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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER 1-12748
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CHESAPEAKE BIOLOGICAL LABORATORIES, INC.
(Exact Name of Registrant as Specified in its Charter)
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<S> <C>
MARYLAND 52-1176514
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1111 S. PACA STREET, BALTIMORE, MARYLAND 21230
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (410) 843-5000
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class: Class A Common Stock, $.01 par value per share.
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-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. /X/
As of May 11, 1998, 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 $36,300,000 based on the
closing sale price of the Class A Common Stock on May 11, 1998.
The number of shares outstanding of each of the Registrant's classes of
common stock, as of May 11, 1998:
Class A Common Stock, $.01 per share--5,280,947 shares
Class B Common Stock, $.01 per share--none
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on July 9, 1998, are incorporated by reference into Part
III of this Form 10-K.
This Form 10-K consists of 32 pages. The index to exhibits is set forth on
page 13.
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PART I
ITEM 1. BUSINESS
GENERAL OVERVIEW
Chesapeake Biological Laboratories, Inc. ("CBL" or the "Company") is an
established provider of pharmaceutical and biopharmaceutical product development
and production services. The Company serves a broad range of customers, from
major international pharmaceutical firms to emerging biotechnology companies.
Since 1990, the Company has provided services on a contract basis to more than
90 pharmaceutical and biotechnology companies and has contributed to the
development and production of more than 100 therapeutic products. Customers
contract with the Company to produce development stage products for use in U.S.
Food and Drug Administration ("FDA") clinical trials and to produce and
manufacture FDA approved products for commercial sale.
The Company has particular experience and expertise in providing development
services and producing sterile, process-sensitive biopharmaceutical products.
Biopharmaceutical products are derived from biological materials and typically
involve larger, more complex molecules than traditional pharmaceutical products,
which generally are based upon smaller, more stable, synthetic organic
molecules. The complexity, inherent instability and process-sensitivity of
biopharmaceutical products require the application of specialized technology and
expertise in their development, production and analysis.
The specialized development services provided by the Company include
research and development on sterile product formulations; test method
development and validation; process design and manufacturing validations;
regulatory and compliance consulting; preparation of clinical trial materials;
container-closure system design; and accelerated and ongoing stability studies.
In June 1996, the Company received ISO (International Organization for
Standardization) 9001 certification demonstrating CBL's conformance with the
established international quality management standards for product design,
development, production, inspection and testing. CBL believes that ISO 9001
certification gives it a competitive advantage in attracting domestic and
international customers.
The Company's objective is to accelerate its growth and profitability by
expanding its share of the market for product development and production
services for the pharmaceutical and biotechnology industries. CBL's strategy to
achieve this objective is to capitalize on outsourcing trends in those
industries by increasing its development and production capabilities. The
Company is renovating a 70,000 square foot building purchased in November 1996,
into a "state-of-the-art" pharmaceutical production facility. The pharmaceutical
production operation was mechanically completed in December 1997. It is
currently undergoing start-up and quality control testing to assure compliance
with FDA regulations. The Company anticipates that this additional facility will
become operational during the summer of 1998 and is actively seeking customers
whose products would be developed and produced at this facility.
CBL believes its established experience and expertise, ISO 9001
certification, anticipated increase in capacity provided by the new facility,
and ability to offer a broad range of drug development and production services,
will enable it to provide competitive, cost-effective services to the
pharmaceutical and biopharmaceutical industries.
STRATEGY
CBL's objective is to accelerate its growth and profitability by expanding
its share of the market for product development and production services for the
pharmaceutical and biotechnology industries. CBL's strategies to achieve this
objective include the following:
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EXPAND PRODUCTION AND DEVELOPMENT SERVICES CAPABILITIES.
The Company is implementing this strategy by improving and equipping its
recently acquired building as a state-of-the-art laboratory and pharmaceutical
production facility. This additional facility will significantly increase the
Company's production capacity when operational, which is expected to occur
during the summer of 1998. This increase in production capacity will enable the
Company to continue to meet its customers' increasing volume requirements,
pursue larger scale, long-term commercial contracts and capture greater market
share. Although the Company is actively seeking commercial contracts to be
fulfilled at the new facility, and negotiations with several potential customers
are underway, to date no definitive agreements have been executed.
CAPITALIZING ON OUTSOURCING TREND.
The Company is tailoring its capabilities to effectively meet the increasing
preference of pharmaceutical and biotechnology companies who outsource
development and production functions. As part of this effort, the Company plans
to expand its scientific and engineering staff to meet the challenges of
developing and producing increasingly complex biologically-derived drug
products. The Company also plans to enhance its data management expertise to
enable it to better support its customers' regulatory needs. CBL is increasing
its marketing staff to better communicate its capabilities to the pharmaceutical
and biotechnology industries.
FOCUS ON DEVELOPMENT OF CUSTOMERS' PRODUCTS.
The Company believes that many pharmaceutical and biotechnology companies
prefer to outsource development services to companies that do not manufacture,
market and distribute potentially competitive proprietary products. CBL focuses
substantially all of its resources on product development and production
services for others and does not pursue research or product development in
competition with its customers.
COMPETITION
The Company directly competes with several pharmaceutical product
development organizations, contract manufacturers of biopharmaceutical products
and university research laboratories. Although many of these pharmaceutical
product development organizations, contract manufacturers and university
research laboratories do not offer the full range of services offered by the
Company, they can and do compete effectively against certain segments of the
Company's business, including its pharmaceutical production capabilities. The
Company also competes with in-house research, development and support service
departments of pharmaceutical and biotechnology companies. Certain competitors,
particularly large pharmaceutical and biotechnology companies, may have
significantly greater resources than the Company.
Competitive factors include reliability, turnaround time, reputation for
innovation and quality performance, capacity to perform numerous required
services, financial strength and price. The Company believes that it competes
favorably in these areas. In addition, the Company's strategy is to complement
its customers by not pursuing research and development, or production, of
products of its own. The Company believes that customers will prefer CBL to
others that offer the same services, but which also manufacture and sell their
own products in competition with those of the customer.
EMPLOYEES
At March 31, 1998, the Company had 78 full-time equivalent employees, of
which 6 hold Ph.D. degrees, 6 hold master's degrees and 8 hold other
professional certifications. 34 of CBL's employees perform scientific or
engineering functions. The Company believes that its relations with its
employees are good.
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GOVERNMENTAL REGULATIONS
The services performed by the Company are subject to various regulatory
requirements designed to ensure the quality and integrity of pharmaceutical
products, primarily under the U.S. Federal Food, Drug and Cosmetic Act and FDA
administered Current Good Manufacturing Practices ("cGMP") regulations. Although
the Company has successfully operated in this stringent regulatory environment
since the early 1980's and believes such experience is an advantage over certain
of its competitors, compliance with these regulations is a continuous process.
These regulations apply to all phases of drug manufacturing, testing and record
keeping, including personnel, facilities, equipment, control of materials,
processes and laboratories, packaging, labeling and distribution. Noncompliance
with cGMP by the Company could result in disqualification of data collected by
the Company. Material violation of cGMP requirements could result in additional
regulatory sanctions, and in severe cases could result in a mandated closing of
the Company's facilities which would materially and adversely affect the
Company's business.
To help assure compliance with applicable regulations, the Company has
established quality assurance controls at its facilities that monitor on-going
compliance by auditing test data and regularly inspecting facilities, procedures
and other cGMP compliance parameters. In addition, FDA regulations and
guidelines serve as a basis for the Company's standard operating procedures.
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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-K or in documents incorporated
herein by reference, including without limitation, statements including the word
"BELIEVES," "ANTICIPATES," "INTENDS," "EXPECTS," or words of similar import,
constitute "FORWARD-LOOKING STATEMENTS" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company expressed or implied by such
forward-looking statements. Such factors include, among others, general economic
and business conditions, changes in business strategy or development plans, the
Company's ability to market and sell its products and services, the Company's
ability to successfully complete start-up and quality control testing of its new
facility in a manner compliant with applicable regulations and standards, and
other factors referenced in this Form 10-K including, without limitation, under
the headings "Business", "Properties", "Market for Registrant's Common Equity
and Related Stockholder Matters", "Management's Discussion and Analysis of
Financial Condition and Results of Operations", and "Financial Statements and
Supplementary Data". For an explanation of certain risk factors which may effect
the Company, the reader should review the Registration Statement on Form S-2
(No. 333-25903) filed with the United States Securities and Exchange Commission
on April 25, 1997, as amended.
ITEM 2. PROPERTIES
The Company's executive offices, pharmaceutical manufacturing facilities and
warehouse operations are located at two sites in Baltimore, Maryland. Since
1986, the Company has leased 15,000 square feet at the Seton Business Park which
the Company has operated as a multi-customer pharmaceutical production facility
in accordance with cGMP regulations. In April 1998, the lease term for this
facility was extended to December 31, 2000, with one, two-year renewal option
thereafter.
In November 1996, the Company acquired an approximately 70,000 square foot
building, located on 3.48 acres of land in the Carroll/Camden Industrial Park in
Baltimore, Maryland, to improve and equip as a pharmaceutical production
facility and to house the Company's administrative offices and warehouse
operations. The Company has retained The Whiting-Turner Contracting Company,
believed by the
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Company to be among the more highly regarded construction and engineering firms
in the mid-Atlantic region, as construction manager for the new facility.
Substantial completion of the office and warehouse space renovations occurred in
February 1997, and the mechanical completion of the pharmaceutical build-out was
accomplished in December 1997. Start-up and quality control testing to assure
compliance with FDA regulations is now underway and the Company anticipates that
this will be completed, and the facility operational during the summer of 1998.
Through May 31, 1997, the Company had leased 19,200 square feet of space in
Owings Mills, Maryland, which previously housed the Company's corporate
headquarters, warehouse facilities and shipping and receiving operations prior
to the relocation of those operations to the Carroll/Camden Industrial Park
facility in February 1997. The Owings Mills facility lease had provided for an
expiration date of December 31, 1998, with the Company responsible for annual
rental payments of $134,400 and all operating and maintenance costs under this
lease through that date. However, as of June 1, 1997, the Company negotiated the
termination of the Owings Mills facility lease obligation and paid a $30,200
termination fee.
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) As of March 31, 1998, the Company's Class A Common Stock traded on the
Nasdaq Stock Market's National Market under the symbol CBLI.
The price range of the Company's Class A Common Stock during the fiscal
years ended March 31, was:
STOCK TRADING PRICE
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<CAPTION>
1998 1997
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YEAR ENDED MARCH 31, HIGH LOW HIGH LOW
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PRICE RANGE OF COMMON STOCK:
First quarter.......................................... $ 5.250 $ 4.125 $ 2.500 $ 1.250
Second quarter......................................... 6.500 3.750 3.500 1.375
Third quarter.......................................... 6.375 5.000 3.625 2.687
Fourth quarter......................................... 7.750 5.500 6.750 3.000
</TABLE>
On May 27, 1997, the Company's Class A Common Stock was listed on the Nasdaq
Stock Market's National Market (the "Nasdaq National Market") under the trading
symbol "CBLI," and trading of the Class A Common Stock on the American Stock
Exchange Emerging Company Marketplace, (the "AMEX-EC", where the Class A Common
Stock had previously traded), terminated as of the close of trading on May 23,
1997. Subsequent to March 31, 1997, and through May 23, 1997, the Company's
stock traded at a high of $5.25 and at a low of $4.44 on the AMEX-EC; and,
subsequent to May 27, 1997, and through March 31, 1998, the high and low sales
prices of the Class A Common Stock on the Nasdaq National Market were $7.75 and
$3.75, respectively.
b) As of May 11, 1998, there were approximately 280 stockholders of record
of the Company's Class A Common Stock.
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c) The Company has never declared or paid a cash dividend on its Class A
Common Stock. Earnings, if any, are expected to be retained to finance the
development of the Company's business.
d) In connection with the listing by the Company of its Class A Common Stock
on the Nasdaq National Market, the Company filed on May 22, 1997, a Registration
Statement on Form 8-A with the United States Securities and Exchange Commission
in order to register the Class A Common Stock pursuant to Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Registration Statement on Form 8-A was declared effective on May 27, 1997.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following data has been derived from the audited consolidated financial
statements of the Company and should be read in conjunction with those
statements, which are included in this report.
SUMMARY OF OPERATIONS
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YEAR ENDED MARCH 31,
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1998 1997 1996 1995 1994
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($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Operating revenue................................................ $ 7,016 $ 8,654 $ 6,174 $ 6,982 $ 5,213
Gross profit..................................................... 1,709 2,758 2,247 1,904 1,897
Operating expenses............................................... 2,328 1,967 1,710 1,539 1,333
(Loss) income from operations.................................... (619) 791 537 365 564
Gain from extraordinary items.................................... -- -- -- -- 1,055
Net (loss) income................................................ (379) 504 309 566 1,563
(Loss) earnings per share........................................ (.08) .12 .08 .14 .13
</TABLE>
CONSOLIDATED BALANCE SHEET DATA
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<CAPTION>
YEAR ENDED MARCH 31,
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1998 1997 1996 1995 1994
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<CAPTION>
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Working capital.................................................. $ 4,873 $ 2,794 $ 2,161 $ 1,822 $ 1,493
Total assets..................................................... 16,313 13,445 4,320 4,138 3,587
Long term obligations............................................ 8,431 8,715 319 290 176
Stockholders' equity............................................. 7,064 4,043 3,384 3,075 2,493
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company's operating revenues are derived from two principal
sources---product development services and commercial production. The Company
provides its customers in the pharmaceutical and biotechnology industries with
product development services, including experimental products for use in
clinical trials, and manufacturing services for FDA approved commercial drugs
and medical devices on a contractual basis. The Company, which is currently
expanding its commercial production capacity, has particular experience and
expertise in the development and production of sterile, process-sensitive
biopharmaceutical products, and is ISO 9001 certified.
The Company's scientific and engineering staff perform multiple product
development functions for CBL's customers, including: research and development
of sterile product formulations; test method development and validation;
container-closure system design; accelerated and on-going product stability
studies; process design and manufacturing validations; and regulatory and
compliance consulting. Following final development of a stable formulation of
the pharmaceutical product and validation of the
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manufacturing process, the Company's production expertise is typically called
upon to produce the development stage product for use in clinical trials or
investigations as part of the FDA approval process.
CBL produces and manufactures FDA approved products for commercial sale by
others. The major commercial product manufactured by CBL during fiscal year 1998
was Vitrax-TM-, an HA-based product developed by the Company and used in human
ophthalmic surgery, for Allergan Botox, Ltd., a subsidiary of Allergan, Inc.
("Allergan"). The previously extended contract manufacturing agreement for the
manufacture of Vitrax-TM- expired during the fiscal year and the last shipment
of Vitrax-TM- was made in September 1997.
During the fiscal year ended March 31, 1998, the commercial production
facility build-out continued in the 70,000 square foot building purchased by the
Company in November 1996, located in the Carroll/ Camden Industrial Park. The
Company moved its executive and administrative staff and warehouse operation
into the building in February 1997, as the renovation of the pharmaceutical
production area proceeded. The commercial production facility was mechanically
completed in December 1997, and is currently undergoing start-up and quality
control testing to assure compliance with FDA regulations. During the fiscal
year ended March 31, 1998, the Company's revenues continued to be generated
solely from its 15,000 square foot Seton plant which is primarily a development
products facility with limited commercial capacity. The Company incurred over
$700,000 in expenses as the renovation of the new and larger facility progressed
over the entire 1998 fiscal year. These expenses include operating and
maintenance costs ($550,000) associated with the opening and pre-production
activity at the new facility and also includes net interest expense ($150,000)
on funds borrowed to finance the renovation.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 31,
1997
Revenues for the fiscal year ended March 31, 1998, were $7.0 million
compared to $8.7 million for fiscal year 1997. Despite this decrease, the
Company's 1998 fiscal year revenues were the second highest in the history of
the Company. 1998 fiscal year revenues reflect the anticipated reduction in
sales of Vitrax-TM- to Allergan, which amounted to 77%, but this reduction was
substantially offset by a 38% increase in sales to other customers. Sales to
Allergan as a percentage of total sales were 14%, 49% and 41% for the fiscal
years 1998, 1997 and 1996, respectively. The Company secured 11 new customers,
accounting for sales of approximately $2.0 million, during the fiscal year. All
operating revenues were generated by the Company's existing experimental
products facility, as renovation of the new pharmaceutical production facility
progressed throughout fiscal year 1998.
Gross margin was 24% of revenue for the fiscal year compared to 32% for
fiscal year 1997. This decrease was primarily the result of costs related to the
new facility, including the $550,000 in operating expenses as described in the
Overview Section above and the decrease in revenues. In addition, during late
fiscal year 1998, additional personnel were hired, initially to assist in
start-up and quality control testing associated with the new facility. It is
expected that once the facility is determined to be FDA compliant, these
personnel will perform production functions. The additional personnel and the
related expenses are necessary in anticipation of the Company's need for trained
and experienced pharmaceutical personnel, although the effort of these personnel
did not contribute to the revenues in the current fiscal year.
Operating expenses for fiscal year 1998 were $2.3 million compared to $2.0
million in fiscal year 1997. The increase is, primarily, attributed to the
addition of an experienced pharmaceutical industry marketing executive and the
development and implementation of a multi-faceted marketing, advertising and
promotion program. With more aggressive marketing, advertising and promotion,
the Company seeks to continue to expand its customer base. As the Company
pursues opportunities for significant growth, management recognizes that
receivable risks may increase and, consequently, has incurred operating expenses
in fiscal year 1998 to increase its allowance for doubtful accounts above
historical levels as of March 31, 1998. Due to the compound effect of the
increase in expenses and the decrease in total revenues, operating expenses were
32% of revenues in fiscal year 1998, as compared to 23% in fiscal year 1997.
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In summary, although the decrease in revenues contributed to the fiscal year
1998 operating loss, a substantial portion of the loss was a direct result of
costs associated with the Company's production capacity expansion and its
increased marketing, advertising and promotion activities. Both of these
undertakings are integral to the achievement by the Company of its objective of
increasing profitability by expanding its share of the market for product
development and production services for the pharmaceutical and biotechnology
industries.
Other income includes both interest income on the $3,300,000 of net proceeds
to the Company from the follow-on public offering of Class A Common Stock,
completed in June 1997, and interest expense of $150,000 on the November 1996
loans to build-out the commercial production facility.
The Company's effective income tax rate in fiscal years 1998 and 1997 was
37%. During fiscal year 1997, the Company fully utilized a previously held net
operating loss carryforward.
Net loss for fiscal year 1998 was $379,000 compared to a net profit of
$504,000 for fiscal year 1997. Basic earnings per share reflect a loss of $0.08
per share for fiscal year 1998 as compared to earnings of $0.12 per share in
fiscal year 1997.
FISCAL YEAR ENDED MARCH 31, 1997 COMPARED TO FISCAL YEAR ENDED MARCH 31,
1996
Revenues for the fiscal year ended March 31, 1997, were $8.7 million
compared to $6.2 million for fiscal year 1996, an increase of approximately 40%.
The strong growth in revenues for fiscal year 1997 was due to a 72% increase in
sales of Vitrax-TM- to Allergan and an 81% increase in sales of product
development services to new and existing customers. This increase in total
revenues occurred notwithstanding an 85% decrease in sales of Equron-TM- to
Solvay, which sold the related business unit to a third party. Sales to Allergan
represented 49% of the Company's total revenue for fiscal year 1997, compared to
41% in fiscal year 1996.
Gross margin for fiscal year 1997 was 32% of revenues compared to 36% in
fiscal year 1996. The decrease was due to expenses related to the expansion and
relocation of the Company's executive and administrative offices and warehouse
to the new facility and the increased proportion of sales of Vitrax-TM-, which
has historically had a low margin.
Operating expenses for fiscal year 1997 were $2.0 million compared to $1.7
million in fiscal year 1996, an increase of approximately 18%. This increase was
due to a full year of research and development expenses in fiscal year 1997 for
a program that had been initiated in the second half of fiscal year 1996, the
salary of an additional executive officer hired in the first quarter of fiscal
year 1997 and an increase in professional fees. As a percentage of revenues,
operating expenses decreased to 23% in fiscal year 1997 from 28% in fiscal year
1996.
Interest income was $9,000 in fiscal year 1997 compared to $23,000 in
interest expense in fiscal year 1996. This improvement was due primarily to the
increase in cash flow from operations which eliminated the Company's need to
utilize available bank credit.
The effective tax rate in fiscal year 1997 was 37% compared to 40% in fiscal
year 1996 due to the utilization of tax credit carry forwards. During fiscal
year 1997, the Company's net operating loss carryforward was fully utilized due
to earnings during the last five years.
Net income for fiscal year 1997 was $504,000 compared to $309,000 for fiscal
year 1996, an increase of approximately 63%. Basic earnings per share were $0.12
per share for fiscal year 1997 as compared to $0.08 per share in fiscal year
1996.
CAPITAL RESOURCES
In November 1996, the Company acquired an approximately 70,000 square foot
building, located on 3.48 acres of land in the Carroll/Camden Industrial Park,
Baltimore, Maryland, to renovate and equip as a commercial production facility
and to house its administrative offices and warehouse operations. The Company
paid $2,150,000 in cash and 125,000 shares of Class A Common Stock for the land
and existing
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improvements. Renovations to convert the building to a commercial production
facility commenced during late fiscal year 1997 and continued through fiscal
year 1998.
The cash portion of the purchase price for the land and existing building,
as well as the cost of the proposed renovations and a portion of the
pharmaceutical manufacturing equipment and related pharmaceutical facility
build-out, was financed through the issuance of $7,000,000 variable rate
economic development demand revenue bonds by the Maryland Industrial Development
Financing Authority ("MIDFA") and a $1,500,000 loan from the Mayor and City
Council of Baltimore, acting through the Department of Housing and Community
Development and the City of Baltimore Development Corporation. In addition,
approximately $3,400,000 of pharmaceutical manufacturing equipment was financed
through equipment operating leases from companies affiliated with NationsBank,
American Equipment Leasing (a unit of European American Bank), BancBoston and
CoreStates.
The bonds issued by MIDFA are variable rate, tax-exempt, and are issued
pursuant to a Trust Indenture. The maximum annual interest rate provided for
under the terms of the bonds is 12% and, subject to certain conditions, the
bonds may be converted to fixed-rate at the option of the Company. However, the
Company has entered into an interest rate swap agreement and, as a result, the
interest rate applicable to the bonds through November 2003, is capped at 5.51%.
As of May 1, 1998, the interest rate was 4.54%. The principal portion of the
bonds, and the accrued interest thereon, is payable from monies drawn under a
direct pay Letter of Credit issued by First Union National Bank of North
Carolina (the "Bank"), in amounts up to $7,280,000. Interest is payable
quarterly, commencing February 1, 1997, and principal portions of the bonds are
subject to redemption, in part, commencing November 1998, in accordance with a
schedule set forth in the bonds. The maturity date is August 1, 2018. The letter
of credit is issued pursuant to a Letter of Credit and Reimbursement Agreement
containing various terms and covenants applicable to the Company. The Company's
obligations in respect to the letter of credit and the bonds are secured by
substantially all of the assets of the Company, including the new facility.
MIDFA has also provided the Bank with additional credit support for the letter
of credit in the form of a $1,800,000 deficiency guaranty.
The loan from the City of Baltimore Development Corporation accrues interest
at a fixed rate of 6.50% per annum, amortized over twenty (20) years with
monthly interest only payments due through November 1998, and monthly payments
of principal and interest due thereafter through November 2016.
The terms of the MIDFA bond financing and applicable provisions of the
Internal Revenue Code of 1986 (the "Code"), as amended, and corresponding
regulations limit to $10,000,000 the aggregate amount of capital expenditures
incurred by or attributable to the Company within the City of Baltimore during
the six year period from November 1993 to November 1999. The Code and
corresponding regulations provide that capital expenditures made by others at
the Seton Business Park facility, including the landlord and other facility
tenants, may accrue against the Company's capital expenditure limit. The Company
intends to manage its anticipated growth to avoid making capital expenditures
which would cause the Company to exceed the imposed limit. For example,
equipment obtained by the Company through operating leases, which are not
capital expenditures, would not accrue against the limit, nor would capital
expenditures by the Company on facilities outside of the jurisdictional limits
of the City of Baltimore. Nevertheless, the Company may exceed the capital
expenditure limit inadvertently or because it determines that to do so is in the
best interest of the Company. In the event that the capital expenditure limit is
exceeded, the Company would be required to refinance the existing indebtedness
through a taxable bond issue, conventional debt financing, or other means.
Management of the Company believes that it has sufficient cash and borrowing
capacity to fund its current operations and capital needs.
FINANCIAL CONDITION AND LIQUIDITY
On March 31, 1998, CBL had cash and cash equivalents of $3,042,000 compared
to $1,433,000 at March 31, 1997. These balances do not include $350,000 held as
collateral for the Company's obligations
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under the Letter of Credit and Reimbursement Agreement with First Union National
Bank of North Carolina, pursuant to which a letter of credit was issued as
credit enhancement for the bonds issued by the Maryland Industrial Development
Financing Authority. The proceeds of these bonds were and are being used by the
Company to finance a portion of the purchase price and the renovation and
equipping of the Carroll/Camden Industrial Park facility. In addition, and not
included in the above sums, $778,000 was held at March 31, 1998, by the Bond
Trustee under the Trust Indenture entered into in connection with the bond
financing. These funds are held by the Trustee pending disbursement, subject and
pursuant to the terms of the financing documents, to pay the continuing costs of
renovation and equipping of the Carroll/ Camden Industrial Park facility. The
Company continues to maintain a $750,000 Revolving Line of Credit from the First
Union National Bank of Maryland, under which there was no outstanding balance at
March 31, 1998.
The increase in cash and cash equivalents is primarily the result of the
completion by the Company of a follow-on public offering of Class A Common
Stock. On April 25, 1997, the Company filed a Registration Statement on Form S-2
(No. 333-25903) with the United States Securities and Exchange Commission,
pursuant to the Securities Act of 1933, as amended, with respect to the offering
and sale by the Company of 1,000,000 shares of its Class A Common Stock,
together with another 150,000 shares to cover over-allotments. On June 11, 1997,
the Company entered into an Underwriting Agreement with Ferris, Baker Watts,
Incorporated, pursuant to which Ferris, Baker Watts, Incorporated agreed to
underwrite, on a firm commitment basis, the offering and sale of 1,000,000
shares covered by the Registration Statement. On June 16, 1997, the initial
closing occurred pursuant to the Underwriting Agreement and the Company sold to
the Underwriter 1,000,000 shares of Class A Common Stock in exchange for net
proceeds (after Underwriter's commissions, Underwriter's expense allowance and
other expenses) of approximately $3.2 million. On July 8, 1997, an additional
34,793 shares were sold to the Underwriter in exchange for net proceeds of
approximately $121,000. The proceeds of the offering are being used by the
Company for working capital and other general corporate purposes to fund the
Company's continued growth.
YEAR 2000 ISSUE
In conjunction with the Company's expansion of its commercial production
facility, the Company plans to upgrade both its computer hardware and software.
Management believes the software upgrade will resolve the Year 2000 issue for
the Company. An independent consultant's study of the Company's current
information technology status and recommended changes is nearing completion. The
study is recommending the installation of commercially available software
packages. Installation of critical modules is expected to be completed by late
1998. The software packages under review have been upgraded to handle the Year
2000 by the software provider. Time-sensitive internal programs have been
reviewed and will require only minor modifications to resolve the Year 2000
issue.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are contained on pages 18
through 31 of this report.
10
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the Company's definitive proxy statement to be
filed pursuant to Regulation 14A within 120 days after March 31, 1998.
ITEM 11. EXECUTIVE COMPENSATION AND RELATED INFORMATION
Incorporated by reference to the Company's definitive proxy statement to be
filed pursuant to Regulation 14A within 120 days after March 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Company's definitive proxy statement to be
filed pursuant to Regulation 14A within 120 days after March 31, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1). FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NUMBER
------------
<S> <C>
Report of Independent Public Accountants....................................................... 15
Consolidated Balance Sheets--March 31, 1998 and 1997........................................... 16
Consolidated Statements of Income--Years Ended March 31, 1998, 1997 and 1996................... 17
Consolidated Statements of Changes in Stockholders' Equity--Years Ended March 31, 1998, 1997 18
and 1996.....................................................................................
Consolidated Statements of Cash Flows--Years Ended March 31, 1998, 1997 and 1996............... 19
Notes to Consolidated Financial Statements..................................................... 20-28
</TABLE>
(a)(2). SCHEDULES
<TABLE>
<CAPTION>
SCHEDULE NUMBER DESCRIPTION PAGE NUMBER
- - ---------------- --------------------------------------------------------------------------------- -------------
<S> <C> <C>
II Valuation and Qualifying Accounts 29
<CAPTION>
EXHIBIT DESCRIPTION PAGE NUMBER
- - ---------------- --------------------------------------------------------------------------------- -------------
<S> <C> <C>
23.1 Consent of Independent Public Accountant 30
</TABLE>
11
<PAGE>
(a)(3). EXHIBITS
<TABLE>
<S> <C>
H 3(a) Articles of Restatement.
D 3(b) Amended and Restated By-Laws of the Registrant
H 4 Article Fifth of the Articles of Restatement. See Exhibit 3(a) above.
A 10(a) Assignment and Agreement, dated March 8, 1980, between William P. Tew, Ph.D.,
and the Registrant.
A 10(b) Incentive Stock Option Plan of the Registrant.
A 10(c) Second Incentive Stock Option plan of the Registrant.
A 10(d) Third Incentive Stock Option Plan of the Registrant.
A 10(e) Director's Agreement dated May 5, 1986, between John C. Weiss, III and the
Registrant.
A 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.
A 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.
A 10(j) Agreements, dated December 7, 1987 between Solvay Veterinary, Inc., and the
Company.
C 10(k) Lease Agreement dated October 6, 1993 by and between the Company and Crondall
Lane Limited Partnership.
B 10(l) Contract Manufacturing Agreement, dated January 1, 1991, by and between the
Registrant and Allergan Pharmaceuticals (Ireland), Ltd., Inc.
B 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 Union National Bank of Maryland.
E 10(n) Employment Agreement dated as of July 1, 1995 by and between the Registrant and
William P. Tew, Ph.D.
E 10(o) Employment Agreement dated as of July 1, 1995 by and between the Registrant and
Narlin B. Beaty, Ph.D.
E 10(p) Employment Agreement dated as of July 1, 1995 by and between the Registrant and
Thomas C. Mendelsohn.
E 10(q) Employment Agreement dated as of July 1, 1995 by and between the Registrant and
John T. Janssen.
E 10(r) Employment Agreement dated as of July 1, 1995 by and between the Registrant and
Robert J. Mello, Ph.D.
F 10(s) Employment Agreement dated as of May 16, 1996 by and between the Registrant and
John C. Weiss, III.
G 10(t) Loan Agreement dated as of November 1, 1996, by and between the Registrant and
Maryland Industrial Development Financing Authority.
G 10(u) Letter of Credit and Reimbursement Agreement dated as of November 1, 1996, by
and between the Registrant and First Union National Bank of North Carolina.
G 10(v) Collateral Pledge Agreement dated as of November 1, 1996, by and between the
Registrant and First Union National Bank of North Carolina.
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
G 10(w) Promissory Note dated as of November 21, 1996 from the Registrant to the Mayor
and City Council of Baltimore, in the original principal sum of $1,500,000.
G 10(x) Promissory Note dated as of November 21, 1996 from the Registrant to the
Maryland Industrial Financing Authority, in the original principal sum of
$7,000,000.
E 10(y) Fourth Incentive Stock Option Plan of the Registrant.
H 10(z) Letter Agreement dated November 21, 1996, by and between Registrant and William
P. Tew, Ph.D.
H 10(aa) Letter Agreement dated November 21, 1996, by and between Registrant and Narlin
B. Beaty, Ph.D.
H 10(bb) Letter Agreement dated November 21, 1996, by and between Registrant and
John C. Weiss, III.
H 10(cc) Letter Agreement dated November 21, 1996, by and between Registrant and Thomas
C. Mendelsohn.
H 10(dd) Letter Agreement dated November 21, 1996, by and between Registrant and
John T. Janssen.
H 10(ee) Letter Agreement dated November 21, 1996, by and between Registrant and
Robert J. Mello, Ph.D.
H 10(ff) 1997 Directors' Stock Option Plan of the Registrant
A 22 Subsidiary of the Registrant.
23.1 Consent of Independent Public Accountants
27 Financial Data Schedule
</TABLE>
- - ------------------------
A Incorporated by reference to Exhibits to Company's Registration Statement on
Form S-18 (No. 33-17655).
B Incorporated by reference to Exhibits to Company's Annual Report on Form 10-K
for Fiscal Year Ended March 31, 1994.
C 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.
D Incorporated by reference to Company's Quarterly Report on Form 10-Q for
fiscal quarter ended September 30, 1994.
E Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
fiscal quarter ended June 30, 1995.
F Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
fiscal quarter ended June 30, 1996.
G Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
fiscal quarter ended December 31, 1996.
H Incorporated by reference to Exhibits to the Company's Registration Statement
on Form S-2 (No. 333-35903)
(b) REPORTS ON FORM 8-K
The Registrant filed a current Report on Form 8-K on March 4, 1997,
reporting an Item 5 event (the appointment of Mr. Thomas P. Rice to the
Board of Directors).
13
<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 in the City of
Baltimore, State of Maryland, on this 15th day of June, 1998.
<TABLE>
<S> <C> <C>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC.
By: /s/ JOHN C. WEISS, III
-----------------------------------------
John C. Weiss, III, PRESIDENT
</TABLE>
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/ WILLIAM P. TEW, PH.D. Chief Executive Officer, June 15, 1998
- - ------------------------------ Chairman of the Board
William P. Tew, Ph.D. and Director
/s/ JOHN C. WEISS, III President and Director June 15, 1998
- - ------------------------------
John C. Weiss, III
/s/ JOHN T. JANSSEN Chief Financial Officer June 15, 1998
- - ------------------------------ and Treasurer
John T. Janssen
/s/ NARLIN B. BEATY, PH.D. Chief Technical Officer June 15, 1998
- - ------------------------------ and Director
Narlin B. Beaty, Ph.D.
/s/ THOMAS C. MENDELSOHN Vice President, Secretary June 15, 1998
- - ------------------------------ and Director
Thomas C. Mendelsohn
/s/ REGIS F. BURKE Director June 15, 1998
- - ------------------------------
Regis F. Burke
/s/ HARVEY L. MILLER Director June 15, 1998
- - ------------------------------
Harvey L. Miller
/s/ THOMAS P. RICE Director June 15, 1998
- - ------------------------------
Thomas P. Rice
14
<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, 1998 and 1997, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for the years ended March 31,
1998, 1997 and 1996. 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, 1998 and 1997, and the results
of their operations and their cash flows for the years ended March 31, 1998,
1997 and 1996, 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 statements, 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.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland,
May 8, 1998
15
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 3,041,705 $ 1,432,944
Restricted cash.................................................................. 350,000 350,000
Accounts receivable, net of allowances of $70,300 and $10,300, respectively...... 1,259,560 714,793
Inventories...................................................................... 524,996 760,075
Prepaid expenses................................................................. 404,696 140,160
Deferred tax asset............................................................... 92,208 50,540
Interest receivable.............................................................. 18,817 32,616
------------- -------------
Total current assets........................................................... 5,691,982 3,481,128
PROPERTY AND EQUIPMENT, net........................................................ 9,428,831 4,915,845
BOND FUNDS HELD BY TRUSTEE......................................................... 778,454 4,682,998
DEFERRED FINANCING COSTS........................................................... 344,021 336,957
OTHER ASSETS....................................................................... 69,912 27,690
------------- -------------
Total assets................................................................... $ 16,313,200 $ 13,444,618
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses............................................ $ 223,481 $ 551,112
Current portion of long term debt................................................ 389,547 20,961
Current portion of capital lease obligation...................................... 28,098 28,808
Deferred revenue................................................................. 177,593 85,887
------------- -------------
Total current liabilities...................................................... 818,719 686,768
LONG TERM LIABILITIES:
Long term debt, net of current portion........................................... 8,283,102 8,524,109
Long term capital lease obligation............................................... 854 29,876
Deferred rent.................................................................... 22,523 52,590
Deferred tax liability........................................................... 124,084 108,549
------------- -------------
Total liabilities.............................................................. 9,249,282 9,401,892
------------- -------------
COMMITMENTS AND CONTINGENCIES...................................................... -- --
STOCKHOLDERS' EQUITY:
Class A common stock, par value $.01 per share; 8,000,000 shares authorized;
5,276,195 and 4,114,558 shares issued and outstanding.......................... 52,762 41,145
Class B common stock, par value $.01 per share; 2,000,000 shares authorized; no
shares issued and outstanding.................................................. -- --
Additional paid-in capital....................................................... 7,369,039 3,980,836
(Accumulated deficit) retained earnings.......................................... (357,883) 20,745
------------- -------------
Total stockholders' equity..................................................... 7,063,918 4,042,726
------------- -------------
Total liabilities and stockholders' equity..................................... $ 16,313,200 $ 13,444,618
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
16
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31, 1998, 1997, AND 1996 1998 1997 1996
- - ------------------------------------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
OPERATING REVENUE....................................................... $ 7,015,858 $ 8,653,793 $ 6,174,148
COST OF REVENUE......................................................... 5,306,367 5,895,479 3,927,331
------------ ------------ ------------
GROSS PROFIT............................................................ 1,709,491 2,758,314 2,246,817
OPERATING EXPENSES:
General and administrative.......................................... 1,533,388 1,430,976 1,210,093
Selling............................................................. 743,095 413,136 454,934
Research and development............................................ 51,586 123,482 44,313
------------ ------------ ------------
(LOSS) INCOME FROM OPERATIONS....................................... (618,578) 790,720 537,477
------------ ------------ ------------
INTEREST INCOME (EXPENSE), net.......................................... 17,581 8,828 (22,580)
------------ ------------ ------------
(LOSS) INCOME BEFORE BENEFIT (PROVISION) FOR INCOME TAXES............... (600,997) 799,548 514,897
BENEFIT (PROVISION) FOR INCOME TAXES.................................... 222,369 (295,833) (205,959)
------------ ------------ ------------
NET (LOSS) INCOME....................................................... $ (378,628) $ 503,715 $ 308,938
------------ ------------ ------------
------------ ------------ ------------
(LOSS) EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
Basic
(Loss) net income................................................... $ (0.08) $ 0.12 $ 0.08
------------ ------------ ------------
------------ ------------ ------------
Diluted
(Loss) net income................................................... $ (0.08) $ 0.12 $ 0.08
------------ ------------ ------------
------------ ------------ ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic............................................................... 4,991,251 4,030,832 3,979,938
------------ ------------ ------------
------------ ------------ ------------
Diluted............................................................. 4,991,251 4,190,767 3,993,064
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(ACCUMULATED
ADDITIONAL DEFICIT)
PAID-IN RETAINED
SHARES PAR VALUE CAPITAL EARNINGS TOTAL
---------- ----------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
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
Issuance of shares pursuant to purchase
of building.......................... 125,000 1,250 148,750 -- 150,000
Issuance of shares pursuant to exercise
of stock options..................... 9,620 96 4,904 -- 5,000
Net income............................... -- -- -- 503,715 503,715
---------- ----------- -------------- --------------- ------------
BALANCE, MARCH 31, 1997.................. 4,114,558 41,145 3,980,836 20,745 4,042,726
Issuance of shares pursuant to
follow-on public offering............ 1,034,793 10,348 3,276,693 -- 3,287,041
Issuance of shares pursuant to exercise
of stock options..................... 126,844 1,269 111,510 -- 112,779
Net loss................................. -- -- -- (378,628) (378,628)
---------- ----------- -------------- --------------- ------------
BALANCE, MARCH 31, 1998.................. 5,276,195 $ 52,762 $ 7,369,039 $ (357,883) $ 7,063,918
---------- ----------- -------------- --------------- ------------
---------- ----------- -------------- --------------- ------------
</TABLE>
See notes to consolidated financial
18
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996 1998 1997 1996
- - ----------------------------------------------------------------------- ------------- ------------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income...................................................... $ (378,628) $ 503,715 $ 308,938
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization........................................ 346,994 360,922 319,827
Deferred income taxes................................................ (26,133) 62,050 205,959
(Increase) decrease in accounts receivable........................... (544,767) (43,167) 19,780
Decrease (increase) in inventories................................... 235,079 927,541 (236,896)
(Increase) decrease in prepaid expenses.............................. (114,536) (96,523) 5,069
Decrease (increase) in interest receivable........................... 13,799 (32,616) --
(Increase) in other assets........................................... (42,222) -- --
(Decrease) increase in accounts payable and accrued expenses......... (327,631) 199,370 (113,858)
Increase (decrease) in deferred revenue.............................. 91,706 (129,626) 87,530
Decrease in deferred rent............................................ (30,067) (30,067) (20,114)
------------- ------------- -----------
Net cash (used in) provided by operating activities.................... (776,406) 1,721,599 576,235
------------- ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment..................................... (4,859,980) (3,612,600) (318,355)
Decrease (increase) in bond funds held by Trustee...................... 3,904,543 (4,682,998) --
------------- ------------- -----------
Net cash used in investing activities.................................. (955,437) (8,295,598) (318,355)
------------- ------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of short term borrowings--net............................... -- -- (127,991)
Repayments of long-term debt........................................... (23,129) (22,419) (21,231)
Repayments of capital lease obligations................................ (29,022) (29,264) (28,867)
Net proceeds from sale of stock........................................ 3,399,819 5,000 --
Payment of debt issuance costs......................................... (7,064) (336,957) --
Increase in restricted cash............................................ -- (350,000) --
Proceeds from long-term note and bond.................................. -- 8,500,000 --
------------- ------------- -----------
Net cash provided by (used in) financing activities.................... 3,340,604 7,766,360 (178,089)
------------- ------------- -----------
Increase in cash and cash equivalents.................................. 1,608,761 1,192,361 79,791
CASH AND CASH EQUIVALENTS, beginning of period......................... 1,432,944 240,583 160,792
------------- ------------- -----------
CASH AND CASH EQUIVALENTS, end of period............................... $ 3,041,705 $ 1,432,944 $ 240,583
------------- ------------- -----------
------------- ------------- -----------
CASH PAID DURING THE YEAR FOR:
Interest............................................................... $ 203,865 $ 27,315 $ 27,180
------------- ------------- -----------
------------- ------------- -----------
Income taxes........................................................... $ 153,800 $ 7,733 $ 55,000
------------- ------------- -----------
------------- ------------- -----------
Non-Cash Transactions:
Note payable--maintenance agreement.................................... $ 150,000 $ -- $ --
Issuance of stock pursuant to purchase of building..................... $ -- $ 150,000 $ --
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION:
Chesapeake Biological Laboratories, Inc. ("CBL" or the "Company") is a
provider of pharmaceutical and biopharmaceutical product development and
production services on a contract basis for a broad range of customers, from
major international pharmaceutical firms to emerging biotechnology companies.
Since 1990, CBL has provided its product development services to more than 90
pharmaceutical and biotechnology companies and has contributed to the
development and production of more than 100 therapeutic products intended for
human clinical trials. Customers contract with the Company to produce
development stage products for use in U.S. Food and Drug Administration ("FDA")
clinical trials and to produce and manufacture FDA approved products for
commercial sale. The Company's business depends in part on strict government
regulation of the drug development process, especially in the United States.
CBL's production facility operates under the current Good Manufacturing
Practices ("cGMP") established and regulated by the FDA.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial
statements include the accounts of CBL and its wholly-owned subsidiary, CBL
Development Corp.
ACCOUNTS RECEIVABLE Accounts receivable are stated net of allowances for
doubtful accounts of $70,300 and $10,300 as of March 31, 1998 and 1997,
respectively.
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 estimated useful lives of three to ten years. The building is
depreciated over an estimated useful life of thirty years. Leasehold
improvements are amortized over the term of the lease. Assets under construction
are not depreciated until placed into service. Interest and construction
overhead costs incurred during the construction period are capitalized.
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. Included in restricted cash are Company
funds of $350,000 which are being held by the Bond Trustee as collateral for the
Company's obligations under the Letter of Credit and Reimbursement Agreement
with First Union National Bank of North Carolina (see Note 7).
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 customers with development products.
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).
STOCK OPTION PLANS The Company accounts for its stock-option plans in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price.
20
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 differ from those estimates.
RECLASSIFICATIONS Certain prior year balances have been reclassified to
conform with current year presentation.
NOTE 3. CONCENTRATIONS OF CREDIT RISK/SIGNIFICANT CUSTOMERS:
The Company's customers span the range of the pharmaceutical and medical
device industries. For many customers, the Company requires an up-front payment
on orders.
The contract manufacturing agreement between the Company and Allergan Botox,
Ltd. ("Allergan") for the production of Vitrax-TM- originally expired in
February 1997. Subsequent to fiscal year ended March 31, 1997, an agreement was
reached between CBL and Allergan which called for the production of Vitrax-TM-
through December 31, 1997, on modified terms using active ingredients supplied
by Allergan, rather than active ingredients manufactured by CBL. In addition,
Allergan was relieved of any obligation to purchase Vitrax-TM- exclusively from
the Company.
During the years ended March 31, 1998, 1997 and 1996, approximately 14%,
49%, and 41%, respectively, of CBL's sales were to Allergan. During the years
ended March 31, 1998, 1997 and 1996, sales to the second largest customer, which
was a different customer each year, were 6%, 8%, and 14% of CBL's sales,
respectively. The Company has been actively seeking to increase and diversify
its customer base and has been successful in its diversification efforts.
However, there can be no assurance that the Company's annual results will not be
dependent upon the performance of a few large projects.
NOTE 4. INVENTORIES:
Inventories consisted of the following at March 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Raw materials......................................................... $ 280,344 $ 324,417
Work-in-process....................................................... 244,652 433,454
Finished goods........................................................ -- 2,204
---------- ----------
$ 524,996 $ 760,075
---------- ----------
---------- ----------
</TABLE>
21
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at March 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C> <C>
Land............................................................. $ 253,763 $ 253,763
Building......................................................... 2,131,538 2,128,503
Construction in progress......................................... 6,119,240 1,324,614
Laboratory equipment............................................. 2,173,321 2,247,692
Furniture and fixtures........................................... 432,015 384,130
Leasehold improvements........................................... 446,992 439,182
------------ -------------
11,556,869 6,777,884
Less: Accumulated depreciation and amortization.................. (2,128,038) (1,862,039)
------------ -------------
$ 9,428,831 $ 4,915,845
------------ -------------
------------ -------------
</TABLE>
Depreciation and amortization expense for the years ended March 31, 1998,
1997 and 1996 was $346,994, $360,922 and $319,827, respectively.
NOTE 6. 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, secured
by the Company's inventory and accounts receivable, and by the equipment
acquired by the Company. The Revolving Credit Facility, which is used to fund
operating requirements, provides for interest at 3.0% over the LIBOR Market
Index Rate. There were no balances on the Revolving Credit Facility as of March
31, 1998, 1997 and 1996.
The average outstanding balance on the Revolving Line of Credit Facility for
fiscal years 1998, 1997 and 1996 was $24,000, $21,000, and $86,000,
respectively. The average interest rate on the Revolving Line of Credit Facility
for fiscal years 1998, 1997 and 1996 was 8.69%, 8.75% and 9.0%, respectively. In
connection with the bond issuance described below, no further funds are
available under the Equipment Leasing/Financing Credit Facility; however, the
Revolving Line of Credit Facility remains in effect, secured by inventory and
accounts receivable.
NOTE 7. LONG TERM DEBT:
In November 1996, the Company completed the acquisition of an approximately
70,000 square foot building on 3.48 acres in Baltimore, Maryland, which the
Company is now in the process of renovating into a commercial production
facility. The Company is actively seeking opportunities and customer contracts
to utilize these expanded capabilities. However, as of March 31, 1998, the
Company has not entered into any definitive customer contracts for the new
facility. The purchase and renovation costs were financed with a $7,000,000
Economic Development Bond issued by the Maryland Industrial Development
Financing Authority and a $1,500,000 loan from the Mayor and City Council of
Baltimore City by and through the Department of Housing and Community
Development. The loan has an interest rate which is fixed at 6.5%. The bonds are
tax exempt and variable rate and may be converted to a fixed rate.
The Company has also entered into an interest rate agreement with First
Union National Bank of North Carolina to reduce the potential impact of the
variable interest rates on the bonds. This agreement
22
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. LONG TERM DEBT: (CONTINUED)
results in a maximum interest rate on the bonds of 5.51%, and relates to
$6,000,000 of the outstanding bonds. The agreement became effective in November
1996, and will expire in November 2003.
The principal portion of the Bonds, and the accrued interest thereon, is
payable from monies drawn under a direct pay letter of credit issued by First
Union National Bank of North Carolina (the "Bank"), in amounts up to $7,280,000.
Interest is payable quarterly, commencing February 1, 1997, and principal
portions of the bonds are subject to redemption, in part, commencing November
1998, in accordance with a schedule set forth in the bonds. The Maturity Date is
August 1, 2018. The loan from the City of Baltimore requires interest only
payments for the first two years, with monthly principal and interest payments
beginning November 1998, with the final payment due in November 2016.
There are certain covenants contained in the debt financing which include
ratios and balances as to minimum tangible net worth, liability to net worth
ratio, EBITDA ratio and current ratio (all as defined). Other covenants include
a ceiling on capital expenditures and on the incurrence of other indebtedness
(as defined). During the year and subsequent to year-end, certain covenants were
modified. As of March 31, 1998, the Company is in compliance with all covenants
except the EBITDA ratio covenant. This covenant has been waived by the bank
through April 1, 1999.
In connection with the financing, the Company incurred costs of
approximately $337,000 which will be amortized over the term of the bonds. The
Company has also capitalized approximately $302,000 of net construction period
interest costs through March 31, 1998, which will be expensed over the useful
life of the building. The Company's other long term debt as of March 31, 1998,
consists of a truck and an equipment loan. The truck 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.
The remaining principal payments on the Company's long term debt as of March
31, 1998, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31 AMOUNT
- - -------------------------------------------------------------------------------- ------------
<S> <C>
1999............................................................................ $ 389,547
2000............................................................................ 774,327
2001............................................................................ 669,519
2002............................................................................ 672,834
2003 and thereafter............................................................. 6,166,422
------------
$ 8,672,649
------------
------------
</TABLE>
Based on the borrowing rates currently available to the Company, the fair
value of long- term debt, exclusive of capital lease obligations, as of March
31, 1998, is approximately $8,411,000.
NOTE 8. LEASES:
In December 1993, the Company entered into a non-cancelable operating lease
agreement for a facility in Owings Mills, Maryland, to house its corporate
offices, warehousing, shipping and receiving functions. The lease terms had
provided for an initial expiration date of December 31, 1998. However, as of
June 1, 1997, the Company negotiated termination of the Owings Mills facility
lease, effective June 1, 1997, in exchange for a termination fee of $30,200 paid
by the Company, resulting in net savings to the
23
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. LEASES: (CONTINUED)
Company of approximately $200,000 over the remaining term of the lease. The rent
expense to the Company under the lease agreement was $59,378, $143,948, and
$147,002 for years ended March 31, 1998, 1997 and 1996, respectively.
The Company's Seton facility is primarily used for experimental development
and 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, 1998, 1997, and 1996, were $243,067, $234,784 and $232,782,
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. In addition, in fiscal year 1997,
the Company entered into several operating leases that expire during fiscal year
2001.
On April 14, 1998, the Company exercised the right to renew the lease of its
Seton facility. The lease now expires on December 31, 2000, and may, at the
Company's option, be renewed again for another two year period.
At March 31, 1998, the aggregate future minimum annual lease payments were
as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDED MARCH 31 LEASES LEASES
- - ----------------------------------------------------------------------------------------- --------- ------------
<S> <C> <C>
1999..................................................................................... $ 36,245 $ 1,100,364
2000..................................................................................... 1,123 912,137
2001..................................................................................... -- 861,484
2002..................................................................................... -- 699,436
--------- ------------
$ 37,368 $ 3,573,421
------------
------------
Less interest............................................................................ (8,416)
---------
Present value of future minimum lease payments........................................... $ 28,952
---------
---------
</TABLE>
NOTE 9. CONTINGENCIES:
In the ordinary course of business the Company could be exposed to a risk of
liability as a result of the products that it has produced or developed for
others. The Company attempts to limit its exposure to liability through
contractual agreements with its customers and insurance coverage. Clinical trial
materials are produced by the Company for use by its customers in studies that
are strictly regulated by the FDA. During fiscal 1998, 1997 and 1996, there were
no legal proceedings to which the Company was a party.
NOTE 10. STOCK OPTION PLANS:
The Company has adopted four incentive stock option plans for employees (the
"Option Plans") and a separate plan for Directors. 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
24
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. STOCK OPTION PLANS: (CONTINUED)
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 the options
range from five to ten years.
The Company applies APB Opinion 25 and related interpretations in accounting
for its plans, under which no compensation expense has been recognized. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Net (loss) income:
As reported................................................ $ (378,628) $ 503,715
Pro forma.................................................. (660,876) 364,955
Basic (loss) earnings per share:
As reported................................................ (0.08) 0.12
Pro forma.................................................. (0.13) 0.09
Diluted (loss) earnings per share:
As reported................................................ (0.08) 0.12
Pro forma.................................................. (0.13) 0.09
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Expected volatility.......................................... 75.0% 82.2%
Risk-free interest rates..................................... 5.5-6.4% 5.9-6.0%
Expected lives............................................... 5 years 4-5 years
</TABLE>
A summary of option transactions for the years ended March 31, 1998, 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ----------- ---------- ----------- ---------- -----------
Outstanding, beginning of year.................. 571,900 $ 2.37 366,750 $ 2.16 256,250 $ 2.43
Granted......................................... 202,361 4.22 300,000 2.98 130,500 1.50
Exercised....................................... (160,484) 1.94 (11,250) 1.28 -- --
Expired or canceled............................. (2,890) 1.40 (83,600) 3.80 (20,000) 1.25
----------- ----- ---------- ----- ---------- -----
Outstanding, end of year........................ 610,887 $ 3.10 571,900 $ 2.37 366,750 $ 2.16
----------- ----- ---------- ----- ---------- -----
----------- ----- ---------- ----- ---------- -----
Shares available for future grant............... 324,239 531,550 43,497
----------- ---------- ----------
----------- ---------- ----------
Options exercisable at end of period............ 166,787 105,000 108,750
----------- ---------- ----------
----------- ---------- ----------
Weighted average fair value of options
granted....................................... $2.78 $2.24 $1.03
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
25
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. STOCK OPTION PLANS: (CONTINUED)
The following table summarizes information about stock options outstanding
at March 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ---------------------------------
NUMBER REMAINING NUMBER
RANGE OF OUTSTANDING AT CONTRACTUAL WEIGHTED AVERAGE EXERCISABLE AT WEIGHTED AVERAGE
EXERCISE PRICES MARCH 31, 1998 LIFE EXERCISE PRICE MARCH 31, 1998 EXERCISE PRICE
- - --------------------------- -------------- --------------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
$1.50-$3.00................ 181,050 7.7 years $ 1.56 32,450 $ 1.55
$3.00-$5.00................ 370,337 8.9 years 3.44 129,337 3.74
$5.00-$6.50................ 59,500 9.5 years 5.68 5,000 5.19
------- --------------- ----- ------- -----
610,887 8.6 years $ 3.10 166,787 $ 3.36
------- --------------- ----- ------- -----
------- --------------- ----- ------- -----
</TABLE>
NOTE 11. INCOME TAXES:
The (benefit) provision for income taxes was comprised of the following for
the years ended March 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Federal:
Current............................................... $ (180,325) $ 198,716 $ --
Deferred.............................................. (24,014) 52,743 175,065
State:
Current............................................... (15,911) 35,067 --
Deferred.............................................. (2,119) 9,307 30,894
----------- ---------- ----------
(Benefit) provision for income taxes.................... $ (222,369) $ 295,833 $ 205,959
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
The following table reconciles income taxes at the federal statutory rate to
the provision for income taxes in the accompanying consolidated statements of
income for the years ended March 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Income tax at federal statutory rate.................... $ (204,339) $ 271,846 $ 175,065
State tax, net of federal benefit....................... (18,030) 36,939 30,894
Other................................................... -- (12,952) --
----------- ---------- ----------
(Benefit) provision for income taxes.................... $ (222,369) $ 295,833 $ 205,959
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
As of March 31, 1997, CBL had no operating loss carry forwards for income
tax purposes.
26
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. INCOME TAXES: (CONTINUED)
Total deferred tax liabilities and deferred tax assets as of March 31, 1998
and 1997, 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:
<TABLE>
<CAPTION>
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Inventory.................................................. $ 41,359 $ 32,251
Accruals and reserves...................................... 59,633 18,289
Credit carry forwards...................................... 17,537 --
-------------- --------------
$ 118,529 $ 50,540
-------------- --------------
-------------- --------------
Deferred tax liabilities:
Property and equipment..................................... $ 143,274 $ 108,549
Consulting costs........................................... 7,131 --
-------------- --------------
$ 150,405 $ 108,549
-------------- --------------
-------------- --------------
</TABLE>
NOTE 12. PROFIT SHARING PLAN:
During the year ended March 31, 1994, the Company established a
401(k)-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 Company suspended the matching of
employee contributions as of July 31, 1994.
NOTE 13. EARNINGS PER SHARE:
In March 1997, the Financial Accounting Standards Board (FASB) issued a
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." SFAS 128 simplifies the standards for computing earnings per share
("EPS") previously found in APB Opinion No. 15, "Earnings per Share." It
replaces the presentation of primary and fully diluted EPS with a presentation
of basic and diluted EPS and requires a reconciliation of the numerator and
denominator of the diluted EPS calculation. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS is
computed similarly to primary EPS pursuant to APB Opinion No. 15. The adoption
of SFAS 128 did not have a significant impact on the Company for the year ended
March 31, 1998, because of the Company's net loss. Earnings per share
information for prior years has been restated to reflect the new requirements.
The dilutive effect of all options outstanding has been determined using the
treasury stock method. The weighted average shares outstanding is calculated as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Basic weighted average shares outstanding.............. 4,991,251 4,030,832 3,979,938
Effect of dilutive common equivalent shares............ -- 159,935 13,126
---------- ---------- ----------
Diluted weighted average shares outstanding............ 4,991,251 4,190,767 3,993,064
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
27
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. EARNINGS PER SHARE: (CONTINUED)
Options to purchase 610,887 shares of common stock at a weighted average
exercise price of $3.10 per share were outstanding at March 31, 1998, but were
not included in the computation of diluted earnings per share because the
Company had a net loss for the year, and, therefore, the effect would be
antidilutive.
NOTE 14. NEW ACCOUNTING PRONOUNCEMENTS:
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." The statements will affect the presentation and disclosure
requirements for annual and interim financial statements beginning in fiscal
year 1999. The Company expects that the new reporting requirements will not have
a material impact on its financial statements.
28
<PAGE>
SCHEDULE II
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES WRITE-OFFS PERIOD
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Allowances for Doubtful Accounts:
For Fiscal Year Ended March 31, 1996:........................... $ 4,000 $ 33,900 $ 21,500 $ 16,400
For Fiscal Year Ended March 31, 1997:........................... 16,400 15,000 21,100 10,300
For Fiscal Year Ended March 31, 1998:........................... 10,300 60,000 0 70,300
</TABLE>
29
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated May 8, 1998, included in
Registration Statement File No. 333-44873. It should be noted that we have not
audited any financial statements of the company subsequent to March 31, 1998, or
performed any audit procedures subsequent to the date of our report.
Baltimore, Maryland /S/ Arthur Andersen LLP
June 15, 1998
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 3,392
<SECURITIES> 0
<RECEIVABLES> 1,330
<ALLOWANCES> 70
<INVENTORY> 525
<CURRENT-ASSETS> 5,692
<PP&E> 11,557
<DEPRECIATION> 2,128
<TOTAL-ASSETS> 16,313
<CURRENT-LIABILITIES> 819
<BONDS> 8,283
0
0
<COMMON> 7,422
<OTHER-SE> (358)
<TOTAL-LIABILITY-AND-EQUITY> 16,313
<SALES> 7,016
<TOTAL-REVENUES> 7,016
<CGS> 5,306
<TOTAL-COSTS> 7,634
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 60
<INTEREST-EXPENSE> (18)
<INCOME-PRETAX> (601)
<INCOME-TAX> (222)
<INCOME-CONTINUING> (379)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (379)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
