Filed pursuant to Rule 424(b)(4)
1,000,000 SHARES
[LOGO] CHESAPEAKE BIOLOGICAL LABORATORIES, INC.
CLASS A COMMON STOCK
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All of the 1,000,000 shares of Class A Common Stock, par value $.01 per
share (the "Common Stock" or "Class A Common Stock"), of Chesapeake Biological
Laboratories, Inc. ("CBL" or the "Company") offered hereby are being sold by the
Company. The Company's Common Stock is traded on The Nasdaq Stock Market's
National Market (the "Nasdaq National Market") under the symbol "CBLI." On June
11, 1997, the closing bid and asked prices for the Common Stock, as reported by
the Nasdaq National Market, were $3.875 and $4.125, respectively. See "Price
Range of Common Stock.".
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SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR CERTAIN
FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
Per Share................................. $3.75 $0.24375 $3.50625
Total(3).................................. $3,750,000 $243,750 $3,506,250
(1) The Company has agreed to indemnify the Underwriter against certain
liabilities including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, which are estimated at
$337,500.
(3) The Company has granted the Underwriter a 30-day option to purchase up to
150,000 additional shares of Common Stock on the same terms and conditions
as set forth above, solely to cover over-allotments, if any. If such option
is exercised in full, the Price to Public will total $4,312,500, the
Underwriting Discounts and Commissions will total $280,312, and the Proceeds
to Company will total $4,032,188. See "Underwriting."
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The shares of Common Stock are offered by the Underwriter, subject to prior
sale, to withdrawal, cancellation or modification of the offer without notice,
to delivery and to acceptance by the Underwriter and to certain further
conditions. It is expected that delivery of the certificates representing such
shares will be made against payment therefor at the offices of Ferris, Baker
Watts, Incorporated, 1720 Eye Street, N.W., Washington, D.C. or through the
facilities of the Depository Trust Company, on or about June 16, 1997.
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FERRIS, BAKER WATTS
Incorporated
THE DATE OF THIS PROSPECTUS IS JUNE 12, 1997
[Photo: man in white suit]
[Photo: high technology machinery]
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IN CONNECTION WITH THE OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND
NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITER'S
OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED. THE OFFERING OF THE SHARES OF
COMMON STOCK PURSUANT TO THIS PROSPECTUS IS REFERRED TO HEREIN AS THE
"OFFERING." INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER
THE HEADING "RISK FACTORS." THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. SEE "SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS."
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THE COMPANY
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, CBL has provided services on a contract basis to more than 80
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.
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 9001 (International Organization for
Standardization) 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 provides it with a competitive advantage for attracting domestic
and international customers.
The pharmaceutical and biotechnology industries have experienced substantial
growth in recent years. The biotechnology industry raised over $8 billion in
equity capital during the twelve months ended June 30, 1996, according to Ernst
& Young LLP. This influx in equity capital has provided pharmaceutical and
biotechnology companies with increased resources to fund expanded research and
development and to pursue additional FDA product approvals. The number of
products in FDA clinical trials increased approximately 38%, from 476 to 657 in
the twelve months ended June 30, 1995 and 1996, respectively, also according to
Ernst & Young LLP. As the pharmaceutical and biotechnology industries focus
their efforts on research and development of new products, certain development
and production functions are increasingly outsourced to companies such as CBL.
See "Business--Market Overview" and "--Factors Influencing Increased
Outsourcing."
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. The Company's primary strategy to
achieve this objective is to capitalize on outsourcing trends in those
industries by increasing its development and production capabilities. As part of
this strategy, in November 1996, the Company acquired a building in Baltimore,
Maryland, which is currently being improved and equipped as a laboratory and
pharmaceutical production facility. The Company anticipates that this additional
facility will be fully operational in early 1998, and will increase its
production capacity several-fold.
1
CBL believes that its established experience and expertise, ISO 9001
certification, anticipated increase in capacity and ability to offer a broad
range of drug development and production services, will enable it to provide
competitive, cost-effective solutions to the pharmaceutical and
biopharmaceutical industries.
The Company was incorporated in Maryland in 1980. The Company's principal
executive offices are located at its new facility at 1111 South Paca Street,
Baltimore, Maryland 21230-2591. The Company's telephone number is (410)
843-5000.
THE OFFERING
Common Stock Offered by the Company.... 1,000,000 shares
Common Stock to be Outstanding after
the Offering......................... 5,114,558 shares(1)
Use of Proceeds........................ For working capital and general corporate purposes,
and to finance further expansion. See "Use of
Proceeds."
Nasdaq National Market Symbol.......... "CBLI"
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(1) Excludes 571,900 shares of Common Stock issuable upon the exercise of
outstanding stock options as of March 31, 1997, of which options to purchase
105,000 shares were then exercisable. See Note 10 of the Notes to
Consolidated Financial Statements contained elsewhere in this Prospectus.
2
SUMMARY FINANCIAL INFORMATION
(In thousands, except per share amounts)
The following summary selected financial information should be read in
conjunction with, and is qualified in its entirety by, the more detailed
financial statements and notes thereto included elsewhere in this Prospectus.
The summary income statement data of the Company for the years ended March 31,
1993, 1994, 1995, 1996 and 1997 and the summary balance sheet data as of March
31, 1996 and 1997 have been derived from the Consolidated Financial Statements
of the Company which have been audited by Arthur Andersen LLP, independent
public accountants. This data should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere herein.
YEAR ENDED MARCH 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
INCOME STATEMENT DATA:
Operating revenue................................................ $ 3,453 $ 5,213 $ 6,982 $ 6,174 $ 8,654
Gross profit..................................................... 1,376 1,897 1,904 2,247 2,758
Income from operations........................................... 314 564 365 538 791
Provision (benefit) for income taxes............................. 13 8 (209) 206 296
Extraordinary item............................................... 41 1,055 -- -- --
Net income....................................................... $ 257 $ 1,563 $ 566 $ 309 $ 504
FULLY DILUTED PER SHARE DATA:
Net income before extraordinary item............................. $ 0.06 $ 0.13 $ 0.14 $ 0.08 $ 0.12
Extraordinary item............................................... 0.01 0.26 -- -- --
--------- --------- --------- --------- ---------
Net income....................................................... $ 0.07 $ 0.39 $ 0.14 $ 0.08 $ 0.12
Weighted average common and common equivalent shares
outstanding.................................................... 3,744 3,979 4,053 3,993 4,282
MARCH 31, 1997
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MARCH 31, AS ADJUSTED
1996 ACTUAL (1)
----------- --------- --------------
BALANCE SHEET DATA:
Cash....................................................................... $ 241 $ 1,433 $ 4,602
Working capital............................................................ 2,161 2,794 5,963
Total assets............................................................... 4,320 13,444 16,613
Long-term debt and capital lease obligations............................... 105 8,554 8,554
Stockholders' equity....................................................... 3,384 4,043 7,212
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(1) Adjusted to give effect to the Offering at a price to the public of $3.75
per share and after deducting estimated underwriting discounts, offering
expenses, and the applicable filing and registration fees.
3
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS 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 (THE "SECURITIES ACT"), AND SECTION 21E OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). 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 TO BE MATERIALLY DIFFERENT FROM ANY FUTURE 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, AND OTHER FACTORS
REFERENCED IN THIS PROSPECTUS, INCLUDING WITHOUT LIMITATION UNDER THE CAPTIONS
"RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS," AND "BUSINESS." GIVEN THESE UNCERTAINTIES, PROSPECTIVE
INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING
STATEMENTS. THE COMPANY DISCLAIMS ANY OBLIGATION TO UPDATE ANY SUCH FACTORS OR
TO PUBLICLY ANNOUNCE THE RESULTS OF ANY REVISIONS TO ANY OF THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN TO REFLECT FUTURE EVENTS OR DEVELOPMENTS.
RISK FACTORS
AN INVESTMENT IN THE COMPANY INVOLVES A HIGH DEGREE OF RISK. THE FOLLOWING
RISK FACTORS, IN ADDITION TO OTHER INFORMATION IN THIS PROSPECTUS, SHOULD BE
CAREFULLY CONSIDERED IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE
PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY.
DEPENDENCE ON AND EFFECT OF GOVERNMENT REGULATION
The design, development, testing, manufacturing and marketing of
pharmaceutical and biopharmaceutical compounds, other biotechnology products,
diagnostic products and medical devices are subject to regulation by
governmental authorities, including the FDA and comparable regulatory
authorities in other countries. Because the Company derives a significant part
of its revenues from the production of pharmaceutical and biopharmaceutical
compounds for use in clinical trials required by the FDA, the Company's business
depends, in part, on strict government regulation of the drug development
process, especially in the United States. See "Business--Government
Regulations."
All facilities and production techniques used to produce products for
clinical use or sale in the United States must be operated in conformity with
the FDA's current Good Manufacturing Practices ("cGMP"), regulations and
guidelines governing the development and production of pharmaceutical products.
The Company's facilities are subject to periodic regulatory inspections to
ensure compliance with cGMP requirements. Failure on the part of the Company to
comply with applicable requirements could result in the termination of ongoing
research or the disqualification of data for submission to regulatory
authorities. A finding that the Company materially violated 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. See "Business--Government Regulations."
DEPENDENCE ON CERTAIN CUSTOMERS
The Company's largest customers account for a significant percentage of its
revenue. During the fiscal year ended March 31, 1997, revenues from the
Company's three largest customers accounted for approximately 49%, 8% and 6%,
respectively (or approximately 63% in the aggregate), of total revenues; during
the fiscal year ended March 31, 1996, revenues from the Company's three largest
customers accounted for approximately 41%, 14% and 8%, respectively (or
approximately 63% in the aggregate), of total revenues; and during the fiscal
year ended March 31, 1995, revenues from the Company's three largest customers
accounted for approximately 51%, 18% and 8%, respectively (or approximately 76%
in the aggregate), of total revenues. During each of these three fiscal years,
the largest customer was Allergan (Botox), Ltd. ("Allergan"), a subsidiary of
Allergan Pharmaceuticals, Inc. and the second and third largest customers
varied. The Company expects that revenues from Allergan will decrease
significantly for the Company's
4
fiscal year ending March 31, 1998, and thereafter. The Company has been actively
seeking to increase and diversify its customer base and, during the fiscal year
ended March 31, 1997, revenues from customers other than Allergan increased to
$4,380,000, or by 20% and 27%, respectively, when compared to the fiscal years
ended March 31, 1996 and 1995. There can be no assurance that the Company's
business will not continue to be dependent on certain customers or that annual
results will not be dependent upon the performance of a few large projects for
specific customers.
Substantially all of the revenues derived by the Company from Allergan have
been for the manufacture and sale to Allergan of Vitrax-TM- ("Vitrax"), a
hyaluronic acid ("HA") based product developed by the Company for use in
opthalmic surgery and now owned by Allergan. The contract manufacturing
agreement for the manufacture of Vitrax for Allergan expired in February 1997.
In April 1997, however, the agreement was extended until December 1997, and
modified to provide for the production of Vitrax using active ingredient
supplied by Allergan, rather than active ingredient manufactured by CBL. In
addition, Allergan has been relieved of any obligation to purchase Vitrax
exclusively from the Company and is seeking FDA approval for the manufacture of
Vitrax at its own facility in Ireland.
Due to the nature of the drug development process, significant customers in
any one period may not continue to be significant customers in subsequent
periods. Some customers may not seek the services of the Company for periods of
a year or more during which they concentrate on testing and clinical trials
related to the product produced by CBL. The Company continually seeks to
increase its customer base and obtain new business from existing customers,
whether or not significant contracts have expired or are expected to expire in
the near future. The loss of business from a significant customer or the failure
on the part of the Company to replace customers whose projects have been
completed (either with new projects for such customers or new customers) could
have a material adverse affect on the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business--Customers."
RISKS ASSOCIATED WITH THE COMPANY'S EXPANSION
In order to meet anticipated accelerating industry demand for its services,
the Company recently acquired a building that, when improved and equipped as a
laboratory and pharmaceutical production facility (expected to occur in early
1998), will significantly expand the Company's pharmaceutical production
capabilities. The proceeds of the Offering may be used for additional expansion
by the Company of its facilities and operations. The Company is actively seeking
opportunities and customer contracts to utilize its anticipated expanded
capabilities. However, as of the date hereof, the Company has not entered into
definitive agreements to do so. If the Company is unable to enter into a
sufficient number of such agreements on favorable terms, the expenses relating
to this growth (including the costs associated with the acquisition of the new
building and the renovation, rehabilitation and equipping of the new building)
may strain operational, human and financial resources before significant revenue
is derived from this expansion. Failure to manage this expansion effectively
could have a material adverse effect on the Company's business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON CERTAIN INDUSTRIES
The Company's revenues are highly dependent on research and development
expenditures, production-related compliance testing expenditures and contract
manufacturing expenditures by the pharmaceutical, biotechnology and medical
device industries. The Company has benefited from the growing tendency of
pharmaceutical and biotechnology companies to engage independent organizations
to conduct development and testing projects and to produce the pharmaceuticals
necessary for such projects and for commercial sale. The Company's business
could be materially and adversely affected by a general economic decline in
these industries or by a reduction in the outsourcing of research, development,
testing and manufacturing or production activities. See "Business--Market
Overview" and "--Factors Influencing Increased Outsourcing."
5
RESTRICTIONS ON CAPITAL EXPENDITURES
The Company financed the acquisition and subsequent renovation,
rehabilitation and equipping of its new facility, located in the Carroll/Camden
Industrial Park, partially with the proceeds of certain tax-exempt economic
development revenue bonds issued by the Maryland Industrial Development
Financing Authority ("MIDFA"). The terms of the financing and the applicable
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and
corresponding regulations, limit to $10,000,000 the aggregate amount of capital
expenditures attributable to facilities occupied by the Company within the City
of Baltimore during the six-year period from November 1993 to November 1999.
Because the Seton Business Park, at which the Company leases space, is also
located in the City of Baltimore, capital expenditures made at that facility
also accrue against this capital expenditure limit. The Code and corresponding
regulations are highly technical and provide that capital expenditures made by
others at the Seton Business Park facility, including the landlord and other
facility tenants, over which the Company has no control, may accrue against the
Company's capital expenditure limit. Accordingly, the Company may exceed the
capital expenditure limit inadvertently.
The Company believes that it is currently in compliance with this limitation
(as of April 1, 1997, the Company estimates that upon completion of the
renovation, rehabilitation and equipping of the new facility, it will have made
capital expenditures of approximately $9,240,000 in the City of Baltimore during
this period). The Company pays interest on the outstanding balance at a
tax-exempt rate which, at June 11, 1997, was equal to 5.105% per annum. In the
event that capital expenditures by the Company, or attributable to facilities
occupied by the Company, in the City of Baltimore during the relevant period
exceed $10,000,000 in the aggregate, an event of default would occur under the
bond financing arrangements, the bonds would automatically lose their tax-exempt
status, and the interest rate payable by the Company on the then outstanding
balance would increase approximately 4%, based on current market conditions, and
the Company would be required to refinance the existing indebtedness through
other means.
The ability of the Company to obtain alternate financing through a taxable
bond issue is subject to a number of factors which are beyond the control of the
Company and neither MIDFA nor First Union National Bank of North Carolina (the
issuer of the letter of credit which enhances the credit of the economic
development revenue bonds now outstanding) are required to cooperate in any such
refinancing. In addition, upon the occurrence of a default resulting from the
Company exceeding the capital expenditure limitation, MIDFA and the letter of
credit issuer would be entitled to exercise their respective rights and remedies
against the Company under the bonds and the security for the Company's
obligations under the letter of credit. Accordingly, there can be no assurance
that any such alternate financing arrangements will be available to the Company
on commercially favorable terms, if at all. The continued application of the
capital expenditure limitation may prevent the Company from undertaking
potentially profitable projects which would otherwise be in the best interest of
the Company until November 1999. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
RISKS ASSOCIATED WITH NEW FACILITY CONSTRUCTION AND VALIDATION
Renovation, rehabilitation and equipping of the Company's new facility are
continuing and involve various and substantial risks, including risks created by
such factors as governmental regulation, changes in economic conditions (such as
fluctuations in interest rates and construction costs), acts of God, changes in
budgeted costs and the performance of various contractors and subcontractors
retained to renovate, construct and equip the new facility. Although the Company
has retained The Whiting-Turner Contracting Company, believed by the Company to
be among the more highly regarded construction and engineering firms in the
mid-Atlantic region, as construction manager for the new facility, no assurances
can be given that the facility will be renovated, constructed and equipped in a
timely or in a good and workmanlike manner, if at all. In addition, because the
pharmaceutical production suites which comprise portions of the new facility
must be operated in conformity with cGMP regulations, once the improvement and
equipping
6
of the facility are completed, validation of the facility in accordance with
cGMP regulations is required prior to the commencement of revenue-producing
pharmaceutical production activities. Although the Company has substantial
experience in validating facilities in accordance with cGMP regulations, no
assurances can be given that, once the renovation, rehabilitation and equipping
of the facility is completed, validation will occur in a timely manner, if at
all. Substantial delay in the renovation, rehabilitation, equipping or
validation of the new facility could have a material adverse effect on the
Company's business.
The Company intends to enter into equipment leasing transactions with
respect to approximately $3,000,000 in pharmaceutical manufacturing equipment to
be installed at the new facility, in part to comply with the capital expenditure
limit imposed by the tax-exempt financing. To date, the Company has received
commitment letters from several equipment leasing companies affiliated with
major financial institutions to supply equipment for the new facility through
operating lease arrangements. Based on these commitment letters, the Company
expects to be able to enter into leasing arrangements on terms acceptable to the
Company for the required equipment; however, the commitments are subject to
conditions typical of like transactions, and no assurances can be given that the
Company will be successful in entering into final leases for the requisite
equipment. CBL's inability to enter into final leases for the requisite
equipment could have a material adverse effect on the Company's business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
VARIATION IN QUARTERLY OPERATING RESULTS
The Company's quarterly results have been, and are expected to continue to
be, subject to fluctuations which are not the result of seasonal or cyclical
factors. Quarterly results can fluctuate as a result of a number of factors,
including the commencement, completion or cancellation of large contracts,
timing of invoices for ongoing contracts, the timing of expenses for new
facilities or equipment and changes in the mix of services provided by the
Company. The Company believes that quarterly comparisons of its financial
results are not necessarily meaningful and should not be relied upon as an
indication of future performance. In addition, fluctuations in quarterly results
could affect the market price of the Common Stock in a manner unrelated to the
longer term operating performance of the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Quarterly
Results."
COMPETITION
The Company competes primarily with several pharmaceutical product
development organizations and contract manufacturers of biopharmaceutical
products, as well as the in-house research, development, quality control and
other support service departments of pharmaceutical and biotechnology companies
and with university research laboratories, some of which have substantially
greater resources than the Company. Competitive factors in the contract
development and manufacturing industry include reliability, turn-around time,
reputation for innovative and quality science, capacity to perform numerous
required services, financial strength and price. Although the Company believes
that it compares well against its direct competitors and its current and
potential customers' in-house capabilities on these factors, there can be no
assurance that the Company will be successful in the future in obtaining
customer contracts on commercially favorable terms, if at all. Increased
competition may lead to increased price and other forms of competition that may
adversely affect the Company. See "Business--Competition."
ENVIRONMENTAL RISKS AND HAZARDOUS MATERIALS
The production, manufacturing and research and development processes of the
Company involve the controlled use of hazardous materials. The Company is
subject to laws and regulations governing the use, manufacture, storage,
handling and disposal of such materials and certain waste products. In the event
of contamination or injury from hazardous materials, the Company could be held
liable for any damages that result and any such liability could exceed its
resources. In addition, there can be no assurance that the Company will not be
required to incur significant costs to comply with environmental laws and
regulations in the future. The Company may incur significant costs in
maintaining environmental programs acceptable to the regulatory authorities.
There can be no assurance that these programs will not require significant
7
ongoing capital expenditures in excess of the planned levels, which could have a
material adverse effect on the Company's results of operations. See
"Business--Government Regulations."
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the shares of Common Stock, like that of the common
stock of many other similarly situated companies, may be highly volatile.
Factors such as developments in the Company's relationships with its customers,
changes in FDA and other governmental regulations, sales of large numbers of
shares of Common Stock by existing Company stockholders and general market
conditions may have a significant effect on the market price of the Common
Stock. In addition, U.S. stock markets have experienced extreme price and volume
fluctuations in the past. This volatility has significantly affected the market
prices of securities of many pharmaceutical and biotechnology companies, and
companies such as the Company in related industries, for reasons frequently
unrelated or disproportionate to the operating performance of the specific
companies. These broad market fluctuations may adversely affect the market price
of the Common Stock.
DEPENDENCE ON KEY PERSONNEL
The Company's success is heavily dependent on the performance of its
executive officers. In addition, the Company's proposed plan of development will
require an increase in scientific, management and marketing personnel and the
development of additional expertise by existing employees and management.
Although the Company has been able to hire and retain qualified personnel, there
can be no assurance that it will be successful in obtaining or recruiting such
personnel in sufficient numbers to successfully implement its growth strategy.
See "Business--Employees" and "Management."
BROAD DISCRETION AS TO USE OF PROCEEDS
The Company intends to use the net proceeds of the Offering to finance
further expansion, for working capital and for general corporate purposes. Most
of the proceeds will be available for projects which are not yet identified and
the management of the Company will have broad discretion with respect to the
application of such proceeds. Pending such uses, the Company intends to invest
the net proceeds of the Offering in United States government securities,
securities issued or guaranteed by United States government agencies, deposits
in commercial banks which have a net worth of at least $100,000,000, or
commercial paper rated P-1 or better by Moody's Investor Service, Inc. or rated
comparably by another nationally recognized rating service or bureau. See "Use
of Proceeds."
POTENTIAL LIABILITY AND RISKS OF OPERATIONS
The Company develops, formulates, tests and produces pharmaceutical products
for others intended for use by the public. Such activities could expose the
Company to risk of liability for personal injury or death to persons using such
products, notwithstanding that the Company does not commercially market or sell
products of its own directly to the public. In contracts for the production of
FDA approved products for commercial sale, the Company seeks to reduce its
potential liability through measures such as contractual indemnification
provisions with customers (the scope of which may vary from customer to customer
and the performance of which are not assured) and by the insurance maintained by
the Company and its customers. Development services are typically undertaken
pursuant to purchase orders which do not include specific indemnification or
insurance provisions. Although the Company believes that this practice is
typical in the industry, CBL could be materially adversely affected if it were
required to pay damages or incur defense costs in connection with a claim for
which no indemnity agreement is applicable; that is outside the scope of any
applicable indemnity agreement; if the indemnity, although applicable, is not
performed in accordance with its terms; or if the Company's liability exceeds
the amount of applicable insurance or indemnity. The Company currently maintains
product liability insurance limited to $1,000,000 with respect to these risks.
See "Business--Potential Liability and Insurance."
8
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock by the Company in this Offering (at an offering price of $3.75 per
share) are estimated to be approximately $3,168,750 ($3,689,062 if the
Underwriter's over-allotment option is exercised in full), after deducting
underwriting discounts and commissions and offering expenses payable by the
Company.
The Company intends to use all of the net proceeds of the Offering for
working capital and other general corporate purposes to fund the Company's
continued growth, including investment to expand and improve CBL's existing
capabilities. Pending such uses, the proceeds from this Offering will be
invested in United States government securities, securities issued or guaranteed
by United States government agencies, deposits in commercial banks which have a
net worth of at least $100,000,000, or commercial paper rated P-1 or better by
Moody's Investor Service, Inc. or rated comparably by another nationally
recognized rating service or bureau. See "Risk Factors--Broad Discretion as to
Use of Proceeds" and "--Restrictions on Capital Expenditures."
PRICE RANGE OF COMMON STOCK
The Common Stock had been listed on the American Stock Exchange Emerging
Company Marketplace under the symbol "PHD.EC." Since May 27, 1997, the Company's
Common Stock has been listed on the Nasdaq National Market under the symbol
"CBLI." The following table sets forth for the periods indicated the high and
low sales prices of the Common Stock as reported by the AMEX-EC and the Nasdaq
National Market:
HIGH LOW
--------- ---------
FISCAL YEAR 1996:
First Quarter.......................................................... $ 2.75 $ 1.875
Second Quarter......................................................... 2.00 1.50
Third Quarter.......................................................... 1.875 1.1875
Fourth Quarter......................................................... 1.75 1.1875
FISCAL YEAR 1997:
First Quarter.......................................................... 2.50 1.25
Second Quarter......................................................... 3.50 1.375
Third Quarter.......................................................... 3.625 2.6875
Fourth Quarter......................................................... 6.75 3.00
FISCAL YEAR 1998:
First Quarter (through June 11, 1997).................................. 5.25 3.75
The closing bid and asked prices of the Common Stock as reported by the
Nasdaq National Market on June 11, 1997, were $3.875 and $4.125, respectively.
As of April 10, 1997, there were approximately 248 holders of record of the
Common Stock, and the Company believes that it had approximately 800 beneficial
owners of the Company's Common Stock.
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on its Common Stock
and intends to retain its earnings, if any, for future growth and, therefore,
does not anticipate paying any cash dividends for the foreseeable future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
9
CAPITALIZATION
The following table sets forth at March 31, 1997 the actual capitalization
of the Company and the capitalization of the Company on an adjusted basis to
give effect to the sale by the Company of 1,000,000 shares of Class A Common
Stock in the Offering (at a price to the public of $3.75 per share), and the
application of the estimated net proceeds therefrom, as if such transactions had
occurred as of March 31, 1997. This table should be read in conjunction with the
Company's financial statements and the notes thereto included elsewhere in this
Prospectus.
AS OF MARCH 31, 1997
----------------------------
ACTUAL AS ADJUSTED
------------- -------------
Long-term debt and capital lease obligations, net of current portion............... $ 8,553,985 $ 8,553,985
------------- -------------
Stockholders' equity:
Class A Common Stock, par value $0.01 per share, 8,000,000 shares authorized,
4,114,558 shares issued and outstanding, actual; 5,114,558 shares issued and
outstanding, as adjusted (1)................................................... 41,145 51,145
Class B (non-voting) Common Stock, par value $0.01 per share, 2,000,000 shares
authorized, none issued and outstanding........................................ -- --
Additional paid-in capital......................................................... 3,980,836 7,139,586
Retained earnings.................................................................. 20,745 20,745
------------- -------------
Total stockholders' equity......................................................... 4,042,726 7,211,476
------------- -------------
Total capitalization............................................................... $ 12,596,711 $ 15,765,461
------------- -------------
------------- -------------
- ------------------------
(1) Excludes 571,900 shares of Class A Common Stock issuable upon the exercise
of certain stock options outstanding on March 31, 1997, of which options to
purchase 105,000 shares were then exercisable. See Note 10 to Consolidated
Financial Statements.
10
SELECTED FINANCIAL DATA
(in thousands, except per share data)
The following table contains certain selected consolidated financial data of
the Company and is qualified by the more detailed Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus. The selected
financial data for the fiscal years ended and as of March 31, 1993, 1994, 1995,
1996 and 1997 have been derived from the Consolidated Financial Statements of
the Company which have been audited by Arthur Andersen LLP, independent public
accountants. This data should be read in conjunction with the Consolidated
Financial Statements and Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere herein.
YEAR ENDED MARCH 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
INCOME STATEMENT DATA:
Operating revenue........................................................ $ 3,453 $ 5,213 $ 6,982 $ 6,174 $ 8,654
Cost of revenue.......................................................... 2,077 3,316 5,078 3,927 5,896
--------- --------- --------- --------- ---------
Gross profit........................................................... 1,376 1,897 1,904 2,247 2,758
Operating expenses:
General and administrative............................................. 862 1,052 1,230 1,210 1,431
Selling................................................................ 200 281 309 455 413
Research and development............................................... -- -- -- 44 123
--------- --------- --------- --------- ---------
Total operating expenses........................................... 1,062 1,333 1,539 1,709 1,967
--------- --------- --------- --------- ---------
Income from operations............................................. 314 564 365 538 791
Interest income (expense)................................................ (85) (48) (8) (23) 9
--------- --------- --------- --------- ---------
Income before provision (benefit) for income taxes and extraordinary
item................................................................... 229 516 357 515 800
Provision (benefit) for income taxes..................................... 13 8 (209) 206 296
--------- --------- --------- --------- ---------
Income before extraordinary item......................................... 216 508 566 309 504
Extraordinary item....................................................... 41 1,055 -- -- --
--------- --------- --------- --------- ---------
Net income............................................................... $ 257 $ 1,563 $ 566 $ 309 $ 504
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
FULLY DILUTED PER SHARE DATA:
Net income before extraordinary item..................................... $ 0.06 $ 0.13 $ 0.14 $ 0.08 $ 0.12
Extraordinary item....................................................... 0.01 0.26 -- -- --
--------- --------- --------- --------- ---------
Net income............................................................... $ 0.07 $ 0.39 $ 0.14 $ 0.08 $ 0.12
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common and common equivalent shares outstanding......... 3,744 3,979 4,053 3,993 4,282
BALANCE SHEET DATA: (AT PERIOD END)
Cash..................................................................... $ 280 $ 634 $ 161 $ 241 $ 1,433
Working capital.......................................................... 1,139 1,493 1,822 2,161 2,794
Total assets............................................................. 2,264 3,587 4,138 4,320 13,444
Long-term debt and capital lease obligations............................. 827 83 154 105 8,554
Stockholders' equity..................................................... 875 2,493 3,075 3,384 4,043
11
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 producing experimental products for use
in clinical trials, and manufacturing services for FDA approved commercial drugs
and medical devices on a contractual basis. The Company has particular
experience and expertise in the development and production of sterile,
process-sensitive biopharmaceutical products.
The Company's scientific and engineering staff performs multiple product
development functions for CBL's customers, including research and development of
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 on-going product stability studies. Following final development
of a stable formulation of the pharmaceutical product and validation of the
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. These products have included Vitrax, an HA-based product developed by
the Company for use in human ophthalmic surgery, and manufactured by the Company
for Allergan, and Equron-TM- ("Equron"), an HA-based product for use in
treatment of equine joint disease, manufactured by the Company for Solvay
Veterinary, Inc., a subsidiary of Solvay & Cie, S.A., a major European chemical
company.
The contract manufacturing agreement for the manufacture of Vitrax for
Allergan expired in February 1997. In April 1997, however, the agreement was
extended until December 1997, and modified to provide for the production of
Vitrax using active ingredient supplied by Allergan, rather than active
ingredient manufactured by CBL. In addition, Allergan is seeking FDA approval
for the manufacture of Vitrax at its own facility in Ireland, and the extension
relieves Allergan of any obligation to purchase Vitrax exclusively from the
Company. See "Risk Factors--Dependence on Certain Customers."
Many of CBL's customers, particularly smaller biotechnology companies, have
raised funds primarily to support drug discovery and research with the
expectation of outsourcing the process development work associated with
commercial development, and, in some cases, the initial and long-term production
responsibilities. The Company believes that this, as well as other factors
affecting both small and large pharmaceutical and biotechnology companies, will
continue to increase demand for its services. See "Business--Factors Influencing
Increased Outsourcing."
Formerly called "GAC Equine Diagnostics, Inc.," the Company was incorporated
in Maryland in March 1980. Initially, the Company provided diagnostic services
and laboratory analysis in connection with the treatment of equine joint
disease. In 1982, the Company changed its name to "Chesapeake Biological
Laboratories, Inc.," and from 1983 until 1990, the Company focused its efforts
on developing and commercially exploiting a specialized process for
manufacturing HA and HA-based products for veterinary and human healthcare
applications. In 1991, the Company sold its Vitrax HA technology to Allergan.
The Company's business has expanded since 1990 into pharmaceutical product
development and production services for firms ranging from major pharmaceutical
firms to emerging biotechnology companies, with an emphasis on sterile,
process-sensitive biopharmaceutical products.
CBL's management has recognized several favorable trends in the markets
affecting its business and has instituted structural and operational changes to
position the Company for growth. In 1995, CBL initiated the process for ISO 9001
certification which it received in 1996. Also, in the fall of 1996, the Company
acquired a new building which, when renovated, will augment its current cGMP
production
12
capability at its Seton Business Park facility. This phase of the Company's
expansion is expected to be completed in early 1998.
RESULTS OF OPERATIONS
PERCENTAGE OF REVENUES
YEARS ENDED MARCH 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Revenues................................................................................. 100.0% 100.0% 100.0%
Cost of revenues......................................................................... 72.7 63.6 68.1
--------- --------- ---------
Gross margin............................................................................. 27.3 36.4 31.9
Operating expenses....................................................................... 22.1 27.7 22.8
Interest income (expense)................................................................ (0.1) (0.4) 0.1
--------- --------- ---------
Income before provision (benefit) for income taxes....................................... 5.1 8.3 9.2
Provision (benefit for) income taxes..................................................... (3.0) 3.3 3.4
--------- --------- ---------
Net income............................................................................... 8.1% 5.0% 5.8%
--------- --------- ---------
--------- --------- ---------
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 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 to Solvay, which sold the
related business unit to a third party. Sales of Vitrax to Allergan represented
47% of the Company's total revenue for fiscal year 1997 compared to 39% in
fiscal year 1996.
Gross margin for fiscal year 1997 was 32% of revenues compared to 36% in
fiscal year 1996. The decrease is 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, which
historically has 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 15%. This increase is
due to a full year of research and development expenses in fiscal 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
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 a $23,000
interest expense in fiscal year 1996. This improvement is 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 carryforwards. 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%. Earnings per share were $0.12 for
fiscal year 1997 compared to $0.08 in fiscal year 1996.
13
FISCAL YEAR ENDED MARCH 31, 1996 COMPARED TO FISCAL YEAR ENDED MARCH 31,
1995
Revenues for the year ended March 31, 1996 were $6.2 million compared to
$7.0 million in fiscal year 1995, a decrease of approximately 12%. The decrease
is attributable to a 30% decline in sales of Vitrax to Allergan, which
instituted an inventory reduction program. In addition, a change in contract
terms reduced development services revenue from Cel-Sci Corporation by 60%.
However, this reduction in revenues was partially offset by sales of product
development services to new and existing customers, which increased by 43%.
Vitrax sales to Allergan and development services performed for Cel-Sci
Corporation represented 39% and 8% of total revenues in fiscal year 1996
compared to 49% and 17% in fiscal year 1995, respectively.
Gross margin for fiscal year 1996 was 36% of revenues compared to 27% in
fiscal year 1995. The increase is attributable to improved manufacturing
operations and a lower percentage of total sales of Vitrax, which historically
has a low margin. In addition, the change in contract terms related to Cel-Sci
Corporation had a positive effect on gross margin.
Operating expenses for fiscal year 1996 were $1.7 million compared to $1.5
million in fiscal year 1995, an increase of approximately 11%. The increase is
due to commissions paid to field representatives and the full year cost of a
manager hired in the fourth quarter of fiscal year 1995. In addition, the
Company initiated a new research and development program for one of its
customers' products in the third quarter of fiscal year 1996 resulting in
expenses of $44,000 in fiscal year 1996.
Interest expense was $23,000 in fiscal year 1996 compared to $8,000 in
fiscal year 1995. This increase is due to a longer duration of borrowing under
the Company's line of credit.
The effective tax rate for fiscal year 1996 was 40%. In fiscal year 1995,
the Company recorded a deferred tax asset, net of a deferred tax liability, of
$210,000 to recognize the future benefit of its remaining net operating loss
carryforwards for income tax purposes. Net operating loss carryforwards in an
aggregate amount of $2.8 million as of March 31, 1992, were reduced to $121,000
as of March 31, 1996, due to profitable operations.
Net income and earnings per share for fiscal year 1996 were $309,000 and
$0.08 compared to $566,000 and $0.14 for fiscal year 1995, respectively.
QUARTERLY RESULTS
The Company's quarterly results have been, and are expected to continue to
be, subject to fluctuations which are not the result of seasonal or cyclical
factors. Quarterly results can fluctuate as a result of a number of factors,
including the volume and identity of products supplied to customers during the
period, the volume and timing of development services performed by the Company,
and the relationship of product shipments to development services performed in
the period. Since a large percentage of the Company's costs are relatively
fixed, timing of shipments and services can have a significant positive or
negative impact on quarterly results. The Company believes that comparisons of
its quarterly financial results are not necessarily meaningful and should not be
relied upon as an indication of future performance. See "Risk Factors--Variation
in Quarterly Operating Results."
14
The following sets forth certain unaudited quarterly statement of income
data for the quarters indicated below:
STATEMENT OF INCOME FOR THE QUARTER ENDING:
(in thousands)
(unaudited)
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1996 1996 1996 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating revenue........................ $ 1,860 $ 1,677 $ 1,182 $ 1,454 $ 1,564 $ 3,015 $ 1,837
Cost of revenue.......................... 1,243 1,088 641 955 1,207 1,921 1,091
Operating expenses....................... 467 410 430 403 492 511 461
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income......................... 150 179 111 96 (135) 583 285
(Taxes) and interest income (expense).... (66) (80) (42) (38) 48 (219) (109)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) per share.............. $ 84 $ 99 $ 69 $ 58 $ (87) $ 364 $ 176
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) per share.............. $ 0.02 $ 0.02 $ 0.02 $ 0.02 $ (0.02) $ 0.09 $ 0.04
MARCH 31,
1997
-----------
Operating revenue........................ $ 2,237
Cost of revenue.......................... 1,677
Operating expenses....................... 501
-----------
Operating income......................... 59
(Taxes) and interest income (expense).... (9)
-----------
Net income (loss) per share.............. $ 50
-----------
-----------
Net income (loss) per share.............. $ 0.01
LIQUIDITY AND 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 pharmaceutical manufacturing
facility and to house its administrative offices and warehouse operations. The
Company paid $2,150,000 in cash and 125,000 shares of Common Stock for the land
and existing improvements.
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 MIDFA, and a $1,500,000 loan from
the Mayor and City Council of Baltimore, acting through the Department of
Housing and Community Development c/o the City of Baltimore Development
Corporation. The Company also intends to equip the new facility with
approximately $2,900,000 of additional pharmaceutical manufacturing equipment to
be financed through equipment operating leases. To date, the Company has
received commitments from several equipment leasing companies, including leasing
companies affiliated with NationsBank, American Equipment Leasing (a unit of
European American Bank), BancBoston and CoreStates, to supply over $4,000,000 in
equipment through operating lease arrangements, for installation and validation
at the new facility. Although actual leases have not been executed, the Company
anticipates that it will be able to establish equipment lease financing
arrangements as necessary to enable the Company to complete the pharmaceutical
build-out of the newly acquired facility. See "Risk Factors--Risks Associated
with New Facility Construction and Validation."
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 June 11, 1997, the interest rate was 5.105%. 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
15
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 of 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 6.5% 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.
On March 31, 1997, the Company had cash and cash equivalents of $1,783,000
compared to $241,000 at March 31, 1996. Cash available to fund operations was
$1,433,000 at March 31, 1997, and $350,000 was held as collateral for the
Company's obligations under the Letter of Credit and Reimbursement Agreement
with the Bank. In addition, and not included in the above sums, $4,683,000 was
held by the bond trustee under the Trust Indenture at March 31, 1997, for the
renovation and equipping of the new facility. The Company also maintains a
$750,000 Revolving Line of Credit with First Union National Bank of Maryland,
under which there was no outstanding balance at March 31, 1997.
The terms of the MIDFA bond financing and applicable provisions of the Code
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. See
"Risk Factors--Restrictions on Capital Expenditures."
Management of the Company believes that it has sufficient cash and borrowing
capacity to fund its current operations and capital needs.
IMPACT OF INFLATION
The Company believes that the effects of inflation generally do not have a
material adverse effect on its results of operation or financial condition.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
During fiscal year 1997, the Company was required to adopt Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This
statement had no impact on the Company in the current year. Going forward, the
Company could be required in certain circumstances to write-down its long-lived
assets, such as property and equipment, to fair market value. During fiscal year
1998, all companies reporting earnings per share will be required to adopt SFAS
No. 128, "Earnings Per Share." This statement changes how earnings per share are
calculated and will require that previous years be restated when adopted in
fiscal year 1998.
16
BUSINESS
CBL 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 80 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 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 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. As part of
this strategy, in November 1996, CBL acquired a building in Baltimore, Maryland
that is currently being improved and equipped as a laboratory and pharmaceutical
production facility. The Company anticipates that this additional facility will
be fully operational in early 1998, and will increase its production capacity
severalfold.
CBL believes its established experience and expertise, ISO 9001
certification, anticipated increase in capacity, and ability to offer a broad
range of drug development and production services, will enable it to provide
competitive, cost-effective solutions to the pharmaceutical and
biopharmaceutical industries.
MARKET OVERVIEW
The Company believes that its business benefits from the financial resources
available to, and the competitive and regulatory environment in, the
pharmaceutical and biotechnology industries. Current trends in these industries
that are positively affecting CBL's business include increases in private and
public equity investments, an increase in the number of strategic alliances, an
increase in research and development expenditures, and increased FDA activity.
PRIVATE EQUITY. According to BIOTECH '97 ALIGNMENT, published by Ernst &
Young LLP (the "Ernst & Young Report"), venture capital and private placements
raised approximately $1.5 billion of private equity capital in 1996 for
biotechnology companies, an increase of approximately 19.7% over the $1.2
billion raised from these sources in 1995. The Ernst & Young Report also
indicates that private equity investments tended to fund biotechnology companies
focused on discovering multiple products, rather than companies investing in
full-scale manufacturing facilities.
17
PUBLIC EQUITY. According to the Ernst & Young Report, capital raised by
biotechnology companies from initial and follow-on public stock offerings
increased over 800% from $537 million to $5.1 billion for the twelve months
ended June 30, 1995 and 1996, respectively, and, as a result, approximately 35%
of public biotechnology companies have available cash to fund over three years
of operations.
STRATEGIC ALLIANCES. In an ongoing effort to reduce costs and bring
products to market more rapidly, large pharmaceutical companies are forming
strategic alliances with biotechnology companies and others to research and
develop new drugs, according to the Pharmaceutical Research and Manufacturers of
America ("PhRMA"). These strategic alliances involve domestic and international
pharmaceutical companies, biotechnology firms, university research centers and
contract research organizations. According to PhRMA, the total number of
strategic alliances increased from 121 in 1986 to over 500 in 1996. In addition,
the Ernst & Young Report indicates that biotechnology companies raised
approximately $2.5 billion from strategic alliances during the two years ended
June 30, 1996.
RESEARCH AND DEVELOPMENT. Domestic drug manufacturers are expected to spend
an estimated $18.9 billion on research and development in 1997, a $2.0 billion
increase over 1996, according to PhRMA. The business of providing research and
development services for pharmaceutical companies on a contract basis is growing
significantly. Of the $18.9 billion estimated to be spent on research and
development this year, the Company estimates that approximately $6.2 billion
will be spent on activities where CBL provides service.
FDA ACTIVITY. The number of products in FDA clinical trials increased
approximately 38%, from 476 to 657, for the twelve months ended June 30, 1995
and 1996, respectively, according to the Ernst & Young Report. In 1996, the FDA
approved 139 new drugs and biological products, a record one-year jump of 63%.
The FDA attributes these results to the Prescription Drug User Fee Act of 1992
that now requires drug manufacturers to pay user fees, thereby allowing the FDA
to allocate more manpower to the approval process.
As an established provider of cGMP product development and production
services to the pharmaceutical and biotechnology industries, CBL believes that
it will benefit from each of these current market trends.
FACTORS INFLUENCING INCREASED OUTSOURCING
Pharmaceutical and biotechnology firms increasingly seek the expertise and
experience of specialists, such as CBL, in the development and production of
their products. The Company believes that factors contributing to this trend
include:
NEED FOR TECHNICAL EXPERTISE. The discovery of increasingly complex
biologically-derived therapeutic molecules presents challenges to the drug
development and production process, many of which arise from the sensitivity of
these molecules to more traditional pharmaceutical processing techniques. As a
result, firms with experience and expertise in providing biopharmaceutical
product development and production services are increasingly sought after for
innovative solutions to these challenges. The Company believes that firms with
proven technical expertise will play an important role in biopharmaceutical drug
development and production.
NEED FOR DATA MANAGEMENT EXPERTISE. Regulatory agencies are continually
increasing the volume of data required to support regulatory filings and new
drug approval applications, and also are requiring increased and easier access
to these data. Recognizing the growing importance of data management expertise,
the Company intends to devote a portion of the proceeds of the Offering to
enhancing its current data management capabilities.
BIOTECHNOLOGY INDUSTRY GROWTH. With the rapid growth of the biotechnology
industry, the number of new therapeutic molecules under investigation has
increased dramatically. Many biotechnology companies
18
do not possess the necessary resources in-house to conduct the required product
development and testing, or to produce drugs once developed. The Company
believes that, with few notable exceptions, emerging biotechnology and
biopharmaceutical companies often prefer to focus their efforts on drug
discovery and product development through intensive research and early stage
product development efforts, and to limit their manufacturing to active
ingredients. Consequently, these firms often seek to outsource formulation, test
method development, process design and other product development tasks performed
by the Company, and to outsource the production of clinical trial materials and
finished product production following FDA approval.
CAPITAL EXPENDITURE INVESTMENT. The high cost of equipping and constructing
facilities to support pharmaceutical and biopharmaceutical product development
work and establishing sophisticated production facilities present significant
economic barriers which lead many companies to dedicate their financial
resources almost exclusively on drug discovery and research. Accordingly, CBL
believes that these factors will increase the outsourcing of the type of drug
development and production work performed by the Company.
CONSOLIDATION IN THE PHARMACEUTICAL INDUSTRY. The pharmaceutical industry
is consolidating as companies seek to reduce costs and increase revenues through
business combinations. The Company believes that, as the pharmaceutical industry
consolidates, the outsourcing of development services and production of clinical
trial materials will be more attractive to pharmaceutical companies. Similarly,
larger pharmaceutical companies often seek to outsource commercial production of
small quantity products that cannot be cost-effectively produced internally.
GLOBALIZATION IN THE MARKET PLACE. Foreign pharmaceutical companies,
particularly firms in Western Europe and Asia, are increasingly seeking to
obtain approval to market their products in the United States. Due to a lack of
familiarity with the complex United States regulatory system, and the difficulty
in bringing their operating facilities into FDA required cGMP compliance,
foreign firms are increasingly relying on independent product development firms
in the United States to provide development services and to assist in preparing
regulatory submissions. An increasing number of European firms are requiring ISO
certification of their contract development service providers. The Company
believes that its established expertise and experience, its ISO 9001
certification, and its ability to offer a broad range of drug development and
production services, enables the Company to provide competitive, cost-effective
solutions to both U.S. firms seeking to expand internationally and foreign firms
seeking to expand in the United States.
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:
EXPAND PRODUCTION AND DEVELOPMENT SERVICES CAPABILITIES. The Company is
implementing this strategy by improving and equipping its newly 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 in early 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.
CAPITALIZE ON OUTSOURCING TREND. The Company is tailoring its capabilities
to effectively meet the increasing preference of pharmaceutical and
biotechnology companies to 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
19
its customer's 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 all of its resources on product
development and production services and does not pursue research in competition
with its customers.
THE BIOPHARMACEUTICAL DRUG DEVELOPMENT PROCESS
Under the U.S. regulatory system, the development process for new
pharmaceutical products can be divided into three distinct phases. The
preclinical phase involves the discovery, characterization, product formulation
and animal testing necessary to prepare an Investigational New Drug ("IND")
exemption for submission to the FDA. The IND must be accepted by the FDA before
the drug can be tested in humans. The second, or clinical, phase of development
follows a successful IND submission and involves the activities necessary to
demonstrate the safety, tolerability, efficacy and dosage of the substance in
humans, as well as the ability to produce the substance in accordance with the
FDA's cGMP regulations. Data from these activities are compiled in a New Drug
Application ("NDA"), or for biotechnology products, a Product License
Application ("PLA"), for submission to the FDA requesting approval to market the
drug. The third phase, or post-approval phase, follows FDA approval of the NDA,
or PLA, and involves the production and continued analytical and clinical
monitoring of the drug. The post-approval phase also involves the development
and regulatory approval of product modifications and line extensions, including
improved dosage forms of the approved product, as well as for generic versions
of the approved drug as the product approaches expiration of patent or other
exclusivity protection.
The following chart illustrates the drug development process and the areas
of CBL's service offerings. The process is described in more detail below.
[Insert chart as described]
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THE PRECLINICAL PHASE. The development of a new pharmaceutical agent begins
with the discovery or synthesis of a new molecule. These agents are screened for
pharmacological activity using various animal and tissue models, with the goal
of selecting a lead agent for further development. Additional studies are
conducted to confirm pharmacological activity, to generate safety data and to
evaluate prototype dosage forms for appropriate release and activity
characteristics. Protocols for these studies are designed in anticipation of
fulfilling regulatory requirements. Once the pharmaceutically active molecule is
fully characterized, an initial purity profile of the agent is established.
During this and subsequent stages of development, the agent is analyzed to
confirm the integrity and quality of material produced. In addition, development
and optimization of the initial dosage forms to be used in clinical trials are
completed, together with analytical models to determine product stability and
degradation. Upon successful completion of preclinical safety and efficacy
studies in animals, an IND submission is prepared and provided to the FDA for
review prior to human clinical trials. The IND submission consists of the
initial chemistry, analytical, formulation and animal testing data generated
during the preclinical phase. The review period for an IND submission is 30
days, after which, if no comments are made by the FDA, the product candidate can
be studied in Phase I clinical trials.
The process for the development of biotechnology products parallels the
process outlined above. Biotechnology products frequently are large proteins,
with activity that is different from the activity of small, organic molecules.
Proteins may be coupled with other biologically active molecules, such as lipids
or sugars, for enhanced or modified biological activity. Biotechnology products
may be composed of the building blocks of DNA. Because of the diversity of the
nature of biotechnology products and their substantial molecular size (usually
hundreds of times larger than small, organic molecules), special technology is
often required for their production, as well as subsequent analysis.
Biotechnology products, especially proteins, may be produced with living
cells. Purity testing can be complex since living cells may harbor viruses and
other agents. The potential presence of these agents, and the requirement to
establish degradation profiles and identify impurities associated with
production and purification, further require establishing, validating and
conducting specialized tests and assays. Formulation development in this area is
often more complex than for small, organic drug substances. Generally, molecules
produced using recombinant DNA technology are inherently less stable than their
organic counterparts because structural integrity must be maintained through
administration and distribution of the product. Accordingly, certain aspects of
the development process for biotechnology products may be more challenging than
similar aspects encountered in the development of small, organic molecules.
THE CLINICAL PHASE. Following successful submission of an IND application,
the sponsor is permitted to conduct Phase I human clinical trials in a limited
number of healthy individuals to determine the drug's safety and tolerability
which analyses include bioanalytical assays to determine the availability and
metabolization of the active ingredient following administration. Prior to
conducting these early stage toxicology trials, the drug sponsor must secure
bulk supply of the active ingredient to support the necessary dosing of the
Phase I trials.
Phase II clinical trials involve administering the drug to individuals who
suffer from the target disease or condition to determine the drug's potential
effectiveness and ideal dose. These pharmacology trials require scale up for
manufacture of increasingly larger batches of bulk chemical. These batches
require validation analysis to confirm the consistent composition of the
product. When further safety (toxicology), tolerability and an ideal dosing
regimen have been established, Phase III clinical trials involving large numbers
of patients are conducted to verify the efficacy and long-term safety of the
drug. Throughout the clinical phase, samples of the product made in different
batches are tested for stability to establish shelf life constraints. In
addition, large-scale production protocols and written standard operating
procedures ("SOPs") for each aspect of commercial manufacture and testing must
be developed.
After the successful completion of Phase III clinical trials, the sponsor of
the new drug submits an NDA, or PLA, to the FDA requesting that the product be
approved for marketing. An NDA, or PLA, is a
21
comprehensive, multi-volume application that includes, among other things, the
results of all preclinical and clinical studies, information about the drug's
composition and the sponsor's plans for producing, packaging and labeling the
drug. The length of the FDA's review ranges from a few months, for drugs related
to life-threatening circumstances, to many years, with the average review
lasting two and one-half years. Prior to granting approval, the FDA generally
conducts an inspection of the facilities, including outsourced facilities, that
will be involved in the manufacture, production, packaging, testing and control
of the drug product for cGMP compliance. Drugs that successfully complete NDA or
PLA review may be marketed in the United States, subject to all conditions
imposed by the FDA.
THE POST-APPROVAL PHASE. Following NDA or PLA approval, the producer of the
drug product must comply with quality assurance and quality control requirements
throughout production and must continue chemical analytical and stability
studies of the drug in commercial production to continue to validate production
processes and confirm product shelf life. Raw materials must be analyzed prior
to use in production, and samples from each production batch must be tested
prior to release of the batch for distribution to the public. Failure to comply
with FDA regulations in manufacturing, production or testing during this phase
could result in severe sanctions, including product recalls or closing of
facilities.
DEVELOPMENT SERVICES
The Company has particular experience and expertise in providing development
services for sterile, process-sensitive biopharmaceutical products. The
specialized development services provided by the Company include research and
development on sterile product formulation; 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 product stability
studies. Since 1990, the Company has worked with more than 80 different
pharmaceutical and biotechnology companies and helped produce over 100 different
therapeutics for human clinical trials. Of these, five have received final FDA
approval and another ten are in late stage clinical trials or awaiting FDA
approval.
STERILE PRODUCT FORMULATION. The Company provides formulation development
services to assist its customers in making the transition from preclinical
investigations to stable pharmaceutical formulation. In many instances the
active ingredient is not stable in aqueous solution and the Company develops the
necessary parameters to produce a sterile, lyophilized (or freeze-dried) dosage
form. The Company has developed significant expertise that enables it to more
efficiently solve the difficult problems that arise in developing complex
formulations with targeted characteristics.
TEST METHOD DEVELOPMENT AND VALIDATION. Throughout the biopharmaceutical
development process, the Company continuously develops and validates the
analytical methods used in the laboratory testing of the pharmaceutical dosage
forms. Such analytical tests demonstrate potency, purity, stability and other
physical attributes. These methods, used throughout the drug development process
and subsequent sterile production, are validated to ensure that the data
generated is accurate, precise, reproducible and reliable.
PROCESS DESIGN AND MANUFACTURING VALIDATIONS. Often the Company's customers
have only recently completed the preclinical testing and characterization of
their therapeutic molecule and have only formulated their product at laboratory
scale. These customers seek CBL's experience and expertise in the scale-up of
the production processes and to identify and resolve associated problems, with a
focus on developing larger scale formulations and sterile process designs
appropriate for clinical trials. In this effort, the Company works closely with
its customers to assure the scaled-up sterile production process does not
compromise the stability or therapeutic activity of their products. For
temperature sensitive biopharmaceuticals, the Company is often called upon to
design and validate a unique integrated sterile processing system which keeps
the product at low temperature throughout formulation and sterile filling of the
product.
22
REGULATORY AND COMPLIANCE CONSULTING. The Company utilizes its experience
and expertise to assist its customers in the management of the regulatory
approval process for their products. The Company identifies for its customers
the supporting data required as part of the filing of the NDA or PLA, and
assists in the preparation of the documentation to be submitted as part of the
filing. In addition, the Company assists its customers in management of the
regulatory process following FDA approval of their products by identifying the
requisite supporting data and by preparation of post-approval submissions to the
FDA.
PREPARATION OF CLINICAL TRIAL MATERIALS. The Company currently produces
clinical trial materials for use by its customers in Phase I through Phase III
clinical trials. The Company produces clinical trial materials for small
biotechnology companies as well as for large pharmaceutical companies that often
seek to outsource production of small-quantity products that cannot be
cost-effectively produced internally.
CONTAINER-CLOSURE SYSTEM DESIGN. Compatibility of pharmaceutical and
biopharmaceutical products with their container-closure systems is of critical
importance to the product development effort. Unanticipated interaction between
the active ingredient or other product components and the container-closure
system can quickly reduce product stability and shelf life. As a result of its
experience with a wide variety of product formulations and container-closure
systems, the Company is able to assist its customers with selection of proper
system design, to minimize unanticipated stability issues. Similarly, the
Company's pharmaceutical and biopharmaceutical product production experience
enables the Company to assist its customers in selecting the container-closure
system best suited for high-speed, high-volume commercial production.
ACCELERATED AND ONGOING PRODUCT STABILITY STUDIES. The Company designs
stability studies and provides stability testing necessary to establish and
confirm shelf-life characteristics. Stability testing is required at all phases
of product development to confirm shelf life of each manufactured batch.
Accelerated stability studies are conducted on products in the earlier phases of
the development process in order to predict shelf life of the fully developed
product, and additional stability studies of the fully developed product are
conducted to demonstrate actual shelf life at anticipated storage conditions.
The Company maintains state-of-the-art climate controlled cGMP facilities to
determine the range of storage conditions the product can withstand. FDA
regulations require that representative samples of clinical and commercial
products be placed in environmentally controlled chambers and analyzed for
stability at predetermined intervals throughout the shelf life period.
COMMERCIAL PRODUCTION
As a product approaches FDA approval and commercialization, the Company and
its customer typically become increasingly focused on the process design and
validation necessary to permit larger scale production. This work often begins
with the initiation of Phase II clinical trials. By the time a determination has
been made to proceed with Phase III clinical trials, process development and
validation for commercial scale production is in process and typically is
completed during the Phase III trials. In many cases, the process design and
validation work undertaken in connection with the scale-up manufacture of
product for clinical trials is similarly applicable to the commercial production
of product following FDA approval.
The Company is ideally situated to produce commercial quantities of products
for those of its customers to which it provided product development services. As
a result of the Company's prior relationship with its customers and knowledge of
their products, commercial production of products following FDA approval is a
natural extension of the Company's activities. Currently, the Company is
producing five FDA approved products for customers to which the Company provided
developmental services prior to the FDA approval of that product.
23
The Company's existing cGMP pharmaceutical production facility consists of a
Class 100,000 manufacturing area, a Class 10,000 formulation suite, a Class 100
clean room and a Class 10,000 packaging area, all of which are currently
utilized for production of a broad variety of sterile biopharmaceutical and
pharmaceutical products. Most biologically derived products produced by the
Company cannot be sterilized by employing traditional pharmaceutical heat
sterilization techniques. Consequently, the application of cold sterilization
and aseptic filling technology is required. The Company's current production
capabilities include unit and multi-dose vials and prefilled syringes, in lots
of up to approximately 20,000 vials and 40,000 syringes.
To expand its commercial production capacity, the Company's new facility
will include a Class 10,000 formulation suite, two Class 100 clean rooms, and a
Class 10,000/100,000 packaging suite, all of which are state-of-the-art. Upon
completion of its new facility, expected to occur in early 1998, the Company
anticipates that its production capacity will increase several fold. See "Risk
Factors--Risks Associated with New Facility Construction and Validation."
CUSTOMERS
Since 1990, CBL has provided services to over 80 customers. These customers
range from major international pharmaceutical firms to emerging biotechnology
companies. The majority of the Company's customers are located in the United
States, but several of the Company's customers are located in other countries,
primarily in Europe and Asia.
For the fiscal years ended March 31, 1997 and 1996, sales to Allergan
represented approximately 49% and 41% of total revenues, respectively. During
the fiscal year ended March 31, 1997, the Company provided development and
production services to 35 customers, of which eight were new and 27 were repeat
customers. Other than Allergan, no single customer accounted for more than 10%
of the Company's revenue in fiscal year 1997. The Company expects that revenues
from Allergan will decrease significantly for the Company's fiscal year ending
March 31, 1998, and thereafter. Due to the nature of the Company's business,
some customers may not seek the services of the Company for periods of a year or
more during which they concentrate on testing and clinical trials related to the
product produced by CBL. Customers typically return when they require new
products developed for testing, additional amounts of existing products for
expanded or further testing, or for commercial production of FDA approved
products. See "Risk Factors--Dependence on Certain Customers."
COMPETITION
The Company directly competes with several pharmaceutical product
development organizations, contract manufacturers of biopharmaceutical products
and university research laboratories, such as Ben Venue Laboratories, Inc., Cook
Imaging Corporation, Connaught Laboratories, Inc. and the University of Iowa.
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 of these 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 its customers will prefer it to
others that offer the same services, but which also manufacture and sell their
own products in competition with those of the customer. See "Risk
Factors--Competition."
24
POTENTIAL LIABILITY AND INSURANCE
In contracts for the production of FDA approved products for commercial
sale, the Company typically seeks to reduce its potential liability by requiring
that the Company be indemnified by the customer or covered by the customer's
product liability insurance policies. These contractual arrangements regarding
liability allocation and insurance are negotiable, and the terms and scope of
such indemnification, liability limitation and insurance coverage vary from
customer to customer and from project to project. Development services are
typically undertaken pursuant to a purchase order, not including specific terms
regarding indemnity or insurance. The Company believes that this is typical in
the industry. Clinical trial materials are produced by the Company for its
customers for use in studies strictly regulated by the FDA. Even in those cases
where the Company is able to negotiate favorable terms in the allocation of risk
and liability, the financial performance by its customers in this regard is not
assumed. Therefore, CBL bears the risk that an indemnifying party may not have
the financial ability to fulfill its obligations or that liability would exceed
the amount of applicable insurance. The Company maintains product liability
coverage of $1 million on a claims-made basis. See "Risk Factors--Potential
Liability and Risks of Operations."
GOVERNMENT 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 Federal Food, Drug and Cosmetic Act and FDA
administered 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.
The Company's activities involve the controlled use of hazardous materials
and chemicals and are subject to federal, state and local laws and regulations
governing the use, storage, handling and disposal of such materials and certain
waste products. Although the Company believes that its safety procedures for
handling and disposing of such materials comply with the standards prescribed by
federal, state and local laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, CBL could be held liable for any damages that
result which could materially and adversely affect the financial condition of
the Company. See "Risk Factors--Dependence on and Effect of Governmental
Regulation" and "--Environmental Risks and Hazardous Materials."
EMPLOYEES
At June 11, 1997, the Company had 59 full-time equivalent employees, of
which six hold Ph.D. degrees, six hold master's degrees and seven hold other
professional certifications. Thirty of CBL's employees perform scientific or
engineering functions. The Company believes that its relations with its
employees are good. No CBL employees are represented by a union.
The Company's performance depends on its ability to attract and retain
qualified professional, scientific and technical staff. Although the level of
competition among employers for skilled personnel is
25
high, the Company believes that its location in the Baltimore-Washington region
allows it to tap a large base of highly-skilled potential employees. This region
has a large number of companies in the pharmaceutical and biotechnology
industries and is home to, among other institutions, the National Institutes of
Health, the FDA, The Johns Hopkins University and the University of Maryland,
all of which have employees with skills similar to those required by the
Company. See "Risk Factors--Dependence on Key Personnel."
CBL provides all personnel who are directly involved in the manufacture of
pharmaceutical products with extensive training as part of their continued
employment and employee development with the Company. This training includes
annual training in the following areas: cGMP and ISO 9001 Awareness Training, as
well as safety training. In addition, employees receive on-the-job training for
specific job related tasks, where completion of a written test is typically
required prior to the employee performing the task without supervision. Training
is also provided to ensure that employees remain fully advised of and conversant
with the Company's established Standard Operating Procedures.
FACILITIES
The Company's executive offices, pharmaceutical manufacturing facilities and
warehouse operations are located at two sites in Baltimore, Maryland. Since
1988, 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. The current lease term for this facility
expires on December 31, 1998, with two, two-year renewal options 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
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 completion of the pharmaceutical build-out is anticipated to
occur in early 1998. The Company believes that, upon completion of the new
facility, its facilities will be adequate for the Company's operations and that
suitable additional space will be available when needed. See "Risk
Factors--Risks Associated with New Facility Construction and Validation."
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, and the Company was responsible for annual rental
payments of $134,400 and all operating and maintenance costs under this lease
through that date. As of June 1, 1997, the Company negotiated the termination of
its Owings Mills facility lease obligation and will pay a $30,200 termination
fee.
LEGAL PROCEEDINGS
The Company is not currently party to any legal proceedings of a material
nature.
26
MANAGEMENT
The directors and executive officers of the Company are as follows:
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
William P. Tew, Ph.D. ............................... 51 Chief Executive Officer and Chairman of the Board
John C. Weiss, III................................... 48 President and Director
Narlin B. Beaty, Ph.D. .............................. 47 Chief Technical Officer and Director
Thomas C. Mendelsohn................................. 52 Vice President of New Business Development, Secretary
and Director
John T. Janssen...................................... 58 Chief Financial Officer, Treasurer
Robert J. Mello, Ph.D. .............................. 46 Vice President of Quality and Regulatory Affairs
Regis F. Burke....................................... 50 Director
Harvey L. Miller..................................... 57 Director
Thomas P. Rice....................................... 47 Director
WILLIAM P. TEW, PH.D. is a founder of the Company and has been Chairman of
the Board of the Company since operations began in 1980 and Chief Executive
Officer since 1988. Dr. Tew holds a B.S. in chemistry and a M.S. in inorganic
chemistry from Lamar University and a Ph.D. in bio-inorganic chemistry from the
University of Idaho. From 1975 to 1977, Dr. Tew was a Post-doctoral Fellow in
the Department of Physiological Chemistry at The Johns Hopkins University School
of Medicine and worked under the late Dr. Albert Lehninger, a pioneer in the
field of biochemistry. From 1977 to 1978, Dr. Tew served as a Senior Research
Scientist with Foxboro Analytical, Inc., a major instrumentation company. From
1979 to 1982, Dr. Tew was an Instructor in the Department of Physiological
Chemistry and Medicine at The Johns Hopkins University School of Medicine and
from 1982 to 1983 he was an Assistant Professor in the Department of Medicine at
The Johns Hopkins University School of Medicine. Presently, Dr. Tew holds an
appointment as Research Associate in the Department of Biological Chemistry at
The Johns Hopkins University School of Medicine.
JOHN C. WEISS, III has been a director of the Company since 1986, and was
appointed President of the Company in May 1996. Mr. Weiss holds a B.S. from
Towson State University and an M.B.A. from Loyola College of Maryland. From 1994
to May 1996, Mr. Weiss was the Managing General Partner of Anthem Capital, L.P.,
a Baltimore-based venture capital firm. From 1990 to 1994, Mr. Weiss was the
Managing Director of The Maryland Venture Capital Trust, created by Maryland
statute to provide a vehicle for investment by Maryland state and local pension
funds and the State of Maryland and its political subdivisions in venture
capital investments. From 1984 to 1990, Mr. Weiss was the Managing Director of
the Baltimore office of Arete Ventures Inc., a venture capital firm, and from
1982 to 1984, he was a Senior Vice President with the Baltimore Economic
Development Corporation. Mr. Weiss currently serves on the Board of Visitors of
the University of Maryland at Baltimore and for the past three years has chaired
the Investment Committee of the Foundation Board of St. Agnes Hospital.
NARLIN B. BEATY, PH.D. joined the Company in 1983 and currently serves as
Chief Technical Officer. Dr. Beaty has been a director of the Company since
1989. Dr. Beaty holds a B.S. in biology and a M.A. in botany from the University
of Texas, and a Ph.D. in biological chemistry from the University of Michigan at
Ann Arbor. His professional associations include the American Association for
the Advancement of Science, the American Chemical Society, and the Biophysical
Society. In 1974, Dr. Beaty was awarded a scientific merit grant from the
University of Texas and between 1975 and 1983 he was the recipient of six
fellowship awards from the National Institutes of Health.
27
THOMAS C. MENDELSOHN joined the Company in 1991 and serves as Vice President
of New Business Development and Corporate Secretary. Mr. Mendelsohn has been a
director of the Company since 1991. Mr. Mendelsohn holds a B.A. in management
from the University of Baltimore. From 1966 to 1991, Mr. Mendelsohn served on
the board of directors and was an officer of Barre-National Inc., a
pharmaceutical company located in Baltimore, Maryland. From 1979 to 1991, he
served as Senior Vice President of Sales and Marketing of Barre-National, Inc.
JOHN T. JANSSEN joined the Company in January 1993 as Chief Financial
Officer. Mr. Janssen, a Certified Public Accountant, holds a B.S. in accounting
from Lehigh University and an M.B.A. from Central Michigan University. Mr.
Janssen has over thirty years of diversified financial management experience,
including pharmaceutical, food processing and consumer product companies. From
1981 to 1988, Mr. Janssen was on the board of directors and was the Chief
Financial Officer of Genesee Brewing Co. From 1988 to 1992, Mr. Janssen was on
the board of directors and was the Chief Financial Officer and Treasurer of
Barre-National, Inc.
ROBERT J. MELLO, PH.D. rejoined the Company in February 1994 and serves as
Vice President of Quality and Regulatory Affairs. Dr. Mello holds a B.S. in
biology and a Ph.D. in biochemistry from The Johns Hopkins University School of
Medicine. Dr. Mello had been with the Company for ten years before joining
Lederle Laboratories in 1992 as Manager, Validation Services. At Lederle he
established, coordinated and monitored validation programs at four sites. During
his earlier ten years with the Company, Dr. Mello served as Director of Research
and Development and later as Director of Quality Assurance and Regulatory
Affairs, and Secretary. From 1979 to 1982, Dr. Mello served as Instructor, then
Assistant Professor in the Department of Ophthalmology (Wilmer Eye Institute) of
The Johns Hopkins University School of Medicine.
REGIS F. BURKE was elected a director of the Company in 1995. Mr. Burke
holds a bachelor's degree in accounting from Mount St. Mary's College. Mr. Burke
is a Certified Public Accountant in practice on his own since 1988. Mr. Burke
specializes in corporate transaction consulting, business planning, business
valuation and litigation support services. Prior to 1988, Mr. Burke was a
partner with Touche Ross & Co., an international accounting firm.
HARVEY L. MILLER was elected a director in 1996. Since 1980, Mr. Miller has
been Chairman of G.S.I. Corporation, a manufacturer of high-tech wire
assemblies. Since 1986, Mr. Miller has been president of DM Realty Corporation,
a developer of commercial real estate sites. Mr. Miller was elected a director
of Maryland Midland Railway, Inc. in March 1997.
THOMAS P. RICE was elected a director in 1997. Mr. Rice holds a B.A. in
accounting from The Johns Hopkins University and an M.S. in finance from Loyola
College of Maryland. Mr. Rice is also a Certified Public Accountant. In 1996,
Mr. Rice founded Columbia Investments, LLC to make selective investments,
primarily in the health care industry. From 1993 to 1996, Mr. Rice was Executive
Vice President, Chief Operating and Financial Officer and a member of the Board
of Directors of Circa Pharmaceuticals, Inc., a publicly-held pharmaceutical
firm. From 1985 to 1990, Mr. Rice was Vice President of Administration and
Finance of PharmaKinetics Laboratories, Inc., Baltimore, Maryland. From 1991 to
1993, Mr. Rice was a principal of Competitive Advantage, a Baltimore-based
management consulting firm.
BOARD COMMITTEES AND COMPENSATION
The Board of Directors has three standing committees; a Compensation
Committee, an Audit Committee and a Stock Option Committee. The current members
of each committee are Messrs. Burke, Miller and Rice. The Compensation Committee
makes recommendations concerning salaries and incentive compensation for
employees of and consultants to the Company. The Audit Committee reviews the
results and scope of the audit and other services provided by the Company's
independent public accountants. The Stock Option Committee administers and
grants stock options and awards pursuant to the Company's Incentive Stock Option
Plans.
Executive Officers of the Company who also serve on the Board of Directors
receive no additional compensation for their service as such. Members of the
Board of Directors who are not also employed by
28
or officers of the Company receive annual compensation equal to $9,600 per year
for their service on the Board of Directors. In addition, the Company generally
grants to each director, upon that individual's initial appointment or election
to the Board of Directors, an option to purchase approximately 8,000 shares of
Common Stock at the then current market price. Accordingly, Mr. Burke was
granted an option to purchase 8,000 shares of Common Stock at $1.50 per share in
November 1995; Mr. Miller was granted an option to purchase 8,000 shares of
Common Stock at $3.125 per share in November 1996; and Mr. Rice was granted an
option to purchase 8,000 shares of Common Stock at an exercise price of $5.1875
per share in March 1997. In addition, in recognition of his long service as a
member of the Board of Directors, in 1995, Mr. Weiss was granted an additional
option to purchase 8,000 shares of Common Stock at an exercise price of $1.50
per share. Each of these respective options is evidenced by a Director's
Agreement and related Option Agreement, by and between the Company and the
director and becomes exercisable on a pro-rata basis over a four-year period,
measured from the date of grant.
The Board of Directors has also adopted the 1997 Directors' Stock Option
Plan, pursuant to which each director serving as chairman of any standing
committees of the Board is granted options annually on a formula basis. See
"Management--Stock Option Plans."
MANAGEMENT COMPENSATION
The following table sets forth the compensation earned by the Company's
Chief Executive Officer and the Company's five other highest paid executive
officers for services rendered in all capacities to the Company for the fiscal
years ended March 31, 1995, 1996 and 1997.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------- -------------
OTHER ANNUAL STOCK
NAME AND PRINCIPAL POSITION YEAR SALARY($) COMPENSATION($) OPTIONS(#)
- -------------------------------------------------------------- --------- --------- ----------------- -------------
William P. Tew, Ph.D. ........................................ 1997 187,219 270(1) 75,000
Chairman and Chief Executive Officer 1996 177,916 1,232(1) --
1995 166,357 1,910(1) --
John C. Weiss, III(2)......................................... 1997 102,917 2,400(3) 70,000
President 1996 -- 11,100(3) 8,000(3)
1995 -- 15,600(3) --
Narlin B. Beaty, Ph.D. ....................................... 1997 145,434 -- 30,000
Chief Technical Officer 1996 141,106 -- 20,000
1995 131,938 -- --
John T. Janssen............................................... 1997 141,299 -- 20,000
Chief Financial Officer 1996 130,546 -- 20,000
1995 105,625 -- --
Thomas C. Mendelsohn.......................................... 1997 136,654 -- 20,000
Vice President New Business Development 1996 131,983 -- 20,000
1995 123,907 -- --
Robert J. Mello, Ph.D. ....................................... 1997 138,698 -- 30,000
Vice President Quality and Regulatory Affairs 1996 123,959 -- 20,000
1995 110,853 -- --
- ------------------------
(1) Represents amounts paid by the Company for life insurance premiums on behalf
of Dr. Tew.
(2) Mr. Weiss was appointed President of the Company in May 1996, after a ten
year tenure on the Board of Directors.
(3) Represents fees and options given to Mr. Weiss as a non-employee director.
29
STOCK OPTION PLANS
The Company has adopted four Incentive Stock Option Plans (the "Option
Plans"). The first three of the four Option Plans have expired, and no
additional options are subject to grant thereunder. Options granted prior to
expiration will remain in effect and subject to exercise in accordance with the
terms of the applicable plan. The Fourth Incentive Stock Option Plan provides
for the issuance of up to an aggregate of 800,000 shares of Common Stock and was
approved by the Company's stockholders in October 1996. The Option Plans provide
for the grant of "incentive stock options" within the meaning of Section 422(A)
of the Internal Revenue Code of 1986, as amended. The Option Plans are
administered by the Stock Option Committee of the Company's Board of Directors,
which determines the number of options granted, the exercise price, the number
of shares subject to the option, and the exercisability thereof.
At March 31, 1997, a total of 1,052,500 shares of the Company's Common Stock
were available for issuance under the Option Plans (after taking into effect the
expiration of the first three plans), including an aggregate of 534,900 shares
of Common Stock subject to outstanding and unexercised options granted to
employees of the Company and 517,600 shares of Common Stock reserved for
issuance upon the exercise of options not yet granted. These currently
outstanding but unexercised options are exercisable at prices ranging from $1.50
to $3.44 per share, and options for 105,000 shares were subject to immediate
exercise. Options granted under the Option Plans generally become exercisable
over the five (5) year period following the date of grant, unless otherwise
determined by the Stock Option Committee at the time of grant.
Of the shares subject to outstanding options under the Option Plans, an
aggregate of 425,000 are subject to options granted to executive officers of the
Company. The following table sets forth the number of options held at March 31,
1997, by each of the Chief Executive Officer and the five other highest paid
officers, the range of exercise prices applicable to each, and a break-down as
to the number of shares with respect to which options were exercisable or not
exercisable at March 31, 1997:
NUMBER OF SHARES
SUBJECT TO RANGE OF EXERCISE EXERCISABLE/
NAME OPTIONS PRICE PER SHARE NOT EXERCISABLE
- ------------------------------------------------------- ----------------- ----------------- ---------------
William P. Tew, Ph.D. ................................. 75,000 $3.44 0/75,000
John C. Weiss, III..................................... 78,000 $1.50 to $3.125 2,000/76,000(1)
Narlin B. Beaty, Ph.D. ................................ 50,000 $1.50 to $3.125 0/50,000
John T. Janssen........................................ 90,000 $1.50 to $3.125 37,500/52,500
Thomas C. Mendelsohn................................... 90,000 $1.50 to $3.125 37,500/52,500
Robert J. Mello, Ph.D. ................................ 50,000 $1.50 to $3.125 0/50,000
- ------------------------
(1) 8,000 of these options were granted to Mr. Weiss as a non-employee director,
other than pursuant to the Option Plans.
In addition, in March 1997, the Board of Directors approved the 1997
Directors' Stock Option Plan of the Company (the "Directors' Plan"). The
Directors' Plan provides for the issuance of a non-qualified stock option to
purchase 3,000 shares of Common Stock to each director of the Company who is not
an officer and who is serving as chairperson of any standing committee of the
Board of Directors at the date of grant. Options under the Directors' Plan are
automatically granted annually at the first meeting of the Board of Directors
following the Annual Meeting of the Stockholders at an exercise price equal to
the then current market price of the Common Stock. Options granted under the
Directors' Plan generally vest on the first anniversary of the date of grant,
provided that the director is deemed under the Directors' Plan to have served as
chairperson of the standing committee through that date. An aggregate of 25,000
shares of Common Stock have been reserved for issuance pursuant to the
Directors' Plan, but no options have been granted to date under the Directors'
Plan.
30
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of its
executive officers. These agreements generally provide for payment of a base
salary, together with incentive compensation in an amount to be determined by
the Board of Directors or Compensation Committee from time to time. The base
salaries established in the employment agreements for Dr. Tew, Mr. Weiss and Dr.
Beaty are $170,000, $130,000 and $131,200, respectively. The base salaries
established in the employment agreements for Messrs. Janssen and Mendelsohn, and
Dr. Mello, are $129,300, $123,300, and $126,600, respectively. The base salary
applicable to any executive officer may be increased through action of the
Compensation Committee or Board of Directors.
The employment agreements provide, in the case of Dr. Tew, for an initial
term of three years, with successive three-year renewal terms; in the case of
Dr. Beaty, for an initial term of three years, with successive three-year
renewal terms; and in the case of Messrs. Weiss, Mendelsohn and Janssen, and Dr.
Mello, for an initial term of two years, with successive two-year renewal terms.
The initial term of each employment agreement commenced July 1, 1995, except in
the case of Mr. Weiss whose term commenced in May 1996. Pursuant to the
employment agreements, each of the executive officers is required to devote
substantially all of his business time to Company-related matters and has agreed
not to solicit clients or customers of the Company for a period following
termination of employment.
The employment agreements also provide for severance payments to the
executive officers of the Company in certain circumstances. Dr. Tew and Mr.
Weiss are entitled to receipt of severance payments of approximately two times
their aggregate annual compensation, in the case of Dr. Tew, upon termination of
his employment either following a change of control of the Company or breach by
the Company of his employment agreement, or for good reason (generally defined
as diminution of title or responsibilities, termination of benefit plans, or
relocation of the Company), and in the case of Mr. Weiss, upon termination of
his employment either following a breach by the Company of his employment
agreement or for good reason. Drs. Beaty and Mello, and Messrs. Janssen and
Mendelsohn, are each entitled to receipt of severance payments in an amount
equal to approximately one-half of their respective annual compensation, upon
termination of their employment following a breach by the Company of their
respective employment agreements or for good reason.
31
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized stock of the Company consists of 10,000,000 shares, divided
into 8,000,000 shares of Class A Common Stock, par value $0.01 per share
(hereinabove defined as, and hereinbelow referred to as, the "Common Stock"),
and 2,000,000 shares of non-voting Class B Common Stock, par value $.01 per
share ("Class B Common Stock"). As of March 31, 1997, 4,114,558 shares of Common
Stock and no shares of Class B Common Stock were outstanding. The rights of
holders of the Company's stock are defined by the Company's charter, as amended
from time to time (the "Charter"), as well as by the Company's Bylaws, as
amended from time to time (the "Bylaws"), and the Maryland General Corporation
Law, as amended from time to time (the "MGCL"). The following summary of certain
provisions of the stock of the Company does not purport to be complete and is
subject to, and qualified in its entirety by reference to the provisions of the
Charter and Bylaws, which are included as exhibits to the Registration Statement
of which this Prospectus forms a part, and by provisions of applicable law,
including the MGCL.
COMMON STOCK
Upon completion of the Offering, 5,114,558 shares of Common Stock will be
issued and outstanding and no shares of Class B Common Stock will be issued and
outstanding. Under Maryland law, stockholders generally are not liable for the
corporation's obligations.
Holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of stockholders, including the election of directors and,
except as provided with respect to any other class or series of stock, the
holders of such shares will possess the exclusive voting power. There is no
cumulative voting in the election of directors, which means that the holders of
a majority of the outstanding shares of Common Stock can elect all of the
directors then standing for election and the holders of the remaining shares
will not be able to elect any directors. Holders of shares of Common Stock have
no preference, conversion, exchange, sinking fund, redemption or appraisal
rights, and have no preemptive or subscriptive rights. All of the outstanding
shares of Common Stock are, and the shares of Common Stock offered hereby will
be, duly authorized, fully paid and non-assessable.
There are no shares of Class B Common Stock issued and outstanding. The
Class B Common Stock is identical to the Common Stock in all respects except
that each share of Class B Common Stock is convertible under certain
circumstances into one share of Common Stock and that holders of Class B Common
Stock are not entitled to vote on any matter requiring stockholder action. The
Class B Common Stock was created and authorized as a separate class of stock of
the Company in connection with a financing transaction entered into by the
Company in 1987, which required that the Company have shares of non-voting
common stock available for issuance upon the exercise of certain warrants. The
Company's obligations in respect of the financing transaction have since been
satisfied and the warrants expired unexercised but 2,000,000 shares of Class B
Common Stock continue to remain authorized for issuance under the Charter.
Subject to the preferential rights of any other shares or series of stock,
holders of the shares of Common Stock and Class B Common Stock have equal rights
to receive dividends, if any, as and when authorized and declared by the Board
of Directors of the Company out of assets legally available therefor and to
share ratably in the assets of the Company legally available for distribution to
its stockholders in the event of its liquidation, dissolution or winding up
after payment of or adequate provision for all known debts and liabilities of
the Company.
Under the MGCL, a Maryland corporation generally cannot dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions outside the ordinary course of
business unless approved by the affirmative vote of stockholders holding at
least two thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of
32
all of the votes entitled to be cast on the matter) is set forth in the
corporation's charter. The Charter provides that the affirmative vote of a
majority of all the votes entitled to be cast on any matter or act requiring
stockholder approval shall be sufficient to approve such matter or act.
CERTAIN PROVISIONS OF MARYLAND LAW AND THE CHARTER
The business combination provisions and the control share acquisition
provisions of the MGCL and certain provisions of the Charter could delay, defer
or prevent a transaction or a change in control of the Company that might
involve a premium price for holders of Common Stock or otherwise be in their
best interest.
BUSINESS COMBINATIONS. Under the MGCL, certain "business combinations"
(including a merger, consolidation, share exchange or, in certain circumstances,
an asset transfer or issuance or reclassification of equity securities) between
a Maryland corporation and any person who beneficially owns ten percent (10%) or
more of the voting power of the corporation's shares or an affiliate of the
corporation who, at any time within the two-year period prior to the date in
question, was the beneficial owner of ten percent or more of the voting power of
the then-outstanding voting stock of the corporation (an "Interested
Stockholder"), or an affiliate of such an Interested Stockholder, are prohibited
for five years after the most recent date on which the Interested Stockholder
becomes an Interested Stockholder. Thereafter, any such business combination
must be recommended by the board of directors of such corporation and approved
by the affirmative vote of at least (i) eighty percent (80%) of the votes
entitled to be cast by holders of outstanding shares of voting stock of the
corporation and (ii) two-thirds of the votes entitled to be cast by holders of
voting stock of the corporation other than shares held by the Interested
Stockholder with whom (or with whose affiliate) the business combination is to
be effected, unless, among other conditions, the corporation's common
stockholders receive a minimum price (as defined in the MGCL) for their shares
and the consideration is received in cash or in the same form as previously paid
by the Interested Stockholder for its shares. These provisions of the MGCL do
not apply, however, to business combinations that are approved or exempted by
the board of directors of the corporation prior to the time that the Interested
Stockholder becomes an Interested Stockholder, or, absent an election by
resolution of the board of directors, to business combinations involving certain
Maryland corporations, such as the Company, having an Interested Stockholder as
of July 1, 1983. Pursuant to the applicable provisions of the statute, the Board
of Directors of the Company adopted a resolution electing to be governed by the
business combination provisions of the MGCL, except in connection with any
business combination involving Dr. Tew or any of his affiliates, which the Board
of Directors exempted from such provisions.
CONTROL SHARE ACQUISITIONS. The MGCL provides that "control shares" of a
Maryland corporation (including the Company) acquired in a "control share
acquisition" have no voting rights except to the extent approved by a vote of
two-thirds of the votes entitled to be cast on the matter, excluding shares of
stock owned by the acquiror, by officers or by directors who are employees of
the corporation. "Control Shares" are voting shares of stock which, if
aggregated with all other such shares of stock previously acquired by the
acquiror or in respect of which the acquiror is able to exercise or direct the
exercise of voting power (except solely by virtue of a revocable proxy), would
entitle the acquiror to exercise voting power in electing directors within one
of the following ranges of voting power: (i) one-fifth or more but less than
one-third, (ii) one-third or more but less than a majority, or (iii) a majority
or more of all voting power. Control shares do not include shares the acquiring
person is then entitled to vote as a result of having previously obtained
stockholder approval. A "control share acquisition" means the acquisition of
control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within fifty (50) days of demand to consider the
voting rights of the shares. If no request for a meeting is made, the
corporation may itself present the question at any stockholders meeting.
33
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
CHARTER PROVISIONS. The Charter authorizes the Board of Directors to
reclassify any unissued shares of stock into other classes or series of classes
of stock and to establish the number of shares in each class or series and to
set the preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications or terms or
conditions of redemption for each such class or series.
The Company believes that the power of the Board of Directors to issue
additional authorized but unissued shares of Common Stock, or Class B Common
Stock, and to classify or reclassify unissued shares of stock and thereafter to
cause the Company to issue such classified or reclassified shares of stock will
provide the Company with increased flexibility in structuring possible future
financings and acquisitions and in meeting other needs which might arise. The
additional classes or series, as well as the Common Stock and Class B Common
Stock, will be available for issuance without further action by the Company's
stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which the Company's
securities may be listed or traded. Although the Board of Directors has no
intention at the present time of doing so, it could authorize the Company to
issue a class or series that could, depending upon the terms of such class or
series, delay, defer or prevent a transaction or a change in control of the
Company that might involve a premium price for holders of shares of Common Stock
or otherwise be in their best interest.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The Bank of New
York.
34
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the form of which is filed as an exhibit to the Registration Statement of which
this Prospectus forms a part (the "Underwriting Agreement"), the Company has
agreed to sell the number of shares of Common Stock to Ferris, Baker Watts,
Incorporated (the "Underwriter"), and the Underwriter has agreed to purchase the
aggregate number of shares of Common Stock set forth opposite its name below.
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
Ferris, Baker Watts, Incorporated.......................................... 1,000,000
-----------------
Total.................................................................... 1,000,000
-----------------
-----------------
The nature of the Underwriter's obligations under the Underwriting Agreement
is such that all shares of Common Stock offered hereby, excluding shares covered
by the over-allotment option granted to the Underwriter, must be purchased if
any are purchased. The Underwriting Agreement provides that the obligations of
the Underwriter to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel
and to certain other conditions.
The Company has been advised by the Underwriter that the Underwriter
proposes to offer the shares of Common Stock to the public at the public
offering price set forth on the cover page of this Prospectus, and to certain
dealers at such public offering price less a selling concession not in excess of
$0.145 per share. The Underwriter may allow, and such dealers may reallow, a
concession not in excess of $0.10 per share to certain other underwriters or to
certain other brokers or dealers.
The Company has granted the Underwriter an option, exercisable within 30
days after the date of this Prospectus, to purchase up to an additional 150,000
shares of Common Stock to cover over-allotments, at the same price per share to
be paid by the Underwriter for the other shares offered hereby. The Underwriter
may purchase such shares only to cover over-allotments, if any, in connection
with the Offering made hereby.
The executive officers, directors and certain stockholders of the Company
have agreed that they will not offer, sell, contract to sell or grant an option
to purchase or otherwise dispose of any shares of Common Stock, options to
acquire shares of Common Stock or any securities exercisable for or convertible
into Common Stock owned by them, in the open market, for a period of 180 days
from the date of this Prospectus, without the prior written consent of the
Underwriter. The Company has agreed not to offer, sell or issue any shares of
Common Stock, options to acquire Common Stock or securities exercisable for or
convertible into shares of Common Stock for a period of 180 days after the date
of this Prospectus, without the prior written consent of the Underwriter, except
that the Company may issue securities pursuant to the Company's stock option
plans and upon the exercise of all outstanding stock options.
The Company and the Underwriter have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act, which may
arise out of or be based upon any untrue statement or alleged untrue statement
of any material fact made by the indemnifying party and contained in this
Prospectus, the Registration Statement, any supplement or amendment thereto, or
any documents filed with state securities authorities, or any omission or
alleged omission of the indemnifying party to state a material fact required to
be stated in any such document or required to make the statements in any such
document, in light of the circumstances in which they are made, not misleading.
The Underwriter intends to make a market in the securities of the Company,
as permitted by applicable laws and regulations. The Underwriter, however, is
not obligated to make a market in such securities and any such market making may
be discontinued at any time at the sole discretion of the Underwriter.
35
The Underwriter has informed the Company that it does not intend to confirm
any sales to accounts over which they exercise discretionary authority.
The Company has agreed to pay to the Underwriter a non-accountable expense
allowance equal to one percent of the gross offering proceeds.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered by this
Prospectus will be passed upon for the Company by Ballard Spahr Andrews &
Ingersoll, Baltimore, Maryland. Certain legal matters related to the Offering
will be passed upon for the Underwriter by Shapiro and Olander, Baltimore,
Maryland.
EXPERTS
The financial statements and schedules included in this Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements, and other
information with the Securities and Exchange Commission (the "Commission"). This
Prospectus, which constitutes a part of a registration statement on Form S-2
(the "Registration Statement") filed by the Company with the Commission under
the Securities Act, omits certain of the information set forth in the
Registration Statement and the exhibits thereto, as permitted by the rules and
regulations of the Commission. Reference is hereby made to the Registration
Statement and the exhibits thereto for further information with respect to the
Company. Statements contained herein as to the content of any contract or other
document are necessarily summaries of such documents, and each such statement is
qualified in its entirety by reference to a copy of the applicable document
filed with the Commission. The Registration Statement, including the exhibits
and schedules filed thereto, and the reports, proxy statements and other
information filed by the Company with the Commission, can be inspected and
copied at the public reference facilities maintained by the Commission at its
principal office at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's Regional Offices at Seven World Trade Center, 13th
Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material also can be
obtained from the Public Reference Section of the Commission, Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition,
registration statements, reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
(such as the Company) through the Commission's Electric Data Gathering, Analysis
and Retrieval ("EDGAR") system are publicly available through the Commission's
site on the World Wide Web, located at http: //www.sec.gov. So long as the
Company's Common Stock is traded on the American Stock Exchange Emerging Company
Marketplace, 86 Trinity Place, New York, New York 10006, copies of certain
reports, proxy statements and other information filed by the Company can be
inspected at such location. If the Company is successful in having its Common
Stock listed on the Nasdaq National Market, 1735 K Street, N.W., Washington, DC
20006-1500, copies of certain reports, proxy statements and other information
filed by the Company can be inspected at such location.
THIS PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (WITHOUT EXHIBITS, UNLESS SUCH
EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE) ARE AVAILABLE WITHOUT
CHARGE AND UPON REQUEST. REQUESTS FOR DOCUMENTS SHOULD BE DIRECTED TO CHESAPEAKE
BIOLOGICAL LABORATORIES, INC., 1111 SOUTH PACA STREET, BALTIMORE, MARYLAND,
21230, ATTENTION: INVESTOR RELATIONS (TELEPHONE: (410) 843-5000).
36
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents are incorporated by reference in this Prospectus:
1. The Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1996.
2. The Registrant's Current Report on Form 8-K filed on March 4, 1997.
3. The Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended December 31, 1996.
4. The Registrant's Current Report on Form 8-K filed on November 26, 1996.
5. The Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1996.
6. The Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1996.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document that also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
37
CHESAPEAKE BIOLOGICAL LABORATORIES, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants............................................. F-2
Consolidated Balance Sheets as of March 31, 1997 and 1996............................ F-3
Consolidated Statements of Income for the years ended March 31, 1997, 1996 and
1995............................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended March
31, 1997, 1996 and 1995............................................................ F-5
Consolidated Statements of Cash Flows for the years ended March 31, 1997, 1996 and
1995............................................................................... F-6
Notes to Consolidated Financial Statements........................................... F-7
Schedule II--Valuation and Qualifying Accounts....................................... F-18
F-1
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, 1997 and 1996, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for the years ended March 31,
1997, 1996 and 1995. 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, 1997 and 1996, and the results
of their operations and their cash flows for the years ended March 31, 1997,
1996 and 1995, 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,
April 25, 1997
F-2
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1997 AND 1996
1997 1996
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 2)................................................. $ 1,432,944 $ 240,583
Restricted cash (Note 2)........................................................... 350,000 --
Accounts receivable, net (Note 2).................................................. 714,793 671,626
Inventories (Notes 2 and 4)........................................................ 760,075 1,687,616
Prepaid expenses................................................................... 140,160 43,637
Deferred tax asset (Note 11)....................................................... 50,540 134,639
Interest receivable................................................................ 32,616 --
------------- ------------
TOTAL CURRENT ASSETS............................................................. 3,481,128 2,778,101
PROPERTY AND EQUIPMENT, net (Notes 2 and 5).......................................... 4,857,664 1,514,167
BOND FUNDS HELD BY TRUSTEE (Notes 2 and 7)........................................... 4,682,998 --
DEFERRED FINANCING COSTS (Note 7).................................................... 395,138 --
OTHER ASSETS......................................................................... 27,690 27,690
------------- ------------
TOTAL ASSETS..................................................................... $ 13,444,618 $ 4,319,958
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses.............................................. $ 551,112 $ 351,742
Current portion of long term debt and capital lease obligations (Notes 7 and 8).... 49,769 49,769
Deferred revenue (Note 2).......................................................... 85,887 215,513
------------- ------------
TOTAL CURRENT LIABILITIES........................................................ 686,768 617,024
LONG TERM LIABILITIES:
Long term debt and capital lease obligations, net of current portion (Notes 7 and
8)............................................................................... 8,553,985 105,668
Deferred rent (Note 8)............................................................. 52,590 82,657
Deferred tax liability (Note 11)................................................... 108,549 130,598
------------- ------------
TOTAL LIABILITIES................................................................ 9,401,892 935,947
------------- ------------
COMMITMENTS AND CONTINGENCIES (NOTES 3, 8, AND 9)
STOCKHOLDERS' EQUITY:
Class A Common Stock, par value $.01 per share; 8,000,000 shares authorized;
4,114,558 and 3,979,938 shares issued and outstanding............................ 41,145 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......................................................... 3,980,836 3,827,182
Retained earnings (accumulated deficit)............................................ 20,745 (482,970)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY (NOTE 10)............................................. 4,042,726 3,384,011
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................................... $ 13,444,618 $ 4,319,958
------------- ------------
------------- ------------
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
1997 1996 1995
------------ ------------ ------------
OPERATING REVENUE (NOTE 2).............................................. $ 8,653,793 $ 6,174,148 $ 6,981,788
COST OF REVENUE......................................................... 5,895,479 3,927,331 5,077,688
------------ ------------ ------------
GROSS PROFIT............................................................ 2,758,314 2,246,817 1,904,100
OPERATING EXPENSES:
General and administrative............................................ 1,430,976 1,210,093 1,230,076
Selling............................................................... 413,136 454,934 308,612
Research and development.............................................. 123,482 44,313 --
------------ ------------ ------------
INCOME FROM OPERATIONS.............................................. 790,720 537,477 365,412
INTEREST INCOME (EXPENSE), NET (NOTES 6, 7 AND 8)....................... 8,828 (22,580) (8,473)
------------ ------------ ------------
INCOME BEFORE PROVISION (BENEFIT) FOR INCOME TAXES.................... 799,548 514,897 356,939
PROVISION (BENEFIT) FOR INCOME TAXES (NOTES 2 AND 11)................... 295,833 205,959 (208,955)
------------ ------------ ------------
NET INCOME.............................................................. $ 503,715 $ 308,938 $ 565,894
------------ ------------ ------------
------------ ------------ ------------
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
Primary
Net Income........................................................ $ 0.12 $ 0.08 $ 0.14
------------ ------------ ------------
------------ ------------ ------------
Fully diluted
Net Income........................................................ $ 0.12 $ 0.08 $ 0.14
------------ ------------ ------------
------------ ------------ ------------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (NOTE
2)
Primary............................................................... 4,190,767 3,993,064 4,051,950
------------ ------------ ------------
------------ ------------ ------------
Fully diluted......................................................... 4,281,723 3,993,064 4,052,551
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these consolidated statements.
F-4
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
RETAINED
ADDITIONAL EARNINGS
PAID-IN (ACCUMULATED
SHARES PAR VALUE CAPITAL DEFICIT) TOTAL
---------- ----------- -------------- ------------- ------------
BALANCE, MARCH 31, 1994..................... 3,890,052 $ 38,900 $ 3,811,992 $ (1,357,802) $ 2,493,090
Issuance of shares pursuant to exercise of
stock options............................. 89,886 899 15,190 -- 16,089
Net income.................................. -- -- -- 565,894 565,894
---------- ----------- -------------- ------------- ------------
BALANCE, MARCH 31, 1995..................... 3,979,938 39,799 3,827,182 (791,908) 3,075,073
Net income.................................. -- -- -- 308,938 308,938
---------- ----------- -------------- ------------- ------------
BALANCE, MARCH 31, 1996..................... 3,979,938 39,799 3,827,182 (482,970) 3,384,011
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
---------- ----------- -------------- ------------- ------------
---------- ----------- -------------- ------------- ------------
The accompanying notes are an integral part of these consolidated statements.
F-5
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
1997 1996 1995
------------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................. $ 503,715 $ 308,938 $ 565,894
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization............................................ 360,922 319,827 274,115
Provision (benefit) for deferred income taxes............................ 62,050 205,959 (210,000)
(Increase) decrease in accounts receivable............................... (43,167) 19,780 (249,716)
Decrease (increase) in inventories....................................... 927,541 (236,896) (134,593)
(Increase) decrease in prepaid expenses.................................. (96,523) 5,069 (30,397)
Increase in interest receivable.......................................... (32,616) -- --
Decrease in inventory due Allergan....................................... -- -- (300,000)
Increase (decrease) in accounts payable and accruals..................... 199,370 (113,858) 96,728
(Decrease) increase in deferred revenue.................................. (129,626) 87,530 (60,225)
(Decrease) increase in deferred rent..................................... (30,067) (20,114) 9,744
------------- ---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.................... 1,721,599 576,235 (38,450)
------------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment....................................... (3,554,419) (318,355) (578,493)
Increase in bond funds held by Trustee................................... (4,682,998) -- --
------------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES.................................. (8,237,417) (318,355) (578,493)
------------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) of/proceeds from short term borrowings--net................. -- (127,991) 127,991
Proceeds from long-term debt............................................. 8,500,000 -- 70,297
Repayments of long-term debt............................................. (22,419) (21,231) (44,910)
Repayments of capital lease obligations.................................. (29,264) (28,867) (26,123)
Payment of debt issuance costs........................................... (395,138) -- --
Increase in restricted cash.............................................. (350,000) -- --
Net proceeds from sale of stock.......................................... 5,000 -- 16,089
------------- ---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.................... 7,708,179 (178,089) 143,344
------------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... 1,192,361 79,791 (473,599)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................. 240,583 160,792 634,391
------------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................... $ 1,432,944 $ 240,583 $ 160,792
------------- ---------- ----------
------------- ---------- ----------
CASH PAID DURING THE YEAR FOR:
Interest................................................................. $ 27,315 $ 27,180 $ 14,538
------------- ---------- ----------
------------- ---------- ----------
Income taxes............................................................. $ 7,733 $ 55,000 $ 12,593
------------- ---------- ----------
------------- ---------- ----------
NON-CASH TRANSACTIONS:
Acquisitions of property and equipment under capital lease obligations... $ -- $ -- $ 62,474
------------- ---------- ----------
------------- ---------- ----------
Issuance of stock pursuant to purchase of building....................... $ 150,000 $ -- $ --
------------- ---------- ----------
------------- ---------- ----------
The accompanying notes are an integral part of these consolidated statements.
F-6
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
1. ORGANIZATION:
Chesapeake Biological Laboratories, Inc. ("CBL" or "the Company") is an
established 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 80
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 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.
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
$10,300 and $16,400 as of March 31, 1997 and 1996, 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 is 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.
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).
F-7
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
REVENUE RECOGNITION
The Company recognizes income when the 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
Prior to April 1, 1996, the Company accounted 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. On
April 1, 1996, the Company adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net earnings and pro forma earnings per share disclosures for employee
stock option grants made in fiscal 1996 and future years as if the
fair-value-based method defined in SFAS 123 had been applied. The Company has
elected to continue to apply the provisions of APB Opinion No. 25 and provide
the pro forma disclosure provisions of SFAS 123 (see Note 10).
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 options at period
end based on the Company's stock price on the AMEX Emerging Company Marketplace.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could significantly differ from those
estimates.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with current
year presentation.
F-8
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. CONCENTRATIONS OF CREDIT RISK/SIGNIFICANT CUSTOMERS:
The Company's customers span the range of the pharmaceutical and medical
device industries. For most customers, the Company requires an up-front payment
on orders. There are some recurring customers, however, for which CBL has waived
that practice.
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 year-end, an agreement was reached between CBL and
Allergan which calls for the production of Vitrax-TM- through December 31, 1997,
on modified terms providing for the production of Vitrax using active
ingredients supplied by Allergan, rather than active ingredients manufactured by
CBL. In addition, Allergan has been relieved of any obligation to purchase
Vitrax exclusively from the Company. During the years ended March 31, 1997, 1996
and 1995, approximately 49%, 41% and 51%, respectively, of CBL's sales were to
Allergan. During the years ended March 31, 1997, 1996 and 1995, sales to the
second largest customer, which was a different customer each year, were 8%, 14%
and 18% 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
business will not continue to be dependent on certain customers or that annual
results will not be dependent upon the performance of a few large projects.
4. INVENTORIES:
Inventories consisted of the following at March 31, 1997 and 1996:
1997 1996
---------- ------------
Raw materials....................................................... $ 324,417 $ 371,954
Work-in-process..................................................... 433,454 1,288,163
Finished goods...................................................... 2,204 27,499
---------- ------------
$ 760,075 $ 1,687,616
---------- ------------
---------- ------------
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at March 31, 1997 and
1996:
1997 1996
------------- -------------
Land............................................................ $ 245,000 $ --
Building........................................................ 2,137,265 --
Construction in progress........................................ 1,324,614 68,741
Laboratory equipment............................................ 2,189,512 2,133,800
Furniture and fixtures.......................................... 384,130 352,792
Leasehold improvements.......................................... 435,582 456,356
------------- -------------
6,716,103 3,011,689
Less: Accumulated depreciation.................................. (1,858,439) (1,497,522)
------------- -------------
$ 4,857,664 $ 1,514,167
------------- -------------
------------- -------------
Depreciation and amortization expense for the years ended March 31, 1997,
1996 and 1995 was $360,917, $319,827, and $274,115, respectively.
F-9
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 0.5% over the prime rate. The
aggregate outstanding balance on the Revolving Credit Facility was $128,000 as
of March 31, 1995, with no balances as of March 31, 1997 and 1996. The average
outstanding balance on the Revolving Credit Facility for fiscal years 1997, 1996
and 1995, was $21,000, $86,000 and $64,000, respectively. The average interest
rate on the Revolving Credit Facility for fiscal years 1997, 1996 and 1995, was
8.75%, 9.0% and 9.5%, 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.
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 to provide CBL with office,
warehouse and pharmaceutical manufacturing space. The Company is actively
seeking opportunities and customer contracts to utilize these expanded
capabilities. However, as of March 31, 1997, 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 results in a maximum
interest rate on the bonds of 5.51%, and relates to $6 million 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). The Company was in compliance with all such covenants as of March
31, 1997.
In connection with the financing, the Company incurred costs of $395,000
which will be amortized over the term of the bonds. The Company has also
capitalized $58,000 of net construction period interest costs through March 31,
1997, which will be expensed over the useful life of the building.
F-10
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. LONG TERM DEBT: (CONTINUED)
The Company's other long term debt as of March 31, 1997, 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, 1997, are as follows:
YEAR ENDED
MARCH 31, AMOUNT
- -------------------------------------------------------------------------------- ------------
1998............................................................................ $ 20,960
1999............................................................................ 347,464
2000............................................................................ 667,869
2001............................................................................ 669,519
2002 and thereafter............................................................. 6,839,257
------------
$ 8,545,069
------------
------------
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,
1997, is approximately $8,522,000.
8. LEASES:
In December 1993, the Company entered into a non-cancelable operating lease
agreement for a second facility to house its corporate offices, warehousing,
shipping and receiving functions. The lease expires December 31, 1998, with two,
two-year renewal terms. The rent expense under the lease agreement was $143,948,
$147,002, and $139,186 for the years ended March 31, 1997, 1996 and 1995,
respectively. The Company is currently in the process of subletting the facility
for the remainder of the lease term and management believes sublease revenues
will approximate the future rental commitment obligation.
The Company's original facility will be primarily used for production and is
occupied under a non-cancelable operating lease agreement with an initial six
and one-half year term, expiring December 31, 1998, and two renewable terms of
two years each. Related rental payments for the years ended March 31, 1997, 1996
and 1995, were $234,784, $232,782, and $228,683, 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.
F-11
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. LEASES: (CONTINUED)
At March 31, 1997, the aggregate minimum annual lease payments were as
follows:
YEAR ENDED CAPITAL OPERATING
MARCH 31 LEASES LEASES
- ---------------------------------------------------------------------- ---------- ----------
1998.................................................................. $ 38,909 $ 273,306
1999.................................................................. 36,245 217,768
2000.................................................................. 1,123 29,541
2001.................................................................. -- 15,904
---------- ----------
76,277 $ 536,519
----------
----------
Less interest......................................................... (17,592)
----------
Present value of future minimum lease payments........................ $ 58,685
----------
----------
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 1997, 1996 and 1995, there were
no legal proceedings to which the Company was a party.
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 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
F-12
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. STOCK OPTION PLANS: (CONTINUED)
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:
YEAR ENDED YEAR ENDED
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
Net income:
As reported.................................................................... $ 503,715 $ 308,938
Pro forma...................................................................... 364,955 286,233
Primary earnings per share:
As reported.................................................................... 0.12 0.08
Pro forma...................................................................... 0.09 0.07
Fully diluted earnings per share:
As reported.................................................................... 0.12 0.08
Pro forma...................................................................... 0.09 0.07
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:
YEAR ENDED YEAR ENDED
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
Expected volatility.............................................................. 82.2% 82.2%
Risk-free interest rates......................................................... 5.9--6.0% 6.5--6.7%
Expected lives................................................................... 4-5 years 4-5 years
A summary of option transactions for the years ended March 31, 1997, 1996
and 1995 is as follows:
1997 1996 1995
-------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- --------------- --------- --------------- --------- ---------------
Outstanding, beginning of year..... 366,750 $ 2.16 256,250 $ 2.43 386,250 $ 1.80
Granted............................ 300,000 2.98 130,500 1.50 -- --
Exercised.......................... (11,250) 1.28 -- -- (98,996) 0.54
Expired or cancelled............... (83,600) 3.80 (20,000) 1.25 (31,004) 0.62
--------- ----- --------- ----- --------- -----
Outstanding, end of year........... 571,900 $ 2.37 366,750 $ 2.16 256,250 $ 2.43
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
Shares available for future
grant............................ 531,550 43,497 132,997
--------- --------- ---------
--------- --------- ---------
Options exercisable at end of
period........................... 105,000 108,750 45,000
--------- --------- ---------
--------- --------- ---------
Weighted average fair value of
options granted.................. $ 2.24 $ 1.03 --
--------- --------- ---------
--------- --------- ---------
The weighted average remaining contractual life of options outstanding at
March 31, 1997, is 5.6 years.
F-13
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. INCOME TAXES:
The provision (benefit) for income taxes was comprised of the following for
the years ended March 31, 1997, 1996 and 1995:
1997 1996 1995
---------- ---------- -----------
Federal:
Current............................................... $ 198,716 $ -- $ 1,045
Deferred.............................................. 52,743 175,065 (178,657)
State:
Current............................................... 35,067 -- --
Deferred.............................................. 9,307 30,894 (31,343)
---------- ---------- -----------
Provision (benefit) for income taxes.................... $ 295,833 $ 205,959 $ (208,955)
---------- ---------- -----------
---------- ---------- -----------
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, 1997, 1996 and 1995.
1997 1996 1995
---------- ---------- -----------
Income tax at federal statutory rate........................................ $ 271,846 $ 175,065 $ 121,359
State tax, net of federal benefit......................................... 36,939 30,894 28,295
Alternative minimum tax................................................... -- -- 1,045
Utilization of net operating loss carryforwards........................... -- -- (149,654)
Recognition of cumulative benefit for deferred income tax................. -- -- (210,000)
Other..................................................................... (12,952) -- --
---------- ---------- -----------
Provision (benefit) for income taxes...................................... $ 295,833 $ 205,959 $ (208,955)
---------- ---------- -----------
---------- ---------- -----------
As of March 31, 1997, CBL had no net operating loss carryforwards for income
tax purposes.
Total deferred tax liabilities and deferred tax assets as of March 31, 1997
and 1996, 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.
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
Deferred tax assets:
Inventory...................................................................... $ 32,251 $ 71,609
Accruals and reserves.......................................................... 18,289 15,845
Net operating loss and credit carryforwards.................................... -- 47,185
-------------- --------------
$ 50,540 $ 134,639
-------------- --------------
-------------- --------------
Deferred tax liability:
Property and equipment......................................................... $ 108,549 $ 130,598
-------------- --------------
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F-14
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. PROFIT SHARING PLAN:
During the year ended March 31, 1994, the Company established a 401K-Profit
Sharing Plan ("the Plan") for all full-time employees with at least six months
of service with the Company. Employees may contribute up to 10% of their salary
to the Plan and the Company may match the first 3% of salary that the employee
contributes to the Plan. The original entry date in the Plan for eligible
employees was October 1, 1993. The Company suspended the matching of employee
contributions as of July 31, 1994. The Company's cost to match employee
contributions was $16,857 for the year ended March 31, 1995.
13. NEW ACCOUNTING PRONOUNCEMENTS:
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" ("SFAS 121"). SFAS 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS 121 is effective for
financial statements with fiscal years beginning after December 15, 1995. The
adoption of SFAS 121 as of April 1, 1996 had no impact on the Company's
financial position or results of operations.
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share" ("SFAS 128"). 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 EPS with a
presentation of basic 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 fully diluted EPS pursuant to APB Opinion No. 15. SFAS 128
is effective for fiscal years ending after December 15, 1997, and early adoption
is not permitted. When adopted, it will require restatement of prior years' EPS.
When adopted for the year ending March 31, 1998, the Company will report basic
EPS instead of primary EPS. Basic EPS for the years ended March 31, 1997, 1996
and 1995 is $0.13, $0.08 and $0.14, respectively.
14. SUBSEQUENT EVENT:
On April 25, 1997, the Company filed a Registration Statement on Form S-2
with the Securities and Exchange Commission for the purpose of issuing 1,000,000
shares of its Class A Common Stock. At the current market price, the net
proceeds to the Company from this offering are expected to be approximately
$4,375,000, if the offering is successfully completed.
F-15
SCHEDULE II
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES WRITE-OFFS PERIOD
----------- ----------- ----------- -----------
Allowances for Doubtful Accounts:
For Fiscal Year Ended March 31, 1995:........................... $ 1,489 $ 17,520 $ 15,009 $ 4,000
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
F-16
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NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
---------
Prospectus Summary.............................. 1
Special Note Regarding Forward-Looking
Information................................... 4
Risk Factors.................................... 4
Use of Proceeds................................. 9
Price Range of Common Stock..................... 9
Dividend Policy................................. 9
Capitalization.................................. 10
Selected Financial Data......................... 11
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 12
Business........................................ 17
Management...................................... 27
Description of Capital Stock.................... 32
Underwriting.................................... 35
Legal Matters................................... 36
Experts......................................... 36
Available Information........................... 36
Incorporation of Certain Information by
Reference..................................... 37
Index to Financial Statements................... F-1
1,000,000 SHARES
[LOGO]
CHESAPEAKE BIOLOGICAL
LABORATORIES, INC.
CLASS A COMMON STOCK
---------------------
PROSPECTUS
---------------------
JUNE 12, 1997
FERRIS, BAKER WATTS
Incorporated
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