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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9
(RULE 14D-101)
RECOMMENDATION STATEMENT UNDER SECTION 14(D)(4)
OF THE SECURITIES EXCHANGE ACT OF 1934
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CHESAPEAKE BIOLOGICAL LABORATORIES, INC.
(Name of Subject Company)
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CHESAPEAKE BIOLOGICAL LABORATORIES, INC.
(Name of Person(s) Filing Statement)
CLASS A COMMON STOCK, $.01 PAR VALUE
Series A-1 Convertible Preferred Stock
Warrants to Purchase Class A Common Stock
(Title of Class of Securities)
165146101
(CUSIP Number of Class of Securities)
THOMAS P. RICE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CHESAPEAKE BIOLOGICAL LABORATORIES, INC.
CAMDEN INDUSTRIAL PARK
1111 SOUTH PACA STREET
BALTIMORE, MARYLAND 21230-2591
410-843-5000
(Name, Address and Telephone Number of Person Authorized to Receive
Notices and Communications on Behalf of the Person(s) Filing Statement)
[ ] Check the box if the filing relates solely to preliminary communications
made before the commencement of a tender offer.
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ITEM 1. SUBJECT COMPANY INFORMATION.
The name of the subject company is Chesapeake Biological Laboratories,
Inc., a Maryland corporation. The address of the principal executive offices of
Chesapeake Biological Laboratories, Inc. is Camden Industrial Park, 1111 South
Paca Street, Baltimore, Maryland 21230-2591. The telephone number at its
principal executive offices is 410-843-5000.
The titles of the classes of equity securities to which this
Recommendation Statement relates are Chesapeake Biological Laboratories, Inc.'s
(a) class A common stock, $.01 par value per share, (b) series A-1 convertible
preferred stock, par value $.01 at a purchase price and (c) warrants to
purchase common stock. As of November 14, 2000, 5,893,030 shares of Chesapeake
class A common stock, 14,511 shares of series A-1 convertible preferred stock
and warrants to purchase 123,370 shares of class A common stock were
outstanding.
ITEM 2. IDENTITY AND BACKGROUND OF FILING PERSON.
The filing person is Chesapeake Biological Laboratories ("Chesapeake").
Chesapeake's name, business address and business telephone number are set forth
above in Item 1.
This Recommendation Statement relates to the tender offer by AC Acquisition
Subsidiary, Inc., a Maryland corporation and a wholly-owned subsidiary of
Cangene Corporation, a Canadian corporation located at 3403 American Drive,
Units 3/4, Mississauga, Ontario, Canada, L4V 1T4, to purchase all of the
outstanding shares of Chesapeake's (a) class A common stock at a purchase price
of $4.60 per share, (b) series A-1 convertible preferred stock at a purchase
price of $4.60 multiplied by the number of shares into which the preferred stock
is convertible and (c) warrants to purchase common stock at a purchase price of
$4.60 multiplied by the number of shares of common stock for which the warrant
is then exercisable, net of the exercise price, each, net to the seller in cash,
on the terms and subject to the conditions described in AC Acquisition
Subsidiary's Offer to Purchase, dated November 17, 2000, included in its Tender
Offer Statement on Schedule TO filed with the Securities and Exchange Commission
and the related Letter of Transmittal.
The offer is being made pursuant to a Merger Agreement, dated October 30,
2000, among Chesapeake, Cangene Corporation ("Cangene") and AC Acquisition
Subsidiary ("AC Acquisition"). The merger agreement provides for AC Acquisition
to make and complete the tender offer, subject to the conditions set forth in
the merger agreement and, as soon as practicable following the satisfaction or
waiver of the conditions set forth in the merger agreement, for the merger of
AC Acquisition with and into Chesapeake, which will become a wholly-owned
subsidiary of Cangene. At the effective time of the merger, each share of
Chesapeake common stock then outstanding (other than shares held by Cangene, AC
Acquisition or any other subsidiary of Cangene) will be converted into the
right to receive $4.60 in cash. A copy of the merger agreement is included as
an exhibit to AC Acquisition's Schedule 13D filed November 9, 2000 and is
incorporated herein by reference.
In addition to the merger agreement, Chesapeake and AC Acquisition entered
into an option agreement, dated October 30, 2000. The option agreement permits
AC Acquisition to purchase from Chesapeake up to 50,000 shares of series B
preferred stock at an aggregate purchase price of $2,500,000, after the closing
of the tender offer, if AC Acquisition has accepted for purchase at least a
majority of the issued and outstanding common stock (giving effect to the
conversion of all outstanding shares of the series A-1 convertible preferred
stock and the exercise of all outstanding warrants). Each share of series B
preferred stock will be entitled to 1,000 votes on any matter presented to the
stockholders of Chesapeake. The series B preferred stock will have a
liquidation preference of $50.00 per share and will be entitled to only such
dividends as are declared and paid on the common stock of Chesapeake, in the
same amount per share. The series B preferred stock is not convertible. Under
the option agreement, the option will not be exercisable if the merger
agreement is terminated. The option will also not be exercisable without
stockholder approval if Chesapeake's counsel advises it that the Nasdaq
National Market rules require stockholder approval of the option. Upon the
exercise of this option, Cangene would be entitled to cast 90% of the votes
entitled to be cast on a merger.
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ITEM 3. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS.
As of the date of this Recommendation Statement, except as described
below, Chesapeake is not aware of any material agreement, arrangement or
understanding or any actual or potential conflicts of interest between
Chesapeake or its affiliates and Chesapeake's executive officers, directors or
affiliates.
Merger Agreement, Option Agreement and Related Agreements. The summaries
of the merger agreement and the option agreement contained in the offer to
purchase of AC Acquisition, which is being mailed to shareholders together with
this Recommendation Statement, are incorporated herein by reference.
Treatment of Options. At or immediately prior to the effective time of the
merger, vested options held by any current or former employee or director to
purchase shares of Chesapeake common stock that have an exercise price below
$4.60 will be converted into the right to receive the difference, in cash,
between the per share exercise price of the option and $4.60 multiplied by the
number of shares for which the option is then exercisable. Options that have an
exercise price below $4.60 per share but which are not fully vested will become
the right to receive the difference, in cash, between the per share exercise
price of the option and $4.60, multiplied by the number of shares for which the
option is exercisable on the applicable vesting date, provided the holder of the
option complies with the other terms of the option agreement, including
remaining employed by Chesapeake. All options with exercise prices above $4.60
per share will be cancelled as a result of the merger. Please see the
Information Statement which is attached hereto as Annex B for information
relating to ownership of options to acquire shares of Chesapeake's common stock
by Chesapeake's executive officers and directors.
Performance Bonuses. In light of previous salary deferrals and performance
during their tenure at Chesapeake, Chesapeake's board of directors has granted
bonuses to Thomas P. Rice and John Botek of $681,152 and $507,500, respectively.
The bonuses are payable after the closing of the tender offer. Additionally, the
board has declared that as of December 15, 2000, all stock options owned by
Messrs. Rice and Botek will vest fully, that the restrictions on the restricted
stock owned by them will lapse and the loans to purchase the restricted stock
will be forgiven.
Thomas Rice and John Botek Employment Agreements. Concurrently with
execution of the Merger Agreement Chesapeake entered into new employment
agreements with Messrs. Rice and Botek (each, an "Executive") in order to
provide Chesapeake, as the surviving corporation, with continuity of
management. The following is a summary of the material provisions of the
employment agreements, each of which is filed as an exhibit to the Schedule TO
filed by AC Acquisition on November 17, 2000. This summary is qualified in its
entirety by reference to the employment agreements, each of which is
incorporated by reference in this Recommendation Statement.
Each employment agreement provides that the Company will continue to
employ the Executive, and the Executive will continue in the employ of the
Company, subject to the terms and conditions of the employment agreement, for
two years after the merger becomes effective. The employment agreements will
automatically renew for one year periods unless either the Executive or
Chesapeake gives 120 days prior written notice. Under the employment
agreements, Messrs. Rice and Botek are entitled to receive (i) an annual base
salary equal to $200,00 and $160,000, respectively, a discretionary annual
bonus (which may include grants of stock options under Cangene's incentive
stock option plan) consistent with bonus compensation for senior executives of
Cangene, and (iii) benefits comparable to those provided to other executive
officers of Chesapeake.
Each Executive's employment with Chesapeake may be terminated, among other
things, (i) by Chesapeake for cause or without cause; (ii) by Chesapeake if
Chesapeake determines in good faith that the Executive has become disabled; or
(iii) by the Executive if, without the Executive's written consent, (A) the
Executive's duties are substantially diminished or duties or responsibilities
materially inconsistent with the Executive's position and duties described in
his employment agreement are assigned to the Executive, (B) the Executive's
annual base salary is reduced, (C) the Executive is relocated outside of the
Baltimore metropolitan area, (D), in the case of Mr. Rice, Chesapeake fails to
elect the Executive to the Board of Directors, (E) if Chesapeake breaches the
employment agreement, or (F) the occurrence of a change of control of
Chesapeake (exclusive of the change in control contemplated by the offer and
the merger agreement).
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Messrs. Rice and Botek are each entitled to continue to receive any unpaid
amounts under the employment agreement if Chesapeake terminates the Executive
without cause or if Executive terminates employment with good reason.
Additionally, upon any such termination, Executives unvested stock options will
vest and remain exercisable for 30 days after termination.
The employment agreements also provide that during their terms and for a
period of one year after the expiration or termination of the employment period
the Executive will not, directly or indirectly, (i) engage in any activity
competitive with the business of Chesapeake, Cangene or any of their
affiliates, (ii) solicit customers of Chesapeake or Cangene, or (iii) solicit
employees of Chesapeake.
Each Executive has further agreed to keep confidential all trade secrets
and confidential or proprietary information of Chesapeake, Cangene and their
affiliates.
ITEM 4. THE RECOMMENDATION.
Recommendation of The Chesapeake Board of Directors. The Chesapeake board
of directors, at a meeting held on October 12, 2000, determined that the offer
and the merger are fair to and in the best interests of Chesapeake and the
Chesapeake stockholders. The board of directors unanimously approved and
declared advisable the merger agreement and the transactions contemplated
thereby, including the issuance of the option, the tender offer and the merger.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE CHESAPEAKE BIOLOGICAL
LABORATORIES STOCKHOLDERS ACCEPT THE OFFER AND TENDER THEIR SHARES OF CHESAPEAKE
BIOLOGICAL LABORATORIES COMMON STOCK IN THE OFFER.
Reasons for the Recommendation of the Board of Directors. In reaching its
recommendation, the board of directors considered a number of factors,
including the factors set forth below.
o Need to Expand Operations to Increase Revenues. At the beginning of 2000,
Chesapeake's board of directors determined that to remain competitive in
the market of contract manufacturing of commercial quantities of
pharmaceuticals and biopharmaceuticals, Chesapeake would have to expand its
production capacity so that it could meet the needs of customers with
products entering full commercial production. To do so, Chesapeake would
require significantly greater capital resources for larger scale production
equipment and to satisfy regulatory requirements.
o Insufficient Capital to Accomplish Expansion. In early 2000, Chesapeake's
board of directors concluded that:
o Chesapeake's existing capital was insufficient to fund the capital
expenditures necessary to increase Chesapeake's production capacity;
o A gradual increase in capacity could be funded from existing capital and
expected operating cash flow, but could not be funded quickly enough for
Chesapeake to remain competitive in the market;
o A debt financing on acceptable terms was not feasible;
o The market price of Chesapeake's common stock ranged, in thin trading,
from $2.25 to $3.563 in the last calendar quarter of 1999. Raising
sufficient equity capital, if possible, would cause substantial dilution
to existing stockholders and, therefore, would not be in the best
interests of the stockholders; and
o Chesapeake should seek a strategic or merger partner that could provide
the capital resources necessary to expand Chesapeake's production
capacity and thereby enhance Chesapeake's prospects for growth.
o Search for Strategic Partner -- No Superior Proposals. In January and
February 2000, management and Chesapeake's board of directors met with
Arnhold and S. Bleichroeder, Inc. ("A&SB").
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o On March 22, 2000 Chesapeake engaged A&SB as its financial
advisor to assist in evaluating and exploring Chesapeake's strategic
alternatives and seeking a strategic alliance or merger partner.
o Beginning in April 2000, A&SB contacted more than 80 companies
to ascertain their possible interest in a strategic alliance or an
acquisition of Chesapeake.
o Twenty-one of the contacted companies signed confidentiality agreements
and reviewed information about Chesapeake.
o Chesapeake's management made oral presentations to six of these
companies about Chesapeake's business, financial condition and
prospects.
o Of the six companies to whom Chesapeake presented, only Cangene made an
offer to acquire or partner with Chesapeake.
o Fairness Opinion of Arnhold and S. Bleichroeder, Inc. A&SB made a
presentation and delivered its opinion that, as of October 12, 2000, the
$4.60 in cash per share to be received by Chesapeake stockholders in the
tender offer and the merger is fair to the stockholders from a financial
point of view. A copy of the opinion is attached hereto as Annex A. The
board was aware that A&SB becomes entitled to the fee described in Item 5
below upon consummation of the tender offer.
o Timing of Completion. Chesapeake's board of directors considered the
anticipated timing of the closing of the transactions in the merger
agreement, including the structure of the transactions as a cash tender
offer for all of the shares of Chesapeake common stock, which should allow
stockholders to receive the consideration earlier than in an alternative
form of transaction, followed by the merger in which stockholders who did
not tender their shares in the offer will receive the same consideration as
received by stockholders who tendered their shares in the offer.
o Value of Shares. Chesapeake's common stock is thinly traded and has a
relatively small public float. Therefore, any material trading in the stock
has tended to have a significant effect on the market price of the stock.
The range of the closing prices of the stock from the third quarter of 1999
through November 14, 2000 was $2.375 per share to $6.50 per share. The
board of directors believes that using traditional valuation methods,
Chesapeake's operating performance would not necessarily justify the higher
prices at which the stock occasionally traded. Further, the ability to sell
at those higher prices was not in the past, and not likely to be in the
future, available to a significant number of the Company's stockholders.
Using traditional valuation methods, and recognizing that the tender offer
and merger gives all stockholders an opportunity to participate both the
board of directors and A&SB have concluded that the price of $4.60 is fair
to the stockholders from a financial point of view.
o Other Matters. Other aspects of the offer from Cangene that the board of
directors considered in making its decision include Cangene's stated
intention to continue to operate Chesapeake from its current facilities and
to continue operating with essentially the same staff.
The above paragraphs include the material factors the board of directors
considered. The board did not find it practicable to, and did not, quantify or
otherwise assign relative weights to the specific factors it considered. After
weighing all of these considerations, the board unanimously approved and
declared the merger agreement advisable and recommends to the Chesapeake
stockholders that they tender their shares in the offer.
Intent to Tender. To the best knowledge of Chesapeake, each executive
officer, director, affiliate and subsidiary of Chesapeake who holds of record
or beneficially any of Chesapeake's class A common stock, series A-1 preferred
stock and warrants to purchase common stock intend to tender such securities
into the offer. Eleven of Chesapeake's stockholders, including all members of
the board of directors and all executive officers have entered into a
stockholders agreement with AC Acquisition and Cangene, agreeing to:
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o Tender all shares of class A common stock, series A-1 preferred stock
and warrants to purchase common stock held of record or beneficially
owned by them in the tender offer;
o Vote in favor of approval of the merger, if a stockholder vote is
necessary;
o Vote against any action or agreement that would impede, interfere with
or prevent the tender offer or the merger;
o Vote against any action or agreement that would cause a breach of a
covenant, representation or warranty or other obligation of Chesapeake
in the merger agreement or stockholders agreement;
o Vote against any change in the capitalization or organization of
Chesapeake other than those described in the merger agreement;
o Grant an irrevocable proxy to Cangene, effective on the date all
necessary governmental approvals or waiting periods have been obtained
or terminated or expired, as applicable, to vote the shareholders'
shares on the matters described above;
o Sell all of their shares to Cangene at a purchase price of $4.60 per
share if an offer is made that causes Chesapeake's board of directors to
withdraw its recommendation of this offer and recommend another offer;
o Refrain from encouraging, soliciting, participating in or initiating
discussions or negotiations with or providing non-public information to
any party concerning any proposed merger, acquisition, share disposition
or liquidation other than as described in the merger agreement and the
offer; and
o Refrain from disposing of their shares in any manner other than by
tender in the offer or sale to Cangene in accordance with the
stockholders agreement.
ITEM 5. PERSON/ASSETS, RETAINED, EMPLOYED, COMPENSATED OR USED.
Arnold and S. Bleichroeder, Inc. In a letter agreement dated March 22,
2000, Chesapeake engaged Arnold and S. Bleichroeder, Inc. to act as financial
advisor to assist Chesapeake in connection with a possible combination of
Chesapeake with a strategic investor, or other disposition of Chesapeake's
securities or assets. Arnold and S. Bleichroeder will be paid a fee based on
the transaction value of any sale, merger or other acquisition of Chesapeake.
The engagement letter provides for a fee of three percent of the first
$10,000,000 in proceeds derived from a change in control of Chesapeake and two
percent of the proceeds above $10,000,000. Based on the purchase price and an
additional fee for the fairness opinion, Bleichroeder's fee is currently
estimated at $1,015,237.
In addition, Chesapeake will reimburse Arnold and S. Bleichroeder for its
reasonable out-of-pocket expenses, including fees and disbursements of counsel,
as well as any other consultants and advisors retained with Chesapeake's
consent.
ITEM 6. INTEREST IN SECURITIES OF THE SUBJECT COMPANY.
Neither Chesapeake nor any of its subsidiaries has made any transaction in
Chesapeake common stock within the past sixty days. To the knowledge of
Chesapeake, no executive officer, director or affiliate has bought or sold any
shares of Chesapeake common stock within the past 60 days. However, on September
22, 2000 Mr. John T. Janssen exercised incentive stock options to purchase
10,000 shares of class A common stock at an exercise price of $1.50 per share.
The options were granted to Mr. Janssen on 11/30/95. Mr. Janssen has not sold
the shares, and pursuant to the stockholders agreement described in this
Recommendation Statement, has agreed not to transfer the shares other than by
tendering the shares in the tender offer or by selling the shares to Cangene in
accordance with the option granted in the stockholders agreement.
ITEM 7. PURPOSES OF THE TRANSACTION AND PLANS OR PROPOSALS.
Except as discussed in this Recommendation Statement, Chesapeake is not
currently undertaking or engaged in any negotiations in response to the offer
that relate to:
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o a tender offer for or other acquisition of Chesapeake's securities by
Chesapeake, any subsidiary of Chesapeake or any other person;
o an extraordinary transaction, such as a merger, reorganization or
liquidation, involving Chesapeake or any subsidiary of Chesapeake;
o a purchase, sale or t.ransfer of a material amount of assets of
Chesapeake or any subsidiary of Chesapeake; or
o any material change in the present dividend rate or policy,
indebtedness or capitalization of Chesapeake.
Except as set forth in this Recommendation Statement, there are no
transactions, resolutions of the board of directors, agreements in principle,
or signed contracts in response to the offer that relate to one or more of the
events referred to in the preceding paragraph.
ITEM 8. ADDITIONAL INFORMATION.
Regulatory Approval--United States Antitrust Compliance. Under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules
that have been promulgated thereunder by the Federal Trade Commission, the
types of acquisition transactions identified in the act and the rules may not
be consummated unless information about the transaction and the parties has
been provided to the Antitrust Division of the Department of Justice and the
FTC, and the waiting period requirements have been satisfied. The proposed
purchase of the Chesapeake shares in the tender offer is subject to these
requirements.
AC Acquisition indicated to Chesapeake that it intends to file, and
Chesapeake also intends to file, a Notification and Report Form under the HSR
Act with respect to purchase of the Chesapeake shares in the tender offer and
the merger with the Antitrust Division and the FTC on or about November 20,
2000, or as soon as possible. The waiting period applicable to the transaction
would expire at 11:59 p.m., New York City time, on or about December 8, 2000,
unless the initial waiting period expires or early termination of the waiting
period is granted or AC Acquisition receives a request for additional
information prior to that date. AC Acquisition and Chesapeake have indicated
that each company may request early termination of the waiting period. We cannot
assure you, however, that the waiting period will be terminated early.
Short Form Merger. Section 3-106 of the Maryland General Corporation Law
provides that, if a parent corporation owns at least 90% of a subsidiary
corporation, the merger of the subsidiary corporation into the parent
corporation may be effected by a plan of merger adopted by the board of
directors of the parent corporation and completion of the appropriate filings
with the Maryland State Department of Assessments and Taxation. Under the
Maryland law, if AC Acquisition acquires shares of stock of Chesapeake entitled
to cast at least 90% of the votes cast on a merger, AC Acquisition will be able
to effect the merger without a vote of the other stockholders of Chesapeake. If
AC Acquisition receives a majority of the outstanding shares of Chesapeake
(treating the series A-1 convertible preferred stock as converted) in the tender
offer, AC Acquisition will be entitled to exercise the option granted to it on
October 30, 2000 to purchase up to 50,000 shares of series B preferred stock.
Each share of series B preferred stock will be able to cast a number of votes
equivalent to 1,000 shares of common stock. The option agreement is filed as
Exhibit C to AC Acquisition's Schedule 13D filed on November 9, 2000 and is
incorporated herein by reference. In the merger agreement, Chesapeake agreed to
take, at the request of AC Acquisition, all necessary and appropriate action to
cause the merger to become effective, as soon as practicable after such
acquisition, without a meeting of the Chesapeake stockholders.
Dissenters' Rights Of Appraisal. Under Maryland law, stockholders do not
have dissenter's rights of appraisal as a result of a merger if their shares are
publicly traded on either the record date for the stockholders' meeting on the
merger or, if a corporation is at least 90% owned by another corporation, on the
date notice of the merger is given to the stockholders. We expect to satisfy at
least one of these two requirements, which means that no stockholders of
Chesapeake will have appraisal rights in connection with the merger.
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ITEM 9. EXHIBITS.
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<CAPTION>
EXHIBIT NO. DESCRIPTION
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(a)(1) Letter to Chesapeake shareholders dated November 17, 2000 (included with this
Recommendation Statement).
(a)(2) Opinion of Arnhold and S. Bleichroeder, Inc., dated October 22, 2000 (included
as Annex A hereto).
(a)(3) Press Release issued by Chesapeake Biological Laboratories, Inc. and Cangene
Corporation (incorporated by reference to press release under cover of Schedule
TO filed by AC Acquisition Subsidiary, Inc. on October 31, 2000).
(e)(1) Merger Agreement, dated as of October 31, 2000, among Cangene Corporation,
Chesapeake Biological Laboratories, Inc. and AC Acquisition Subsidiary, Inc.
(incorporated by reference to Exhibit A to Schedule 13D filed by AC
Acquisition Subsidiary, Inc. on November 9, 2000).
(e)(2) Option Agreement, dated as of October 30, 2000, between Chesapeake
Biological Laboratories, Inc. and AC Acquisition Subsidiary, Inc. (incorporated by
reference to Exhibit C to Schedule 13D filed by AC Acquisition Subsidiary, Inc. on
November 9, 2000)
(e)(3) Stockholders Agreement, dated as of October 30, 2000, among Chesapeake
Biological Laboratories, Inc. AC Acquisition Subsidiary, Inc. and the Stockholders named
therein (incorporated by reference to Exhibit B to Schedule 13D filed by AC
Acquisition Subsidiary, Inc. on November 9, 2000).
(e)(6) Employment Agreement, dated as of October 30, 2000, between Chesapeake
Biological Laboratories, Inc. and Thomas Rice (incorporated by reference to Exhibit
(d)(5) of the Schedule TO of AC Acquisition Subsidiary, Inc. filed on November 17,
2000).
(e)(9) Employment Agreement, dated as of October 30, 2000, between Chesapeake
Biological Laboratories, Inc. and John Botek (incorporated by reference to Exhibit
(d)(6) of the Schedule TO of AC Acquisition Subsidiary, Inc. filed on November 17,
2000).
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SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
CHESAPEAKE BIOLOGICAL LABORATORIES, INC.
By: /s/ Thomas P. Rice
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Name: Thomas P. Rice
Title: President and Chief Executive
Officer
Date: November 17, 2000
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