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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NO. 0-19659
CHRYSALIS INTERNATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2877973
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
575 ROUTE 28, RARITAN, NEW JERSEY 08869
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (908) 722-7900
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE ("COMMON STOCK")
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
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
REQUIREMENT FOR THE PAST 90 DAYS. YES |X| NO |_|
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. |_|
THE AGGREGATE MARKET VALUE OF COMMON STOCK HELD BY NON-AFFILIATES AS OF
MARCH 20, 1998 AT A CLOSING PRICE OF $2.75 PER SHARE AS REPORTED BY THE NASDAQ
NATIONAL MARKET WAS APPROXIMATELY $24,295,552.
THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 20, 1998
WAS 11,430,764.
DOCUMENTS INCORPORATED BY REFERENCE
(a) THE COMPANY'S PROXY STATEMENT FOR ITS 1998 ANNUAL MEETING OF
STOCKHOLDERS IS INCORPORATED HEREIN BY REFERENCE IN PART III OF THIS
ANNUAL REPORT ON FORM 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Chrysalis International Corporation, a Delaware corporation (the
"Company" or "Chrysalis"), incorporated in 1988, is an international contract
research organization ("CRO") providing a broad range of integrated drug
development services primarily to the pharmaceutical and biotechnology
industries. This broad portfolio of drug development services includes
transgenic discovery research, preclinical development and clinical capabilities
that enable the Company to manage a comprehensive drug development program or a
client's specific requirements. The Company utilizes its international expertise
and experience in preclinical and clinical services to provide a coordinated
approach for a client to transition its drug through various preclinical to
clinical stages of development thereby minimizing certain delays which typically
occur before a new drug is introduced to the market. In addition, the Company is
the only CRO that is currently able to use its proprietary transgenic and
licensed gene targeting technology to provide services for its clients that
require transgenic animal models in order to determine the function of human
genes and identify therapeutic targets implicated in disease and for the
evaluation of therapeutic lead compounds for further development. The Company
generates substantially all of its revenues from its drug development services
and provides services for more than 250 clients in 26 countries.
On March 16, 1998, the Company issued a $5.0 million subordinated
debenture to a wholly-owned subsidiary of MDS Inc., a Canadian corporation
("MDS"). As part of this transaction, the Company also issued a warrant to
purchase 2,000,000 shares of Common Stock for $2.50 per share. In addition, the
Company and MDS entered into a standstill agreement which, among other things,
governs the ownership and acquisition of securities of the Company by MDS and
its affiliates. As a part of this transaction, MDS and the Company will explore
opportunities to pursue strategic alliances and other business opportunities
with respect to their respective operations.
On December 18, 1996, the Company issued 2,632,600 shares of Common
Stock in connection with the acquisition (the "Acquisition") by the Company of
all of the outstanding capital stock of, or equity interests in, BioClin, Inc.,
a Delaware corporation, BioClin Europe AG, a Swiss corporation, BioClin GmbH, a
German corporation, Kilmer N.V., a Netherlands Antilles corporation, and BioClin
Institute of Clinical Pharmacology GmbH, a German corporation (collectively, the
"BioClin Group"). The Acquisition was recorded using the "pooling-of-interests"
method of accounting.
Chrysalis is also the exclusive commercial licensee of a U.S. patent
covering DNA microinjection ("DNA Microinjection"), the process widely used in
the pharmaceutical and biotechnology industries to develop transgenic animal
models. The Company employs this process for its transgenic research and drug
discovery services and grants several types of sublicenses for the use of this
technology by commercial firms and academia. These sublicenses entitle the
Company to receive revenues consisting of fees and, in certain cases, royalties.
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NEW DRUG DEVELOPMENT PROCESS OVERVIEW
Drug development is an expensive and lengthy process. Before a new drug
can be marketed, it must undergo extensive testing and regulatory review to
determine its safety and efficacy. This process consists of many stages -- two
of the most critical being preclinical and clinical testing. In preclinical
testing, the sponsor of the new drug conducts laboratory analyses and animal
tests to determine the basic biological activity and safety of the drug. After
successfully completing the preclinical phase, the drug undergoes a series of
clinical tests in humans, typically progressing from dosing studies in healthy
volunteers to testing in patients with the targeted disease. The information
generated during these trials is critical for gaining marketing approval from
the United States Food and Drug Administration (the "FDA") or other regulatory
agencies. In the United States, preclinical and clinical testing must comply
with the requirements of Good Laboratory Practices ("GLP") and Good Clinical
Practices ("GCP") and other standards promulgated by the FDA and other federal
and state governmental authorities.
The FDA pioneered the use of clinical trials for new drug development,
and the agency's approval process has shaped much of drug regulation worldwide.
In recent years, the FDA and corresponding regulatory agencies of the major
industrial countries, including Canada, Japan and the European Union (the "EU"),
commenced discussions to develop common standards for both the conduct of
preclinical and clinical studies and the format and content of applications for
new drug approvals. Data from multi-national studies adhering to GCP are now
generally acceptable to the FDA and the governments within the EU.
In the United States, a drug sponsor must file an Investigational New
Drug Application (the "IND") with the FDA before the commencement of human
testing of a drug. The IND includes preclinical testing results and sets forth
the sponsor's plans for conducting human clinical trials. The design of these
plans, known as the study protocol, is critical to the success of the drug
development effort because the protocol must correctly anticipate the data and
results that the FDA will require before approving the drug.
Extensive preclinical testing, involving pharmacology and toxicology
studies, is required before a drug developer may obtain permission to conduct
safety and efficacy testing in humans. In efficacy studies, drug candidates are
evaluated by administering them to animal models that simulate human disease
conditions. Such screens are used primarily by pharmaceutical and biotechnology
companies. In toxicology studies, drug candidates are tested in normal, healthy
animals to determine their potential toxicity to humans. In addition, new
industrial and agricultural chemicals often require extensive toxicology testing
before they may be sold. Consequently, toxicology tests are used not only by
developers of new drugs, but also by developers of other chemical products.
Human trials usually start on a small scale to assess safety and then
expand to test efficacy. Trials are usually grouped into four phases, with
multiple trials generally conducted within each phase. Clinical trials often
represent the most expensive and time-consuming part of the overall drug
development process. The information generated during these trials is critical
for gaining marketing approval from the FDA or other regulatory agencies.
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Phase I. Phase I trials are conducted on healthy volunteers, typically
20 to 80 persons, to develop basic safety data relating to toxicity, metabolism,
absorption, elimination and other pharmacological actions.
Phase II. Phase II trials are conducted on a small number of subjects,
typically 100 to 200 patients, who suffer from the drug's targeted disease or
condition. Phase II trials offer the first evidence of clinical efficacy, as
well as additional safety data.
Phase III. Phase III trials are conducted on a significantly larger
population of several hundred to several thousand patients who suffer from the
targeted disease or condition. Phase III trials are designed to measure efficacy
on a large scale as well as long-term side effects.
Phase IV. As a condition of granting marketing approval, the FDA may
require that a sponsor continue to conduct additional clinical trials, known as
Phase IV trials, to monitor long-term risks and benefits, study different dosage
levels, or evaluate different safety and efficacy parameters in target patient
populations. With the increasing importance of Phase IV trials also comes
increased complexity in the scope of the trials (i.e., the number of patients
tested) and the manner in which they are conducted (i.e., the number of sites at
which testing is performed).
After the successful completion of Phase III trials, the sponsor of a
new drug may submit a New Drug Application ("NDA") to the FDA. The NDA is a
comprehensive filing 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. Most of the
clinical data contained in an NDA is generated during the Phase II and III
trials. Drugs that successfully complete FDA review may be marketed in the
United States, subject to the conditions imposed by the FDA in its approval.
INDUSTRY OVERVIEW
The CRO industry provides independent product development services
primarily for the pharmaceutical and biotechnology industries. Companies in
these industries outsource product development services to CROs in order to
manage the drug development process more efficiently and cost-effectively to
maximize the benefits in time and profit of patent-protected products. CROs
derive substantially all of their revenue from the research and development
expenditures of pharmaceutical and biotechnology companies. The CRO industry has
evolved from providing primarily preclinical services in the 1970s to a full
service industry offering virtually all preclinical and clinical services
required for development of new drugs. In addition to managing preclinical and
clinical studies, CROs may also provide scientific results analysis and
reporting according to good clinical and laboratory practices as required by
applicable regulatory authorities.
The CRO industry is highly fragmented, including several hundred small,
limited-service providers and a few large, full service CROs with global
capabilities. Although there are few barriers to entry for small,
limited-service providers, the Company believes there are significant barriers
to becoming a full service CRO with global capabilities. Some of these barriers
include the infrastructure necessary to serve the global needs of clients, the
high fixed personnel costs required to develop broad therapeutic capabilities,
the expertise and facilities
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necessary to provide both general and specialty preclinical and clinical
services, the ability to access investigators and specific patient populations
in sufficient numbers, and the need for sophisticated management information
systems, expertise and technology to manage complex clinical trials.
As a result of competitive pressures and economies of scale, the CRO
industry is consolidating. Mergers and acquisitions have resulted in the
emergence of a few full service CROs with the international human, technical and
financial resources to conduct the full range of preclinical and clinical drug
development trials on behalf of pharmaceutical and biotechnology companies. The
Company believes that industry trends favor those CROs able to provide a full
range of services in the top drug development markets around the world.
TRENDS AFFECTING THE CRO INDUSTRY
The Company believes that certain industry trends will continue to
increase the need for pharmaceutical and biotechnology companies to outsource
their drug development requirements. These trends include:
(i) Cost Containment Pressures. The desire of many pharmaceutical
companies to respond to cost containment pressures and reduce the high fixed
costs associated with drug development by relying on the combination of internal
resources and CROs.
(ii) Market Globalization. The attempt by pharmaceutical and
biotechnology companies to outsource drug development to CROs with global
capabilities to maximize worldwide sales and profits from a given drug by
pursuing regulatory approvals in multiple countries simultaneously.
(iii) Maturation of the Biotechnology Industry. The maturation of
the biotechnology industry and the resulting increase in the demand for
expertise and services provided by outside sources, including CROs.
(iv) Need for Faster Drug Development. The desire by pharmaceutical
and biotechnology companies to reduce the time required to develop and bring a
new drug to market by outsourcing preclinical studies and clinical trials to
CROs that provide a full range of services.
(v) Increasingly Stringent Regulation. Increasingly complex and
stringent regulatory requirements on a global basis, together with recent
efforts to develop globally harmonized regulatory standards, escalate the
demands on data collection, analysis, and reporting which prompts outsourcing to
CROs with global data management expertise and capability.
(vi) Therapeutic Focus on Chronic Diseases. The escalation of
worldwide research and development expenditures for new drugs, including amounts
spent on services of the type provided by CROs, stemming from pressures to
develop new drugs for the treatment of chronic disorders and life-threatening
diseases.
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(vii) Need to Focus Internal Resources. The efforts by
pharmaceutical companies to reserve their internal resources for the development
of new drugs by using CROs to manage and conduct preclinical studies and
clinical trials.
(viii) Growing Interest in Genomics. The growth by pharmaceutical and
biotechnology companies in the area of genomics research in order to determine
the function of human genes and identify gene targets implicated in disease.
In response to these trends, the CRO industry has begun to experience
consolidation, including the formation of strategic alliances. Pharmaceutical
companies have begun to utilize a smaller pool of CROs and have sought to
transform their contractual relationships with CROs from "vendor" to "strategic
partner." Biotechnology companies have also begun to take a more global,
long-term perspective on their CRO contracting activities.
BUSINESS STRATEGY
The Company follows a strategy to focus on these industry trends. The
primary components of this strategy include: (i) the utilization of a broad
range of services enabling clients to use the preclinical and/or clinical drug
development services provided by the Company on an international basis; (ii) a
coordinated approach for a client to transition its drug through various
preclinical to clinical stages of development thereby minimizing certain delays
which typically occur before a new drug is introduced to the market; (iii) the
use of transgenic and preclinical services to establish early relationships with
clients and the leveraging of its existing transgenic and preclinical client
base to utilize the Company's broad range of drug development services, in
particular, drug development services relating to Phase I through Phase IV
trials; (iv) the utilization of transgenic animal technology to provide services
to biotechnology and pharmaceutical companies of the genomics industry; (v) the
expansion, through selective strategic alliances and/or acquisitions or through
internal growth, into new geographic areas and new areas of therapeutic
specialization and into complementary businesses; (vi) the continued investment
of resources in the Company's specialty preclinical services such as continuous
infusion techniques and transgenic technology for functional genomics research;
and (vii) the continuation of investment in and utilization of information and
data management technology.
SERVICES
The Company provides a broad portfolio of drug development services.
The major categories of services offered by the Company are as follows:
TRANSGENIC SERVICES.
The Company has observed an acceptance by the pharmaceutical and
biotechnology industries in the use of transgenic laboratory animal model
technology as a tool to improve drug discovery programs. This acceptance,
together with the Company's scientific experience, its proprietary DNA
Microinjection technology and its gene targeting commercial research license,
provides the Company with the opportunity to offer its portfolio of specialty
transgenic-based contract research services for those companies electing to
outsource all or a portion of their transgenic animal model needs. These
transgenic-based specialty contract
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research services include gene function assessment, custom model development
programs, molecular biology services and other related services.
In the area of genomics research, the Company's transgenic animal
technology is being used to determine the functions of human genes and to
identify human gene targets implicated in disease. Transgenic animal technology
provides for the genetic manipulation of animals, allowing for the production of
animals that more accurately reflect human biochemistry, physiology and
pathology. Coupled with the identification of new genes, resulting from
worldwide efforts to map and sequence the human genome, transgenic animal
technology allows for the generation of new laboratory animals with specifically
engineered genetic traits. These new animals will facilitate the understanding
of the molecular basis of disease progression which may lead to the
identification of new pharmacological approaches and improved animal models for
evaluating new pharmaceutical therapies. By identifying more specific
pharmaceutical targets and providing more informative preclinical data on
experimental compounds, these genetically modified animals may have the
potential to reduce the time to bring new pharmaceutical therapies to market.
PRECLINICAL SERVICES.
The Company believes it offers clients, on an international basis, a
broad range of preclinical drug development services and can provide a majority
of the preclinical testing requirements necessary to secure FDA (U.S.), EC
(Europe) and MHW (Japan) approval to initiate human clinical trials. The Company
provides the following preclinical drug development services:
Toxicology. Toxicology studies are designed to identify and evaluate
any harmful effects that pharmaceuticals or chemicals might cause to humans.
These studies are required in connection with the FDA approval process. The
Company provides the following toxicology testing services: mutagenesis/genetic
toxicology; teratology; reproduction/fertility; immunotoxicology; continuous
infusion; carcinogenesis; and acute, sub-acute and chronic evaluations. The
Company believes it has a recognized specialty expertise in continuous infusion
administration techniques and immunotoxicology.
Pharmacology. Pharmacology studies are designed to quantify the
properties and reactions of drugs primarily in relation to their therapeutic
value. The Company provides testing in the following therapeutic areas: central
nervous system; cardiovascular; pulmonary; anti-inflammatory; gastrointestinal;
cardiopulmonary; and analgesia. In addition, the Company provides safety
pharmacology studies, which include the evaluation of possible effects on the
central nervous system, cardiovascular, gastrointestinal, pulmonary and renal
function as well as adverse interaction with drugs likely to be co-administered
with the development candidate.
Pharmacokinetics. Pharmacokinetic studies are designed to characterize
the time course of drug absorption, distribution, metabolism and excretion and
relate these processes to the intensity and time course of pharmacological and
toxicological effects of drugs.
Immunology. Immunology studies are designed to evaluate and test the
immunoregulatory potential of substances.
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CLINICAL SERVICES.
The Company's clinical services include clinical trial management
services, clinical data management and biostatistical services, and product
registration and regulatory services. These services can be provided separately
or as an integrated package. Services from each of these categories can be
utilized for the development and execution of an NDA.
Clinical Trial Management Services. The Company offers complete
services for the design, placement, performance and management of clinical trial
programs, critical elements in obtaining regulatory approval for drugs. The
Company has performed services in connection with trials in many therapeutic
areas. The Company's multi-disciplinary clinical trials group has the ability to
examine a product's existing preclinical and clinical data for the purposes of
designing protocols for clinical trials in order to ascertain evidence of the
product's safety and efficacy.
The Company's services include management of Phase I through IV trials,
including design of operations manuals, identification and recruitment of trial
investigators, initiation of sites, monitoring for strict adherence to GCP, site
visits to ensure compliance with protocol procedures and proper collection of
data, interpretation of trial results and report preparation. Many of the
Company's current projects involve Phase II, III or IV clinical trials, which,
in most cases, are significantly larger and more complex than Phase I trials.
Phase I Services. The Company provides a number of specialized Phase I
services. They include: computerized volunteer databases; a clinical
pharmacology unit; access to special populations; vital signs; telemetry; and
statistical evaluation. Phase I trials are conducted on healthy volunteers,
typically 20 to 80 persons, to develop basic safety data relating to toxicity,
metabolism, absorption, elimination and other pharmacological actions.
Tolerability pharmacokinetic and pharmacodynamic investigations and
drug-drug interaction studies can be performed in young and elderly healthy
volunteers, as well as in special populations, including patients with renal or
hepatic impairment. The Company has access to a large population of suitable and
reliable volunteers, and, since its opening, has built up an active panel of
approximately 2,000 volunteers which is continually reviewed and expanded.
The Company's Phase I capability complements its European and North
American clinical operations for Phase II to IV trials. This network of clinical
facilities allows parallel, worldwide development of pharmaceutical products.
Phase II -- Phase IV Services. The Company provides Phase II through
Phase IV services, including efficacy testing, additional safety data, long-term
risks and side effects and other matters. The Company maintains a network of
physicians who serve as investigators, hospitals and university centers for in-
and outpatient studies, established research sites performing special
investigations and a selection of centralized laboratories in each country
across Europe, Israel, and North America. In connection with Phase II through
Phase IV services, the Company provides project management, traditional
monitoring or monitoring by fax or remote/direct data entry and data management.
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One recent development in the CRO industry is the emergence of trials
involving tests on over 1,000 patients over a period of several years at
multiple sites. These large multiple site trials have resulted from the drug
companies' emphasis on treating and curing chronic disorders and the resulting
need to thoroughly test large numbers of patients for long-term side effects of
new drugs. The Company is able to conduct large multiple site trials and
actively markets its capabilities in this area.
Monitoring for Strict Adherence to GCP. Efficient data collection, form
design, detailed operations manuals and site visits by the Company's clinical
research associates ("CRAs") are utilized to determine whether clinical
investigators and their staff follow established protocols and accurately record
the findings of the trials. In addition, the Company has quality assurance
auditors that provide additional internal and external auditing.
In connection with its services, the Company assists clients with one
or more of the following:
(i) Study Protocol. The protocol defines the medical issues the
study seeks to examine and the statistical tests to be conducted such as the
frequency and type of laboratory and clinical measures that are to be tracked
and analyzed, the number of patients required to produce a statistically valid
result, the period of time over which they must be tracked and the frequency and
dosage of drug administration.
(ii) Case Report Forms. Once the study protocol has been finalized,
special forms for recording the required information must be developed. These
forms are called Case Report Forms ("CRFs").
(iii) Site and Investigator Recruitment. The drug is administered to
patients under the supervision of physicians who serve as investigators, at
hospitals, clinics or other locations, referred to as sites. Potential
investigators may be identified by the drug sponsor or the Company, which then
solicits the investigators' participation in the study. Generally, the
investigators contract directly with the Company. The trial's success depends on
the successful identification and recruitment of investigators with proper
expertise and an adequate base of patients who satisfy the requirements of the
study protocol. The Company maintains a network of investigators who have
conducted clinical trials.
(iv) Patient Recruitment and Enrollment. The Company recruits Phase
I volunteers and maintains a database of such volunteers. The investigators,
however, find and enroll patients suitable for the Phase II through IV trials
according to the study protocol. Prospective patients are required to review
information about the drug and its possible side effects and sign an informed
consent to record their knowledge and acceptance of potential side effects.
Patients also undergo a medical examination to determine whether they meet the
requirements of the study protocol. Patients then receive the drug and are
examined by the investigator as specified by the study protocol.
(v) Study Monitoring and Data Collection. As patients are examined
and tests are conducted in accordance with the study protocol, data are recorded
on CRFs and laboratory reports. The data are collected from study sites by CRAs.
CRAs visit sites regularly to ensure
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that the CRFs are completed correctly and that all data specified in the
protocol are collected. CRFs are reviewed for consistency and accuracy before
their data are entered into an electronic database.
(vi) Medical Affairs. Throughout the course of a clinical trial,
the Company may provide various medical research and services, including medical
monitoring of clinical trials, interpretation of clinical trial results and
preparation of clinical study reports.
(vii) Report Writing. The results of statistical analysis of data
collected during the trial, together with other clinical data, are included in a
final report generated for inclusion in a regulatory document.
(viii) Information Technology. A fully networked information system
is available to facilitate complete computerized data management of Phase I
through Phase IV trials. Data capture for Phase I is maintained by direct CRF
"bedside" entry of primary data and the creation of the electronic CRF. Data
collected in CRFs is entered into the study database within 72 hours of
collection. Laboratory data is on-line for review by physicians and project
managers.
For Phase II through Phase IV trials, monitored CRF pages are forwarded
to the Company's two data management centers (Dusseldorf, Germany and Austin,
Texas) for double data entry. Query lists are generated and returned to the
monitors for resolution. Alternatively, the Company offers the Almedica Fax
Monitoring(TM) system whereby completed CRF pages are transmitted from the sites
directly to either of the Company's two data management centers.
Clinical Data Management and Biostatistical Services. The Company has
experience in the creation of scientific databases for all phases of the drug
development process. These databases provide clients with data abstraction, data
review and coding, data verification and editing and problem data resolution
capabilities. The Company utilizes an imaging technology process which
eliminates time and minimizes potential data entry errors by electronically
routing, tracking and querying optically scanned CRFs. The Company's data
management professionals assist in the design and development of study protocols
and CRFs, training manuals and training sessions for investigators and
coordinators.
The Company's biostatistics professionals provide biostatistical
consulting, database design, data analysis and statistical reporting. The
Company's biostatisticians provide clients with assistance in all phases of drug
development. These professionals develop and review protocols, design
appropriate analysis plans and design report formats to address the objectives
of the study protocol, as well as the client's individual objectives.
The Company believes that its data management and biostatistical
services capabilities can be utilized by a client more effectively when packaged
as part of its total clinical trials management services in the conduct of Phase
I through Phase IV trials. This packaging permits a faster and less costly
clinical trial process, as the data are collected and analyzed more rapidly and
the decision to move to the next phase can be made more quickly. Although the
Company believes that many pharmaceutical companies treat each phase as a
distinct trial, the Company emphasizes this packaged approach as an integrated
process.
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Product Registration Services/Regulatory Affairs. The pharmaceutical
companies, who are clients of the Company, have their own regulatory expertise
and generally register their products without the assistance of third parties.
In connection with its Phase I through Phase IV services to these pharmaceutical
companies, the Company provides regulatory strategy formulation, consultation
and, if requested, acts as a liaison with the FDA and other international
regulatory agencies.
The Company intends to market its clinical testing services to
biotechnology companies which may not have experience or expertise in regulatory
and product registration matters. As part of its clinical trial services, the
Company offers these clients comprehensive product registration services,
document preparation, regulatory strategy formulation and compliance, and may
act as liaison with the FDA and other international regulatory agencies.
Although to date the revenues from these services to biotechnology
companies have not been material, the Company believes it necessary to offer
these services to be competitive in the CRO industry. As a result, the Company's
regulatory affairs professionals review existing published literature, assess
the scientific background of a product, assess the competitive and regulatory
environment, identify deficiencies and define the steps necessary to obtain
registration in the most expeditious manner. Through this service, the Company
may assist its clients to determine the feasibility of developing a particular
product or product line.
The Company's regulatory affairs professionals have experience in the
analysis, preparation and submission of FDA regulatory documents covering a wide
range of products, including prescription and over-the-counter drugs. The
Company also has experience with preparing regulatory documentation for
submission to European regulatory authorities.
MARKETING
The majority of new studies conducted by the Company are derived from
existing clients. To obtain new clients, the Company contacts potential clients
directly through its marketing and sales representatives and its senior business
management, participates in various scientific association and/or business
symposia, and indirectly via such media as scientific and trade journal
advertising, brochures, and direct mailings. Further, the Company's sales and
marketing representatives target the promotion efforts to potentially new
clients who are not familiar with the Company's services, as well as to the
expansion of services for existing clients. In addition, the Company's
scientific personnel participate in a variety of business/scientifically
oriented endeavors such as publishing scientific papers and making presentations
at scientific meetings. The Company also participates in, and advertises at,
commercial conferences. Further, the Company also attends and provides exhibits
at selected industry trade shows in the United States and Europe.
The Company currently coordinates its marketing efforts for its broad
range of services through a central business development function, which
includes the involvement of senior operational and scientific personnel in this
effort. The Company's marketing personnel seek new clients, seek contracts with
new therapeutic areas or divisions with existing clients, cross-sell other
services to existing clients and develop strategic alliances with major
pharmaceutical and biotechnology companies.
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CONTRACTUAL ARRANGEMENTS
Most of the Company's contracts are fixed priced contracts that require
a portion of the contract amount to be paid at or near the time the trial is
initiated. The Company generally bills its clients upon the completion of
negotiated performance requirements and, to a lesser extent, on a date certain
basis. Most of the Company's contracts are subject to cost limitations which
cannot be exceeded without client approval. Because, in many cases, the Company
bears the risk of cost overruns, unbudgeted costs in connection with performing
these contracts may have a detrimental effect on the financial results of the
Company. If it is determined that a loss will result from the performance of a
contract, the entire amount of the estimated loss is charged against income in
the period in which the determination is made.
The Company's contracts generally may be terminated with or without
cause. In the event of termination, the Company is typically entitled to all
sums owed for work performed through the notice of termination and all costs
associated with termination of the study. Once a trial has been commenced,
change orders may be requested by clients based on the results of the trial to
date, including changes in the scope of the trial and in the services to be
provided by the Company. Accordingly, compensation under a contract may increase
or decrease during the duration of a contract. The loss of a large contract or
the loss of multiple contracts, however, could adversely affect the Company's
future revenues and profitability. In addition, termination or delay in the
performance of a contract occurs for various reasons, including, but not limited
to, unexpected or undesired results, including unexpected or undesired results
from other studies not conducted by the Company, inadequate patient enrollment
or investigator recruitment, production problems resulting in shortages of the
drug being tested, adverse patient reactions to the drug being tested, or the
client's decision to de-emphasize a particular trial. The Company's service
contracts contain certain provisions designed to address the negative impact on
the Company's revenues and profitability as a result of non-controllable delays.
These provisions, however, may not be included in all of the Company's service
contracts. In any event, the Company attempts to negotiate reimbursement of
certain fees whether or not such provisions are included in the service
contract. The Company is not always successful in negotiating such
reimbursement. The delay of a large clinical trial, or multiple trials, could
adversely affect the Company's future revenues and profitability.
CUSTOMERS
The Company has in the past derived, and may in the future derive, a
significant portion of its net service revenue from a relatively limited number
of major projects or clients. Concentrations of business in the CRO industry are
not uncommon and are increasing as large pharmaceutical and biotechnology
companies are outsourcing larger clinical trials and large multiple site trials
to fewer full service CROs. For the year ended December 31, 1997, the Company's
top five customers accounted for approximately 38% of the Company's combined net
service revenue. One customer of the Company, a large international
pharmaceutical company with revenues in excess of $10 billion, accounted for
approximately 23% of net service revenues for the year ended December 31, 1997.
The Company believes that the loss of any of these customers, if not replaced or
if services provided to existing customers are not expanded, may have a material
adverse effect on the Company. There can be no assurance that the loss of any
such customers would be replaced or services to existing customers would be
expanded on terms acceptable to the Company.
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<PAGE> 13
BACKLOG
The Company reports backlog based on anticipated net revenues from
uncompleted projects which have been authorized by the client, through a written
contract or otherwise. Once work under a letter of intent or contract commences,
net service revenue is recognized over the life of the contract using the
percentage-of-completion method of accounting. In certain cases, the Company
will commence work on a project prior to finalizing a letter of intent or
contract. Contracts included in backlog are subject to termination or delay at
any time by the client or regulatory authorities. Termination or delays can
result from a number of factors, many of which are beyond the Company's control.
Delayed contracts remain in the Company's backlog pending determination of
whether to continue, modify or cancel the contract.
The Company believes that its backlog as of any date is not necessarily
a meaningful indicator of future results and no assurance can be given that the
Company will be able to realize net service revenue included in backlog. As of
December 31, 1997, the Company's backlog was approximately $41 million compared
to approximately $25 million at December 31, 1996. One contract with Company's
largest client, which is currently delayed, accounted for approximately 60% of
the backlog at December 31, 1997. The Company anticipates that approximately 40%
of the December 31, 1997 backlog will be realized after December 31, 1998.
COMPETITION
The Company competes primarily against pharmaceutical companies' own
in-house research departments, other CROs and universities and teaching
hospitals. The CRO industry includes several hundred small, limited-service
providers, several medium-sized CROs, and a few full service global drug
development companies. The CRO industry is consolidating and, in recent years,
several large, full service competitors have emerged. This trend of industry
consolidation may result in greater competition among the larger CROs for
clients and possible candidates for further consolidation for these larger CROs.
Such large, full service competitors may have substantially greater capital,
technical and other resources, may be better known, and may have more
experienced personnel than the Company. The Company's major competitors include:
Covance, Inc.; Parexel International Corporation; Quintiles Transnational
Corporation; ClinTrials Research Inc.; Pharmaceutical Products Development
Corporation; Huntington Life Sciences Ltd.; Kendle International, Inc.; Phoenix
International Life Sciences, Inc.; and IBAH, Inc.
CROs generally compete on the basis of previous experience, medical and
scientific expertise in specific therapeutic areas, specialty preclinical
capabilities, the quality of contract research, the ability to organize and
manage large-scale trials on a global basis, the ability to manage large and
complex medical databases, the ability to provide statistical and regulatory
services, the ability to recruit investigators, the ability to integrate
information technology with systems to improve the efficiency of contract
research, an international presence with strategically located facilities,
financial viability, and, in certain markets, price is a significant factor.
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<PAGE> 14
MICROINJECTION PATENT LICENSING
The Company possesses an exclusive license to a U.S. patent awarded to
Ohio University, covering DNA Microinjection, which is utilized in providing its
specialty transgenic-based services.
The Company grants sublicenses of its proprietary DNA Microinjection
technology, the process widely used in the pharmaceutical and biotechnology
industries to develop transgenic animals. These sublicenses entitle the Company
to receive revenues consisting of fees and, in certain cases, royalties.
While the Company has retained the exclusive rights to use DNA
Microinjection for its drug development services, it has granted several
non-exclusive sublicenses for the use of DNA Microinjection in a variety of
applications, including the development, use and sale of other commercial
transgenic animal-based products and transgenic animal models. In those certain
instances where the Company grants a sublicense for commercial applications,
such as the use of a transgenic animal to produce therapeutic proteins, the
Company receives an annual license fee and revenue based royalties upon
commercialization of the transgenic animal-based products and services. In the
case of sublicenses for noncommercial applications, such as the use of
transgenic technology for basic in-house research purposes, the Company
generally receives an annual license fee. The Company will continue to license
this technology for the development of transgenic animals and transgenic animal
derived products which do not conflict with the specialty transgenic animal
services offered by the Company.
GOVERNMENT REGULATION
The Company's operations are subject to numerous regulatory
requirements designed to assure the quality and integrity of its drug
development services. In recent years, these regulations have become more
numerous and stringent, reflecting an increased public concern about the dangers
of potentially toxic drugs, chemicals and other substances. To the extent that
the following information describes statutory or regulatory provisions, it is
qualified in its entirety by reference to the particular statutory and
regulatory provisions currently in effect. Any change in applicable law or
regulation may have a material effect on the business and prospects of the
Company.
The industry standard for conducting biological testing is embodied in
regulations called "Good Laboratory Practices." GLP has been adopted by the
Environmental Protection Agency ("EPA") and the FDA in the United States and the
Minister des Affaires Sociales et de la Solidarite Nationale in France. GLP
stipulates requirements for facilities, equipment and professional staff. The
regulations mandate standardized procedures for controlling studies, for
recording and reporting data and for retaining appropriate records. The EPA, FDA
and any other governmental agency with the authority to control marketing
approval for new products can reject test results if they do not comply with
GLP. The Company monitors ongoing compliance with GLP standards. Additionally,
Organization of Economic Cooperation and Development ("OECD") member countries
(including France) must adopt GLP principles laid down by the OECD as indicated
in Directive 87/18/EEC.
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<PAGE> 15
In addition, the Company is subject to scrutiny by many regulators
regarding its laboratories and materials. On the federal level in the United
States, the Company is regulated by the Department of Transportation,
Occupational Safety and Health Administration, Nuclear Regulatory Commission and
the Drug Enforcement Administration. At the state level, the Company is
monitored by the Commonwealth of Pennsylvania Department of Labor and Industry
and the Pennsylvania Department of Environmental Resources. In addition, certain
of the Company's European operations are subject to certain regulations in
France similar to the aforementioned federal and state regulations.
In addition to the regulatory framework and GLP standards for
preclinical drug development services, the Company is and may be subject to
regulation under federal, state and foreign law, including requirements
regarding occupational safety, laboratory practices, the care and use of animals
in experimentation and testing, the use, handling and disposition of radioactive
materials, environmental protection and hazardous substance control, and may be
subject to other present and future local, state, federal and foreign
regulation, including future regulation of the preclinical drug development
industry, the biotechnology field and the biological testing industry.
The clinical services provided by the Company are ultimately subject to
FDA regulation in the United States and comparable agencies in other countries,
although the level of applicable regulation in other countries is generally less
comprehensive than regulation present in the United States. The industry
standard for conducting clinical research and development studies is embodied in
regulations and guidelines called "Good Clinical Practices." Although the FDA
has not formally adopted a single GCP guideline, certain provisions of GCP have
been included in FDA regulations. In Europe, all work is carried out in
accordance with the EU Note For Guidance, "Good Clinical Practice for Trials on
Medicinal Products in the European Community." As a matter of practice, the FDA
and many other regulatory authorities require that test results submitted to
such authorities be based on studies conducted in accordance with GCP. These
regulations include: (i) complying with FDA regulations governing the selection
of qualified investigators; (ii) obtaining specific written commitments from the
investigators; (iii) verifying that the patient's informed consent is obtained;
(iv) monitoring the validity and accuracy of data; (v) verifying drug or device
accountability; and (vi) instructing investigators to maintain records and
reports. The Company must also maintain reports for each study for specified
periods for inspection by the study sponsor and the FDA and other applicable
regulatory authorities during audits. Non-compliance with GCP can result in the
disqualification of data collected during the clinical trial.
The Company's standard operating procedures are written in accordance
with regulations and guidelines appropriate to the region where they will be
used. FDA regulations and guidelines serve as a basis for the North American
standard operating procedures. The Company has developed operating procedures in
accordance with local requirements and in harmony with the North American and
European operations. The Company has implemented common standard operating
procedures across geographic regions to assure consistency whenever it is
feasible and appropriate to do so. Complete external auditing services are
provided by the Company's U.S. and European operations.
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<PAGE> 16
INTELLECTUAL PROPERTY
The Company has an exclusive commercial license to a U.S. patent
awarded to Ohio University in October 1989 covering DNA Microinjection, which is
the method of gene transfer widely employed for the successful development of
transgenic animals in several mammalian species. The Company has granted several
non-exclusive sublicenses for a variety of applications under this patent. The
Company, as it becomes aware of activities potentially infringing on its
commercial rights as the exclusive commercial licensee for the Ohio University
DNA Microinjection patent, takes appropriate action to curtail infringing
activities. There can be no assurance, however, that the Company's actions will
result in proof of infringement, curtailment of the potentially infringing
party's activities, or that the potentially infringing party will become
properly licensed and, thereby, financially obligated to the Company. Further,
there can be no assurance that technology circumventing the DNA Microinjection
process may not be developed in the future; nor can there be any assurance that
if such technology is developed that the Company would be able to continue to
practice the processes contained in the DNA Microinjection patent or that the
Company would be able to obtain licenses for such new technology on reasonable
terms, if at all. Outside of the U.S., the DNA Microinjection process is
non-proprietary; however, the commercialization of any products in the United
States using the DNA Microinjection process are protected by the patent. The
license has a term equal to the life of the last to expire of all patents
covered by the license, unless earlier terminated by either party for cause.
POTENTIAL LIABILITY AND INSURANCE
The Company attempts to manage its potential liability by obtaining
indemnity provisions in its contracts with clients and with investigators hired
by the Company on behalf of its clients. These indemnities generally do not,
however, protect the Company against certain of its own actions such as those
involving negligence. Moreover, these indemnities are contractual arrangements
that are subject to negotiation with individual clients, and the terms and scope
of such indemnities can vary from client to client and from study to study.
Finally, the financial performance of these indemnities is not secured, so that
the Company bears the risk that an indemnifying party may not have the financial
ability to fulfill its indemnification obligations. In addition to such
indemnification provisions, the Company maintains limited coverage for
professional service liability insurance. The Company could be materially and
adversely affected if it were required to pay damages or incur defense costs in
connection with a claim that is outside the scope of an indemnity or in excess
of its insurance coverage or where the indemnity, although applicable, is not
performed in accordance with its terms.
The Company believes that the risk of liability to patients in clinical
trials is mitigated by various regulatory requirements, including the role of
institutional review boards ("IRBs") and the need to obtain each patient's
informed consent. The FDA requires each human clinical trial to be reviewed and
approved by the IRB at each study site. An IRB is an independent committee that
includes both medical and nonmedical personnel and is obligated to protect the
interests of patients enrolled in the trial. After the trial begins, the IRB
monitors the protocol and the measures designed to protect patients, such as the
requirement to obtain informed consent.
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<PAGE> 17
NEXTRAN
On August 29, 1994, the Company, through a wholly-owned subsidiary,
entered into a Joint Venture Agreement (the "Joint Venture Agreement") with
Baxter Transplant Holdings, Inc. ("Holdings"), a wholly-owned subsidiary of
Baxter Healthcare Corporation ("Baxter"), which is a subsidiary of Baxter
International, Inc. ("Baxter International"). Under the Joint Venture Agreement,
the Company and Holdings formed Nextran, a Delaware general partnership
("Nextran"), in which the Company had a 30% partnership interest and Holdings
had a 70% partnership interest. In connection with the formation of Nextran, the
Company contributed $2.5 million in cash and certain rights under patent
licenses, research agreements, and other intangible assets related to its
xenograft (animal to human) organ transplantation and blood substitute programs,
including certain limited rights to practice under the DNA Microinjection patent
specifically within the xenograft and hemoglobin blood substitute fields of use.
In addition, the Company contributed laboratory and office space in Princeton,
New Jersey, swine research facilities near Athens, Ohio and certain related
equipment and other related assets with a net book value of $2.4 million to
Nextran. Baxter contributed to Nextran $20 million in cash and certain rights
under research and product marketing programs between Baxter and various third
parties related to certain of its transplantation programs.
Pursuant to the terms of the Purchase Agreement, dated September 22,
1995, as amended, the Company consummated the sale of its 30% partnership
interest in Nextran to Transplant Acquisition Inc., a wholly-owned subsidiary of
Baxter, for a cash purchase price of $18 million. In connection with this
transaction, in the third quarter of 1995, the Company eliminated its investment
in Nextran and recorded an estimated nonrecurring gain, net of expenses, income
taxes and related accruals, of approximately $17.3 million. Additionally, in the
event that Nextran develops and commercializes hemoglobin blood substitutes
using technologies licensed to Nextran by the Company, the Company will receive
royalty income of 3% of end product sales.
RESEARCH AND DEVELOPMENT EXPENSES
As the result of the sale of the Company's interest in Nextran, as well
as the change in the strategic focus of the Company, the Company's research and
development expenses have decreased significantly since 1994.
EMPLOYEES
As of December 31, 1997, the Company employed 450 individuals on a
full-time basis. None of the Company's U.S. employees are represented by trade
unions. All of the employees of its European preclinical operations, except
senior management, are represented by a legal trade union. These employees are
governed by an agreement, which is subject to renegotiation on an annual basis.
Although no employees of the European clinical operations are covered by a trade
union, many of them have written contracts with the Company in accordance with
local law. The Company believes that it maintains good relations with its
employees.
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<PAGE> 18
BUSINESS SEGMENT INFORMATION
For information on amounts of revenue, operating profit and loss and
identifiable assets attributable to the Company's operations, see Note 18 of the
Notes to Consolidated Financial Statements included in Part IV of this Annual
Report on Form 10-K.
ITEM 2. PROPERTIES
The Company's corporate headquarters is located in Raritan, New Jersey.
The Company, under an option provision of the lease agreement, extended its
lease on this facility through February 1999. The lease includes another renewal
option for an additional one year period which would expire in February 2000.
The Company's U.S. preclinical operations are located in two adjacent
facilities near Scranton, Pennsylvania. One facility is approximately 21,000
square feet and is leased through August 1999. The other, a 20,000 square foot
facility, is owned subject to a mortgage. The Company owns and operates
approximately 100,000 square feet of facilities on approximately nine acres near
Lyon, France for its preclinical operations in Europe. The Company has an option
to purchase land adjacent to these facilities.
The Company's specialty transgenic services business operates in
Princeton, New Jersey. The Company leases a facility for administrative offices
and research laboratories. This lease expires in May 2000. The Company is
pursuing alternative facilities to accommodate its expanding business in
transgenic services. Additionally, the Company shares an adjacent facility
pursuant to an agreement with Nextran, regarding its transgenic services
operations, which remains in force until August 1999.
The Company's U.S. clinical operations are conducted in a leased
facility in Austin, Texas, which lease expires in February 2001. The Company
leases its European clinical headquarters in Cham, Switzerland, which lease
expires in March 2000. The Company also maintains offices in Canada; Mannheim,
Germany; France; Belgium; The Netherlands; the United Kingdom; Sweden; Denmark;
Norway; Finland; Spain; Italy; Israel; Vilnius, Lithuania; Poland; Russia; and
the Ukraine for its clinical operations.
The Company also leases a facility in Dusseldorf, Germany which is
utilized for Phase I and Phase II trials and is the information systems, data
management and biostatistical center. This lease expires in August 2001.
The Company believes that the space it leases is adequate for its
current operations and that the leases generally reflect market rates in their
respective geographic areas.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Annual Report on Form 10-K.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The information under this Item 4A is furnished pursuant to Instruction
3 to Item 401(b) of Regulation S-K.
PAUL J. SCHMITT, CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE
OFFICER. Mr. Schmitt has served as Chairman of the Board of Directors since
October 1994. Mr. Schmitt joined the Company as President and Chief Executive
Officer in November 1988. Mr. Schmitt was elected as a Director of the Company
in November 1988. From May 1986 to October 1988, Mr. Schmitt was President of
Biolectron, Inc., a medical device company. Prior to joining Biolectron, Mr.
Schmitt was with the BOC Group, PLC, an industrial gas and health care company,
where, from October 1981 until May 1986, he served as Vice President and General
Manager in BOC's health care group. Mr. Schmitt received his B.S. degree in
finance from Lehigh University and his M.B.A. degree from Rutgers University.
Mr. Schmitt is 46 years old.
JACK BARBUT, SC.D., VICE CHAIRMAN AND PRESIDENT, CLINICAL SERVICES. In
connection with the Acquisition in December 1996, Dr. Barbut was appointed as
Vice Chairman and President, Clinical Services of the Company and was elected to
the Board of Directors of the Company. Prior to the Acquisition, Dr. Barbut
founded the BioClin Group in 1979 and oversaw its operations thereafter. Dr.
Barbut received his Sc.D. degree in systems engineering from The Polytechnic
Institute in Lausanne, Switzerland. Dr. Barbut is 45 years old.
JOHN G. COOPER, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER. Mr.
Cooper has served as Senior Vice President and Chief Financial Officer of
Chrysalis since June 1996. He was Vice President, Chief Financial Officer,
Treasurer and Secretary from February 1991 to June 1996 and has been the
Company's principal financial officer since January 1989. Prior to joining the
Company, Mr. Cooper served in several senior corporate financial management
positions for Pharmacia ENI, Inc., a public medical diagnostics company, since
March 1984. Previously, Mr. Cooper held financial positions with C.R. Bard,
Inc., a health care company, from July 1982 to March 1984. Mr. Cooper is a
Certified Public Accountant and received his B.S. degree in commerce from Rider
University. Mr. Cooper is 39 years old.
LEIF MODEWEG, D.V.M., PRESIDENT, PRECLINICAL SERVICES. Dr. Modeweg has
served as President of Preclinical Services of the Company since September 1,
1994. Dr. Modeweg has also served as President of the European preclinical
operations since December 1992. From June 1989 to December 1992, he served as
Managing Director of Hazleton France, predecessor to the European preclinical
operations. From 1980 to 1989, Dr. Modeweg was employed by BioResearch
Laboratories, a contract preclinical drug development services organization in
Montreal, Canada, and served as Vice President from 1988 to 1989. From 1972 to
1980, he served as a toxicologist and department head for Toxicology for Novo
Industri A/S, the leading pharmaceutical company in Denmark. Previously, Dr.
Modeweg
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was employed by the Danish Institute for Biochemical Research and Development.
Dr. Modeweg received his D.V.M. degree from the Royal Veterinary University,
Copenhagen, Denmark. Dr. Modeweg is 60 years old.
J. CHRISTIAN JENSEN, PH.D., PRESIDENT, INTERNATIONAL SERVICES. In
connection with the Acquisition in December 1996, Dr. Jensen was appointed as
President, International Services of the Company and was elected to the Board of
Directors of the Company. Dr. Jensen joined the BioClin Group in 1991 and, prior
to the Acquisition, served as President of the BioClin Group's European
operations and Chief Operating Officer of the BioClin Group. Dr. Jensen served
as Human Pharmacology Expert from 1989 to 1991 and Pharmacological and Medical
Expert from 1986 to 1989 at Sandoz Pharma Ltd. From 1981 to 1986 he was a
pharmacologist and toxicologist at the University of Bonn Medical Clinics. In
1986, Dr. Jensen became an associate professor of Clinical Pharmacology at the
University of Bonn and received his B.S. degree in Biology from Baker University
and a Ph.D. degree in Pharmacology and Toxicology from the University of Kansas.
Dr. Jensen is 47 years old.
There exists no arrangement or understanding between any executive
officer and any other person pursuant to which such executive officer was
appointed. Each executive officer serves until their successor is duly appointed
and qualified.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of the close of business on March 20, 1998 there were 4,013 holders
of record of Common Stock. The Company has not declared or paid any cash
dividends on shares of its equity securities, including Common Stock, since its
incorporation in 1988. The Company currently intends to retain its earnings, if
any, to finance its future development and growth and therefore does not
anticipate paying any cash dividends on its capital stock in the foreseeable
future.
The Common Stock is traded on The Nasdaq National Market. The symbol
currently is CRLS. Prior to December 18, 1996, the Company's trading symbol was
DNXX.
The Company's Common Stock commenced trading on December 11, 1991. The
table below sets forth the high and low closing prices by quarter during 1997
and 1996.
<TABLE>
<CAPTION>
QUARTER 1997 HIGH LOW QUARTER 1996 HIGH LOW
- ------------ ---- --- ------------ ---- ---
<S> <C> <C> <C> <C> <C>
1ST $5-15/16 $4-7/16 1ST $5-3/4 $3-1/2
2ND 5 4-1/16 2ND 8-1/2 4-1/4
3RD 4-1/2 3-7/16 3RD 6-5/8 4-5/8
4TH 4-3/8 2-1/16 4TH 5-3/4 4
</TABLE>
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995 1994 1993
-------- ------ ------ ------ ------
STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net revenues $ 42,298 41,487 39,609 36,188 30,894
Operating costs and expenses:
Direct costs 29,217 27,313 27,691 25,499 22,342
Research and development 166 528 1,063 3,940 9,876
General, administrative and marketing 12,416 10,942 9,631 9,975 9,515
Depreciation and amortization 2,699 2,780 2,907 3,594 3,683
Special charge(1) -- -- -- -- 7,095
Business combination costs(2) -- 3,649 -- -- --
-------- ------ ------ ------ ------
44,498 45,212 41,292 43,008 52,511
Loss from operations (2,200) (3,725) (1,683) (6,820) (21,617)
-------- ------ ------ ------ ------
Other income (expense), net 390 742 (635) (525) (231)
Net loss before equity in net loss of Nextran,
gain on sale of Nextran and taxes (1,810) (2,983) (2,318) (7,345) (21,848)
Equity in net loss of Nextran(3) -- -- 2,700 1,329 --
Gain on sale of Nextran, net of income taxes(3) -- -- 17,266 -- --
Income tax expense (benefit) 240 477 (177) 390 (22)
-------- ------ ------ ------ ------
Net income (loss) $ (2,050) (3,460) 12,425 (9,064) (21,826)
======== ====== ====== ====== ======
Basic earnings (loss) per share $ (0.18) (0.31) 1.12 (0.82) (1.99)
======== ====== ====== ====== ======
Diluted earnings (loss) per share $ (0.18) (0.31) 1.06 (0.82) (1.99)
======== ====== ====== ====== ======
BALANCE SHEET DATA:
Cash, cash equivalents and investments $ 6,925 13,470 23,102 6,234 14,592
Restricted cash 460 5,010 777 1,724 1,430
Accounts receivable, net 9,669 10,788 10,907 9,340 7,546
Property, equipment and leasehold
improvements, net 15,127 15,963 17,806 18,548 19,391
Intangible assets, net 805 953 1,035 991 1,252
Investment in Nextran(3) -- -- -- 3,844 --
Other assets 2,254 1,759 1,797 1,454 2,377
-------- ------ ------ ------ ------
Total assets $ 35,240 47,943 55,424 42,135 46,588
======== ====== ====== ====== ======
Current liabilities, excluding debt 12,295 17,501 15,292 16,047 13,443
Short-term debt 2,668 11,238 11,559 9,876 8,145
Current portion of long-term debt 768 180 744 784 3,691
Long-term debt, excluding current portion 6,561 2,376 7,830 8,502 6,131
Deferred income taxes 1,646 2,053 2,059 2,075 1,965
Other liabilities 633 1,054 948 1,180 1,758
Total stockholders' equity 10,669 13,541 16,992 3,671 11,455
-------- ------ ------ ------ ------
Total liabilities and stockholders' equity $ 35,240 47,943 55,424 42,135 46,588
======== ====== ====== ====== ======
</TABLE>
- ----------
(1) In 1993, the Company initiated a plan to suspend research and development
efforts on its hemoglobin blood substitute program and thereby downsized
and reorganized its operations. In accordance with this decision, the
Company recorded a special charge of $7.1 million.
(2) In the fourth quarter of 1996, the Company recorded business combination
costs of approximately $3.6 million for costs incurred as a result of its
acquisition of the clinical drug development business on December 18, 1996.
See Note 5 of the Notes to Consolidated Financial Statements included in
Part IV of this Annual Report on Form 10-K.
(3) On August 29, 1994, the Company, through a wholly-owned subsidiary, entered
into a Joint Venture Agreement with Baxter to form Nextran, a partnership
in which the Company had a 30% partnership interest. On September 22, 1995,
the Company consummated the sale of its 30% partnership interest in Nextran
to Transplant Acquisition Inc. for a cash purchase price of $18 million. As
a result of the sale of its partnership interest in Nextran, the Company
recorded a nonrecurring gain, net of expenses, income taxes and related
accruals of approximately $17.3 million. See Note 7 of the Notes to
Consolidated Financial Statements included in Part IV of this Annual Report
on Form 10-K.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL SUMMARY
The Company is an international CRO providing a broad range of
integrated drug development services primarily to the pharmaceutical and
biotechnology industries. This broad portfolio of drug development services
includes transgenic discovery research, preclinical development and clinical
capabilities that enable the Company to manage a comprehensive drug development
program or a client's specific requirements. The Company utilizes its
international expertise and experience in preclinical and clinical services to
provide a coordinated approach for a client to transition its drug through
various preclinical to clinical stages of development thereby minimizing certain
delays which typically occur before a new drug is introduced to the market. In
addition, the Company is the only CRO that is currently able to use its
proprietary transgenic and licensed gene targeting technology to provide
services for its clients that require transgenic animal models in order to
determine the function of human genes and identify therapeutic targets
implicated in disease and for the evaluation of therapeutic lead compounds for
further development. The Company generates substantially all of its revenues
from its drug development services and provides services for more than 250
clients in 26 countries.
On March 16, 1998, the Company issued a $5.0 million subordinated
debenture to a wholly-owned subsidiary of MDS. As part of this transaction, the
Company also issued a warrant to purchase 2,000,000 shares of Common Stock for
$2.50 per share. In addition, the Company and MDS entered into a standstill
agreement which, among other things, governs the ownership and acquisition of
securities of the Company by MDS and its affiliates. As a part of this
transaction, MDS and the Company will explore opportunities to pursue strategic
alliances and other business opportunities with respect to their respective
operations.
On December 18, 1996, the Company issued 2,632,600 shares of Common
Stock in connection with the Acquisition by the Company of all of the
outstanding capital stock of, or equity interests in, BioClin, Inc., a Delaware
corporation, BioClin Europe AG, a Swiss corporation, BioClin GmbH, a German
corporation, Kilmer N.V., a Netherlands Antilles corporation, and BioClin
Institute of Clinical Pharmacology GmbH, a German corporation. The Acquisition
was recorded using the "pooling-of-interests" method of accounting. In
connection with the Acquisition, the Company incurred business combination costs
aggregating approximately $3.6 million.
Chrysalis is also the exclusive commercial licensee of a U.S. patent
covering DNA Microinjection, the process widely used in the pharmaceutical and
biotechnology industries to develop transgenic animals. The Company utilizes
this license for its drug development services and grants sublicenses for the
use of this technology. These sublicenses entitle the Company to receive
revenues consisting of fees and, in certain cases, royalties.
The Company's financial statements are denominated in U.S. dollars and,
accordingly, changes in the exchange rate between non-U.S. currencies and the
U.S. dollar will affect the translation of non-U.S. revenues and operating
results into U.S. dollars for purposes of reporting the Company's financial
results. For the year ended December 31, 1997, approximately 63% of
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<PAGE> 23
the Company's revenues were from operations outside the U.S. Approximately 44%
of the Company's revenues for the year ended December 31, 1997 were from
operations in France and denominated in French Francs; accordingly, fluctuations
in the exchange rate between the French Franc and the U.S. dollar may have a
material effect on the Company's operating results. See " -- Liquidity and
Capital Requirements -- Exchange Rate Fluctuations."
In addition, the Company may be subject to foreign currency transaction
risk when the Company's multi-country contracts are denominated in a currency
other than the currency in which the Company incurs the expenses related to such
contracts. For such multi-country contracts, the Company seeks to require its
client to incur the effect of fluctuations in the relative values of the
contract currency and the currency in which the expenses are incurred. To the
extent the Company is unable to require its clients to incur the effects of
currency fluctuations, these fluctuations could have a material effect on the
results of operations of the Company. The Company does not currently hedge
against the risk of exchange rate fluctuations.
The Company's contracts are typically fixed price contracts that
require a portion of the contract amount to be paid at or near the time the
trial is initiated. The Company generally bills its clients upon the completion
of negotiated performance requirements and, to a lesser extent, on a date
certain basis. Certain of the Company's contracts are subject to cost
limitations which cannot be exceeded without client approval. Because, in many
cases, the Company bears the risk of cost overruns, unbudgeted costs in
connection with performing these contracts may have a detrimental effect on the
financial results of the Company. If it is determined that a loss will result
from the performance of a contract, the entire amount of the estimated loss is
charged against income in the period in which the determination is made.
The Company's contracts generally may be terminated with or without
cause. In the event of termination, the Company is typically entitled to all
sums owed for work performed through the notice of termination and all costs
associated with termination of the study. In addition, most of the Company's
contracts provide for an early termination fee, the amount of which usually
declines as the work progresses. The Company's service contracts also contain
certain provisions designed to address the negative impact on the Company's
revenues and profitability as a result of non-controllable delays. These
provisions, however, may not be included in all of the Company's service
contracts. In any event, the Company attempts to negotiate reimbursement of
certain fees whether or not such provisions are included in the service
contract. The Company is not always successful in negotiating such
reimbursement. The loss of or delay in a large contract or the loss of multiple
contracts, however, could adversely affect the Company's future revenues and
profitability. In addition, termination or delay in the performance of a
contract occurs for various reasons, including, but not limited to, unexpected
or undesired results, inadequate patient enrollment or investigator recruitment,
production problems resulting in shortages of the drug being tested, adverse
patient reactions to the drug being tested, or the client's decision to not
proceed with a particular trial.
Revenue for contracts is recognized on a percentage of completion basis
as work is performed. Revenue is affected by the mix of trials conducted and the
degree to which effort is expended. The Company will incur travel costs and may
subcontract with third-party investigators in connection with multi-site
clinical trials. These costs are passed through to clients and, in accordance
with industry practice, are included in service revenue. The costs may vary
significantly from contract to contract; therefore, changes in service revenue
may not be indicative
23
<PAGE> 24
of trends in revenue growth. Accordingly, the Company considers net service
revenue, which consists of service revenue less these costs, as its primary
measure of revenue growth.
The Company has had, and will continue to have, certain clients from
which at least 10% of the Company's overall revenue is generated over multiple
contracts. Such concentration of business is not uncommon within the CRO
industry. For the year ended December 31, 1997, the Company's top five customers
accounted for approximately 38% of its combined net service revenue. One
customer, one of the world's leading pharmaceutical companies, accounted for
approximately 23% of the Company's net service revenues in fiscal 1997. The
Company believes that the loss of any of these customers, if not replaced or if
services provided to existing customers are not expanded, may have a material
adverse effect on the Company. There can be no assurance that the loss of any
such customer would be replaced or services to existing customers would be
expanded on terms acceptable to the Company.
The Company has incurred expenses during 1997 expanding its
infrastructure, primarily in the clinical operations, to support global drug
development capabilities and utilizing management's resources primarily to
communicate these expanded capabilities to its existing client base and the
pharmaceutical and biotechnology industries. As a result of these efforts, the
Company believes it is capable of supporting higher revenues. However, the
Company's future operating results will be contingent upon successfully
utilizing this expanded infrastructure which will require the Company to convert
proposals into contracts and revenues. There can be no assurance that the
Company will be able to successfully utilize its expanded infrastructure or that
proposals will be converted into revenues in a timely manner. The Company's
ability to utilize its expanded infrastructure in order to enhance future
operating results may also be affected by factors such as delays in initiating
or completing significant preclinical and clinical trials, the lengthening of
lead times to convert proposals into contracts and revenues, and the termination
of preclinical and clinical trials, all of which may be beyond the control of
the Company. See " -- Quarterly Results."
The Company's quarterly operating results may fluctuate as a result of
various factors, such as delays experienced in implementing or completing
particular services and termination of services. Since a substantial portion of
the Company's operating costs are relatively fixed, while revenue is subject to
fluctuations, minor variations or delays in the timing of services or the
progress of services may cause significant variations in quarterly operating
results. Results of one quarter are not necessarily indicative of results for
the next quarter.
The Company's largest client, a leading pharmaceutical company,
notified the Company that it decided to change a clinical protocol and thereby
delay a large clinical trial which was originally expected to begin during the
fourth quarter of 1997. As a result, consistent with management's expectations,
results during the fourth quarter of 1997 were negatively impacted. As a result
of this delay and the strategic decision to maintain clinical infrastructure
utilized for this contract and to position Chrysalis for growth opportunities,
revenues and earnings in the first half of 1998 will be significantly affected.
The Company has been informed that this client currently anticipates a decision
on the commencement of this trial in the second quarter of fiscal 1998.
On August 29, 1994, the Company, through a wholly-owned subsidiary,
entered into the Joint Venture Agreement with Holdings, a wholly-owned
subsidiary of Baxter, which is a subsidiary of Baxter International. Under the
Joint Venture Agreement, the Company and Holdings formed Nextran, a Delaware
general partnership, in which the Company had a 30%
24
<PAGE> 25
partnership interest and Holdings had a 70% partnership interest. Pursuant to
the terms of the Purchase Agreement, dated September 22, 1995, as amended, the
Company consummated the sale of its 30% partnership interest in Nextran to
Transplant Acquisition Inc., a wholly-owned subsidiary Baxter, for a cash
purchase price of $18 million. As a result of these transactions, the Company is
no longer required to use its resources to fund the development of its organ
transplantation or blood substitute programs. Historically, these programs have
accounted for a substantial portion of the Company's research and development
expenses, capital expenditures, working capital and accumulated deficit. Prior
to the sale of its partnership interest in Nextran, the Company recorded its
share of Nextran's financial results of operations in its consolidated financial
statements according to the equity method of accounting.
RESULTS OF OPERATIONS
REVENUES BY BUSINESS AND GEOGRAPHIC REGION
<TABLE>
<CAPTION>
REVENUES ($000'S)
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Preclinical 27,259 29,090 24,396
Clinical 14,243 11,883 14,286
Licensing/Other 796 514 927
------ ------ ------
Total 42,298 41,487 39,609
====== ====== ======
International 26,778 28,322 24,890
North America 14,724 12,651 13,792
Licensing/Other 796 514 927
------ ------ ------
Total 42,298 41,487 39,609
====== ====== ======
</TABLE>
Fiscal year ended December 31, 1997 as compared to the fiscal years
ended December 31, 1996 and 1995.
Revenues. Revenues were $42,298,000 for 1997 compared to $41,487,000
and $39,609,000 for 1996 and 1995, respectively. For the year ended December 31,
1997, the Company generated approximately 63% of its revenues from operations
outside of the U.S. Excluding the impact of foreign currency translations,
revenues for the year ended December 31, 1997 would have been approximately
$46,204,000 as compared to $41,487,000 for 1996. See " -- Liquidity and Capital
Requirements - Exchange Rate Fluctuations." This increase from 1996 to 1997 was
primarily the result of the following: (i) an increase in the clinical business
including services provided under contracts with the Company's largest customer;
(ii) an increase in the Company's specialty transgenic and molecular biology
services; and (iii) an increase in preclinical business in Europe. These
increases were offset by the unfavorable impact of foreign currency translations
as well as by a decrease in the preclinical business in North America, and the
Phase I clinical business in Europe. Additionally, revenues in 1997 were
negatively impacted by a delay in a large clinical trial which was originally
expected to begin in the fourth quarter of 1997. The Company believes that
revenue growth for the clinical business for the year ended December 31, 1997
was also adversely affected as a result of (i) the long lead times in converting
proposals into contracts and revenues and (ii) in the first half of 1997, the
continuing impact, as a result of such long lead times, of the focus of senior
management in the clinical business in the negotiation and
25
<PAGE> 26
consummation of the Acquisition during 1996 and, consequently, having less
opportunity to devote to business development and marketing the clinical
business.
The Company's largest client, a leading pharmaceutical company,
notified the Company that it decided to change a clinical protocol and thereby
delay a large clinical trial which was originally expected to begin during the
fourth quarter of 1997. As a result, consistent with management's expectations,
results during the fourth quarter of 1997 were negatively impacted. As a result
of this delay and the strategic decision to maintain clinical infrastructure
utilized for this contract and to position Chrysalis for growth opportunities,
revenues and earnings in the first half of 1998 will be significantly affected.
The Company has been informed that this client currently anticipates a decision
on the commencement of this trial in the second quarter of fiscal 1998.
The increase in revenues from 1995 to 1996 was due to an increase in
business activity for the preclinical drug development services in both the
European and U.S. marketplace. This increase in preclinical services was offset
by a decrease in revenues from clinical services. The Company believes the
increase in preclinical business activity was a result of the improvement in the
pharmaceutical and biotechnology industries outsourcing trends and expanded cash
reserves within the biotechnology sector. The decrease of approximately
$2,400,000 in revenues for the clinical business was due to the decision in 1995
to discontinue providing services for Phase I trials in the U.S. which
represented approximately $3,500,000 in revenues for the clinical business in
1995. In addition, revenues for the clinical business in 1996 were adversely
affected by senior managements' involvement in the negotiation and consummation
of the Acquisition and, consequently, having less opportunity than in 1995 to
devote to business development and marketing the clinical business.
Operating Expenses. Direct costs were $29,217,000 or 69% of net
revenues for 1997, compared with $27,313,000 or 66% of net revenues for 1996.
For 1995 direct costs were $27,691,000 or 70% of net revenues. Excluding the
impact of foreign currency translations, this increase in direct costs of
$1,904,000 for the year ended December 31, 1997, as compared to the same period
in 1996, would have been approximately $4,491,000. This increase in direct costs
was primarily due to (i) investment in personnel and infrastructure to support
the long-term business expansion strategy of the Company and to accommodate the
large clinical trial with a leading pharmaceutical company which was delayed in
the last quarter of 1997 (See " -- General Summary") and (ii) increased variable
costs as a result of increased business activity in the Company's European
preclinical services and specialty transgenic and molecular biology services in
1997. The increase in these costs as a percent of revenues is due to a base cost
structure of personnel, facilities, and related expenses which is capable of
supporting a higher level of revenues than experienced during the year ended
December 31, 1997. This relationship of direct costs to revenues is expected to
continue at least through the first half of 1998, as the Company will retain the
majority of its recently expanded infrastructure to better position the Company
for long-term growth.
Although direct costs remained relatively unchanged on a Company-wide
basis for 1996 as compared to 1995, direct costs associated with preclinical
business increased as a result of additional business activity, which resulted
in an increase in variable costs such as materials and supplies, offset by a
decrease in direct costs for the clinical business primarily due to the decision
to discontinue providing services for Phase I trials in the U.S.
26
<PAGE> 27
Research and development expenses in 1997 decreased to $166,000 from
$528,000 in 1996, which decreased from $1,063,000 in 1995. This decrease in
research and development expenses over the past three years was primarily the
result of the shift in the strategic focus of the Company's transgenic animal
services from the internal development of transgenic animal models to providing
commercial specialty drug development services. Because research and development
expenses have become immaterial primarily as a result of the shift in the
strategic focus and the related decline in costs, research and development
expenses shown for reporting purposes in prior periods will be reclassified in
1998 into direct costs.
General, administrative and marketing expenses increased to $12,416,000
in 1997 from $10,942,000 in 1996, which increased from $9,631,000 in 1995.
Excluding the impact of foreign currency translation, this increase of
$1,474,000, for the period ended December 31, 1997, as compared to the same
period in 1996, would have been approximately $2,590,000. This increase in
expenses for 1997 was primarily due to: (i) the increase in personnel and
related costs for marketing and business development, information systems,
general management and financial management activities, (ii) the increase in
personnel and related costs associated with the management of the European
clinical business, and (iii) the increase in personnel and facility costs
associated with the increase in the Company's specialty transgenic and molecular
biology services. The increase in these expenses from 1995 to 1996 was primarily
the result of an increase in costs for expansion of operations in Eastern
Europe, additional personnel for accounting, business development,
administration and information systems, increased personnel related costs and
increased sales, marketing and advertising expenses.
Depreciation and amortization decreased to $2,699,000 in 1997 from
$2,780,000 in 1996 and $2,907,000 in 1995.
Business Combination Costs. The Company incurred costs in 1996
associated with the Acquisition aggregating $3,649,000. These costs included
expenses associated with the acquisition of the clinical business, the name
change from DNX Corporation to Chrysalis and certain other related items. As of
December 31, 1996, $1,380,000 of these costs remained to be paid and are
classified as accrued expenses in the Consolidated Financial Statements included
in Part IV of this Annual Report on Form 10-K.
Other Income (Expense). Other income (expense) represented income of
$390,000 in 1997, compared to income of $742,000 for 1996, and expense of
$635,000 for 1995. This decrease from 1996 to 1997 was partially due to a
decrease in interest expense resulting from lower outstanding debt balances (see
" -- Liquidity and Capital Requirements -- Debt") offset by a decrease in
interest income earned in 1997 as a result of a decrease in cash and other
investment balances. Also included in other income in 1997 was a $700,000
nonrecurring gain resulting from a settlement agreement with Virginia
Commonwealth University, signed in the third quarter of 1997. The primary
reasons for the improvement in other income (expense) in 1996 from 1995 were
interest income of $1,187,000 earned as the result of higher cash balances
primarily resulting from the sale of Nextran in the third quarter of 1995 and a
foreign currency gain of $517,000 primarily as a result of exchange rate
fluctuations between the German Mark and Swiss Franc associated with short-term
borrowings of the Company's German operations denominated in Swiss Francs. The
Company repaid this debt denominated in Swiss Francs in 1997. Such income was
offset primarily by interest expense of $1,445,000 on outstanding debt. In 1998,
the Company expects to report an
27
<PAGE> 28
increase in net interest expense as a result of the issuance of the subordinated
debenture and the warrants in the transaction with MDS.
Equity In Net Loss Of Nextran. As a result of its minority equity
ownership in Nextran, the Company recorded its share of Nextran's financial
results in its consolidated financial statements based on the equity method of
accounting. As a result of the sale of its partnership interest in Nextran, the
Company no longer records a share of Nextran's financial results of operations
in its consolidated financial statements subsequent to September 30, 1995. The
Company's share of Nextran's loss amounted to $2,700,000 for the period ended
September 30, 1995, as compared to $1,329,000 for the period from August 29,
1994 (the date of formation of Nextran) through December 31, 1994.
Gain on Sale of Nextran. As a result of the sale of its partnership
interest in Nextran, in the third quarter of 1995 the Company eliminated its
investment in Nextran and recorded a nonrecurring gain, net of expenses,
estimated income taxes of $200,000, and related accruals, of $17,266,000.
Taxes. The Company's foreign subsidiaries are subject to foreign income
taxes under foreign tax laws on the profits generated in such countries which in
general may not be offset by losses from operations in other countries. As a
result, primarily for its French operations, the Company recorded an income tax
expense of $240,000 in fiscal 1997 compared to an income tax expense in 1996 of
$477,000 and an income tax benefit in 1995 of $177,000. These expenses are
primarily due to profits generated by its French operations partially offset by
tax benefits recorded as a result of losses in other European operations.
The impact from United States federal income taxes is currently not
significant due to the Company's available net operating loss carryforwards. At
December 31, 1997, the Company has available net operating loss carryforwards of
approximately $26,434,000 for United States federal income tax purposes. Such
loss carryforwards expire through 2012. The Company also has research and
development tax credit carryforwards of approximately $3,012,000 for U.S.
federal income tax reporting purposes which are available to reduce U.S. federal
income taxes, if any, through 2011. The Company has alternative minimum tax
credit carryforwards of approximately $164,000 for U.S. federal income tax
purposes which are available to reduce U.S. federal income taxes, if any. These
tax credits have an unlimited carryforward period. The Company's acquisition of
the clinical drug development business resulted in an ownership change under the
Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, the
Company's ability to utilize its net operating loss carryforwards to offset
operating profits may be subject to certain limitations in the future under the
Code. These net operating loss carryforwards may not be utilized to offset
profit in other countries.
QUARTERLY RESULTS
The Company's quarterly operating results are subject to variation, and
are expected to continue to be subject to variation, as a result of factors such
as delays in initiating or completing significant preclinical and clinical
trials, termination of preclinical and clinical trials, acquisitions and
exchange rate fluctuations. Delays and terminations of studies or trials are
often the result of actions taken by clients or regulatory authorities and are
not typically subject to the control of the Company. Since a large amount of the
Company's operating costs are relatively fixed while its
28
<PAGE> 29
revenues are subject to fluctuation, minor variations in the commencement,
progress or completion of preclinical and clinical trials may cause significant
variations in quarterly operating results.
The following table presents unaudited quarterly operating results for
each of the fiscal quarters of 1997. In the opinion of the Company, this
information has been prepared on the same basis as the audited consolidated
financial statements and reflects all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of results of
operations for those periods. This quarterly financial data should be read in
conjunction with the consolidated audited financial statements and notes thereto
included in Part IV of this Annual Report on Form 10-K. The operating results
for any quarter are not necessarily indicative of the results to be expected in
any future period.
<TABLE>
<CAPTION>
QUARTER ENDED ($000'S)
(UNAUDITED)
-----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues $ 9,905 10,145 10,623 11,624
Operating expenses:
Direct costs 6,970 7,054 7,392 7,802
Research and development 52 47 31 36
General, administrative and 2,874 2,976 3,123 3,442
marketing
Depreciation and
amortization 638 654 708 699
-------- ------- ------- -------
10,534 10,731 11,254 11,979
Loss from operations (629) (586) (631) (355)
Other income (expense):
Interest income 181 123 93 72
Interest expense (191) (165) (206) (213)
Foreign currency gain -- -- -- 11
Other 4 (6) 692 (4)
-------- ------- ------- -------
(6) (48) 579 (134)
-------- ------- ------- -------
Loss before income taxes (635) (634) (52) (489)
Income tax expense (9) (31) (41) (159)
-------- ------- ------- -------
Net loss $ (644) (665) (93) (648)
======== ======= ======= =======
</TABLE>
REVENUES BY BUSINESS AND GEOGRAPHIC REGION BY QUARTER
<TABLE>
<CAPTION>
QUARTER ENDED ($000'S)
(UNAUDITED)
----------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Preclinical $6,720 6,708 6,476 7,355
Clinical 2,909 3,277 3,972 4,085
Licensing/Other 276 160 175 184
------ ------ ------ ------
Total 9,905 10,145 10,623 11,624
====== ====== ====== ======
International 6,779 6,661 6,168 7,170
North America 2,850 3,324 4,280 4,270
Licensing/Other 276 160 175 184
------ ------ ------ ------
Total $9,905 10,145 10,623 11,624
====== ====== ====== ======
</TABLE>
29
<PAGE> 30
LIQUIDITY AND CAPITAL REQUIREMENTS
Cash Reserves. The Company finances its operations and activities by
relying on (i) its operating activities for its working capital requirements,
(ii) its cash reserves, and (iii) its available lines of credit. Additionally,
the Company obtained a five year $5.0 million term loan from a large commercial
bank in the third quarter of 1997. As of December 31, 1997, the Company had cash
reserves (consisting of cash and cash equivalents and restricted cash) of
$7,385,000. The Company invests its excess cash in a diversified portfolio of
high-grade money market funds, United States Government-backed securities and
commercial paper and corporate obligations. The Company's cash reserves
(including its short-term investments and marketable securities) decreased by
approximately $11,095,000 during the year ended December 31, 1997 primarily due
to the following: (i) the payment of approximately $5,000,000 of outstanding
debt associated with the Acquisition of the clinical business; (ii) the payment
of approximately $1,380,000 of nonrecurring business combination costs
associated with the Acquisition of the clinical business; (iii) capital
expenditures of approximately $3,281,000, and (iv) the funding of operating
losses of approximately $2,639,000.
Capital Expenditures. In 1997 the Company invested a total of
approximately $3,281,000 in property and equipment, as compared to approximately
$1,815,000 for fiscal 1996. This increase was primarily associated with
solidifying and expanding its position in preclinical continuous infusion
capabilities, updating and expanding information systems and supporting the
growth of the transgenic/gene targeting services business.
Debt. In connection with the Acquisition on December 18, 1996, the
Company acquired approximately $9.8 million of short-term borrowings outstanding
under line of credit arrangements with various banks. The majority of such
borrowings and credit arrangements were guaranteed by certain prior stockholders
of the clinical business. One of the conditions of the closing of the
Acquisition was the release of these guarantees. In order to satisfy this
condition, on December 18, 1996, the Company paid approximately $4.0 million to
reduce these short-term borrowings and transferred approximately $4.6 million
into escrow for purposes of securing the future payment of the remaining
personally guaranteed borrowings. In January 1997, the Company paid the
remaining outstanding balance on these lines utilizing the cash in escrow and
established a new $3.0 million line of credit with a Swiss bank. As of December
31, 1997 the outstanding balance under this line of credit was approximately
$2,377,000.
Additionally, the Company has lines of credit and overdraft privileges
with French banks in the aggregate amount of 10.5 million French Francs ($1.7
million at the exchange rate in effect on December 31, 1997). At December 31,
1997 and 1996 there were no short-term borrowings outstanding under these
facilities
On March 16, 1998, the Company issued, in exchange for $5,000,000 cash,
a subordinated debenture and a warrant to purchase 2,000,000 shares of Common
Stock for $2.50 per share, to a wholly-owned subsidiary of MDS. The terms of the
subordinated debenture provide for semi-annual interest payments with the
aggregate principal amount payable on March 16, 2001. This debenture is
subordinate to certain outstanding indebtedness of the Company, including its
existing bank debt and mortgages described below. In addition, a portion or all
of the principal amount of the debenture may, at the option of the holder, be
satisfied by issuance of the shares of Common Stock in accordance with the terms
of the warrant.
30
<PAGE> 31
In December 1992, the Company acquired preclinical operations in
France. Included in the purchase price were promissory notes having an aggregate
principal amount of $7.0 million (the "Notes"). The unpaid principal balance on
the Notes as of December 31, 1996 of $5.0 million was paid-off in August 1997.
In the third quarter, the Company refinanced this debt by obtaining a five year
$5.0 million term loan from a large commercial bank, with the principal payable
in quarterly installments beginning September 1998. Interest will be paid
monthly over the life of the loan. This loan is secured by substantially all of
the Company's domestic assets, including the capital stock of its subsidiaries.
The Company was in default at December 31, 1997 under certain financial
covenants set forth in the credit agreement with respect to this term loan. In
the first quarter of 1998, the Company obtained a waiver of such default from
the commercial bank which provided this term loan.
In connection with its U.S. preclinical facility, in 1994 the Company
secured (i) a $1.5 million 15-year mortgage with a bank and (ii) a $1.2 million
15-year mortgage from a Pennsylvania agency, which required cash collateral of
$450,000. These two loans are also secured by mortgages on the property
acquired. As of December 31, 1997, the aggregate outstanding balance under these
mortgages was approximately $2.3 million. The cash collateral on the mortgage
loan with the Pennsylvania agency is classified as restricted cash as of
December 31, 1997. Upon achievement of certain financial covenants, this
$450,000 of cash collateral will be released. Additionally, the favorable
interest rate on the mortgage with the Pennsylvania agency is subject to change
upon review by the agency of certain future conditions.
Capital Requirements. The Company anticipates that its future capital
requirements may include investment for expansion of its operating
infrastructure to meet anticipated increased demand for drug development
services from the pharmaceutical and biotechnology industries. In connection
with the refinancing of the Notes (see " -- Debt"), the Company has quarterly
cash requirements for the repayment of principal beginning September 1998, and
monthly cash requirements for interest payments due throughout the five year
term of the loan, as well as a requirement to comply with certain restrictive
debt covenants. In addition, the Company will have semi-annual cash requirements
beginning in 1998 for the payment of interest on the subordinated debenture
issued in the MDS transaction. The Company believes that with its current
financial resources it has the ability to meet its working capital requirements
for the foreseeable future.
The Company may, from time to time, consider funding its future capital
requirements including retirement of or interest payments on current debt by
issuing stock or other securities in public or private equity or debt
financings. In the event that the Company seeks to issue stock or other
securities, there can be no assurance that the Company will be able to issue
such stock or other securities or that any financing will be available to the
Company or that such offering or financing will be available on acceptable
terms.
In addition to the above, the Company's working capital and other
capital requirements will depend on numerous factors, including among others:
success in increasing the Company's revenues and managing its operations;
maintaining its contractual relationship with its top customer; exchange rate
fluctuations between the U.S. dollar and foreign currencies; capital
expenditures for clinical and preclinical information system objectives; the
level of Company resources devoted to management, marketing, information and
data management capabilities and business and financial administration;
technological advances; and the status of competitors; as well as the costs of
potential future acquisitions, dispositions or strategic alliances described
below.
31
<PAGE> 32
Additionally, the Company from time to time may engage in discussions
regarding acquisitions, dispositions or strategic alliances. The Company may
finance such an acquisition or alliance with its existing cash resources or by
additional public or private debt or equity financings. In the event that the
Company seeks to pursue any such acquisition or alliance requiring financing,
there can be no assurance that any financing will be available to the Company or
that such financing will be available on acceptable terms. Although the Company
continually considers and evaluates potential acquisitions, dispositions or
alliances and related opportunities for growth, it does not have any
understandings, arrangements or agreements with respect to any such
acquisitions, dispositions or alliances.
EXCHANGE RATE FLUCTUATIONS
Approximately 63%, 68% and 63% of the Company's net revenues for 1997,
1996 and 1995, respectively, were derived from the Company's operations outside
the United States. The Company's consolidated financial statements are
denominated in U.S. dollars and, accordingly, changes in exchange rates between
the applicable foreign currency and the U.S. dollar will affect the translation
of such subsidiary's financial results into U.S. dollars for purposes of
reporting the Company's consolidated financial results. Translation adjustments
are reported as a separate section of stockholders' equity.
The Company may be subject to foreign currency transaction risks when
the Company's multi-country contracts are denominated in a currency other than
the currency in which the Company incurs the expenses related to such contracts.
For such multi-country contracts, the Company seeks to require its client to
incur the effect of fluctuations in the relative values of the contract currency
and the currency in which the expenses are incurred. To the extent the Company
is unable to require its clients to incur the effects of currency fluctuations,
these fluctuations could have a material effect on the results of operations of
the Company. The Company generally does not hedge its currency translation and
transaction exposure.
Due to its preclinical operations in France, the percentage of the
Company's total revenues recorded in French Francs is significant. For the
fiscal years 1997, 1996 and 1995, the French operations accounted for
approximately 44%, 48% and 44% of the Company's revenues, respectively.
Accordingly, changes in the exchange rate between the French Franc and the U.S.
dollar will affect the translation of the French preclinical operation's
revenues and operating results into U.S. dollars for purposes of reporting the
Company's consolidated financial results, and also affect the U.S. dollar
amounts actually received by the Company from the French preclinical operations.
Based on the assumption that the French preclinical operations will continue to
represent a significant portion of the business of the Company, the appreciation
of the U.S. dollar against the French Franc would have an unfavorable impact on
the Company's revenues and a favorable impact on the Company's operating
expenses due to the effect of such currency translation on the French
preclinical operation's operating results; however, the depreciation of the U.S.
dollar against the French Franc would have a favorable impact on the Company's
revenues and an unfavorable impact on the Company's operating expenses. The net
effect of such impact can not be predicted with certainty.
32
<PAGE> 33
For purposes of the Company's consolidated financial results, the
results of operations of the French preclinical business denominated in French
Francs have been translated from French Francs into U.S. dollars using the
following exchange rates:
<TABLE>
<CAPTION>
FRENCH FRANC U.S. DOLLAR PER
PERIOD PER U.S. DOLLAR FRENCH FRANC
------ --------------- ---------------
<S> <C> <C>
1997 5.8364 .1713
1996 5.1187 .1954
1995 4.9850 .2006
</TABLE>
The rates in the above table represent an average exchange rate calculated using
rates quoted in The Wall Street Journal. As of March 9, 1998, the French Franc
per U.S. dollar rate was 6.1235.
ACCUMULATED DEFICIT
Since its inception in 1988 until the formation in 1994 and subsequent
sale of its partnership interest in Nextran in 1995, the Company expended
substantial funds for research and development and capital expenditures. A
significant portion of such expenditures were made to support the Company's
organ transplantation and blood substitute research and development programs,
which programs were transferred to the Nextran partnership. Historically, these
expenditures accounted for a substantial portion of the Company's accumulated
deficit. Also contributing to the accumulated deficit are the costs associated
with the development of a worldwide clinical business.
INFLATION
The Company believes that inflation has not had a material impact on
its results of operations.
YEAR 2000
The Company is currently taking steps to assess the Year 2000 issue
from an internal, supplier and customer perspective. Although the Company
believes at this time that neither the costs nor expenses of the Year 2000 issue
will be material to the Company, the ultimate costs and expenses are currently
unknown and such costs or the consequences of failure to correct any Year 2000
issues could have a material impact on Chrysalis' financial conditions, business
or operations.
FORWARD LOOKING STATEMENTS
The statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere throughout this
Annual Report on Form 10-K that are not historical facts are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange of 1934. These forward-looking statements
are subject to certain risks and uncertainties described below, which could
cause actual results to differ materially from those reflected in the
forward-looking statements. These forward-looking statements reflect
management's analysis, judgment, belief or expectation
33
<PAGE> 34
only as of the date hereof. The Company undertakes no obligation to publicly
revise these forward-looking statements to reflect events or circumstances that
arise after the date hereof or to publicly release the results of any revisions
to such forward-looking statements that may be made to reflect events or
circumstances after the date hereof. In addition to the disclosure contained
herein, readers should carefully review any disclosure of risks and
uncertainties contained in other documents the Company files or has filed from
time to time with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934.
Factors that could cause actual results to differ materially from those
reflected in the forward looking statements include, without limitation: the
degree of the Company's success in obtaining new contracts; the scope and
duration of drug development trials; the loss or downsizing of, or delay in,
existing drug development trials; the lengthening of the lead time to convert
proposals into contracts and revenues; the Company's exposure to cost overruns
under fixed-price contacts; the Company's dependence on certain clients,
especially its largest client, and on the pharmaceutical and biotechnology
industries; adverse trends in the regulatory environment, including health care
reform measures; the Company's dependence on key management personnel;
competition and consolidation in the drug development services industry;
liability for negligence or errors and omissions arising out of drug development
trials; foreign exchange rate fluctuations; and the costs associated with
integrating future acquired businesses. In addition, the Company's quarterly
operating results will continue to be subject to variation as a result of
factors such as those discussed above in " -- Quarterly Results" as well as the
costs associated with integrating the clinical and preclinical businesses.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is set forth at pages F-1
through F-22 of the Consolidated Financial Statements contained in Part IV
hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Directors of the Company is set forth in
the Proxy Statement under the heading "Election of Directors," which information
is incorporated herein by reference. Information regarding the executive
officers of the Company is included as Item 4A of Part I of this Annual Report
on Form 10-K as permitted by Instruction 3 to Item 401(b) of Regulation S-K.
34
<PAGE> 35
Information required by Item 405 of Regulation S-K is set forth in the Proxy
Statement under the heading "Section 16(a) Beneficial Ownership Reporting
Compliance," which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is set forth in the
Proxy Statement under the headings "Election of Directors -- Compensation
Committee Interlocks and Insider Participation," "Election of Directors --
Compensation of Directors" and "Election of Directors -- Compensation of
Executive Officers," which information is incorporated herein by reference
(except for the Report of the Compensation Committee on Executive Compensation
and the Comparative Stock Performance Graph).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial
owners and management is set forth in the Proxy Statement under the heading
"Election of Directors -- Security Ownership of Certain Beneficial Owners and
Management," which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related
transactions is set forth in the Proxy Statement under the heading, "Election of
Directors -- Compensation Committee Interlocks and Insider Participation" and
"Election of Directors -- Certain Relationships and Related Transactions," which
information is incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) and (2) Financial Statement and Financial Statement Schedules
The responses to Items 14(a) (1) and (2) are set forth beginning
at page F-1 of this Annual Report on Form 10-K.
(3) Listing of Exhibits
See the exhibit index beginning at page X-1 of this Annual Report
on Form 10-K.
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during
the fourth quarter.
35
<PAGE> 36
(c) Exhibits
The response to Item 14(c) is set forth beginning at page X-1
of this Annual Report on Form 10-K.
(d) Financial Statement Schedules
None.
36
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CHRYSALIS INTERNATIONAL CORPORATION
By:/s/ John G. Cooper
------------------------------
John G. Cooper
Senior Vice President, Chief Financial Officer,
Treasurer and Secretary
Date: March 27, 1998
Pursuant to the requirements of the Securities and Exchange Act of
1934, this Report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
*Paul J. Schmitt Chairman of the Board, President and March 27, 1998
- --------------------------- Chief Executive Officer (Principal
Paul J. Schmitt Executive Officer), Director
/s/ John G. Cooper Senior Vice President, Chief Financial March 27, 1998
- --------------------------- Officer, Treasurer and Secretary
John G. Cooper (Principal Financial Officer and
Principal Accounting Officer)
*Jack Barbut Vice Chairman, President of Clinical March 27, 1998
- --------------------------- Services, Director
Jack Barbut
*J. Christian Jensen President of International Services, Director March 27, 1998
- ---------------------------
J. Christian Jensen
- --------------------------- Director March 27, 1998
Desmond H. O'Connell
*Photios T. Paulson Director March 27, 1998
- ---------------------------
Photios T. Paulson
*Barry T. Sherman Director March 27, 1998
- ---------------------------
Barry T. Sherman
*W. Leigh Thompson Director March 27, 1998
- ---------------------------
W. Leigh Thompson
</TABLE>
*John G. Cooper, by signing his name hereto, does hereby sign this Annual Report
on Form 10-K on behalf of each of the above named and designated officers and
Directors of the Company pursuant to a Power of Attorney executed by such
persons and filed with the Securities and Exchange Commission.
/s/ John G. Cooper March 27, 1998
- ---------------------------------
John G. Cooper, Attorney-in-Fact
37
<PAGE> 38
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a) (1) AND ITEM 14(d)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LIST OF FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
CHRYSALIS INTERNATIONAL CORPORATION
RARITAN, NEW JERSEY
<PAGE> 39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
Page
----
Independent Auditors' Report.............................................. F-3
Consolidated Balance Sheets - December 31, 1997 and 1996.................. F-4
Consolidated Statements of Operations -
Years ended December 31, 1997, 1996 and 1995............................ F-5
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 1997, 1996 and 1995............................ F-6
Consolidated Statements of Cash Flows -
Years ended December 31, 1997, 1996 and 1995............................. F-7
Notes to Consolidated Financial Statements -
December 31, 1997, 1996 and 1995 ....................................... F-8
F-2
<PAGE> 40
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Chrysalis International Corporation:
We have audited the accompanying consolidated balance sheets of Chrysalis
International Corporation and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Chrysalis
International Corporation and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Princeton, New Jersey
March 4, 1998
<PAGE> 41
CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 6,925 10,455
Cash in escrow (note 9) -- 4,550
Short-term investments and marketable securities (note 2) -- 2,619
Trade accounts receivable, net (note 3) 9,669 10,788
Prepaid expenses and other current assets 1,916 1,433
-------- -------
Total current assets 18,510 29,845
Property and equipment, net (notes 6 and 10) 15,127 15,963
Marketable debt securities (note 2) -- 396
Intangible assets, net (note 8) 805 953
Other assets 338 326
Restricted cash (note 10) 460 460
-------- -------
$ 35,240 47,943
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings (note 9) 2,377 10,939
Note payable - related party (note 14) 291 299
Current portion of long-term debt (note 10) 768 180
Accounts payable 3,204 3,386
Accrued expenses (note 4) 5,567 8,273
Deferred revenue 3,524 5,842
-------- -------
Total current liabilities 15,731 28,919
Long-term debt, excluding current portion (note 10) 6,561 2,376
Deferred income taxes (note 13) 1,646 2,053
Other liabilities 633 1,054
-------- -------
Total liabilities 24,571 34,402
-------- -------
Stockholders' equity (notes 11 and 12):
Serial preferred stock, $.01 par value, 5,000,000
shares authorized; no shares issued and outstanding -- --
Common stock, $.01 par value, 20,000,000 shares
authorized; issued and outstanding 11,430,764 in
1997 and 11,359,721 in 1996 114 113
Additional paid-in capital 57,768 57,498
Translation adjustment (536) 462
Employee stock purchase loans (86) (86)
Accumulated deficit (46,591) (44,541)
Net unrealized gain on marketable securities -- 95
-------- -------
Total stockholders' equity 10,669 13,541
-------- -------
Commitments and contingencies (notes 15 and 17)
$ 35,240 47,943
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 42
CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS EXPECT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Revenues:
Service revenue $ 47,271 47,398 43,233
Less: Reimbursed costs (5,769) (6,425) (4,551)
-------- ------- -------
Net service revenue 41,502 40,973 38,682
License fees and other 796 514 927
-------- ------- -------
42,298 41,487 39,609
-------- ------- -------
Operating expenses:
Direct costs 29,217 27,313 27,691
Research and development 166 528 1,063
General, administrative and marketing 12,416 10,942 9,631
Depreciation and amortization 2,699 2,780 2,907
Business combination costs (note 5) -- 3,649 --
-------- ------- -------
44,498 45,212 41,292
-------- ------- -------
Loss from operations (2,200) (3,725) (1,683)
-------- ------- -------
Other income (expense):
Interest income 465 1,187 648
Interest expense (notes 9 and 10) (769) (1,445) (1,515)
Foreign currency gain (loss), net 11 517 (292)
Other (notes 15 and 17) 683 483 524
-------- ------- -------
390 742 (635)
-------- ------- -------
Loss before equity in net loss of Nextran,
gain on sale of Nextran and income taxes (1,810) (2,983) (2,318)
Equity in net loss of Nextran (note 7) -- -- 2,700
Gain on sale of Nextran, net of taxes of
$200 (note 7) -- -- 17,266
-------- ------- -------
Income (loss) before income taxes (1,810) (2,983) 12,248
Income tax expense (benefit) (note 13) 240 477 (177)
-------- ------- -------
Net income (loss) $ (2,050) (3,460) 12,425
======== ======= =======
Basic earnings (loss) per share $ (0.18) (0.31) 1.12
======== ======= =======
Weighted average shares outstanding-Basic 11,396 11,307 11,143
======== ======= =======
Diluted earnings (loss) per share $ (0.18) (0.31) 1.06
======== ======= =======
Weighted average shares outstanding-Diluted 11,396 11,307 11,675
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 43
CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS)
EMPLOYEE ON TOTAL
ADDITIONAL STOCK MARKETABLE STOCK-
COMMON PAID-IN DEFERRED TRANSLATION PURCHASE ACCUMULATED DEBT HOLDERS'
STOCK CAPITAL COMPENSATION ADJUSTMENT LOAN DEFICIT SECURITIES EQUITY
------ --------- ------------ ---------- -------- ----------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 111 57,111 (104) 80 (99) (53,506) 78 3,671
Issuance of 135,248 shares of common
stock upon exercise of stock options
(note 12) 1 124 -- -- -- -- --
125
Issuance of 14,563 shares of common
stock pursuant to 401(k) plan (note 16) -- 56 -- -- -- -- --
56
Amortization of deferred compensation
(note 12) -- -- 104 -- -- -- --
104
Translation adjustment -- -- -- 606 -- -- -- 606
Cash received on employee stock
purchase loan -- -- -- -- 6 -- -- 6
Decrease in net unrealized gain on
marketable debt securities -- -- -- -- -- -- (1) (1)
Net income -- -- -- -- -- 12,425 -- 12,425
--- ------ ---- ---- ------ ------- ------ -------
Balance, December 31, 1995 112 57,291 -- 686 (93) (41,081) 77 16,992
Issuance of 101,650 shares of common
stock upon exercise of stock options
and warrants (note 12) 1 112 -- -- -- -- -- 113
Issuance of 18,065 shares of common
stock pursuant to 401(k) plan (note 16) -- 95 -- -- -- -- --
95
Translation adjustment -- -- -- (224) -- -- -- (224)
Cash received on employee stock
purchase loan -- -- -- -- 7 -- -- 7
Increase in net unrealized gain on
marketable debt securities -- -- -- -- -- -- 18 18
Net loss -- -- -- -- -- (3,460) -- (3,460)
--- ------ ---- ---- ------ ------- ------ -------
Balance, December 31, 1996 113 57,498 -- 462 (86) (44,541) 95 13,541
Issuance of 26,006 shares of common
stock upon exercise of stock options
and warrants (note 12) -- 82 -- -- -- -- -- 82
Issuance of 45,037 shares of common
stock pursuant to 401(k) plan (note 16) 1 188 -- -- -- -- --
189
Translation adjustment -- -- -- (998) -- -- -- (998)
Decrease in net unrealized gain on
marketable debt securities -- -- -- -- -- (95) (95)
Net loss -- -- -- -- -- (2,050) -- (2,050)
------ ---- ---- ------ ------- ------ -------
Balance, December 31, 1997 114 57,768 -- (536) (86) (46,591) -- 10,669
=== ====== ==== ==== ====== ======= ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 44
CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,050) (3,460) 12,425
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Non-cash items:
Depreciation and amortization 2,699 2,958 3,119
Foreign currency transaction (gain) loss (11) (517) 292
Deferred income tax benefit (306) (37) (535)
Loss on disposal of property and equipment 4 12 43
Amortization of premium on short and long-term investments -- 195 54
Non-cash charges 188 96 56
Equity in net loss of Nextran -- -- 2,700
Gain on sale of partnership interest in Nextran -- -- (17,266)
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable, net 207 (460) (1,049)
(Increase) decrease in prepaid expenses and other current assets (461) (22) 203
Increase in other assets (68) (179) (126)
Increase (decrease) in accounts payable 66 590 (1,659)
Increase (decrease) in accrued expenses (2,228) 2,271 621
Increase (decrease) in deferred revenue (1,847) 30 (9)
Increase (decrease) in other liabilities (212) 502 10
-------- ------- -------
Net cash provided by (used in) operating activities (4,019) 1,979 (1,121)
-------- ------- -------
Cash flows from investing activities:
Decrease in restricted cash -- 317 947
(Increase) decrease in cash in escrow 4,550 (4,550) --
Purchases of property and equipment (3,281) (1,815) (1,160)
Proceeds from disposal of property and equipment -- 73 6
Purchases of intangible assets (22) (31) (18)
Purchases of investments -- (5,409) (2,055)
Proceeds from maturities of investments 2,518 3,697 1,000
Proceeds from sale of partnership interest in Nextran -- -- 18,000
-------- ------- -------
Net cash provided by (used in) investing activities 3,765 (7,718) 16,720
-------- ------- -------
Cash flows from financing activities:
Proceeds from short-term borrowings 2,398 660 1,899
Payments on short-term borrowings (5,401) (5,130) (944)
Proceeds from borrowings of long-term debt 5,000 -- --
Principal payments on long-term debt (5,203) (1,014) (719)
Proceeds from stock options exercised and warrants issued 82 113 125
Payments received on employee stock purchase loans -- 7 7
Increase in note payable - related party -- 17 20
-------- ------- -------
Net cash provided by (used in) financing activities (3,124) (5,347) 388
-------- ------- -------
Effect of exchange rate changes on cash (152) 373 (218)
-------- ------- -------
Increase (decrease) in cash and cash equivalents (3,530) (10,713) 15,769
Cash and cash equivalents, beginning of year 10,455 21,168 5,399
-------- ------- -------
Cash and cash equivalents, end of year $ 6,925 10,455 21,168
======== ======= =======
Supplemental disclosure of cash flow information Cash paid during the year for:
Interest $ 769 1,005 1,450
Income taxes 1,093 57 1,035
-------- ------- -------
Noncash investing and financing activities:
Unrealized gain on marketable debt securities $ -- 95 77
-------- ------- -------
</TABLE>
In 1995, the Company entered into capital lease obligations for laboratory
equipment in the amount of $60.
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 45
CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization:
Chrysalis International Corporation, a Delaware Corporation
incorporated in 1988, (the "Company" or "Chrysalis"), formerly DNX Corporation
("DNX"), is an international contract research organization ("CRO") providing a
broad portfolio of integrated drug development services primarily to the
pharmaceutical and biotechnology industries. This portfolio of drug development
services includes transgenic discovery research, preclinical development and
clinical capabilities that enable the Company to manage a comprehensive drug
development program or a client's specific requirements. The Company generates
substantially all of its revenues from its drug development services business
and services more than 250 clients in 26 countries.
On December 18, 1996, the Company issued 2,632,600 shares of Common
Stock in connection with the acquisition (the "Acquisition") by the Company of
all of the outstanding capital stock of, or equity interests in, BioClin, Inc.,
a Delaware corporation, BioClin Europe AG, a Swiss corporation, BioClin GmbH, a
German corporation, Kilmer N.V., a Netherlands Antilles corporation, and BioClin
Institute of Clinical Pharmacology GmbH, a German corporation (collectively, the
"BioClin Group"). This transaction was recorded using the "pooling-of-interests"
method of accounting (note 5).
Chrysalis is also the exclusive commercial licensee of a U.S. patent
covering Pronuclear DNA Microinjection technology, the process widely used in
the pharmaceutical and biotechnology industries to develop transgenic animals.
The Company utilizes this license for its drug development services and grants
sublicenses for the use of this technology. These sublicenses entitle the
Company to receive revenues consisting of fees and, in certain cases, royalties.
Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.
Revenue recognition:
Revenues from services are generally recognized in accordance with the
terms of the contract and in the periods in which the related services have been
rendered and the related costs incurred. Revenue related to contract
modifications is recognized after performance and when realization is assured
and the amounts are reasonably determinable. Adjustments to contract cost
estimates are made in the period in which the facts which require the revisions
become known. When the revised estimate indicates a loss, such loss is provided
for in its entirety. Revenues earned but not billed as of a given date are
reflected in the accompanying consolidated balance sheets as trade accounts
receivable (note 3). Funds received that relate to future performance under
service contracts are deferred and recognized as revenue when earned.
Revenue from other contracts, primarily cost plus fixed-fee government
contracts, is recognized in the period in which the related services have been
rendered and costs incurred.
Revenue from license fees is recognized upon issuance or renewal of
technology licenses. Additionally, sublicenses of the Company's proprietary DNA
Microinjection technology entitle the Company to receive additional revenues
consisting of royalties and milestone payments, which amounts are recognized as
revenue when received. To date, no material revenues have been received from
royalties and milestone payments.
Reimbursed costs:
Substantially all amounts recorded as reimbursed costs in the
accompanying statements of operations relate to independent investigator and
travel costs. These costs are reimbursed by sponsors of the respective studies
in accordance with the respective contract terms. Payments received from
sponsors for investigator and travel costs in excess of costs incurred are
classified as deferred revenue and costs incurred in excess of amounts paid by
sponsors are classified as trade accounts receivable--unbilled.
F-8
<PAGE> 46
CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Cash and cash equivalents and short-term investments:
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents
consist primarily of money market funds, corporate obligations and U.S.
Government obligations and are carried at cost, which approximates market value.
Short-term investments consist primarily of U.S. Government and corporate
obligations which mature in one year or less. The Company has both the intent
and ability to hold its investments until maturity, and accordingly, all
investments are carried at amortized cost.
The Company classifies its marketable debt securities into one or more
of the following categories: held-to-maturity, trading or available-for-sale.
All of the Company's marketable debt securities are foreign corporate debt
securities and are classified as available-for-sale. Available-for-sale
securities are recorded at fair market value and any unrealized gains or losses
are recorded as part of stockholders' equity.
Concentration of credit risks:
The Company invests its excess cash in deposits with major financial
institutions, money market funds and notes issued by companies with strong
credit ratings. The Company has established guidelines relating to
diversification and maturities that maintain safety and liquidity. To date, the
Company has not experienced any losses on its cash equivalents and short-term
investments.
The Company extends unsecured trade credit in connection with its
commercial services to a diversified customer base comprised of both foreign and
domestic entities, most of which are concentrated in the pharmaceutical and
biotechnology industries.
Property and equipment:
Major additions and replacements of assets are capitalized at cost.
Maintenance, repairs and minor replacements are expensed as incurred. Property
and equipment are depreciated using the straight-line method over the following
periods: buildings and improvements--twenty to forty years; laboratory
equipment, vehicles, office and computer equipment, furniture and
software--three to ten years. Leasehold improvements are amortized using the
straight-line method over the estimated useful life of the asset or the lease
term, whichever is shorter. Upon retirement or sale, the cost of the assets
disposed of and the related accumulated depreciation are removed from the
accounts and any resulting gain or loss is credited or charged to operations.
Equipment leased under capital leases is capitalized with corresponding payment
obligations recorded in current and long-term debt.
Intangible assets:
Costs in excess of net assets acquired are capitalized and are being
amortized on a straight-line basis over twenty years.
Costs incurred in filing for patents are capitalized. Capitalized costs
related to unsuccessful patent applications are expensed when it becomes
determinable that such applications will be rejected. Capitalized costs related
to successful patent applications are amortized on a straight-line basis over a
period not to exceed seventeen years or the remaining life of the patent,
whichever is shorter.
F-9
<PAGE> 47
CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Income taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes"
(FAS 109). Under the asset and liability method of FAS 109, deferred tax assets
and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled. Valuation allowances are established to reduce deferred tax assets if
it is determined to be "more likely than not" that all or some portion of the
potential deferred tax assets will not be realized. Under FAS 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date of the tax rate change.
Earnings (loss) per share:
SFAS No. 128, "Earnings Per Share" (SFAS 128), was adopted by the
Company on December 31, 1997. In accordance with the pronouncement, all prior
year earnings per share data have been restated upon adoption to conform to the
new standards. SFAS 128 simplifies the calculation of earnings per share data by
replacing primary and fully diluted earnings per share with basic and diluted
earnings per share, respectively. Basic earnings per share excludes potentially
dilutive securities, including stock options, and is calculated by dividing net
income (loss) available to common stockholders by the weighted average common
shares outstanding for the period. Diluted earnings per share, which is
generally consistent with the fully diluted calculation under present accounting
rules, reflects the dilution to earnings that would occur if convertible
securities, stock options and potentially dilutive securities were converted
into common stock resulting in the issuance of common stock. Accordingly, all
prior period EPS data has been restated.
In computing diluted earnings per share for the years ended December
31, 1997 and 1996, the denominator did not change from the computation of basic
earnings per share, because the effect of including potential common shares in
this calculation, would be antidilutive. If the effect on diluted earnings per
share had not been antidilutive, the denominator would have increased by 339,000
and 561,000 shares for 1997 and 1996, respectively. This increase in shares
represents the inclusion of stock options and warrants outstanding at December
31, 1997 and 1996 with an exercise price less then the average market price of
Chrysalis' common stock during 1997 and 1996, respectively. In computing diluted
earnings per share for the year ended December 31, 1995, the denominator was
increased by 532,000, representing the dilution of stock options and warrants
outstanding at December 31, 1995 with an exercise price less than the average
market price for the Company's stock during 1995.
Foreign currency translation:
The financial statements of the Company's European subsidiaries are
translated into U.S. dollars in accordance with SFAS No. 52, "Foreign Currency
Translation." Substantially all assets and liabilities are translated at
year-end exchange rates and income and expense items are translated at an
average exchange rate. Exchange adjustments resulting from foreign currency
transactions are generally recognized in operations, whereas adjustments
resulting from the translation of financial statements are reflected as a
separate component of stockholders' equity.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of:
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
F-10
<PAGE> 48
CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Stock Option Plans:
Prior to January 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 January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," 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 No. 123 also allows entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option grants
made in 1995 and future years as if the fair-value-based method defined in SFAS
No. 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 No. 123 (note 12).
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 at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassification:
Certain amounts contained in the 1996 and 1995 consolidated financial
statements have been reclassified to conform to the 1997 presentation.
New Accounting Pronoucements:
The FASB has recently issued two new accounting standards, Statement
No. 130 "Reporting Comprehensive Income" and Statement No. 131, "Disclosure
about Segments of an Enterprise and Related Information," and if adopted will be
effective for periods presented after December 31, 1997. The Company is
evaluating the effect of these new statements.
(2) SHORT-TERM INVESTMENTS AND MARKETABLE DEBT SECURITIES
Short-term investments at December 31, 1996 were $2,518,000.
Marketable debt securities outstanding at December 31, 1996 are
available for sale and are recorded in the accompanying consolidated balance
sheets at fair value. The amortized cost, gross unrealized holding gains and
fair value of available-for-sale foreign corporate debt securities as of
December 31, 1996 were $402,000, $95,000 and $497,000, respectively.
Maturities of corporate debt securities classified as
available-for-sale as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
---- -----
(IN THOUSANDS)
<S> <C> <C>
Due within one year $ 79 101
Due after one year through five years 323 396
---- ---
$402 497
==== ===
</TABLE>
F-11
<PAGE> 49
CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable as of December 31, 1997 and 1996 consist of
the following:
<TABLE>
<CAPTION>
1997 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Trade accounts receivable--billed $ 6,500 7,217
Trade accounts receivable--unbilled 3,310 3,701
------- ------
9,810 10,918
Less: allowance for doubtful accounts 141 130
------- ------
$ 9,669 10,788
======= ======
</TABLE>
Trade accounts receivable--unbilled relates to revenues earned on
commercial services when the related services have been rendered and costs
incurred, but which were not billed to the customer as of the end of the
reporting period. At December 31, 1997 and 1996, there were no prerequisites for
billing such unbilled trade accounts receivable.
(4) SUPPLEMENTAL BALANCE SHEET INFORMATION
Accrued expenses as of December 31, 1997 and 1996 consist of the
following:
<TABLE>
<CAPTION>
1997 1996
------ -----
(IN THOUSANDS)
<S> <C> <C>
Facilities costs $ -- 155
Payroll and fringe benefits 2,735 2,737
Professional fees 120 245
Value-added taxes 605 688
Income taxes 151 550
Interest 44 104
Investigator payment and contract expenses 575 1,532
Business combination costs 44 1,380
Other 1,293 882
------ -----
$5,567 8,273
====== =====
</TABLE>
(5) MERGER WITH THE BIOCLIN GROUP
On December 18, 1996, the Company issued approximately 2.6 million
shares of its common stock in exchange for all of the outstanding common stock
of the BioClin Group. The merger was accounted for as a pooling-of-interests and
accordingly, the Company's consolidated financial statements were restated to
include the accounts and operations of the BioClin Group for all periods prior
to the merger. Separate net revenue, net income (loss) and related earnings
(loss) per share amounts of the merged entities are presented in the following
table. In addition, the table includes unaudited pro forma net income (loss) and
earnings (loss) per share amounts which reflect the elimination of the
nonrecurring business combination costs in 1996.
<TABLE>
<CAPTION>
1996 1995
-------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Net revenue
DNX $ 29,604 25,323
BioClin Group 11,883 14,286
-------- -------
Total $ 41,487 39,609
======== =======
Net income (loss)
DNX $ 474 12,566
BioClin Group (285) (141)
-------- -------
Proforma net income (loss) 189 12,425
Merger costs (3,649) --
-------- -------
Net income (loss), as reported $ (3,460) 12,425
======== =======
</TABLE>
F-12
<PAGE> 50
CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) MERGER WITH THE BIOCLIN GROUP, CONTINUED
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Diluted Earnings (loss) per share
As reported $ (0.31) 1.06
Pro forma 0.02 1.06
</TABLE>
In connection with the merger, $3.6 million of business combination
costs and related expenses were incurred and expensed in the fourth quarter of
1996. The business combination costs and expenses primarily consisted of legal,
accounting, and investment banking fees, expenses related to creating and
promoting the new company name and other related expenses.
(6) PROPERTY AND EQUIPMENT
A summary of property and equipment as of December 31, 1997 and 1996 is
as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Land $ 501 537
Buildings and improvements 11,620 12,492
Leasehold improvements 837 408
Laboratory equipment 7,497 7,683
Office and computer equipment, software and furniture 6,379 4,876
------- ------
26,834 25,996
Less accumulated depreciation and amortization 11,707 10,033
------- ------
$15,127 15,963
======= ======
</TABLE>
(7) NEXTRAN
On August 29, 1994, the Company, through a wholly-owned subsidiary,
entered into a Joint Venture Agreement (the Joint Venture Agreement) with Baxter
Transplant Holdings, Inc. (Holdings), a wholly-owned subsidiary of Baxter
Healthcare Corporation (Baxter), which is a subsidiary of Baxter International,
Inc. Under the Joint Venture Agreement, the Company and Holdings formed Nextran,
a Delaware general partnership, in which the Company had a 30% partnership
interest and Holdings had a 70% partnership interest. Pursuant to the terms of
the Purchase Agreement, dated September 22, 1995, as amended, the Company
consummated the sale of its 30% partnership interest in Nextran to Transplant
Acquisition Inc., a wholly owned subsidiary of Baxter, for a cash purchase price
of $18 million. Although the Company has sold its partnership interest in
Nextran, in the event that Nextran develops and commercializes hemoglobin blood
substitutes using technologies licensed to Nextran by the Company, the Company
will receive royalty income.
Prior to the sale of its partnership interest in Nextran, the Company
recorded its share of Nextran's financial results of operations in its
consolidated financial statements according to the equity method of accounting.
As a result of the sale of its partnership interest in Nextran, the Company no
longer records a share of Nextran's financial results of operations in its
consolidated financial statements, subsequent to September 30, 1995.
(8) INTANGIBLE ASSETS
Intangible assets consist of the following components at December 31,
1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Costs in excess of net assets acquired $ 983 1,139
Licensed technology 61 61
Patent application costs 91 69
------ -----
1,135 1,269
Less accumulated amortization 330 316
------ -----
$ 805 953
====== =====
</TABLE>
F-13
<PAGE> 51
CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) SHORT-TERM BORROWINGS
To support operations in France, the Company has lines of credit and
overdraft privileges with French banks in the aggregate amount of 10.5 million
French Francs ($1,700,000 at the exchange rates in effect on December 31, 1997).
At December 31, 1997 and 1996 there were no outstanding borrowings under these
credit facilities.
The clinical business had line of credit arrangements with domestic and
foreign banks totaling approximately $6,410,000 as of December 31, 1996. The
amount outstanding under the line of credit arrangements amounted to
approximately $5,939,000 as of December 31, 1996. The majority of these
borrowings and credit arrangements were guaranteed by certain prior stockholders
of the clinical business. One of the conditions of the closing of the
Acquisition was the release of these guarantees. Therefore, in January 1997, the
Company paid off the outstanding balances on the majority of these line of
credit arrangements using the cash in escrow and established a new line of
credit arrangement with a Swiss bank totaling $3,000,000. This line is secured
by the clinical operation's trade accounts receivable and a guarantee by the
Company. The amount outstanding under this line of credit was approximately
$2,400,000 at December 31, 1997.
At December 31, 1996, short-term borrowings included Promissory Notes
of $5,000,000, issued in connection with the acquisition of the French
preclinical business. In the third quarter of 1997, the Company refinanced this
debt by obtaining a five year $5,000,000 term loan (note 10).
(10) LONG-TERM DEBT
Long-term debt consists of the following components at December 31,
1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Term loan with a large commercial bank bearing interest
at the prime rate plus 1.0% (9.5% as of December 31, 1997)
with interest payable monthly, and principal payable in
quarterly installments beginning September 1998 $5,000 --
Mortgage with a commercial bank, bearing interest
at the prime rate plus 1.5% (10% as of December 31,
1997) due in monthly installments through 2009 1,348 1,410
Mortgage with a Pennsylvania state agency, bearing
interest at 2%, due in monthly installments
through 2009 975 1,048
Equipment line of credit -- 16
Equipment loan with Pennsylvania state agency -- 55
Obligation under capital lease 6 27
------ -----
7,329 2,556
Less: Current portion 768 180
------ -----
$6,561 2,376
====== =====
</TABLE>
Future principal maturities of long-term debt at December 31, 1997 are
as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998 768
1999 1,399
2000 1,408
2001 1,418
2002 803
Thereafter 1,533
---------
$ 7,329
=========
</TABLE>
F-14
<PAGE> 52
CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) LONG-TERM DEBT, CONTINUED
In December 1992, the Company acquired preclinical operations in
France. Included in the purchase price were promissory notes having an aggregate
principal amount of $7,000,000 (the "Notes"). The unpaid principal balance on
the Notes as of December 31, 1996 of $5,000,000 was paid-off in August 1997. In
the third quarter, the Company refinanced this debt by obtaining a five year
$5,000,000 term loan from a large commercial bank, with the principal payable in
quarterly installments beginning September 1998. Interest will be paid monthly
over the life of the loan. This loan is secured by substantially all of the
Company's domestic assets, including the capital stock of its subsidiaries. The
Company was in default at December 31, 1997 under certain financial covenants
set forth in the credit agreement with respect to this term loan. In the first
quarter of 1998, the Company obtained a waiver of such default from the
commercial bank which provided this term loan.
In connection with its U.S. facility, the preclinical business secured
(i) a $1,500,000, 15-year mortgage with a bank, which originally required cash
collateral of $180,000, and (ii) a $1,200,000, 15-year mortgage from a
Pennsylvania agency, which required cash collateral of $450,000. These two loans
are also secured by mortgages on the property acquired. As a result of achieving
certain financial covenants, the cash collateral on the mortgage loan with the
bank was released in 1995. The cash collateral on the mortgage with the
Pennsylvania agency is classified as restricted cash as of December 31, 1997. If
the Company achieves certain financial milestones, this $450,000 of cash
collateral will be released. Additionally, the favorable interest rate on the
mortgage with the Pennsylvania agency is subject to change upon review by the
agency of certain future conditions.
In May 1994, the preclinical business obtained a $500,000 equipment
loan from a Pennsylvania agency secured by certain of the equipment required in
connection with the expansion of the preclinical business' United States
operations. The unpaid principal balance on this loan was paid off in the third
quarter of 1997.
(11) STOCKHOLDERS' EQUITY
Warrants:
In 1994, in conjunction with a financial consulting and advisory
arrangement, the Company issued a warrant to purchase 110,000 shares of Common
Stock exercisable at $4.25 per share to the advisor. The warrant is currently
exercisable and expires on December 31, 1998.
(12) STOCK OPTION PLANS
The Company maintains three stock incentive plans, the 1988 Stock Plan,
the 1991 Stock Option Plan and the 1996 Stock Option Plan, (the Plans), which
provide for the granting of options to officers, directors, employees and
consultants at an option price which approximates the fair market value of such
common shares at the date of grant as determined by the Board of Directors. The
Plans provide for an aggregate of 2,460,250 options to be granted. The options
are exercisable for a period of ten years after the date of grant and generally
vest over a four-year period. The weighted average exercise price of the options
granted under these plans was $3.91, $3.75 and $3.51 per share at December 31,
1997, 1996 and 1995, respectively.
The weighted average fair values of stock options granted during 1997,
1996 and 1995 were $3.11, $2.77 and $1.97 per share respectively. Such fair
values are estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions: in 1997, dividend yield of 0%; expected
volatility of 66%; risk-free interest rates of 6.25%; and expected lives of 7
years. In 1996 and 1995, the assumptions were: dividend yield of 0%; expected
volatility of 35%; risk-free interest rates of 7%; and expected lives of 7
years.
F-15
<PAGE> 53
CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) STOCK OPTION PLANS, CONTINUED
The Company applies APB Opinion No. 25 in accounting for its Plans. Had
the Company determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123, the Company's net income (loss)
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Net income (loss)
As reported $(2,050) $(3,460) $12,425
Pro forma (2,669) (3,827) 12,282
</TABLE>
The pro forma net income (loss) reflects only the options granted in
1997, 1996 and 1995. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma net
income (loss) amounts presented above because compensation cost is reflected
over the option's vesting period of four years and compensation cost for options
granted prior to January 1, 1995 is not considered.
A summary of activity under the Plans for the years ending December 31,
1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
COMMON STOCK OPTIONS
OUTSTANDING
-----------
SHARES PRICE PER SHARE
------ ---------------
<S> <C> <C>
Balance, December 31, 1994 1,292,343 $ 0.40 - 10.50
Granted 557,475 3.00 - 4.38
Exercised (135,248) 0.40 - 2.50
Canceled (111,176) 0.40 - 6.25
---------
Balance, December 31, 1995 1,603,394 0.40 - 10.50
Granted 473,150 4.44 - 7.25
Exercised (101,650) 0.40 - 6.00
Canceled (50,131) 2.50 - 6.50
---------
Balance, December 31, 1996 1,924,763 0.40 - 10.50
---------
Granted 123,000 3.44 - 5.50
Exercised (26,006) 0.50 - 4.75
Canceled (96,582) 2.50 - 6.00
----------
Balance, December 31, 1997 1,925,175 0.40 -10.50
=========
Shares exercisable at December 31, 1997 1,379,023
=========
</TABLE>
F-16
<PAGE> 54
CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) INCOME TAXES
Income tax expense (benefit) attributable to the net income (loss)
consists of the following during the years ended December 31, 1997, 1996 and
1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current
U.S. Federal $ -- -- 232
State and local -- -- --
Foreign 756 514 326
----- ---- ----
756 514 558
----- ---- ----
Deferred
U.S. Federal -- -- --
State and local -- -- --
Foreign (516) (37) (535)
----- ---- ----
(516) (37) (535)
----- ---- ----
$ 240 477 23
----- ==== ----
</TABLE>
Income tax expense (benefit) attributable to the net income (loss) for
the years ended December 31, 1997, 1996 and 1995 differed from the amounts
computed by applying the U.S. federal income tax rate of 34 percent to the
income (loss) before income tax expense (benefit) as a result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" income tax expense (benefit) $(615) (1,014) 4,263
Increase (reduction) in income taxes resulting
from:
Change in the beginning-of-the-year balance
of the valuation allowance for Federal
deferred tax assets allocated to income
tax expense 326 206 (3,831)
Nondeductible reorganization expenses -- 1,241 --
Foreign tax rate differential 499 82 (394)
Changes in enacted tax rates 30 -- --
Alternative minimum taxes -- -- 32
Other, net -- (38) (47)
----- ------ ------
$ 240 477 23
----- ------ ------
</TABLE>
F-17
<PAGE> 55
CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) INCOME TAXES, CONTINUED
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 and 1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Retirement indemnities $ 192 243
Other 139 119
Deferred revenue 288 971
Accrued expenses 223 625
Capitalized research and development costs 643 436
Net operating loss carryforwards 13,547 12,657
Tax credit carryforward 3,179 3,167
-------- -------
Total gross deferred tax assets 18,211 18,218
Less valuations allowance 17,803 17,477
-------- -------
Net deferred tax assets 408 741
-------- -------
Deferred tax liabilities:
Property and equipment, principally due to allocation
of the purchase price of the French operation and
differences in depreciation and capitalized interest (1,259) (1,980)
Other (387) (512)
-------- -------
Total gross deferred liabilities (1,646) (2,492)
-------- -------
Net deferred tax liability $ (1,238) (1,751)
======== =======
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1995
was $17,197,000. The net change in the total valuation allowance for the years
ended December 31, 1997, 1996 and 1995 were (decreases) increases of $326,000,
$280,000, and (3,424,000), respectively.
At December 31, 1997, the Company has net operating loss carryforwards
for Federal income tax purposes of approximately $26,434,000 which are available
to offset future Federal taxable income, if any, through 2012.
The Company also has research and development tax credit carryforwards
of approximately $3,012,000 for federal income tax reporting purposes which are
available to reduce federal income taxes, if any, through 2011. The Company has
alternative minimum tax credit carryforwards of approximately $164,000 for
federal income tax reporting purposes which are available to reduce federal
income taxes, if any. These tax credits have an unlimited carryforward period.
(14) RELATED PARTY TRANSACTIONS
Note Payable - Related Party:
As of December 31, 1997 and 1996, the Company owed approximately
$291,000 and $299,000, respectively, to a relative of an officer and major
shareholder. The note payable bears interest at a rate of 6.25% and is unsecured
and due upon demand. Amounts outstanding as of December 31, 1997 and 1996
include accrued interest of approximately $17,000 and $66,000, respectively.
Indemnification by certain stockholders:
Pursuant to the Acquisition agreement, certain stockholders indemnify
the Company for certain named litigation costs. As a result of this
indemnification, the Company has established a receivable due from the
stockholders in the amount of $284,000 and $265,000 as of December 31, 1997 and
1996, respectively, payable in Common Stock at $5.0625 per share, the closing
price at December 18, 1996.
F-18
<PAGE> 56
CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) COMMITMENTS AND CONTINGENCIES
The Company leases office and laboratory facilities and equipment under
various noncancellable operating lease agreements. Future minimum rental
commitments for the next five years as of December 31, 1997 on the
aforementioned operating leases are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
------
(IN THOUSANDS)
<S> <C>
1998 $ 1,509
1999 1,305
2000 821
2001 373
2002 86
Thereafter 1
-------
Total minimum lease payments $ 4,095
=======
</TABLE>
Rental expense aggregated $1,493,000, $1,312,000, and $1,106,000 in
1997, 1996 and 1995, respectively.
In 1994, the Company reversed into income $300,000 which was previously
an accrued liability, established in connection with the Company's curtailment
of the blood substitute program for the estimated restoration costs of its
Plainsboro pilot plant facility, when the Company was relieved of these
obligations upon a new tenant assuming the lease for this facility without
requiring restoration. In addition, in connection with this transaction, in
January 1995 the Company sold certain equipment associated with the pilot plant
to this new tenant for a total of $600,000 to be paid over 21 months.
(16) EMPLOYEE BENEFITS
Pension Plans:
The clinical business maintains a pension plan for its key management
employees in Europe, one of whom is also a major shareholder. The plan provides
benefits based upon age, years of service, and remuneration. The plan is an
unfunded book reserve plan. Expenses for this plan totaled approximately
$158,000, $104,000, and $172,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
Most retirement benefits in France are paid out under the auspices of a
government-sponsored defined contribution retirement plan. Under the terms of
labor agreements, however, employees are entitled to an additional lump sum
payment at retirement provided they are still employed by the preclinical French
operation at their normal retirement date.
Net periodic pension cost for 1997, 1996 and 1995 includes the
following components:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service costs-benefits earned during the period $ 32 34 39
Interest cost on projected benefit obligation 26 25 27
Net amortization and deferral (18) 25 19
---- -- --
Net periodic pension cost $ 40 84 85
==== == ==
</TABLE>
F-19
<PAGE> 57
CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) EMPLOYEE BENEFITS, CONTINUED
The present value of benefit obligations and the funded status of the
preclinical French operation's retirement indemnities recognized in the
Company's consolidated balance sheets as of December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of accumulated benefit
obligations (no amounts are vested) $418 454
Additional amounts related to salary increases 38 30
---- ---
Total projected benefit obligation 456 484
---- ---
Plan assets at fair value -- --
Accrued pension cost $456 484
==== ===
</TABLE>
Assumptions used in the actuarial computations for 1997, 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Discount rate 8.0% 6.0% 6.0%
Rate of compensation increases 2.0% 2.0% 3.0%
</TABLE>
Profit-sharing of the operations in France:
Profit-sharing is a requirement under French law. The payments are made
to employees after a period of 5 years unless certain conditions are met and
payment can be made earlier. During 1997, 1996 and 1995, profit sharing costs
aggregated $199,000, $181,000 and $0, respectively.
Savings Plan:
The Company has an employee savings plan ("Savings Plan"), that
qualifies as a deferred salary arrangement under Section 401(k) of the Internal
Revenue Code. Under the Savings Plan, participating U.S. employees may defer a
portion of their pretax earnings, up to the Internal Revenue Service annual
contribution limit. Effective May 1, 1993, the Company amended the Savings Plan
to provide for a Company match of 50% of each employee's contributions with
newly issued common stock of the Company. For the years ended December 31, 1997,
1996 and 1995, the Company issued 45,037, 18,065 and 14,563 shares of common
stock, respectively, to participants in the Savings Plan. Charges to operations
for the years ended December 31, 1997, 1996 and 1995 aggregated $188,000,
$95,000 and $56,000, respectively, under this plan.
(17) LEGAL PROCEEDINGS
In the ordinary course of business, the Company is involved in certain
legal actions. In the opinion of management, based upon the advice of counsel,
the resolution of these legal matters will not have a material effect upon the
Company or its financial condition.
In 1995, the Company terminated its relationship with the Virginia
Commonwealth University (VCU), which performed Phase I and analytical services
on behalf of the Company in the United States. The Company signed a settlement
agreement with VCU in the third quarter of 1997, that was significantly less
than the recorded liability. This action resulted in a book gain of $700,000,
which was recorded in other income in the third quarter of 1997.
F-20
<PAGE> 58
CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18) BUSINESS SEGMENT AND CUSTOMER INFORMATION
Business segment information:
The Company operates in two geographic areas. Information on the
Company's geographic operations is set forth in the table below.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues:
North American operations $ 15,520 13,165 14,719
International operations 26,778 28,322 24,890
-------- ------- -------
Total net revenues $ 42,298 41,487 39,609
======== ======= =======
Operating income (loss):
North American operations $ (838) (381) (294)
International operations (255) 1,166 (493)
General corporate (1,107) (861) (896)
Special charge -- (3,649) --
-------- ------- -------
Total operating loss $ (2,200) (3,725) (1,683)
======== ======= =======
Identifiable assets:
North American operations $ 11,017 9,388 10,031
International operations 19,839 24,129 24,616
General corporate 4,384 14,426 20,777
-------- ------- -------
Total identifiable assets $ 35,240 47,943 55,424
======== ======= =======
</TABLE>
Customer information:
For the year ended December 31, 1997 net revenues from one customer
aggregated approximately $9,537,000 or 23% of the Company's total net revenues.
For the year ended December 31, 1996 net revenues from one customer aggregated
approximately $5,021,000 or 12% of the Company's total net revenues. For the
year ended December 31, 1995, net revenues from one customer aggregated
approximately $6,408,000 or 16% of the Company's total net revenues.
As described in note 17, in 1995 the Company terminated its
relationship with VCU, which performed Phase I and analytical services on behalf
of the Company in the United States. The combined statements of operations
include net revenues related to these services in the amount of $3,465,000 in
1995.
(19) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, short-term investments, trade accounts receivable,
accrued interest receivable, restricted cash, accounts payable, and accrued
expenses:
The carrying amount approximates fair value because of the short term
maturity of these instruments.
Long-term debt:
The carrying amount of long-term debt with variable interest rates
approximates fair value due to its variable nature. The fair value of long-term
debt with fixed interest rates is estimated on the current rates offered to the
Company for debt of the same remaining maturities. The carrying amount of
long-term debt with fixed interest rates aggregated $975,000 and $1,103,000
while the fair value approximated $605,000 and $642,000 as of December 31, 1997
and 1996, respectively.
F-21
<PAGE> 59
CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(20) SUBSEQUENT EVENT (UNAUDITED)
On March 16, 1998, the Company issued, in exchange for $5,000,000 cash,
a subordinated debenture and a warrant to purchase 2,000,000 shares of Common
Stock for $2.50 per share to a wholly-owned subsidiary of MDS Inc. The terms of
the subordinated debenture provide for semi-annual interest payments with the
aggregate principal amount payable on March 16, 2001. The debenture is
subordinate to certain outstanding indebtedness of the Company, including its
existing bank debt and mortgages. In addition, a portion or all of the principal
amount of the debenture may, at the option of the holder, be satisfied by
issuance of the shares of Common Stock in accordance with the terms of the
warrant.
F-22
<PAGE> 60
EXHIBIT INDEX
(3) Articles of Incorporation and Bylaws
(i) Third Amended and Restated Certificate of Incorporation of the
Company is incorporated herein by reference to Exhibit 3.1 to
the Company's Current Report on Form 8-K dated December 18,
1996.
(ii) Certificate of Amendment of Certificate of Incorporation of
the Company is incorporated by reference to Exhibit 3(ii) of
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995.
(iii) Third Amended and Restated Bylaws of the Company is
incorporated herein by reference to Exhibit 3.2 to the
Company's Current Report on Form 8-K dated December 18, 1996.
(4) Instruments defining the Rights of Security Holders, including Indentures
(i) Stockholders' Agreement, dated as of December 18, 1996, among
DNX Corporation, Dr. Gerald Rittershaus, as Trustee and
Employee Trustee, Manfred Wissman, as Trustee, Dr. Jack
Barbut, Alec Hackel, Dr. John Christian Jensen, Sherby N.V.,
Martha Lee Reynolds, Barry Dvorchik, Bettina Donhardt and
Christine Dune-Kraatz is incorporated herein by reference to
Exhibit 2.4 to the Company's Current Report on Form 8-K dated
December 18, 1996.
(10) Material Contracts
(i) *1988 Stock Plan of the Company, as amended, is incorporated
herein by reference to Exhibit 10(i) of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1995.
(ii) *1991 Stock Option Plan of the Company, as amended, is
incorporated herein by reference to Exhibit 10(ii) of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995.
(iii) *1996 Stock Option Plan of the Company is incorporated by
reference to Appendix G to the Company's Schedule 14A dated
November 8, 1996.
(iv) *Employment Agreement between Pharmakon Research
International, Inc. and Leif Modeweg, dated as of June 28,
1993, is incorporated herein by reference to Exhibit 10(iv)
of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995.
(v) *Employment Agreement between the Company and John G.
Cooper, dated May 29, 1996, is incorporated herein by
reference to Exhibit 10(v) of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996.
(vi) *Employment Agreement between the Company and Paul J.
Schmitt, dated June 2, 1995, is incorporated herein by
reference to Exhibit 10.1 of the Company's Quarterly Report
on Form 10-Q for the period ended June 30, 1995.
(vii) *Employment Agreement between the Company and John Christian
Jensen, dated December 18, 1996, is incorporated herein by
reference to Exhibit 10(vii) of the Company's Annual Report
on Form 10-K for the fiscal year ended
X-1
<PAGE> 61
December 31, 1996.
(viii) *Employment Agreement between the Company and Dr. Jack
Barbut, dated December 18, 1996, is incorporated herein by
reference to Exhibit 10(viii) of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996.
(ix) *Consulting Agreement between the Company and Dr. Jack
Barbut dated December 18, 1996, is incorporated herein by
reference to Exhibit 10(ix) of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996.
(x) *Form of Individual Long Term Disability Policy of New
England Mutual Life Insurance Company for Corporate Officers
is incorporated herein by reference to Exhibit 10(vii) of
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995.
(xi) Assignment Agreement between Genetic Engineering, Inc. and
the Company dated October 30, 1989, is incorporated herein
by reference to Exhibit 10(viii) of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1995.
(xii) License Agreement between Ohio University and DNX, Inc.
dated June 13, 1985, as amended July 1, 1991, is
incorporated herein by reference to Exhibit 10.6 to
Amendment No. 2 to the Company's Registration Statement on
Form S-1 filed December 10, 1991 (Registration Statement No.
33-43553). Certain confidential information contained in
such Exhibit 10.6 has been granted confidential treatment by
the Commission on December 10, 1991.
(xiii) Exclusive Worldwide License Agreement between Princeton
University and DNX, Inc. dated December 22, 1987, as amended
December 28, 1990, is incorporated herein by reference to
Exhibit 10.7 to Amendment No. 3 to the Company's
Registration Statement on Form S-1 filed December 10, 1991
(Registration Statement No. 33-43553). Certain confidential
information contained in such Exhibit 10.7 has been granted
confidential treatment by the Commission on December 10,
1991.
(xiv) License Agreement between The Board of Trustees of the
Leland Stanford Junior University and DNX, Inc. effective as
of July 1, 1990, is incorporated herein by reference to
Exhibit 10(x) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995.
(xv) Lease made as of August 28, 1991 between Richard J. Matthews
and Sally G. Matthews and Pharmakon is incorporated herein
by reference to Exhibit 10(xii) to the Company's Annual
Report on Form 10-K for the fiscal year December 31, 1995.
(xvi) *Form of Indemnification Agreement between the Company and
its officers and directors is incorporated herein by
reference to Exhibit 10(xiii) to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995.
(xvii) Warrant Agreement to Purchase Shares of Common Stock of the
Company, as amended as of December 23, 1997, by and among
the Company and Hambrecht & Quist Incorporated.
X-2
<PAGE> 62
(xviii) Agreement of Sale dated March 3, 1993 between Scranton
Lackawanna Industrial Building Company and Pharmakon is
incorporated herein by reference to Exhibit 10(xxxv) to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995.
(xix) Loan Agreement dated June 29, 1993 between First Eastern
Bank, N.A. and Pharmakon is incorporated herein by reference
to Exhibit 10(xxxvi) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995.
(xx) Joint Venture Agreement, dated as of August 29, 1994 by and
among DNX Biotherapeutics and Baxter Transplant Holdings,
Inc. is incorporated herein by reference to Exhibit
10(xxxvii) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
(xxi) Asset Transfer Agreement, dated as of August 29, 1994 by and
among the Company, DNX Biotherapeutics, Baxter Healthcare
Corporation and Baxter Transplant Holdings, Inc is
incorporated herein by reference to Exhibit 10(xxxviii) to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995.
(xxii) Guaranty Agreement (DNX), dated as of August 29, 1994 by and
among the Company, Nextran, Baxter Transplant Holdings,
Inc., and Baxter Healthcare Corporation is incorporated
herein by reference to Exhibit 10(xxxix) to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.
(xxiii) Assignment and Assumption of Lease, dated August 29, 1994 by
and among the Company, DNX Biotherapeutics, Inc. and Baxter
Transplant Holdings, Inc. is incorporated herein by
reference to Exhibit 10(xl) to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995.
(xxiv) Agreement, dated October 8, 1996, between the Company and
Nextran.
(xxv) Intentionally omitted
(xxvi) Loan Agreement, dated as of October 3, 1994 by and between
Scranton Lackawanna Industrial Building Company and The
Pennsylvania Industrial Development Authority is
incorporated herein by reference to Exhibit 10(xliii) to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995.
(xxvii) Promissory Note in the principal amount of $1,200,000, dated
as of October 3, 1994, made by Scranton Lackawanna
Industrial Building Company to the order of The Pennsylvania
Industrial Development Authority is incorporated herein by
reference to Exhibit 10(xliv) to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995.
(xxviii) Consent, Subordination and Assumption Agreement, effective
as of October 3, 1994 by Pharmakon and Scranton Lackawanna
Industrial Building Company in favor of The Pennsylvania
Industrial Development Authority is incorporated herein by
reference to Exhibit 10(xlv) to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995.
(xxix) Loan Agreement, dated May 25, 1994 by and between Pharmakon
and the Commonwealth of Pennsylvania, acting by and through
the Department of
X-3
<PAGE> 63
Commerce is incorporated herein by reference to Exhibit
10(xlvi) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.
(xxx) Purchase Agreement, dated as of September 23, 1995, by and
among Transplant Acquisition Inc., Baxter HealthCare
Corporation, DNX Biotherapeutics, Inc. and DNX Corporation
is incorporated herein by reference to Exhibit 2.1 of the
Company's Current Report on Form 8-K filed on October 31,
1995.
(xxxi) Amendment No. 1 to Purchase Agreement, dated as of September
29, 1995, by and among Transplant Acquisition Inc., Baxter
HealthCare Corporation, DNX Biotherapeutics, Inc. and DNX
Corporation is incorporated herein by reference to Exhibit
2.2 of the Company's Current Report on Form 8-K filed on
October 31, 1995.
(xxxii) Merger Agreement, dated as of August 19, 1996, among DNX
Corporation, DNX Acquisition Corporation, Dr. Jack Barbut,
Alec Hackel, Dr. John Christian Jensen, Sherby N.V. and
BioClin, Inc. is incorporated herein by reference to Exhibit
2.1 to the Current Report on Form 8-K filed by the Company
on August 19, 1996.
(xxxiii) Share Exchange Agreement, dated as of August 19, 1996, among
DNX Corporation, Mr. Manfred Wissman, as Trustee, Dr. Gerald
Rittershaus, as Employee Trustee, Dr. Jack Barbut, Alec
Hackel, Dr. John Christian Jensen, Bettina Donhardt,
Christine Dune-Kraatz, BioClin GmbH, Kilmer N.V. and BioClin
Europe AG is incorporated herein by reference to Exhibit 2.2
to the Company's Current Report on Form 8-K filed on August
19, 1996.
(xxxiv) Share Acquisition Agreement, dated as of August 19, 1996,
among DNX Corporation, Dr. Gerald Rittershaus, as Trustee,
Dr. Jack Barbut, Alec Hackel, Dr. John Christian Jensen and
BioClin Institute of Clinical Pharmacology GmbH is
incorporated herein by reference to Exhibit 2.3 to the
Company's Current Report on Form 8-K filed on August 19,
1996.
(xxxv) Term Loan and Security Agreement, dated as of August 29,
1997, among the Company , Chrysalis International
Preclinical Services Corporation, Chrysalis DNX Transgenic
Sciences Corporation, Chrysalis International Clinical
Services Corporation and CoreStates Bank, N.A.
(xxxvi) Promissory Note in the principal amount of $5,000,000, dated
August 29, 1997, made by the Company, Chrysalis
International Preclinical Services Corporation, Chrysalis
DNX Transgenic Sciences Corporation and Chrysalis
International Clinical Services Corporation, to the order
of CoreStates Bank, N.A.
(xxxvii) Security Agreement, dated August 29, 1997, among the
Company, Chrysalis International Preclinical Services
Corporation, Chrysalis DNX Transgenic Sciences Corporation,
Chrysalis International Clinical Services Corporation and
CoreStates Bank, N.A.
(xxxviii) Stock Pledge Agreement, dated August 29, 1997, between the
Company and CoreStates Bank, N.A.
(xxxix) Collateral Assignment of Contracts, dated August 29, 1997,
among the Company, Chrysalis International Preclinical
Services Corporation, Chrysalis DNX Transgenic Sciences
Corporation, Chrysalis International Clinical Services
Corporation and CoreStates Bank, N.A.
X-4
<PAGE> 64
(xl) First Amendment to Term Loan and Security Agreement, dated
September 24, 1997, among the Company, Chrysalis International
Preclinical Services Corporation, Chrysalis DNX Transgenic
Sciences Corporation, Chrysalis International Clinical
Services Corporation and CoreStates Bank, N.A.
- -----------------------------
*Management contract or compensatory plan or arrangement
required to be filed as an exhibit pursuant to Item 14(c) of
Form 10-K.
(21) Subsidiaries of the Company
(23) Consent of Experts
(i) The Consent of KPMG Peat Marwick LLP regarding the Company's
Registration Statement on Form S-8 (File No. 33-49124) and
Registration Statement on Form S-8 (File No. 33-70976) is
attached hereto as Exhibit 23(i).
(24) Powers of Attorney
(27) Financial Data Schedule
X-5
<PAGE> 1
Exhibit 10(xvii)
Chrysalis
Corporate Offices
575 Route 28
Raritan, NJ 08869 USA
Tel: (908) 722-7900
Fax: (908) 722-6677
E-mail: corporate @ chrysalisintl.com
December 23, 1997
Mr. George Montgomery
Managing Director
Hambrecht & Quist Inc.
One Bush Street
San Francisco, CA 94104
Dear George:
This is to confirm our verbal agreement to extend the expiration date of
Hambrecht & Quist's warrant (original warrant agreement dated June 21, 1994) to
purchase 110,000 shares of DNX Corporation common stock for a period of one year
from December 31, 1997 to December 31, 1998.
We very much look forward to continuing our work with you.
Sincerely,
/s/ Paul J. Schmitt
Paul J. Schmitt
Chairman, President &
Chief Executive Officer
PJS:kaw
<PAGE> 1
EXHIBIT 10(xxiv)
AGREEMENT
This Agreement (this "Agreement") is made and entered into
this 8th day of October 1996 by and between DNX Corporation, a Delaware
corporation ("DNX"), and Nextran, a Delaware general partnership ("Nextran").
RECITALS
DNX, through its affiliate DNX Biotherapeutics, Inc., an Ohio
corporation ("DNX Biotherapeutics"), and Baxter Healthcare Corporation, a
Delaware corporation ("BHC"), through its affiliate Baxter Transplant Holdings,
Inc. ("Baxter"), formed Nextran pursuant to that certain Joint Venture
Agreement, dated as of August 29, 1994.
Pursuant to that certain Purchase Agreement, dated as of
September 22, 1995, BHC, through its affiliate Transplant Acquisition, Inc., a
Delaware corporation, acquired DNX Biotherapeutics' interest in Nextran (the
"1995 Transaction").
In connection with the formation of Nextran, DNX and Nextran
executed that certain Services Agreement (DNX) and that certain Services
Agreement (Nextran), each effective as of August 29, 1994 (collectively the
"Services Agreements"). The Services Agreements were not amended or modified
in connection with the 1995 Transaction and each of the Services Agreements
continue in full force and effect.
DNX and Nextran desire to amend and restate the Services
Agreements as a single unified agreement.
<PAGE> 2
AGREEMENT
In consideration of the following mutual covenants and
agreements, and subject to the terms and conditions set forth herein, the
Services Agreements are hereby amended and restated in their entirety as
follows:
ARTICLE I
SERVICES TO BE PROVIDED BY NEXTRAN
1.1 License. (a) Nextran hereby grants to DNX a license
to use, during the Term (as defined below), on an exclusive basis, the portions
of Nextran's facility (the "Facility") in which DNX currently operates its
animal colony located at 303B College Road East, Princeton, New Jersey,
together with such furnishings and fixtures therein (the "Licensed Premises"),
as the same is more particularly described on Exhibit 1.1 hereto. Further,
Nextran hereby grants to DNX a license to use, during the Term, on a
non-exclusive basis, (a) the portions of the Facility necessary to permit DNX,
and its agents, employees, contractors and invitees, access to the Licensed
Premises on a twenty-four (24) hours per day, seven (7) days per week basis,
and (b) the restroom facilities and loading, shipping, and receiving areas,
kitchen facilities and common corridors serving the Facility (the portions of
the Facility described in clauses (a) and (b) being collectively referred to
herein as the "Related Areas"). Each such license shall be irrevocable during
the Term.
2
<PAGE> 3
(b) Nextran shall make available to DNX all electric, water,
gas, lighting, heating, ventilation and air conditioning, and shipping and
receiving services which Nextran has provided to DNX in the Licensed Premises
prior to the effective date hereof, all without interference or interruption,
except such interference or interruption which is not caused by Nextran.
1.2 Lease. The grant of each license pursuant to this
Agreement shall be subject to the conditions, limitations and restrictions
applicable to the Licensed Premises and the Related Areas, as the case may be,
by virtue of the terms and conditions of the lease between DNX Corporation and
College Road Associates, dated as of October 10, 1988, as amended (the
"Lease"). Except for such of Nextran's obligations which DNX has agreed to
perform pursuant to this Agreement, Nextran agrees to perform all of its
obligations under the Lease in a timely manner and to maintain the Lease in
full force and effect.
1.3 License Fees. DNX shall pay to Nextran, on the first
day of each and every month during the Term, the license fee set forth on
Exhibit 1.2 hereto. Further, as set forth on Exhibit 1.2 hereto, DNX shall
reimburse Nextran for the cost of utilities consumed by DNX in the Licensed
Premises and for a proportionate share of the real estate taxes and operating
expenses charged to Nextran pursuant to the Lease, as set forth on Exhibit 1.2.
1.4 Maintenance, Repair and Insurance. DNX shall
maintain the Licensed Premises in good operating condition, normal wear and
tear excepted. Nextran shall maintain the
3
<PAGE> 4
insurance which Nextran is required to maintain in respect of the Licensed
Premises by virtue of the Lease. In the event of any casualty damage to the
Property, the restoration of the Licensed Premises shall be governed by the
Lease, subject to the indemnification provisions contained herein. In the
event of any casualty damage which cannot, with reasonable effort, be restored
or repaired within ninety (90) days after such casualty event, each party
hereto shall have the right to terminate this Agreement by written notice to
the other. DNX will maintain liability insurance and casualty insurance on its
property located in the Licensed Premises to the same extent that Nextran is
required to maintain such coverage in the Lease.
1.5 Security Deposit. (a) DNX has delivered to Nextran
the sum of $22,000.00 which is held by Nextran as security for DNX's
performance of its obligations hereunder (the "Security Deposit"). Provided
that DNX shall not be in default under this Agreement, the Security Deposit
shall be returned to DNX, with interest at the rate of eight percent (8%) per
annum, within thirty (30) days after the expiration or termination of this
Agreement.
(b) Nextran and DNX acknowledge that the landlord under the
Lease (the "Landlord") holds a security deposit with respect to the Lease and
that DNX is entitled to such security deposit. Promptly after the date of this
Agreement, Nextran shall provide to the Landlord such substitute security as
the Landlord shall require under the Lease so that the Landlord shall pay to
DNX the entire amount of DNX's security deposit.
4
<PAGE> 5
ARTICLE II
SERVICES TO BE PROVIDED BY DNX
2.1 General. Subject to the limitations set forth on
Exhibit 2.1 hereto, Nextran agrees to purchase from DNX and DNX agrees to sell
and provide to Nextran the services (the "Services") at the pricing and in the
quantities described on Exhibit 2.1 hereto. DNX shall provide the Services at
the Facility. Nextran agrees to provide to DNX the operational information
required for DNX to provide the Services.
2.2 Performance Standards. DNX shall provide the
Services to Nextran at substantially the same quality levels and in the same
order of priority as DNX provides services similar to the Services to third
parties.
ARTICLE III
TERM
3.1 Term. This Agreement shall become effective on the
later of January 1, 1997 or when DNX completes construction of its offices and
lab at 301B College Road East, Princeton, New Jersey and shall expire on August
31, 1999 at 11:59 p.m.; provided, however, that should the Lease be terminated
by the Landlord pursuant to the terms of the Lease, that the term of this
Agreement will expire upon such termination of the Lease (the "Term").
5
<PAGE> 6
ARTICLE IV
CONFIDENTIALITY
4.1 Confidential Treatment. Each of DNX and Nextran
agrees that it will keep confidential and not disclose any information provided
to the other in connection with the services being rendered hereunder to any
other person without the consent of the party from whom the information was
obtained, unless the information is known or becomes known to the public other
than through the breach of this Agreement or such disclosure is required by
law. Upon expiration or termination of this Agreement, each of DNX and Nextran
agrees to return all information to the other person, including all copies
thereof, unless the returning party is otherwise required to retain such
information by law.
ARTICLE V
INDEMNIFICATION
5.1 Nextran. Nextran shall indemnify and hold harmless
DNX, and its controlling persons, directors, officers, employees and agents
(collectively, for purposes of this Article V only, "DNX") from and against any
and all losses, expenses, claims, actions, lawsuits and judgments thereon
(including reasonable attorneys fees), which may be brought against DNX as a
result of the acts or omissions of Nextran or its stockholders, employees,
directors, officers or agents or Nextran's or any such person's activities in
carrying out the terms of this Agreement; provided, however, that DNX shall not
be indemnified for any loss, liability or damage resulting from DNX's failure
to comply
6
<PAGE> 7
with the terms of this Agreement or any acts of gross negligence or willful
misconduct by DNX.
5.2 DNX. DNX shall indemnify and hold harmless Nextran,
and its controlling persons, directors, officers, employees and agents
(collectively, for purposes of this Article V only, "Nextran") from and against
any and all losses, expenses, claims, actions, lawsuits and judgments thereon
(including reasonable attorneys' fees), which may be brought against Nextran as
a result of the acts or omissions of DNX or its stockholders, employees,
directors, officers or agents or DNX's or any such person's activities in
carrying out the terms of this Agreement; provided, however, that Nextran shall
not be indemnified for any loss, liability or damage resulting from Nextran's
failure to comply with the terms of this Agreement or any acts of gross
negligence or willful misconduct by Nextran.
ARTICLE VI
TERMINATION AND REMEDIES
6.1 Termination. (a) Both DNX and Nextran shall have
the right to terminate this Agreement upon the breach of any provision of this
Agreement by the other party. Notice of breach and termination shall be given
in writing by the nonbreaching party to the breaching party. The termination
pursuant to this Section 6.1(a) shall be effective 30 days after delivery of
written notice unless the breaching party shall have cured the breach to the
reasonable satisfaction of the nonbreaching party prior to such termination
date.
7
<PAGE> 8
(b) This Agreement shall automatically terminate upon the
effectiveness of the termination of the Lease by the Landlord pursuant to the
terms of the Lease. Notwithstanding the foregoing, within three business day's
following the receipt by Nextran of notice from the Landlord of termination of
the Lease, Nextran shall furnish written notice to DNX, both by telecopy
(transmission confirmed) and by overnight courier, of such termination of the
Lease.
ARTICLE VII
ARBITRATION
7.1 Arbitration. (a) All disputes between or among
Nextran and DNX arising out of or in connection with the execution,
interpretation and performance of this Agreement (including the validity, scope
and enforceability of this arbitration provision) shall be solely and finally
settled by arbitration. The arbitration proceedings shall be held in Chicago,
Illinois, and shall be conducted in accordance with the Center for Public
Resources (the "CPR") Rules for Non-Administered Arbitration of Business
Disputes. The arbitration shall be governed by the provisions of the federal
Arbitration Act unless otherwise provided herein, and shall be conducted by a
sole arbitrator appointed by the CPR (the "Arbitrator"). In case of conflict
between the CPR Rules and this Agreement, the provisions of this Agreement
shall govern. All arbitrations commenced with respect to this Agreement shall
be consolidated for hearing before a sole Arbitrator as prescribed herein.
8
<PAGE> 9
(b) If a party hereto determines to submit a dispute for
arbitration pursuant to this Section 7.1, such party (the "Petitioner") shall
furnish the other party (the "Respondent") with a dated, written statement (the
"Arbitration Notice") indicating (i) such party's intent to commence
arbitration proceedings, (ii) the nature, with reasonable detail, of the
dispute and (iii) the remedy such party will seek. A copy of the Arbitration
Notice shall be concurrently provided to the CPR, along with a copy of this
Agreement and a request to appoint an Arbitrator.
(c) At any time within forty (40) days after the date of the
Arbitration Notice, the Petitioner and Respondent can make discovery requests
of the other in any form permitted under the United States Federal Rules of
Civil Procedure. The recipient of a discovery request shall have ten (10) days
after the receipt of such request to object to any or all portions of such
request, and shall respond to any portions of such request not so objected to
within twenty (20) days of the receipt of such request. All objections shall
be in writing and shall indicate the reasons for such objections. The
objecting party shall insure that all objections and responses are received by
other parties within the above time periods. Any party seeking to compel
discovery following receipt of an objection shall file with the other parties
and the Arbitrator a motion to compel, including a copy of the initial request
and the objection. The Arbitrator shall allow five days for responses to the
motion to come before ruling. Claims of privilege and other objections shall
be
9
<PAGE> 10
determined as they would be in United States federal court in a case applying
Illinois law.
(d) Hearings must commence no later than the 83rd day
following the date of the Arbitration Notice and such hearings shall be
conducted for no more than five days, unless otherwise agreed by the parties or
ordered by the Arbitrator.
(e) Each of the Petitioner and Respondent shall submit a
brief, outlining such party's claim for relief or defense to any claim, to the
other and to the Arbitrator on or before the 10th day following the last day of
the hearing. Reply briefs must be exchanged and submitted to the Arbitrator on
or before the 20th day following the last day of the hearing. The Arbitrator
shall render the decision that, in its judgment, is most consistent with the
terms of this Agreement and applicable law.
(f) The foregoing time periods and procedural steps may be
modified or extended by agreement of the parties or by the Arbitrator in its
discretion to the extent it deems necessary to prevent fundamental unfairness;
provided that at all times the Arbitrator shall be mindful of the parties'
desire for the most expeditious possible resolution of their disputes; and
provided, further, that a final decision of the Arbitrator shall be rendered
within 120 days of the Arbitration Notice.
(g) To the extent permissible under applicable law, the
parties hereto agree that the award of the Arbitrator shall be final and shall
be subject only to the judicial review permitted by the federal Arbitration
Act. Judgment on the
10
<PAGE> 11
arbitration award may be entered and enforced in any court having jurisdiction
over the parties or their assets. It is the intent of the parties that the
arbitration provisions hereof be enforced to the fullest extent permitted by
applicable law. In no event shall any demand for arbitration be made after the
date that institution of legal or equitable proceedings based upon the claim,
dispute or other matter would be barred by the applicable statute of
limitations or otherwise barred by this Agreement.
(h) The Arbitrator may not award punitive damages, and the
parties hereby irrevocably waive any right to punitive damages.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
8.1 Force Majeure. Neither party shall be liable for any
delay in or failure of performance hereunder due to any contingency beyond its
control, including, without limiting the generality of the foregoing, an act of
God, war, mobilization, riot, strike, fire, flood, disease, power failure,
embargo or shortage of supplies; provided, however, that any party's obligation
to pay any amounts hereunder shall be suspended to the extent of the other
party's delay in or failure of performance hereunder.
8.2 No Warranty. (a) DNX makes no representations or
warranties, express or implied, regarding the marketability, use or fitness for
any particular purpose of the materials or services provided to Nextran by DNX.
DNX shall not be liable
11
<PAGE> 12
under this Agreement for special, consequential or incidental damages.
(b) Nextran makes no representations or warranties, express
or implied, regarding the marketability, use or fitness for any particular
purpose of the materials or services provided to DNX by Nextran. Nextran shall
not be liable under this Agreement for special, consequential or incidental
damages.
8.3 Independent Contractor. DNX is an independent
contractor, not an employee or agent of Nextran. Nothing in this Agreement
shall render DNX or any of its agents or employees, agents or employees of
Nextran, nor authorize or empower it or its agents or employees to speak for,
represent or obligate Nextran in any way. Nextran recognizes that DNX retains
all the rights and privileges of an employer, including but not limited to the
right to hire, direct, discipline, compensate and terminate employees assigned
to perform the Services. DNX shall have the exclusive rights to designate
which of its employees render any Service hereunder. DNX assumes any and all
liabilities with respect to compensation of its employees. Each of DNX and
Nextran, for itself and its respective affiliates, agree, for the Term of this
Agreement and for a period of one (1) year thereafter not to solicit for
employment the employees of the other.
8.4 Amendments and Waivers. This Agreement may be
amended only by a written instrument signed by the parties hereto. No failure
to exercise and no delay in exercising, on the part of any party, any right,
remedy, power or privilege
12
<PAGE> 13
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, remedy, power or privilege hereunder or thereunder
preclude any other or further exercise thereof or the exercise of any other
right, remedy, power or privilege. The rights, remedies, powers and privileges
herein provided are cumulative and not exclusive of any rights, remedies,
powers and privileges provided by law. The failure of any party to insist upon
a strict performance of any of the terms or provisions of this Agreement, or to
exercise any option, right or remedy herein contained, shall not be construed
as a waiver or as a relinquishment for the future of such term, provision,
option, right or remedy, but the same shall continue and remain in full force
and effect. No waiver by any party of any term or provision of this Agreement
shall be deemed to have been made unless expressed in writing and signed by
such party.
8.5 Captions and Section Headings. Section titles or
captions contained in this Agreement are inserted as a matter of convenience
and for reference purposes only, and in no way define, limit, extend or
describe the scope of this Agreement or the intent of any provision hereof.
8.6 Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument.
8.7 Notices. All notices, demands or other
communications hereunder shall be in writing and shall be deemed given when
delivered personally, three (3) days after being
13
<PAGE> 14
mailed by certified or registered mail, postage prepaid, when actually
delivered if sent by overnight courier services or telecopied (transmission
confirmed), or otherwise actually delivered.
If to Nextran: Nextran
303B College Road East
Princeton Forrestal Center
Princeton, New Jersey 08540
Attention: Controller
Telephone: (609) 520-0300
Facsimile: (609) 520-9864
with copies to: Baxter Healthcare Corporation
1620 North Waukegan Road
McGaw Park, Illinois 60085
Attention: Thomas Sabatino
Associate General Counsel
Telephone: (708) 473-6030
Facsimile: (708) 473-6933
If to DNX: DNX Corporation
575 Route 28
Raritan, New Jersey 08869
Attention: Chief Financial Officer
Telephone: (609) 520-0300
Facsimile: (609) 520-9864
with copies to: Jones, Day, Reavis & Pogue
North Point
901 Lakeside Avenue
Cleveland, Ohio 44114
Attention: Thomas C. Daniels, Esq.
Telephone: (216) 586-7017
Facsimile: (216) 579-0212
or at such other address and numbers as may have been furnished by such person
in writing to the other parties.
8.8 Successors and Assigns. All rights, covenants and
agreements of the parties contained in this Agreement shall, except as
otherwise provided herein, be binding upon and inure to the benefit of their
respective successors and assigns.
8.9 Severability and Governing Law. Should any Section
or any part of a Section within this Agreement be
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<PAGE> 15
rendered void, invalid or unenforceable by any court of law for any reason,
such invalidity or unenforceability shall not void or render invalid or
unenforceable any other Section or part of a Section in this Agreement. This
Agreement shall be governed by, and construed in accordance with, the laws of
the State of Illinois.
8.10 Further Assurances. Each party hereto agrees to do
all acts and to make, execute and deliver such written instruments as shall
from time to time be reasonably required to carry out the terms and provisions
of this Agreement.
8.11 No Benefit to Others. The representations,
warranties, covenants and agreements contained in this Agreement are for the
sole benefit of the parties hereto and their successors and assigns, and they
shall not be construed as conferring any rights on any other person, except the
rights of Silicon Valley Bank (the "Bank") as secured creditor of DNX, holding
a duly perfected first priority lien in certain equipment located at the
Facility and in all of DNX's right, title and interest in this Agreement and
the Bank's rights pursuant to the Service Equipment Subordination Agreement,
dated as of August 29, 1994.
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<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first above written.
DNX Corporation
By: /s/ John G. Cooper
-------------------------------------------
Name: John G. Cooper
Nextran
By: Baxter Transplant Holdings
Inc., General Partner
By: /s/ Donald Joseph
-----------------------------------
Name: Donald Joseph
By: Transplant Acquisition, Inc.,
General Partner
By: /s/ Donald Joseph
-----------------------------------
Name: Donald Joseph
16
<PAGE> 1
EXHIBIT 10(xxxv)
TERM LOAN AND SECURITY AGREEMENT
Dated as of August 29, 1997
by and among
CHRYSALIS INTERNATIONAL CORPORATION
CHRYSALIS INTERNATIONAL PRECLINICAL SERVICES CORPORATION
CHRYSALIS DNX TRANSGENIC SCIENCES CORPORATION
and
CHRYSALIS INTERNATIONAL CLINICAL SERVICES CORPORATION
and
CORESTATES BANK, N.A.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE 1 DEFINITIONS; CERTAIN TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
-----------
SECTION 1.2 Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
----------------
ARTICLE 2 THE LOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 2.1 Agreement to Loan; The Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
---------------------------
SECTION 2.2 Principal Payments; Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
----------------------------
SECTION 2.3 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
--------
2.3.1 Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
-------------
2.3.2 Conversion Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
-----------------
2.3.3 Interest Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
----------------
2.3.4 Special Provisions Applicable to LIBOR Rate . . . . . . . . . . . . . . . . . . . . . . . . . . 11
-------------------------------------------
2.3.5 Usury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
-----
SECTION 2.4 Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
----------
SECTION 2.5 Compensation for Certain Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
--------------------------------------
2.5.1 Taxes, Reserves and Expenses on Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
-------------------------------------
2.5.2 Capital Adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
----------------
SECTION 2.6 Default Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
----------------
SECTION 2.7 Deduction of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
--------------------
SECTION 2.8 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
-------
SECTION 2.9 Structuring Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
---------------
ARTICLE 3 COLLATERAL SECURITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
-------------------
SECTION 3.1 Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
----------
SECTION 3.2 Collateral Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
------------------
ARTICLE 4 CONDITIONS OF LENDING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 4.1 Conditions Precedent to the Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
-------------------------------------
4.1.1 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
----
4.1.2 Representations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
---------------
4.1.3 Deliveries to Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
------------------
4.1.4 No Material Adverse Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
---------------------------
4.1.5 Satisfactory Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
------------------------
ARTICLE 5 REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 5.1 Representations and Warranties of the Borrowers . . . . . . . . . . . . . . . . . . . . . . . . 21
-----------------------------------------------
5.1.1 Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
---------
5.1.2 Corporate Authorizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
------------------------
5.1.3 Capitalization and Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
-------------------------------
5.1.4 No Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
------------
5.1.5 Authorizations and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
----------------------------
5.1.6 Validity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
--------
5.1.7 Pending Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
------------------
5.1.8 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
--------------------
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
5.1.9 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
--------
5.1.10 Margin Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
-----------------
5.1.11 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
-----
5.1.12 Compliance with Laws and Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
-----------------------------------
5.1.13 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
-----
5.1.14 Patents and Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
----------------------
5.1.15 Restrictions on Borrowers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
-------------------------
5.1.16 Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
----------------------
5.1.17 The Security Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
----------------------
5.1.18 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
-----
5.1.19 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
---------
5.1.20 Environmental Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
------------------------
5.1.21 License and Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
-------------------
5.1.22 Customer and Trade Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
----------------------------
5.1.23 Labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
-----
5.1.24 Survival of Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
----------------------
5.1.25 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
----------
ARTICLE 6 COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 6.1 Financial Covenants of Borrowers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
--------------------------------
6.1.1 Current Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
-------------
6.1.2 Consolidated Debt Service Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
----------------------------------------
6.1.3 Consolidated Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
-------------------------------
6.1.4 Ratio of Consolidated Total Liabilities to Tangible Net Worth . . . . . . . . . . . . . . . . . 29
-------------------------------------------------------------
6.1.5 Minimum Cash and Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
--------------------------------------
SECTION 6.2 Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
----------------------
6.2.1 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
--------------------
6.2.2 Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
-----------------
SECTION 6.3 Compliance with Laws, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
-------------------------
SECTION 6.4 Preservation of Existence, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
------------------------------
SECTION 6.5 Obtaining of Permits, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
-------------------------
SECTION 6.6 Maintenance of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
------------------------
SECTION 6.7 Maintenance of Properties, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
------------------------------
SECTION 6.8 Inspection Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
-----------------
SECTION 6.9 Operating Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
------------------
SECTION 6.10 Liens on Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
-------------------
SECTION 6.11 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
------------
SECTION 6.12 Loans and Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
---------------------
SECTION 6.13 Merger, Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
---------------------
SECTION 6.14 Sale of Assets, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
-------------------
SECTION 6.15 Change in Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
------------------
SECTION 6.16 Pension Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
-------------
SECTION 6.17 Environmental Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
------------------------
</TABLE>
- ii -
<PAGE> 4
<TABLE>
<S> <C> <C>
SECTION 6.18 Inconsistent Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
-----------------------
SECTION 6.19 Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
-----------
SECTION 6.20 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
---------
SECTION 6.21 Sale of Patent/License . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
----------------------
ARTICLE 7 EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 7.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
-----------------
ARTICLE 8 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 8.1 Notices, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
------------
SECTION 8.2 Amendments, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
---------------
SECTION 8.3 No Waiver; Remedies, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
------------------------
SECTION 8.4 Fees, Costs, Expenses and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
-------------------------------
SECTION 8.5 Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
---------
SECTION 8.6 Right of Set-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
----------------
SECTION 8.7 Severability of Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
--------------------------
SECTION 8.8 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
----------------------
SECTION 8.9 Assignment and Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
----------------------------
SECTION 8.10 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
------------
SECTION 8.11 Waiver of Jury Trial; Consent to Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . 46
---------------------------------------------
SECTION 8.12 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
-------------
SECTION 8.13 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
-----------
SECTION 8.14 Joint and Several Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
---------------------------
SECTION 8.15 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
----------------
</TABLE>
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<PAGE> 5
TERM LOAN AND SECURITY AGREEMENT
THIS TERM LOAN AND SECURITY AGREEMENT (such agreement, as amended
or otherwise modified from time to time, being hereinafter referred to as the
"Agreement"), dated as of August 29, 1997, is made by and among CHRYSALIS
INTERNATIONAL CORPORATION, a Delaware corporation, CHRYSALIS INTERNATIONAL
PRECLINICAL SERVICES CORPORATION, a Pennsylvania corporation, CHRYSALIS DNX
TRANSGENIC SCIENCES CORPORATION, an Ohio corporation and CHRYSALIS
INTERNATIONAL CLINICAL SERVICES CORPORATION, a Delaware corporation (each a
"Borrower" and together, the "Borrowers"), and CORESTATES BANK, N.A. (the
"Bank").
Background
A. The Borrowers wish to refinance an outstanding term loan
due on December 31, 1997 made in the principal amount of $5,000,000.
B. In order to refinance this outstanding indebtedness, the
Borrowers have requested that the Bank lend to the Borrowers the principal
amount of FIVE MILLION DOLLARS ($5,000,000) (the "Term Loan").
C. The Term Loan which the Bank has agreed to make, subject to
the terms and conditions set forth in this Agreement, will be secured by the
Security Documents (as defined below).
NOW, THEREFORE, in consideration of the mutual promises and
covenants herein contained, and intending to be legally bound hereby, the
parties hereto covenant and agree as follows:
ARTICLE 1
DEFINITIONS; CERTAIN TERMS
SECTION 1.1 Definitions. As used in this Agreement, the
following terms shall have the respective meanings indicated below (such
meanings to be applicable equally to both the singular and plural forms of such
terms).
"Affiliate" of any Person means any Person or group of Persons
acting in concert which, directly or indirectly, controls or is controlled by
or is under common control with such Person including, without limitation (i)
any Person which, directly or indirectly, owns or holds a voting or equity
interest or 10% or more in such Person and (ii) any other Person of which such
<PAGE> 6
Person, directly or indirectly, holds or owns a voting or equity interest of
10% or more. "Control" as used herein, means the power to direct or cause the
direction of the management and policies of an entity, whether through the
ownership of voting securities or by contract or otherwise.
"Authorized Officer" means, with respect to any act to be performed
or duty to be discharged by any Person which is not an individual, any officer
or other representative thereof authorized to perform such act or discharge
such duty.
"Business Day" means a day when the Bank is open for the conduct of
banking business at its principal offices in Philadelphia, Pennsylvania other
than a Saturday, Sunday or a federal or state holiday.
"Capitalized Lease Obligations" means all lease obligations that,
in accordance with generally accepted accounting principles, have been or
should be capitalized on the books of the lessee and, for purposes hereof, the
amount of any such obligation shall be the capitalized amount thereof
determined in accordance with such principles.
"Cash Collateral" shall have the meaning set forth in Section 7.1.
"CERCLA" means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the Superfund Amendment
and Reauthorization Act of 1986 and other amendments made thereto, together
with the rules and regulations promulgated thereunder as in effect from time to
time.
"Clean Air Act" means the Federal Clean Air Act, 42 U.S.C. Section
7401 et. seq., as amended.
"Closing Date" means, the date of execution and delivery of this
Agreement and the other Loan Documents.
"Collateral" shall have the meaning set forth in
Section 3.1.
"Commitment" means the aggregate principal amount outstanding under
the Term Loan.
"Consolidated," when used with reference to Indebtedness or other
accounts of Borrowers means the sum of the Indebtedness
- 2 -
<PAGE> 7
or such other accounts of Borrowers and their Consolidated Subsidiaries, as
consolidated in accordance with generally accepted accounting principles
consistent with those followed in the preparation of the Financial Statements,
after elimination of intercompany items.
"Consolidated Current Assets" means all assets that, as of the date
of determination thereof and in accordance with generally accepted accounting
principles should be classified as current assets on a consolidated balance
sheet of Borrowers and their Consolidated Subsidiaries, minus all receivables
from, and all loans or advances to, any shareholder or Affiliate of any
Borrower which was included in determining such current assets.
"Consolidated Current Liabilities" means all liabilities that, as
of the date of determination thereof and in accordance with generally accepted
accounting principles, should be classified as current liabilities on a
consolidated balance sheet of Borrowers and their Consolidated Subsidiaries,
plus all Indebtedness (including the Obligations) of the Borrowers and their
Consolidated Subsidiaries (to the extent not already included in such
liabilities) which would be classified as current liabilities if stated on a
consolidated balance sheet of the Borrowers and their Consolidated
Subsidiaries, including, without limitation, all such Indebtedness payable on
demand or within one year after such date.
"Consolidated Debt Service Coverage Ratio" means, for Borrowers and
their Consolidated Subsidiaries with respect to any period, (i) the sum of (A)
Consolidated Net Income for such period and (B) depreciation and amortization
expense deducted in determining such Consolidated Net Income ("Cash Flow")
divided by (ii) the sum of all principal payments of the Term Loan and all
other long-term debts, which are scheduled to be made within one year from the
date of calculation.
"Consolidated Net Income" means, for Borrowers and their
Consolidated Subsidiaries with respect to any period, net income of the
Borrowers and their Consolidated Subsidiaries, on a consolidated basis in
accordance with generally accepted accounting principles; provided, that there
shall be excluded therefrom (a) gains or losses from the sale of capital assets
not in the ordinary course, (b) the net income of any Person (other than a
Borrower) included in the calculation of such consolidated net income, except
to the extent it has been actually received by a Borrower in a cash
distribution, and (c) any gains or losses
- 3 -
<PAGE> 8
arising from extraordinary items, as defined by generally accepted accounting
principles consistently applied.
"Consolidated Tangible Net Worth" means, with respect to Borrowers
and their Consolidated Subsidiaries, at any time (a) the net amount of
consolidated shareholders' equity (including capital stock, additional paid-in
capital, capital surplus and retained earnings, after deducting treasury stock)
which would appear on the consolidated balance sheet of Borrowers and their
Consolidated Subsidiaries at such time, prepared in accordance with generally
accepted accounting principles consistently applied minus (b) the sum of
unamortized debt discount and expense, goodwill, trademarks, trade names,
computerized software, patents, deferred charges and other intangible assets of
Borrowers and their Consolidated Subsidiaries determined on a consolidated
basis in accordance with generally accepted accounting principles consistently
applied.
"Consolidated Subsidiaries" means the Subsidiaries of Borrowers
whose accounts are, at the time of determination, required to be consolidated
with those of Borrowers in accordance with generally accepted accounting
principles consistently applied.
"Default" shall mean any event or occurrence which with the passing
of time, the giving of notice, or both, would become an Event of Default.
"Employee Plan" means an employee pension benefit plan covered by
Title IV of ERISA and maintained in whole or in part for employees of any
Borrower or any of its Affiliates.
"Environmental Laws" means all applicable Federal, state, and local
laws, statutes, ordinances, rules, regulations, permits and valid orders
relating to the use, possession, handling, generation, transportation,
treatment, storage, recycling, discharge, disposal, emission, presence, or
Release (as defined in Section 5.1.20(b)), or the threat of Release of
(collectively "Management"), or any remedial, removal or response action in
connection with, any hazardous, toxic and polluting substances or wastes,
including without limitation, petroleum products.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended from time to time, together with the rules
- 4 -
<PAGE> 9
and regulations promulgated thereunder as in effect from time to time.
"Event of Default" means any of the events set forth in Section 7.1
hereof.
"Financial Statements" means the financial statements required to
be delivered by the Borrowers to the Bank periodically pursuant to Section
6.2.1 hereof.
"Fiscal Year" means the twelve month accounting period of the
Borrowers commencing on January 1 and ending on December 31 of each year.
"GAAP" shall have the meaning set forth in Section 1.2.
"Hazardous Substances" has the meaning given to that term in
Section 5.1.20(b) hereof.
"Indebtedness" means, with respect to any Person, calculated
without duplication, (a) all indebtedness of such Person for borrowed money or
for the deferred purchase price of property or services (other than accounts
payable due in the ordinary course of business within 90 days of the date of
determination), (b) all indebtedness of any other Person for borrowed money or
for the deferred purchase price of property or services, the payment or
collection of which such Person has guaranteed (except by reason of endorsement
for collection in the ordinary course of business) or in respect of which such
Person is liable, contingently or otherwise, including, without limitation, by
way of agreement to purchase, to provide funds for payment, to supply funds to
or otherwise to invest in such other Person, or otherwise to assure a creditor
against loss, (c) all indebtedness of any other Person for borrowed money or
for the deferred purchase price of property or services secured by (or for
which the holder of such indebtedness has an existing right, contingent or
otherwise, to be secured by) any mortgage, deed of trust, pledge, lien,
security interest or other charge or encumbrance upon or in property
(including, without limitation, accounts and contract rights) owned by such
Person, whether or not such Person has assumed or become liable for the payment
of such indebtedness, provided that such indebtedness shall be deemed to be
Indebtedness only to the extent of the book value of the property encumbered
thereby, (d) Capitalized Lease Obligations of such Person, (e) all
reimbursement obligations of such Person in respect of drafts drawn under
letters of credit
- 5 -
<PAGE> 10
and bankers acceptances, (f) any equity or other interest in such Person which,
by its terms, is convertible into a debt instrument and (g) withdrawal
liability incurred under ERISA by any Borrower or any of its Affiliates to any
multiemployer plan (as defined in Section 4001(a)(3) of ERISA); provided,
however, that Indebtedness shall not include any deferred revenues of any
Borrower in respect of services to be performed in the future by such Borrower.
"Interest Period" means, with respect to any LIBOR Rate Loan, the
interest period applicable thereto, as selected pursuant to Section 2.3.3.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended from time to time.
"LIBOR Rate" means, with respect to any LIBOR Rate Loan for any
Interest Period, the arithmetic average of the rates of interest per annum
(rounded upwards, if necessary, to the next 1/16th of 1%) which the Bank is
offered on deposits of United States Dollars on the London Interbank Market on
or about 9:00 a.m. (New York time) one or two Business Days prior to the
commencement of such Interest Period in amounts substantially equal to the
principal amount of the LIBOR Rate Loan requested with a maturity of comparable
duration to the Interest Period selected by the Borrowers.
"Loan" means the Term Loan.
"Loan Documents" means this Agreement, the Term Note and the
Security Documents.
"Maturity Date" means September 30, 2002.
"Note" means the Term Note.
"Obligations" means (a) the obligations of Borrowers to pay, as and
when due and payable (by scheduled maturity or otherwise), all amounts owing by
them in respect of the Loan Documents, whether for principal, interest, fees or
otherwise, and (b) the obligations of Borrowers to perform or observe all of
their other obligations from time to time existing under the Loan Documents.
- 6 -
<PAGE> 11
"Permitted Liens" shall have the meaning set forth in Section 6.10.
"Person" means an individual, corporation, partnership, limited
liability company or partnership or other similar entity, association,
joint-stock company, trust, unincorporated organization or joint venture, or a
court or government or any agency or political subdivision thereof.
"PIDA and PNC Loans" shall have the meaning set forth in Section
6.10(h).
"Prime Rate" means the rate so designated and established by the
Bank (which is not necessarily the lowest rate charged by the Bank), as such
rate may change from time to time, all such changes to be effective
immediately.
"Prohibited Transaction" has the meaning specified in Title IV of
ERISA.
"Release" has the meaning given to that term in Section 5.1.20(b).
"Reportable Event" has the meaning specified therefor in Title IV
of ERISA.
"Security Agreement" means the Security Agreement delivered by the
Borrowers and attached hereto as Exhibit C.
"Security Documents" mean the Security Agreement, Stock Pledge
Agreement, Collateral Assignment of Contracts, and the other documents and
agreements listed in Article 3 hereof and such other documents and agreements
which may be entered into by any Person with the Bank to provide collateral or
other security for the obligations of the Borrowers to the Bank hereunder.
"Subsidiary" means each Person of which all of the outstanding
Voting Securities are, at the time of determination, owned directly, or
indirectly through one or more intermediaries, by a Person.
"Term Loan" shall have the meaning set forth in the Background
section of this Agreement.
"Term Note" shall have the meaning set forth in Section 2.1(b).
- 7 -
<PAGE> 12
"Voting Securities" means, with respect to any corporation,
securities of all classes the holders of which are ordinarily, in the absence
of contingencies, entitled to elect a majority of the corporate directors (or
Persons performing similar functions).
SECTION 1.2 Accounting Terms. Except as otherwise expressly
provided herein, accounting terms not otherwise defined herein shall have the
meanings assigned to them in accordance with accounting principles and
practices generally accepted in the United States of America, as such
principles may change from time to time ("GAAP").
ARTICLE 2
THE LOAN
SECTION 2.1 Agreement to Loan; The Note.
(a) Subject to the terms and conditions set
forth in this Agreement, the Bank agrees to lend to the Borrowers on the
Closing Date Five Million Dollars ($5,000,000) with interest to accrue from the
date of the Term Note at the rate and payable in accordance with the terms and
provisions of this Agreement and the Term Note.
(b) The obligation of the Borrowers to repay
the Term Loan shall be evidenced by the Borrowers' promissory note of even date
herewith in the original principal amount of $5,000,000 (the "Term Note").
SECTION 2.2 Principal Payments; Maturity.
(a) Principal Payments. Principal payments on
the Term Loan shall be due and payable in sixteen (16) equal consecutive
quarterly installments of $312,500 commencing on September 30, 1998, and
thereafter on the last Business Day of each following December, March, June and
September, with the final quarterly installment due and payable on September
30, 2002 (the "Maturity Date").
(b) Maturity Date. The Term Loan shall mature
on the Maturity Date at which time the Borrower shall pay all outstanding
principal and accrued interest on the Term Loan and all other sums due
hereunder, and under any other Loan Document.
- 8 -
<PAGE> 13
SECTION 2.3 Interest.
2.3.1 Interest Rate.
(a) Determination of Rate. The Term Loan and
all other Obligations shall bear interest from the date such Term Loan is made
or Obligation becomes due to the date paid at a rate per annum determined by
reference to the LIBOR Rate or the Prime Rate. The applicable basis for
determining the rate of interest shall be selected by Borrowers initially at
the time the Term Loan is made hereunder and thereafter in accordance with
Section 2.3.2 hereof. At Borrowers' option, the applicable rate of interest
shall be either (i) the LIBOR Rate plus 3.5% per annum or (ii) the Prime Rate
plus 0.75% per annum (collectively, the "Original Interest Rates"). If the
interest rate selected by Borrowers is determined by reference to the LIBOR
Rate, such Loan shall sometimes be referred to hereinafter as the "LIBOR Rate
Loan" and if the interest rate selected by Borrowers is determined by reference
to the Prime Rate, such Loan shall sometimes be referred to hereinafter as the
"Prime Rate Loan".
(b) Reduced Rate. Notwithstanding the
foregoing, commencing after December 31, 1997, upon the Bank's receipt of
Borrowers' quarterly or annual Financial Statements in accordance with Section
6.2.1 hereof, demonstrating that the Borrowers' Consolidated Debt Service
Coverage Ratio for the immediately preceding consecutive four (4) fiscal
quarters exceeded 1.5 to 1, and provided there is no existing Event of Default
hereunder, the interest rate for the LIBOR Rate Loan shall be reduced to the
LIBOR Rate plus 2.5% per annum and the interest rate for the Prime Rate Loan
shall be reduced to the Bank's Prime Rate (collectively, the "Reduced Interest
Rates"). The Reduced Interest Rates shall remain in effect only so long as
there is no Event of Default under this Agreement and only so long as the
Borrowers' Consolidated Debt Service Coverage Ratio for any subsequent period
of four (4) consecutive quarterly periods continues to exceed 1.5 to 1. If the
Borrowers' Consolidated Debt Service Coverage Ratio for any subsequent period
of four (4) consecutive quarterly periods fails to exceed 1.5 to 1, then the
Original Interest Rates shall be reinstated until the subsequent achievement of
the conditions for the application of the Reduced Interest Rates upon which the
Reduced Interest Rates shall be reinstated. Any change in the Original
Interest Rates or the Reduced Interest Rates under this Subsection shall become
effective on the first day of the calendar month immediately following the
Bank's receipt of
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<PAGE> 14
Financial Statements demonstrating the requisite change, provided, however,
that in the case of a LIBOR Rate Loan, the change in the rate shall become
effective on the first Business Day immediately following the expiration of the
Interest Period then in effect for the LIBOR Rate Loan.
(c) Payment. Interest on the Term Loan shall
be payable with respect to a Prime Rate Loan or a LIBOR Rate Loan, monthly in
arrears on the first Business Day of each month during the term of the Term
Loan.
(d) Computation. All computation of interest
hereunder shall be made on the actual number of days elapsed over a year of 360
days.
(e) Default Rate. If an Event of Default
shall have occurred and be continuing, interest shall be paid at the default
rate in accordance with Section 2.6 hereof.
2.3.2 Conversion Option. Subject to the
provisions of this Section, the Borrowers shall have the option to convert at
any time, all but not part of the Term Loan, from a Prime Rate Loan or LIBOR
Rate Loan into the other or upon expiration of any Interest Period applicable
to a LIBOR Rate Loan to continue such Loan as a LIBOR Rate Loan and the
Interest Period of such continued Loan shall commence on the last day of the
Interest Period of the Loan to be continued; provided that except as otherwise
provided in Section 2.3.4 a LIBOR Rate Loan may be converted into a Prime Rate
Loan or continued as a LIBOR Rate Loan only on the last day of an Interest
Period applicable thereto. Each such conversion (or continuation) shall be
effected by an Authorized Officer or Officers of the Borrowers giving the Bank
prior to noon (New York time) at least three (3) Business Days (or the same
Business Day in the case of a conversion to a Prime Rate Loan) prior written
notice (or telephonic notice promptly confirmed in writing) (each a "Notice of
Continuance/Conversion") substantially in the form of Exhibit B hereto,
specifying the type of Term Loan to be converted into and (after being
converted into or continued as a LIBOR Rate Loan), the Interest Period to be
initially applicable thereto. If no Notice of a Continuance/Conversion has been
delivered with respect to a LIBOR Rate Loan on or before the third Business Day
prior to the last day of the Interest Period applicable thereto, such LIBOR
Rate Loan shall be automatically converted to a Prime Rate Loan.
- 10 -
<PAGE> 15
2.3.3 Interest Periods. At the time the
Borrowers give a Notice of Continuance/Conversion in respect of the making of,
continuance of, or conversion into, a LIBOR Rate Loan, it shall have the right
to elect, by giving the Bank written notice (or telephonic notice promptly
confirmed in writing), the Interest Period, which Interest Period shall, at the
option of Borrower, be a one, two or three month period. Notwithstanding
anything to the contrary contained herein:
(a) If any Interest Period relating to a LIBOR
Rate Loan begins on a date for which there is no numerically corresponding date
in the calendar month in which such Interest Period ends, such Interest Period
shall end on the last Business Day of such calendar month;
(b) If any Interest Period would otherwise
expire on a day which is not a Business Day, such Interest Period shall expire
on the next succeeding Business Day; provided, that if any Interest Period in
respect of a LIBOR Rate Loan would otherwise expire on a day which is not a
Business Day but is a day of the month after which no further Business Day
occurs in such month, such Interest Period shall expire on the next preceding
Business Day; and
(c) No Interest Period shall extend beyond the
Maturity Date.
2.3.4 Special Provisions Applicable to LIBOR Rate.
(a) The LIBOR Rate may be automatically
adjusted by the Bank on a retroactive basis to take into account (but only to
the extent necessary to recover such additional or increased costs) the
additional or increased cost of maintaining any necessary reserves for
Eurodollar deposits or increased cost due to any change in applicable law or
regulation or the interpretation thereof by any governmental authority charged
with the administration thereof or the introduction of any law or regulation
occurring subsequent to the commencement of the then applicable Interest
Period, including but not limited to changes in tax laws (except changes of
general applicability in corporate income tax laws) and changes in the reserve
requirements imposed by the Board of Governors of the Federal Reserve System
(or any successor), that increases the cost to the Bank of funding a LIBOR Rate
Loan. The Bank shall give the Borrowers notice of such a determination and
adjustment and the Borrowers may, by
- 11 -
<PAGE> 16
notice to the Bank: (x) require the Bank to furnish to the Borrowers a
statement setting forth the basis for adjusting such LIBOR Rate and the method
for determining the amount of such adjustment; and/or (y) may either (i) if a
Notice of Continuance/Conversion has been given with respect to the affected
LIBOR Rate Loan, cancel said notice by giving Bank telephonic notice (confirmed
promptly in writing) thereof on the same date Borrowers was notified pursuant
to this subsection, or (ii) if the affected LIBOR Rate Loan is still
outstanding, upon at least three Business Days' notice to the Bank, require the
Bank to convert each such LIBOR Rate Loan into a Prime Rate Loan, or prepay
such LIBOR Rate Loan; provided, that the Borrower shall compensate the Bank as
set forth in Section 2.3.4(d) hereof.
(b) In the event that the Bank shall have
reasonably determined that Eurodollar deposits equal to the amount of the LIBOR
Rate Loan requested, for the Interest Period specified, are unavailable or that
a LIBOR Rate will not adequately and fairly reflect the cost of making or
maintaining such LIBOR Rate Loan during the Interest Period specified or, that
by reason of circumstances affecting Eurodollar markets, adequate and
reasonable means do not exist for ascertaining a LIBOR Rate applicable to the
specified Interest Period, the Bank shall promptly give notice of such
determination to the Borrowers that a LIBOR Rate Loan is not available, and any
Notice of Continuance/Conversion given by the Borrowers with respect to
borrowing, conversion or continuance of a LIBOR Rate Loan which have not been
incurred shall be deemed rescinded by the Borrowers. A determination by the
Bank pursuant to this subsection shall be conclusive.
(c) In the event that it becomes unlawful for
the Bank to maintain Eurodollar liabilities sufficient to fund a LIBOR Rate
Loan, then the Bank shall notify the Borrowers and the Bank's obligation
hereunder to advance or maintain a LIBOR Rate Loan shall be suspended until
such time as the Bank may again offer a LIBOR Rate Loan. If the affected LIBOR
Rate Loan is still outstanding, the Bank shall require, as promptly as
practicable, that the Borrower either: (i) convert each such LIBOR Rate Loan
into a Prime Rate Loan, or (ii) prepay such LIBOR Rate Loan; provided, that the
Borrower shall compensate the Bank as set forth in Section 2.3.4(d) hereof.
(d) The Borrowers shall compensate the Bank,
upon written request by the Bank, for reasonable losses, expenses and
liabilities (including, without limitation, such
- 12 -
<PAGE> 17
factors as any interest paid by the Bank to lenders of funds borrowed by it to
make or carry a LIBOR Rate Loan and any loss sustained by the Bank in
connection with re-employment of such funds based upon the difference between
the amount earned in connection with re-employment of such funds and the amount
payable by Borrowers if such funds had been borrowed or remained outstanding)
which the Bank may sustain with respect to the Borrowers' LIBOR Rate Loan: (i)
if for any reason (other than a default or error by the Bank) a LIBOR Rate Loan
does not occur on a date specified therefor in a Notice of
Continuance/Conversion or in a telephonic request for conversion, or a
successive Interest Period in respect of any such LIBOR Rate Loan does not
commence after notice thereof is given pursuant to Section 2.3.2, (ii) if any
prepayment (under Section 2.4) or conversion of any LIBOR Rate Loan to the
Borrowers occurs on a date which is not the last day of the Interest Period
applicable to the Term Loan, (iii) if any prepayment of any such LIBOR Rate
Loan to the Borrowers is not made on any date specified in a notice of
prepayment given by the Borrowers, and (iv) any other failure by the Borrowers
to repay a LIBOR Rate Loan when required by the terms of this Agreement,
including an election by Borrowers made pursuant to this subsection; provided,
however, that the Borrowers shall not be required to compensate the Bank to the
extent such losses, expenses and liabilities have already been recovered by the
Bank pursuant to Section 2.3.4(a).
2.3.5 Usury. If at any time the interest rate
being charged to the Borrowers under this Agreement or the Term Note shall be
deemed by any governmental authority to exceed the maximum rate of interest
permitted by applicable law, then, without affecting the validity or
enforceability of this Agreement or any part hereof or the Term Note, such rate
shall be reduced to the maximum rate permissible under such applicable law. If
the Bank has received any payment of interest which exceeded the maximum legal
rate, then such amount shall, at the option of the Bank, be applied to the
reduction of the unpaid principal balance (and not to the payment of interest)
or returned to the Borrowers.
SECTION 2.4 Prepayment. (a) The Borrowers shall have the
right to prepay the Term Loan in whole, or in part (in increments equal to
quarterly installments), at any time and from time to time upon not less than
ten (10) days prior written notice to the Bank of Borrowers' intention to
prepay. If the Term Loan is a Prime Rate Loan at the time of prepayment, the
prepayment shall include all accrued and unpaid interest on the
- 13 -
<PAGE> 18
principal amount of the Term Loan so paid through the prepayment date, but
shall not include any premium or penalty. If the Term Loan is a LIBOR Rate
Loan at the time of prepayment, any prepayment of the Term Loan shall include
the payment of all accrued and unpaid interest on the principal amount so paid,
plus a premium equal to the amount, if any, by which (i) the installments of
principal being prepaid plus the installments of interest which would have been
payable thereon when discounted to a present value at a rate per annum equal to
the yield to maturity of the Applicable Treasury Bond Obligation exceeds (ii)
the principal amount being prepaid. As used herein, "Applicable Treasury Bond
Obligation" means the debt obligation of the United States Treasury having a
maturity date nearest in time to the last day of an Interest Period applicable
thereto. The maturity date and yield to maturity of such Applicable Treasury
Bond Obligation shall be determined by the Bank in its sole discretion on the
basis of quotations published in the Wall Street Journal on the date of
prepayment. The Bank shall notify the Borrowers in a timely manner of the
amount of such premium owed to the Bank and the basis of its calculation.
SECTION 2.5 Compensation for Certain Contingencies.
2.5.1 Taxes, Reserves and Expenses on Loans. If any
law, regulation, treaty or official directive, or the interpretation or
application thereof by any court or by any governmental authority charged with
the administration thereof, or the compliance with any guideline or request
from any central bank or other governmental authority (whether or not having
the force of law) (a) subjects the Bank to any tax or changes the basis of
taxation with respect to payments of principal, interest or other amounts due
from Borrowers (except for taxes, fees or other charges based on, or measured
by, the income or profits of the Bank (or the relevant lending office or
offices) or any franchise taxes or similar taxes imposed in lieu thereof); (b)
imposes, modifies or deems applicable any reserve, special deposit, premium, or
similar requirement against assets held by, or deposits in or for the account
of, or loans or commitments by, the Bank; or (c) imposes upon the Bank any
other condition with respect to this Agreement; and the result of any of the
foregoing is to increase the cost to the Bank, reduce the income receivable by
the Bank or impose any expense upon the Bank with respect to the Term Loan by
an amount which has not resulted or been reflected in an increase in the
interest rate(s) applicable to the Term Loan or otherwise recovered pursuant to
Section 2.3.4 and the Bank deems to be material, the Bank shall from time to
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time notify Borrowers; and Borrowers shall pay to the Bank, within thirty (30)
Business Days after receipt of such notice, that amount which shall compensate
the Bank (on an after-tax basis) for such increase in cost, reduction in income
or additional expense. The Bank's computation of the amount necessary to
compensate it shall be (i) set forth in reasonable detail, along with the basis
therefor, in a certificate which shall accompany the Bank's notice to Borrowers
of any such amount, (ii) made in good faith with a reasonable basis, and (iii)
conclusive in the absence of manifest error.
2.5.2 Capital Adequacy. If (a) the introduction of, or
any change in, or in the interpretation of, any United States law, rule or
regulation or (b) compliance with any directive, guidelines or request from any
central bank or other United States or foreign governmental authority (whether
or not having the force of law) promulgated or made after the date hereof
affects or would affect the amount of capital required or expected to be
maintained by the Bank or any corporation directly or indirectly owning or
controlling the Bank, and the Bank shall have determined that such
introduction, change or compliance has or would have the effect of reducing the
rate of return on the Bank's capital or on the capital of such owning or
controlling corporation as a consequence of its obligations hereunder to a
level below that which the Bank or such owning or controlling corporation could
have achieved but for such introduction, change or compliance (after taking
into account the Bank's policies or the policies of such owning or controlling
corporation, as the case may be, regarding capital adequacy) by an amount
deemed by the Bank (in its sole discretion) to be material, which has not been
reflected in the interest rate(s) applicable to the Loans or otherwise
recovered pursuant to Section 2.3.4, then, from time to time Borrowers shall
pay to the Bank within thirty (30) Business Days after receipt of notice from
the Bank of any change described in this Section such amount as shall
compensate the Bank for any such change. The Bank's computation of the amount
necessary to compensate it shall be (i) set forth in reasonable detail, along
with the basis therefor, in a certificate which shall accompany the Bank's
notice to Borrowers of any such amount, (ii) made in good faith with a
reasonable basis, and (iii) conclusive absent manifest error.
SECTION 2.6 Default Interest. Following any Event of Default
hereunder and while such Event of Default is continuing, Borrowers shall pay
interest on (a) the outstanding principal balance of the Term Loan and (b) to
the extent permitted by law,
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on all overdue portions of interest on the Term Loan and all such other overdue
amounts owing to the Bank outstanding up to the date of actual payment (after
as well as before judgment) at a rate equal to 3% per annum above the Original
Interest Rate for the LIBOR Rate Loan or Prime Rate Loan, then in effect.
SECTION 2.7 Deduction of Payment. Any principal, interest,
fees or other Obligations payable by Borrowers hereunder shall be deducted by
the Bank and paid from the Borrowers' operating accounts described in Section
6.9 hereof as and when due from time to time; provided, however, that the Bank
shall give Borrowers reasonable prior notice of its intent to so deduct funds
other than interest (including default interest), principal and any fees
related to the Bank's duties pursuant to Section 2.9 below.
SECTION 2.8 Closing. The Term Loan will be closed at the
offices of Dechert, Price & Rhoads, Princeton Pike Corporate Center, 997 Lenox
Drive, Building 3, Suite 210, Lawrenceville, New Jersey, or any other location
agreed upon by the Borrowers and the Bank. Closing of the Term Loan shall occur
no later than August 29, 1997.
SECTION 2.9 Structuring Fee. A loan structuring fee of
$40,000 shall be paid by the Borrowers to the Bank on the Closing Date (the
"Structuring Fee"). If Chrysalis International Corporation ("Chrysalis"),
however, engages CoreStates Investment Advisors on the Closing Date, to act as
its sole cash investment advisor and primary depository for the investment
business of its excess corporate funds and the excess corporate funds of the
other Borrowers for the term of the Term Loan on mutually satisfactory terms,
the Bank shall refund the Structuring Fee to Chrysalis. If Chrysalis forgoes
any right to the refund of the Structuring Fee and engages another cash
investment advisor and primary depository for such excess corporate funds and
the excess corporate funds of the other Borrowers, provided such other entity
must be based in the United States and be reasonably satisfactory to the Bank,
the Bank shall be entitled to a first lien in all such corporate funds of the
Borrowers, and such other entity shall enter into such security arrangements
with the Bank as the Bank may deem necessary or appropriate, including, without
limitation, the following:
(a) An acknowledgment and confirmation of the
Bank's first priority lien in all such corporate funds of the Borrowers;
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<PAGE> 21
(b) Arrangements for the delivery to the Bank
of detailed reports no less often than monthly, dated as of a recent date,
setting forth a complete description of the following:
(i) account and investment balances,
(ii) the types and amounts of investment
securities,
(iii) name of depositary, location and
account numbers for all accounts containing funds of investment of Borrowers,
and any foreign or domestic Subsidiaries, and
(iv) all loan balances and short-term
borrowings, including all intercompany advances or investments (whether foreign
or domestic); and
(c) Upon the occurrence of an Event of Default
under this Agreement, provision for the immediate delivery to the Bank (through
wire transfer or other means acceptable to the Bank) of corporate funds of the
Borrowers in an amount equal to the Cash Collateral.
ARTICLE 3
COLLATERAL SECURITY
SECTION 3.1 Collateral. As security for the performance of
this Agreement and for the prompt and complete payment of the Term Note when
due (whether at the Maturity Date, by acceleration or otherwise), and as
security for all other existing and future indebtedness of the Borrowers to the
Bank, the Borrower hereby grants to the Bank a first priority lien on and
security interest in all of the assets of the Borrowers located in the United
States (excluding the Permitted Liens) including, without limitation, the
following, whether now owned or after-acquired (the "Collateral"):
(a) all of Borrowers' existing and future
accounts receivable, chattel paper, instruments, contract rights, investment
accounts (including, without limitation, the investment accounts described in
Section 2.5 herein), documents, rights to the payment of money (including
patent and other license fees and royalties), inventory, goods, machinery and
equipment, fixtures and all other personal property and all proceeds, including
insurance proceeds, of the foregoing;
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<PAGE> 22
(b) all of Borrowers' general intangibles,
including, without limitation, all right, title and interest of the Borrowers
in and to all patents (including, without limitation, the exclusive license to
the microinjection patent), copyrights, licenses, royalty fees, service marks,
tradenames and trademarks, rights to file and prosecute applications for
patents, copyrights and trademarks, and similar intellectual property anywhere
in the world and the good will of the business connected with the use of and
symbolized by any patents, licenses, copyrights, service marks, trade names and
trademarks, together with all assets which reflect the good will of the
business of the Borrowers, including, but not limited to, the Borrowers' trade
names, customer lists, trade secrets, corporate and other business records,
advertising materials, operating, sales and programming manuals, methods,
processes, and know-how, sales literature, drawings, specifications,
descriptions, inventions, catalogues, copyrights, confidential information; and
(c) a pledge to the Bank of all outstanding
stock of all direct and indirect subsidiaries, both foreign and domestic, of
Chrysalis.
SECTION 3.2 Collateral Reports. The Borrowers shall provide to
the Bank detailed quarterly reports regarding accounts receivable from domestic
operations and licensing operations in form and substance satisfactory to the
Bank. In addition, the Borrowers shall provide to the Bank within ten (10)
days of the end of each calendar month a report disclosing the Borrowers' and
Subsidiaries' cash balances and borrowings under lines of credit or other
credit facilities for such month, both domestic and foreign, in form and
substance satisfactory to the Bank. The Borrowers' obligation to provide the
monthly reports described in the preceding sentence shall be suspended upon
delivery to the Bank of Financial Statements of the Borrowers' demonstrating
that the Borrowers' and Subsidiaries' Consolidated Net Income for the four (4)
immediately preceding consecutive fiscal quarters exceeds $1,000,000 and
provided the Borrowers are not in default under this Agreement. The Borrowers'
obligation to deliver such monthly reports shall be reinstated immediately upon
the Borrowers' failure to demonstrate Consolidated Net Income in excess of
$1,000,000 for any such four (4) quarter period.
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<PAGE> 23
ARTICLE 4
CONDITIONS OF LENDING
SECTION 4.1 Conditions Precedent to the Term Loan. The
obligation of the Bank to fund the Term Loan shall be subject to the prior or
concurrent fulfillment of each of the following conditions precedent.
4.1.1 Fees. Borrowers shall have paid, or made
arrangements satisfactory to the Bank for the payment of, all fees, costs,
expenses, taxes and indemnities required hereunder and under any other Loan
Document including, without limitation, the Structuring Fee and a Loan
Commitment fee of $15,000 (which shall be used to pay counsel to the Bank
pursuant to Section 8.4).
4.1.2 Representations. The following statements
shall be true and the making of the Term Loan hereunder shall be deemed to be a
representation and warranty of the Borrowers to the effect that (a) the
representations and warranties contained in Article 5 of this Agreement and in
each other Loan Document and certificate or other writing delivered to the Bank
pursuant hereto on or prior to the Closing Date are correct in all material
respects on and as of the Closing Date as though made on and as of such date;
and (b) no Default or Event of Default has occurred and is continuing or would
result from the making of the Term Loan on the Closing Date.
4.1.3 Deliveries to Bank. The Bank shall have
received on or before the Closing Date the following, each in form and
substance reasonably satisfactory to the Bank:
(a) This Agreement and the Term Note, both
duly executed and delivered by the Borrowers;
(b) the Security Documents duly executed and
delivered by the Borrowers;
(c) appropriate financing statements on Form
UCC-1, duly executed by the Borrowers in proper form for filing in such offices
as may be necessary or, in the opinion of the Bank, desirable to perfect the
security interests purported to be created by the Security Documents;
(d) certified copies of requests for copies
listing all effective financing statements which name as
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<PAGE> 24
debtor, any Borrower or any predecessor of any Borrower, which are filed in the
offices reasonably specified by the Bank, together with copies of such
financing statements, none of which, except as otherwise agreed to in writing
by the Bank, shall cover any of the Collateral;
(e) evidence that the Borrowers have obtained
the insurance coverage required by the terms of this Agreement or any other
Loan Document.
(f) a copy of the resolutions adopted by the
Boards of Directors of each Borrower, certified as of the Closing Date relating
to the Term Loan by an Authorized Officer thereof, authorizing (i) the
transactions contemplated by the Loan Documents to which such Borrower is a
party and (ii) the execution, delivery and performance by such Borrower of such
Loan Documents and the execution and delivery of the other documents to be
delivered by it in connection herewith;
(g) a certificate executed by an Authorized
Officer of each Borrower, each dated the Closing Date and certifying the names
and true signatures of the officers of each Borrower authorized to sign each
Loan Document to which such Borrower is a party and the other documents to be
executed and delivered by such Borrower in connection herewith, together with
evidence of the incumbency of such Authorized Officer;
(h) a certificate, dated as of a date not more
than 20 Business Days prior to the Closing Date of the appropriate official(s)
of the state of incorporation and each state of foreign qualification of each
Borrower, if any, certifying as to the subsistence in good standing of such
Borrower in such state;
(i) a copy of the certificate of incorporation
or other charter document and all amendments thereto of each Borrower,
certified as of a date not more than 20 Business Days prior to the Closing Date
by the appropriate official of the state of incorporation of such Borrower and
as of the Closing Date by an Authorized Officer of such Borrower;
(j) a copy of the bylaws of each Borrower,
certified as of the Closing Date by an Authorized Officer thereof;
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<PAGE> 25
(k) a written opinion of Jones, Day, Reavis &
Pogue, counsel to Borrowers, dated the Closing Date, in substantially the form
of Exhibit A;
(l) a certificate of the President or a Vice
President of each Borrower, each certifying as to the matters set forth in
Section 4.1.2. and
(m) a copy of any agreement between Borrowers
and the entity selected prior to the Closing Date, if any, to be the cash
investment advisor and primary depository pursuant to Section 2.9 hereof.
4.1.4 No Material Adverse Changes. For the
period from the date of the most recent financial statements submitted to the
Bank through the Closing Date, there shall have been (i) no material adverse
change in, and there shall have occurred no development likely to have a
material adverse effect on, the business, operations, assets or conditions
(financial or otherwise) of the Borrowers taken as a whole and considered as
one enterprise and (ii) no occurrence or event which shall have a material
adverse effect on the rights and remedies of the Bank or on the ability of the
Borrowers to perform their respective obligations to the Bank hereunder
("Material Adverse Effect").
4.1.5 Satisfactory Proceedings. All proceedings
in connection with the making of the Term Loan and the other transactions
contemplated by this Agreement, and all documents incidental thereto, shall be
reasonably satisfactory to the Bank and its counsel, and the Bank and such
counsel shall have received all such information and such counterpart originals
or certified or other copies of such documents as the Bank, or such counsel,
may reasonably request.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
SECTION 5.1 Representations and Warranties of the Borrowers.
Each Borrower hereby jointly and severally represents and warrants as follows:
5.1.1 Existence. Each Borrower is a corporation
duly organized, validly existing and in good standing under the laws of its
state of incorporation in the jurisdictions set forth in the first paragraph on
Page 1 hereof.
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<PAGE> 26
5.1.2 Corporate Authorizations. Each Borrower
(a) has all requisite corporate power and authority to conduct its business as
now conducted and as presently contemplated to be conducted, and to consummate
the transactions contemplated hereby and by any Loan Document to which it is or
will be a party and (b) is duly qualified to do business and is in good
standing in each jurisdiction in which the character of the properties owned or
leased by it or in which the transaction of its business makes such
qualification necessary.
5.1.3 Capitalization and Indebtedness.
(a) The authorized and issued stock of
Chrysalis International Corporation ("Chrysalis") is as set forth in its
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. All of the
issued stock of each other Borrower is owned beneficially and of record by
Chrysalis. All of such issued and outstanding shares of capital stock of each
Borrower have been duly authorized, validly issued and are fully paid and
non-assessable. Except as disclosed in the Definitive Proxy Statement of
Chrysalis dated April 30, 1997, no Borrower has outstanding any rights,
options, warrants, conversion rights or agreements for the purchase or
acquisition from such Borrower of any shares of their capital stock.
(b) Schedule 5.1.3 correctly lists all
outstanding Indebtedness for which each Borrower is liable or to which each
Borrower is a party, whether or not indebtedness is outstanding thereunder, and
the maximum amounts of indebtedness which may be incurred thereunder, and there
have heretofore been delivered to the Bank complete and correct copies of all
agreements and other instruments relating to such Indebtedness.
5.1.4 No Violation. The execution, delivery and
performance by each Borrower of each Loan Document to which it is or will be a
party, (a) are within its corporate powers, (b) have been duly authorized by
all necessary corporate action, (c) do not and will not contravene its charter
or by-laws, any law or governmental regulation or any contractual restriction
(other than a restriction with respect to which the Borrowers have secured a
valid waiver or consent) binding on or affecting it or any of its properties,
and (d) do not and will not result in or require the creation of any lien,
security interest or other charge or encumbrance (other than pursuant to any
such Loan Document) upon or with respect to any of its properties, whether now
owned or hereafter acquired.
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<PAGE> 27
5.1.5 Authorizations and Approvals. Except for
the waivers and consents obtained by the Borrowers with respect for the PIDA
and PNC Loans, no authorization or approval or other action by, and no notice
to or filing with, any governmental authority or other regulatory body is
required for the due execution, delivery and performance by any Borrower of any
Loan Document to which it is or will be a party.
5.1.6 Validity. This Agreement is, and each other Loan
Document to which each Borrower is or will be a party, when delivered
hereunder, will be, a legal, valid and binding obligation of such Borrower,
enforceable against it in accordance with its terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency, moratorium and
other laws affecting creditors rights generally and except as may be limited by
equitable principles.
5.1.7 Pending Litigation. There is no action, suit or
proceeding pending or to the knowledge of the Borrowers threatened against or
otherwise affecting any Borrower before any court, arbitrator or governmental
department, commission, board, bureau, agency or instrumentality, which would
have a Material Adverse Effect.
5.1.8 Financial Statements. The audited annual
consolidated and consolidating financial statements of Chrysalis and its
Consolidated Subsidiaries, dated as of December 31, 1996, and the unaudited
quarterly financial statements of Chrysalis and its Consolidated Subsidiaries,
dated March 31, 1997 fairly present the financial condition of the Borrowers,
as at the respective dates thereof and the results of operations of the
Borrowers described therein for the fiscal periods ended on such respective
dates, all in accordance with generally accepted accounting principles
consistently applied (subject to normal year-end audit adjustments in the case
of interim financial statements).
5.1.9 Solvency. The Borrowers taken as a whole (both
before and after giving effect to the transactions contemplated hereby) are
solvent, have assets (including goodwill) having a fair saleable value in
excess of the amount required to pay their consolidated probable liabilities on
existing debts as they become absolute and matured, and have, and will have,
access to adequate capital for the conduct of their business and the ability to
pay their debts from time to time incurred in connection therewith as such
debts mature.
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<PAGE> 28
5.1.10 Margin Securities. No Borrower is or will be
engaged in the business of extending credit for the purpose of purchasing or
carrying margin stock (within the meaning of Regulation U issued by the Board
of Governors of the Federal Reserve System), and no proceeds of the Term Loan
will be used to purchase or carry any margin stock or to extend credit to
others for the purpose of purchasing or carrying any margin stock.
5.1.11 Taxes. All Federal, state and local tax returns
and other reports required by applicable law to be filed have been filed, and
all taxes, assessments and other governmental charges imposed upon each
Borrower and which have become due and payable on or prior to the date hereof
have been paid except (a) insofar as extensions have been obtained and are
currently in effect and (b) to the extent contested in good faith by proper
proceedings which stay the imposition of any penalty, fine or lien resulting
from the non-payment thereof and with respect to which adequate reserves have
been set aside for the payment thereof or (c) except as to income taxes,
withholding taxes or sales taxes, where the failure to file such returns or
reports or pay such taxes would not have a Material Adverse Effect.
5.1.12 Compliance with Laws and Agreements. No Borrower
is in violation of (a) its charter or by-laws, (b) any law, governmental
regulation, order or judgment or (c) any term of any agreement or instrument
(other than with respect to which the Borrowers have secured a valid waiver or
consent) binding on or affecting it or any of its properties except insofar as
such violation would not, in the case of clauses (b) and (c), have a Material
Adverse Effect.
5.1.13 Liens. Each Borrower has good and marketable
title to all of its properties and assets and such properties and assets are
free and clear of all liens, security interests and other charges and
encumbrances and other types of preferential arrangements except for Permitted
Liens.
5.1.14 Patents and Trademarks. Each Borrower owns or has
sufficient rights to use all the patents, trademarks, copyrights, licenses and
rights necessary for the present and planned future conduct of their respective
businesses, without any known conflict with the rights of others.
5.1.15 Restrictions on Borrowers. No Borrower is a party
to any contract or agreement, or subject to any charter or
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other corporate restriction, which would have a Material Adverse Effect. No
Borrower has agreed or consented to cause or permit in the future (upon the
happening of a contingency or otherwise) any of the property of any such
corporation, whether now owned or hereafter acquired, to be subject to a lien,
other than Permitted Liens.
5.1.16 Investment Company Act. No Borrower is an
"investment company" registered or required to be registered under the
Investment Company Act of 1940, as amended, nor is it controlled by an
"investment company".
5.1.17 The Security Documents. The provisions of the
Security Documents are effective to create in favor of the Bank, a legal, valid
and enforceable security interest in all right, title and interest of each
Borrower in the Collateral except as the enforceability thereof may be limited
by bankruptcy, insolvency, moratorium and other laws affecting creditors rights
generally and except as may be limited by equitable principles; upon the proper
filing of financing statements as required by the applicable Uniform Commercial
Code the Security Documents shall constitute a fully perfected first lien on,
and security interest in all right, title and interest of such Borrower in the
Collateral described therein to the extent the filing of financing statements
under the Uniform Commercial Code are permissible methods of perfection of
security interests in the Collateral described therein in each such
jurisdiction, subject to no prior liens, except Permitted Liens.
5.1.18 ERISA. Each Pension Plan has complied and has
been administered in all material respects, in accordance with applicable
provisions of ERISA and the Internal Revenue Code. Neither the Borrowers nor
any Commonly Controlled Entity has, as of the date hereof, or during the
immediately preceding six-year period, has had any obligation to contribute to
any Multiemployer Plan. For purposes of the Section, "Pension Plan" means any
"employee pension plan" as defined in Title 3 of ERISA, maintained by
Borrowers; "Multiemployer Plan" means a Pension Plan which is a multiemployee
plan as defined in Section 4001(a)(3) of ERISA; and "Commonly Controlled
Entity" means an entity, whether or not incorporated, which is or was during
the period set forth above under common control with the Borrowers within the
meaning of Section 4001 of ERISA.
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<PAGE> 30
5.1.19 Insurance. All insurance policies to which the
Borrowers are a party or that provide coverage to the Borrowers or any director
or officer of the Borrowers: (a) are valid, outstanding, and enforceable; (b)
are issued by an insurer that is financially sound and reputable; (c) taken
together, provide adequate insurance coverage for the assets and the operations
of the Borrowers for all risks to which the Borrowers are normally exposed; (d)
are sufficient for compliance in all material respects with all legal
requirements that are applicable to the Borrowers or to the conduct or
operation of their business or the ownership or use of any of their properties
or assets taken as whole; and (e) will continue in full force and effect
following the consummation of the transactions contemplated hereby.
5.1.20 Environmental Compliance.
(a) Each Borrower (including for the purposes
of this Section, any former or current Affiliate or Subsidiary of each
Borrower) is now and has been in compliance with all Environmental Laws, except
where the failure to be in compliance would not, individually or in the
aggregate, have a Material Adverse Effect.
(b) No toxic, hazardous or polluting
substances or wastes ("Hazardous Substances") have been released, discharged or
disposed of, spilled, leaked, pumped, poured, emitted, emptied, injected,
leached, dumped or allowed to escape ("Release") other than as allowed by the
Environmental Laws, at, on, or under any property now owned or occupied by any
Borrower, or during such time as any Borrower formerly owned or occupied any
property, by any Borrower, or to any Borrower's knowledge, by any third party.
(c) No Borrower has received from any federal,
state or local environmental regulatory entity any requests for information,
notices of claim, demand letters, or other notification that in connection with
the ownership or use of any real estate or the conduct of such Borrower's
business, it is or may be potentially responsible with respect to any
investigation or clean-up of Hazardous Substances at any sites.
(d) No Hazardous Substance has come to be
located at any site which is listed or proposed for listing under CERCLA,
Comprehensive Environmental Response, Compensation Liability Information System
(CERCLIS) or on any similar state
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list, or which is the subject of federal, state or local enforcement actions or
other investigations which may lead to claims against any Borrower or the Banks
for clean-up costs, remedial work, damages to natural resources or for personal
injury claims, including, but not limited to, claims under CERCLA.
(e) There have been no environmental
inspections, investigations, studies, audits, tests, reviews or other analyses
prepared by or on behalf of any Borrower ("Reports") conducted in relation to
either (i) any property or business now owned, operated, or leased by any
Borrower or (ii) any property previously owned, operated or leased by any
Borrower.
5.1.21 License and Permits. Each Borrower is current and
in good standing with respect to all governmental approvals, permits,
certificates, licenses, inspections, consents and franchises necessary to
continue to conduct its business and to own or lease and operate its properties
as heretofore conducted, owned, leased or operated and as presently
contemplated to be conducted, owned, leased or operated, except where the
failure to be so current or in good standing would not have a Material Adverse
Effect.
5.1.22 Customer and Trade Relations. As of the date
hereof, giving effect to the consummation of the transactions contemplated by
the Loan Documents, there exists no actual or, to Borrowers' knowledge,
threatened termination, cancellation or material limitation of, or any material
modification or material change in:
(a) the business relationship of any Borrower
with any customer or group of customers of such Borrower whose purchases
individually or in the aggregate are material to the operations of the
Borrowers taken as a whole, or
(b) the business relationship of any Borrower
with any material supplier to such Borrower or such Borrower's predecessors,
and, to such Borrower's knowledge, no material customers or suppliers have
notified the Borrowers that they will not continue a business relationship with
such Borrower after the consummation of the transactions contemplated by the
Loan Documents on a basis no less favorable to such Borrower than that
conducted prior to the Closing Date (except where the failure would not have a
Material Adverse Effect);
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<PAGE> 32
and there exists no other condition or state of facts or circumstance which
would have a Material Adverse Effect or prevent Borrowers from conducting their
respective businesses after the consummation of the transactions contemplated
by the Loan Documents on a basis no less favorable in any material respect to
Borrowers than that in which they have been conducted by Borrowers prior to the
Closing Date.
5.1.23 Labor. There are no strikes, work stoppages or
controversies pending or, to Borrowers' knowledge, threatened, between any
Borrower and any of its employees which would have a Material Adverse Effect.
5.1.24 Survival of Warranties. All representations and
warranties contained in the Loan Documents shall survive the execution and
delivery of the Loan Documents and the termination hereof.
5.1.25 Disclosure. No Loan Document, no schedule or
exhibit thereto and no other document, certificate, report, statement or other
information furnished to the Bank in connection herewith or with the
consummation of the transactions contemplated hereby contains any material
misstatement of fact with respect to Borrowers or omits to state a material
fact with respect to Borrowers necessary to make the statements contained
herein or therein not misleading.
ARTICLE 6
COVENANTS
So long as any Obligation remains outstanding or unsatisfied,
unless the Bank shall otherwise consent in writing, Borrowers jointly and
severally agree to the following:
SECTION 6.1 Financial Covenants of Borrowers.
6.1.1 Current Ratio. Borrowers shall maintain a
ratio of Consolidated Current Assets to Consolidated Current Liabilities of at
least 1.0 to 1.0 as of the end of each calendar quarter throughout the term of
the Term Loan.
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<PAGE> 33
6.1.2 Consolidated Debt Service Coverage Ratio.
Borrowers and their Consolidated Subsidiaries shall maintain a Consolidated
Debt Service Coverage Ratio at the end of each calendar quarter during the Term
Loan (calculated with respect to the four full consecutive calendar quarters
ending on or immediately after the calculation date) of not less than 1.25 to
1.00 on December 31, 1997 and on March 31, 1998, and a Consolidated Debt
Service Coverage Ratio of 1.50 to 1.00 on June 30, 1998 and thereafter.
6.1.3 Consolidated Tangible Net Worth. Borrowers shall
maintain Consolidated Tangible Net Worth as at the end of each calendar quarter
during the term of the Term Loan through the date set forth below of not less
than the following amounts:
(i) September 30, 1998 - $10,000,000; and
(ii) December 31, 1998 and thereafter -
$11,500,000.
6.1.4 Ratio of Consolidated Total Liabilities to
Tangible Net Worth. Borrowers shall maintain a ratio of Consolidated total
liabilities of Borrowers to Consolidated Tangible Net Worth as of the end of
each calendar quarter during the term of the Term Loan in accordance with the
periods and amounts set forth below:
(i) Until March 31, 1998 - 2.75 to 1.00; and
(ii) June 30, 1998 and thereafter - 2.50 to
1.00
6.1.5 Minimum Cash and Marketable Securities.
At all times during the term of the Term Loan, Borrowers shall maintain (i)
cash and marketable securities on deposit with CoreStates Investment Advisors
(or with another entity selected pursuant to Section 2.9 hereof) of not less
than $3,500,000 and (ii) Consolidated cash and marketable securities of not
less than $3,500,000 (after deduction of all outstanding Consolidated
short-term borrowings). Borrowers shall deliver or cause to be delivered to
the Bank on a monthly basis detailed reports dated as of a recent date in form
reasonably satisfactory to the Bank setting forth a complete description of the
following information with respect to the corporate funds of each of the
Borrowers and their Subsidiaries (i) account and investment business, (ii) the
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types and amounts of various investment securities, (iii) name of depositary,
location and account number for all accounts containing funds or investments of
Borrowers and their Subsidiaries (both domestic and foreign) and (iv) all loan
balances and short-term borrowings, including all intercompany advances or
investments (whether foreign or domestic).
SECTION 6.2 Reporting Requirements. Borrowers will furnish to
the Bank:
6.2.1 Financial Statements.
(a) As soon as available, and, in no event
later than 90 days after the end of each fiscal year of Chrysalis, its
consolidated and consolidating balance sheet as at the end of such fiscal year
and its related statement of income, retained earnings and cash flows for such
fiscal year, setting forth in comparative form the corresponding figures for
the previous fiscal year, all in reasonable detail and accompanied by a report
and opinion of independent certified public accountants reasonably satisfactory
to the Bank. The Borrower shall deliver to the Bank together with such audited
annual financial statements a certificate in the form of Exhibit D attached
hereto signed by the Chief Financial Officer of Chrysalis, certifying that (1)
he has reviewed the provisions of this Agreement and that no Event of Default
has occurred hereunder, or if an Event of Default has occurred, setting forth
the details thereof, and (2) setting forth in reasonable detail calculations
demonstrating compliance by the Borrowers with the financial covenants
contained in Section 6.1 hereof.
(b) As soon as available, and in any event
within forty-five (45) days after the end of the first three fiscal quarters of
Chrysalis, and within ninety (90) days after the end of the fourth fiscal
quarter of Chrysalis, its consolidated and consolidating balance sheet at the
end of such quarterly period prepared by Chrysalis and the related statements
of income and cash flow and retained earnings of Chrysalis for such quarterly
periods, and in each case setting forth comparative figures for the related
periods in the prior Fiscal Year, subject to normal adjustments. The quarterly
financial statements shall be in reasonable detail and certified by the Chief
Financial Officer of the Borrower as having been prepared in accordance with
GAAP. The Borrower shall deliver to the Bank together with such financial
statements, a certificate, in the form of Exhibit D attached hereto, dated as
of a date within
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five (5) days of delivery and signed by the Chief Financial Officer of
Chrysalis.
(c) Promptly following request by the Bank,
such other information concerning the Borrower as the Bank may from time to
time reasonably request.
6.2.2 Other Information.
(a) As soon as practicable and in any event
within five (5) Business Days after any Borrower obtains knowledge of the
occurrence of a Default or an Event of Default, any material default in the
fulfillment of or compliance with any of the terms, covenants, provisions or
conditions of any agreement the termination of which would have a Material
Adverse Effect, the written statement of the Chief Financial Officer of such
Borrower setting forth the details of such Event of Default, event or material
adverse change and the statement of such officer setting forth the action which
Borrowers propose to take with respect thereto;
(b) Promptly after the sending thereof, copies
of all statements, reports and other material information which each Borrower
has delivered to any holders of its Indebtedness or its securities or filed
with the Securities and Exchange Commission or any national securities
exchange;
(c) Promptly after receipt thereof, copies of
any report or notice that Borrowers or any of their Affiliates receive from the
Internal Revenue Service, the Pension Benefit Guaranty Corporation or the U.S.
Department of Labor, or from any plan sponsor (as defined in Section 3(16)(B)
of ERISA), in respect of any Employee Plan that evidence the Pension Benefit
Guaranty Corporation's intention to terminate any Employee Plan or to have a
trustee appointed to administer any Employee Plan or which concerns the
imposition or amount of withdrawal liability pursuant to Section 4202 of ERISA;
(d) Promptly after the commencement thereof
but in any event not later than ten (10) Business Days after service of process
with respect thereto on, or the obtaining of knowledge thereof by, any
Borrower, notice of each action, suit or proceeding before any court,
arbitrator or governmental department, commission, board, bureau, agency or
instrumentality which, would be reasonably likely to have a Material Adverse
Effect; and
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(e) Promptly upon request, such other
information concerning the condition or operations, financial or otherwise, of
Borrowers as the Bank, may from time to time reasonably request.
SECTION 6.3 Compliance with Laws, Etc. Each Borrower will
comply with all applicable laws, rules, regulations and orders, such compliance
to include, without limitation, compliance with ERISA with respect to any
Employee Plan, compliance with Environmental Laws, paying before the same
become delinquent all taxes, assessments and governmental charges or levies
imposed upon it or upon its income or profits or its properties, and paying all
lawful claims which if unpaid might become a lien or charge upon any of its
properties, with which the failure to so comply would have a Material Adverse
Effect except to the extent contested in good faith by proper proceedings which
stay the imposition of any penalty, fine or lien resulting from the non-payment
thereof and with respect to which adequate reserves have been set aside for the
payment thereof and such contest will not in the reasonable judgment of the
Bank endanger its interest in any Collateral.
SECTION 6.4 Preservation of Existence, Etc. Each Borrower
will maintain and preserve its existence, rights and privileges, except that
any Borrower may merge with another Borrower, and become or remain duly
qualified and in good standing in each jurisdiction in which the character of
the properties owned or leased by it or in which the transaction of its
business makes such qualification necessary, except where the failure to be so
qualified will not have a Material Adverse Effect.
SECTION 6.5 Obtaining of Permits, Etc. Each Borrower will
obtain, maintain and preserve all permits, licenses, authorizations, approvals
and accreditations necessary or useful in the proper conduct of its business,
except where the failure to so obtain, maintain and preserve will not have a
Material Adverse Effect.
SECTION 6.6 Maintenance of Insurance. The Borrowers shall
maintain in effect insurance (including, without limitation, casualty and fire
insurance, business interruption risk policy, worker's compensation and public
liability insurance) with companies reasonably satisfactory to the Bank and in
such amounts and covering such risks as are customarily carried by companies
engaged in the same or similar business as
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the Borrowers. The Borrowers agree to pay the cost and periodic premiums of
all such insurance and, upon the Bank's written request, deliver certificates
evidencing such insurance to the Bank. The Borrowers will notify the Bank and
will cause the insurance companies to notify the Bank in writing at least
thirty (30) days prior to lapse, cancellation or termination or any other
change in coverage. Except for worker's compensation, all such insurance
policies shall name the Bank as loss payee pursuant to appropriate endorsements
in form and substance reasonably satisfactory to the Bank.
SECTION 6.7 Maintenance of Properties, Etc. Each Borrower
will (a) maintain and preserve all of its properties necessary in the proper
conduct of its business in good working order and condition, ordinary wear and
tear excepted, and (b) comply at all times with the provisions of all leases to
which it is a party as lessee or under which it occupies property, so as to
prevent any material loss or forfeiture thereof or thereunder except where the
failure to so maintain, preserve or comply would not have a Material Adverse
Effect.
SECTION 6.8 Inspection Rights. Each Borrower will permit the
Bank or any agent or representative thereof at any reasonable time and from
time to time and with reasonable prior notice to examine and make copies of and
abstracts from its records and books of account, to visit and inspect its
properties and to discuss its affairs, finances and accounts with any of the
officers thereof. Without limiting the foregoing, the Bank shall have the
right (at its own cost) to perform an annual audit of the Company's books and
records and to verify the Collateral pledged to secure the Obligations. The
costs of such audit, including all out-of-pocket expenses relating thereto,
shall be paid by the Borrowers following any Event of Default.
SECTION 6.9 Operating Accounts. The Borrowers shall transfer
its primary operating accounts to the Bank within 180 days of the Closing Date
and maintain such operating accounts with the Bank throughout the term of the
Term Loan. If Borrowers do not transfer all such operating accounts to the
Bank within 180 days of the Closing Date, Borrowers shall pay the Bank a fee of
$20,000 payable on the 181st day after the Closing Date.
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<PAGE> 38
SECTION 6.10 Liens on Collateral. No Borrower will create or
suffer to exist, any lien, security interest or other charge or encumbrance, or
any other type of preferential arrangement, upon or with respect to any of its
properties, rights or other assets, whether now owned or hereafter acquired,
which are included in the Collateral, other than the following: (referred to
collectively as "Permitted Liens"):
(a) liens or security interests created
pursuant to the Loan Documents and the notation of such liens or security
interests on the records of such Borrower;
(b) liens for taxes, assessments or other
governmental charges not delinquent or being contested in good faith and by
appropriate proceedings and with respect to which proper reserves have been
taken in accordance with generally accepted accounting principles;
(c) deposits or pledges to secure obligations
under worker's compensation, social security or similar laws, or under
unemployment insurance;
(d) deposits or pledges to secure (or deposits
or pledges to secure letters of credit to secure) bids, tenders, contracts
(other than contracts for the payment of money), leases, statutory obligations,
surety and appeal bonds and other obligations of like nature arising in the
ordinary course of business in an aggregate amount not to exceed $250,000;
(e) judgment liens that have been stayed or
bonded and which are subordinate to the Bank's liens on the Borrowers'
property;
(f) liens on deposits of property or funds
delivered to stay litigation in aggregate amounts not exceeding $250,000;
(g) purchase money security interests not
perfected by possession or filing;
(h) certain existing real estate of the
Borrowers located in Pennsylvania for which mortgages have been granted to the
Pennsylvania Industrial Development Authority and PNC Bank) (the "PIDA and PNC
Loans"); and
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(i) liens on certain property in connection
with a loan from the Pennsylvania Department of Commerce and liens on phone
systems secured by AT&T Credit Corporation and Master Lease, Division of Tokai
Financial Services, Inc.
(j) other liens incidental to the conduct of
Borrowers' business or the ownership of their real property and assets which
were not incurred in connection with the borrowing of money or the obtaining of
advances or credit, and which do not in the aggregate materially detract from
the value of their real property or materially impair the use thereof in the
operation of the business of the Borrowers taken as a whole and considered as
one enterprise (including but not limited to easements, rights of way, and
similar restrictions or encumbrances not interfering with the ordinary conduct
of business of any Borrower).
SECTION 6.11 Indebtedness. Chrysalis and its Subsidiaries will
not incur any Indebtedness in excess of an aggregate amount of $500,000, except
for amounts outstanding under the PIDA and PNC Loans, other Indebtedness
outstanding as of the Closing Date as identified on Schedule 5.1.3 and amounts
available under credit facilities existing on the Closing Date.
SECTION 6.12 Loans and Investments. Except as specifically
agreed to by the Bank, no Borrower will make any loan or advance (other than
advances in the ordinary course of business with regard to valid business
expenses) or extend credit to any Person, or make any investment in such
Person, or its securities, except (a) investments in United States Treasury
obligations, (b) certificates of deposit, bankers acceptances and other "money
market instruments" issued by the Bank or any other bank or trust company
organized under the laws of the United States or any state thereof and having
capital and surplus not less than $100,000,000, (c) open market commercial
paper bearing Standard & Poor's Corp. highest credit rating or by another
similar nationally recognized firm, and repurchase agreements with any bank or
trust company organized under the laws of the United States or any state
thereof and having capital and surplus not less than $100,000,000 relating to
United States government obligations, in each case maturing in less than one
year, and (d) investments by a Borrower in any other Borrower.
SECTION 6.13 Merger, Consolidation. No Borrower will merge or
consolidate with, purchase, lease or otherwise acquire all or substantially all
of the assets or properties of, or
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acquire any capital stock, equity interests, debt or other securities of, any
Person; provided, however, that any corporation may be merged into a Borrower
in order to effect any acquisition approved in writing by the Bank (which
approval shall not unreasonably be withheld) and any Borrower may merge with
another Borrower.
SECTION 6.14 Sale of Assets, Etc. Unless consented to by the
Bank in writing, no Borrower will sell, assign, lease or otherwise dispose of
any of its properties or assets (whether now owned or hereafter acquired)
included in the Collateral to any Person, including sale-leaseback
transactions, other than sales of inventory and used equipment in the ordinary
course of business or other sales not in excess of $100,000 in the aggregate in
any Fiscal Year.
SECTION 6.15 Change in Business. None of the Borrowers will
change the fundamental nature of the business it conducts on the Closing Date
during the term of the Term Loan.
SECTION 6.16 Pension Plans. Each Borrower will (a) keep in
full force and effect any and all Employee Plans which are presently in
existence or may, from time to time, come into existence under ERISA, unless
such Employee Plans can be terminated without material liability to such
Borrower in connection with such termination (as distinguished from any
continuing funding obligation); (b) make contributions to all Employee Plans of
such Borrower in a timely manner and in a sufficient amount to comply in all
material respects with all material requirements of ERISA; (c) comply in all
material respects with all material requirements of ERISA which relate to such
Employee Plans so as to preclude the occurrence of any Reportable Event,
Prohibited Transaction or material "accumulated funding deficiency" as such
term is defined in ERISA; and (d) notify the Bank immediately upon receipt by
such Borrower of any notice of the institution of any proceeding or other
action which may result in the termination of any Employee Plan, unless such
Employee Plan can be terminated without material liability to such Borrower in
connection with such termination, and deliver to the Bank, promptly after the
filing or receipt thereof, copies of all reports or notices which such Borrower
files or receives under ERISA with or from the Internal Revenue Service, the
Pension Benefit Guaranty Corporation, or the U.S. Department of Labor. In
addition, none of the Borrowers will incur any obligation to contribute to any
Multiemployer Plan without the prior written consent of the Bank, unless such
obligation to
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contribute can be terminated without material liability to such Borrower. In
addition, none of the Borrowers will offer any benefits to any of their
respective retirees or dependents or beneficiaries of such retirees under any
welfare benefit plan (as defined in Section 3(1) of ERISA) except (1) benefits
required pursuant to COBRA.
SECTION 6.17 Environmental Compliance. Each Borrower will:
(a) be in compliance with all Environmental
Laws, except where the failure to so comply would not, individually or in the
aggregate, have a Material Adverse Effect;
(b) not Release or cause the Release of any
Hazardous Substances on property owned or occupied by any Borrower (any such
event being hereinafter referred to as a "Hazardous Discharge");
(c) notify the Bank within five (5) Business
Days of any Hazardous Discharge, any oral or written notice of violation,
request for information or notification that it is potentially responsible for
investigation or cleanup of environmental conditions at the property owned or
occupied by any Borrower, demand letter or complaint, order, claim, penalty
assessment, citation or any other notice, any suit or other proceeding,
administrative, civil or criminal, at law or in equity, pending or threatened
against any Borrower (collectively referred to as "Environmental Complaint")
received from or filed by any person or entity, including any federal, state or
local governmental authority, with respect to any alleged violation of any
Environmental Law or with respect to management of Hazardous Substances or any
other environmental matter in connection with any Borrower's ownership or use
of any real estate or the conduct of its business, and forward a copy of same
to the Bank.
SECTION 6.18 Inconsistent Agreements. No Borrower will enter
into any agreement containing any provision which would be violated or breached
by the Term Loan hereunder or by the performance by Borrowers of their
respective obligations hereunder or under any Loan Document.
SECTION 6.19 Derivatives. No Borrower will make any investment
in or take any position in any derivative securities, including, but not
limited to, foreign exchange contracts,
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interest rate contracts, interest rate swap agreements, options relating to
debt or equity investments, short sales or similar investments, other than in
the ordinary course of business and not primarily for speculative purposes.
SECTION 6.20 Dividends. None of the Borrowers or any of their
Subsidiaries shall declare or pay any dividends, redeem or repurchase, or make
or pay any other distributions on account of or with respect to any of their
outstanding capital stock, or any warrants or options therefor, other than the
payment of any dividend or distribution to any Borrower by another Borrower or
Subsidiary.
SECTION 6.21 Sale of Patent/License. Notwithstanding the
foregoing, if the Bank consents pursuant to Section 6.14 (such consent not to
be unreasonably withheld) to the sale or other disposition of any of the
Borrowers' patent rights, licenses or royalty fee rights, such sale or other
disposition shall be made for fair market value, and the proceeds will be used
to repay the Term Loan. The Bank shall release its lien with respect to any
assets which are sold pursuant to the Bank's consent.
ARTICLE 7
EVENTS OF DEFAULT
SECTION 7.1 Events of Default. If any of the following Events
of Default shall occur and be continuing:
7.1.1 Borrowers shall fail to pay any principal
of the Term Note when due (whether by scheduled maturity, acceleration, demand
or otherwise); or
7.1.2 Borrowers shall fail to pay any interest
on the Term Note or any other amount (other than any amount specified in
Section 7.1.1 above) payable hereunder within five (5) Business Days following
the date such payment is due or declared due; or
7.1.3 Any representation or warranty made by any
Borrower or any officer of any Borrower in any Loan Document or certificate or
writing delivered pursuant to any Loan Document shall have been incorrect in
any material respect when made; or
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7.1.4 Any Borrower shall fail to perform or observe the
covenants set forth in Sections 6.1, 6.10 through 6.15, and 6.19; or
7.1.5 Any Borrower shall fail to perform or observe any
term, covenant, condition or agreement contained in any Loan Document (other
than a term, covenant, condition or agreement a default in the performance of
which is elsewhere in this Section specifically dealt with) to be performed or
observed by Borrowers and such failure shall remain unremedied for ten (10)
days in the case of a failure under Section 6.2 hereof or 20 days after an
executive officer of any Borrower shall have knowledge of such failure or any
Borrower shall have received written notice of such failure in the case of any
other such failure; or
7.1.6 Any Borrower shall (a) fail to pay any of
its Indebtedness (excluding Indebtedness evidenced by the Term Note) exceeding
$250,000 in the aggregate or any interest or premium thereon, when due (whether
by scheduled maturity, acceleration, demand or otherwise) and such failure
shall continue after the applicable grace period, if any, specified in the
agreement or instrument relating to such Indebtedness unless such failure is
waived prior to the expiration of such grace period, or (b) fail to perform or
observe any term, covenant or condition to be performed or observed by it under
any agreement or instrument relating to any such Indebtedness when required to
be performed or observed, and such failure shall continue after the applicable
grace period, if any, specified in such agreement or instrument, if the effect
of such failure to perform or observe is to accelerate, or to permit the
acceleration of, the maturity of such Indebtedness exceeding $250,000, or any
such Indebtedness shall be declared to be due and payable, or required to be
prepaid (other than by a regularly scheduled required prepayment), prior to the
stated maturity thereof; or
7.1.7 Borrower shall be unable or fail, or admit in
writing, its inability to pay its debts as they become due, or shall make a
general assignment for the benefit of creditors; or any petition shall be filed
by or against any such Person under the Federal bankruptcy laws, or any other
proceeding shall be instituted by or against any such Person seeking to
adjudicate it a bankrupt or insolvent, or seeking liquidation, reorganization,
arrangement, adjustment or composition of it or its debts under any law
relating to bankruptcy, insolvency or reorganization or relief of debtors, or
seeking the entry of an order for relief or
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the appointment of a receiver, trustee, custodian or other similar official for
such Person or for any substantial part of its property; or such Borrower shall
take any action to authorize or effect any of the actions set forth above in
this subsection; or
7.1.8 Any material provision of any Loan Document shall
at any time for any reason be declared to be null and void, or the validity or
enforceability thereof shall be contested by any Borrower, or a proceeding
shall be commenced by Borrowers, or by any governmental agency or authority
having jurisdiction over any Borrower, seeking to establish the invalidity or
unenforceability thereof, or any Borrower shall deny that it has any liability
or obligation purported to be created under any Loan Document; or
7.1.9 The Security Agreement, or any other Security
Document, after delivery thereof, shall for any reason, fail or cease to create
a valid and perfected, and except to the extent permitted by the terms hereof
or thereof, first priority lien on or security interest in any of the
Collateral purported to be covered thereby, unless such failure is cured within
ten (10) days after an executive officer of any Borrower has knowledge hereof
or any Borrower receives written notice thereof; or
7.1.10 A judgment or order for the payment of money
exceeding any applicable insurance coverage by more than $500,000 shall be
rendered against any Borrower which remains unsatisfied and (a) either
enforcement proceedings shall have been commenced by any creditor upon such
judgment or order or (b) there shall be any period of 20 consecutive days
during which a stay of enforcement of such judgment or order, by reason of a
pending appeal or otherwise, shall not be in effect; or
7.1.11 If (a) any Reportable Event creates a possibility
of the termination of any Employee Plan or of the appointment by the
appropriate United States District Court of a trustee to administer any such
Plan, shall have occurred and be continuing 30 days after written notice to
such effect shall have been given the Bank, or (b) any Borrower withdraws from
any Multiemployer Plan, or (c) the plan administrator of any Employee Plan
files with the Pension Benefit Guaranty Corporation a notice of intention to
terminate such Plan, or (d) the Pension Benefit Guaranty Corporation institutes
proceedings to terminate any such Plan or to appoint a trustee to administer
any such Plan, and if,
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in any of the cases described in the foregoing clauses (a) through (d), the
Bank further reasonably determines that the "amount of unfunded guaranteed
benefits" (as defined by Section 4001(a)(17) of ERISA) resulting upon
termination of such Employee Plan or the amount of liability resulting from the
withdrawal from any such Multiemployer Plan would have a Material Adverse
Effect; or
7.1.12 If any Borrower becomes a party to any litigation
which will cause such Borrower to be obligated for damages in excess of
$2,000,000 or any other material litigation which the Bank reasonably believes
may have a Material Adverse Effect on the Borrower; or
7.1.13 Any other event shall have occurred that would
have a Material Adverse Effect; or
7.1.14 An "Event of Default" (as defined in any Loan
Document) shall occur and be continuing;
then, the Bank at its option and at any time by notice to Borrowers, may do one
or more of the following: (a) declare the Term Note, all interest thereon and
all other amounts payable under this Agreement to be forthwith due and payable,
whereupon the Term Note, all such interest and all such amounts shall become
and be forthwith due and payable, without presentment, demand, protest or
further notice of any kind, all of which are hereby expressly waived by
Borrowers; (b) exercise any and all of its other rights under applicable law,
hereunder and under the other Loan Documents; and (c) require the Borrowers to
deposit with the Bank cash collateral ("Cash Collateral") consisting of cash
and marketable securities in an amount at least equal to (a) the outstanding
balance of all Obligations due under the Term Loan minus (b) the sum of (i) 50%
of Borrowers' Eligible Accounts Receivable as of a recent date, plus (ii) the
aggregate amount of cash received by Borrowers in the immediately preceding
Fiscal Year from microinjection revenues, license fees and royalty fees,
provided, however, that all one-time, non-recurring and other lump sum payments
made during such Fiscal Year shall be excluded from the calculation of the cash
received by Borrowers from such revenues and fees. For purposes hereof,
"Eligible Accounts Receivable" shall mean Borrowers' rights to payment for
goods sold or services rendered in the ordinary course of business to
non-Affiliated parties, but excluding receivables which are more than ninety
(90) days past due, chargebacks, ineligible account debtors (as reasonably
determined by the Bank), accounts of any
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<PAGE> 46
debtor where 50% of more of such debtor's accounts are past due, foreign
accounts, government accounts, accounts subject to setoff or offset, accounts
or debtors which have filed for bankruptcy and other accounts reasonably deemed
ineligible by the Bank; provided, that no notice need be given to any Borrower
upon the occurrence of any Event of Default described in Section 7.1.7 and the
Obligations shall be automatically accelerated.
7.1.15 Non-Waiver. The remedies provided herein, and in
any other Loan Document or otherwise available to the Bank at law or in equity,
and any warrants of attorney therein contained, shall be cumulative and
concurrent, and may be pursued singly, successively or together at the sole
discretion of Bank, and may be exercised as often as occasion therefor shall
occur; and the failure to exercise any such right or remedy shall in no event
be construed as a waiver or release of the same.
ARTICLE 8
MISCELLANEOUS
SECTION 8.1 Notices, Etc. All notices and other
communications provided for hereunder shall be in writing and shall be mailed,
telecopied or delivered, if to Borrowers, to each of them c/o Chrysalis
International Corporation, 575 Route 28, Raritan, New Jersey 08869, Attention:
Chief Financial Officer, with a copy to Thomas C. Daniels, Esq., Jones, Day,
Reavis & Pogue, North Point, 901 Lakeside Avenue, Cleveland, Ohio 44114, if to
the Bank at its address at 370 Scotch Road, West Trenton, New Jersey 08628
Attention: Middle Market Manager or, as to each party, at such other address as
shall be designated by such party in a written notice to the other parties
complying as to delivery with the terms of this Section 8.1. All such notices
and other communications shall be effective (a) if mailed, when received or
three Business Days after mailing, whichever is earlier; (b) if telecopied,
when received; or (c) if delivered, when delivered, except that notices to the
Bank pursuant to Article 2 shall not be effective until received by the Bank.
SECTION 8.2 Amendments, Etc. No amendment of any provision of
this Agreement or the Term Note shall be effective unless it is in writing and
signed by Borrowers and the Bank, and no waiver of any provision of this
Agreement or the Term Note, nor consent to any departure by either Borrower
therefrom, shall be effective unless it is in writing and signed by the Bank,
and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
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SECTION 8.3 No Waiver; Remedies, Etc. No failure on the part
of the Bank to exercise, and no delay in exercising, any right hereunder or
under any other Loan Document shall operate as a waiver thereof; nor shall any
single or partial exercise of any right under any Loan Document preclude any
other or further exercise thereof or the exercise of any other right. The
rights and remedies of the Bank provided herein and in the other Loan Documents
are cumulative and are in addition to, and not exclusive of, any rights or
remedies provided by law. The rights of the Bank under any Loan Document
against any party thereto are not conditional or contingent on any attempt by
the Bank to exercise any of its rights under any other Loan Document against
such party or against any other Person.
SECTION 8.4 Fees, Costs, Expenses and Taxes. Whether or not
the Term Loan is made hereunder or the transactions contemplated hereby are
consummated, Borrowers will pay on demand all fees, costs and expenses in
connection with the preparation, execution, delivery, filing, and recording of
the Loan Documents and the other documents to be delivered under the Loan
Documents, including, without limitation, the reasonable fees, out-of-pocket
expenses and other reasonable disbursements of Dechert Price & Rhoads, counsel
to the Bank, and of any other counsel retained by the Bank with respect thereto
and with respect to advising the Bank as to its rights and responsibilities
under the Loan Documents (provided that such legal fees are not to exceed
$15,000 and shall be paid from the Committment Fee previously paid by Borrowers
pursuant to Section 4.1.1), and all costs and expenses, if any, in connection
with any waiver or amendment of any Loan Document or in connection with the
enforcement of the Loan Documents and the other documents to be delivered under
the Loan Documents and in connection with any inspection conducted by the Bank.
In addition, Borrowers will pay any and all stamp and other taxes and fees
payable or determined to be payable in connection with the execution, delivery,
filing and recording of the Loan Documents and the other documents to be
delivered under the Loan Documents, and will save the Bank harmless from and
against any and all liabilities with respect to or resulting from any delay in
paying or omission to pay such taxes and fees.
SECTION 8.5 Indemnity. Each Borrower agrees to indemnify the
Bank and its Affiliates, directors, officers, employees, agents and controlling
persons against, and to hold the Bank and each such Person harmless from, any
and all losses, claims, damages, liabilities and related expenses, including
reasonable counsel fees and expenses, incurred by or asserted
- 43 -
<PAGE> 48
against the Bank or any such Persons arising out of, in any way in connection
with, or as a result of (i) this Agreement, any of the Loan Documents and the
other documents contemplated hereby or thereby, the performance by the parties
hereto and thereto of their respective obligations hereunder and thereunder and
consummation of the transactions contemplated hereby and thereby, or (ii) any
claim, litigation, investigation or proceeding relating to any of the
foregoing, whether or not the Bank or any such Person is a party thereto, or
(iii) breach of any representation, warranty or covenant hereof, or (iv)
environmental conditions, including without limitation, the presence of
Hazardous Substances at, on, under or within any property owned or occupied by
Borrowers, the Release or threat of Release of Hazardous Substances at such
property whether into the air, soil, ground or surface waters, or any
Environmental Complaint (as defined in Section 6.17); provided, however, any
such indemnity provided for in clause (i) through (iv) above shall not as to
the Bank, apply to any such losses, claims, damages, liabilities or related
expenses arising from its bad faith, gross negligence or wilful misconduct.
Borrowers agree to respond on the Bank's behalf to any matter subject to
subsections (iii) and (iv) above or, at the Bank's election, to pay the costs
of the Bank's response. Borrowers hereby waive and release the Bank from any
and all losses, claims, damages, and liabilities, known or unknown, foreseen or
unforeseen, which exist or which may arise in the future under common or
statutory law, including CERCLA or any other Environmental Laws now or
hereafter in effect. The provisions of this Section shall remain operative and
in full force and effect regardless of the expiration of the term of this
Agreement or any other of the Loan Documents, the repayment of the Term Loan,
the invalidity or unenforceability of any term or provision of this Agreement,
the Term Note or any other Loan Document, or any investigation made by or on
behalf of the Bank. All amounts due under this Section shall be payable on
written demand therefor.
SECTION 8.6 Right of Set-off. Upon occurrence and during the
continuance of any Event of Default and the declaration by the Bank that the
Term Note is due and payable, the Bank may, and is hereby authorized at any
time and from time to time, without notice to Borrowers (any such notice being
expressly waived by Borrowers) and to the fullest extent permitted by law, to,
set off and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held and other indebtedness at any time owing
by the Bank to or for the credit or the account of Borrowers against any and
all
- 44 -
<PAGE> 49
obligations of Borrowers now or hereafter existing under this Agreement and the
Term Note held by the Bank, irrespective of whether or not the Bank shall have
made any demand under this Agreement or the Term Note and although such
obligations may be contingent or unmatured. The Bank agrees promptly to notify
Borrowers after any such set-off and application made by the Bank, provided
that the failure to give such notice shall not affect the validity of such
set-off and application. The rights of the Bank under this Section are in
addition to other rights and remedies (including, without limitation, other
rights of set-off) which the Bank may have.
SECTION 8.7 Severability of Provisions. Any provision of this
Agreement, or of any other Loan Document, which is prohibited or unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to the
extent of such prohibition or invalidity without invalidating the remaining
portions hereof or thereof or affecting the validity or enforceability of such
provision in any other jurisdiction.
SECTION 8.8 Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of each Borrower, and the Bank and their
respective successors and assigns, except that neither Borrower shall have the
right to assign its rights hereunder or any interest herein without the prior
written consent of the Bank.
SECTION 8.9 Assignment and Participation.
(a) The Bank shall have the right from time to
time to assign to one or more assignees all or any portion of its commitment to
make loans to in its interest in the Obligations of the Borrowers hereunder and
correspondingly delegate its duties thereunder; provided, however, that such
consent of Borrowers shall not be required if an Event of Default has occurred
and is continuing.
(b) The Bank may sell participations to one or
more banks or other financial institutions in all or a portion of its rights
and obligations under this Agreement (including, without limitation all or a
portion of its Commitment, the advances owing to it and the Obligations held by
it); provided, however, that (a) the Bank's obligations under the Loan
Documents remain unchanged, (b) the Bank shall remain solely responsible to the
other parties for performance of such
- 45 -
<PAGE> 50
obligations, (c) the Bank shall remain the holder of any Note for all purposes
of this Agreement, (d) the Borrower shall continue to deal solely and directly
with the Bank in connection with the Bank's rights and obligations under this
Agreement and (e) the Bank shall not grant participants any voting rights
except as such rights relate to changes in interest rates, fees, amounts of
payments or terms of payments.
SECTION 8.10 Counterparts. This Agreement may be executed in
two or more counterparts, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same instrument.
SECTION 8.11 Waiver of Jury Trial; Consent to Jurisdiction.
(a) EXCEPT AS PROHIBITED BY LAW, EACH PARTY
HERETO WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH
THIS AGREEMENT, ANY OF THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY.
(b) EACH BORROWER IRREVOCABLY SUBMITS AND
CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF A STATE OR FEDERAL COURT SITTING
IN PENNSYLVANIA OVER ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THE
LOAN DOCUMENTS, AND EACH BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN
RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH
PENNSYLVANIA STATE OR FEDERAL COURT. EACH BORROWER AGREES THAT SERVICE OF
COPIES OF ANY SUMMONS AND COMPLAINT AND ANY OTHER PROCESS WHICH MAY BE SERVED
IN ANY SUCH ACTION MAY BE MADE BY MAILING BY REGISTERED MAIL OR DELIVERING A
COPY OF SUCH PROCESS TO EACH BORROWER AT THE ADDRESS SPECIFIED IN SECTION 8.1.
SECTION 8.12 Governing Law. This Agreement and the Term Note
shall be governed by, and construed in accordance with, the law of
Pennsylvania.
SECTION 8.13 Termination. Upon the payment and satisfaction of
all principal, interest, fees and other sums due and owing under this Agreement
and termination of the Commitments hereunder or release of the Obligations,
this Agreement, except for the provisions of Section 8.5 hereof, shall
terminate and the Bank's liens on the Collateral will be released.
- 46 -
<PAGE> 51
SECTION 8.14 Joint and Several Liability. Each Borrower agrees
that the obligations of the Borrowers hereunder are joint and several. Each
Borrower acknowledges that it is substantially dependent upon the other
Borrowers, and that a loan to any Borrower directly benefits the other
Borrowers in providing sufficient inventory and capital for all Borrowers.
SECTION 8.15 Entire Agreement. This Agreement and the
agreements referred to herein contain the entire agreement and understanding of
the parties hereto respecting the subject matter hereof, and supersede and
replace all prior agreements and understandings with respect thereto, whether
written or oral.
- 47 -
<PAGE> 52
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed by their respective officers thereunto duly authorized, as of
the date first above written.
CHRYSALIS INTERNATIONAL CORPORATION
By: /s/ John G. Cooper
-----------------------------
Name: John G Cooper
Title: Senior Vice President and
Chief Financial Officer
CHRYSALIS INTERNATIONAL PRECLINICAL
SERVICES CORPORATION
By: /s/ John G. Cooper
-----------------------------
Name: John G. Cooper
Title: Senior Vice President and
Chief Financial Officer
CHRYSALIS DNX TRANSGENIC SCIENCES
CORPORATION
By: /s/ John G. Cooper
-----------------------------
Name: John G. Cooper
Title: Senior Vice President and
Chief Financial Officer
CHRYSALIS INTERNATIONAL CLINICAL
SERVICES CORPORATION
By: /s/ John G. Cooper
-----------------------------
Name: John G. Cooper
Title: Senior Vice President and
Chief Financial Officer
CORESTATES BANK, N.A.
By: /s/ Stephen McWilliams
-----------------------------
Name: Stephen McWilliams
Title: Vice President
- 48 -
<PAGE> 1
EXHIBIT 10(xxxvi)
TERM NOTE
<TABLE>
<S> <C>
$5,000,000 Princeton, New Jersey
August 29, 1997
</TABLE>
For value received, Chrysalis International Corporation, a
Delaware corporation, Chrysalis International Preclinical Services Corporation,
a Pennsylvania corporation, Chrysalis DNX Transgenic Sciences Corporation, an
Ohio corporation, and Chrysalis International Clinical Services Corporation, a
Delaware corporation (collectively the "Borrowers"), hereby jointly and
severally promise to pay to the order of CORESTATES BANK, N.A. (the "Bank") the
principal amount of Five Million Dollars ($5,000,000) or, if less, the unpaid
principal amount outstanding under the Loan Agreement (as defined below),
together with interest thereon at the rate and in the installments and at the
times hereinafter provided.
1. Loan Agreement. This Term Note is delivered pursuant
and subject to the Term Loan and Security Agreement, dated the date hereof by
and among the Borrowers and the Bank (the "Loan Agreement"). All terms and
conditions of the Loan Agreement are hereby incorporated by reference into this
Term Note, and reference is made to the Loan Agreement for, among other things,
the security for this Term Note, Events of Default hereunder, and the Bank's
rights and remedies upon the occurrence of any Event of Default. All
capitalized terms used herein shall have the same meaning as ascribed to them
in the Loan Agreement unless otherwise expressly stated.
2. Interest and Fees.
(a) Rate of Interest; Computation. The Term
Loan shall bear interest on the unpaid principal balance thereof from the
Closing Date to the Maturity Date as set forth in Section 2.3 of the Loan
Agreement. All interest and fees payable hereunder shall be computed on the
basis of a 360-day year for the actual number of days elapsed.
(b) Interest Payments. The Borrowers shall pay
interest on the outstanding principal balance of the Term Loan in arrears
commencing on September 1, 1997 and thereafter on the first Business Day of
each month during the term of the Term Loan.
(c) Post Maturity Interest. Any principal
payment on the Term Loan not paid when due and, to the extent permitted by
applicable law, any interest payment thereon not paid when due whether at the
Maturity Date, by acceleration,
<PAGE> 2
after commencement of bankruptcy or insolvency proceedings or otherwise, shall
continue to bear interest payable on demand in accordance with Sections 2.6 and
7.1 of the Loan Agreement.
3. Principal Payments; Maturity.
(a) Principal Payments. Principal payments on
the Term Loan shall be due and payable in sixteen (16) equal consecutive
quarterly installments of $312,500 commencing on September 30, 1998, and
thereafter on the last Business Day of each following December, March, June and
September, with the final quarterly installment due and payable on the Maturity
Date.
(b) Maturity Date. The Term Loan shall mature on
the Maturity Date at which time the Borrowers shall pay all outstanding
principal and accrued interest on the Term Loan and all other sums due
hereunder.
4. Prepayments. The Borrowers shall have the right
(subject to any prepayment penalties set forth in Section 2.4 of the Loan
Agreement), to prepay all or a portion of the Term Loan in accordance with
Section 2.4 of the Loan Agreement.
5. Payments. All payments of principal, interest, fees
and expenses hereunder shall be made by the Borrowers without defense, set-off,
or counterclaim and in same day funds and delivered to the Bank at its office
specified in Section 8.1 of the Loan Agreement. The Borrowers hereby authorize
the Bank to draw against any deposit or disbursement account owned by the
Borrowers at the Bank on account of such fees and expenses or payments, when
payment of same shall be due (including upon acceleration after an Event of
Default), subject to the conditions set forth in Sections 2.7 and 8.6 of the
Loan Agreement.
6. Invalidity. If any provision of this Term Note
shall for any reason be held to be invalid or unenforceable, such invalidity or
unenforceability shall not affect any other provision hereof, but this Term
Note shall be construed as if such invalid or unenforceable provisions had
never been contained herein.
7. Collection Costs. The Borrowers agree to pay all
expenses incurred by the Bank after an Event of Default in connection with any
action, proceeding or effort taken or commenced by the Bank to enforce this
Term Note, including without limitation, reasonable attorneys' fees and
expenses.
- 2 -
<PAGE> 3
8. Waivers. Except as otherwise provided in the Loan
Agreement, the Borrowers hereby waive presentment, demand, protest and notice
of nonpayment. The liabilities and obligations of the Borrowers hereunder
shall be unconditional without regard to the liability or obligations of any
other party. Any failure of the Bank to exercise any right hereunder shall not
be construed as a waiver of the right to exercise the same or any other right
at any time and from time to time thereafter. The terms of this Term Note may
be waived, changed or modified only by an agreement in writing and signed by
the party against whom enforcement thereof is sought.
9. Governing Law; Waiver of Jury Trial. The validity
and effect of this Term Note shall be determined by reference to the
substantive laws of the State of Pennsylvania without giving effect to the
conflict of laws provisions thereof. EXCEPT AS PROHIBITED BY LAW, EACH PARTY
HERETO WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH
THIS TERM NOTE.
- 3 -
<PAGE> 4
IN WITNESS WHEREOF, and intending to be legally bound hereby,
the undersigned have executed this Term Note the day and year first above
written.
CHRYSALIS INTERNATIONAL CORPORATION
By: /s/ John G. Cooper
---------------------------
Name: John G. Cooper
Title: Senior Vice President and
Chief Financial Officer
CHRYSALIS INTERNATIONAL PRECLINICAL
SERVICES CORPORATION
By: /s/ John G. Cooper
---------------------------
Name: John G. Cooper
Title: Senior Vice President and
Chief Financial Officer
CHRYSALIS DNX TRANSGENIC SCIENCES
CORPORATION
By: /s/ John G. Cooper
---------------------------
Name: John G. Cooper
Title: Senior Vice President and
Chief Financial Officer
CHRYSALIS INTERNATIONAL CLINICAL
SERVICES CORPORATION
By: /s/ John G. Cooper
---------------------------
Name: John G. Cooper
Title: Senior Vice President and
Chief Financial Officer
- 4 -
<PAGE> 1
EXHIBIT 10(xxxvii)
SECURITY AGREEMENT
THIS SECURITY AGREEMENT is entered into as of August 29, 1997
by and among Chrysalis International Corporation, a Delaware corporation,
Chrysalis International Preclinical Services Corporation, a Pennsylvania
corporation, Chrysalis DNX Transgenic Sciences Corporation, an Ohio
corporation, and Chrysalis International Clinical Services Corporation, a
Delaware corporation (each, a "Debtor" and together, the "Debtors"), and
CoreStates Bank, N.A. (the "Secured Party" or the "Bank").
BACKGROUND
The Debtors and the Secured Party have entered into a Term
Loan and Security Agreement dated as of the date hereof (the "Loan Agreement").
Pursuant to the Loan Agreement, the Bank has agreed, subject to the terms and
conditions set forth therein, to make a term loan to the Debtors in the
aggregate principal amount of $5,000,000 (the "Loan"), which Loan is to be
secured by a continuing first priority lien and security interest in
substantially all of the property and assets of the Debtors, all as more fully
described in Section 3.1 of the Loan Agreement and in the Loan Documents (as
defined therein) entered into pursuant thereto.
It is a condition precedent to the making of the Loan by the
Secured Party pursuant to the Loan Agreement that the Debtors enter into this
Security Agreement in order to secure the prompt and complete payment,
observance and performance of all of the Debtors' Obligations.
The defined terms used in this Security Agreement shall have
the respective meanings set forth in Section 1 hereof unless elsewhere defined
or the context shall otherwise require.
TERMS
NOW, THEREFORE, in order to induce the Secured Party to make
the Loan under the Loan Agreement and intending to be legally bound, the
Debtors hereby agrees with the Secured Party as follows:
1. INTERPRETATION OF AGREEMENT: DEFINITIONS.
1.1. Definitions. Unless otherwise defined herein, each
capitalized term used herein that is defined in the Loan Agreement shall have
the meaning specified for such term in the Loan Agreement. Unless the context
otherwise requires, the term hereinafter set forth when used herein shall have
the following meaning:
<PAGE> 2
"Property" means any interest in any kind of property or
asset, whether real, personal or mixed, or intangible or tangible.
2. GRANT OF SECURITY.
The Debtors hereby grant to the Secured Party to secure the
payment and performance of all Obligations, a continuing security interest in
and lien on all of the Debtors' Property wherever located, whether now owned or
hereafter acquired or arising, all proceeds and products thereof and all parts
thereof and all accessions thereto (all of the same being hereinafter called
the "Collateral"), including, without limiting the generality of the foregoing,
the following properties, assets and rights owned by the Debtors:
(a) all goods, accounts, contract rights;
(b) all rights to the payment of money, including tax
refund claims, insurance proceeds and indemnity, warranty and tort claims and
all rights to proceeds of any termination, including any partial termination,
of employee benefit plans;
(c) all chattel paper, documents, instruments,
securities and general intangibles, together with all right, title and interest
of the Debtors in and to all patents and trademarks which the Debtors may
hereinafter acquire, the right to file and prosecute applications for patents
and trademarks, and similar intellectual property anywhere in the world and the
good will of the business connected with the use of and symbolized by any
patents and trademarks, together with all assets which uniquely reflect the
good will of the business of the Debtors, including but not limited to, the
Debtors' trade names, customer lists, trade secrets, corporate and other
business records, license rights, advertising materials, operating manuals,
methods, processes, know-how, sales literature, drawings, specifications,
descriptions, inventions, name plates, catalogues, copyrights, dealer
contracts, supplier contracts, distribution agreements, confidential
information, consulting agreements, engineering contracts and engineering
drawings; and
(d) all furniture, fixtures, equipment, inventory, raw
materials, work in progress, goods returned or repossessed, books and records,
and real property and interests and rights in, on or over real property.
- 2 -
<PAGE> 3
3. GENERAL REPRESENTATIONS, WARRANTIES AND COVENANTS.
The Debtors represent and warrant to the Secured Party that:
3.1. Warranty of Title to Collateral. The Debtors are
the owners of the Collateral free from any lien, security interest, encumbrance
or other right, title or interest of any other person, except for the security
interest, pledges and liens granted by the Borrowers to the Secured Party
hereby and pursuant to the Loan Documents and the Permitted Liens, and the
Debtors shall defend the Collateral against all claims and demands of all
persons at any time claiming the same or any interest therein adverse to the
Secured Party.
3.2. No Financing Statements. There is no financing
statement or similar notice now on file in any public office covering any
Property of any kind which is part of the Collateral hereunder, or intended so
to be, or in which any of the Debtors is named as or has signed as a debtor
except those naming the Secured Party as secured party or for which termination
statements are on file and except in connection with any Permitted Liens, and
so long as any Obligations remain unpaid or unperformed or this Security
Agreement remains in effect, the Debtors will not execute, and there will not
be on file in any public office any financing statement or statements except
the financing statements filed or to be filed in respect of and for the
security interests of the Secured Party granted hereunder and pursuant to the
other Loan Documents and except in connection with any Permitted Liens. The
Debtors have no trade names.
3.3. Location of Chief Places of Business, Accounts
and Equipment. The locations of the Debtors' chief places of business,
accounts and equipment are at the addresses set forth on Exhibit A hereto. In
the event that any of the Debtors discovers that any representation made in
this Section is untrue or incorrect for any reason, it will immediately notify
the Secured Party and take such actions as may be necessary to make such
representation true and correct. No account is evidenced by a note or other
instrument.
3.4. Valid Security Interest. Upon the proper filing of
the financing statements prepared by the Bank covering the Collateral, this
Agreement creates a valid and perfected first priority security interest in the
Collateral (except for the Permitted Liens), securing the payment of the
Obligations.
3.5. Consents. No authorization, approval or other
action by, and no notice to or filing with any governmental
- 3 -
<PAGE> 4
authority or regulatory body is required either (a) for the grant by the
Debtors of the security interest granted hereby or for the execution, delivery
or performance of this Agreement by the Debtors or (b) for the perfection of or
the exercise by the Secured Party of its rights and remedies hereunder, other
than the proper filing of the financing statements prepared by the Bank
covering the Collateral.
4. PARTICULAR COVENANTS OF THE DEBTORS.
4.1. Payment of Obligations. The Debtor agrees to pay
all Obligations at the time and place and in the manner as provided therein and
in any Loan Document and in a timely fashion, comply with and perform and
fulfill the terms, covenants and conditions contained herein or in any Loan
Document.
4.2. Maintenance of Lien; Recording.
(a) The Debtors will, at its own expense, take all
actions requested by the Secured Party to maintain and preserve the lien of
this Security Agreement so long as any Obligations are outstanding.
(b) The Debtors will, forthwith, upon the
execution and delivery of this Security Agreement and thereafter from time to
time, cause this Security Agreement and all required financing statements to be
filed, registered and recorded in such manner and in such places as shall be
necessary or as the Secured Party may reasonably request, in order to publish
notice of and fully protect the lien thereof as it relates to the Collateral,
and in order to continue such protection, refile, reregister and rerecord
whenever necessary, and from time to time upon the reasonable request of the
Secured Party will perform or cause to be performed any other act as provided
by law and will execute or cause to be executed any and all further instruments
for such publication and protection. To the extent permitted by applicable
law, the Debtors will pay or cause to be paid all filing, registration and
recording taxes and fees incident to such filing, registration and recording,
any federal or state stamp taxes and other taxes, duties, imposts, assessments
and charges arising out of or in connection with the execution and delivery of
this Security Agreement and all required financing statements and each such
instrument of further assurance. Without limiting the foregoing, the Debtors
hereby authorize the Secured Party to file one or more financing or
continuation statements, and amendments thereto, relative to all or any part of
the Collateral without the signature of the Debtors where permitted by law. A
carbon, photographic or other reproduction of this Agreement or any financing
statement covering the
- 4 -
<PAGE> 5
Collateral or any part thereof shall be sufficient as a financing statement
where permitted by law.
4.3. Further Assurances; After-Acquired Property.
(a) The Debtors will do, execute, acknowledge and
deliver, or cause to be done, executed, acknowledged and delivered, all such
further acts, deeds, conveyances, mortgages, assignments, transfers and
assurances as may be necessary or as the Secured Party reasonably may require
for the perfection of the lien being herein provided for in the Collateral.
Without limiting the generality of the foregoing, the Debtors will: (i) mark
conspicuously each document related to the Debtors' chattel paper and all other
documents or instruments related to accounts, contract rights or general
intangibles ("Related Contracts") and, at the request of the Secured Party,
each of its records pertaining to the Collateral with a legend, in form and
substance satisfactory to the Secured Party, indicating that such documents,
chattel paper, Related Contracts or Collateral is subject to the security
interest granted hereby; and (ii) if any account, contract right or general
intangible ("Receivables") shall be evidenced by a promissory note or other
instrument or chattel paper, deliver and pledge to the Secured Party hereunder
such note, instrument or chattel paper duly indorsed and accompanied by duly
executed instruments or transfer or assignment, all in form and substance
satisfactory to the Secured Party.
(b) All right, title, and interest of the Debtors
in and to all extensions, improvements, betterments, renewals, substitutes and
replacements of, and all additions and appurtenances to, the Collateral or any
part thereof, hereafter constructed or acquired by the Debtors, immediately
upon such construction or acquisition, and without any further mortgage,
conveyance or assignment, shall become and be part of the Collateral and shall
be subject to the lien of this Security Agreement as fully and completely and
with the same effect as though now owned by the Debtors, but at any and all
times the Debtors will execute and deliver to the Secured Party any and all
such further assurances, mortgages, conveyances or assignments thereof and
financing statements and other instruments with respect thereto as shall be
necessary or desirable or as the Secured Party may reasonably require for the
purpose of expressly and specifically subjecting the same to the lien of this
Security Agreement.
4.4. Right of Secured Party to Perform Covenants,
Etc. In the event of the occurrence and during the continuance of an Event of
Default, the Secured Party, without waiving or
- 5 -
<PAGE> 6
releasing any Obligation, may (but shall be under no obligation to) at any time
thereafter make such payment or perform such act for the account and at the
expense of the Debtors, and may enter upon any Property of the Debtors for such
purpose and take all such action thereon as, in the reasonable opinion of the
Secured Party, may be necessary or appropriate therefor. All sums so paid by
the Secured Party and all costs and expenses (including without limitation,
reasonable attorneys' fees and expenses) so incurred, together with interest
thereon at the rate set forth in the Loan Agreement for overdue payments from
the date of payment or incurrence, shall be secured hereby and shall be paid by
the Debtors to the Secured Party on demand. The Secured Party in making any
payment authorized under this Section relating to taxes or assessments may do
so according to any bill, statement or estimate procured from the appropriate
public office without inquiry into the accuracy of such bill, statement or
estimate or into the validity of any tax assessment, sale, forfeiture, tax lien
or title or claim thereof.
4.5. Limitation on Liens. The Debtors agree not to
create or incur or suffer to be incurred or to exist, any mortgage, pledge,
security interest, encumbrance, lien or charge of any kind upon the Collateral
or upon any income or proceeds therefrom other than encumbrances specifically
permitted by the Loan Documents.
4.6. As to Equipment. The Debtors shall:
(a) Keep all equipment at the places therefor
specified in Section 3.3 or, upon 30 days prior written notice to the Secured
Party, at such other places in jurisdictions where all action required by
Section 4.2 shall have been taken with respect to such equipment.
(b) Cause all equipment to be maintained and
preserved in the same condition, repair and working order as when new, ordinary
wear and tear excepted, and in accordance with any manufacturer's manual, and
shall forthwith, or in the case of any loss or damage to any of the equipment
as quickly as practicable after the occurrence thereof, make or cause to be
made all repairs, replacements and other improvements in connection therewith
which are necessary or desirable to such end. The Debtors shall promptly
furnish to the Secured Party a statement respecting any material loss or damage
to any of the equipment.
(c) Pay promptly when due all property and other
taxes, assessments and governmental charges or levies imposed upon, and all
claims (including claims for labor, materials and
- 6 -
<PAGE> 7
supplies) against, the equipment and inventory, except to the extent the
validity thereof is being contested in good faith.
4.7. Insurance.
(a) The Debtors shall, at their own expense,
maintain insurance with respect to their equipment, inventory and other
Property in such amounts, against such risks, in such form and with such
insurers, as shall be reasonably satisfactory to the Secured Party from time to
time. Each policy for (i) liability insurance shall provide for all losses to
be paid on behalf of the Secured Party and the Debtor as their respective
interests may appear and (ii) property damage insurance shall provide for all
losses (except for losses of less than $250,000 per occurrence) to be paid
directly to the Secured Party. Each such policy shall in addition (1) name the
Debtor and the Secured Party as insured parties thereunder (without any
representation or warranty by or obligation upon the Secured Party) as their
interests may appear, (2) contain the agreement by the insurer that any loss
thereunder shall be payable to the Secured Party notwithstanding any action,
inaction or breach of representation or warranty by the Debtor, (3) provide
that there shall be no recourse against the Secured Party for payment of
premiums or other amounts with respect thereto and (4) provide that at least
thirty days prior written notice of cancellation or of lapse shall be given to
the Secured Party by the insurer. The Debtor shall, if so requested by the
Secured Party, deliver to the Secured Party original or duplicate policies of
such insurance and, as often as the Secured Party may reasonably request, a
report of a reputable insurance broker with respect to such insurance.
Further, the Debtor shall, at the request of the Secured Party, duly execute
and deliver instruments or assignments of such insurance policies to comply
with the requirements of this Section 4.7 and cause the respective insurers to
acknowledge notice of such assignment.
(b) Reimbursement under any liability insurance
maintained by the Debtor pursuant to this Section 4.7 may be paid directly to
the person who shall have incurred liability covered by such insurance. In
case of any loss involving damage to Property when subsection (c) of this
Section 4.7 is not applicable, the Debtor shall make or cause to be made the
necessary repairs to or replacements of such Property and any proceeds of
insurance maintained by the Debtor pursuant to this Section 4.7 shall be paid
to the Debtor as reimbursement for the costs of such repairs or replacements.
(c) Upon (i) the occurrence and during the
continuance of any Event of Default, or (ii) the actual or
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<PAGE> 8
constructive total loss (in excess of $1,000,000 per occurrence) of any
Property, all insurance payments in respect of such Property shall be paid to
and applied by the Bank as specified in Section 5.5.
4.8. Maintenance of Office. The Debtors shall keep its
chief places of business and the offices where it keeps its records concerning
the Receivables and Related Contracts and equipment at the locations therefor
specified on Exhibit A hereto or at such other locations in a jurisdiction
where all action required by Section 4.2 shall have been taken with respect to
such Property. The Debtors will hold and preserve such records and chattel
paper and will permit representatives of the Secured Party at any time during
normal business hours to inspect and make abstracts from such records and
chattel paper.
4.9. As to Receivables. The Debtors agree that with
respect to any Receivables:
(a) Unless the Debtors have theretofore given the
Secured Party written notice to the contrary, as of the time any Receivable
becomes subject to the security interest provided for hereby, the Debtors shall
be deemed to have warranted as to each and all of such Receivables that each
Receivable and all papers and documents relating thereto are genuine and in all
respects what they purport to be; that each Receivable is valid and subsisting
and arises out of a bona fide sale of goods sold and delivered by the Debtors
to, or in the process of being delivered to, or out of and for services
theretofore actually rendered by the Debtors to the account debtor named in the
Receivable; that the amount of the Receivable represented as owing is the
correct amount actually owing from the account debtor, is not subject to any
setoffs or deductions (other than normal trade discounts) or any counter-claim
or other defense on the part of such account debtor; that no such Receivable is
evidenced by any note unless such instrument or chattel paper has theretofore
been endorsed and delivered to the Secured Party; and that no surety bond was
required or given in connection with said Receivable or the contracts or
purchase orders out of which the same arose.
(b) Except as otherwise provided in this
subsection (b), the Debtors shall continue to collect, at their own expense,
all amounts due or to become due the Debtors under the Receivables. The
Secured Party shall have the right at any time following an Event of Default
and during its continuance to notify any and all account debtors of the
assignment of such Receivables to the Secured Party and to direct such account
debtors or obligors to make payment of all amounts due or to become due to the
Debtors thereunder directly to the Secured
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<PAGE> 9
Party and, upon such notification and at the expense of the Debtors, to enforce
collection of any such Receivables, and to adjust, settle or compromise the
amount or payment thereof, in the same manner and to the same extent as the
Debtors might have done, and the Debtors shall not adjust, settle or compromise
the amount or payment of any Receivable, or release wholly or partly any
account debtor or obligor thereof, or allow any credit or discount thereon.
Following an Event of Default and during its continuance, the Receivables at
any time received by the Debtors shall (unless the Secured Party shall
otherwise elect in writing) be forthwith accounted for and transmitted to the
Secured Party to an account in its name in the same form as received (not less
often than once per week) by the Debtors, shall be received in trust for the
Secured Party and shall not be commingled with any other funds of the Debtors.
In the event that the Secured Party shall at any time elect in writing not to
have the proceeds transmitted to the Secured Party, the Secured Party
nevertheless shall have and retain the right at any time thereafter following
an Event of Default and during its continuance to demand that such proceeds be
delivered and transmitted to the Secured Party as set forth above.
(c) The proceeds of the Receivables so
transmitted to the Secured Party or such designee bank may be handled and
administered by the Secured Party in and through a remittance or similar
account at the Secured Party and the Debtors acknowledges that the maintenance
of such an account by the Secured Party is solely for the Secured Party's own
convenience and that the Debtors do not have any right, title or interest in
such remittance or similar account or any amounts at any time credited thereto.
Except to the extent that the Secured Party may from time to time in its sole
discretion release proceeds to the Debtors for use in its business, all
proceeds received by the Secured Party shall be applied to the payment of the
Obligations (whether or not it shall then be due) such application to be made
at such intervals and in such manner as the Secured Party may determine, but
not less often than once each week. The Secured Party need not apply or give
credit for any item included in such proceeds until the Secured Party has
received final payment thereof at its office in cash or solvent credit accepted
by it as such. The Debtors shall accompany each transmission of proceeds to
the Secured Party with a report in such form as the Secured Party shall require
identifying the particular Receivables to which such proceeds apply. Upon the
occurrence of an Event of Default, at the request of the Secured Party, the
Debtors will enter into such lock box arrangements for payments of Receivables
as the Secured Party shall request.
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<PAGE> 10
(d) Upon the occurrence of an Event of Default
and during its continuance, the Secured Party shall have the right in its own
name or in the name of the Debtors to demand, collect, receive, receipt for,
sue for, compound and give acquittance for any and all amounts due or to become
due on the Receivables and to endorse the name of the Debtors on all commercial
paper given in payment or partial payment thereof and, in addition, may upon
the occurrence of an Event of Default and during its continuance, in its
discretion, file any claim or take any other action or proceeding which the
Secured Party may deem necessary or appropriate to protect and preserve and
realize upon the security interest of the Secured Party in the Receivables and
the proceeds thereof.
5. DEFAULTS; REMEDIES OF THE SECURED PARTY.
5.1. Completed Default; Acceleration of Maturity. Upon
declaration by the Secured Party of the acceleration of maturity of the
Obligations in accordance with Section 7 of the Loan Agreement, the Debtors
shall pay to the Secured Party the whole amount which then shall have become
due on the Obligations. In case the Debtors shall fail to pay the same
forthwith, the Secured Party shall be entitled to recover judgment for the
whole amount so due and unpaid against the Debtors. The right of the Secured
Party to recover such judgment shall not be affected by the exercise of any
other right, power or remedy for the enforcement of the provisions of this
Security Agreement.
5.2. Remedies. In case of the happening of an Event of
Default and during its continuance, the Secured Party may exercise, in addition
to all other rights and powers described herein or permitted under applicable
law, all remedies available to a secured creditor under applicable law, all
remedies available to a secured creditor under any applicable Uniform
Commercial Code and all or any of the following powers:
(a) The Secured Party may protect and enforce its
rights by bringing such actions, at law or in equity or before any
administrative tribunal, as the Secured Party, shall deem appropriate,
including, without limitation, actions for the specific performance of any
covenant hereof; and the Secured Party shall be entitled to recover judgment
for any and all sums then, or during any Default, becoming due and payable by
the Debtor under any provision hereof or of any Loan Document, including,
without limitation, any deficiency in the payment of all amounts due under the
provisions hereof or any Loan Document remaining after any sale of the
Collateral and, in addition thereto, such amounts as shall be sufficient to
cover the costs and expenses of collection, including reasonable attorneys'
fees,
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<PAGE> 11
and of other proceedings hereunder, and to collect out of the Property of the
Debtors in any manner provided by law all amounts adjudged or decreed to be
payable.
(b) The Secured Party as a matter of contract
right and not as a penalty shall be entitled to the appointment of a receiver
of, or may enter upon and take possession of, all or any part of the
Collateral, and such receiver or the Secured Party shall thereupon be entitled
to operate all or any part of the Collateral and to make all expenditures and
to take all actions necessary or desirable therefor, and to collect and retain
all income and earnings arising from such Property or business.
(c) Upon receipt by the Debtor or the Secured
Party of checks, drafts, cash and other remittance in payment of accounts
payable to the Debtors, the Secured Party may require the Debtors to provide
all necessary endorsements and deliver such remittance to the Secured Party to
be applied upon the Obligations.
(d) The Secured Party may require the Debtors to
assemble the Collateral (other than fixtures) and make it available at a place
or places designated by the Secured Party which is mutually convenient to allow
the Secured Party to take possession or dispose of the Collateral.
(e) Without notice except as specified below, the
Secured Party may sell the Collateral or any part thereof in one or more
parcels at public or private sale, at any of the Secured Party's offices or
elsewhere, for cash, on credit or for future delivery, and upon such other
terms as the Secured Party may deem commercially reasonable. The Debtors agree
that, to the extent notice of sale shall be required by law, at least ten days
notice to the Debtors of the time and place of any public sale or the time
after which any private sale is to be made shall constitute reasonable
notification. The Secured Party shall not be obligated to make any sale of
Collateral regardless of notice of sale having been given. The Secured Party
may adjourn any public or private sale from time to time by announcement at the
time and place fixed therefor, and such sale may, without further notice, be
made at the time and place to which it is so adjourned.
5.3. Sale to Accelerate Obligations. In the event of any
sale made under or by virtue of this Security Agreement, whether made under the
power of sale herein granted or under or by virtue of judicial proceedings or
of a valid judgment, the Obligations, if not previously due, immediately
thereupon shall
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<PAGE> 12
become due and payable, anything in this Security Agreement or any Loan
Document to the contrary notwithstanding.
5.4. Application of Proceeds of Sale. The purchase money
proceeds or avails of any sale of the Collateral shall be applied as follows:
First: To the payment of the costs and expenses of
suit, if any, and of such sale, and to the extent permitted by applicable law,
the reasonable compensation of the Secured Party's agents, attorneys and
counsel, and of all proper expenses, liability and advances incurred or made
hereunder or any of the Loan Documents by the Secured Party, and of all taxes,
assessments or liens superior to the lien of these presents, except any taxes,
assessments or other superior lien subject to which said sale may have been
made;
Second: To the amount then owing or unpaid on the
Obligations; and
Third: To the payment of the surplus, if any, to
the Debtors and their successors or assigns or as may be directed by a court of
competent jurisdiction.
5.5. Purchase of Collateral. Upon any sale made under or
by virtue of this Security Agreement, the Secured Party may bid for and
purchase the Collateral being sold, and upon compliance with the terms of sale,
may hold, retain and possess and dispose of such Property in its own absolute
right without further accountability; and the Secured Party at any such sale
may, in paying the purchase price, apply any amount of the Obligations then
unpaid in lieu of cash to the amount which shall, upon distribution of the net
proceeds of such sale, be payable thereon.
5.6. Waiver. The Secured Party may waive any Event of
Default hereunder and its consequences which result from the failure of the
Debtors to comply with any provisions of this Security Agreement or any Loan
Document. In case of any such waiver, or in case any proceedings taken on
account of any Event of Default shall be discontinued or abandoned or
determined adversely to the Secured Party, then and in every such case, the
Debtors and the Secured Party shall be restored to their former positions and
rights hereunder respectively. No such waiver shall extend to any subsequent
Event of Default or impair any right consequent thereon.
5.7. Remedies Cumulative. No remedy herein conferred
upon or reserved to the Secured Party is intended to be exclusive
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<PAGE> 13
of any other remedy or remedies, and each and every such remedy shall be
cumulative, and shall be in addition to every other remedy given hereunder or
now or hereafter existing at law or in equity or by statute.
5.8. Delay or Omission Not a Waiver. No delay or
omission of the Secured Party to exercise any right or power accruing upon any
Event of Default shall impair any such right or power or shall be construed to
be a waiver of any Event of Default or an acquiescence therein; and every power
and remedy given by this Security Agreement to the Secured Party may be
exercised from time to time and as often as may be deemed expedient by the
Secured Party.
5.9. Secured Party's Duties. The powers conferred on the
Secured Party hereunder are solely to protect its interest in the Collateral
and shall not impose any duty upon its to exercise any such powers. Except for
the safe custody of any Collateral in its possession and the accounting for
moneys actually received by it hereunder, the Secured party shall have no duty
as to any Collateral or as to the taking of any necessary steps to preserve
rights against prior parties or any other rights pertaining to any Collateral.
5.10. Secured Party Appointed Attorney-in-Fact. The Debtors
hereby irrevocably appoint the Secured Party each Debtor's attorney-in-fact,
with full authority in the place and stead of such Debtor and in the name of
such Debtor, the Secured Party or otherwise, from time to time in the Secured
Party's discretion, to take any action and to execute any instrument which the
Secured Party may deem necessary or advisable to accomplish the purposes of
this Agreement, including, without limitation: (a) to obtain and adjust
insurance required to be paid to the Bank pursuant to Section 4.7, (b) to ask,
demand, collect, sue for, recover, compound, receive and give acquittance and
receipts for moneys due and to become due under or in respect of any of the
Collateral, (c) to receive, indorse, and collect any drafts or other
instruments, documents and chattel paper, in connection with clauses (a) and
(b) above, and (d) to file any claims or take any action or institute any
proceedings which the Secured Party may deem necessary or desirable for the
collection of any of the Collateral or otherwise to enforce the rights of the
Secured Party with respect to any of the Collateral.
5.11. Expenses; Indemnity. The Debtors hereby agree to
reimburse the Secured Party on demand, for all costs and expenses incurred by
the Secured Party in enforcing this Security Agreement (including reasonable
expenses of agents and attorneys employed by the Secured Party). The Debtors
agree to indemnify
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<PAGE> 14
and save and hold the Secured Party harmless from and against any and all
claims, damages, loss, liability or judgments which may be incurred or
sustained by the Secured Party or asserted against the Secured Party directly
or indirectly, in connection with the existence of or the lawful exercise of
any of the rights under this Security Agreement or any Loan Document except
such claims, damages, loss, liability or judgments as may result from the bad
faith, gross negligence or willful misconduct of the Secured Party.
6. DEFEASANCE.
If the Debtors shall pay and discharge or provide, in a manner
reasonably satisfactory to the Secured Party, for the payment and discharge of
the whole amount of the Obligations, then and in that case all Property, rights
and interests hereby conveyed or assigned or pledged shall revert to the
Debtors, and the estate, right, title and interest of the Secured Party shall
thereupon terminate; and the Secured Party, in such case, on demand of the
Debtors and at its expense, shall execute and deliver to the Debtors a proper
instrument or proper instruments acknowledging the satisfaction and termination
of this Security Agreement, and shall convey, assign and transfer, or cause to
be conveyed, assigned or transferred, and shall deliver or cause to be
delivered, to the Debtors, all Property, including money, then held by the
Secured Party, other than moneys deposited with the Secured Party for the
payment of the Obligations.
7. MISCELLANEOUS PROVISIONS.
7.1. Security Agreement for Benefit of Parties Hereto.
Nothing in this Security Agreement, expressed or implied, is intended or shall
be construed to confer upon or to give to, any Person other than the parties
hereto, any right, remedy or claim under or by reason of this Security
Agreement or any covenant, condition or stipulation hereof; and the covenants,
stipulations and agreements contained in this Security Agreement are and shall
be for the sole and exclusive benefit of the parties hereto, and their
successors and assigns.
7.2. Severability. In case any one or more of the
provisions contained in this Security Agreement shall be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby.
7.3. Notices. All notices, requests, demands, directions
and other communications which may or are required to be given, served or sent
by the Debtors or the Secured Party to
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<PAGE> 15
the other shall be given, served or sent as provided in the Loan Agreement and
shall be effective in accordance with the terms of the Loan Agreement.
7.4. Successors and Assigns. Whenever in this Security
Agreement any of the parties hereto is named or referred to, the successors and
assigns of such party shall be deemed to be included, and all the covenants,
promises and agreements in this Security Agreement contained by or on behalf of
the Debtors, or on behalf of the Secured Party shall bind and inure to the
benefit of their respective successors and assigns, whether so expressed or
not.
7.5. Counterparts; Descriptive Headings. This Security
Agreement is being executed in any number of counterparts, each of which is an
original and all of which are identical. Each counterpart of this Security
Agreement is to be deemed an original hereof and all counterparts collectively
are to be deemed but one instrument. The descriptive headings of the several
Sections to this Security Agreement were inserted in this Security Agreement
for convenience only and shall not be deemed to affect the meaning or
construction of any of the provisions hereof.
7.6. Amendments, Etc. No amendment or waiver of
any provision of this Agreement nor consent to any departure by the Debtors
herefrom shall in any event be effective unless the same shall be in writing
and signed by the Secured Party, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
7.7. Governing Law; Terms. This Agreement shall be
governed by and construed in accordance with the laws of the State of
Pennsylvania, except to the extent that the validity or perfection of the
security interest hereunder, or remedies hereunder, in respect of any
particular Collateral are governed by the laws of a jurisdiction other than the
State of Pennsylvania. Unless otherwise defined herein or in the Loan
Agreement, terms used in Article 9 of the Uniform Commercial Code in the State
of Pennsylvania are used herein as therein defined.
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<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have executed this
Security Agreement as of the date first above written.
CHRYSALIS INTERNATIONAL CORPORATION
By: /s/ John G. Cooper
--------------------------
Name: John G. Cooper
Title: Senior Vice President and
Chief Financial Officer
CHRYSALIS INTERNATIONAL PRECLINICAL
SERVICES CORPORATION
By: /s/ John G. Cooper
--------------------------
Name: John G. Cooper
Title: Senior Vice President and
Chief Financial Officer
CHRYSALIS DNX TRANSGENIC SCIENCES
CORPORATION
By: /s/ John G. Cooper
--------------------------
Name: /s/ John G. Cooper
Title: Senior Vice President and
Chief Financial Officer
CHRYSALIS INTERNATIONAL CLINICAL
SERVICES CORPORATION
By: /s/ John G. Cooper
--------------------------
Name: John G. Cooper
Title: Senior Vice President and
Chief Financial Officer
CORESTATES BANK, N.A.
By: /s/ Stephen McWilliams
--------------------------
Name: Stephen McWilliams
Title: Vice President
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<PAGE> 17
SCHEDULE A
to
Security Agreement
Location of Principal Offices and Equipment:
1) Chrysalis International Corporation
Raritan, Somerset County, New Jersey
2) Chrysalis International Preclinical Services
Corporation - Lackawanna County, Pennsylvania
3) Chrysalis International Clinical Services
Corporation - Austin, Travis County, Texas
4) Chrysalis DNX Transgenic Sciences Corporation -
Raritan, Somerset County, New Jersey Princeton,
Mercer and Middlesex Counties, New Jersey
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<PAGE> 1
EXHIBIT 10(xxxviii)
STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT (the "Agreement") is entered into
as of August 29, 1997, by and between Chrysalis International Corporation, a
Delaware corporation ("Chrysalis" or the "Pledgor"), and CoreStates Bank, N.A.
(the "Bank").
BACKGROUND
Chrysalis and certain of its wholly-owned subsidiaries,
Chrysalis International Preclinical Services Corporation, Chrysalis DNX
Transgenic Sciences Corporation and Chrysalis International Clinical Services
Corporation (such subsidiaries being hereinafter referred to collectively as
the "Other Borrowers") and the Bank have entered into a Term Loan and Security
Agreement dated as of the date hereof (the "Loan Agreement"). Pursuant to the
Loan Agreement, the Bank has agreed, subject to the terms and conditions set
forth therein, to make a term loan to Chrysalis and the Other Borrowers in the
aggregate principal amount of $5,000,000 (the "Loan"), which Loan is to be
secured by a continuing first priority lien and security interest in
substantially all of the property and assets of Chrysalis and the Other
Borrowers, all as more fully described in Section 3.1 of the Loan Agreement and
in the Loan Documents (as defined therein) entered into pursuant thereto.
The Loan is being made to the Pledgor and the Other Borrowers, and
the obligation of the Bank to make the Loan is subject to the condition that,
among other things, the Pledgor execute and deliver this Stock Pledge Agreement
and grant the security interest hereinafter described. Capitalized terms used
herein and not otherwise defined herein shall have the meaning ascribed to such
terms in the Loan Agreement.
TERMS
NOW, THEREFORE, in order to induce the Bank to enter into the
Loan Agreement and to agree, subject to the terms and conditions set forth
therein, to make the Loan to Chrysalis and the Other Borrowers pursuant
thereto, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, it is hereby agreed as follows:
1. Pledge. The Pledgor hereby grants to Bank a security
interest in the following property (collectively, the "Pledged Shares"):
(a) 100% of the issued and outstanding shares of
common stock of the Other Borrowers and the certificates or instruments
representing such stock and all dividends, interest, cash, instruments, and
other property from time to time received,
<PAGE> 2
receivable, or otherwise distributed or distributable in respect of or in
exchange for any or all of such stock;
(b) all additional shares of common stock and any
other securities issued by the Other Borrowers to Pledgor from time to time,
and the certificates or instruments representing such additional securities,
and all dividends, interest, cash, instruments, and other property from time to
time received, receivable, or otherwise distributed or distributable in respect
of or in exchange for any or all of such additional securities; and
(c) all proceeds of any of the foregoing.
2. Security for Liabilities. The security interest
granted by this Agreement secures the payment and performance of all
Obligations of every kind and nature of the Pledgor and the Other Borrowers to
Bank under the Loan Agreement and the Loan Documents.
3. Delivery of Pledged Shares.
(a) All certificates or instruments representing
or evidencing the Pledged Shares shall be delivered to and held by Bank
pursuant hereto and shall be duly endorsed to Bank or shall be otherwise in
suitable form for transfer by delivery, or shall be accompanied by duly
executed instruments of transfer or assignment in blank, all in form and
substance satisfactory to Bank. After the occurrence of an Event of Default
and during its continuance, Bank shall have the right, at any time in its
discretion without further notice to Pledgor, to transfer to or to register in
the name of Bank or its nominees, any or all of the Pledged Shares. In
addition, upon the occurrence and during the continuance of an Event of Default
as hereinafter defined, Bank shall have the right at any time to exchange
certificates or instruments representing or evidencing Pledged Shares for
certificates or instruments of smaller or larger denominations.
(b) This Agreement shall terminate and all
certificates or instruments representing or evidencing the Pledged Shares shall
be delivered to Pledgors upon payment in full of all Obligations.
4. Further Assurances. The Pledgor agrees that at any
time and from time to time, at the expense of Pledgor, Pledgor will promptly
execute and deliver all further instruments and documents, and take all further
action that may be necessary,
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<PAGE> 3
or that Bank may reasonably request, in order to perfect and protect any
security interest granted or purported to be granted hereby or to enable Bank
to exercise and enforce the rights and remedies hereunder with respect to any
of the Pledged Shares.
5. Representations and Warranties. The Pledgor hereby
represents and warrants that:
(a) Pledgor has all right, title and interest in
and to the property now constituting the Pledged Shares, free and clear of any
liens, claims, security interests, and other encumbrances and free and clear of
any warrants, options, and other rights other than the security interests,
pledges and liens granted by the Pledgor hereby and pursuant to the Loan
Documents;
(b) all shares of stock now included in the
Pledged Shares are, and any shares of stock or other securities subsequently
included in the Pledged Shares pursuant to the terms hereof will be upon
becoming Pledged Shares, duly authorized and issued, validly outstanding, and
fully paid and nonassessable;
(c) on the date hereof, the Pledged Shares
constitutes 100% of the issued and outstanding shares of common stock of each
of the Other Borrowers;
6. Voting Rights and Dividends.
(a) So long as no Event of Default shall have
occurred and be continuing:
(i) The Pledgor shall be entitled
to exercise any and all of Pledgor's voting and other consensual rights
pertaining to the Pledged Shares or any part thereof for any purpose not
inconsistent with the terms of this Agreement; provided, however, that Pledgor
shall give Bank at least thirty days' written notice of the manner in which it
intends to exercise, or the reasons for refraining from exercising, any such
right which would have a material adverse effect on the value of the Pledged
Shares; and, provided further, that Pledgor shall not exercise or refrain from
exercising any such right if Bank advises Pledgor that, in Bank's reasonable
judgment, such action would have a material adverse effect on the value of the
Pledged Shares or any part thereof.
(ii) The Pledgor shall be entitled
to receive and retain free and clear of the security interest of Bank
hereunder, any and all of such dividends, interest and other
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<PAGE> 4
distributions as are permitted in accordance with the Loan Agreement to be paid
to Pledgor in respect of the Pledged Shares or any part thereof, except that
(A) any and all dividends, interest or other distributions paid or payable
other than in cash in respect of, and instruments and other property received,
receivable or otherwise distributed in respect of, or in exchange for, any
Pledged Shares shall also constitute Pledged Shares and shall be promptly
delivered to Bank in accordance with Section 3 hereof, and (B) any and all (1)
dividends, interest, or other distributions paid or payable in cash in respect
of any Pledged Shares in connection with a partial or total liquidation or
dissolution or in connection with a reduction of capital, capital surplus or
paid-in surplus, and (2) cash paid, payable or otherwise distributed in
redemption of, or in exchange for, any Pledged Shares, received by Pledgor
shall be so received in trust for the benefit of Bank, be segregated from the
other property or funds of Pledgor, and be forthwith delivered to Bank in the
same form as so received (with any necessary endorsement) to be held as Pledged
Shares and applied as provided herein.
(iii) The Bank shall execute and
deliver (or cause to be executed and delivered) to the Pledgor all such proxies
and other instruments as Pledgor may reasonably request for the purpose of
enabling such Pledgor to exercise the voting and other rights which it is
entitled to exercise pursuant to paragraph (i) above and to receive the
dividends, interest and other distributions which it is authorized to receive
and retain pursuant to paragraph (ii) above.
(b) Upon the occurrence and during the
continuance of an Event of Default:
(i) All rights of the Pledgor to
exercise the voting and other consensual rights which it would otherwise be
entitled to exercise pursuant to Section 6(a)(i) hereof and to receive the
dividends, interest and other distributions which it would otherwise be
authorized to receive and retain pursuant to Section 6(a)(ii) hereof shall
cease, and all such rights shall thereupon become vested in Bank which shall
thereupon have the sole right to exercise such voting and other consensual
rights and to receive such dividends, interest, and other distributions.
(ii) All dividends, interest and
other distributions which are received by the Pledgor contrary to the
provisions of paragraph (i) of this Section 6(b) shall be received in trust for
the benefit of Bank, shall be segregated from other funds of Pledgor, and shall
be forthwith paid over to
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<PAGE> 5
Bank in the same form as so received (with any necessary endorsement) to be
held as cash collateral and applied as provided herein.
7. Transfers and Liens. Pledgor will not (i) sell or
otherwise dispose of, or grant any option with respect to, any of the Pledged
Shares, or (ii) create or permit to exist any lien, security interest, or other
charge or encumbrance upon or with respect to any of the Pledged Shares other
than the security interest, pledges and liens granted by Pledgor hereunder and
pursuant to the Loan Documents.
8. Bank Appointed Attorney-in-Fact. The Pledgor hereby
appoints Bank as Pledgor's attorney-in-fact, with full authority in the place
and stead of Pledgor and in the name of Pledgor or otherwise, and from time to
time in Bank's discretion to take any action and to execute any instrument
which Bank may deem necessary or advisable to accomplish the purposes of this
Agreement, including, without limitation, upon the occurrence and during the
continuance of an Event of Default to receive, endorse, and collect all
instruments made payable to Pledgor representing any dividend, interest, or
other distribution in respect of the Pledged Shares or any part thereof and to
give full discharge for the same. Bank shall not, in its capacity as such
attorney-in-fact, be liable for any acts or omissions, nor for any error of
judgment or mistake of fact or law, but only for bad faith, willful misconduct
or gross negligence. This power, being coupled with an interest, is
irrevocable until all Obligations have been fully satisfied.
9. Bank May Perform. If Pledgor fails to perform any
agreement contained herein, Bank may itself perform, or cause performance of,
such agreement, and the reasonable expenses of Bank incurred in connection
therewith shall be payable by the Pledgor under Section 13(b) hereof.
10. Bank's Duties. The powers conferred on Bank hereunder
are solely to protect its interests in the Pledged Shares and shall not impose
any duty to exercise any such powers. Except for the safe custody of any
Pledged Shares in its possession and the accounting for moneys actually
received by it hereunder, Bank shall not have any duty as to any Pledged Shares
or as to the taking of any necessary steps to preserve rights against any
parties or any other rights pertaining to any Pledged Shares. Without limiting
the generality of the foregoing, Bank shall not have any responsibility for
ascertaining or taking action with respect to calls, conversions, exchanges,
maturities,
- 5 -
<PAGE> 6
tenders, or other matters relating to any Pledged Shares, whether or not Bank
has or is deemed to have knowledge of such matters.
11. Events of Default; Remedies. The term "Event of
Default", as used herein, shall mean: (a) any Event of Default under the Loan
Agreement or any of the other Loan Documents as that term is defined in the
Loan Agreement; (b) any warranty or representation contained in this Agreement
shall prove to have been false or incorrect or breached in any material respect
on the date as of which made pursuant to Section 7.1 of the Loan Agreement; and
(c) any violation by Pledgor in any material respect of any covenant contained
in this Agreement pursuant to Section 7.1 of the Loan Agreement. If there is
an Event of Default then:
(i) Bank may exercise in respect of the
Pledged Shares, in addition to other rights and remedies provided for herein or
otherwise available to it, all the rights and remedies of a secured party on
default under the Uniform Commercial Code as in effect in the State of New
Jersey (the "Code") and other applicable laws and agreements and also may,
without notice except as specified below, sell the Pledged Shares or any part
thereof in one or more parcels at public or private sale, at any exchange,
brokers' board or at any of Bank's offices or elsewhere, for cash, on credit,
or for future delivery, and upon such other terms as Bank may deem commercially
reasonable. Pledgor agrees that at least fifteen days' notice to Pledgor of
the time and place of any public sale or the time after which any private sale
is to be made shall be given and shall constitute reasonable notification. The
Bank shall not be obligated to make any sale of Pledged Shares regardless of
notice of sale having been given. The Bank may adjourn any public or private
sale from time to time by announcement at the time and place fixed therefor,
and such sale may, without further notice, be made at the time and place to
which it was so adjourned.
(ii) Any cash held by Bank as Pledged
Shares and all cash proceeds received by Bank in respect of any sale of,
collection from, or other realization upon all or any part of the Pledged
Shares may, in the reasonable discretion of Bank, be held by Bank as collateral
for, and/or then or at any time thereafter applied (after payment of any
amounts payable to Bank pursuant to Section 13 hereof) in whole or in part by
Bank against, all or any part of the Obligations in such order as Bank shall
elect. Any surplus of such cash or cash proceeds held by Bank and remaining
after payment in full of all the Obligations shall be
- 6 -
<PAGE> 7
paid over to Pledgor or to whosoever may be lawfully entitled to receive such
surplus.
12. Private Sale. Pledgor acknowledges and recognizes
that Bank may be unable to effect a public sale of all or a part of the Pledged
Shares and may be compelled to resort to one or more private sales to a
restricted group of purchasers who will be obligated to agree, among other
things, to acquire the Pledged Shares for their own account, for investment and
not with a view to the distribution or resale thereof. Pledgor acknowledges
that any such private sales may be at prices and on terms less favorable to
Bank than those of public sales, and agree that such private sales shall be
deemed to have been made in a commercially reasonable manner and that Bank has
no obligation to delay sale of any Pledged Shares to permit the issuer thereof
to register it for public sale under the Securities Act of 1933, as from time
to time amended, even if the issuer is willing to do so.
13. Indemnity and Expenses. (a) Pledgor agrees to
indemnify Bank, jointly and severally, from and against any and all claims,
losses and liabilities growing out of or resulting from this Agreement
(including, without limitation, enforcement of this Agreement), except claims,
losses, or liabilities resulting from Bank's bad faith, willful misconduct or
gross negligence.
(b) Pledgor will upon demand pay to Bank the
amount of any and all reasonable expenses, including the reasonable fees and
expenses of counsel and of any experts and agents, which Bank may incur in
connection with (i) the administration and enforcement of this Agreement, (ii)
the custody or preservation of, or the sale of, collection from, or other
realization upon, any of the Pledged Shares, (iii) the exercise or enforcement
of any of the rights of Bank hereunder, or (iv) the failure by Pledgor to
perform or observe any of the provisions hereof.
14. Amendments, Indulgences, Etc. No amendment or waiver
of any provision of this Agreement nor consent to any departure by Pledgor
herefrom shall in any event be effective unless the same shall be in writing
and signed by Bank, and then such waiver or consent shall be effective only in
the specific instance and for the specific purpose for which given. No failure
or delay on the part of Bank in the exercise of any right, power, or remedy
under this Agreement shall constitute a waiver thereof, or prevent the exercise
thereof in that or any other instance.
- 7 -
<PAGE> 8
15. Addresses for Notices. All notices and other
communications provided for hereunder shall be in writing and given in
accordance with Section 8.1 of the Loan Agreement.
16. Continuing Security Interest. This Agreement creates
a continuing security interest in the Pledged Shares and shall (a) be binding
upon Pledgor, and its heirs, executors, administrators, successors, and assigns
and (b) inure to the benefit of Bank and its successors, transferees and
assigns. The execution and delivery of this Agreement shall in no manner
impair or affect any other security (by endorsement or otherwise) for the
payment or performance of the Obligations and no security taken hereafter as
security for payment or performance of the Obligations shall impair in any
manner or affect this Agreement or the security interest granted hereby, all
such present and future additional security to be considered as cumulative
security. Any of the Pledged Shares may be released from this Agreement
without altering, varying, or diminishing in any way this Agreement or the
security interest granted hereby as to the Pledged Shares not expressly
released, and this Agreement and such security interest shall continue in full
force and effect as to all of the Pledged Shares not expressly released.
17. Governing Law; Consent to Jurisdiction. This
Agreement shall be governed by and construed in accordance with the laws of the
State of Pennsylvania applicable to contracts made and wholly performed within
Pennsylvania. Pledgor consents to the jurisdiction of the courts of
Pennsylvania and of the court of the United States sitting in Pennsylvania in
any litigation concerning this Agreement, and Pledgor waives any objection
based on venue or inconvenient forum. Unless otherwise defined herein, terms
defined in the Uniform Commercial Code as in effect on the date hereof are used
herein as therein defined as of such date. This Agreement may be executed in
any number of counterparts, all of which taken together shall constitute one
and the same instrument, and any of the parties hereto may execute this
Agreement by signing any such counterpart.
18. Severability. The provisions of this Agreement are
independent of and separable from each other, and no such provision, shall be
altered or rendered invalid or unenforceable by virtue of the fact that for any
reason any other such provision may be invalid or unenforceable in whole or in
part.
- 8 -
<PAGE> 9
IN WITNESS WHEREOF, the undersigned Pledgor, intending to be
legally bound, has executed this Agreement in favor of the Bank as of the date
first above written.
CHRYSALIS INTERNATIONAL CORPORATION
By: /s/ John G. Cooper
--------------------------------
Name: John G. Cooper
Title: Senior Vice President and
Chief Financial Officer
CORESTATES BANK, N.A.
By: /s/ Stephen McWilliams
--------------------------------
Name: Stephen McWilliams
Title: Vice President
- 9 -
<PAGE> 1
EXHIBIT 10(xxxix)
COLLATERAL ASSIGNMENT OF CONTRACTS
THIS COLLATERAL ASSIGNMENT OF CONTRACTS (this "Assignment") is
made as of August 29, 1997, by and among Chrysalis International Corporation, a
Delaware corporation, Chrysalis International Preclinical Services Corporation,
a Pennsylvania corporation, Chrysalis DNX Transgenic Sciences Corporation, an
Ohio corporation, and Chrysalis International Clinical Services Corporation, a
Delaware corporation (collectively, the "Assignors") and CoreStates Bank, N.A.
("Assignee").
BACKGROUND
Assignors are in the business of licensing technology and
other proprietary information in exchange for certain payments, including the
payment of license fees and royalties relating to the DNA microinjection
technology held under license by Assignors.
Assignors, in the operation of their business, enter into
various contracts, licenses and other agreements, including without limitation,
the License Agreements listed on Schedule A attached hereto (the "Contracts").
Assignors and the Assignee have entered into the Term Loan and
Security Agreement dated as of the date hereof (the "Loan Agreement").
Pursuant to the Loan Agreement, the Assignee has agreed, subject to the terms
and conditions set forth therein, to make a term loan to the Assignors in the
aggregate principal amount of $5,000,000 (the "Loan"), which Loan is to be
secured by a continuing first priority lien and security interest in
substantially all of the property and assets of the Assignors, all as more
fully described in Section 3.1 of the Loan Agreement and in the Loan Documents
(as defined therein) entered into pursuant thereto. As additional security for
the performance of all of Assignors' obligations under the Loan Agreement and
the other Loan Documents (and any extensions and/or modifications to any of the
foregoing), Assignors have agreed to collaterally assign to Assignee all of
Assignors' rights under all Contracts now or hereafter existing or any part
thereof, all on the terms and subject to the conditions hereinafter set forth.
All capitalized terms used herein and not otherwise defined shall have the
meanings ascribed to such terms in the Loan Agreement.
TERMS
NOW THEREFORE, in consideration of the mutual promises and
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which is hereby
<PAGE> 2
acknowledged, Assignors, intending to be legally bound, hereby agree as
follows:
1. Assignment of Contracts. Assignors hereby
collaterally convey, transfer, assign and set over unto Assignee all of
Assignors' rights, title, interest and privileges in all Contracts now or
hereafter in existence, together with any extension or renewal thereof,
including without limitation, all income, profits, fees, royalties and other
sums due or to become due under the Contracts (collectively, "Income").
2. Limitations on Assignment.
(a) This assignment is given for the purpose of
securing the performance by Assignors of all of their Obligations. Upon
payment in full of all Obligations, this Assignment shall automatically become
null and void.
(b) So long as no Event of Default has occurred
and is continuing hereunder or under the other Loan Documents (which has not
been waived by Assignee), Assignors shall have the right to collect and retain
all Income under the Contracts and to retain all of its rights, title, interest
and privileges under the Contracts and to retain, use and enjoy the same.
3. Assignors' Covenants. Assignors hereby covenant that
they will not do any of the following acts other than in the ordinary course of
business without the prior written consent of the Assignee, except that the
Assignee's prior written consent shall not be required where such acts would
not, individually or in the aggregate, have a material adverse effect on the
business, operations, properties, assets or condition (financial or otherwise)
of any of the Assignors:
(a) cancel or terminate any of the Contracts or
accept a surrender thereof, except as permitted under the terms thereof;
(b) modify, amend, alter or otherwise change any
of the Contracts, either orally or in writing, so as to decrease the term or
materially reduce the amount due under any Contracts or materially diminish any
party's obligations to Assignors thereunder, including without limitation, with
regard to the payment of any other sums due thereunder;
(c) consent to an assignment of a party's
interest in any of the Contracts which would relieve such party
- 2 -
<PAGE> 3
(or any guarantor or surety of such party's performance under such Agreements)
of liability for the payment or performance of its obligations to Assignors
thereunder or which would violate any provision contained in any other
Contracts assigned to Assignee as additional security for the Loan Documents;
(d) permit the payment of any sum under the
Contracts more than thirty (30) days in advance of the due date thereof, or
anticipate, discount, compromise, forgive, encumber or assign any sum under the
Contracts or any interest therein, as collateral security for the payment
thereby, and except as permitted therein and except for the security interests,
pledges and liens granted by the Assignors hereby and pursuant to the Loan
Documents.
Notwithstanding the foregoing, the Assignors will provide the
Assignee with prior written notice of any of the above acts.
4. Assignors' Obligations. Assignors agree that, in
accordance with the exercise of commercially reasonable judgment, they will
perform all of their obligations under the Contracts and enforce the
performance by the other parties thereto of all of their respective obligations
to Assignors thereunder. Assignors further agree to send to Assignee copies of
all material notices sent or received by any Assignor under the Contracts or
any of them.
5. Assignee Not Bound To Perform Under Contracts.
Notwithstanding any legal presumption to the contrary, Assignee shall not be
obligated by reason of its acceptance of this Assignment to perform any
obligation of Assignors under the Contracts, or any of them, and Assignors
hereby jointly and severally agree to indemnify and defend Assignee and save it
harmless from and against any and all loss, liability, damage or expense,
including without limitation reasonable attorneys fees, costs of suit and
interest (collectively, "Losses"), arising from or as a result of any claim by
any party arising under or in connection with the Contracts, other than any
Losses arising from or relating to the Assignee's bad faith, gross negligence
or willful misconduct. However, after the occurrence and during the
continuance of an Event of Default which has not been waived by Assignee,
Assignee may, at its sole option, and without releasing Assignors from any
obligation hereunder or under the Contracts, discharge any obligation arising
under an Agreement which Assignors fail to discharge, including, without
limitation, defending any legal action, and Assignors agree to pay
- 3 -
<PAGE> 4
immediately upon demand all sums expended by Assignee in connection therewith,
including reasonable counsel fees, together with interest thereon at the rate
provided for in the Notes, and the same shall be added to the indebtedness
evidenced by the Note and secured by the Loan Documents and this Assignment.
Neither the acceptance of this Assignment nor the collection of sums due or
becoming due under the Contracts assigned hereby shall constitute a waiver of
any rights of Assignee under any of the Loan Documents or any other collateral
now or hereafter mortgaged, pledged or assigned as collateral for the Note and
the performance of Assignors' Obligations.
6. Representations and Warranties of Assignors.
Assignors hereby jointly and severally represent and warrant to Assignee, as a
material inducement to Assignee to accept this Assignment and to make the Loan,
that:
(a) Assignors, either jointly or severally, are
the absolute owner of the Contracts, subject to the security interests and
liens granted by the Assignors to the Assignee hereby and pursuant to the Loan
Documents, and the Assignors have not executed any assignment of any of their
rights under the Contracts or any of them, except to the Assignee hereunder;
(b) Assignors have not performed any act or
failed to exercise any act which they are required to perform, the effect of
which is likely to prevent Assignee from or limit Assignee in exercising its
rights and remedies hereunder; and
(c) Assignors have not accepted any sums under
any Contracts more than thirty (30) days in advance of their due date.
7. Bankruptcy. Anything to the contrary contained
herein notwithstanding, Assignors hereby assign to Assignee any award hereafter
made to Assignors in any proceeding involving any of the parties to the
Contracts in any bankruptcy, insolvency, reorganization or similar proceedings
in any state or federal court. Assignors hereby appoint Assignee as their
irrevocable attorney-in-fact to appear, at the Assignors' expense, in any such
action and/or to collect any such award or payment; provided, however, that
Assignee shall not exercise any such appointment unless an Event of Default has
occurred and is continuing which has not been waived by the Bank.
8. Default; Cross Default. Any Event of Default shall
constitute a default under this Assignment, and in any such
- 4 -
<PAGE> 5
event (unless such default or Event of Default shall have been waived by
Assignee), Assignee shall be entitled to exercise its rights and remedies under
the Loan Documents, or under this Assignment, or as may otherwise be available
to Assignee at law or in equity, in such order as Assignee may elect.
9. Remedies.
(a) Upon the occurrence of an Event of Default
and while it is continuing (which has not been waived by Assignee), in addition
to remedies available to Assignee under the Loan Agreement, Assignors hereby
authorize Assignee to enter upon the premises of the Assignors, whether by a
receiver to be appointed by a court or by its agents or employees, for the
collection of the Income and any other payments made or to be made by parties
under the Contracts, or the performance of any other obligations by such
parties thereunder all in the same manner and to the same extent that the
Assignors may act.
(b) Upon the occurrence of an Event of Default
and while it is continuing (which has not been waived by Assignee), Assignors
hereby authorize Assignee to give written notice of this Assignment to any
party under any of the Contracts. All parties to the Contracts are authorized
to make all payments required under the Contracts, when due, directly to
Assignee upon receipt from Assignee of a statement that an Event of Default has
occurred and is continuing, accompanied by a demand for such payment, without
any further proof of any such default.
10. Successors and Assigns. This Assignment shall be
binding upon Assignors and their successors and permitted assigns, and shall
inure to the benefit of Assignee and its successors and assigns, including any
assignee of any Loan Document.
11. Notices. All notices, requests, demands and other
communications which this Assignment requires or permits any party to give any
other party shall be in writing and shall be given to such party in the manner
and at its address specified in Section 8.1 of the Loan Agreement (or at such
other address as shall be designated by such party in a notice to each other
party complying with the terms of the Loan Agreement), and shall be effective
upon the time or times specified in the Loan Agreement.
12. Governing Law. The validity and effect of this
Assignment shall be determined by reference to the substantive
- 5 -
<PAGE> 6
laws of the State of Pennsylvania without regard to the principles of conflicts
of laws.
13. Counterparts. This Assignment may be executed in any
number of counterparts, each of which shall be an original and all of which
together shall constitute but one and the same Agreement.
- 6 -
<PAGE> 7
IN WITNESS WHEREOF, Assignors have duly executed this
Assignment, under seal, and Assignee has accepted this Assignment, the day and
year first above written.
CHRYSALIS INTERNATIONAL CORPORATION
By: /s/ John G. Cooper
------------------------------
Name: John G. Cooper
Title: Senior Vice President
and Chief Financial Officer
CHRYSALIS INTERNATIONAL PRECLINICAL
SERVICES CORPORATION
By: /s/ John G. Cooper
------------------------------
Name: John G. Cooper
Title: Senior Vice President
and Chief Financial Officer
CHRYSALIS DNX TRANSGENIC
SCIENCES CORPORATION
By: /s/ John G. Cooper
------------------------------
Name: John G. Cooper
Title: Senior Vice President
and Chief Financial Officer
CHRYSALIS INTERNATIONAL CLINICAL
SERVICES CORPORATION
By: /s/ John G. Cooper
------------------------------
Name: John G. Cooper
Title: Senior Vice President
and Chief Financial Officer
CORESTATES BANK, N.A
By: /s/ Stephen McWilliams
------------------------------
Name: Stephen McWilliams
Title: Vice President
- 7 -
<PAGE> 1
EXHIBIT 10 (x1)
FIRST AMENDMENT TO TERM LOAN AND SECURITY AGREEMENT
This First Amendment to Term Loan and Security Agreement is made the
24th day of September, 1997, to be effective as of September 24, 1997 by and
between Chrysalis International Corporation, a Pennsylvania corporation,
Chrysalis International Preclinical Services Corporation, a Pennsylvania
corporation, Chrysalis DNX Transgenic Sciences Corporation, an Ohio corporation
and Chrysalis International Clinical Services Corporation, a Delaware
corporation ("Borrower"), and CORESTATES BANK, N.A. (hereinafter referred to as
"Bank"), a national banking association (the "Amendment").
BACKGROUND
Borrower and Bank have previously entered into various agreements,
documents and instruments including, without limitation, a Term Loan and
Security Agreement dated the 29th day of August, 1997, providing for a term
loan in the amount of $5,000,000.00 and collateral therefore (all of which are
hereinafter collectively referred to as the "Agreement") such financing being
evidenced by a Term Note dated August 29, 1997 (the "Note"). Borrower and Bank
desire to amend the Agreement and it is the intention of the parties that this
First Amendment to Term Loan and Security Agreement set forth such amendments.
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the parties hereto, intending to be legally bound hereby, agree as
follows:
1. AMENDMENT OF AGREEMENT; DEFINITION OF TERMS. This Amendment is intended to
amend the Agreement and the Agreement shall be so amended from and after the
date hereof. This Amendment does not constitute the extinguishment of any debt
evidenced by the Note nor does it affect or impair any and all Collateral now
or hereafter held by the Bank to secure payment of Borrower's obligations to
Bank under the Agreement and the Note. All terms used herein as defined terms
shall have the same meanings ascribed to them in the Agreement unless herein
provided to the contrary.
2. AMENDMENTS TO AGREEMENT.
A. The third sentence of Sections 2.3.1 (a) (i) and (ii) of the
Agreement are hereby amended to read as follows:
(i) "At Borrower's option, the applicable rate of interest shall be
either the ADJUSTED LIBOR Rate plus 3.75% per annum for interest periods
of either 30, 60 or 90 days or (ii) the Prime Rate plus 1% per annum
such rate options to be effective beginning as of September 24, 1997 and
ending January 31, 1998. Commencing February 1, 1998, interest on the
Term Loan and all other Obligations shall be computed at the Original
Interest Rates as defined in Sections 2.3 (a) as set forth in Section
2.3 prior to the effective date of this Amendment."
<PAGE> 2
(ii) Section 2.3.1 (b) of the Agreement does not apply for the period
beginning as of September 24, 1997 and ending January 31, 1998.
(iii) Beginning on February 1, 1998, provided no event of default has
occurred, and upon written notification to Borrower, Section 2.3.1 (b)
of the Agreement may become effective again.
B. The first sentence of Section 6.1.5 (ii) of the Agreement is hereby
amended as follows:
(ii) "At all times during the term of the Term Loan, Borrower shall
maintain (i) cash and marketable securities on deposit with CoreStates
Investment Advisors (or with another entity selected pursuant to Section
2.9 hereof) of not less than $2,500,000 and (ii) Consolidated cash and
marketable securities of not less than $2,500,000 (after deduction of
all outstanding Consolidated short-term borrowings) for the period
beginning as of September 24, 1997 and ending January 31, 1998.
Commencing February 1, 1998, and thereafter, at all times during the
term of the Term Loan, Borrower shall maintain (i) cash and marketable
securities on deposit with CoreStates Investment Advisors (or with
another entity selected pursuant to Section 2.9 hereof) of not less than
$3,500,000 and (ii) Consolidated cash and marketable securities of not
less than $3,500,000 (after deduction of all outstanding Consolidated
short-term borrowings)."
3. CERTIFICATION OF NO DEFAULT. Borrower hereby represents and warrants to the
Bank that, as of the date of execution of this Amendment, no Event of Default
under the Agreement and no event which, with the giving of notice or passage of
time or both, could become such an Event of Default has occurred.
4. MISCELLANEOUS. Except as modified by the terms hereof, all terms,
provisions, and conditions of the Agreement are hereby ratified and confirmed
without condition, shall continue in full force and effect, and are hereby
incorporated herein by reference. This Amendment and the Agreement shall be
deemed as complementing one another and not restricting Bank's rights hereunder
or thereunder. If there is any conflict or discrepancy between the provisions
of this Amendment and those of the Agreement, the terms and provisions of this
Amendment shall control and prevail.
5. EFFECTIVENESS OF AMENDMENT. Anything to the contrary contained in this
Amendment not withstanding, the provisions hereof shall not be effective until
this Amendment is: (a) duly executed, sealed, delivered by authorized officers
of Borrower to Bank's office in Pennington, New Jersey; and (b) duly signed by
an authorized officer of Bank.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to Loan and
Security Agreement to be executed and delivered by their proper and duly
authorized officers as of the day and year first above written.
2
<PAGE> 3
Attest: CHRYSALIS INTERNATIONAL CORPORATION,
a Pennsylvania corporation
- ----------------- By /s/ JOHN G. COOPER
Seal --------------------------
John G. Cooper SR VP/ CFO
-----------------------------
print name and title
Attest: CHRYSALIS INTERNATIONAL PRECLINICAL
SERVICES CORPORATION, a Pennsylvania corporation
- ----------------- By /s/ JOHN G. COOPER
Seal -------------------------
John G. Cooper SR VP/ CFO
-----------------------------
print name and title
Attest: CHRYSALIS DNX TRANSGENIC SCIENCES
CORPORATION, an Ohio corporation
- ----------------- By /s/ JOHN G. COOPER
Seal --------------------------
John G. Cooper SR VP/ CFO
-----------------------------
print name and title
Attest: CHRYSALIS INTERNATIONAL CLINICAL
SERVICES, a Delaware corporation
- ----------------- By /s/ JOHN G. COOPER
Seal -------------------------
John G. Cooper SR VP/ CFO
----------------------------
print name and title
Attest: CORESTATES BANK, N.A.
- ----------------- By /s/ Stephen McWilliams
Seal ----------------------------------
Stephen McWilliams, Vice President
3
<PAGE> 1
Exhibit 21
SUBSIDIARIES
Name Incorporation
- ---- -------------
Chrysalis International Preclinical Services Pennsylvania
Corporation
Chrysalis International, S.A.* France
Chrysalis DNX Transgenic Sciences Ohio
Corporation
Chrysalis International Clinical Services Delaware
Corporation
Chrysalis International Holding, A.G.* Switzerland
Chrysalis International, A.G.* Switzerland
Chrysalis International, GmbH* Germany
Chrysalis International Clinical Pharmacology Germany
Services, GmbH*
All subsidiaries are wholly-owned except as otherwise indicated.
* Wholly-owned subsidiary except for director qualifying shares.
<PAGE> 1
Exhibit 23(i)
The Board of Directors and Stockholders
Chrysalis International Corporation:
We consent to the incorporation by reference in the registration statements
(Nos. 33-49124 and No. 33-70976) on Form S-8 of Chrysalis International
Corporation of our report dated March 4, 1998, relating to the consolidated
balance sheets of Chrysalis International Corporation and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1997, which report appears in the
December 31, 1997, Annual Report on Form 10-K of Chrysalis International
Corporation.
Princeton, New Jersey
March 27, 1998
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors
and officers of Chrysalis International Corporation, a Delaware corporation,
hereby constitutes and appoints Paul J. Schmitt, John G. Cooper, Thomas C.
Daniels and Robert J. Bush, and each of them, as the true and lawful attorney or
attorneys-in-fact, with full power of substitution and resubstitution, for each
of the undersigned, to sign on behalf of each of the undersigned and in the
name, place and stead of each of the undersigned, to sign on behalf of each of
the undersigned an Annual Report on Form 10-K for the fiscal year ended December
31, 1997 pursuant to Section 13 of the Securities Exchange Act of 1934 and to
sign any and all amendments to such Annual Report, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting to said attorney or
attorneys-in-fact, and each of them, full power and authority to do so and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as the undersigned
might or could do in person, hereby ratifying and confirming all that said
attorney or attorneys-in-fact or any of them or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
This Power of Attorney may be executed in multiple counterparts, each
of which shall be deemed an original with respect to the person executing it.
Executed as of this 25 day of March 1998.
/s/ Paul J. Schmitt /s/ John G. Cooper
- ------------------------------ -------------------------------
Paul J. Schmitt John G. Cooper, Senior Vice
Chairman of the Board, President President, Chief Financial Officer,
& Chief Executive Officer (Principal Secretary & Treasurer (Principal Financial
Executive Officer) Officer & Principal Accounting Officer)
/s/ Jack Barbut /s/ J. Christian Jensen
- ------------------------------ -------------------------------
Jack Barbut, Sc.D., Director J. Christian Jensen, Director
/s/ Photios T. Paulson /s/ Barry M. Sherman
- ------------------------------ -------------------------------
Photios T. Paulson, Director Barry M. Sherman, Director
/s/ W. Leigh Thompson
- ------------------------------
W. Leigh Thompson, Director
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