect on the gross margin dollars, did raise the
fiscal year 1996 margin as a percent of revenues.
Operating expenses include selling, general and administrative plus
research and development costs which as a percentage of revenues were 28%, 22%
and 26% for the fiscal years 1996, 1995 and 1994, respectively. The fiscal year
1996 costs were 11% over fiscal year 1995 which was 15% over fiscal year 1994.
The 1996 cost increase was primarily due to commissions paid to a field sales
representative and the full year cost of a manager hired in fiscal year 1995.
In addition, the Company launched a new R&D effort during the third quarter of
fiscal year 1996. This function is devoted to product specific R&D and is an
extension of CBL's development and processing abilities. Fiscal year 1996 R&D
costs were $44,000 compared to none in prior years.
As discussed in prior year's 10-K reports, during fiscal years 1995 and
1994, the Company renegotiated certain of the long-term contractual obligations
to a subsidiary of Allergan, Inc. and to Edward Weck, Inc. a subsidiary of
Bristol-Myers Squibb Company. As a result of these renegotiations the Company
realized extraordinary gains of $1,055,000 in fiscal year 1994.
6
<PAGE>
During fiscal year 1996, it was determined that the Company's Contract
Manufacturing Agreement with Allergan for the production of Vitrax-TM- will not
be renewed beyond its current expiration date of February 1997. The Company's
facility remains at this time as the only FDA approved manufacturing facility
for Vitrax-TM-, but Allergan is currently seeking approval for the manufacture
of Vitrax-TM- at its own facility in Ireland. Until February 1997, and
thereafter until such time as Allergan is successful in obtaining FDA approval
for manufacture in Ireland, the Company expects to continue to manufacture
commercial quantities of Vitrax-TM- for Allergan.
The Company has recorded a provision for income taxes in fiscal year 1996
and a reduction of the deferred tax asset recorded in fiscal year 1995. The
effective tax rate in fiscal year 1996 was 40%. During fiscal year 1995, the
Company recorded a deferred tax asset, net of a deferred tax liability, of
$210,000 to recognize the future benefit of its remaining net operating loss
carryforwards ("NOL") for income tax purposes. The NOL's, generated in prior
years which had totaled approximately $2,900,000 as of March 31, 1992, had been
reduced to approximately $121,000 as of March 31, 1996, due to profitable
operations. Recognition of the deferred tax asset increased fiscal year 1995
net profits by $210,000.
FINANCIAL CONDITION AND LIQUIDITY
On March 31, 1996, the Company had cash and cash equivalents of $241,000
compared to $161,000 at March 31, 1995. Cash provided by operations of $576,000
was due primarily to earnings plus depreciation and amortization offset by an
increase in inventories and the decrease in accounts payable.
The Company is currently working with Baltimore City and State of Maryland
economic development officials, as well as with representatives of the Company's
primary bank, to arrange credit enhanced financing for the construction of a new
pharmaceutical production facility. In the event that the Company's efforts are
successful in this regard, the Company would incur additional equipment leasing
obligations, as well as long-term debt as required to finance construction
costs.
CAPITAL RESOURCES
As reported in last year's 10-K, during fiscal year 1995, the Company
secured a $750,000 Revolving Line of Credit and a $2,000,000 Equipment
Lease/Finance Line of Credit from First Union National Bank. As of March 31,
1996, the Company had no outstanding borrowing against the Revolving Line of
Credit and had outstanding leases of $54,000 against the Equipment Lease/Finance
Line of Credit.
As noted above, the Company is currently working with Baltimore City and
State of Maryland economic development officials, as well as with
representatives of its primary bank to arrange financing for the construction by
the Company of a new pharmaceutical production facility. In the event that the
Company is successful in this regard, it is anticipated that the existing
Revolving Line of Credit will remain in place, and that the existing
Equipment/Lease Finance Line of Credit will be replaced with a new equipment
leasing line of credit as part of the financing package for the new facility.
There can be no assurance, however, that the Company will be successful in its
efforts to finalize the financing necessary to construct the new facility.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are contained on pages 21 through 24 of this
report.
7
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors, executive officers and other key personnel of the Company
are as follows:
Name Age Position
---- --- --------
William P. Tew, Ph.D. 50 Chief Executive Officer and Chairman of the Board
Narlin B. Beaty, Ph.D. 46 President, Chief Operating Officer and Director
Thomas C.Mendelsohn 51 Vice President of New Business Development and
Director
John T. Janssen 57 Chief Financial Officer, Treasurer
Robert J. Mello, Ph.D. 45 Vice President of Quality and Regulatory Affairs
John C. Weiss, III 47 Director
Regis F. Burke 48 Director
WILLIAM P. TEW, PH.D. is a founder of the Company and has been Chairman of
the Board of the Company since operations began in 1980. Dr. Tew holds a
bachelor of science degree in chemistry and a master of science degree in
inorganic chemistry from Lamar University and a Ph.D. degree in bio-inorganic
chemistry from the University of Idaho. From 1975 to 1977, Dr. Tew was a Post-
doctoral Fellow in the Department of Physiological Chemistry at The Johns
Hopkins University School of Medicine and worked under the late Dr. Albert
Lehninger, a pioneer in the field of biochemistry. From 1977 to 1978, Dr. Tew
served as a Senior Research Scientist with Foxboro Analytical, Inc., a major
instrumentation company. From 1979 to 1982, Dr. Tew was an Instructor in the
Department of Physiological Chemistry and Medicine and from 1982 to 1983 he was
an Assistant Professor in the Department of Medicine at The Johns Hopkins
University School of Medicine.
NARLIN B. BEATY, PH.D. joined the Company in 1983 and serves as President
and Chief Operating Officer. Dr. Beaty holds a bachelor of science degree in
biology and a master of arts degree in botany from the University of Texas, and
a Ph.D degree in biological chemistry from the University of Michigan at Ann
Arbor. His professional associations include the American Association for the
Advancement of Science, the American Chemical Society, and the Biophysical
Society. In 1974, Dr. Beaty was awarded a scientific merit grant from the
University of Texas and between 1975 and 1983 he was the recipient of fellowship
awards from the National Institutes of Health. At CBL, Dr. Beaty has
progressively held the positions of Senior Research Chemist, Director of
Development, Chief Technical Officer, Acting President, and President.
THOMAS C. MENDELSOHN joined the Company in 1991 and serves as Vice
President of New Business Development and Corporate Secretary. Mr. Mendelsohn
holds a bachelor of arts degree in management from the University of Baltimore.
From 1966 to 1991, Mr. Mendelsohn served on the Board of Directors and was an
officer of Barre-National Inc., a pharmaceutical company located in Baltimore,
Maryland. For the last 12 of those years, he served as Senior Vice President of
Sales and Marketing.
JOHN T. JANSSEN joined the Company in January 1993 as Chief Financial
Officer. Mr. Janssen, a Certified Public Accountant, has a bachelor of science
degree in accounting from Lehigh University and a masters in business management
from Central Michigan University. He has over 30 years of diversified financial
management experience including pharmaceutical,
8
<PAGE>
food processing and consumer product companies. In the twelve years prior to
joining CBL he was on the board of directors and was the Chief Financial Officer
of both Barre-National Inc. (Baltimore) and Genesee Brewing Co. (Rochester, NY).
ROBERT J. MELLO, PH.D. rejoined the Company in February 1994 and serves as
Vice President of Quality and Regulatory Affairs. Dr. Mello holds a bachelor of
science degree in biology and a Ph.D. degree in Biochemistry from The Johns
Hopkins University School of Medicine. Dr. Mello had been with the Company for
10 years before joining Lederle Laboratories in 1992 as Manager, Validation
Services. At Lederle he established, coordinated and monitored validation
programs at 4 sites. During his 10 years with the Company Dr. Mello served
originally as Director of Research and Development and then as Director, Quality
Assurance and Regulatory Affairs and Corporate Secretary.
JOHN C. WEISS, III has been a director of CBL since 1986. He currently is
the Managing General Partner of Anthem Capital, L.P., a Baltimore based venture
capital firm. Currently, Mr. Weiss is affiliated with the NASBIC and has a seat
on the Board of Governors. Previously, he was the managing director of The
Maryland Venture Capital Trust from 1990 to 1994. From 1984 to 1990, Mr. Weiss
was the managing director of the Baltimore office of Arete Ventures, and from
1982 to 1984 a senior vice president with the Baltimore Economic Development
Corporation.
REGIS F. BURKE became a Director of the Company in April 1995. Mr. Burke
is a Certified Public Accountant who started his own practice in 1988. Mr.
Burke specializes in corporate transaction consulting, business planning,
business valuation and litigation support services. Prior to 1988, Mr. Burke
was a partner with Touche Ross & Co. an international accounting and management
consulting firm.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of The Securities Exchange Act of 1934 requires the Company's
officers and directors and persons who own more than ten percent (10%) of a
registered class of the Company's equity securities, to file a report of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Officers, directors and greater than ten-percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms that they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that with respect to the
Company's fiscal years 1996, 1995 and 1994 all filing requirements applicable to
its officers, directors and greater than ten-percent beneficial owners were
complied with.
ITEM 11. EXECUTIVE COMPENSATION AND RELATED INFORMATION
COMPENSATION COMMITTEE REPORT
As members of the Compensation Committee of the Chesapeake Biological
Laboratories Board of Directors, it is our duty to exercise the power and
authority of the Board of Directors with respect to the compensation of the
Company's executive officers.
9
<PAGE>
GENERAL COMPENSATION POLICY
Under the supervision of the Compensation Committee, the Company has
developed a compensation policy which is designed to attract and retain
qualified key executives critical to the Company's success and to provide such
executives with performance-based incentives tied to the growth and
profitability of the Company. It is our objective to have a portion of each
officer's compensation contingent upon the Company's performance as well as upon
the individual's contribution to the success of the Company as measured by
personal performance. Accordingly, each executive officer's compensation
package is fundamentally comprised of three elements: (i) base salary which
reflects individual performance and expertise; (ii) an incentive compensation
tied to the Company's profit, payable as an adjustment to base salary, and (iii)
long-term stock-based incentive awards through the Company's Employee Incentive
Stock Option Program which strengthen the mutuality of interests between the
executive officers and the Company's stockholders.
FACTORS
Because the Company is in a growth stage, the use of traditional standards
(such as profit levels and return on equity) are not appropriate as the sole
factor in evaluating the performance of its executive officers. Several of the
more important factors which were considered in establishing the components of
each executive officer's compensation package for the 1996 fiscal year are
summarized below. Additional factors were also taken into account, and we may
at our discretion apply entirely different factors, particularly different
measures of performance, in setting executive compensation for future fiscal
years, but all compensation decisions will be designed to further the general
compensation policy indicated above.
BASE SALARY
Base compensation is established through negotiation between the Company
and the executive at the time the executive is first hired, and then
subsequently when the executive's base compensation is subject to review or
reconsideration. When establishing or reviewing base compensation levels for
each executive officer, the Compensation Committee considers numerous factors,
including the qualifications of the executive and the amount of relevant
individual experience the officer brings to the Company, strategic goals for
which the executive has responsibility, compensation levels at companies at a
comparable stage of development who compete with the Company for business and
executive talent and the incentives which are necessary to attract and retain
qualified management.
INCENTIVE COMPENSATION
In addition to the base salary, the Board of Directors has adopted an
Incentive Compensation Program whereby the annual base salary of specified
Company executives may be increased based on the profit of the Company at the
end of each fiscal year. The base salaries of 7 executives were increased
during the year to reflect the adjustments specified under the Incentive
Compensation Program. No cash bonuses were granted to the Company's executive
officers in the fiscal year ended March 31, 1996.
LONG-TERM COMPENSATION
Each executive officer of the Company is eligible for stock option awards
under the Company's Employee Incentive Stock Option Program which is designed to
give the
10
<PAGE>
recipient a significant equity stake in the Company and thereby closely align
their interests with those of the Company's stockholders. Factors considered
include the executive's or key employee's position in the Company, his or her
performance and responsibilities, and the extent to which he or she already
holds an equity stake in the Company. During the year, grants of 20,000 shares
each were issued to: N. Beaty, J. Janssen, R. Mello, and T. Mendelsohn at an
option price of $1.50 per share.
CEO COMPENSATION
The annual base salary review of William P. Tew, Ph.D., the Company's
Founder and Chief Executive Officer was completed as of July 1, 1995, when his
base salary was set at $162,908. Dr. Tew's total cash compensation (base plus
incentive) for the fiscal year ended March 31, 1996 was $177,916. In setting
Dr. Tew's base salary we determined that he had made significant achievements
over the past several years which were important to the Company's future growth
and could assist the Company in enhancing stockholder value.
We conclude our report with the acknowledgement that no member of the
Compensation Committee is a former or current officer or employee of the
Company.
Compensation Committee, March 31, 1996
John C. Weiss, III
Regis F. Burke
SUBSEQUENT TO MARCH 31, 1996
Mr. John C. Weiss, III, a member of the Board of Directors since 1986, was
appointed President of the Company in May 1996. Mr. Weiss remains a Director
but has resigned from the Compensation Committee, Stock Option Committee, and
Audit Committee. Mr. Harvey L. Miller has been appointed to the Board of
Directors, the Compensation Committee, Stock Option Committee and Audit
Committee. Mr. Miller, age 56, has been Chairman of GSI Corporation since 1980
and President of DM Realty Corp since 1986.
11
<PAGE>
STOCK PERFORMANCE GRAPH
The graph depicted below shows the Company's stock price as an index
assuming $100 invested on March 31, 1991, along with the composite prices of
companies listed on the NASDAQ Biotech Index and AMEX Value Index.
Comparison of Five-Year Cumulative
Total Return Among CBL, AMEX Value Index,
NASDAQ Biotech Index
[GRAPH]
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
3/31/91 3/31/92 3/31/93 3/31/94 3/31/95 3/31/96
- - --------------------------------------------------------------------------------
Chesapeake
Bio. Labs. Inc. $100.00 $200.00 $260.00 $560.00 $380.00 $240.00
AMEX Value
Index $100.00 $110.00 $117.88 $123.36 $129.29 $159.07
NASDAQ
Biotech Index $100.00 $136.58 $97.50 $97.67 $71.93 $126.67
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
The Company believes the NASDAQ Biotech Index is a reasonable peer group
comparison.
12
<PAGE>
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth the compensation earned by the Company's
Chief Executive Officer and the Company's four other highest paid executive
officers for services rendered in all capacities to the Company for each of the
last three fiscal years.
TABLE I
SUMMARY COMPENSATION
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
Name Other Long-Term
and Annual Compensation
Principal Salary Compensation Stock
Position Year ($) ($) Options (#)
- - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William P. Tew, Ph.D. 1996 177,916 1,232(1) ---
Chairman and 1995 166,357 1,910(1) ---
CEO 1994 155,717 694(1) ---
N. Bennet Beaty, Ph.D. 1996 141,106 20,000
President 1995 131,938 --- ---
1994 123,409 --- ---
John T. Janssen 1996 130,546 20,000
Chief Financial 1995 105,625 --- ---
Officer 1994 91,931 --- ---
Thomas C. Mendelsohn 1996 131,983 20,000
Vice President New 1995 123,907 --- ---
Business Development 1994 115,982 --- ---
Robert J. Mello(2) 1996 123,959 20,000
Vice President 1995 110,853 --- ---
Quality 1994 18,000 --- 50,000
</TABLE>
(1) Represents amounts paid to the Company for life insurance premiums on
behalf of Dr. Tew.
(2) Dr. Mello rejoined the Company in February, 1994 as Vice President of
Quality and Regulatory Affairs.
All employees of the Company are eligible to receive stock option awards
through the Company's Employee Incentive Stock Option Program. The granting of
such stock option awards are made at the sole discretion of the Stock Option
Committee of the Board of Directors. It is the Company's philosophy to
encourage equity ownership of the Company by its employees, thereby aligning
their interest with those of the Company's stockholders. Factors considered in
granting stock options include the employee's position in the Company, his or
her performance and responsibilities, and the extent the employee already holds
an equity stake in the Company.
At present the Company does not award cash bonuses, nor offer any other
long-term incentive compensation. The Company established a 401K-Profit Sharing
Plan for all full-
13
<PAGE>
time CBL employees with six months service with the Company. Employees may
contribute up to 10% of their salary to the plan and the Company may match the
first 3% of salary the employee contributes to the plan. The original entry
date for the 401K plan for all eligible employees was October 1, 1993. The
Company suspended the matching of employee contributions as of July 31, 1994.
The Company, may at its option, contribute a variable percent of eligible
employee salaries to the employee's account in the plan. For the year ended
March 31, 1996 and 1995 the Company chose not to contribute to this plan.
STOCK OPTIONS
Stock option grants of 114,500 shares at $1.50 per share were made to 39
employees during the 1996 fiscal year under the Company's Employee Incentive
Stock Option Program.
OPTION EXERCISES AND HOLDINGS
The table below sets forth information concerning the exercise of options
during the 1996 fiscal year and unexercised options held as of the end of the
fiscal year by the Company's Chief Executive Officer and the Company's three
other most highly paid executive officers.
Table III
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options Options
at Fiscal at Fiscal
Acquired Value Year-End (#) Year-End ($)(1)
on Exercise Realized Exercisable (E)/ Exercisable (E)/
Name (#) ($) Unexercisable (U) Unexercisable (U)
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William P. Tew, Ph.D. --- --- 0 (U) $0
N. Bennet Beaty, Ph.D. --- --- 20,000 (U) $0
John T. Janssen --- --- 25,000 (E) $0 (E)
45,000 (U) $0 (U)
Thomas C. Mendelsohn --- --- 25,000 (E) $0 (E)
45,000 (U) $0 (U)
</TABLE>
- - --------------------
(1) Assumes, for all unexercised in-the-money options, the difference between
fair market value and the exercise price. The fair market value on March
31, 1996 was $1.50/share.
14
<PAGE>
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AGREEMENTS
Effective as of July 1, 1995, the Company entered into employment
agreements with each of its executive officers. These agreements generally
provide for payment of a stated base salary, together with incentive
compensation in an amount to be determined by the Board of Directors or
Compensation Committee from time to time. The base salary established in the
employment agreements for each of the Company's executive officers is subject to
a pro rata downward adjustment in the event of a significant and sustained
downturn in the financial performance, condition or prospects of the Company.
In addition, the employment agreements provide for severance payments of varying
amounts to the executive officers of the Company in certain circumstances. Drs.
Tew and Beaty are entitled to receipt of severance payments of approximately two
times their aggregate annual compensation, in the case of Dr. Tew, upon
termination of his employment either following a change of control of the
Company or breach by the Company of the employment agreement, or for good reason
(generally defined as diminution of title or responsibilities, termination of
benefit plans, or Company relocation), and, in the case of Dr. Beaty, upon
termination of his employment either following breach by the Company of his
employment agreement or for good reason. Messrs. Janssen and Mendelsohn, and
Dr. Mello, are each entitled to receipt of severance payments in an amount equal
to approximately their annual aggregate compensation upon termination of their
employment following breach by the Company of their respective employment
agreements or for good reason.
The employment agreements are, in the case of Dr. Tew, for an initial term
of four years, with successive four-year renewal terms; in the case of Dr.
Beaty, for an initial term of four years, with successive three-year renewal
terms; and in the case of Messrs. Mendelsohn and Janssen, and Dr. Mello, for an
initial term of two years with successive two-year renewal terms.
The base salary established in the employment agreements for Dr. Tew and
Dr. Beaty is $162,900 and $129,200, respectively. The base salary applicable to
Messrs. Janssen and Mendelsohn, and Dr. Mello, is $121,300, $121,300, and
$118,700, respectively. The base salary applicable to any executive officer may
be increased through action of the Compensation Committee from time to time.
Pursuant to the employment agreements, each of the executive officers is
required to devote substantially all his business time to Company related
matters and has agreed not to solicit clients or customers of the Company for a
period following termination of employment.
COMPENSATION OF BOARD OF DIRECTORS
The members of the Company's Board of Directors who are also officers or
otherwise employees of the Company do not receive compensation for service as
Directors. Compensation for each of the Company's two outside Directors, John
C. Weiss, III and Regis F. Burke, was reduced as of July 1, 1995 from $15,600
annually to $9,600 per year. Messrs. Weiss and Burke were also each granted an
option during fiscal year 1996 to purchase 8,000 shares of the Company's Class A
Common Stock, at $1.50 per share, pursuant to a 1995 Director's Agreement. Mr.
Weiss continues to hold an option to purchase an additional 6,250 shares of the
Company's Class A Common Stock at $.80 per share, granted to him pursuant to a
1986 Director's Agreement. The Company has a right of first refusal in the
event that either director wishes to sell shares acquired under their respective
Director's Agreements.
15
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of May 15, 1996, with respect
to the number of shares owned by each person who is known by the Company to own
beneficially 5% or more of its Class A Common Stock, each director of the
Company and all directors and officers of the Company as a group.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Name and Address of Shares Beneficially Percentage Beneficially
Beneficial Owner Owned(1) Owned
- - --------------------------------------------------------------------------------
William P. Tew, Ph.D. 437,038(2) 11.0%
11412 Cronridge Drive
Owings Mills, MD 21117
- - --------------------------------------------------------------------------------
Joanne W. Tew 265,250 6.7%
911 Arran Road
Baltimore, MD 21239
- - --------------------------------------------------------------------------------
Regis F. Burke 6,800 0.2%
6 Kincaid Court
Baldwin, MD 21013
- - --------------------------------------------------------------------------------
Narlin B. Beaty, Ph.D. 171,405 4.3%
15 Thurkill Court
Cockeysville, MD 21030
- - --------------------------------------------------------------------------------
Thomas C. Mendelsohn 75,615(3) 1.9%
2117 Burdock Road
Baltimore, MD 21209
- - --------------------------------------------------------------------------------
John C. Weiss, III 15,770(4) 0.4%
5907 Charlesmead Ave.
Baltimore, MD 21212
- - --------------------------------------------------------------------------------
All directors and officers as 812,715(5) 20.4%
a group (7 persons)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
(1) Unless otherwise noted, all shares indicated are held with sole voting and
sole investment power.
(2) Includes 435,038 shares with sole voting and dispositive power and 2,000
shares with sole voting power only.
(3) Includes 25,000 shares purchasable under option exercisable within 60 days
of May 15, 1996.
(4) Includes 6,250 shares purchasable under option exercisable within 60 days
of May 15, 1996
(5) Includes 56,250 shares purchasable under option exercisable within 60 days
of May 15, 1996.
16
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1). FINANCIAL STATEMENTS
Page Number
-----------
Report of Independent Public Accountants. . . . . . . . . . 20
Consolidated Balance Sheets - March 31, 1996
and 1995. . . . . . . . . . . . . . . . . . . . . . 21
Consolidated Statements of Income - Years
Ended March 31, 1996, 1995 and 1994. . . . . . . . . 22
Consolidated Statements of Changes in Stockholders'
Equity - Years Ended March 31, 1996,
1995 and 1994. . . . . . . . . . . . . . . . . . . . 23
Consolidated Statements of Cash Flows -
Years Ended March 31, 1996, 1995 and 1994. . . . . . 24
Notes to Consolidated Financial Statements. . . . . . . . . 25
(a)(2). SCHEDULES
Schedule Number Description Page Number
- - --------------- ----------- -----------
II Valuation and Qualifying Accounts. 32
17
<PAGE>
(a)(3). EXHIBITS Page No.
*3(a) Articles of Amendment and Restatement.
****3(b) Amended and Restated By-Laws of the Registrant
*4 Article Fifth of the Articles of Incorporation. See Exhibit 3(a)
above.
*10(a) Assignment and Agreement, dated March 8, 1980, between
William P. Tew, Ph.D., and the Registrant.
*10(b) Incentive Stock Option Plan of the Registrant.
*10(c) Second Incentive Stock Option plan of the Registrant.
*10(d) Third Incentive Stock Option Plan of the Registrant.
*10(e) Director's Agreement dated May 5, 1986, between John C.
Weiss, III and the Registrant.
*10(f) Lease, dated December 26, 1986, between Centennial/Warren
Technology Associates Limited Partnership, as predecessor of
Jiffy Lube International of Maryland, Inc., and the Registrant.
*10(g) Advisory Agreement, dated January 1, 1987, between Joseph W.
Burnett and the Registrant.
*10(h) Advisory Agreement, dated January 1, 1987, between David S.
Hungerford and the Registrant.
*10(i) Agreement, dated May 16, 1983 between E.R. Squibb & Sons, Inc.
and the Registrant, and notice and consent to assignment dated
October 10, 1985, among Squibb, Solvay Veterinary, Inc. and the
Registrant.
*10(j) Agreements, dated December 7, 1987 between Solvay Veterinary,
Inc., and the Company.
***10(k) Lease Agreement dated October 6, 1993 by and between the
Company and Crondall Lane Limited Partnership.
**10(l) Contract Manufacturing Agreement, dated January 1, 1991, by and
between the Registrant and Allergan Pharmaceuticals (Ireland), Ltd.,
Inc.
10(m) Loan and Security Agreement, dated September 2, 1994, by and between
the Registrant and the Bank of Baltimore Bancorp Leasing and
Financial, Inc., both now known as First Fidelity Bank, N.A.
*****10(n) Employment Agreement dated as of July 1, 1995 by and between the
Registrant and William P. Tew, Ph.D.
*****10(o) Employment Agreement dated as of July 1, 1995 by and between the
Registrant and Narlin B. Beaty, Ph.D.
*****10(p) Employment Agreement dated as of July 1, 1995 by and between the
Registrant and Thomas C. Mendelsohn.
*****10(q) Employment Agreement dated as of July 1, 1995 by and between the
Registrant and John T. Janssen.
*****10(r) Employment Agreement dated as of July 1, 1995 by and between the
Registrant and Robert J. Mello, Ph.D.
*22 Subsidiary of the Registrant.
_________________
* Incorporated by reference to Exhibits to Company's Registration
Statement on Form S-18 (No. 33-17655).
** Incorporated by reference to Exhibits to Company's Annual Report on
Form 10-K for Fiscal Year Ended March 31, 1994.
*** Incorporated by reference to Company's Form 10-K/A, Amendment No.1 to
Annual Report on Form 10-K for Fiscal Year Ended March 31, 1994.
**** Incorporated by reference to Company's Quarterly Report on Form 10-Q
for fiscal quarter ended September 30, 1994.
***** Incorporated by reference to the Company's Quarterly Report on Form 10-
Q for fiscal quarter ended June 30, 1995.
(b) REPORTS ON FORM 8-K
None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHESAPEAKE BIOLOGICAL LABORATORIES, INC.
By: /s/N. Bennet Beaty/
------------------------------------
N. Bennet Beaty, President
Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- - --------- ----- ----
/s/N. Bennet Beaty, Ph.D./ President May 15, 1996
- - ------------------------------
N. Bennet Beaty, Ph.D.
/s/Regis F. Burke/ Director May 15, 1996
- - ------------------------------
Regis F. Burke
/s/Thomas C. Mendelsohn/ Secretary May 15, 1996
- - ------------------------------
Thomas C. Mendelsohn
/s/William P. Tew, Ph.D./ Chairman of the Board May 15, 1996
- - ------------------------------ of Directors
William P. Tew, Ph.D.
/s/John C. Weiss, III/ Director May 15, 1996
- - ------------------------------
John C. Weiss, III
19
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Chesapeake Biological Laboratories, Inc.:
We have audited the accompanying consolidated balance sheets of Chesapeake
Biological Laboratories, Inc. (a Maryland corporation) and subsidiary as of
March 31, 1996 and 1995, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for the years ended March 31,
1996, 1995 and 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Chesapeake Biological
Laboratories, Inc. and subsidiary as of March 31, 1996 and 1995, and the results
of their operations and their cash flows for the years ended March 31, 1996,
1995 and 1994 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule II is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic consolidated financial statements. This schedule
has been subjected to the auditing procedures applied in the audit of the basic
consolidated financial statement, and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
Baltimore, Maryland
May 1, 1996
20
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 240,583 $ 160,792
Accounts receivable, net of allowance
for doubtful accounts of $16,400 and
$4,000, respectively 616,458 673,893
Inventories (Notes 1 and 3) 1,687,616 1,450,720
Prepaid expenses 43,637 48,706
Other receivables 55,168 17,513
Deferred tax asset (Note 11) 134,639 243,000
---------- ----------
TOTAL CURRENT ASSETS 2,778,101 2,594,624
PROPERTY AND EQUIPMENT, net (Notes 1 and 4) 1,514,167 1,515,639
OTHER ASSETS 27,690 27,690
---------- ----------
TOTAL ASSETS $4,319,958 $4,137,953
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 351,742 $ 465,600
Short term borrowings (Note 5) --- 127,991
Current portion of long term debt and
capital lease obligations (Notes 2, 6 and 7) 49,769 51,295
Deferred revenue (Note 1) 215,513 127,983
---------- ----------
TOTAL CURRENT LIABILITIES 617,024 772,869
LONG TERM LIABILITIES:
Long term debt and capital lease obligations, net
of current portion (Notes 2, 6 and 7) 105,668 154,240
Other liabilities (Note 7) 82,657 102,771
Deferred tax liability (Note 11) 130,598 33,000
---------- ----------
TOTAL LIABILITIES 935,947 1,062,880
---------- ----------
COMMITMENTS AND CONTINGENCIES
(NOTES 2, 7, AND 8)
STOCKHOLDERS' EQUITY:
Class A common stock, par value $.01 per share;
8,000,000 shares authorized; 3,979,938 and
3,979,938 shares issued and outstanding 39,799 39,799
Class B common stock, par value $.01 per share;
2,000,000 shares authorized; no shares issued
and outstanding --- ---
Additional paid-in capital 3,827,182 3,827,182
Accumulated deficit (482,970) (791,908)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY (NOTE 9) 3,384,011 3,075,073
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,319,958 $4,137,953
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
21
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING REVENUE (NOTE 10) $6,174,148 $6,981,788 $5,213,435
COST OF REVENUE 3,927,331 5,077,688 3,316,433
---------- ---------- ----------
GROSS PROFIT 2,246,817 1,904,100 1,897,002
OPERATING EXPENSES:
General and administrative 1,210,093 1,230,076 1,052,232
Selling 454,934 308,612 280,808
Research and development 44,313 --- ---
---------- ---------- ----------
INCOME FROM OPERATIONS 537,477 365,412 463,962
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income 4,600 6,065 18,782
Interest expense (Notes 2, 5, 6, and 7) (27,180) (14,538) (67,226)
---------- ---------- ----------
(22,580) (8,473) (48,444)
---------- ---------- ----------
INCOME BEFORE PROVISION (BENEFIT) FOR
INCOME TAXES AND EXTRAORDINARY ITEM 514,897 356,939 515,518
PROVISION (BENEFIT) FOR INCOME TAXES
(NOTES 1 AND 11) 205,959 (208,955) 7,826
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 308,938 565,894 507,692
EXTRAORDINARY ITEM:
Gain on debt restructuring (Note 2) --- --- 1,055,497
---------- ---------- ----------
NET INCOME $ 308,938 $ 565,894 $1,563,189
---------- ---------- ----------
---------- ---------- ----------
PER COMMON AND EQUIVALENT SHARE:
Income before extraordinary item $ .078 $ .144 $ .128
Extraordinary item --- --- .265
---------- ---------- ----------
Net income $ .078 $ .144 $ .393
---------- ---------- ----------
---------- ---------- ----------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING (NOTE 1) 3,979,938 3,928,131 3,979,415
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
22
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Additional Accumulated
Shares Par Value Paid-In Capital Deficit Total
------ --------- --------------- ----------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1993 3,665,852 $ 36,658 $3,759,442 $(2,920,991) $ 875,109
Issuance of shares
pursuant to exercise
of stock options 224,200 2,242 52,550 --- 54,792
Net income --- --- --- 1,563,189 1,563,189
---------- -------- ---------- ------------ ----------
BALANCE, MARCH 31, 1994 3,890,052 38,900 3,811,992 (1,357,802) 2,493,090
Issuance of shares
pursuant to exercise
of stock options 89,886 899 15,190 --- 16,089
Net income --- --- --- 565,894 565,894
---------- -------- ---------- ------------ ----------
BALANCE, MARCH 31, 1995 3,979,938 39,799 3,827,182 (791,908) 3,075,073
Net income --- --- --- 308,938 308,938
---------- -------- ---------- ------------ ----------
BALANCE, MARCH 31, 1996 3,979,938 $39,799 $3,827,182 $ (482,970) $3,384,011
---------- -------- ---------- ------------ ----------
---------- -------- ---------- ------------ ----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
23
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 308,938 $ 565,894 $1,563,189
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 319,827 274,115 165,768
Provision (benefit) for deferred income taxes 205,959 (210,000) ---
Imputed interest on long-term debt --- --- 66,473
Pre-tax gain on extraordinary items --- --- (1,071,751)
Decrease (increase) in accounts receivable 57,435 (363,388) 221,182
Increase in inventories (236,896) (134,593) (523,658)
Decrease (increase) in prepaid expenses 5,069 (30,397) (5,574)
(Increase) decrease in other receivables (37,655) 113,672 (131,185)
Increase in other assets --- --- (11,201)
(Decrease) increase in inventory due Allergan --- (300,000) 300,000
(Decrease) increase in accounts payable and
accruals (113,858) 96,728 184,417
Increase (decrease) in deferred revenue 87,530 (60,225) 157,598
(Decrease) increase in other liabilities (20,114) 9,744 9,744
--------- --------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 576,235 (38,450) 925,002
--------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (318,355) (578,493) (602,772)
--------- --------- -----------
NET CASH USED IN INVESTING ACTIVITIES (318,355) (578,493) (601,772)
--------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) of/proceeds from short term
borrowings - net (127,991) 127,991 ---
(Repayments) of/proceeds from long term debt (21,231) 70,297 24,560
Repayments of capital lease obligations (28,867) (26,123) (1,534)
Repayments of long term debt --- (44,910) (46,633)
Net proceeds from sale of stock --- 16,089 54,792
--------- --------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES (178,089) 143,344 31,185
--------- --------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 79,791 (473,599) 354,415
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 160,792 634,391 279,976
--------- --------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 240,583 $ 160,792 $ 634,391
--------- --------- -----------
--------- --------- -----------
CASH PAID DURING THE YEAR FOR:
Interest $ 27,180 $ 14,538 $ 753
--------- --------- -----------
--------- --------- -----------
Income taxes, net of refunds $ 55,000 $ 12,593 $ 37,148
--------- --------- -----------
--------- --------- -----------
NON-CASH TRANSACTIONS:
Acquisitions of property and equipment
under capital lease obligations $ --- $ 62,474 $ 81,999
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
24
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1992, 1991 AND 1990
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the accounts of
Chesapeake Biological Laboratories, Inc. (CBL), and its wholly-owned
subsidiary, CBL Development Corp.
INVENTORIES:
Inventories consist of raw materials, work-in-process and finished goods
which are stated at the lower of cost or market, determined under the
first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost less accumulated depreciation.
Equipment is depreciated using the straight-line method over the estimated
useful lives of three to ten years. Leasehold improvements are amortized
over the term of the lease.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include amounts invested in accounts with a
maturity of three months or less which are readily convertible to known
amounts of cash.
REVENUE RECOGNITION
The Company recognizes income when product is shipped or the service has
been provided to the customer. Deferred revenues represent deposits
normally required of development customers.
INCOME TAXES
Deferred income taxes are computed using the liability method, which
provides that deferred tax assets and liabilities are recorded based on the
differences between the tax bases of assets and liabilities and their
carrying amounts for financial reporting purposes (see Note 11).
PER SHARE INFORMATION
Per share information is based on the weighted average number of shares of
common and common equivalent shares outstanding. The Company uses the
Treasury Stock method to calculate the dilutive effect of outstanding
warrants and options at period end based on the Company's stock price on
the AMEX Emerging Company Marketplace.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could significantly differ
from those estimates.
25
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with current
year presentation.
2. STRATEGIC ALLIANCES:
As a result of negotiations during fiscal 1994, Allergan, a major customer,
has forgiven all of the indebtedness outstanding from CBL to Allergan,
which had been evidenced by a Note of $850,000. As a result of the
forgiveness of indebtedness, CBL realized an extraordinary gain of
approximately $769,000, net of taxes, in fiscal 1994. In addition, a
security interest formerly held by Allergan in substantially all of CBL's
assets was released and certain of the terms applicable to the manufacture
and purchase arrangements existing for Vitrax-TM- were revised. In
connection with the forgiveness, the Company agreed to relieve Allergan of
its obligation to purchase certain quantities of Vitrax-TM- from the
Company through 1995. Satisfaction of these purchase obligations had
previously been conditions precedent to the Company's obligation to repay
the Note to Allergan. Allergan remains obligated to purchase up to 240,000
units per year of their Vitrax-TM- requirements which are to be resold in
the United States, exclusively from CBL until February 1997. The
manufacturing agreement between the Company and Allergan for the
manufacture of Vitrax-TM- will expire in February 1997. The Company will
supply Vitrax-TM- to Allergan beyond that date if Allergan's new
production facility in Ireland has not received FDA approval.
During the fourth quarter of fiscal 1994, a contingent Note Payable to
Weck, shown as $349,000 on the Company's Balance Sheets as of March 31,
1994, was compromised and settled. Under the terms of this compromise and
settlement, the Company agreed to make payments in the amount of $66,500 in
full satisfaction of the contingent Note, $26,500 of which was paid in
March 1994, with the balance of $40,000 paid in April 1994. As a result,
the Company had an additional extraordinary gain of approximately $286,000,
net of taxes, in fiscal 1994. Also as part of the compromise and
settlement of the contingent Note, a security interest formerly held by
Weck in certain of the Company's assets was released.
3. INVENTORIES:
Inventories consisted of the following at March 31, 1996 and 1995:
1996 1995
---- -----
Raw materials $ 371,954 $ 447,745
Work-in-process 1,288,163 951,872
Finished goods 27,499 51,103
---------- ----------
$1,687,616 $1,450,720
---------- ----------
---------- ----------
26
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at March 31, 1996 and
1995:
1996 1995
---- ----
Laboratory equipment $ 2,147,367 $ 1,984,909
Furniture and fixtures 352,792 344,965
Leasehold improvements 511,530 363,460
----------- -----------
3,011,689 2,693,334
Less: Accumulated depreciation (1,497,522) (1,177,695)
----------- -----------
$ 1,514,167 $ 1,515,639
----------- -----------
----------- -----------
Depreciation and amortization expense for the years ended March 31, 1996,
1995 and 1994 was $319,827, $274,115, and $165,768, respectively.
5. BANK FINANCING ARRANGEMENTS:
During fiscal 1995, the Company obtained a $750,000 Revolving Line of
Credit Facility and a $2,000,000 Equipment Leasing/Financing Credit
Facility, both of which are secured by the Company's inventory and accounts
receivable, and by the equipment financed by the Company through the
facilities. The Revolving Credit Facility, which is used to fund operating
requirements, provides for interest at .5% over prime. The aggregate
outstanding balance on the Revolving Credit Facility as of March 31, 1996
and 1995, was $0 and $128,000, respectively. The average outstanding
balance on the Revolving Credit Facility for fiscal year 1996 and 1995, was
$86,000 and $64,000, respectively. The average interest rate on the
Revolving Credit Facility for fiscal year 1996 and 1995, was 9.0% and 9.5%,
respectively. The Equipment Facility includes an operating lease facility
under which specific items of equipment may be acquired by the Bank and
leased to the Company. Interest accrues on borrowings under the line of
credit portion of the Equipment Facility at prime plus 1%; and interest
accrues on borrowings under the term loan portion of the Equipment Facility
at either prime plus 1% or at a fixed per annum rate based upon the rate
then applicable to United States Treasury Securities having a term
equivalent to the term of the Term Loan. The interest rate applicable
under the lease portion of the Equipment Facility is based on the then
applicable rate for the 5-year U.S. Treasury Note.
6. LONG TERM DEBT:
The Company's long term debt as of March 31, 1996 consists of a vehicle and
an equipment loan. The vehicle loan bears interest at 6.9% and is
repayable through December 8, 1998 in equal monthly installments. The
equipment loan bears interest at 8.5% and is repayable through April 1,
1999 in variable monthly installments.
27
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. LONG TERM DEBT, CONTINUED:
The remaining principal payments on the vehicle and equipment loans as of
March 31, 1996, are as follows:
Year Ended
March 31, Amount
--------- ------
1997 $22,420
1998 22,420
1999 21,192
2000 1,457
-------
$67,489
-------
-------
7. LEASES:
In December 1993, the Company entered into a non-cancelable operating lease
agreement for a second facility to house its corporate offices,
warehousing, shipping and receiving functions. The lease expires
December 31, 1998 with two renewal terms of two years each. The rent
expense under the lease agreement was $147,002, $139,186, and $41,910 for
the years ended March 31, 1996, 1995 and 1994, respectively.
The Company's original facility will be primarily used for production and
is occupied under a non-cancelable operating lease agreement with an
initial six and one-half year term, expiring December 31, 1998 and two
renewable terms of two years each. Related rental payments for the years
ended March 31, 1996, 1995 and 1994, were $232,782, $228,683, and $224,058,
respectively. The operating lease agreement contains terms which feature
reduced rental payments in the early years and accelerated payments toward
the end of the lease term. For financial reporting purposes, rental
expense represents an average of the minimum annual rental payments over
the initial six and one-half year term. On an annual basis, this expense
is approximately $192,000.
During previous years, the Company entered into several non-cancelable
capital lease obligations for various pieces of laboratory equipment and
furniture that expire during fiscal year 1999.
At March 31, 1996 the aggregate minimum annual lease payments were as
Year Ended Capital Operating
March 31 Leases Leases
---------- ------ ------
1997 $ 38,909 $222,151
1998 38,909 222,151
1999 36,244 166,613
2000 1,122 ---
-------- --------
115,184 $610,915
Less interest (27,236) --------
-------- --------
Present value of future
minimal lease payments $ 87,948
--------
--------
28
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. LITIGATION:
The Company has in the past been party to legal proceedings related to HA-
based products. During fiscal 1996 there were no legal proceedings to
which the Company was a party.
9. COMMON STOCK, OPTIONS AND WARRANTS:
The Company has adopted three incentive stock option plans (the "Option
Plans"). A total of 937,500 shares of the Company's Class A Common Stock
have been authorized for issuance under the Option Plans. The Option Plans
provide for the granting of incentive stock options within the meaning of
Section 422A of the Internal Revenue Code of 1986, as amended. The
exercise price of all options granted under the Option Plans must be at
least equal to the fair market value of such shares on the date of the
grant (110% in the case of an optionee who is an owner of more than 10% of
the Company's Common Stock), and the maximum term of each option is five
years.
At March 31, 1996, options for 568,253 shares have been exercised and
options for 108,750 shares were exercisable.
In addition, stock options have been granted to two members of the
Technical Advisory Board and one of the Directors of the Company, to
purchase 18,750 shares at $.80 per share. These were exercisable on March
31, 1994, by members of the Technical Advisory Board and Directors of the
Company and expire on July 15, 1996. Additional stock options have been
granted to two Directors of the Company, to purchase 16,000 shares at
$1.50 per share. These were exercisable on November 30, 1995 by members of
the Directors of the Company and expire on November 30, 2005.
Transactions involving the shares under option are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Outstanding, beginning of period 256,250 386,250 550,355
Granted 130,500 --- 70,000
Exercised --- (98,996) (202,500)
Expired or canceled (20,000) (31,004) (31,605)
------- ------- -------
Outstanding, end of period 366,750 256,250 386,250
------- ------- -------
------- ------- -------
Price per share of:
Exercised options N /A 37.5 CENTS - $1.875 37.5 CENTS - 41.25 CENTS
Outstanding options .80 CENTS - $4.375 37.5 CENTS - $4.375 37.5 CENTS -$4.375
</TABLE>
10. SIGNIFICANT CUSTOMERS:
During the year ended March 31, 1996 approximately 63% of CBL's sales were
to three customers. Sales to the three customers in the years ended March
31, 1995 and March 31, 1994 were 74% and 62%, respectively.
29
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. INCOME TAXES:
The provision (benefit) for income taxes was comprised of the following for
the years ended March 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Provision (benefit) for income taxes
before impact of extraordinary item $205,959 $(208,955) $ 7,826
Income tax effect of extraordinary item --- --- 16,254
-------- --------- --------
Provision (benefit) for income taxes $205,959 $(208,955) $ 24,080
-------- --------- --------
-------- --------- --------
Federal:
Current $ --- $ 1,045 $ 24,080
Deferred 175,065 (178,657) ---
State:
Current --- --- ---
Deferred 30,894 (31,343) ---
-------- --------- --------
Provision (benefit) for income taxes $205,959 $(208,955) $ 24,080
-------- --------- --------
-------- --------- --------
</TABLE>
The following table reconciles income taxes at the federal statutory rate
to the provision for income taxes in the accompanying consolidated
statements of operations for the years ended March 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C>
Income tax at federal statutory rate $175,065 $ 121,359 $ 539,671
State tax, net of federal benefit 30,894 28,295 74,110
Alternative minimum tax --- 1,045 24,080
Less: Utilization of net operating
loss carryforwards --- (149,654) (613,781)
Recognition of cumulative benefit
for deferred income tax --- (210,000) ---
-------- --------- ---------
Provision (benefit) for income taxes $205,959 $(208,955) $ 24,080
-------- --------- ---------
-------- --------- ---------
</TABLE>
30
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. INCOME TAXES, CONTINUED:
As of March 31, 1996, CBL had net operating loss carryforwards of
approximately $121,000 for income tax purposes. These carryforwards begin
to expire in 2004. Due to the limitation on the Company's ability to
utilize net operating loss carryforwards to offset alternative minimum
taxable income, CBL had a current income tax provision of $0, $1,045 and
$24,080 related to alternative minimum tax for the years ended March 31,
1996, 1995 and 1994, respectively. In addition, as of March 31, 1996, CBL
had research and development and investment tax credit carryforwards of
approximately $105,000 and $10,000 respectively.
Total deferred tax liabilities and deferred tax assets as of March 31, 1996
and 1995 and the sources of the differences between financial accounting
and tax basis of the Company's assets and liabilities which give rise to
the deferred tax liabilities and deferred tax assets and the tax effects of
each are as follows.
Deferred tax assets: March 31, 1996 March 31, 1995
-------------- --------------
Inventory $ 71,609 $ 61,557
Accruals and reserves 15,845 5,594
Net operating loss
carryforwards and credits 47,185 290,115
-------- --------
$134,639 $357,266
-------- --------
-------- --------
Deferred tax liability:
Property and equipment $130,598 $147,266
-------- --------
-------- --------
12. PROFIT SHARING PLAN:
During the year ended March 31, 1994, the Company established a 401K-Profit
Sharing Plan (the Plan) for all full-time employees with at least six
months of service with the Company. Employees may contribute up to 10% of
their salary to the Plan and the Company may match the first 3% of salary
that the employee contributes to the Plan. The original entry date in the
Plan for eligible employees was October 1, 1993. The Company's cost to
match employee contributions was $0, $16,857 and $24,000, for the years
ended March 31, 1996, 1995 and 1994, respectively. The Company suspended
the matching of employee contributions as of July 31, 1994.
31
<PAGE>
SCHEDULE II
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
Balance At Additions Write-Offs Balance At
Beginning Charged To End of
Of Period Costs and Period
Expenses
- - --------------------------------------------------------------------------------
Allowances for
Doubtful Accounts:
For Fiscal Year
Ending March 31,
1994: $ 5,210 $ --- $ 3,721 $ 1,489
For Fiscal Year
Ending March 31,
1995: $ 1,489 $17,520 $15,009 $ 4,000
For Fiscal Year
Ending March 31,
1996: $ 4,000 $33,900 $21,500 $16,400
32
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 240,583
<SECURITIES> 0
<RECEIVABLES> 632,858
<ALLOWANCES> 16,400
<INVENTORY> 1,687,616
<CURRENT-ASSETS> 2,778,101
<PP&E> 3,011,689
<DEPRECIATION> 1,497,522
<TOTAL-ASSETS> 4,319,958
<CURRENT-LIABILITIES> 617,024
<BONDS> 0
0
0
<COMMON> 3,866,981
<OTHER-SE> (482,970)
<TOTAL-LIABILITY-AND-EQUITY> 4,319,958
<SALES> 6,174,148
<TOTAL-REVENUES> 6,174,148
<CGS> 3,927,331
<TOTAL-COSTS> 3,927,331
<OTHER-EXPENSES> 1,709,340
<LOSS-PROVISION> 33,900
<INTEREST-EXPENSE> 27,180
<INCOME-PRETAX> 514,897
<INCOME-TAX> 205,959
<INCOME-CONTINUING> 308,938
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 308,938
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
