10-Q 1 a2030257z10-q.txt 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark one) [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended SEPTEMBER 30, 2000 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________ to ___________ Commission File Number: 1-12748 CHESAPEAKE BIOLOGICAL LABORATORIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MARYLAND 52-1176514 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 1111 S. PACA STREET, BALTIMORE, MARYLAND 21230 2834 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (SIC) (410) 843-5000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- The number of shares outstanding of each of the Registrant's classes of common stock, as of November 3, 2000: Class A Common Stock, $.01 per share - 5,892,405 shares CHESAPEAKE BIOLOGICAL LABORATORIES, INC. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - September 30, 2000 and March 31, 2000 ..................................... 3 Consolidated Statements of Earnings for the three and six months ended September 30, 2000 and 1999............. 4 Consolidated Statement of Changes in Stockholders' Equity for the six months ended September 30, 2000 ............................... 5 Consolidated Statements of Cash Flows for the six months ended September 30, 2000 and 1999....................... 6 Notes to Consolidated Financial Statements................................. 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................. 11-12 Item 3. Quantitative and Qualitative Disclosures About Market Risk............... 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................................ 12 Item 6. Exhibits and Reports on Form 8-K......................................... 12 SIGNATURES.......................................................................... 13

2 PART I. FINANCIAL INFORMATION CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of the consolidated balance sheets. 3 CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF EARNINGS

The accompanying notes are an integral part of the consolidated statements. CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

The accompanying notes are an integral part of the consolidated statements. 5 CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of the consolidated statements. 6 CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2000 1. ORGANIZATION Chesapeake Biological Laboratories, Inc. ("CBL" or the "Company") is a provider of pharmaceutical and biopharmaceutical parenteral 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 parenteral product development services to more than 100 pharmaceutical and biotechnology companies and has contributed to the development and production of more than 125 therapeutic products intended for human clinical trials. Customers contract with the Company for services to produce development stage products for use in U.S. Food and Drug Administration ("FDA") clinical trials and to produce and manufacture FDA approved parenteral 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 facilities operate under the current Good Manufacturing Practices ("cGMP") established and regulated by the FDA. The Company's operations are treated as one operating segment, pharmaceutical and biopharmaceutical product development and production services, as it only reports profit and loss information on an aggregate basis to operating management of the Company. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The unaudited consolidated financial statements include the accounts of Chesapeake Biological Laboratories, Inc. and its wholly owned subsidiary (the "Company"). The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. The consolidated balance sheet as of September 30, 2000, consolidated statements of earnings for the three and six months ended September 30, 2000 and 1999 and the consolidated statements of cash flows for the six months ended September 30, 2000 and 1999 are unaudited, but include all adjustments (consisting of normal recurring adjustments) which the Company considers necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and footnote information normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Results for any interim period are not necessarily indicative of results for any future interim period or for the entire year. The accompanying unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended March 31, 2000. CASH AND CASH EQUIVALENTS Cash and cash equivalents include amounts held in bank accounts and amounts invested in accounts with an original maturity of three months or less, which are readily convertible to known amounts of cash. Included in restricted cash are Company funds of $175,000 and $350,000, at September 30, 2000 and March 31, 2000, respectively. These funds 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. 7 CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2000 (CONTINUED) ACCOUNTS RECEIVABLE Accounts receivable are stated net of allowance for doubtful accounts of $55,000 and $75,000 at September 30, 2000 and March 31, 2000, respectively. INVENTORIES Inventories consist of raw materials, work-in-process and finished goods, which are stated at the lower of cost or market. Finished goods represent materials filled and labor incurred for filled vials and relate to services completed and invoiced to the customer. When the vials are labeled and the product is shipped, inventory is relieved. Cost is determined using the first-in, first-out (FIFO) method. REVENUE RECOGNITION The Company recognizes revenue for its product development services once the services have been provided to the customer. CBL also provides commercial production services of parenteral and other sterile product presentations and recognizes revenue when a product has been shipped or when the terms of the agreement with the customer are completed. Deferred revenue represents deposits normally required of customers with development products and revenue for services performed for finished goods deferred until product shipment. Deferred revenue at September 30, 2000 relating to filling services completed with the related units not shipped of commercial product totaled $0.3 million. Related costs of $0.1 million were classified as finished goods in inventory. During the three months ended September 30, 2000, $1.1 million in deferred revenue was recognized as revenue when the units were shipped. RECLASSIFICATIONS Certain reclassifications have been made to prior years' financial statements to conform with the current year presentation. 3. INVENTORIES Inventories consisted of the following at:

4. LONG TERM DEBT Under the documentation applicable to the bond financing, the Company is obligated to maintain certain financial ratios and balances, including a minimum tangible net worth, a liability to net worth ratio, an EBITDA ratio and current ratio, all as defined and established in the applicable documents. 8 CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2000 (CONTINUED) As of September 30, 2000 and March 31, 2000, the Company was in compliance with all of its covenants. 5. STOCKHOLDERS' EQUITY In July 2000, the Company executed stock purchase agreements with Messrs. Rice and Botek in connection with their new employment agreements. Messrs. Rice and Botek purchased 100,000 restricted shares and 75,000 restricted shares, respectively, subject to forfeiture, under the Company's Fifth Stock Incentive Plan, for $2.50 per share, the fair market value on the date of agreement. Messrs. Rice and Botek each signed a 50% full recourse and a 50% limited recourse promissory note to the Company for the purchase price for the shares. The shares to which the Company's repurchase right lapses first, are those shares that would be used to pay the full recourse portion of the applicable note. These notes carry an interest rate of 6.53% and are due on May 31, 2002. This transaction along with the accrued interest earned on the note with Messrs. Rice and Botek was recorded as a subscription receivable in the consolidated statement of stockholders' equity. 6. EARNINGS PER SHARE Earnings per common share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding. Earnings per common share, assuming dilution, is computed based on the weighted-average number of common shares outstanding after consideration of the dilutive effect of stock options and the assumed conversion of the preferred stock at the stated rate. The computations of earnings per common share and earnings per common share, assuming dilution, for the six months ended September 30, 2000 and September 30, 1999, are as follows:

9 CHESAPEAKE BIOLOGICAL LABORATORIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2000 (CONTINUED) 7. RESTRUCTURING CHARGES In the fourth quarter of fiscal year 1999, the Company implemented a realignment of management, a workforce reduction and decided to close its Seton experimental facility and consolidate its operation into the new Camden facility. The workforce reduction resulted in the termination of full time and temporary employees. This action in addition to other non-personnel cost reductions resulted in a restructuring charge of $1.2 million in fiscal 1999. The realignment and the workforce reduction resulted in a charge of $693,000 in fiscal year 1999 and $548,000 was provided for the closing of the Seton facility. Expenses totaling $210,739 of the restructuring were charged against the accrual for the six months ended September 30, 2000. Of the remaining accrual balance of $418,384, $392,491 is classified in current liabilities as accrued restructuring and is expected to be paid over the next 12 months, with the remaining balance of $25,893 recorded as a non-current liability. 8. SUBSEQUENT EVENT On October 30, 2000, the Company announced a definitive merger agreement with Cangene Corporation, under which Cangene will acquire Chesapeake Biological Laboratories in an all-cash tender offer for $4.60 per share, or approximately $42 million including including assumption of Chesapeake Biological Laboratories' outstanding debt of $7.2 million. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Management's discussion below should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2000. THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 Operating revenues for the three months ended September 30, 2000 increased 104% to $5,322,000 from $2,614,000 for the three months ended September 30, 1999. Operating revenues for the six months ended September 30, 2000 increased 60% to $8,090,000 from $5,063,000 for the six months ended September 30, 1999. These revenues for the three and six month periods ended September 30, 2000 were generated by 57 customers. Revenues for the three months ended September 30, 2000 include $1,135,000 of previously deferred revenue related to filling services provided and invoiced in prior periods but which were not recognized as revenue until the product was shipped. Although commercial revenues increased during the period, the Company's revenues continue to be primarily non-commercial. These customers have chosen the Company for current developmental work due to the Company's ability to provide long-term commercial scale volume after product approval by the FDA. Gross margin for the three and six months ended September 30, 2000 was $1,650,000 and $2,399,000 respectively, compared to $788,000 and $1,473,000 in the prior year. Gross margin as a percentage of revenues did not increase significantly due to a shift in sales mix toward commercial products, which have a higher material cost. Other factors affecting gross margin percentage were an increase in the number of permanent and temporary staff plus overtime, required to support the increased revenues related to a launch of a customer's new commercial product. General and administrative expenses decreased 7% to $371,000 for the three months ended September 30, 2000 and increased 3% to $727,000 for the six months ended September 30, 2000 as compared to the prior year periods. The decrease in expenses and the increase in revenue resulted in general and administrative expenses decreasing to 7% of revenues for the three months ended September 30, 2000 compared to 15% in the prior year period. For the six months ended September 30, 2000 general and administrative expenses as a percentage of revenues were 9% versus 14% for the comparable six month period of the previous year. Sales and marketing costs increased $78,000 to $205,000 for the three months ended September 30, 2000. For the six months ended September 30, 2000, sales and marketing costs increased $130,000 to $397,000 as compared to the six months ended September 30, 1999. Sales and marketing expenses have increased primarily due to the addition of sales personnel and additional sales incentive program costs associated with the sales volume increases. As a result of the revenue increases and cost reductions, operating income, was $1,074,000 for the three months ended September 30, 2000 and $1,275,000 for the six months ended September 30, 2000, as compared to $261,000 and $503,000, respectively, for the comparable prior year periods. Interest expense was relatively consistent at $154,000 for the three months ended September 30, 2000 and $305,000 for the six months ended September 30, 2000 as compared to $148,000 and $303,000, respectively, for the three and six month periods in the prior year. Income before taxes was $937,000 and $993,000 for the three and six months ended September 30, 2000, respectively, compared to $143,000 and $255,000 for the comparable three and six month periods, in the previous fiscal year. The Company recorded a provision for income taxes of $385,000 and $407,000 for the three and six months ended September 30, 2000 , although due to a net operating loss carryforward, taxes will not be paid. Due to the net operating losses generated during the fiscal year ended March 31, 1999, no tax liability was accrued related to the income for the period ended September 30, 2000. 11 FINANCIAL CONDITION AND LIQUIDITY On September 30, 2000, CBL had cash and cash equivalents of $17,000 compared to $595,000 at March 31, 2000. These balances do not include $175,000 at September 30, 2000 and $350,000 at March 31, 2000 held as collateral for the Company's obligation under the Letter of Credit and Reimbursement Agreement with First Union National Bank of North Carolina, pursuant to which, a letter of credit was issued as credit enhancement for bonds issued by the Maryland Industrial Development Financing Authority. The proceeds of these bonds were used by the Company to finance a portion of the purchase price, renovation and equipping of the Camden production facility. The Company continues to maintain a $750,000 Revolving Line of Credit from First Union National Bank of Maryland. There was no outstanding balance as of September 30, 2000 or as of March 31, 2000. The $578,000 decrease in the cash position during the six months ended September 30, 2000 was the result of several factors, but primarily related to the growth in the accounts receivable levels needed to support the significant increases in operating revenues. Management believes that based on the current financial position, its operating plan will generate sufficient cash resources to meet its cash needs through at least April 2001. However, there can be no assurance this will occur. The Company was in compliance with all bank loan covenants at September 30, 2000. STATEMENTS REGARDING FORWARD-LOOKING DISCLOSURE Certain information contained in this Report includes forward-looking statements, which can be identified by the use of forward-looking terminology such as "may", "will", "expect", "should", "believes", "anticipates", "intends", or words of similar import. These statements may involve risks and uncertainties, as outlined in Item 1 of the Company's March 31, 2000 Form 10-K that could cause actual results to differ materially from those described in the statements. The risks and uncertainties include (without limitation) general economic and business conditions, changes in business strategy or development plans, and others. Given these uncertainties, the reader is cautioned to place undo reliance on such forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the reported market risks since March 31, 2000. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not presently a party to any material litigation. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K None 12 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHESAPEAKE BIOLOGICAL LABORATORIES, INC. By: /s/THOMAS P. RICE By: /s/ JOHN T. JANSSEN ------------------------ --------------------------- Thomas P. Rice John T. Janssen President and Chief Executive Treasurer and Chief Financial Officer Officer November 13, 2000 13

CHESAPEAKE BIOLOGICAL LABORATORIES INC 10-Q