<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended December 31, 1995 Commission File Number: 1-12748
----------------- -------
CHESAPEAKE BIOLOGICAL LABORATORIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1176514
- - ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) 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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
The number of shares outstanding of each of the issuer's classes of common stock
as of December 31, 1995 and December 31, 1994:
---------------------------------------
<TABLE>
<CAPTION>
Outstanding at Outstanding at
Class December 31, 1995 December 31, 1994
------- ----------------- -----------------
<S> <C> <C>
Class A Common Stock, $.01 par value 3,979,938 3,977,438
Class B Common Stock, $.01 par value -0- -0-
</TABLE>
Page 1 of 11
1
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC.
TABLE OF CONTENTS
PAGE
----
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets as of
December 31, 1995 and March 31, 1995 . . . . . . . . . 3
Consolidated Statements of Operations for
the three months and nine months ended
December 31, 1995 and 1994 . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows
for the nine months ended December 31, 1995
and 1994 . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 11
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1995 1995
------------ -----------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 325,448 $ 160,792
Accounts receivable, net of allowance
for doubtful accounts of $13,000 and
$4,000, respectively 285,746 673,893
Inventories (Notes 1 and 3) 1,695,660 1,450,720
Prepaid expenses 36,730 48,706
Other receivables 6,155 17,513
Deferred tax asset (Note 5) 130,182 243,000
------------ -----------
TOTAL CURRENT ASSETS 2,479,921 2,594,624
PROPERTY AND EQUIPMENT, net (Notes 1 and 4) 1,434,332 1,515,639
OTHER ASSETS 27,690 27,690
------------ -----------
TOTAL ASSETS $ 3,941,943 $ 4,137,953
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 121,839 $ 465,600
Short term borrowings -- 127,991
Current portion of long term debt and
capital lease obligations (Notes 2 and 4) 49,769 51,295
Deferred revenue (Note 1) 201,837 127,983
------------ -----------
TOTAL CURRENT LIABILITIES 373,445 772,869
LONG TERM LIABILITIES:
Long term debt and capital lease obligations, net
of current portion (Notes 2 and 4) 118,525 154,240
Other liabilities 90,173 102,771
Deferred tax liability (Note 5) 33,000 33,000
------------ -----------
TOTAL LIABILITIES 615,143 1,062,880
------------ -----------
COMMITMENTS AND CONTINGENCIES
(NOTE 2)
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 (540,181) (791,908)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 3,326,800 3,075,073
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,941,943 $ 4,137,953
============ ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
3
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------------- --------------------------
1995 1994 1995 1994
-------------------------- --------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
OPERATING REVENUE $ 1,182,176 $ 1,725,278 $ 4,719,732 $ 5,210,330
COST OF SALES 641,361 1,161,015 2,972,310 3,831,076
----------- ----------- ----------- -----------
GROSS PROFIT 540,815 564,263 1,747,422 1,379,254
----------- ----------- ----------- -----------
OPERATING EXPENSES
General and administrative 315,202 284,285 938,735 878,437
Selling 99,232 74,315 352,772 194,709
Research and development 15,164 -- 15,164 --
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 111,217 205,663 440,751 306,108
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest income 1,015 1,726 1,923 5,527
Interest expense (8,439) (2,882) (23,129) (7,652)
----------- ----------- ----------- -----------
Total (7,424) (1,156) (21,206) (2,125)
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME
TAXES 103,793 204,507 419,545 303,983
----------- ----------- ----------- -----------
PROVISION FOR INCOME TAXES
(NOTES 1 AND 5) 35,202 2,001 167,818 11,046
----------- ----------- ----------- -----------
NET INCOME $ 68,591 $ 202,506 $ 251,727 $ 292,937
=========== =========== =========== ===========
NET INCOME PER COMMON AND
EQUIVALENT SHARE $ .017 $ .051 $ .063 $ .075
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 3,979,938 3,963,121 3,979,938 3,921,171
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
--------------------------------
1995 1994
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 251,727 $ 292,937
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 236,501 195,340
Provision for deferred income taxes 112,818 --
Decrease (increase) in accounts receivable 388,147 (234,625)
Decrease (increase) in inventories (244,940) (22,302)
Decrease (increase) in prepaid expenses 11,976 (23,951)
Decrease (increase) in other receivables 11,358 (18,385)
Increase (decrease) in deferred revenue 73,854 (22,720)
Increase (decrease) in accounts payable
and accrued expenses (343,761) (270,489)
Increase (decrease) in other liabilities (12,598) 7,308
----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES 485,082 (96,887)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (155,194) (446,005)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (155,194) (446,005)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of short-term borrowings (127,991) --
Proceeds from sale of stock -- 11,402
Proceeds from sale-leaseback of equipment -- 51,198
Repayments of capital lease obligations and debt (37,241) (62,810)
----------- -----------
NET CASH (USED IN) FINANCING ACTIVITIES (165,232) (210)
----------- -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 164,656 (543,102)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 160,792 634,391
----------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 325,448 $ 91,289
=========== ===========
CASH PAID DURING THE PERIOD FOR:
INTEREST $ 23,129 $ --
=========== ===========
INCOME TAXES $ 55,000 $ 10,593
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES:
The consolidated financial statements included herein for Chesapeake
Biological Laboratories, Inc. (the "Company" or "Registrant") and its
wholly owned subsidiary, CBL Development Corp. (the "Subsidiary"), have
been prepared from the records of the Company without audit and include,
in management's opinion, all adjustments necessary for a fair presentation.
All such adjustments were of a normal recurring nature. The results for an
interim period are not necessarily indicative of results to be expected
for a full fiscal year. The financial statements have been prepared in
conformity with the accounting principles described in Note 1 to the
Financial Statements included in the Company's 1995 Annual Report on
Form 10-K.
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.
REVENUE RECOGNITION:
The Company recognizes income when product is shipped or services have been
provided to the customer. Deferred revenue represents deposits normally
required of development customers.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include amounts invested in accounts which are
readily convertible to known amounts of cash with a maturity of three
months or less.
INCOME TAXES:
The Company has adopted the provisions of Statement No. 109, "Accounting
for Income Taxes", which was issued by the Financial Accounting Standards
Board in February 1992.
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.
6
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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. Allergan may now
purchase the United States requirements for Vitrax-TM- in excess of
240,000 units per year and all of its requirements for Vitrax-TM- for
resale outside of the United States from CBL or elsewhere.
During the fourth quarter of fiscal 1994, a contingent Note Payable to
Weck, shown as $349,000 on the Company's Balance Sheet as of March 31,
1993, 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 $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 consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1995 1995
----------- -----------
<S> <C> <C>
Raw Materials $ 366,021 $ 447,745
Work-in-Process 1,310,178 951,872
Finished Goods 19,461 51,103
----------- -----------
$ 1,695,660 $ 1,450,720
=========== ===========
</TABLE>
4. 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. The lease expires December 31, 1998,
with two renewal terms of two years each. The rent expense under the
lease agreement was $111,370 and $104,360 for the 9 months ended
December 31, 1995, and December 31, 1994, respectively.
The Company's original facility is primarily used for production and is
occupied under a non-cancelable operating lease agreement with an initial
six and one-half year term, expiring December 31, 1998, with two renewal
terms of two years each. Related rental payments for the 9 months ended
December 31, 1995, and 1994, were $174,860 and $171,100, 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.
The Company has also entered into several non-cancelable capital lease
obligations for various pieces of laboratory equipment and furniture that
expire during fiscal year 1999.
7
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INCOME TAXES:
As of March 31, 1995, CBL had net operating loss carryforwards of
approximately $450,000 for income tax purposes. These carryforwards begin
to expire in 2004. In addition, as of March 31, 1995, CBL had research and
development and investment tax credit carryforwards of approximately
$105,000 and $10,000, respectively. As of March 31, 1995, the Company
recorded $210,000 to recognize the tax benefit of its remaining Net
Operating Loss carryforwards. The Net Operating Loss carryforward is being
utilized currently to offset taxable income and the related deferred tax
asset is being realized during the year.
8
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The management discussion below should be read in conjunction with the
quarterly financial reports and footnotes as well as the Company's Annual
Report on Form 10-K as of March 31, 1995.
Three and nine months ended December 31, 1995 and 1994:
Operating revenue of $1,182,000 for the quarter ended December 31, 1995,
was down 31% from the corresponding quarter last year. Operating revenue for
the nine month period ended December 31, 1995, was down 9%, to $4,720,000 as
compared to the same period last year. The primary cause of the decrease in
operating revenue for the third quarter and the nine month period is a
decrease in Vitrax sales resulting from a decision by Allergan to reduce its
inventory levels. Modification of invoicing arrangements with another of the
Company's customers, Cel-Sci Corporation, resulted in a reduction of recorded
revenues, but had little overall effect on gross profit. The Company also
established a strategic alliance with Pasadena Research Laboratories, Inc.
("PRL") during the fiscal quarter ended December 31, 1995, for the
development, manufacture and marketing of select sterile injectable generic
pharmaceuticals. In connection with the establishment of that strategic
alliance, the Company received an initial payment of $140,000 from PRL and
recorded a portion of that payment, equal to $70,000, as third-quarter
revenues.
Gross profit for the quarter ended December 31, 1995, was $541,000 (46%
of Revenues) compared to $564,000 (33% of Revenues) for the comparable
quarter last year. Gross profit was $1,747,000 (37% of Revenues) for the
nine months ended December 31, 1995 compared to $1,379,000 (26% of Revenues)
for the same period last year. The improvement in gross profit as a percent
of revenues results primarily from improved production procedures implemented
by the Company over the past fifteen months.
Selling, general administrative and research and development expenses of
$430,000 for the quarter ended December 31, 1995, and $1,307,000 for the nine
month period ended December 31, 1995, represents an increase of $71,000 and
$234,000, respectively, compared to the same periods last year. Expansion of
the Company's customer base, and increases in advertising expenses and sales
commissions, contributed to the increase in operating expenses over the three
and nine month periods ended December 31, 1995. In addition, the Company has
expanded its internal customer support staff in order to improve service to
both new and existing customers. The Company has launched a new research and
development effort to do research on the PRL product line and other research
specifically related to products in which existing customers have expressed
an interest.
Third quarter income before taxes of $104,000 was down 49%, while
year-to-date pre-tax income of $420,000 was up 38%, as compared to the
year-to-date figure for December 31, 1994. The Company recorded a provision
for income taxes of $35,000 for the third quarter, compared to $2,000 for the
third quarter last year, and recorded a provision for income taxes of
$168,000 for the nine month period ended December 31, 1995, compared to
$11,000 for the nine month period ended December 31, 1994. The effective tax
rate increase to 40%, from approximately 4%, is due to realization of a
portion of the deferred tax asset recognized during the last quarter of
fiscal year 1995.
9
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
On December 31, 1995, CBL had cash and cash equivalents of $325,000,
compared to $161,000 at March 31, 1995. This increase is due to a variety of
reasons including profitable operations and decreases in accounts receivable
offset by an increase in inventory, a decrease in accounts payable, plus
$155,000 in capital expenditures. As of December 31, 1995, there were no
draw downs on the $750,000 Revolving Line of Credit available to the Company
from First Fidelity Bank.
10
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
None
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.
CHESAPEAKE BIOLOGICAL
LABORATORIES, INC.
_______________________________________
Registrant
DATE: __________ By: ___________________________________
N. Bennet Beaty, Ph.D.
President
DATE: __________ By: ___________________________________
Thomas C. Mendelsohn
Secretary
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-30-1995
<PERIOD-START> APR-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 325,448
<SECURITIES> 0
<RECEIVABLES> 298,746
<ALLOWANCES> 13,000
<INVENTORY> 1,695,660
<CURRENT-ASSETS> 2,479,921
<PP&E> 2,852,128
<DEPRECIATION> 1,417,796
<TOTAL-ASSETS> 3,941,943
<CURRENT-LIABILITIES> 373,445
<BONDS> 0
0
0
<COMMON> 3,866,981
<OTHER-SE> 540,181
<TOTAL-LIABILITY-AND-EQUITY> 3,941,943
<SALES> 1,182,176<F1>
<TOTAL-REVENUES> 1,182,176<F1>
<CGS> 641,361<F1>
<TOTAL-COSTS> 429,598<F1>
<OTHER-EXPENSES> 0<F1>
<LOSS-PROVISION> 3,000<F1>
<INTEREST-EXPENSE> 8,439<F1>
<INCOME-PRETAX> 103,793<F1>
<INCOME-TAX> 35,202<F1>
<INCOME-CONTINUING> 68,591<F1>
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET-INCOME> 68,591<F1>
<EPS-PRIMARY> .017<F1>
<EPS-DILUTED> .017<F1>
<FN>
<F1>P&L info (#26-41) is for the quarter ended 12/31/95 (not the nine month period)
</FN>
</TABLE>
