-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K93npLU/toauu96OI1Vrs5Ow4rqhfHGmUMnLVRX6LrdyMf8jq7EY5vxN2wM17gyx LtTlVZiR+qbYbxaQx0ubhQ== 0000893220-98-000620.txt : 19980401 0000893220-98-000620.hdr.sgml : 19980401 ACCESSION NUMBER: 0000893220-98-000620 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHRYSALIS INTERNATIONAL CORP CENTRAL INDEX KEY: 0000880456 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 222877973 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19659 FILM NUMBER: 98579983 BUSINESS ADDRESS: STREET 1: 575 ROUTE 28 CITY: RARITAN STATE: NJ ZIP: 08869 BUSINESS PHONE: 9087227900 MAIL ADDRESS: STREET 1: 575 RT 28 CITY: RARITAN STATE: NJ ZIP: 08869 FORMER COMPANY: FORMER CONFORMED NAME: DNX CORP DATE OF NAME CHANGE: 19930328 10-K 1 CHRYSALIS INTERNATIONAL CORPORATION FORM 10-K 1 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. 2 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. 2 3 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. 3 4 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 4 5 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. 5 6 (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 6 7 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. 7 8 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. 8 9 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 9 10 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. 10 11 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. 11 12 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. 12 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. 13 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. 14 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. 15 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. 16 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. 17 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. 18 19 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 19 20 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.
QUARTER 1997 HIGH LOW QUARTER 1996 HIGH LOW - ------------ ---- --- ------------ ---- --- 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
20 21 ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31, 1997 1996 1995 1994 1993 -------- ------ ------ ------ ------ STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA) 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 ======== ====== ====== ====== ======
- ---------- (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. 21 22 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 22 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 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 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
REVENUES ($000'S) 1997 1996 1995 ------ ------ ------ 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 ====== ====== ======
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 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 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 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 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.
QUARTER ENDED ($000'S) (UNAUDITED) ----------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 1997 1997 1997 1997 -------- ------- ------- ------- 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) ======== ======= ======= =======
REVENUES BY BUSINESS AND GEOGRAPHIC REGION BY QUARTER
QUARTER ENDED ($000'S) (UNAUDITED) ---------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 1997 1997 1997 1997 ------ ------ ------ ------ 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 ====== ====== ====== ======
29 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 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 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 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:
FRENCH FRANC U.S. DOLLAR PER PERIOD PER U.S. DOLLAR FRENCH FRANC ------ --------------- --------------- 1997 5.8364 .1713 1996 5.1187 .1954 1995 4.9850 .2006
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 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 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 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 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. *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
*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 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 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 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 41 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
1997 1996 -------- ------- 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 ======== =======
See accompanying notes to consolidated financial statements. F-4 42 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS EXPECT PER SHARE AMOUNTS)
1997 1996 1995 -------- ------- ------- 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 ======== ======= =======
See accompanying notes to consolidated financial statements. F-5 43 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS EXCEPT SHARE AMOUNTS)
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 ------ --------- ------------ ---------- -------- ----------- ---------- ------ 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 === ====== ==== ==== ====== ======= ====== =======
See accompanying notes to consolidated financial statements. F-6 44 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS)
1997 1996 1995 -------- ------- ------- 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 -------- ------- -------
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 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 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 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 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:
AMORTIZED FAIR COST VALUE ---- ----- (IN THOUSANDS) Due within one year $ 79 101 Due after one year through five years 323 396 ---- --- $402 497 ==== ===
F-11 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:
1997 1996 ------- ------ (IN THOUSANDS) 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 ======= ======
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:
1997 1996 ------ ----- (IN THOUSANDS) 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 ====== =====
(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.
1996 1995 -------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) 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 ======== =======
F-12 50 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (5) MERGER WITH THE BIOCLIN GROUP, CONTINUED
1996 1995 ---- ---- Diluted Earnings (loss) per share As reported $ (0.31) 1.06 Pro forma 0.02 1.06
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:
1997 1996 ---- ---- (IN THOUSANDS) 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 ======= ======
(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:
1997 1996 ---- ---- (IN THOUSANDS) 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 ====== =====
F-13 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:
1997 1996 ---- ---- (IN THOUSANDS) 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 ====== =====
Future principal maturities of long-term debt at December 31, 1997 are as follows:
(IN THOUSANDS) 1998 768 1999 1,399 2000 1,408 2001 1,418 2002 803 Thereafter 1,533 --------- $ 7,329 =========
F-14 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 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:
1997 1996 1995 ---- ---- ---- (IN THOUSANDS) Net income (loss) As reported $(2,050) $(3,460) $12,425 Pro forma (2,669) (3,827) 12,282
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:
COMMON STOCK OPTIONS OUTSTANDING ----------- SHARES PRICE PER SHARE ------ --------------- 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 =========
F-16 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:
1997 1996 1995 ---- ---- ---- (IN THOUSANDS) 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 ----- ==== ----
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:
1997 1996 1995 ---- ---- ---- (IN THOUSANDS) 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 ----- ------ ------
F-17 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:
1997 1996 ---- ---- (IN THOUSANDS) 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) ======== =======
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 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:
OPERATING LEASES ------ (IN THOUSANDS) 1998 $ 1,509 1999 1,305 2000 821 2001 373 2002 86 Thereafter 1 ------- Total minimum lease payments $ 4,095 =======
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:
1997 1996 1995 ---- ---- ---- (IN THOUSANDS) 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 ==== == ==
F-19 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:
1997 1996 ---- ---- (IN THOUSANDS) 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 ==== ===
Assumptions used in the actuarial computations for 1997, 1996 and 1995 are as follows:
1997 1996 1995 ------ ------ ------ Discount rate 8.0% 6.0% 6.0% Rate of compensation increases 2.0% 2.0% 3.0%
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 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.
1997 1996 1995 ---- ---- ---- (IN THOUSANDS) 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 ======== ======= =======
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 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 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 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 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 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 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 EX-10.(XVII) 2 WARRANT AGREEMENT 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 EX-10.(XXIV) 3 AGREEMENT 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. 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 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 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 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 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 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 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 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 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 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 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 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 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 14 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. 15 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 EX-10.(XXXV) 4 TERM LOAN AND SECURITY AGREEMENT 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. 2 TABLE OF CONTENTS
Page 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 --------------------
3 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 ------------------------
- ii - 4 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 ----------------
- iii - 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 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 - 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 - 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 - 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 - 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 - 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 - 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 - 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 - 9 - 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 - 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 - 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 - 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 - 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 - 14 - 19 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, - 15 - 20 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; - 16 - 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; - 17 - 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. - 18 - 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 - 19 - 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; - 20 - 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. - 21 - 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. - 22 - 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. - 23 - 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 - 24 - 29 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. - 25 - 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 - 26 - 31 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); - 27 - 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. - 28 - 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 - 29 - 34 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 - 30 - 35 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 - 31 - 36 (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 - 32 - 37 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. - 33 - 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 - 34 - 39 (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 - 35 - 40 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 - 36 - 41 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, - 37 - 42 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 - 38 - 43 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 - 39 - 44 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, - 40 - 45 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 - 41 - 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. - 42 - 47 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 - 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 - 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 - 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 - 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 - 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 - EX-10.(XXXVI) 5 TERM NOTE 1 EXHIBIT 10(xxxvi) TERM NOTE $5,000,000 Princeton, New Jersey August 29, 1997
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, 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 - 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 - 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 - EX-10.(XXXVII) 6 SECURITY AGREEMENT 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: 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 - 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 - 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 - 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 - 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 - 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 - 7 - 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 - 8 - 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. - 9 - 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, - 10 - 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 - 11 - 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 - 12 - 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 - 13 - 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 - 14 - 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. - 15 - 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 - 16 - 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 - 17 - EX-10.(XXXVIII) 7 STOCK PLEDGE AGREEMENT 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, 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, - 2 - 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 - 3 - 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 - 4 - 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 - 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 - 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 - 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 - 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 - EX-10.(XXXIX) 8 COLLATERAL ASSIGNMENT OF CONTRACTS 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 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 - 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 - 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 - 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 - 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 - 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 - EX-10.(XL) 9 FIRST AMENDMENT TO TERM LOAN & SECURITY AGREEMENT 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." 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 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 EX-21 10 SUBSIDIARIES 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. EX-23.(I) 11 CONSENT OF EXPERTS 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 EX-24 12 POWERS OF ATTORNEY 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 EX-27 13 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1997 DEC-31-1997 6,925 0 9,669 0 0 18,510 15,316 0 35,240 15,713 0 0 0 114 10,555 35,240 0 42,298 0 29,217 15,281 0 769 (1,810) 240 (2,050) 0 0 0 (2,050) (.18) (.18)
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