-----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, U91vt4iaL6QQSuD82eKV+QK4HOZmiKQGDk6Q5vzkAmRR8BaSAnxvT0lX7JprXCDb Pu7sVdTLNi/dFPGSAK9veQ== 0001047469-99-013760.txt : 19990408 0001047469-99-013760.hdr.sgml : 19990408 ACCESSION NUMBER: 0001047469-99-013760 CONFORMED SUBMISSION TYPE: F-4 PUBLIC DOCUMENT COUNT: 48 FILED AS OF DATE: 19990407 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHOENIX INTERNATIONAL LIFE SCIENCES INC CENTRAL INDEX KEY: 0000935016 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING, ACCOUNTING, RESEARCH, MANAGEMENT [8700] IRS NUMBER: 223209631 FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: F-4 SEC ACT: SEC FILE NUMBER: 333-75779 FILM NUMBER: 99588422 BUSINESS ADDRESS: STREET 1: 2350 COHEN STREET STREET 2: ST LAURENT QUEBEC CITY: H4R 2P7 CANADA STATE: A8 ZIP: 00000 F-4 1 F-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 7, 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM F-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ PHOENIX INTERNATIONAL LIFE SCIENCES INC. (Exact name of Registrant as specified in its charter) CANADA 8731 22-3209631 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code Number) Identification No.)
2350 COHEN STREET PHS CORPORATE SERVICES, INC. SAINT-LAURENT (MONTREAL) SUITE 1600, 1201 MARKET STREET QUEBEC, CANADA H4R 2N6 P.O. BOX 1709 (514) 333-0033 WILMINGTON, DELAWARE 19899-1709 (Address, including zip code, and telephone number, (302) (Address, including zip code, and telephone number, 777-6500 including area code, of Registrant's principal including area code, of Registrant's principal executive executive offices) offices)
------------------------------ COPIES OF ALL COMMUNICATIONS TO: MICHAEL P. GALLAGHER, ESQUIRE THOMAS C. DANIELS, ESQUIRE DANIEL L. DAMSTRA, ESQUIRE LAURIE F. HUMPHREY, ESQUIRE PEPPER HAMILTON LLP JONES, DAY, REAVIS & POGUE 1235 WESTLAKES DRIVE 901 LAKESIDE AVENUE SUITE 400 NORTH POINT BERWYN, PENNSYLVANIA 19312 CLEVELAND, OHIO 44114 (610) 640-7800 (216) 586-3939
------------------------------ Approximate Date of Commencement of Proposed Sale to Public: As soon as practicable after this Registration Statement is declared effective and all other conditions to the merger described herein have been satisfied or waived. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same officer. / / ------------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION FEE SECURITIES TO BE REGISTERED BE REGISTERED SHARE PRICE (3) Common Shares, no par value 1,140,473 (1) Not Applicable $7,757,410 (2) $2,157 Options to purchase Common Shares 145,672 (4) Not Applicable $990,851 (5) $275
(1) Based on the product of (a) 13,374,844 the maximum number of shares of common stock, of Chrysalis International Corporation that would be outstanding immediately prior to the merger of Chrysalis and a subsidiary of Phoenix, assuming the exercise of all underlying Chrysalis options (whether or not currently exercisable), and (b) a conversion ratio of 0.08527 for each share of Chrysalis common stock. (2) Estimated solely for the purpose of calculating the registration fee required by Section 6(b) of the Securities Act of 1933, as amended, and computed pursuant to Rules 457(f)(l) and 457(e) thereunder based on $0.58, the average of the high and low sale prices of shares of Chrysalis common stock on April 1, 1999 as reported on the Nasdaq National Market, and 13,374,844, the maximum number of shares of Chrysalis common stock to be exchanged in the Merger. (3) The registration fee for all securities registered hereby, $2,432, has been calculated pursuant to Rule 457(f) of the Securities Act by multiplying the proposed maximum aggregate offering price by .000278. A fee of $1,111 was paid on December 24, 1998 pursuant to Section 14(g)(1)(A) of the Securities Exchange Act of 1934, as amended, and Rule 0-11 promulgated under the Securities Act and Rule 0-11 and Section 14(g)(1)(B) of the Exchange Act the amount of such previously paid fee has been credited against the registration fee in connection herewith. Accordingly, an additional fee of $1,321 is required to be paid with this Registration Statement. (4) Based on the product of (i) 1,708,364 shares of Chrysalis common stock underlying outstanding Chrysalis options as of March 31, 1999 and (ii) a coversion ratio of 0.08527 for each share of Chrysalis common stock. (5) Estimated solely for the purpose of calculating the registration fee required by Section 6(b) of the Securities Act of 1933, as amended, and computed pursuant to Rules 457(f)(1) and 457(e) thereunder based on $0.58, the average of the high and low sale prices of shares of Chrysalis common stock on April 1, 1999 as reported on the Nasdaq National Market, and 1,708,364 shares of Chrysalis common stock underlying outstanding Chrysalis options as of March 31, 1999. ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROXY STATEMENT/PROSPECTUS [LOGO] [LOGO]
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT The Board of Directors of Chrysalis International Corporation has approved a merger agreement that would result in Chrysalis becoming owned by Phoenix International Life Sciences Inc. If Chrysalis and Phoenix complete the merger, Chrysalis stockholders will receive approximately 0.08527 of a Phoenix common share for each share of Chrysalis common stock that they own and cash for fractional Phoenix common shares. The formula for the exact portion of a Phoenix common share is described in the accompanying proxy statement/prospectus. Phoenix estimates that it will issue approximately 1,001,208 of its common shares to Chrysalis stockholders in the merger. Those shares will represent approximately 4% of the Phoenix common shares outstanding after the merger. The Nasdaq National Market has approved the listing of Phoenix common shares under the symbol "PHXI." The listing is subject to Phoenix's meeting the listing requirements at the time of the merger. Chrysalis and Phoenix cannot complete the merger unless Chrysalis stockholders adopt the merger agreement. Chrysalis has scheduled a special meeting of its stockholders to vote on this important matter. YOUR VOTE IS VERY IMPORTANT. Please take the time to vote by completing the enclosed proxy card and returning it in the return envelope provided, even if you plan to attend the special meeting. You should note that if you sign, date and mail your proxy card without indicating how you wish to vote, your proxy will be counted as a vote in favor of adoption of the merger agreement. If you hold your shares in the name of a bank or broker, you should follow the instructions on the form you receive from your bank or broker. If you hold any shares under the Chrysalis employee savings plan, to vote those shares you should follow the instructions on the form you receive from the trustee under the plan. The special stockholders' meeting will be held at the Somerset Hills Hotel, 200 Liberty Corner Road, Warren, New Jersey, on April 30, 1999, at 9:00 a.m., local time. This document provides you with detailed information about the meeting and the proposed merger. I urge you to read this entire document carefully. IN PARTICULAR, YOU SHOULD READ THE "RISK FACTORS" SECTION BEGINNING ON PAGE 14 FOR A DESCRIPTION OF SOME OF THE RISKS THAT YOU SHOULD CONSIDER IN EVALUATING THE MERGER. [SIGNATURE OF PAUL J. SCHMITT] Paul J. Schmitt PRESIDENT AND CHIEF EXECUTIVE OFFICER NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE OR CANADIAN PROVINCIAL SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED UNDER THIS PROXY STATEMENT/ PROSPECTUS OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. This proxy statement/prospectus is dated April 9, 1999. It was first mailed to Chrysalis stockholders on or about April 9, 1999. CHRYSALIS INTERNATIONAL CORPORATION 575 Route 28 Raritan, New Jersey 08869 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON APRIL 30, 1999 A special meeting of stockholders of Chrysalis International Corporation, a Delaware corporation, will be held at the Somerset Hills Hotel, 200 Liberty Corner Road, Warren, New Jersey, on April 30, 1999, at 9:00 a.m., local time, or at any adjournments or postponements thereof, for the following purposes: (1) to consider and vote upon a proposal to adopt the Agreement and Plan of Merger, dated as of November 18, 1998, and amended by Amendment No. 1 dated as of March 24, 1999, among Chrysalis, Phoenix International Life Sciences Inc., a company constituted under the laws of Canada, and Phoenix Merger Sub Corp., a newly formed, wholly-owned subsidiary of Phoenix, a Delaware corporation. The merger agreement will result in Phoenix Merger Sub merging with and into Chrysalis and each outstanding share of common stock, par value $.01 per share, of Chrysalis being converted into the right to receive a fraction of a common share, without par value, of Phoenix. A copy of the merger agreement is attached to the proxy statement/prospectus as Appendix A. (2) to act on other matters relating to the conduct of the special meeting and any adjournments or postponements thereof. Only stockholders of record at the close of business on March 1, 1999, are entitled to notice of and to vote at the special meeting or any adjournments or postponements of the special meeting. A complete list of stockholders entitled to vote will be available for inspection at the Somerset Hills Hotel, 200 Liberty Corner Road, Warren, New Jersey, during ordinary business hours, for a period of ten days prior to the special meeting. The accompanying proxy statement/prospectus describes the merger agreement, the proposed merger and other actions to be taken in connection with the merger. To ensure that your vote will be counted, please complete, date and sign the enclosed proxy card and return it promptly in the enclosed postage-paid envelope, whether or not you plan to attend the special meeting. You may revoke your proxy in the manner described in the accompanying proxy statement/prospectus at any time before the vote at the special meeting. Executed proxies with no instructions indicated on the proxy card will be voted "for" adoption of the merger agreement. By Order of the Board of Directors, [LOGO] John G. Cooper SECRETARY Raritan, New Jersey Dated: April 9, 1999 THE CHRYSALIS BOARD OF DIRECTORS RECOMMENDS YOU VOTE FOR THE PROPOSAL TO ADOPT THE MERGER AGREEMENT. TABLE OF CONTENTS
PAGE --------- QUESTIONS AND ANSWERS ABOUT THE MERGER..................................................................... 1 SUMMARY.................................................................................................... 3 SUMMARY SELECTED FINANCIAL DATA............................................................................ 7 Summary Selected Historical Financial Data of Chrysalis.................................................... 7 Summary Consolidated Financial Information of Phoenix...................................................... 8 COMPARATIVE PER SHARE MARKET INFORMATION AND DIVIDEND DATA................................................. 11 COMPARATIVE PER SHARE DATA................................................................................. 12 RISK FACTORS............................................................................................... 14 If Chrysalis is Not Able to Consummate the Merger Prior to March 31, 1999, Chrysalis Will Not Have Sufficient Cash to Continue to Fund Operations......................................................... 14 If the Merger is Not Completed, Chrysalis Common Stock May Be Delisted From the Nasdaq National Market................................................................................................. 14 If Chrysalis Stockholders Do Not Adopt the Merger Agreement, Chrysalis Will Likely Owe Phoenix $1.5 Million................................................................................................ 14 The Value of the Phoenix Common Shares to be Received by Chrysalis Stockholders Will Fluctuate With the Phoenix Common Share Price............................................................................. 15 Chrysalis' Shut Downs and Downsizing Will Materially Adversely Affect Its Operations and Competitive Position if the Merger Is Not Completed................................................................ 15 Chrysalis Stockholders Will Be Unable to Control Phoenix After the Merger................................ 15 Restrictive Covenants in Merger Agreement May Adversely Affect Chrysalis' Operations..................... 15 Loss of a Significant Number of Employees May Adversely Affect Chrysalis' Operations..................... 16 Rights of Chrysalis Stockholders Will Change as a Result of the Merger................................... 16 Phoenix's Share Price Has Been and May Continue to Be Volatile........................................... 16 One of Phoenix's Major Bioanalytical Services Clients Recently Insourced Most of Its Work................ 16 Phoenix is Dependent Upon the Continued Outsourcing of Research and Development Expenditures by the Pharmaceutical and Biotechnology Industries............................................................ 16 The Loss of Another Major Project or Client Could Materially Adversely Affect Phoenix.................... 16 Phoenix May Not Be Able to Manage Its Growth Resulting from Recent Acquisitions.......................... 17 If Phoenix Fails to Recruit and Retain Key Management and Professional, Scientific and Technical Personnel its Ability to Support Growth and be Competitive Could be Adversely Affected................. 17 Phoenix's Customer Contracts May Be Terminated by Customers on Short Notice for Reasons Beyond Phoenix's Control................................................................................................ 17 Fluctuations in Phoenix's Revenues Combined with Significant Fixed Expenses Could Result in Variation in Phoenix's Quarterly Operating Results.................................................................. 18 Phoenix is Exposed to Potential Liability While Conducting Its Clinical Trials........................... 18 Recent Changes in Government Regulation of Pharmaceutical Industry Could Decrease Business Opportunities.......................................................................................... 19 Intense Competition and Increasing Consolidation in the Pharmaceutical Industry May Cause Price or Margin Erosion................................................................................................ 19 Failure to Comply with Applicable Government Regulation Could Result in Adverse Consequences to Phoenix................................................................................................ 19 1997 FDA Audit Could Result in Substantial Fines or Penalties or Otherwise Materially Adversely Affect Phoenix................................................................................................ 19
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PAGE --------- Phoenix's Growing International Operations Subject It to Additional Risks................................ 20 Phoenix is Not Sure What the Effect of the Recent Establishment of the Euro Will Be on Phoenix's Financial Condition or Results of Operations........................................................... 20 Phoenix Has Recurring Amortization Expense Resulting from Substantial Intangible Assets.................. 20 Phoenix May Experience Unanticipated Delays, Complications and Expenses in Integrating Management Information Systems from Recent Acquisitions........................................................... 21 Phoenix's Operations May Be Disrupted if Systems Failure or Data Corruption Result from the Year 2000 Issue.................................................................................................. 21 Loss of Investment Tax Credits Could Negatively Impact Phoenix's Net Income.............................. 21 Chrysalis Stockholders May Find It Difficult to Enforce Civil Liabilities in Canada...................... 21 Chrysalis and Phoenix Have Made Statements Concerning Future Financial Results that Are Subject to Risks and Uncertainties Which May Cause Actual Results to Differ Materially from Those Expressed in these Statements............................................................................................. 22 THE MERGER................................................................................................. 23 Background of the Merger................................................................................. 23 Reasons for the Merger................................................................................... 29 Recommendation of the Chrysalis Board.................................................................... 30 Opinion of the Financial Advisor to the Chrysalis Board.................................................. 30 Additional Benefits to Chrysalis Directors and Executive Officers Resulting from the Merger.............. 37 Phoenix Director Will Receive Additional Benefits from the Merger........................................ 38 Plans for Chrysalis After the Merger..................................................................... 38 Accounting Treatment..................................................................................... 38 REGULATORY MATTERS......................................................................................... 38 Antitrust Matters........................................................................................ 38 Resale of Phoenix Common Shares Issued in the Merger; Affiliates......................................... 39 Canadian Stock Exchanges................................................................................. 39 Delisting and Deregulation of Chrysalis Common Stock; Cessation of Chrysalis Periodic Reporting.......... 39 Exchange Controls and Other Limitations Affecting Security Holders....................................... 39 ENFORCEMENT OF CIVIL LIABILITIES IN CANADA................................................................. 39 MATERIAL TAX CONSEQUENCES.................................................................................. 40 Material Income Tax Consequences......................................................................... 40 Dividends and Tax Credits................................................................................ 42 Sale of the Phoenix Common Shares........................................................................ 42 Consequences if Phoenix is a Passive Foreign Investment Company.......................................... 43 Dividends and Withholding Taxes.......................................................................... 43 Disposition of Phoenix Common Shares..................................................................... 44 THE MERGER AGREEMENT....................................................................................... 45 The Merger............................................................................................... 45 Certificate of Incorporation and By-Laws of Surviving Corporation........................................ 45 Officers and Directors of the Surviving Corporation...................................................... 45 Effect on Chrysalis Common Stock and Outstanding Options................................................. 45 Exchange of Certificates in the Merger................................................................... 46 Fractional Shares........................................................................................ 47 Representations and Warranties........................................................................... 47 Businesses of Chrysalis and Phoenix Pending the Merger................................................... 49 Other Covenants.......................................................................................... 50
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PAGE --------- No Solicitation.......................................................................................... 51 Conditions............................................................................................... 51 Additional Conditions to the Obligations of Phoenix...................................................... 51 Additional Conditions to the Obligations of Chrysalis.................................................... 52 Amendment; Termination................................................................................... 52 Effect of Termination.................................................................................... 53 Termination Fees; Expenses............................................................................... 53 OTHER AGREEMENTS........................................................................................... 53 Support/Voting Agreements................................................................................ 53 Forbearance Agreement.................................................................................... 54 Guaranty; Pledge and Assignment Agreement; Option Letter................................................. 54 Amendment to Forbearance Agreement....................................................................... 54 THE SPECIAL MEETING........................................................................................ 55 Date, Time and Place..................................................................................... 55 Matters to be Considered at the Special Meeting.......................................................... 55 Record Date; Stock Entitled to Vote; Quorum.............................................................. 55 Share Ownership of Chrysalis Management.................................................................. 55 Voting of Proxies........................................................................................ 55 FINANCIAL STATEMENT PRESENTATION AND EXCHANGE RATES........................................................ 57 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION..................................................... 58 Notes to Unaudited Pro Forma Consolidated Financial Information.......................................... 63 DESCRIPTION OF PHOENIX..................................................................................... 69 Overview................................................................................................. 69 Industry Overview........................................................................................ 70 Strategy................................................................................................. 76 Services................................................................................................. 77 Information Technology................................................................................... 84 Proprietary Rights....................................................................................... 85 Recent Acquisitions...................................................................................... 86 Properties............................................................................................... 87 Marketing and Sales...................................................................................... 89 Clients.................................................................................................. 89 Competition.............................................................................................. 90 Research and Development................................................................................. 91 Human Resources and Training............................................................................. 92 Government Regulation.................................................................................... 92 Potential Liability and Insurance........................................................................ 96 Legal Proceedings........................................................................................ 97 SELECTED CONSOLIDATED FINANCIAL INFORMATION OF PHOENIX..................................................... 98 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PHOENIX........... 100 Overview................................................................................................. 100 Recent Developments...................................................................................... 101 Results of Operations.................................................................................... 101 Liquidity and Capital Resources.......................................................................... 104 Quarterly Results........................................................................................ 106
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PAGE --------- Recent Acquisitions...................................................................................... 106 Geographical Segment Information......................................................................... 107 Canadian Federal and Quebec Tax Credits.................................................................. 107 Year 2000 Compliance..................................................................................... 108 Euro Conversion.......................................................................................... 109 DIRECTORS AND OFFICERS OF PHOENIX AFTER THE MERGER......................................................... 110 Directors................................................................................................ 110 Executive Officers....................................................................................... 112 PRINCIPAL SHAREHOLDERS AND HOLDINGS OF OFFICERS AND DIRECTORS OF PHOENIX................................... 113 COMPENSATION OF EXECUTIVE OFFICERS OF PHOENIX.............................................................. 116 Executive Compensation................................................................................... 116 Certain Transactions..................................................................................... 122 DESCRIPTION OF CHRYSALIS................................................................................... 123 General.................................................................................................. 123 Services................................................................................................. 125 Marketing................................................................................................ 129 Loss of a Large Clinical Trial........................................................................... 129 Customers................................................................................................ 130 Backlog.................................................................................................. 130 Competition.............................................................................................. 130 Microinjection Patent Licensing.......................................................................... 131 Government Regulation.................................................................................... 131 Intellectual Property.................................................................................... 133 Potential Liability and Insurance........................................................................ 133 Nextran.................................................................................................. 134 Employees................................................................................................ 134 Segment and Geographic Information....................................................................... 134 Properties............................................................................................... 134 Legal Proceedings........................................................................................ 135 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CHRYSALIS......... 136 General Summary.......................................................................................... 136 Results of Operations (1998, 1997 and 1996).............................................................. 138 Quarterly Results........................................................................................ 141 Liquidity and Capital Requirements....................................................................... 143 Exchange Rate Fluctuations............................................................................... 145 Accumulated Deficit...................................................................................... 146 Inflation................................................................................................ 146 Year 2000................................................................................................ 146 Euro Conversion.......................................................................................... 147 New Accounting Pronouncements............................................................................ 147 Qualitative and Quantitative Disclosures about Market Risk............................................... 148 SELECTED FINANCIAL DATA OF CHRYSALIS....................................................................... 149 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF CHRYSALIS................................ 150
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PAGE --------- COMPARISON OF STOCKHOLDERS' RIGHTS AND DESCRIPTION OF PHOENIX COMMON SHARES AND CHRYSALIS COMMON STOCK..... 152 Classes and Series of Capital Stock...................................................................... 152 Phoenix Common Shares.................................................................................... 153 Phoenix Preferred Shares................................................................................. 153 Annual Meeting of Stockholders........................................................................... 154 Special Meetings of Stockholders......................................................................... 154 Quorum of Stockholders................................................................................... 155 Stockholder Action Without a Meeting..................................................................... 155 Notice of Stockholder Proposals.......................................................................... 155 Access to Corporate Records and Financial Statements..................................................... 156 Charter Amendments....................................................................................... 156 By-Law Amendments........................................................................................ 157 Sale or Lease of Assets.................................................................................. 157 Preemptive Rights........................................................................................ 158 Dividends and Distributions.............................................................................. 158 Appraisal and Dissent Rights............................................................................. 158 Stock Repurchases........................................................................................ 159 Number and Qualification of Directors.................................................................... 160 Filling Vacancies on the Board of Directors.............................................................. 160 Removal of Directors..................................................................................... 161 Transactions with Directors.............................................................................. 161 Director and Officer Liability and Indemnification....................................................... 162 Oppression Remedy........................................................................................ 164 Derivative Action........................................................................................ 164 Anti-Takeover Provisions................................................................................. 165 Voluntary Dissolution.................................................................................... 167 Vote on Extraordinary Corporate Transactions............................................................. 167 LEGAL OPINIONS............................................................................................. 168 EXPERTS.................................................................................................... 168 ANNUAL STOCKHOLDERS MEETING................................................................................ 168 WHERE YOU CAN FIND MORE INFORMATION........................................................................ 169 INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1 APPENDIX A -- Agreement and Plan of Merger................................................................. A-1 APPENDIX B -- Opinion of Vector Securities International, Inc.............................................. B-1
v QUESTIONS AND ANSWERS ABOUT THE MERGER Q1: WHAT DO I NEED TO DO NOW? A1: You should vote your shares by mailing your signed proxy card in the enclosed return envelope as soon as possible so that your shares will be represented at the special meeting. If you do not vote your shares, it will be the same as a vote against adoption of the merger agreement. Q2: WHAT IF MY SHARES OF CHRYSALIS COMMON STOCK ARE HELD IN CHRYSALIS' EMPLOYEE SAVINGS PLAN? A2: If all or any of your shares of Chrysalis common stock are held in the Chrysalis employee savings plan, you have also received a letter of transmittal from the trustee under the employee savings plan explaining the procedures to follow to instruct the trustee how to vote shares allocated to your account. If the trustee does not receive voting instructions from you before April 23, 1999, your shares in the plan will not be voted. This will be the same as a vote against adoption of the merger agreement. If only some of your shares of Chrysalis common stock are held in the employee savings plan, to ensure that all of your shares are voted, you should: - sign, date and return your proxy card; and - follow the procedures to instruct the trustee to vote your shares held in the plan. If all of your shares of Chrysalis common stock are held in Chrysalis' employee savings plan, you can disregard the proxy card and only follow the trustee's voting instruction procedures. Q3: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY SHARES FOR ME? A3: Your broker will vote your shares only if you instruct your broker how to vote. Your broker should mail information to you that will explain how to give voting instructions to your broker. Please provide instructions to your broker on how to vote your shares. If you do not instruct your broker how to vote, your shares will not be voted. This will be the same as a vote against adoption of the merger agreement. Q4: WHAT IF I WANT TO CHANGE MY VOTE? A4: You can change your vote at any time before your proxy is voted at the special meeting. If you hold your shares directly, you can do this in one of three ways: - You can send a written notice to the Secretary of Chrysalis stating that you would like to revoke your proxy. - You can complete and submit a new proxy card. - You can attend the special meeting and request to vote in person. Your attendance at the special meeting alone will not, however, revoke your proxy. If your shares are held in the employee savings plan, you must follow the instructions in the trustee's letter of transmittal to change your vote. If you have instructed a broker to vote your shares, you must follow directions received from your broker to change those instructions. Q5: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED? A5: We hope to complete the merger by April 30, 1999. Q6: SHOULD I SEND IN MY STOCK CERTIFICATES NOW? A6: No. After the merger is completed, you will receive written instructions on how to exchange your stock certificates. 1 WHO CAN HELP ANSWER YOUR QUESTIONS? If you have additional questions about the merger you should contact: CHRYSALIS INTERNATIONAL CORPORATION 575 Route 28 Raritan, NJ 08869 Attention: Paul J. Schmitt or John G. Cooper Telephone: 1-908-722-7900 Ext. 11 for Mr. Schmitt and Ext. 16 for Mr. Cooper If you would like additional copies of this joint proxy statement/prospectus, or if you have questions about the merger, you should contact: Kissel Blake, a division of Shareholder Communications Corporation 110 Wall Street New York, New York 10005 212-344-6733 or 800-554-7733 2 SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY STATEMENT/PROSPECTUS. IT MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THE MERGER FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE MERGER, YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT. EXCEPT AS OTHERWISE NOTED, ALL REFERENCES TO CHRYSALIS INCLUDE ALL SUBSIDIARIES OF CHRYSALIS, AND ALL REFERENCES TO PHOENIX INCLUDE ALL SUBSIDIARIES AND AFFILIATES OF PHOENIX. UNLESS OTHERWISE INDICATED, FINANCIAL INFORMATION RELATING TO PHOENIX IS PRESENTED IN CANADIAN DOLLARS PREPARED UNDER CANADIAN GAAP AND FINANCIAL INFORMATION RELATING TO CHRYSALIS IS PRESENTED IN U.S. DOLLARS UNDER U.S. GAAP. UNLESS OTHERWISE INDICATED, ALL TRANSLATIONS OF CANADIAN DOLLAR AMOUNTS TO U.S. DOLLARS AND ALL TRANSLATIONS OF U.S. DOLLARS TO CANADIAN DOLLARS USE THE NOON BUYING RATE IN NEW YORK CITY FOR CABLE TRANSFERS IN CANADIAN DOLLARS AS CERTIFIED FOR CUSTOMS PURPOSES BY THE FEDERAL RESERVE BANK AS OF THE APPLICABLE DATE OR PERIOD. THE COMPANIES INVOLVED IN THE MERGER PHOENIX INTERNATIONAL LIFE SCIENCES INC. 2350 Cohen Street Saint-Laurent (Montreal) Quebec, Canada H4R 2N6 (514) 333-0033 Phoenix is one of the largest contract research organizations in the world. Phoenix provides a comprehensive range of research and development services to the pharmaceutical and biotechnology industries. Phoenix is one of the world's leading contract research organization providers of bioanalytical services to drug companies, based on laboratory throughput capacity. Phoenix believes it is one of the world's leading providers of Phase I clinical research services, with over 500 beds located in the United States, Canada and Germany. Phoenix also believes it is a leading provider of Phase II-IV clinical research services with operations in the United States, Canada and Europe. In addition to these core services, Phoenix offers a variety of related services and products, and is a pioneer in the development of emerging services, such as drug discovery support. For a description of the phases of clinical research services and a detailed discussion of each of the types of services provided by Phoenix, see "Description of Phoenix--Types of Contract Research Organization Services." PHOENIX MERGER SUB Phoenix Merger Sub is a Delaware corporation formed by Phoenix in November 1998 solely for the purpose of being merged with and into Chrysalis. Phoenix Merger Sub does not conduct any business. Phoenix Merger Sub is wholly owned by Phoenix. The mailing address of Phoenix Merger Sub's principal executive offices is c/o 2350 Cohen Street, Saint-Laurent (Montreal) Quebec, Canada H4R 2N6, (514) 333-0033. CHRYSALIS INTERNATIONAL CORPORATION 575 Route 28 Raritan, New Jersey 08869 (908) 722-7900 Chrysalis is an international contract research organization providing drug development services primarily to the pharmaceutical and biotechnology industries. Chrysalis' services include: - transgenic discovery research; - preclinical development; and - clinical capabilities. In addition, Chrysalis uses its proprietary transgenic and licensed gene targeting technology to provide services for its clients that require transgenic animal models. Chrysalis' customers use transgenic animal models to: - determine the function of human genes and identify therapeutic targets implicated in disease; and - to evaluate therapeutic lead compounds for further development. THE MERGER WHAT YOU WILL RECEIVE IN THE MERGER In the merger, each share of Chrysalis common stock that you own will be converted into approximately 0.08527 of a Phoenix common share. You will receive a cash payment for any fractional Phoenix common share that you would otherwise receive. The formula that will be used 3 to calculate the exact portion of a Phoenix common share you will receive is: US$8,290,000 DIVIDED BY (shares of Chrysalis common stock outstanding at the merger date plus the number of shares of Chrysalis common stock subject to options having an exercise price less than $.71) DIVIDED BY US$8.28, which represents the value of the Phoenix common shares determined under the merger agreement. We have included examples of the conversion of specific numbers of Chrysalis common stock into Phoenix common shares under "The Merger Agreement--Effect on Chrysalis Common Stock and Options." DIFFERENCES BETWEEN CHRYSALIS COMMON STOCK AND PHOENIX COMMON SHARES A number of differences exist between the rights of stockholders in Delaware corporations, like Chrysalis, and shareholders of Canadian corporations, like Phoenix. These differences are described under "Comparison of Stockholders' Rights and Description of Phoenix Common Shares and Chrysalis Common Stock." REASONS FOR THE MERGER; RECOMMENDATION OF THE CHRYSALIS BOARD At and after September 30, 1998, Chrysalis was in default under its senior secured term loan and as a result has negotiated a forbearance agreement with its senior secured lender to permit the merger to be consummated by April 30, 1999. The Chrysalis Board and the board of directors of Phoenix each considered a number of factors in determining whether to approve the merger. The Chrysalis Board also considered a number of factors in determining whether to recommend that Chrysalis stockholders adopt the merger agreement. These considerations are described below under "The Merger--Reasons for the Merger," and "--Recommendation of the Chrysalis Board." The Chrysalis Board has determined that the merger agreement and the merger are advisable and are fair to and in the best interests of Chrysalis and its stockholders. Accordingly, the Chrysalis Board has approved the merger and the merger agreement. In addition, the Chrysalis Board recommends that the Chrysalis stockholders vote FOR adoption of the merger agreement. OPINION OF CHRYSALIS' FINANCIAL ADVISOR In deciding to approve the merger agreement, the Chrysalis Board considered, among other things, the written opinion of its financial advisor, Vector Securities, that the merger consideration was fair from a financial point of view to Chrysalis stockholders. A copy of this written opinion is attached as Appendix B to this proxy statement/prospectus. You should read carefully the Vector Securities opinion. The factors considered by Vector Securities in reaching its opinion are described below under "The Merger-- Opinion of Financial Advisor to the Chrysalis Board." ACCOUNTING TREATMENT Phoenix will account for the merger under the "purchase" method of accounting in accordance with U.S. GAAP and Canadian GAAP. TAX CONSEQUENCES Tax counsel has advised Phoenix that, based on factual representations and covenants made by Phoenix and Chrysalis, the merger will be a nontaxable reorganization under the U.S. Internal Revenue Code. Chrysalis stockholders will not recognize any taxable gain or loss on the exchange of the Chrysalis common stock for the Phoenix common shares, except with respect to cash payments received for fractional shares. A Chrysalis stockholder who owns 5% or more of the outstanding stock of Phoenix after the merger will be required to file a special agreement with the Internal Revenue Service to claim tax free treatment. LISTING OF PHOENIX COMMON SHARES Phoenix common shares are currently listed on the Montreal Exchange and the Toronto Stock Exchange. Phoenix has received approval to list the Phoenix common shares on The Nasdaq National Market. It is a condition to consummation of the merger that the Nasdaq listing occur. 4 THE MERGER AGREEMENT CONDITIONS TO THE MERGER The completion of the merger depends upon meeting a number of conditions, including the following: - adoption of the merger agreement by Chrysalis stockholders; - receipt of regulatory approvals and consents required under applicable U.S. and foreign law; and - the listing of the Phoenix common shares on the Nasdaq National Market. All of the conditions to the completion of the merger are waivable by the party that is entitled to the benefits of the condition. TERMINATION OF THE MERGER AGREEMENT Phoenix and Chrysalis may terminate the merger agreement, and abandon the merger, only in a very limited number of circumstances: (1) Phoenix and Chrysalis can mutually agree to terminate the merger agreement; (2) Phoenix or Chrysalis can terminate the merger agreement if the other party breaches or fails to comply with any of its representations, warranties or agreements under the merger agreement , and the breach or failure would result in the failure of a condition to the merger that is not cured prior to April 30, 1999; (3) Phoenix or Chrysalis can terminate the merger agreement if any law or final court order prohibits the merger; (4) Chrysalis can terminate the merger agreement if a third party has made a superior proposal and as a result of the superior proposal the Chrysalis Board decides not to hold the special meeting or withdraws or modifies its recommendation that Chrysalis stockholders adopt the merger agreement; (5) Phoenix can terminate the merger agreement if the Chrysalis Board determines not to hold the special meeting or withdraws or modifies its recommendation that Chrysalis stockholders adopt the merger agreement; (6) Phoenix or Chrysalis can terminate the merger agreement if the Chrysalis stockholders do not adopt the merger agreement; (7) The merger agreement will terminate automatically if, without Phoenix's consent, the Chrysalis Board or the board of directors of any Chrysalis subsidiary adopts a resolution authorizing a liquidation or the filing of a bankruptcy petition; and (8) If a bankruptcy petition with respect to Chrysalis is filed by a Chrysalis creditor, other than Phoenix, Phoenix can terminate the merger agreement upon the earlier to occur of April 30, 1999 or 60 days after the bankruptcy petition. TERMINATION PAYMENTS The merger agreement requires Chrysalis to pay Phoenix a termination fee of $1.5 million if the merger agreement terminates under the circumstances described in clauses (4), (5), (6), (7) or (8) under "Termination of the Merger Agreement" above. The merger agreement requires Phoenix to pay Chrysalis a termination fee of $1.5 million if Chrysalis terminates the merger agreement under the circumstances described in clause (2) under "Termination of the Merger Agreement" above. FORBEARANCE AGREEMENT; GUARANTY; PLEDGE; OPTION LETTER Based on third quarter and later period financial results, Chrysalis was in default under its loan agreement with its senior lender. Chrysalis, the lender and Phoenix entered into a forbearance agreement concurrently with the merger agreement. Under the forbearance agreement, as amended, the lender has agreed not to exercise its rights and remedies with respect to current defaults under the loan agreement until April 30, 1999. In connection with the forbearance agreement, Phoenix has given to the lender a guaranty 5 of Chrysalis' debt to the lender and a cash collateral pledge of approximately US$4.7 million to secure the guaranty. In connection with the guaranty and pledge, the lender granted Phoenix an option to purchase Chrysalis' indebtedness under the loan agreement. THE SPECIAL MEETING TIME; PLACE; PURPOSE Chrysalis will hold the special meeting on April 30, 1999, at 9:00 a.m., local time, at the Somerset Hills Hotel, 200 Liberty Corner Road, Warren, New Jersey. At the special meeting, Chrysalis will ask you to adopt the merger agreement. RECORD DATE; VOTING POWER You may vote at the special meeting if you owned shares of Chrysalis common stock at the close of business on March 1, 1999. On March 1, 1999, 11,666,480 shares of Chrysalis common stock were outstanding. For each share of common stock that they owned on that date, Chrysalis stockholders will have one vote at the special meeting on the proposal to adopt the merger agreement. VOTE REQUIRED Adoption of the merger agreement requires the favorable vote of at least a majority of the outstanding shares of Chrysalis common stock. DISSENTERS' RIGHTS Chrysalis stockholders do not have dissenters' rights in connection with the merger. ADDITIONAL BENEFITS TO CHRYSALIS DIRECTORS AND EXECUTIVE OFFICERS FROM THE MERGER In evaluating the merger, you should recognize that each of Chrysalis' directors and executive officers have interests in the merger that are different from, or in addition to, yours as a Chrysalis stockholder. The interests arise from: - employment and severance agreements that provide for payments to two executive officers if their employment is terminated or, in one case, altered upon or after the merger; - the terms of a "stay" bonus granted to one executive officer of Chrysalis; - the terms of all of Chrysalis' outstanding stock options held by directors and executive officers that became 100% vested upon execution of the merger agreement; and - the terms of the merger agreement that require Phoenix to assume Chrysalis' employment and severance agreements and to continue to provide indemnification and insurance coverage to current and former directors and officers of Chrysalis after the merger. The Chrysalis Board was aware of these interests and considered them, among other factors, in approving the merger agreement and the merger. In addition, Phoenix and one executive officer of Chrysalis have entered into a consulting agreement under which he will provide services to Phoenix for a short period of time after the merger. 6 SUMMARY SELECTED FINANCIAL DATA Chrysalis and Phoenix are providing the following summary financial information to aid you in your analysis of the financial aspects of the merger. This information is only a summary. You should read it in conjunction with the historical financial statements of Chrysalis and Phoenix and the related notes contained elsewhere in this proxy statement/prospectus. SUMMARY SELECTED HISTORICAL FINANCIAL DATA OF CHRYSALIS The following table shows summary consolidated financial data of Chrysalis. The summary consolidated financial data are derived from Chrysalis' audited consolidated financial statements. You should be aware of the following factors that affect comparisons from year to year: - In 1994, Chrysalis entered into the Nextran joint venture, in which it held a minority interest. In 1995, Chrysalis sold its minority interest for $18 million and recorded a nonrecurring gain, net of expenses, income taxes and related accruals of approximately $17.3 million. See "Description of Chrysalis--Nextran." - In 1996, Chrysalis recorded business combination costs of approximately $3.6 million related to the acquisition of the Bioclin Group. See "Description of Chrysalis--General--Other Matters." - In the fourth quarter of 1998, Chrysalis recorded a restructuring charge of $3,872,000 in connection with the restructuring of its clinical operations. Chrysalis expects to record an additional restructuring charge of $825,000 in the second quarter of 1999 in connection with this restructuring. See "Description of Chrysalis--General--Restructuring of Clinical Operations" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--General Summary." - As a result of Chrysalis' default under its senior term loan, the principal amount of the loan is classified as short-term debt at December 31, 1998. See "Other Agreements." You should read the following data in conjunction with the consolidated financial statements of Chrysalis and "Management's Discussion and Analysis of Financial Condition and Results of Operations of Chrysalis" included elsewhere in this proxy statement/prospectus. 7 SUMMARY SELECTED HISTORICAL FINANCIAL DATA OF CHRYSALIS (IN ACCORDANCE WITH U.S. GAAP)
YEARS ENDED DECEMBER 31 ----------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- (IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net revenues...................................................... $ 39,384 $ 42,298 41,487 39,609 36,188 Operating costs and expenses: Direct costs.................................................... 31,041 29,217 27,313 27,691 25,499 Research and development........................................ -- 166 528 1,063 3,940 General, administrative and marketing........................... 12,828 12,416 10,942 9,631 9,975 Depreciation and amortization................................... 2,092 2,699 2,780 2,907 3,594 Business combination costs...................................... -- -- 3,649 -- -- Restructuring costs............................................. 3,872 -- -- -- -- --------- --------- --------- --------- --------- 49,833 44,498 45,212 41,292 43,008 Loss from operations............................................ (10,449) (2,200) (3,725) (1,683) (6,820) --------- --------- --------- --------- --------- Other income (expense), net..................................... (992) 390 742 (635) (525) Net loss before equity in net loss of Nextran, gain on sale of Nextran and taxes............................................. (11,441) (1,810) (2,983) (2,318) (7,345) Equity in net loss of Nextran................................... -- -- -- (2,700) (1,329) Gain on sale of Nextran, net of income taxes.................... -- -- -- 17,266 -- Income tax expense (benefit).................................... 716 240 477 (177) 390 --------- --------- --------- --------- --------- Net income (loss)........................................... $ (12,157) $ (2,050) (3,460) 12,425 (9,064) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Basic earnings (loss) per share................................. $ (1.06) $ (0.18) (0.31) 1.12 (0.82) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Diluted earnings (loss) per share............................... $ (1.06) $ (0.18) (0.31) 1.06 (0.82) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- BALANCE SHEET DATA (AT YEAR END): Cash, cash equivalents and investments............................ $ 6,705 $ 6,925 13,470 23,102 6,234 Restricted cash................................................... -- 460 5,010 777 1,724 Accounts receivable, net.......................................... 8,766 9,669 10,788 10,907 9,340 Property, equipment and leasehold improvements, net............... 15,686 15,127 15,963 17,806 18,548 Intangible assets, net............................................ 809 805 953 1,035 991 Investment in Nextran............................................. -- -- -- -- 3,844 Other assets...................................................... 2,615 2,254 1,759 1,797 1,454 --------- --------- --------- --------- --------- Total assets................................................ $ 34,581 $ 35,240 47,943 55,424 42,135 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Current liabilities, excluding debt............................... 17,681 12,295 17,501 15,292 16,047 Short-term debt................................................... 3,250 2,668 11,238 11,559 9,876 Current portion of long-term debt................................. 4,821 768 180 744 784 Long-term debt, excluding current portion......................... 6,010 6,561 2,376 7,830 8,502 Deferred income taxes............................................. 1,832 1,646 2,053 2,059 2,075 Other liabilities................................................. 725 633 1,054 948 1,180 Total stockholders' equity........................................ 262 10,669 13,541 16,992 3,671 --------- --------- --------- --------- --------- Total liabilities and stockholders' equity.................. $ 34,581 $ 35,240 47,943 55,424 42,135 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
SUMMARY CONSOLIDATED FINANCIAL INFORMATION OF PHOENIX The following table presents summary consolidated financial information of Phoenix in Canadian dollars. The summary consolidated financial information for the five years ended August 31, 1998 derived from the consolidated financial statements of Phoenix which have been prepared in accordance with Canadian GAAP and audited by Ernst & Young LLP, independent chartered accountants. The summary consolidated financial information for the three months ended November 30, 1998 and 1997 have been derived from the unaudited consolidated financial statements of Phoenix. The summary consolidated financial information as at August 31, 1997 and 1998 and for the three year period ended August 31, 1998 in accordance with U.S. GAAP are derived from note 15 to the consolidated financial statements of Phoenix. The following information should be read in conjunction with the consolidated 8 financial statements of Phoenix. "Unaudited Pro Forma Consolidated Financial Information," and "Management's Discussion and Analysis of Financial Condition and Results of Operations of Phoenix," included elsewhere in this proxy statement/prospectus. See also "Financial Statement Presentation and Exchange Rates." The consolidated financial statements of Phoenix have been prepared in accordance with Canadian GAAP. In certain respects, Canadian GAAP differs from U.S. GAAP. See note 15 to the consolidated financial statements of Phoenix included elsewhere in the proxy statement/prospectus for a description of material differences between U.S. GAAP and Canadian GAAP as they relate to the consolidated financial statements of Phoenix and a reconciliation to U.S. GAAP of Phoenix's financial position, net income and shareholders' equity. You should be aware of the following factors that affect comparisons from year to year: - In the quarter ended November 30, 1998, Phoenix completed the acquisition of Clinserve AG. This acquisition was accounted for under the pooling of interests method under U.S. GAAP. The pooling of interests method requires the restatement of financial statements of periods prior to the pooling transaction in a manner that assumes that the two companies had always been combined. As a result, the U.S. GAAP data presented below has been restated to reflect to this transaction. - During August 1997 and February 1998, Phoenix acquired two significant Phase II-IV operations: - Institut Technique Pour l'Etude du Medicament, which is referred to as ITEM; and - IBRD-Rostrum Global, Inc. These acquisitions accounted for incremental net revenues of approximately $67 million for the year ended August 31, 1998. The acquisition of ITEM through the issuance of 4,690,142 Phoenix common shares resulted in an increase in consolidated assets of approximately $54 million and $48.5 million in shareholders' equity under Canadian GAAP, and approximately $4 million and $0 under U.S. GAAP. In February 1998, Phoenix acquired 100% of IBRD-Rostrum for approximately $44 million. This resulted in an increase in consolidated assets of approximately $63 million under both Canadian and U.S. GAAP. - In the year ended August 31, 1994, Phoenix benefited from research and development financing available under relevant Quebec tax legislation, which gave rise to financing income of $1,152,000. Because of changes in related income tax legislation, these transactions have not recurred. - In accordance with accepted Canadian practice, the basic and fully-diluted earnings and pre-tax earnings per share amounts for the year ended August 31, 1994 are based on the weighted average number of Phoenix common shares outstanding as at August 31, 1995, due to the changes in Phoenix's capital structure which occurred when Phoenix became a public company on October 24, 1994. 9 SUMMARY CONSOLIDATED FINANCIAL INFORMATION OF PHOENIX
THREE MONTHS ENDED NOVEMBER 30 (UNAUDITED) YEAR ENDED AUGUST 31 -------------------- ----------------------------------------------------- 1998 1997 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS) STATEMENTS OF INCOME (LOSS) DATA AMOUNTS IN ACCORDANCE WITH CANADIAN GAAP Gross revenues............................. 74,163 35,536 $ 218,360 $ 86,736 $ 64,182 $ 47,452 $ 33,872 Net revenues............................... 58,661 31,679 171,238 82,477 63,082 46,651 33,197 Income (loss) before income taxes.......... 5,169 2,732 15,691 5,188 (5,181) 7,001 9,922 Net income (loss).......................... 2,854 1,830 9,067 2,349 (5,361) 4,941 7,030 AMOUNTS IN ACCORDANCE WITH U.S. GAAP Gross revenues............................. 76,216 38,618 228,226 125,533 106,127 Net revenues............................... 60,714 34,761 181,104 115,966 97,569 Income (loss) before income taxes.......... 5,025 3,230 18,271 5,885 (2,643) Net income (loss).......................... 2,691 2,314 11,603 2,014 (3,751) PER COMMON SHARE AMOUNTS IN ACCORDANCE WITH CANADIAN GAAP Basic and fully-diluted earnings (loss).... 0.11 0.08 0.37 0.12 (0.29) 0.30 0.43 Pre-tax earnings (loss).................... 0.21 0.11 0.64 0.26 (0.28) 0.42 0.60 Dividends.................................. -- -- -- -- -- 0.07 -- PER COMMON SHARE AMOUNTS IN ACCORDANCE WITH U.S. GAAP Basic and diluted earnings (loss).......... 0.10 0.09 0.46 0.08 (0.16) Pre-tax earnings (loss).................... 0.19 0.13 0.73 0.23 (0.11) Dividends.................................. -- -- -- -- -- BALANCE SHEET DATA (AT PERIOD-END) AMOUNTS IN ACCORDANCE WITH CANADIAN GAAP Working capital............................ 6,513 9,942 16,498 17,425 8,367 6,500 Total assets............................... 303,915 271,470 160,858 89,570 66,282 34,648 Total debt................................. 53,790 50,351 11,672 11,210 13,695 15,842 Long-term debt............................. 41,843 42,440 4,058 9,226 10,158 9,899 Shareholders' equity....................... 147,305 129,953 112,265 61,248 39,352 12,027 BALANCE SHEET DATA (AT PERIOD-END) AMOUNTS IN ACCORDANCE WITH U.S. GAAP Working capital............................ 6,513 9,942 17,986 Total assets............................... 236,291 217,924 114,285 Shareholders' equity....................... 79,681 76,407 63,840 UNAUDITED PRO FORMA DATA IN ACCORDANCE WITH CANADIAN GAAP: Pro forma gross revenues................... 91,508 325,846 Pro forma net revenues..................... 74,921 255,826 Pro forma income (loss) before income taxes.................................... (2,470) 1,813 Pro forma net loss......................... (5,567) (5,509) Pro forma total assets..................... 375,155 Pro forma total debt....................... 76,799 Pro forma shareholders' equity............. 160,611 Pro forma basic and fully diluted loss per share.................................... (0.21) (0.22) UNAUDITED PRO FORMA DATA IN ACCORDANCE WITH U.S. GAAP: Pro forma gross revenues................... 93,561 335,712 Pro forma net revenues..................... 76,974 270,250 Pro forma net loss......................... (5,730) (3,075) Pro forma total assets..................... 307,531 Pro forma shareholders' equity............. 92,987 Pro forma basic and diluted loss per share.................................... (0.21) (0.12)
10 COMPARATIVE PER SHARE MARKET INFORMATION AND DIVIDEND DATA The Chrysalis common stock is traded on the Nasdaq National Market under the symbol "CRLS." The Phoenix common shares have been listed for trading on the Montreal Exchange and the Toronto Stock Exchange since 1994 under the symbol "PHX." In connection with the merger, Phoenix has received approval to list the Phoenix common shares on the Nasdaq National Market under the symbol "PHXI." The table below shows, for the fiscal quarters indicated, the reported high and low sale prices of the Chrysalis common stock as reported on the Nasdaq National Market.
CHRYSALIS (U.S. DOLLARS) -------------------- NASDAQ -------------------- HIGH LOW --------- --------- 1997 First Quarter.................................................................................. 5.94 4.44 Second Quarter................................................................................. 5.00 4.06 Third Quarter.................................................................................. 4.50 3.44 Fourth Quarter................................................................................. 4.38 2.06 1998 First Quarter.................................................................................. 3.38 2.19 Second Quarter................................................................................. 3.00 1.38 Third Quarter.................................................................................. 1.59 0.75 Fourth Quarter................................................................................. 1.63 0.34 1999 First Quarter.................................................................................. 0.69 0.38
The table below shows, for the fiscal quarters indicated, the reported high and low sale prices of the Phoenix common shares as reported in the Montreal Exchange and the Toronto Stock Exchange.
PHOENIX (CANADIAN DOLLARS) ------------------------------------------ MONTREAL EXCHANGE TORONTO STOCK EXCHANGE -------------------- -------------------- HIGH LOW HIGH LOW --------- --------- --------- --------- 1997 First Quarter............................................................... 13.75 9.55 13.75 9.50 Second Quarter.............................................................. 13.30 9.10 13.30 9.05 Third Quarter............................................................... 10.75 8.00 9.40 8.00 Fourth Quarter.............................................................. 12.40 8.65 12.50 8.55 1998 First Quarter............................................................... 11.55 7.00 11.55 8.00 Second Quarter.............................................................. 11.25 7.75 11.25 7.75 Third Quarter............................................................... 14.50 10.05 14.50 10.05 Fourth Quarter.............................................................. 14.00 9.05 13.95 9.05 1999 First Quarter............................................................... 14.20 8.10 14.15 8.10 Second Quarter.............................................................. 18.25 11.00 18.25 11.00 Third Quarter (through March 31, 1999)...................................... 14.00 11.50 14.20 11.50
11 The merger was announced on November 18, 1998. The table below shows the closing price of the Chrysalis common stock and the closing price of Phoenix common shares on the Toronto Stock Exchange on November 17, 1998 and April 1, 1999.
NOVEMBER 17, 1998 APRIL 1, 1999 ----------------- ------------------- Chrysalis (US$)............................................................ $ 1.06 $ 0.59 Phoenix (CDN$)............................................................. $ 12.84 $ 13.25
You should obtain more recent stock price quotes from other sources of financial information. Neither Chrysalis nor Phoenix has declared or paid dividends during the past three fiscal years and neither has any current intention of doing so in the future. COMPARATIVE PER SHARE DATA The following table presents unaudited historical and pro forma per share data that reflect the completion of the merger based upon the historical financial statements of Chrysalis and Phoenix. The pro forma data does not indicate the results of future operations or the actual results that would have occurred had the merger been consummated at the beginning of the periods presented. You should read the data presented below in conjunction with the historical consolidated financial statements, including applicable notes, of Phoenix and Chrysalis included in this proxy statement/prospectus, and "Unaudited Pro Forma Consolidated Financial Information," appearing elsewhere in this proxy statement/prospectus. The first and second columns on the left in the tables below present historical per share amounts for Phoenix and Chrysalis, respectively. The third column presents pro forma per share amounts for Phoenix. The fourth column sets forth pro forma equivalent amounts based on the number of Phoenix common shares that will be issued in the merger for each share of Chrysalis common stock.
HISTORICAL ------------------------------ (UNAUDITED) CHRYSALIS EQUIVALENT (PHOENIX PRO FORMA DATA PHOENIX MULTIPLIED BY PHOENIX CHRYSALIS PRO FORMA 0.08527) THREE MONTH THREE MONTH THREE MONTH THREE MONTH PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED NOVEMBER 30, DECEMBER 31, NOVEMBER 30, NOVEMBER 30, 1998 1998 1998 1998 --------------- ------------- ------------- --------------- (CDN$) (US$) (CDN$) (US$) CANADIAN GAAP Basic and fully diluted income (loss) per common share................................................. 0.11 (0.21) Book value per common share........................... $ 5.66 $ 5.93 U.S. GAAP Basic and diluted income (loss) per common share...... 0.10 (0.47) (0.21) (0.01) Book value per common share........................... $ 3.06 $ 0.02 $ 3.44 $ 0.20
12
HISTORICAL ------------------------------ (UNAUDITED) CHRYSALIS EQUIVALENT (PHOENIX PRO FORMA DATA CHRYSALIS PHOENIX MULTIPLIED BY 12 MONTH PRO FORMA 0.08527) PHOENIX PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, AUGUST 31, AUGUST 31, AUGUST 31, 1998 1998 1998 1998 --------------- ------------- ------------- --------------- (CDN $) (US $) (CDN $) (US $) CANADIAN GAAP Basic and fully diluted income (loss) per common share................................................. 0.46 (0.22) U.S. GAAP Basic and diluted income (loss) per common share...... 0.37 (0.64) (0.12) (0.01)
13 RISK FACTORS You should consider carefully all of the information contained in this document, including the following factors that relate to the effect of your vote and those matters related to your receipt of Phoenix common shares in the merger. IF CHRYSALIS IS NOT ABLE TO CONSUMMATE THE MERGER PRIOR TO APRIL 30, 1999, CHRYSALIS WILL NOT HAVE SUFFICIENT CASH TO CONTINUE TO FUND OPERATIONS. Chrysalis' ability to meet ongoing debt service requirements, to meet cash funding requirements and to otherwise satisfy its obligations to vendors and lenders from cash solely provided by operations has been adversely affected by significant losses from clinical operations. Chrysalis is currently in default under its senior secured term debt. Under the terms of the forbearance agreement among Chrysalis, Phoenix and Chrysalis' senior secured lender and other related agreements, Chrysalis has obtained the agreement of the lender to delay acceleration of the term loan, but only if the merger is consummated on or before April 30, 1999, Chrysalis' senior secured lender is referred to as the "Bank". In addition, if the Bank were to accelerate the term loan, other of Chrysalis' debt would also be in default. The merger cannot be completed if Chrysalis stockholders do not adopt the merger agreement. If the merger is not consummated prior to April 30, 1999, Chrysalis will not have sufficient cash to satisfy its obligations to its creditors and fund operating activities. In this event, Chrysalis would attempt to pursue other alternatives, but alternative strategies may not be successful. It is possible that Chrysalis could be forced into bankruptcy by its creditors. Although Chrysalis currently intends, if necessary, to seek reorganization under chapter 11 of the Bankruptcy Code, Chrysalis currently believes that a successful reorganization would likely require a strategic transaction involving a sale of one or more of Chrysalis' facilities or operations to generate a source of liquidity during any bankruptcy proceeding. As a result of the default and other factors affecting Chrysalis, the auditors opinion for Chrysalis contained in this proxy statement/prospectus contains an explanatory paragraph stating as follows: "The consolidated financial statements have been prepared assuming that [Chrysalis] and its subsidiaries will continue as going concerns. [Chrysalis] has suffered recurring losses from operations, has a net working capital deficiency and is in default of [some of its] debt covenants which raise substantial doubt about their ability to continue as going concerns. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty." IF THE MERGER IS NOT COMPLETED, CHRYSALIS COMMON STOCK MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET. In January 1999, Nasdaq informed Chrysalis that its common stock will be delisted from the Nasdaq National Market beginning April 8, 1999. The Chrysalis common stock will be delisted unless the closing price is $1 or more for any consecutive ten-day period prior to April 6, 1999. Based on recent trading prices and the estimated exchange ratio, Chrysalis does not expect the closing price requirement to be met. In April 1999, Chrysalis requested a written hearing with Nasdaq in connection with the delisting. However, there can be no assurance that the hearing will be granted or that delisting will be stayed during the hearing process. IF CHRYSALIS STOCKHOLDERS DO NOT ADOPT THE MERGER AGREEMENT, CHRYSALIS WILL LIKELY OWE PHOENIX $1.5 MILLION. Under the terms of the merger agreement, Chrysalis is required to pay Phoenix $1.5 million if either Phoenix or Chrysalis terminates the merger because the merger agreement is not adopted by Chrysalis 14 stockholders. Chrysalis expects that one party would terminate the merger agreement under these circumstances. THE VALUE OF THE PHOENIX COMMON SHARES TO BE RECEIVED BY CHRYSALIS STOCKHOLDERS WILL FLUCTUATE WITH THE PHOENIX COMMON SHARE PRICE. The value of the Phoenix common shares used to calculate the exchange ratio has been fixed and will not change even if the market price of Phoenix common shares or Chrysalis common stock changes before the merger is completed. For purposes of calculating the exchange ratio under the merger agreement, the value of the Phoenix common shares is CDN$12.74, or US$8.28. If the Phoenix common shares were to trade below that price at the time of or after the merger, the value of Phoenix common shares to be received in the merger would be less than the expected value. Stockholders are urged to obtain current market quotations for the Phoenix common shares. Chrysalis does not intend to obtain an updated fairness opinion from Vector Securities prior to the completion of the merger. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of Phoenix-- Recent Developments." CHRYSALIS' SHUT DOWNS AND DOWNSIZING WILL MATERIALLY ADVERSELY AFFECT ITS OPERATIONS AND COMPETITIVE POSITION IF THE MERGER IS NOT COMPLETED. Chrysalis has begun to shut down its U.S. clinical operations and downsize its European clinical operations. The shut down and downsizing have materially adversely affected: - its ability to provide clinical data management and biostatistical services; - its ability to coordinate its marketing efforts and cross-sell its services; and - its ability to compete with international full service contract research organizations for clinical contracts. If the merger is not completed, these factors are expected to continue to materially adversely affect Chrysalis' operations, results of operations and financial condition for the long term. CHRYSALIS STOCKHOLDERS WILL BE UNABLE TO CONTROL PHOENIX AFTER THE MERGER. Chrysalis stockholders will receive collectively in the merger approximately 4% of the outstanding Phoenix common shares based on Phoenix common shares outstanding on January 31, 1999. If Phoenix issues more of its common shares, the ownership percentage will decrease further. Therefore, Chrysalis stockholders will likely exert little or no influence over Phoenix's affairs. RESTRICTIVE COVENANTS IN MERGER AGREEMENT MAY ADVERSELY AFFECT CHRYSALIS' OPERATIONS. The merger agreement contains a number of covenants restricting Chrysalis' ability to conduct its operations. These covenants include restrictions on Chrysalis' ability, without Phoenix's consent, to: - increase compensation to employees; - make capital and other expenditures; and - enter into or amend real property leases. Although the merger agreement does not permit Phoenix to unreasonably withhold or delay its consent, the restrictive covenants, or the refusal or delay of Phoenix to give any required consent, may adversely affect Chrysalis' ability to conduct its operations prior to the merger. In addition, it is possible that the restrictive covenants will hamper Chrysalis' operations to such an extent that Chrysalis will be unable to satisfy one or more of the conditions to the merger. If this occurred, Phoenix may be able to choose not to consummate the merger. 15 LOSS OF A SIGNIFICANT NUMBER OF EMPLOYEES MAY ADVERSELY AFFECT CHRYSALIS' OPERATIONS. The recent uncertainty regarding Chrysalis' future and the announcement of the proposed merger have contributed to the departure of a number of employees of Chrysalis. In addition, the restructuring of Chrysalis' clinical operations has and will continue to result in the termination or departure of a number of other employees. Chrysalis may not be able to retain a sufficient number of skilled personnel to continue adequately providing services to its customers, whether or not the merger occurs. RIGHTS OF CHRYSALIS STOCKHOLDERS WILL CHANGE AS A RESULT OF THE MERGER. In the merger, you will receive Phoenix common shares. There are numerous differences between the rights of a stockholder in Chrysalis, a Delaware corporation, and the rights of a shareholder in Phoenix, a Canadian corporation. These differences are described below under "Comparison of Stockholders' Rights and Description of Phoenix Common Shares and Chrysalis Common Stock." PHOENIX'S SHARE PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE. The trading price of Phoenix' common shares has in the past and could in the future fluctuate significantly. The fluctuations have been or could be in response to numerous factors including: - quarterly variations in results of operations; - changes in securities analysts' recommendations; - earnings estimates for Phoenix and Phoenix's ability or inability to meet those estimates and - general fluctuations in the stock market. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of Phoenix--Recent Developments." ONE OF PHOENIX'S MAJOR BIOANALYTICAL SERVICES CLIENTS RECENTLY INSOURCED MOST OF ITS WORK. One of Phoenix's major bioanalytical services clients recently insourced most of its liquid chromatography/mass spectrometry work. Phoenix expects this loss of business to materially adversely affect its results of operations for its second quarter of fiscal 1999 ending February 28, 1999, and have a lesser adverse impact on its third quarter results. These adverse effects are expected to reduce Phoenix's fiscal 1999 net income by approximately $4.0 million. PHOENIX IS DEPENDENT UPON THE CONTINUED OUTSOURCING OF RESEARCH AND DEVELOPMENT EXPENDITURES BY THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRIES. Phoenix's revenues are highly dependent upon research and development expenditures by the pharmaceutical and biotechnology industries. Phoenix's operations could be materially and adversely affected by a general economic decline in these industries or by any reduction in the outsourcing of research and development expenditures by companies operating in these industries. One of Phoenix's major bioanalytical services clients recently insourced most of its work. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of Phoenix--Recent Developments." THE LOSS OF ANOTHER MAJOR PROJECT OR CLIENT COULD MATERIALLY ADVERSELY AFFECT PHOENIX. Phoenix has in the past derived, and may in the future derive, a significant portion of its net revenue from a relatively limited number of major projects or clients. In fiscal 1996, 1997 and 1998 and the three month period ended November 30, 1998, Phoenix's top five customers accounted for approximately 25%, 26%, 29% and 31%, respectively, of Phoenix's consolidated net revenue. As pharmaceutical companies continue to outsource large projects and studies to fewer full-service providers and as 16 consolidation within the pharmaceutical industry continues, Phoenix's concentration of business could increase. The loss of a major project or client could materially and adversely affect Phoenix. PHOENIX MAY NOT BE ABLE TO MANAGE ITS GROWTH RESULTING FROM RECENT ACQUISITIONS. Phoenix has completed six acquisitions since August 1997. Phoenix's rapid growth over the past two years has placed a substantial strain on its operational, human and financial resources. In order to manage its growth, Phoenix must continue to: - improve its operating, administrative and information systems; - attract and retain qualified management, professional, scientific and technical personnel; and - assimilate differences in foreign business practices and overcome language barriers. Failure by Phoenix to manage its growth effectively could have a material adverse effect on Phoenix. Acquisitions involve a number of other risks including: - difficulties and expenses incurred in connection with the acquisition; - integration of the operations and services of the acquired companies; - diversion of Phoenix management's attention from other business concerns; - acquisition of significant intangible assets; - the potential loss of key employees of the acquired companies; and - potential losses resulting from undiscovered liabilities of acquired companies that are not covered by indemnification. IF PHOENIX FAILS TO RECRUIT AND RETAIN KEY MANAGEMENT AND PROFESSIONAL, SCIENTIFIC AND TECHNICAL PERSONNEL ITS ABILITY TO SUPPORT GROWTH AND BE COMPETITIVE COULD BE ADVERSELY AFFECTED. Phoenix depends heavily on its senior management team. Further, Phoenix faces intense competition in attracting and retaining qualified professional, scientific and technical operating personnel. In addition, beginning September 30, 1999, the employment agreement of Dr. John Hooper, Chairman of the Board and Chief Executive Officer of Phoenix, can be terminated by Dr. Hooper on three months' notice. Phoenix's strategy for growth in the contract research organization industry depends on its ability to attract and retain qualified professional, scientific and technical operating personnel. The failure to recruit and retain senior management and professional, scientific and technical operating personnel could have a material adverse effect on Phoenix's business. PHOENIX'S CUSTOMER CONTRACTS MAY BE TERMINATED BY CUSTOMERS ON SHORT NOTICE FOR REASONS BEYOND PHOENIX'S CONTROL. Most of Phoenix's clients can terminate their contracts with Phoenix upon 30 days' notice. Clients may terminate contracts for a variety of reasons over which Phoenix has no control, including: - the failure of a product to satisfy safety requirements; - unexpected or undesired results of the product; - the client's decision to forego a particular study; - insufficient patient enrollment or investigator recruitment; or - production shortages. 17 Phoenix believes that several factors, including increased cost containment pressures, have caused pharmaceutical companies to apply more stringent criteria to the decision to proceed with clinical trials for new products. This application of more stringent criteria may result in a greater willingness of these companies to cancel contracts. The termination of a large contract or of multiple contracts could adversely affect Phoenix's business, financial condition and results of operations. FLUCTUATIONS IN PHOENIX'S REVENUES COMBINED WITH SIGNIFICANT FIXED EXPENSES COULD RESULT IN VARIATION IN PHOENIX'S QUARTERLY OPERATING RESULTS. Phoenix's results of operations have been and can be expected to continue to be subject to quarterly fluctuations. Because a significant portion of Phoenix's expenses are relatively fixed, the amount and timing of increases in these expenses are based in large part on Phoenix's expectations concerning future revenue. If revenue is below expectations in any given quarter, the adverse effect may be magnified by Phoenix's inability to reduce spending quickly enough to compensate for the revenue shortfall. Accordingly, a variation from expected revenue could have a material adverse effect on Phoenix's operating results and financial condition for a given quarter. Quarterly results can fluctuate as a result of a number of factors, including: - the commencement, completion or cancellation of significant contracts; - seasonal variations in demand for Phoenix's services ; - changes in the mix of services offered; - the timing of start-up expenses for new facilities; - acquisitions, including any related one-time expenses or write-offs; - currency exchange fluctuations; and - general economic conditions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of Phoenix--Recent Developments." PHOENIX IS EXPOSED TO POTENTIAL LIABILITY WHILE CONDUCTING ITS CLINICAL TRIALS. Phoenix contracts with physicians to serve as investigators in conducting clinical trials to test new drugs on human volunteers. This creates a risk of liability for personal injury to or death of volunteers resulting from adverse reactions to the drugs administered. Phoenix could be held liable for the claims and expenses arising from professional malpractice of investigators or in the event of personal injury to or death of persons participating in clinical trials. Phoenix also could be held liable for errors or omissions in connection with the services it performs. Phoenix may not be able to maintain sufficient professional liability insurance coverage on terms acceptable to Phoenix. Phoenix could be materially and adversely affected if it were required to pay damages or bear the costs of defending any claim which was not covered by insurance. 18 RECENT CHANGES IN GOVERNMENT REGULATION OF PHARMACEUTICAL INDUSTRY COULD DECREASE BUSINESS OPPORTUNITIES. In November 1997, the United States Congress passed the United States Food and Drug Modernization Act. This legislation is designed, among other things, to streamline the drug approval process in the United States. Phoenix cannot predict the effect, if any, of this legislation on its business. Phoenix's business opportunities could be decreased by regulatory changes which either: - relax the scope of regulatory requirements; or - simplify drug approval procedures. INTENSE COMPETITION AND INCREASING CONSOLIDATION IN THE PHARMACEUTICAL INDUSTRY MAY CAUSE PRICE OR MARGIN EROSION. The market for contract research services is intensely competitive. Expansion by Phoenix's competitors into other areas in which Phoenix operates could adversely affect Phoenix's competitive position. Increased competition may lead to price and other forms of competition that may adversely affect Phoenix's margins. Consolidation within the pharmaceutical industry, as well as a trend by pharmaceutical companies to limit outsourcing to fewer organizations, has heightened the competition for contract research services. As a result, consolidation also has occurred among the providers of contract research services, and several large multi-service providers have emerged. If these consolidation trends continue, they may result in price erosion and greater competition among the larger contract research providers for clients and acquisition candidates. There can be no assurance that increased competition in, or consolidation of, the contract research organization industry will not have a material adverse effect on Phoenix. FAILURE TO COMPLY WITH APPLICABLE GOVERNMENT REGULATION COULD RESULT IN ADVERSE CONSEQUENCES TO PHOENIX. The FDA and other regulatory authorities audit and inspect Phoenix from time to time to ensure compliance with applicable regulations and guidelines, including with respect to environmental and health and safety matters. Phoenix's failure to comply with all applicable requirements could result in: - the termination of research; - the disqualification of data; - the denial of the right to conduct business; - fines; - criminal penalties; and - other enforcement actions. Any of these could have a material adverse effect on Phoenix. 1997 FDA AUDIT COULD RESULT IN SUBSTANTIAL FINES OR PENALTIES OR OTHERWISE MATERIALLY ADVERSELY AFFECT PHOENIX. In an FDA inspection of Phoenix's Cincinnati facility in the summer of 1997, the inspectors cited various deficiencies, primarily with regard to some anomalous data connected with repeated height and weight measurements of some healthy volunteers screened for specific clinical studies. These studies were conducted in 1995 and early 1996, shortly after the Cincinnati facility opened. In March 1998, Phoenix received a grand jury subpoena, requesting documents from Phoenix. The subpoena requested documents relating to studies conducted during the early phase of the Cincinnati facility's development, 19 including the period covered by the 1997 inspection. Phoenix cannot at this time predict the ultimate resolution of the 1997 inspection or the final outcome of any proceedings relating to the grand jury subpoena. An adverse resolution of the 1997 inspection or an adverse outcome of any proceedings relating to the grand jury subpoena could result in substantial fines or penalties, the effect of which could be material and adverse to Phoenix's business, financial condition, or results of operations. In addition, the pendency of the proceedings may have a material adverse effect on Phoenix's ability to obtain new business. PHOENIX'S GROWING INTERNATIONAL OPERATIONS SUBJECT IT TO ADDITIONAL RISKS. Phoenix derived approximately 82%, 78%, 88% and 92% of its total revenues from customers located outside of Canada in fiscal 1996, 1997, 1998 and the first quarter of fiscal 1999, respectively. Phoenix's growing international operations make Phoenix increasingly subject to: - difficulty in staffing and managing geographically disparate operations; - longer accounts receivable payment cycles; - exchange rate fluctuations; - compliance with a variety of foreign laws and regulations; - unexpected changes in regulatory requirements; - overlap of different tax structures; - greater difficulty in safeguarding intellectual property; - import and export licensing requirements; - trade restrictions; - changes in tariff rates; and - economic and political instability in international markets. Phoenix's business, results of operations or financial condition may be adversely affected by these factors. PHOENIX IS NOT SURE WHAT THE EFFECT OF THE RECENT ESTABLISHMENT OF THE EURO WILL BE ON PHOENIX'S FINANCIAL CONDITION OR RESULTS OF OPERATIONS. On January 1, 1999, eleven of the fifteen member countries of the European Union established fixed conversion rates between their sovereign currencies and the euro. As of that date, the participating countries have agreed to adopt the euro as their common legal currency. Phoenix cannot reasonably determine at this time the effect of the recent establishment of the euro on Phoenix's financial condition or results of operations. Due to numerous uncertainties, Phoenix is not sure what the effect of the recent establishment of the euro on Phoenix's financial condition or results of operations. Due to numerous uncertainties, Phoenix is not sure what effects one common currency will have on pricing or what the resulting impact, if any, will be on Phoenix's financial condition or results of operations. PHOENIX HAS RECURRING AMORTIZATION EXPENSE RESULTING FROM SUBSTANTIAL INTANGIBLE ASSETS. As of November 30, 1998, approximately $118 million of Phoenix's assets consisted of goodwill obtained through acquisitions. Goodwill represents the excess of consideration paid for acquisitions over the value of net tangible assets acquired. On a pro forma basis after giving effect to the merger, Phoenix would have carried approximately $136 million in goodwill at November 30, 1998. The substantial amount of goodwill results in significant recurring amortization expense, which for the fiscal year 20 ended August 31, 1998 and three months ended November 30, 1998 amounted to $2.2 million and $732,000. Future acquisitions could result in an increase in goodwill and associated amortization expense. Furthermore, any determination that a significant impairment of Phoenix's goodwill has occurred could require the write-off of the impaired portion. A write-off could adversely affect Phoenix's results of operations. PHOENIX MAY EXPERIENCE UNANTICIPATED DELAYS, COMPLICATIONS AND EXPENSES IN INTEGRATING MANAGEMENT INFORMATION SYSTEMS FROM RECENT ACQUISITIONS. Phoenix's business is dependent on its management information systems to provide services and manage its operations. Phoenix is currently in the process of integrating the disparate systems of the businesses recently acquired by it. If the merger is approved, Phoenix will have to integrate Chrysalis' systems as well. Phoenix may experience unanticipated delays, complications and expenses in integrating these systems. Further, these systems, once integrated, may not perform as expected and further modifications might be required. The failure by Phoenix to timely complete the integration of these systems, or the failure of these systems, once integrated, to perform as expected, could have a material adverse effect on Phoenix's business, financial condition and results of operations. PHOENIX'S OPERATIONS MAY BE DISRUPTED IF SYSTEMS FAILURE OR DATA CORRUPTION RESULT FROM THE YEAR 2000 ISSUE. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of Phoenix's computer programs that have date sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a systems failure or data corruption causing disruptions of operations. In that event, Phoenix may not be able to process transactions or engage in similar business activities. A failure by Phoenix, its suppliers or its customers to adequately address the Year 2000 issue of its existing systems and Chrysalis' systems in a timely manner could have a material adverse effect on the operations of Phoenix. For more information see "Management's Discussion and Analysis of Financial Condition and Results of Operations of Phoenix--Year 2000 Compliance" and "Management's Discussion and Analysis of Financial Condition and Results of Operations of Chrysalis--Year 2000 Compliance." LOSS OF INVESTMENT TAX CREDITS COULD NEGATIVELY IMPACT PHOENIX'S NET INCOME. Canadian and Quebec tax credits for research and development are a material part of Phoenix's net earnings. Any changes to the applicable Canadian and Quebec income tax laws and regulations governing these investment tax credits could have a material adverse impact on the net income of Phoenix. CHRYSALIS STOCKHOLDERS MAY FIND IT DIFFICULT TO ENFORCE CIVIL LIABILITIES IN CANADA. Phoenix is a Canadian corporation with its principal place of business in Canada. A majority of Phoenix's directors and officers, and some experts named in this proxy statement/prospectus are residents of Canada and/or are organized under the laws of Canada or a province thereof. All or a substantial portion of the assets of these persons and of Phoenix are located outside the United States. Consequently, it may be difficult for United States investors to effect service within the United States upon Phoenix, its directors or officers and experts. In addition, U.S. investors may find it difficult to realize in the United States upon judgments of courts of the United States predicated upon civil liabilities under the Securities Act. In addition, special rules may apply and it may be difficult for investors to: - enforce in Canadian courts judgments of U.S. courts obtained in actions against Phoenix or these persons based upon the civil liability provisions of the U.S. federal securities laws or the securities or blue sky laws of any state within the United States; or 21 - enforce, in original actions in Canadian courts, liabilities against Phoenix or these persons predicated upon the U.S. federal securities laws or any state securities or blue sky laws. CHRYSALIS AND PHOENIX HAVE MADE STATEMENTS CONCERNING FUTURE FINANCIAL RESULTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES WHICH MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN THESE STATEMENTS. This proxy statement/prospectus contains forward-looking statements, including statements concerning possible or assumed future results of operations of Chrysalis and Phoenix. Some of these statements appear under: - "The Merger;" - "Management's Discussion and Analysis of Financial Condition and Results of Operations of Phoenix;" - "Description of Chrysalis;" - "Management's Discussion and Analysis of Financial Condition and Results of Operations of Chrysalis;" and - "Unaudited Pro Forma Consolidated Financial Information." Forward-looking statements include those preceded by, followed by or that include the words "intends," "believes," "expects," "anticipates" or similar words. These statements constitute forward-looking statements for purposes of the safe harbor contained in the Private Securities Litigation Reform Act of 1995. You should understand that the following important factors, in addition to those discussed above and elsewhere in this document, could affect the future results of Chrysalis and Phoenix, and could cause those results to differ materially from those expressed in the forward-looking statements: - The success in obtaining the necessary regulatory and stockholder approvals for the consummation of the merger; - The satisfaction of the closing conditions to the merger agreement, some of which are beyond the companies' control; - The consummation of the merger; - The failure to realize fully expected cost savings from the merger; - Greater than expected costs or difficulties related to the downsizing of Chrysalis and to the integration of the businesses of the companies; - The degree of the companies' success in obtaining new contracts; - The scope and duration of new clinical trials and preclinical studies, and the loss, downsizing or delay in existing drug development trials; - The lengthening of the lead time to convert proposals into contracts and revenues; - The ability to enter, the timing of entry and the profitability of entering new markets; - Any claims for patent infringement; - Unanticipated costs in connection with Year 2000 conversion; - Adverse changes in economic conditions in the markets served by the companies; and - The ability to obtain future financing. 22 THE MERGER BACKGROUND OF THE MERGER In the spring of 1998, Chrysalis' management had several discussions with Chrysalis' Board regarding strategic alternatives available to address operational issues. The impetus for much of this discussion was the delay and subsequent loss of a large contract to manage a clinical trial for a major pharmaceutical client. During the spring of 1998, Chrysalis management advised the Chrysalis Board that, as a result of the loss of this major contract, Chrysalis should begin to consider alternatives if Chrysalis was unable to obtain additional business to replace the loss of the large clinical study by year-end 1998. See "Description of Chrysalis--Loss of Large Clinical Trial," and "Description of Chrysalis--Backlog." On May 11, 1998, the Chrysalis Board authorized Chrysalis management to retain Vector Securities to pursue potential financings and other strategic alternatives, including identifying financing partners, potential acquirors, or strategic partners. Chrysalis management and Vector Securities prepared a list of companies which they believed might be interested in pursuing strategic alternatives with Chrysalis. Between June and September of 1998, Vector Securities contacted approximately 40 potential strategic and financial partners to assess their interest in a transaction involving Chrysalis. Between the middle of June and the middle of November 1998, Chrysalis management had a number of discussions with the Bank regarding potential defaults and, after September 30, 1998, existing defaults under the Bank's loan agreement. These discussions also addressed the possibility of obtaining from the Bank a waiver of the defaults, an amendment to the loan agreement or forbearance. On June 16 and 17, 1998, a meeting of the Chrysalis Board was held. At the meeting, representatives of Vector Securities presented information regarding potential financings and strategic alternatives. The Chrysalis Board authorized management to pursue further potential financings and strategic alternatives with the assistance of Vector Securities. On July 1, 1998, a meeting of the Chrysalis Board was held. At the meeting, the Chrysalis Board created a Special Committee to consider and evaluate potential financings and other strategic alternatives and to make recommendations to the Chrysalis Board. Desmond H. O'Connell, Jack Barbut and Photios Paulson were appointed members of the Special Committee. In addition, Chrysalis management updated the Chrysalis Board regarding their discussions with Vector Securities about potential financings and other strategic alternatives. Between July and October 1998, Chrysalis management and representatives of Vector Securities updated periodically the members of the Special Committee of the Chrysalis Board on an informal basis regarding potential financings and other strategic alternatives being pursued by Chrysalis management and Vector Securities. On July 21, 1998, a representative of Pennsylvania Merchant Group, Phoenix's financial advisor, contacted Mr. Schmitt and Vector Securities to express Phoenix's interest in evaluating a possible transaction with Chrysalis. Phoenix and Chrysalis executed a confidentiality agreement on July 22, 1998 which provided for, among other things, Phoenix's receipt and treatment of confidential information regarding Chrysalis. On July 28, 1998, senior management of Chrysalis and Phoenix, and representatives from their financial advisors, met to discuss Chrysalis' business and its reasons for exploring strategic alternatives. Mr. Schmitt attended the meeting on behalf of Chrysalis. John Hooper, Phoenix's Chairman and Chief Executive Officer, attended the meeting on behalf of Phoenix. At that meeting, Phoenix and Chrysalis discussed generally the proposed structure of a potential transaction and Chrysalis' various business lines. In August and September of 1998, Chrysalis provided to Phoenix and its advisors various information regarding Chrysalis' operations, financial condition and results of operations. In addition, during that 23 same period, members of Phoenix management, its advisors and accountants visited Chrysalis' U.S. and European facilities and conducted a number of discussions with Chrysalis management regarding its various operations and financial results. On August 18, 19 and 20, 1998, members of Phoenix management and its advisors visited Chrysalis' Austin, Princeton and Scranton facilities. Each of these visits included meetings with the operational management of Chrysalis responsible for the businesses conducted at that location. On August 24, 1998, Phoenix's financial advisor submitted to Chrysalis a request for additional information. During late August and throughout September of 1998, Chrysalis provided to Phoenix and its advisors the additional information requested. On September 9, 1998, representatives of Chrysalis met with representatives of the Bank to discuss Chrysalis' cash projections and the status of potential strategic alternatives. Mr. O'Connell, Mr. Schmitt and John G. Cooper, Chrysalis' Senior Vice President and Chief Financial Officer, attended the meeting on behalf of Chrysalis. On September 10, 1998, Chrysalis received a letter of intent from a bidder other than Phoenix which had conducted limited due diligence meetings with Chrysalis management in August 1998. The other bidder is a company founded by individuals who had previously served as management of contract research organizations. The group was interested in acquiring and operating contract research organizations. Chrysalis does not believe the other bidder had any operations as of September 1998. The letter of intent contemplated an acquisition of Chrysalis' preclinical business. The letter of intent contemplated a cash purchase price, with a portion of the consideration being contingent on 1998 and 1999 revenues. In addition, the terms of the letter of intent indicated that the other bidder would not assume any of Chrysalis' debt. The letter contained a number of conditions, including completion of due diligence and satisfactory arrangements to repay Chrysalis' debt related to its preclinical business. On September 14, 1998, Chrysalis received a letter from Pennsylvania Merchant Group, indicating Phoenix's potential interest in acquiring either Chrysalis or Chrysalis' transgenics and preclinical operations. Phoenix indicated that it would be willing to pay cash or Phoenix common shares as consideration for an acquisition of the transgenics and preclinical operations. Phoenix also indicated that it would be willing to pay Phoenix common shares as consideration for an acquisition of Chrysalis in its entirety. The letter was a non-binding indication of interest in a potential acquisition of Chrysalis. Between September 10, 1998 and September 16, 1998, Vector Securities had discussions with Phoenix and the other bidder regarding the scope and potential terms of a potential acquisition. On the morning of September 15, 1998, a meeting of the Special Committee of the Chrysalis Board was held. Two of the three members of the Special Committee were present by conference call. In addition, Mr. Schmitt, Mr. Cooper and a representative of Jones, Day, Reavis & Pogue were present by conference call. At the meeting, Mr. Schmitt summarized the indications of interest that Chrysalis had received. After the presentation, the members of the Special Committee and Mr. Schmitt engaged in extensive discussions regarding the status of potential financings and other strategic alternatives. On the evening of September 15, 1998, another meeting of the Special Committee of the Chrysalis Board was held. Two of the three members of the Special Committee were present by conference call. In addition, Mr. Schmitt, Mr. Cooper, a representative of Jones, Day, Reavis & Pogue and representatives of Vector Securities were present by conference call. At the meeting, the Vector Securities representatives updated the Special Committee regarding the status of discussions concerning potential financings and a possible sale of Chrysalis. The members of the Special Committee engaged in extensive discussions with management and Vector Securities regarding these matters and recommended that management and Vector Securities pursue further discussions with Phoenix, the other bidder and any other potentially interested persons. On September 16, 1998, a meeting of the Special Committee of the Chrysalis Board was held. All three members of the Special Committee were present by conference call. In addition, Mr. Schmitt, 24 Mr. Cooper, a representative of Jones, Day, Reavis & Pogue and representatives of Vector Securities were present by conference call. After a preliminary discussion of the duties and responsibilities of the Chrysalis directors under applicable law, the Vector Securities representatives updated the Special Committee regarding the status of discussions concerning the possible sale of all or a portion of Chrysalis and reported on discussions held since the prior day's meetings. The members of the Special Committee engaged in extensive discussions with Chrysalis management and the Vector Securities representatives regarding these matters and recommended that management and Vector Securities pursue further discussions with Phoenix, the other bidder and any other potentially interested persons. On September 17, 1998, Chrysalis received a letter from the other bidder revising its prior letter of intent and a letter from Phoenix revising its prior letter. Each of these letters contemplated an acquisition of all of Chrysalis' operations. The letter of intent from the other bidder contemplated a cash transaction in which the other bidder would assume Chrysalis' debt. The letter of intent included further conditions, including modifications of existing debt and cooperation and accommodations by Chrysalis' lenders. The Phoenix letter continued to be a non-binding indication of interest. Phoenix's letter contemplated the issuance of Phoenix common shares as consideration for the acquisition. On September 18, 1998, representatives of Chrysalis and representatives of Vector Securities met with representatives of the Bank to discuss Chrysalis's cash projections and the prospects and timing for a potential sale of Chrysalis. Mr. Schmitt, Mr. O'Connell and Mr. Cooper attended the meeting on behalf of Chrysalis. Representatives of the Bank indicated that they were unwilling to amend the senior secured loan agreement or to waive potential defaults. On September 18, 1998, a meeting of the Special Committee of the Chrysalis Board was held. All three members of the Special Committee were present by conference call. In addition, Mr. Schmitt, Mr. Cooper, a representative of Jones, Day, Reavis & Pogue and representatives of Vector Securities were present by conference call. A representative of Vector Securities provided an update of the status of discussions concerning the possible sale of all or a portion of Chrysalis and outlined the terms and conditions of the proposals received from Phoenix and the other bidder. The members of the Special Committee engaged in extensive discussions with Chrysalis management and the Vector Securities representatives regarding these issues and recommended that Chrysalis management and Vector Securities pursue further discussions regarding the proposals. On September 20, 1998, Vector Securities contacted the other bidder to confirm its capitalization and to determine the status of equity and debt financing that would be required for the other bidder to complete an acquisition of Chrysalis' operations. On September 20, 1998, a meeting of the Chrysalis Board was held. All of the Chrysalis directors were present by conference call. Also present were a representative of Jones, Day, Reavis & Pogue and representatives of Vector Securities. Mr. Schmitt briefly updated the Chrysalis Board regarding the status of discussions regarding a potential sale of Chrysalis. The representative of Jones, Day, Reavis & Pogue explained to the Chrysalis Board their duties and responsibilities under applicable law in considering the proposals. A representative of Vector Securities then presented information regarding the terms and conditions, including contingencies, of the proposals received from Phoenix and the other bidder and the results of discussions with other potentially interested parties. The members of the Chrysalis Board discussed extensively the proposals received from Phoenix and the other bidder. In addition, Mr. Schmitt addressed questions and concerns raised by the members. At that point, Mr. Cooper joined the meeting by conference call. Mr. Cooper addressed financial questions and concerns raised by the members. In addition, Mr. Cooper updated the Chrysalis Board on his recent discussions with the Bank. The members of Chrysalis' Board of Directors also discussed ongoing discussions by management and Vector Securities with other potentially interested parties. 25 On September 22, 1998, members of senior management of both Phoenix and Chrysalis, as well as their financial advisors, met at Chrysalis' headquarters to discuss various aspects of the structure and valuation of the proposed transaction. Mr. Schmitt, Mr. Cooper and Leif Modeweg, Chrysalis' Senior Vice President and Director of International Operations, attended the meeting on behalf of Chrysalis. Dr. Hooper and Jean-Yves Caloz, then Phoenix's Senior Vice President and Chief Financial Officer, attended the meeting on behalf of Phoenix. These discussions covered purchase price, proposed structure and related matters, including potential shut downs and related costs. On September 23, 1998, a meeting of Chrysalis's Board of Directors was held. All of the members of the Chrysalis Board were present in person or by conference call. Also present in person were Mr. Cooper, Mr. Modeweg, a representative of Jones, Day, Reavis & Pogue and representatives of Vector Securities. The representative of Jones, Day, Reavis & Pogue explained to the Chrysalis Board their duties and responsibilities under applicable law in considering any proposals presented for their consideration. The Vector Securities representatives then presented information regarding strategic alternatives, including a summary of contacts made by Vector Securities to ascertain the interest of potential purchasers in a transaction involving Chrysalis. The Vector Securities representatives then described the two written proposals received from Phoenix and the other bidder, copies of which had been previously provided to the members of the Chrysalis Board. Vector Securities then responded to several questions posed by members of the Chrysalis Board regarding strategic alternatives. The members of the Chrysalis Board, Chrysalis management and the Vector Securities representatives engaged in extensive discussions regarding the process conducted by Vector Securities, the contacts made by Vector Securities and the terms and conditions of the proposals. Each member of the Special Committee of the Chrysalis Board also discussed the proposals and consideration given to the alternatives presented and made their recommendation with respect to the proposals. The Chrysalis Board then authorized the officers of Chrysalis to discuss and negotiate with Phoenix a merger or other business combination involving Chrysalis and Phoenix. Finally, Mr. Cooper updated the Chrysalis Board regarding Chrysalis' financial condition and the status of discussions with the Bank. On September 29, 1998, a meeting of the Phoenix Board was held. All of the members of the Phoenix Board were present. Also present were members of Phoenix management, including Mr. Caloz. Dr. Hooper made a presentation regarding the potential acquisition of Chrysalis, the potential strategic opportunities the acquisition presented and a general outline of the potential terms and structure of the transaction. On behalf of Pennsylvania Merchant Group, Mr. McCarthy gave a presentation of the financial aspects of the transaction. The Phoenix Board authorized Phoenix management to commence legal and financial due diligence of Chrysalis and to proceed with negotiations regarding terms and structure. Mr. McCarthy abstained from the Board action due to a potential conflict of interest. In late September and October 1998, representatives of Phoenix conducted additional due diligence and discussed with Chrysalis management estimates of costs associated with shutting down some of Chrysalis' clinical operations in the United States and Europe. During the same time period, representatives of Pepper Hamilton LLP, Phoenix's legal advisors with respect to the merger, conducted legal due diligence with respect to Chrysalis. Between early October and the middle of November 1998, Chrysalis and Phoenix negotiated the terms of the merger agreement. These negotiations addressed purchase price, treatment of options, scope of representations and warranties, scope of covenants and other matters. On October 2, 1998, members of senior management of Phoenix and Chrysalis and their financial advisors met at Chrysalis' headquarters. Mr. Schmitt, Mr. Cooper and Mr. Modeweg, together with three members of Chrysalis middle management, attended the meeting on behalf of Chrysalis. Dr. Hooper, Susan Thornton, President and Chief Operating Officer of Phoenix's U.S. Phase II-IV 26 operations, and Lucien Steru, President and Chief Operating Officer of Phoenix's European Operations, attended the meeting on behalf of Phoenix. These discussions covered due diligence matters, potential shut downs and related costs. In a series of discussions in the second half of October 1998 and the first half of November 1998, management of Chrysalis and Phoenix and their respective advisors reviewed and evaluated the estimated costs of shutting down some of Chrysalis' clinical operations and negotiated purchase price and other terms of the proposed transaction. On October 23, 1998, members of senior management of both Phoenix and Chrysalis, as well as their financial advisors, met at Chrysalis' headquarters to discuss various aspects of the structure and valuation of the proposed transaction. Mr. Schmitt, Mr. Cooper and Stephane Bulle, Vice President of Finance for Chrysalis' European operations, attended the meeting on behalf of Chrysalis. Dr. Hooper and Mr. Caloz attended the meeting on behalf of Phoenix. These discussions covered purchase price, proposed structure and related matters, including potential shut downs and related costs. On October 27, 1998, representatives of Chrysalis and Vector Securities met again with representatives of the Bank to discuss Chrysalis' defaults as of the end of its third quarter under the loan agreement. Mr. O'Connell, Mr. Schmitt and Mr. Cooper attended the meeting on behalf of Chrysalis. At this meeting, the Bank proposed a forbearance agreement, including a pledge of cash by Chrysalis to the Bank, to address the existing defaults. On October 28, 1998, a meeting of the Phoenix Board was held. All of the members of the Phoenix Board were present. Mr. Caloz was also present. Dr. Hooper and Mr. Caloz reported on the status of the business, legal and financial due diligence, as well as the status of the negotiations of the merger agreement. The Phoenix Board instructed management to complete due diligence and proceed with negotiating the merger agreement. On November 4, 1998, a meeting of the Phoenix Board was held. All of the members of the Phoenix Board other than Mr. Spilker were present in person or by telephone. Mr. Caloz was also present. Dr. Hooper and Mr. Caloz updated the Phoenix Board on the further business, legal and financial due diligence conducted with respect to Chrysalis. The update included a discussion of the estimated costs associated with shutting down Chrysalis' clinical operations in the United States and Europe. Mr. Caloz also reported on the structure, terms and conditions of the merger agreement. The Board approved the merger agreement in principle with those changes recommended and approved by Dr. Hooper and Mr. Caloz. Mr. McCarthy abstained from the Board action due to a potential conflict of interest. In addition, the Phoenix Board authorized and instructed Dr. Hooper and Mr. Caloz to complete negotiation of the merger agreement. On November 12, 1998, representatives of Chrysalis, Phoenix and their respective advisors met with representatives of the Bank to discuss the proposed forbearance agreement. Mr. Cooper attended the meeting on behalf of Chrysalis. Mr. Caloz attended the meeting on behalf of Phoenix. The parties discussed alternative arrangements to address Chrysalis' defaults. These alternatives included the possibility of the Bank granting to Phoenix an option to acquire the debt owed by Chrysalis to the Bank. During subsequent conversations later in the day, the Bank, Chrysalis and Phoenix agreed to an arrangement. Under the arrangement, the Bank agreed not to exercise its rights and remedies with respect to defaults under the loan agreement until January 31, 1999 and Chrysalis agreed to pledge $3.0 million of cash collateral to the Bank. The Bank, Chrysalis and Phoenix also agreed that the forbearance period would be extended until March 31, 1999 and Chrysalis' cash collateral pledge would be released if Phoenix delivered to the Bank a guaranty of Chrysalis' obligations to the Bank and granted cash collateral to secure the guaranty. Finally, Phoenix and the Bank agreed that, if Phoenix gave the guaranty and cash collateral, the Bank would give Phoenix an option to purchase Chrysalis' debt. 27 On November 12, 1998 and November 13, 1998, representatives of Chrysalis and Phoenix and their legal counsel continued to negotiate the merger agreement. On November 13, 1998, representatives of Chrysalis, Phoenix and the Bank and their legal counsel negotiated the forbearance agreement. On November 12, 1998, a meeting of the Phoenix Board was held with all members other than Mr. Goldman and Mr. Spilker present in person or by conference call. Mr. Caloz was also present by conference call. Dr. Hooper and Mr. Caloz reported on the status of the merger agreement negotiations and described the changes which had been negotiated since the prior Phoenix Board meeting. Mr. Caloz also reported on the meeting with the Bank, including the status of Chrysalis' defaults, the Bank's unwillingness to waive the defaults, and the Bank's willingness to grant to Phoenix an option to acquire Chrysalis' debt to the Bank. Mr. Caloz then described the proposed forbearance agreement, guaranty, pledge and assignment and option letter. Mr. Caloz also reported on his discussions with Phoenix's lender regarding refinancing the Chrysalis debt, including the debt to the Bank, and the availability of funds to grant the cash collateral under the pledge and assignment. The Phoenix Board reaffirmed its approval of the merger agreement with any additional changes recommended and approved by Dr. Hooper and Mr. Caloz. The Phoenix Board also approved the forbearance agreement, guaranty, pledge and assignment and option letter, in a form acceptable to Dr. Hooper and Mr. Caloz. Mr. McCarthy abstained from the Board action due to a potential conflict of interest. On November 13, 1998, a meeting of the Chrysalis Board was held. All of the directors of Chrysalis were present at the meeting by conference call. Mr. Cooper and representatives of Jones, Day, Reavis & Pogue and Vector Securities were also present by conference call. After a discussion regarding the responsibilities of the Chrysalis directors under applicable laws, a representative of Jones, Day, Reavis & Pogue explained to the Chrysalis Board the various provisions of the merger agreement and related documents, drafts of which had been previously circulated to the Board of Directors. In addition, subsequent revisions made to the circulated draft merger agreement were also discussed. After the discussions regarding the terms of the merger agreement, representatives of Vector Securities presented information regarding the financial terms of the merger agreement, including the aggregate purchase price and per share merger consideration contemplated by the draft merger agreement. At this meeting, Vector Securities delivered to the Chrysalis Board the opinion of Vector Securities that, subject to the matters set forth in the Vector Securities' opinion, the per share merger consideration was fair from a financial point of view to Chrysalis stockholders. A copy of Vector Securities' fairness opinion is attached to this proxy statement/prospectus as Appendix B. After extensive discussion regarding the terms of the proposed merger agreement and Chrysalis' financial condition, the Chrysalis Board unanimously approved the merger agreement and the other documents and related transactions, including the merger, and recommended that the Chrysalis stockholders adopt the merger agreement. Between November 13, 1998 and November 17, 1998, representatives of Phoenix and Chrysalis and their legal counsel finalized the merger agreement. During the same period, representatives of the Bank, Phoenix and Chrysalis and their legal counsel continued to negotiate the forbearance agreement and related documents. On November 17, 1998, a meeting of the Chrysalis Board was held to discuss proposed revisions to the merger agreement draft approved at the November 13, 1998 Chrysalis Board meeting. All of the Chrysalis directors other than Mr. Paulson were present at the meeting, either in person or by conference call. Representatives of Jones, Day, Reavis & Pogue and representatives of Vector Securities were also present by conference call. Representatives of Jones, Day, Reavis & Pogue advised the Chrysalis Board regarding their duties and responsibilities under applicable law in connection with the approval of the merger agreement and the merger. Representatives of Jones, Day, Reavis & Pogue also explained to the Chrysalis Board the proposed revisions to the merger agreement. In addition, Vector Securities indicated that the proposed revisions would not result in a withdrawal of its fairness opinion. After extensive discussion, including Phoenix's expressed reasons for the proposed revisions and the financial and legal implications of the revisions, the Board of Directors, by a unanimous vote of all 28 directors present at the meeting, approved the revised draft merger agreement and related transactions, including the merger, and recommended that the Chrysalis stockholders adopt the merger agreement. Chrysalis and Phoenix executed the merger agreement on November 18, 1998. The Bank, Chrysalis and Phoenix executed the forbearance agreement on November 18, 1998. Phoenix and Chrysalis each made a public announcement of the proposed merger on November 18, 1998. On November 19, 1998, Phoenix delivered to the Bank the guaranty of Chrysalis' obligations to the Bank, and granted the cash collateral to secure the guaranty. On the same date, Phoenix obtained from the Bank an option to purchase Chrysalis' debt owed to the Bank. On March 24, 1999, Chrysalis and Phoenix executed an amendment to the merger agreement to change from March 31, 1999 to April 30, 1999 the dates in some of the termination provisions. REASONS FOR THE MERGER CHRYSALIS The Chrysalis Board has approved and adopted the merger agreement. The Chrysalis Board believes that the merger is fair and in the best interests of Chrysalis and its stockholders and recommends the adoption of the merger agreement by the stockholders of Chrysalis at the special meeting. In reaching its decision to approve the merger agreement and the transactions contemplated by the merger agreement, the members of the Chrysalis Board considered a number of factors. These factors include: - Chrysalis' inability to generate sufficient new clinical contracts to compensate fully for the lost revenues associated with the loss of the large clinical trial that materially and adversely affected Chrysalis' results of operations for the fourth quarter of 1997 and for 1998; - Chrysalis' defaults under its senior secured loan agreement and the Bank's expressed unwillingness to execute waivers or grant forbearance of its rights unless Chrysalis entered into a transaction similar to the merger; - Discussions by Chrysalis management and Vector Securities with other parties regarding a potential financing with Chrysalis or acquisition of Chrysalis; - The Chrysalis Board's analysis of the offers it received from Phoenix and the other bidder, the level of due diligence previously performed by Phoenix and the other bidder and the Chrysalis Board's belief regarding the ability of Phoenix and the other bidder to complete a proposed transaction; - The Chrysalis Board's perception that the merger will result in a combined entity with substantially greater resources and a more diversified product base, service capacity and international presence; - The Chrysalis Board's view that Phoenix would be able to provide resources to ease Chrysalis' liquidity constraints, to work with the Bank to obtain forbearance on terms acceptable to Chrysalis and to satisfy Chrysalis' obligations to its lenders, and Phoenix's willingness to do so; - The terms and conditions of the merger agreement, including the merger consideration, covenants and termination fees potentially payable thereunder; - The written opinion of Vector Securities to the effect that, as of the date of the opinion and based upon and subject to the matters stated therein, the merger consideration was fair, from a financial point of view, to Chrysalis' stockholders; - Information regarding historical market prices of the Chrysalis common stock and the Phoenix common shares; 29 - General trends affecting the contract research organization industry, particularly recent consolidations; and - The benefits to be derived by directors and executive officers of Chrysalis in the merger other than the consulting agreement between Phoenix and Mr. Schmitt that was entered into after the Chrysalis Board approved the merger agreement. This summary of the factors considered by the Chrysalis Board is not complete. In view of the wide variety of factors considered, the Chrysalis Board did not find it practicable, and did not, quantify or otherwise attempt to assign relative weights to the factors. In addition, individual members of the Chrysalis Board may have given different weights to different factors. PHOENIX Phoenix believes that as a result of the merger and through the addition of the preclinical animal toxicology business of Chrysalis, unlike most other contract research organizations it will be able to provide all major functions required for drug development, from just after drug discovery through registration of the final product and post-marketing studies. Phoenix believes the acquisition of Chrysalis will also add further balance to its service profile, with the business distributed among four main areas: - discovery support/preclinical; - Phase I clinical studies; - Phase II-IV clinical studies; and - laboratory services. Phoenix believes that balancing its business mix in this way will lessen the financial impact of a possible downturn in any one market area or a possible cancellation of one or more major contracts in Phase II-IV clinical research. Phoenix's acquisition of Chrysalis' transgenics business will add specialized talents in the growing areas of the use of genomics to develop new drugs. Phoenix will obtain Chrysalis' exclusive license to the patents used in Chrysalis' transgenics business. This will provide new opportunities for Phoenix. With the addition of Chrysalis' clinical operations in Eastern Europe, Germany and Scandinavia, Phoenix will strengthen its presence in Europe and enhance its critical mass in its global Phase II-IV clinical operations. Phoenix also believes that shutting down Chrysalis' executive offices, its clinical operations in Austin, Texas, Cham, Switzerland and Dusseldorf, Germany, and consolidating Chrysalis' operations in Mannheim, Germany and Israel, will result in substantially improved operating results. RECOMMENDATION OF THE CHRYSALIS BOARD The Chrysalis Board has approved the merger agreement, and has determined that the merger agreement and the related transactions, including the merger, are advisable and are fair and in the best interests of Chrysalis and its stockholders. Accordingly, the Chrysalis Board recommends that the Chrysalis stockholders vote FOR the proposal to adopt the merger agreement. OPINION OF THE FINANCIAL ADVISOR TO THE CHRYSALIS BOARD The full text of the opinion of Vector Securities, dated November 13, 1998 which sets forth the assumptions made, procedures followed, matters considered and limitations on the review undertaken, is attached as Appendix B to this proxy statement/prospectus and is incorporated herein by reference. You should read the opinion carefully in its entirety. The summary of the opinion of Vector Securities set forth in this proxy statement/prospectus is qualified in its entirety by reference to the full text of the opinion. 30 Chrysalis retained Vector Securities as its financial advisor to assist Chrysalis in evaluating its strategic alternatives, including potential financings. In connection with the engagement, Chrysalis requested Vector Securities to render an opinion as to whether or not the consideration offered to the Chrysalis stockholders by Phoenix in the merger is fair, from a financial point of view, to the Chrysalis stockholders. In connection with the Chrysalis Board's consideration of the merger, Vector Securities delivered its oral opinion, which was subsequently confirmed in writing, that, as of November 13, 1998, and based on its review and assumptions and subject to the limitations on the review undertaken as set forth in the opinion, the consideration to be received by the Chrysalis stockholders in the merger is fair to the stockholders from a financial point of view. The opinion of Vector Securities was prepared at the request of and for the use of the Chrysalis Board for the purposes of its evaluation of the proposed merger. The opinion of Vector Securities did not constitute a recommendation to the Chrysalis Board with respect to the approval of the proposed merger. It also does not constitute a recommendation to any Chrysalis stockholder as to how any stockholder should vote with respect to the merger. In arriving at its opinion, Vector Securities, among other things: - reviewed Chrysalis' Annual Reports, Forms 10-K and related financial information for the three fiscal years ended December 31, 1997, Forms 10-Q and related unaudited financial information for the three and six months ended March 31, 1998 and June 30, 1998 and draft of Form 10-Q and related unaudited financial information for the nine months ended September 30, 1998; - reviewed Phoenix's Annual Reports and related financial information for the three fiscal years ended August 31, 1998; - reviewed information, including financial forecasts, relating to the respective businesses, earnings, cash flows, assets and prospects of Chrysalis and Phoenix furnished to Vector Securities by Chrysalis and Phoenix; - conducted discussions with members of senior management of Chrysalis and Phoenix concerning their businesses and prospects; - reviewed the historical market prices and trading activity for the Chrysalis common stock and Phoenix common shares and compared the prices and trading histories with those of other relevant publicly traded companies; - compared the financial position and operating results of Chrysalis and Phoenix with those of other relevant publicly traded companies; - compared the proposed financial terms of the merger with the financial terms of other relevant transactions; - reviewed the financial terms of the merger in the draft Agreement and Plan of Merger, dated November 12, 1998; and - reviewed other appropriate financial studies and analyses and performed other investigations and took into account other appropriate matters. In preparing its opinion, Vector Securities relied on the accuracy and completeness of all information that was publicly available, supplied or otherwise made available to Vector Securities by or on behalf of Chrysalis and Phoenix. Vector Securities did not attempt to independently verify or assume any responsibility for independent verification of any such information. Vector Securities assumed that the financial forecasts examined by it were reasonably prepared on bases reflecting the best available estimates and judgments of the respective managements of Chrysalis and Phoenix as to the future financial performance of Chrysalis and Phoenix. Vector Securities noted that, as of the date of its opinion, Chrysalis did not have sufficient funds to continue its operations beyond March 1999 and had no immediate sources of equity or other financing. Vector Securities did not make or obtain any independent evaluation or appraisal of the assets of 31 Chrysalis or Phoenix. The opinion of Vector Securities is based upon economic, market and other conditions existing on the date of the opinion. Furthermore, Vector Securities expressed no opinion as to the value of the Phoenix common shares to be issued in the merger when issued or the price or trading range at which the Phoenix common shares will trade at any time following the date of the Vector opinion. In rendering its opinion, Vector Securities assumed that: - the average closing sales price per Phoenix common share for the thirty days following the public announcement of the merger would be substantially equivalent to the average closing sales price per Phoenix common share for the thirty days prior to the public announcement of the merger; - the transactions contemplated by the proposed merger will be consummated on the terms described in the draft agreement, including that the merger would qualify as a reorganization under the provisions of Section 368 of the Code, without any material waiver or modification; and - obtaining any necessary regulatory approvals for the merger will not have an adverse effect on Chrysalis or Phoenix. The opinion of Vector Securities does not address the relative merits of the merger and any other transactions or business strategies discussed by the Chrysalis Board as alternatives to the merger, or the decision of the Chrysalis Board to proceed with the merger. Chrysalis did not place any limitations upon Vector Securities with respect to the procedures followed or factors considered in rendering its opinion. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant quantitative methods of financial analyses and the application of those methods to the particular circumstances. Therefore, the opinion is not readily susceptible to partial analysis or summary description. Vector Securities did not attribute any particular weight to analyses or factors considered by it. Rather, Vector Securities made qualitative judgements as to the significance and relevance of each analysis or factor. Accordingly, Vector Securities believes that its analysis must be considered as a whole. Vector Securities believes that considering any portion of the analysis or the factors considered, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying its opinion. In its analyses, Vector Securities made numerous assumptions with respect to Chrysalis, Phoenix and industry performance, general business and economic conditions and other matters. Many of these matters are beyond the control of Chrysalis and Phoenix. Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than as set forth in the opinion. In addition, analyses relating to the value of businesses do not purport to be appraisals or to reflect the prices at which businesses may actually be sold. Because the analyses are inherently subject to uncertainty, neither Vector Securities nor any other person assumes responsibility for their accuracy. The following paragraphs summarize the significant analyses performed by Vector Securities in arriving at its opinion. STOCK TRADING HISTORY. Vector Securities reviewed the history of the trading prices and volume for the Chrysalis common stock and the Phoenix common shares, separately and in relation to each other, a 32 market index and a comparable company index. The comparable company index included the following contract research organizations: - ClinTrials Research Inc. - PAREXEL International Corporation - Covance Inc. - Pharmaceutical Product Development, Inc. - ICON Public Limited Company - Premier Research Worldwide, Ltd. - Kendle International Inc. - Quintiles Transnational Corporation
The companies listed above are referred to as the "comparable companies." 33 SELECTED COMPARABLE PUBLIC COMPANY ANALYSIS. Using publicly available information, Vector Securities compared selected historical and projected financial, operating and stock market performance data of Chrysalis to the corresponding data of the comparable companies. Vector Securities compared multiples of total enterprise value, which was determined by taking market value plus debt minus cash and cash equivalents, to latest twelve month revenue, earnings before interest, taxes, depreciation and amortization ("EBITDA") and earnings before interest and taxes ("EBIT"). Vector Securities also compared the multiple of stock price to latest twelve month earnings per share and the multiple of market capitalization to tangible book value. The latest twelve month EBITDA, EBIT and earnings per share for Chrysalis were not meaningful. The multiples for Chrysalis and the comparable companies were as follows:
COMPARABLE COMPARABLE COMPARABLE COMPANIES COMPANIES COMPANIES MULTIPLES CHRYSALIS LOW HIGH MEDIAN - -------------------------------------------------------------- ----------- ------------- ------------- ------------- Latest twelve month revenue................................... 0.6x 0.6x 5.2x 2.6x Latest twelve month EBITDA.................................... N/M 14.5x 31.5x 17.6x Latest twelve month EBIT...................................... N/M 21.3x 37.7x 25.7x Latest twelve month earnings per share........................ N/M 30.4x 55.1x 38.1x Tangible book value........................................... 2.4x 1.0x 12.4x 4.1x
The multiples derived from this analysis were applied to Chrysalis' financial results to determine a range of implied values for Chrysalis. In reviewing which multiples of the comparable companies were most relevant, Vector Securities took into account that Chrysalis was downsizing a significant portion of its clinical business. In addition, Vector Securities considered that, as of the date of its opinion, Chrysalis did not have sufficient funds to continue its operations beyond March 1999 and had no immediate sources of equity or other financing. Based on this analysis, Vector Securities derived an equity value range for Chrysalis of $2.3 million to $9.3 million, or $0.20 to $0.80 per fully diluted share. With respect to Phoenix and the comparable companies, using publicly available information, Vector Securities compared selected historical and projected financial, operating and stock market performance data of Phoenix to the corresponding data of the comparable companies. Vector Securities compared multiples of total enterprise value to latest twelve month revenue and EBIT. Vector Securities also compared multiples of stock price to latest twelve month earnings per share, 1998 calendar year estimated earnings per share and 1999 calendar year estimated earnings per share. The 1998 and 1999 calendar year earnings per share estimates for Phoenix and the comparable companies were derived from Zack's Investment Research, Inc., dated November 8, 1998, and I/B/E/S International, Inc., dated November 11, 1998. The multiples for Phoenix and the comparable companies were as follows:
COMPARABLE COMPARABLE COMPARABLE COMPANIES COMPANIES COMPANIES MULTIPLES PHOENIX LOW HIGH MEDIAN - ---------------------------------------------------------------- ----------- ------------- ------------- ------------- Latest twelve months revenue.................................... 1.8x 0.6x 5.2x 2.6x Latest twelve months EBIT....................................... 20.4x 21.3x 37.7x 25.7x Latest twelve months earnings per share......................... 25.2x 30.4x 55.1x 38.1x 1998 calendar year estimated earnings per share................. 24.0x 28.8x 44.9x 35.2x 1999 calendar year estimated earnings per share................. 18.1x 21.9x 32.3x 28.6x
The multiples derived from this analysis were applied to Phoenix's financial results to determine a range of implied values for Phoenix. Based on this analysis, Vector Securities derived an equity value range for Phoenix of $276.0 million to $323.0 million, or $11.08 to $12.94 per fully diluted share. The multiples of the comparable company analysis were also applied to financial forecasts for Phoenix, 34 provided by Phoenix management, for the fiscal year ending August 31, 1999 to determine a range of projected implied values for Phoenix. These projected values were discounted back to November 15, 1998 to determine the present value of the implied values for Phoenix. Based on this analysis, Vector Securities derived an equity value range for Phoenix of $306.0 million to $483.0 million, or $12.27 to $19.24 per fully diluted share. SELECTED COMPARABLE MERGERS AND ACQUISITIONS ANALYSIS. Vector Securities reviewed publicly available financial information for selected mergers and acquisitions involving contract research organizations. Vector Securities analyzed the following nine completed transactions.
TARGET ACQUIROR - ------------------------------------------------------- ----------------------------------------------- IBAH, Inc. Omnicare, Inc. IBRD-Rostrum Global Inc. Phoenix GMI gesellschaft fur Angewandte Mathematik Kendle International Inc. und Informatik mbH U-Gene Research B.V. Kendle International Inc. BioClin Group Chrysalis BRI International, Inc. Quintiles Transnational Corp. HGB, Inc. IBAH, Inc. Applied Bioscience International Inc. Pharmaceutical Product Development, Inc. Bio-Research Laboratories Ltd. ClinTrials Research Inc.
The transactions listed above are referred to as "comparable transactions." Vector Securities calculated, among other things, total transaction value plus net debt, which is debt minus cash and cash equivalents, as a multiple of latest twelve month revenue, EBITDA and EBIT and total transaction value as a multiple of latest twelve month net income and tangible book value for the comparable transactions. The multiples for the comparable transactions were as follows:
COMPARABLE TRANSACTIONS MULTIPLES LOW HIGH MEDIAN - ------------------------------------------------------------------------------------------- --- --------- ----------- Latest twelve month revenue................................................................ 0.7x 2.8x 1.8x Latest twelve month EBITDA................................................................. 4.2x 26.5x 17.8x Latest twelve month EBIT................................................................... 4.4x 52.3x 30.8x Latest twelve month net income............................................................. 9.9x 37.9x 23.9x Tangible book value........................................................................ 2.4x 11.4x 9.9x
The multiples derived from this analysis were applied to Chrysalis' financial results to determine a range of implied values for Chrysalis. In reviewing which multiples of the comparable transactions were most relevant, Vector Securities took into account that Chrysalis was downsizing a significant portion of its clinical business. In addition Vector Securities considered that, as of the date of its opinion, Chrysalis did not have sufficient funds to continue its operations beyond March 1999 and had no immediate sources of equity or other financing. Based on this analysis, Vector Securities derived an equity value range for Chrysalis of $5.5 million to $15.0 million, or $0.48 to $1.28 per fully diluted share. No comparable transaction used in the comparable mergers and acquisitions analysis is identical to the merger. No comparable company used in the comparable public company analysis is identical to Chrysalis or Phoenix. Accordingly, an analysis of the results of the foregoing is not entirely mathematical. Rather, the analysis involves complex considerations and judgements concerning differences in financial and operating characteristics and other factors that could affect the public trading or acquisition value of the companies to which they are being compared. DISCOUNTED CASH FLOW ANALYSIS. Vector Securities analyzed the value of Chrysalis based on a discounted cash flow analysis of the projected financial performance of Chrysalis. This discounted cash 35 flow analysis was based upon five-year forecasts for Chrysalis provided by Chrysalis management, adjusted with management's input to reflect the downsizing of a significant portion of Chrysalis' clinical business and the need for additional financing in order to continue operations beyond March 1999, as of the date of the Vector Securities opinion. The discounted cash flow analysis determined the present value of the cash flows generated over the five-year period and a terminal value based upon a range of EBITDA multiples from 14.0x to 18.0x. The cash flows and terminal value were discounted using a range of discount rates from 30.0% to 40.0%. Based on this analysis, Vector Securities derived an equity value range for Chrysalis of $1.2 million to $7.8 million, or $0.11 to $0.67 per fully diluted share. RELATIVE CONTRIBUTION ANALYSIS. Vector Securities performed an analysis of the relative contributions of Chrysalis and Phoenix to the operating performance of the pro forma combined company, based on the Chrysalis projections and the Phoenix projections. Vector Securities then compared Chrysalis' relative contribution to revenue, operating income and net income to the relative ownership percentage in the pro forma combined company represented by the Phoenix common shares received by Chrysalis stockholders as aggregate consideration in the merger. Vector Securities noted that the pro forma ownership percentage represented by Phoenix common shares received in the merger is approximately 4.0%. The percent assumed an exchange ratio of 0.0874 Phoenix common shares for each share of Chrysalis common stock. The assumption was based on the closing sales price of a Phoenix common share on the Toronto Stock Exchange on November 12, 1998 of US$8.07. Chrysalis' relative contribution to the operating performance of the pro forma combined company is as follows:
FISCAL YEAR ENDED AUGUST 31, ------------------------------- 1997 1998 1999 --------- --------- --------- Revenue........................................................................... 35.9% 25.2% 18.8% Operating income (loss)........................................................... (64.8%) (88.4%) (20.8%) Net income (loss)................................................................. N/M N/M (60.6%)
Based on net income (loss), Chrysalis' relative contribution to the operating performance of the pro forma combined company is not meaningful for the fiscal years ended August 31, 1997 or 1998. Chrysalis selected Vector Securities to be its financial advisor in connection with the merger because Vector Securities is a prominent investment banking and financial advisory firm with experience in the valuation of health care and life science companies and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of securities, private placements and valuations for corporate purposes. In addition, Vector Securities was familiar with Chrysalis and its operations as a result of services rendered by Vector Securities to Chrysalis in connection with its acquisition of the BioClin Group. Pursuant to an engagement letter between Chrysalis and Vector Securities dated May 22, 1998, Vector Securities will receive a $700,000 fee upon completion of the merger. Chrysalis has also agreed to reimburse Vector Securities for all reasonable out-of-pocket expenses, including fees and disbursements of its counsel. Chrysalis has also agreed to indemnify Vector Securities, its affiliates and its employees against specified liabilities, including liabilities under federal securities laws. Chrysalis management and Vector Securities negotiated the fee to be paid to Vector Securities in connection with its services. The negotiated fee was approved by the Chrysalis Board. Vector Securities performed investment banking services for Chrysalis in connection with its acquisition of the BioClin Group in December 1996. Chrysalis paid Vector Securities $600,000 and reimbursed its expenses for those services. Vector Securities may provide financial advisory services to, and may act as underwriter or placement agent for, the combined company in the future. Vector Securities may actively trade the securities of Chrysalis and/or Phoenix for its own account and for the accounts of its customers. Accordingly Vector Securities may at any time hold long or short positions in those securities. 36 ADDITIONAL BENEFITS TO CHRYSALIS DIRECTORS AND EXECUTIVE OFFICERS RESULTING FROM THE MERGER In considering the Chrysalis Board's recommendation that you vote in favor of adopting the merger agreement, you should be aware that Chrysalis' directors and officers have interests in the merger that are different from, or in addition to, yours as a Chrysalis stockholder. - The merger will constitute a change in control of Chrysalis under compensation agreements between Chrysalis and two of its executive officers. Under the terms of these agreements, these executive officers will receive payments and other benefits upon or after the merger. - Under Mr. Schmitt's employment agreement, dated June 2, 1995, as amended January 20, 1999, if Mr. Schmitt's employment is terminated within 12 months after the merger, he will receive one year's salary to be paid in a lump sum as a result of the January 1999 amendment. At January 31, 1999, Mr. Schmitt's salary was $230,000. Mr. Schmitt will also receive medical and dental insurance coverage for 12 months. In addition, the exercise period of all of his stock options will be extended for 18 months, or, if earlier, until the tenth anniversary of the date of grant of the option. At March 31, 1999, Mr. Schmitt held options to purchase 297,500 shares of Chrysalis common stock. Phoenix intends to terminate Mr. Schmitt's employment immediately after the merger. - Under Mr. Cooper's employment agreement, dated May 29, 1996, as amended on January 20, 1999, if Mr. Cooper's employment is terminated without cause within 12 months after the merger or if his duties and responsibilities after the merger are not consistent with being chief financial officer of a parent company that is a public company, he will receive one year's salary, to be paid in a lump sum as a result of the January 1999 amendment. At January 31, 1999, Mr. Cooper's salary was $155,000. Mr. Cooper will also receive medical and dental insurance coverage for 12 months or, if earlier, until the date he is eligible for similar coverage at a new employer. In addition, the exercise period of all of his stock options will be extended for 18 months, or, if earlier, until the tenth anniversary of the date of grant of the option. At March 31, 1999, Mr. Cooper held options to purchase 292,500 shares of Chrysalis common stock. Phoenix intends to terminate Mr. Cooper's employment immediately after the merger. - Chrysalis has granted Dr. Modeweg a $50,000 "stay" bonus which he will receive if he remains employed by Chrysalis until the merger. In addition, under Dr. Modeweg's employment agreement, if Dr. Modeweg's employment is terminated other than for reckless or gross misconduct, whether or not the merger occurs, Chrysalis is required to enter into a 12-month or 24-month consulting agreement with Dr. Modeweg. Under the consulting agreement, Dr. Modeweg will provide services to Chrysalis in exchange for annual payments equal to his current annual salary and health and medical benefits. Dr. Modeweg's salary was 925,000 french francs, approximately US$160,000, at March 31, 1999. If the term of the consulting agreement is 24 months, Dr. Modeweg will be bound by a one-year noncompetition provision. - The execution of the merger agreement resulted in 100% vesting of 472,748 of the 576,798 unvested outstanding stock options granted by Chrysalis as of November 18, 1998. The accelerated vesting of stock options included an aggregate of 315,052 shares of Chrysalis common stock covered by options held by directors and executive officers of Chrysalis as of November 18, 1998. - Phoenix will assume all stock options granted by Chrysalis. Outstanding options include options for an aggregate of 1,029,000 shares of Chrysalis common stock held by directors and executive officers of Chrysalis as of March 31, 1999. As a result of the assumption by Phoenix, the stock options held by directors and executive officers will be converted into options covering approximately 87,742 Phoenix common shares. See "The Merger Agreement--Effect on Chrysalis Common Stock and Outstanding Options." 37 - The merger agreement requires Phoenix to continue to provide indemnification to current and former directors and officers of Chrysalis and its subsidiaries for actions based on matters and events occurring prior to the merger. Phoenix must provide indemnification for 6 years after the merger. The indemnification must be the same as currently provided in the charter documents of Chrysalis and existing indemnification agreements. - The merger agreement requires Phoenix to provide to the current and former officers and directors of Chrysalis director and officer liability insurance substantially similar to the insurance currently provided by Chrysalis. The insurance coverage must be provided for 6 years after the merger. - In addition, Phoenix and Mr. Schmitt have entered into a consulting agreement under which Mr. Schmitt will provide consulting services on matters relating to Chrysalis for 30 days after the merger. He will be paid $30,000 for those services. PHOENIX DIRECTOR WILL RECEIVE ADDITIONAL BENEFITS FROM THE MERGER Cornelius P. McCarthy, III, a director of Phoenix, is also Managing Director, Corporate Finance, of Pennsylvania Merchant Group. Pennsylvania Merchant Group acted as financial advisor to Phoenix in connection with the merger. Phoenix will pay to Pennsylvania Merchant Group a fee of approximately $400,000 for Pennsylvania Merchant Group's services in connection with the merger. In addition, Phoenix will reimburse out-of-pocket expenses incurred by Pennsylvania Merchant Group. PLANS FOR CHRYSALIS AFTER THE MERGER After the merger, Chrysalis will be a wholly-owned subsidiary of Phoenix. The merger agreement requires Chrysalis to begin to downsize and consolidate some of its clinical operations. Chrysalis has started the downsizing and consolidation. Phoenix anticipates that it will be completed shortly after the merger. While no final plans have been adopted, after the merger Phoenix intends to: - integrate Chrysalis' European clinical and pre-clinical operations with Phoenix's European operations; - make further investments in Chrysalis' preclinical and transgenics/genomic facilities; - integrate Chrysalis' North American preclinical operations with Phoenix's Montreal operations; - require Chrysalis' transgenics/genomic operations to report to Phoenix's corporate headquarters, with close ties to the Montreal-based drug discovery support group; and - eventually close Chrysalis' corporate headquarters. Except as indicated in this proxy statement/prospectus or as contemplated by the downsizing and consolidation, Phoenix does not have any present plans or proposals which relate to or would result in any other extraordinary corporate transaction. ACCOUNTING TREATMENT Phoenix will account for the merger under the "purchase" method of accounting in accordance with U.S. GAAP and Canadian GAAP. REGULATORY MATTERS ANTITRUST MATTERS Chrysalis and Phoenix are required by the U.S. antitrust laws to provide notice of the merger to the Department of Justice and the FTC. They may not complete the merger until the waiting period has 38 expired or been terminated earlier. Phoenix and Chrysalis have received regulatory clearance from the FTC and the Department of Justice to complete the merger. RESALE OF PHOENIX COMMON SHARES ISSUED IN THE MERGER; AFFILIATES The Phoenix common shares to be issued to Chrysalis stockholders in connection with the merger generally will be freely transferable under the Securities Act. However, any person deemed to be an affiliate of Chrysalis at the time of the special meeting may not sell Phoenix common shares acquired in connection with the merger except as permitted by the Securities Act. The Securities Act requires these shares to be sold: - through an effective registration statement under the Securities Act covering the shares to be sold; - in compliance with Rule 145 under the Securities Act; or - under another applicable exemption from the registration requirements of the Securities Act. Chrysalis has identified for Phoenix those persons who Chrysalis believes may have been affiliates of Chrysalis at the time of the execution of the merger agreement. Each of those persons has entered into a letter agreement with Phoenix providing that the affiliate will not sell, pledge, transfer or otherwise dispose of, or hedge or otherwise reduce its risk with respect to, any Phoenix common shares except in accordance with Rule 145. CANADIAN STOCK EXCHANGES Phoenix has filed with the Montreal Exchange and the Toronto Stock Exchange notices related to the Phoenix common shares to be issued in the merger. Phoenix has also filed with the Montreal Exchange and the Toronto Stock Exchange applications for the listing of Phoenix common shares to be issued in the merger upon exercise of the stock options to be assumed by Phoenix. Phoenix expects to receive shortly conditional approval from the Montreal Exchange and the Toronto Stock Exchange. DELISTING AND DEREGULATION OF CHRYSALIS COMMON STOCK; CESSATION OF CHRYSALIS PERIODIC REPORTING If the merger is completed, Chrysalis common stock will no longer be listed on the Nasdaq National Market. Phoenix intends to cause Chrysalis to apply to the Securities and Exchange Commission for the deregistration of Chrysalis common stock after the merger. Upon the deregistration, Chrysalis will no longer be required to make separate periodic filings with the Securities and Exchange Commission under the Exchange Act. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS Except as described under "Material Tax Consequences--Dividends and Withholding Taxes," Canada does not restrict the export or import of capital, including foreign exchange controls, or limit the remittance of dividends, interest or other payments to nonresident holders of Phoenix's securities. Canadian law and Phoenix's articles and by-laws do not limit the right of nonresident or foreign owners to hold or vote Phoenix common shares. ENFORCEMENT OF CIVIL LIABILITIES IN CANADA Phoenix is organized under the laws of Canada pursuant to the Canada Business Corporations Act and its principal place of business is in Canada. A majority of Phoenix's directors and officers and experts named herein are residents of Canada and/or are organized under the laws of Canada or a province 39 thereof. All or a substantial portion of the assets of these persons and of Phoenix are located outside the United States. Special rules apply for: (1) the enforcement in Canada of judgments obtained in non-Canadian courts; and (2) the institution of original actions in Canadian courts to enforce liabilities based upon non-Canadian laws. See "Risk Factors--Chrysalis Stockholders May Not Be Able to Enforce Civil Liabilities in Canada." Phoenix has appointed PHS Corporate Services, Inc. of Wilmington, Delaware, as agent for service of process, in any action in any U.S. federal or state court brought against it under the securities laws of the United States arising out of the registration of Phoenix common shares pursuant to the registration statement of which this proxy statement/prospectus forms a part. MATERIAL TAX CONSEQUENCES MATERIAL INCOME TAX CONSEQUENCES U.S. FEDERAL INCOME TAX CONSEQUENCES The following discussion of the material U.S. federal income tax consequences of the merger and of holding Phoenix common shares is based on the U.S. Internal Revenue Code, the final, proposed and temporary Treasury Regulations, administrative rulings and interpretations and judicial decisions, in each case as in effect as of the date hereof. All of the foregoing are subject to change at any time, possibly with retroactive effect, and to differing interpretations. Except as specifically provided below, the following discussion is limited to the U.S. federal income tax consequences relevant to a beneficial owner of Chrysalis common stock that is: (1) an individual who is a citizen or resident of the United States; (2) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, or any political subdivision thereof; (3) an estate otherwise subject to U.S. federal income taxation on its worldwide income; (4) a trust, if a court within the United States is able to exercise primary supervision of the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust, including trusts in existence on August 20, 1996 and properly treated as United States persons prior to that date that timely elected to continue to be treated as United States persons; or (5) a partnership or other entity, other than a corporation, created or organized under the laws of the United States or of any State thereof that is properly treated as a United States person. Each of the individuals, corporations, estates, trusts, partnerships or other entities described in numbers (1)-(5) above is referred to as a U.S. Holder. A Non-U.S. Holder is any stockholder other than a U.S. Holder. The discussion below does not address all aspects of U.S. federal income taxation that may be relevant to a particular holder of shares of Chrysalis common stock in light of the holder's particular circumstances or to holders subject to special treatment under the U.S. federal income tax laws, such as Non-U.S. Holders, banks, other financial institutions, insurance companies, dealers in securities, tax-exempt entities, persons who hold Chrysalis common stock or Phoenix common shares as part of a "straddle,""hedge" or "conversion transaction" or holders who acquired their Chrysalis common stock pursuant to the exercise of employee stock options or otherwise as compensation, persons who hold, directly, constructively or by attribution, 5% or more of either the total voting power or total value of the capital stock of Phoenix immediately after the merger, or 10% or more of the total voting power of 40 the capital stock of Phoenix at any time, taxpayers whose functional currency is not the U.S. dollar, nor any consequences arising under the laws of any state, locality or foreign jurisdiction. This discussion assumes that the holders of Chrysalis common stock hold their shares of stock as capital assets within the meaning of Section 1221 of the U.S. Internal Revenue Code. TAX IMPLICATIONS OF THE MERGER TO U.S. HOLDERS OF CHRYSALIS COMMON STOCK. In general, for an exchange of Chrysalis common stock for Phoenix common shares by a U.S. person in the merger to qualify for tax-free reorganization treatment, in addition to meeting the requirements of Section 354 and Section 368 of the U.S. Internal Revenue Code, the reporting requirements of Treasury Regulation Section 1.367(a)-3(c)(6) must be satisfied and each of the following conditions must be met: (1) fifty percent or less of both the total voting power and the total value of the stock of Phoenix, in the aggregate, is received in the transaction by the stockholders of Chrysalis that are U.S. persons; (2) fifty percent or less of the total voting power and the total value of the stock of Phoenix is owned, in the aggregate, immediately after the transaction by U.S. persons that are either officers or directors of Chrysalis or stockholders of Chrysalis who owned 5% or more of the outstanding stock of Chrysalis, by vote or value, immediately before the merger, computed taking into account direct, indirect and constructive ownership; (3) either (A) the U.S. person does not own 5% or more of the outstanding Phoenix stock after the merger or (B) the U.S. person owns 5% or more of the outstanding Phoenix stock after the merger and enters into a gain recognition agreement, as defined in Treasury Regulation Section 1.367(a)-8, with the IRS; and (4) a specified active trade or business test is satisfied. Pepper Hamilton LLP, counsel to Phoenix, has delivered its opinion that, based on representations and covenants of Phoenix and Chrysalis, no gain or loss will be recognized for U.S. federal income tax purposes by holders of Chrysalis common stock as a result of the receipt of Phoenix common shares in exchange for Chrysalis common stock (except as may otherwise be indicated in (3)(B) above). Cash received in lieu of fractional share interests will be treated as received in exchange for a fractional Phoenix common share. Gain or loss recognized on a fractional share exchange will be measured by the difference between the amount of cash received and the portion of the tax basis in the shares of the Chrysalis common stock surrendered that is allocable to the fractional share. Gain or loss on the fractional share exchange will be capital gain or loss. Capital gains of individuals derived with respect to capital assets held for more than one year are subject to a maximum federal income tax rate of 20%. The deductibility of capital losses is subject to limitations. Further, the aggregate tax basis of Phoenix common shares received as a result of the merger will be the same as the U.S. Holder's aggregate tax basis in the Chrysalis common stock surrendered in the merger, decreased by the basis allocable to fractional shares for which cash is received in the merger. The holding period of the Phoenix common shares held by a former holder of Chrysalis common stock as a result of the merger will include the period during which the holder held the Chrysalis common stock surrendered. The IRS has not been requested to issue a ruling on the taxation of the merger. The opinion of Pepper Hamilton LLP is not binding on the IRS. 41 U.S. TAX IMPLICATIONS TO U.S. HOLDERS OF HOLDING PHOENIX COMMON SHARES. DIVIDENDS AND TAX CREDITS A U.S. Holder of Phoenix common shares will be required to include in gross income as dividend income the amount of any distributions (including constructive distributions) paid on the Phoenix common shares (including any foreign taxes withheld from the amount received) on the date this distribution is received, to the extent Phoenix has current or accumulated earnings and profits, as defined under the U.S. Internal Revenue Code. Dividends paid on the Phoenix common shares generally will not qualify for the dividends-received deduction available to corporations. Dividends paid in foreign currency will be includible in the income of the U.S. Holder in a U.S. dollar amount calculated by reference to the exchange rate on the day the dividends are received. If the Canadian dollars received as a dividend are not converted into U.S. dollars on the date of receipt, in general, a U.S. Holder will have a basis in Canadian dollars equal to its U.S. dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition will generally be treated as ordinary income or loss. As described below, dividends paid or credited (or deemed paid or credited) on the Phoenix common shares will generally be subject to a Canadian tax that will be withheld from the distribution. Generally, a U.S. Holder will have the option of claiming the Canadian tax withheld as either a deduction from adjusted gross income or, subject to the limitations described below, as a dollar-for-dollar credit against the U.S. Holder's U.S. federal income tax liability. If the U.S. Holder elects to claim a credit for Canadian taxes, the election will be binding for all other foreign taxes paid or accrued by the U.S. Holder for the taxable year. Individuals who claim the standard deduction rather than itemized deductions may not claim a deduction for foreign taxes withheld, but may claim this amount as a credit against the individual's U.S. federal income tax liability. If a U.S. Holder is subject to the alternative minimum tax, the foreign tax credit in any taxable year may not offset more than 90% of a U.S. Holder's liability for the alternative minimum tax. The ability to credit the Canadian taxes against the U.S. Holder's federal income tax liability is restricted by the rules found in Section 904 of the U.S. Internal Revenue Code. In general, the credit for the Canadian tax withheld from the distributions will be limited to the U.S. tax liability on foreign source passive income that is earned by the U.S. Holder. Dividends paid by Phoenix generally will be foreign source passive income for U.S. foreign tax credit purposes. If the Canadian tax withheld is more than the U.S. Holder's overall federal income tax liability for the year, no refund will be issued by the IRS. U.S. Holders who are individuals may use a simplified method of calculating the credit for the Canadian taxes. If a U.S. individual holder's entire gross income from foreign sources consists of passive income, up to $300 ($600 for joint filers) of foreign taxes may be credited against the holder's U.S. federal income tax liability without regard to the limitations described above. Additional limitations on the credit apply if the U.S. Holder (1) has held Phoenix common shares for less than a specified minimum period during which it is not protected from risk of loss or (2) is obligated to make payments related to dividends (whether pursuant to a short sale or otherwise) with respect to a substantially similar or related property. Under recent IRS guidance, a U.S. Holder will not be allowed a foreign tax credit for Canadian taxes withheld from dividends paid on the Phoenix common shares if the U.S. Holder holds its Phoenix common shares pursuant to arrangements in which its expected economic profit is insubstantial compared to the foreign tax credit claimed SALE OF THE PHOENIX COMMON SHARES For federal income tax purposes, a U.S. Holder will recognize taxable gain or loss on any sale, exchange or other disposition of Phoenix common shares in an amount equal to the difference between the U.S. dollar value of the amount realized on this sale, exchange or other disposition and the U.S. Holder's basis in these shares. Any gain or loss will be capital gain or loss, assuming the stock is held 42 as a capital asset. Capital gains of individuals derived with respect to capital assets held for more than one year are subject to a maximum federal income tax rate of 20%. The deductibility of capital losses is subject to limitations. CONSEQUENCES IF PHOENIX IS A PASSIVE FOREIGN INVESTMENT COMPANY If Phoenix is determined to be or becomes a passive foreign investment company, the U.S. Holders of the Phoenix common shares would be subject to a different set of U.S. tax rules. Generally, unless the U.S. Holder makes a special election at the time Phoenix becomes a passive foreign investment company, upon the disposition of the Phoenix common shares or upon the receipt of an excess distribution (as defined in Section 1291 of the U.S. Internal Revenue Code) from Phoenix, the U.S. Holder would incur an interest charge for the deferral of income and the gain on the sale of the stock would be ordinary income, not capital gain. Phoenix would be a PFIC if 75% or more of its gross income for a year is passive income, or if 50% or more of its average assets during the taxable year produce or are held to produce passive income. Phoenix does not believe it is a passive foreign investment company at this time. U.S. HOLDERS OF CHRYSALIS COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM FROM THE MERGER AND FROM HOLDING PHOENIX COMMON SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS. CANADIAN FEDERAL INCOME TAX CONSEQUENCES TO U.S. HOLDERS The following discussion of the material Canadian federal income tax considerations is generally applicable to a U.S. Holder who acquires Phoenix common shares in the merger and who, for the purposes of the Income Tax Act (Canada) and the Canada-United States Income Tax Convention (the "Convention"), as applicable and at all relevant times: (1) is resident in the United States and not resident or deemed resident in Canada; (2) holds Phoenix common shares as capital property; (3) does not have a "permanent establishment" or "fixed base" in Canada (as defined in the Convention); and (4) deals at arm's length with Phoenix. Special rules, which are not discussed below, may apply to "financial institutions" (as defined in the Income Tax Act) and to non-resident insurers carrying on an insurance business in Canada and elsewhere. A limited liability company may not be, and a partnership will not be, a U.S. Holder to which this discussion applies. This discussion (1) is based on the current provisions of the Income Tax Act and the regulations thereunder and the Convention, all specific proposals to amend the Income Tax Act or the regulations thereunder announced by or on behalf of the Canadian Minister of Finance prior to the date hereof and the current published administrative practices of Revenue Canada and (2) does not otherwise take into account or anticipate any changes in law or administrative practice nor any income tax laws or considerations of any province or territory of Canada or any jurisdiction other than Canada, which may differ from the Canadian federal income tax consequences described herein. DIVIDENDS AND WITHHOLDING TAXES Under the Income Tax Act and the Convention, dividends paid or credited, or deemed to be paid or credited, on the Phoenix common shares to a U.S. Holder who owns less than 10% of Phoenix's voting shares will be subject to Canadian withholding tax at the rate of 15% of the gross amount of these dividends or deemed dividends. If a U.S. Holder is a corporation and owns 10% or more of Phoenix's voting shares, the rate is reduced from 15% to 5%. Under the Convention, dividends paid to religious, 43 scientific, educational or charitable tax exempt organizations and pension organizations that are resident and exempt from tax in the United States and that have complied with administrative procedures are exempt from this Canadian withholding tax. DISPOSITION OF PHOENIX COMMON SHARES A capital gain realized by a U.S. Holder on a disposition or deemed disposition of Phoenix common shares will not be subject to tax in Canada under the Income Tax Act unless the Phoenix common shares constitute "taxable Canadian property" within the meaning of the Income Tax Act at the time of the disposition or deemed disposition. In general, the Phoenix common shares will not be "taxable Canadian property" to a U.S. Holder unless they are not listed on a prescribed stock exchange (which includes Nasdaq, the Montreal Exchange and the Toronto Stock Exchange). Even if the shares are so listed, the gain will be taxable under the Income Tax Act, if at any time within the five-year period immediately preceding the disposition the U.S. Holder, persons with whom the U.S. Holder did not deal at arm's length, or the U.S. Holder together with those persons, owned or had an interest in or a right to acquire more than 25% or more of any class or series of Phoenix's shares. A deemed disposition of Phoenix common shares will arise on the death of a U.S. Holder. Even if the disposition would be taxable in Canada under the Income Tax Act, any capital gain realized on a disposition or deemed disposition of Phoenix common shares will generally be exempt from tax by virtue of the Convention if the value of the Phoenix common shares at the time of the disposition or deemed disposition is not derived principally from real property (as defined by the Convention) situated in Canada. Phoenix is of the view that the Phoenix common shares do not now derive their value principally from real property situated in Canada; however, the determination as to whether Canadian tax would be applicable on a disposition or deemed disposition of Phoenix common shares must be made at the time of the disposition or deemed disposition. Provided that the Phoenix common shares remain listed on a prescribed stock exchange, a U.S. Holder who disposes of Phoenix common shares will not be required to comply with the Canadian notification procedures generally applicable to dispositions of taxable Canadian property. U.S. HOLDERS OF CHRYSALIS COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR CANADIAN TAX CONSEQUENCES TO THEM OF ACQUIRING AND HOLDING PHOENIX COMMON SHARES. 44 THE MERGER AGREEMENT The description of the merger agreement set forth below is not complete but summarizes the material provisions of the merger agreement. The complete composite text of the merger agreement, as amended, is attached as Appendix A to this proxy statement/prospectus. THE MERGER The merger agreement provides for a merger in which Phoenix Merger Sub will merge with and into Chrysalis, with Chrysalis surviving the merger as a wholly owned subsidiary of Phoenix. The merger will become effective when the certificate of merger for the merger is filed with the Secretary of State of the State of Delaware, or at any later time specified in the certificate of merger. The merger is expected to occur as soon as practicable after the last of the conditions set forth in the merger agreement has been satisfied or waived. See "--Conditions" and "--Additional Conditions." CERTIFICATE OF INCORPORATION AND BY-LAWS OF SURVIVING CORPORATION The certificate of incorporation of Phoenix Merger Sub immediately prior to the merger will become the certificate of incorporation of the surviving corporation. However, the certificate of amendment will be amended to increase the authorized number of shares of Chrysalis common stock to 1,001,208 shares, and to change the name of the surviving corporation to a name designated by Phoenix. The bylaws of Phoenix Merger Sub immediately prior to the merger will become the bylaws of the surviving corporation. OFFICERS AND DIRECTORS OF THE SURVIVING CORPORATION The officers and directors of Chrysalis will not be involved in the management of Chrysalis' business after the merger. The officers and directors of Phoenix Merger Sub prior to the merger will become the officers and directors of the surviving corporation. Phoenix may choose to change the directors and officers after the merger. EFFECT ON CHRYSALIS COMMON STOCK AND OUTSTANDING OPTIONS In the merger, each share of Chrysalis common stock issued and outstanding immediately prior to the merger will be converted into the right to receive approximately 0.08527 of a Phoenix common share, rounded down to the nearest whole number, plus any cash payable for fractional Phoenix common shares as described below under "--Fractional Shares." The exchange ratio is a fraction equal to: US$8,290,000 DIVIDED BY (shares of Chrysalis common stock outstanding at the merger date plus shares of Chrysalis common stock subject to options having an exercise price less than US$.71) DIVIDED BY US$8.28, which represents the value of one Phoenix common share determined under the merger agreement Because the exchange ratio is in part based on the number of outstanding shares, and some options to purchase shares, of Chrysalis common stock, it cannot yet be determined. Chrysalis has granted a number of outstanding options and warrants to purchase shares of Chrysalis common stock. If any of these options or warrants were to be exercised, the exchange ratio may change. However, the exchange ratio will not change if a stock option with an exercise price less than $0.71 per share were exercised. In addition, if any options with an exercise price less than $0.71 were to terminate or expire prior to being exercised, the exchange ratio may change. Chrysalis does not intend to issue any more shares of its common stock except in connection with the exercise of options and warrants. 45 Based on shares and options for Chrysalis common stock outstanding at March 31, 1999, the exchange ratio would be 0.08527. To illustrate, assuming an exchange ratio of 0.08527, if you own the following number of shares of Chrysalis common stock, you will receive in the merger approximately the following number of Phoenix common shares plus cash for the fractional shares indicated:
NUMBER OF SHARES OF NUMBER OF PHOENIX CHRYSALIS COMMON STOCK COMMON SHARES FRACTIONAL SHARES - ----------------------- --------------------- ----------------- 100 8 .527 250 21 .3175 500 42 .635 1,000 85 .27 1,750 149 .2225 2,500 213 .175 10,000 852 .7
In the merger, each option to purchase Chrysalis common stock issued under Chrysalis' stock option plans and outstanding immediately prior to the merger, will be assumed by Phoenix. In the merger, the options will be converted into options to acquire the number of Phoenix common shares determined by the following formula: (Number of shares of Chrysalis common stock subject to the option) X (exchange ratio) The number of shares will be rounded down to the nearest whole share. The per share exercise price of each stock option will be determined by the following formula: Aggregate exercise price of Chrysalis stock option ---------------------------------------------------------------- Number of Phoenix common shares issuable under converted stock option The exercise price will be rounded up to the nearest cent. For example, assuming an exchange ratio of 0.08527, a stock option covering the following number of shares of Chrysalis common stock at the following exercise price would be converted into an option for the following number of Phoenix common shares at the following exercise price:
PHOENIX STOCK OPTION CHRYSALIS STOCK OPTION -------------------------- - -------------------------------------- NUMBER OF NUMBER OF SHARES OF EXERCISE PHOENIX EXERCISE CHRYSALIS COMMON STOCK PRICE COMMON SHARES PRICE - ------------------------- ----------- ------------- ----------- 1,000 $ 4.00 85 $ 47.06 2,500 $ 1.00 213 $ 11.74 3,000 $ 0.50 255 $ 5.88
The merger agreement requires Phoenix to prepare and file with the Securities and Exchange Commission a registration statement on Form S-8 under the Securities Act covering Phoenix common shares subject to options assumed by Phoenix. Phoenix must file the registration statement within two business days after the merger. Phoenix must use commercially reasonable efforts to maintain the effectiveness of the registration statement as long as any options assumed by Phoenix remain outstanding. EXCHANGE OF CERTIFICATES IN THE MERGER Before the merger, Phoenix will appoint an exchange agent reasonably acceptable to Chrysalis to assist with the exchange of certificates of Chrysalis common stock for certificates of Phoenix common shares. As soon as reasonably practicable after the merger, the exchange agent will mail to each holder of a certificate of Chrysalis common stock issued and outstanding immediately before the merger a letter of transmittal and instructions for surrendering Chrysalis stock certificates and obtaining a certificate 46 representing the Phoenix common shares and cash for fractional shares. Upon surrender of Chrysalis stock certificates to the exchange agent together with the letter of transmittal, the certificate holder will be entitled to receive a certificate representing the appropriate number of Phoenix common shares and cash for fractional shares. In addition, the holder will be entitled to receive any unpaid dividends and other distributions to which the holder is entitled. The surrendered Chrysalis stock certificates will be canceled. We request that you not surrender your certificates for exchange until you receive the letter of transmittal and instructions. Neither Chrysalis nor Phoenix will pay to you any interest on the merger consideration. Holders of Chrysalis common stock will not be entitled to receive any dividends or other distributions payable by Phoenix, or cash for fractional shares, until their Chrysalis stock certificates are surrendered. Upon surrender, however, subject to applicable laws, the holders will receive any accumulated dividends and distributions, without interest, together with cash for fractional shares to which they may be entitled. After the merger, no further registration of transfer of shares of Chrysalis common stock will occur. Any portion of the merger consideration given to the exchange agent by Phoenix and not claimed by the holders of shares of Chrysalis common stock within twelve months after the merger will be returned to Phoenix. Thereafter, any holder who has not exchanged his or her shares of Chrysalis common stock will have to look only to Phoenix for his or her claim for merger consideration and any dividends or distributions. Any amounts not claimed by holders of shares of Chrysalis common stock within two years after the merger will become the property of Phoenix unless restricted by applicable law. FRACTIONAL SHARES Each holder of shares of Chrysalis common stock exchanged in the merger who would otherwise have been entitled to receive a fraction of a Phoenix common share will instead receive cash, without interest, for the fractional share. The cash will be an amount equal to the holder's proportionate interest in the net proceeds from the sale by the exchange agent on behalf of all holders of all fractional Phoenix common shares which would otherwise have been issued. The sale of the fractional shares by the exchange agent will occur on the Nasdaq National Market. As soon as practicable after the determination of the amount of cash to be paid to holders of fractional shares: - the exchange agent will notify Phoenix; - Phoenix will deposit the amount with the exchange agent; and - the exchange agent will forward cash payments to holders of fractional shares. REPRESENTATIONS AND WARRANTIES The merger agreement includes representations and warranties by Chrysalis as to: - corporate organization, standing and power; - capital structure; - authority to enter into the merger agreement and the absence of conflicts between the merger and Chrysalis' organizational documents, other material contracts and applicable laws, orders and regulatory requirements; - third party and governmental consents or approvals required in connection with the consummation of the merger; - possession and validity of permits; 47 - reports filed with the Securities and Exchange Commission and financial statements; - information supplied in connection with the Registration Statement of Phoenix on Form F-4 of which this proxy statement/prospectus forms a part; - the absence of material changes or events with respect to its business, condition, assets, liabilities or results of operations since December 31, 1997; - Chrysalis Board approvals; - subsidiaries; - finders fees; - fairness opinions; - the absence of undisclosed material liabilities; - taxes; - title to and condition of real and personal property; - material contracts; - litigation; - environmental matters; - employee benefit plans and labor matters; - compliance with laws; - intellectual property rights; - accounts receivable; - insurance; - inapplicability of anti-takeover laws or devices, including the rights agreement of Chrysalis; - product warranties and liabilities; - relationships with customers and suppliers; - transactions with affiliates; and - regulatory matters. The merger agreement includes representations and warranties of Phoenix as to: - corporate organization, standing and power; - capital structure; - authority to enter into the merger agreement; - the absence of conflicts between the merger agreement and its organizational documents, other material contracts and applicable laws, orders and regulatory requirements; - reports filed with the Canadian Securities Commission and financial statements; - the Form F-4; - information supplied in connection with this proxy statement/prospectus; 48 - the absence of certain changes or events with respect to its business, condition, assets, liabilities or results of operation since August 31, 1998. - the absence of undisclosed material liabilities; - ownership of Chrysalis common stock; - finders fees; and - sufficiency of cash to repay borrowings of Chrysalis after the merger. The merger agreement also includes representations and warranties by Phoenix Merger Sub as to: - corporate organization, standing and power; - capital structure; - authority to enter into the merger agreement; - the absence of conflicts between the merger agreement and its organizational documents, other material contracts and applicable laws, orders and regulatory requirements; and - the absence of any business activities except for the purpose of completing the merger. BUSINESSES OF CHRYSALIS AND PHOENIX PENDING THE MERGER Chrysalis and Phoenix generally have agreed that before the merger, each of Chrysalis and Phoenix will conduct its business in the ordinary course consistent with past practice. Chrysalis and Phoenix have also agreed to use commercially reasonable efforts to preserve intact their business organizations and relationships with third parties and to keep available the services of their present officers and employees. The merger agreement restricts Chrysalis' ability to: - change its organizational documents; - merge, consolidate or acquire material assets; - sell, lease, license or dispose of material assets; - declare or pay dividends or distributions; - create liens on material assets; - issue capital stock; - change its capital stock; - borrow money; - loan, advance or contribute capital to another person or entity; - change severance arrangements, termination agreements, employment agreements, employee benefit plans or compensation arrangements; - adopt a plan of liquidation or dissolution; - change its method of accounting; - make tax elections or take other tax-related actions; - settle litigation in excess of $25,000; - waive, modify, terminate or assign its material contract rights; 49 - make capital expenditures in excess of $10,000 individually or $50,000 in the aggregate; - materially change any pricing or investment policy; - take any action that would result in its representations and warranties being false or incorrect in any material respect; - enter into customer contracts or other leases or contracts for amounts in excess of $100,000 individually; - enter into or modify any real property lease; - terminate any employee, consultant or agent; and - pay any expense or disbursement over $25,000 except ordinary course of business and other expenses. The merger agreement restricts Phoenix's ability to (1) change its organizational documents and (2) declare any dividends or distributions. OTHER COVENANTS The merger agreement contains other covenants, including covenants relating to: - the preparation and distribution by both parties of this proxy statement/prospectus and the preparation by both parties of the Form F-4; - the recommendations by the Chrysalis Board to its stockholders for adoption of the merger agreement; - access to information by each party; - the parties' obligations to use commercially reasonable efforts and cooperation to satisfy the conditions to the merger; - the obligations of Phoenix to provide for 6 years after the merger indemnification and insurance coverage for Chrysalis' current and former directors and officers at least equivalent to the coverage in effect on the date of the merger agreement; - public announcements by the parties; - the approval of quotation on the Nasdaq National Market of the Phoenix common shares to be issued in the merger; - cooperation with respect to any litigation regarding the proposed merger; - the commencement by Chrysalis of shutting down its facilities located in Austin, Texas, Cham, Switzerland and Dusseldorf, Germany and the reduction of expenses related to its operations in Mannheim, Germany and Israel; - Chrysalis' maintenance of intellectual property rights; - Chrysalis providing notice of intent to repay bank indebtedness; - using commercially reasonable efforts to obtain written confirmation from Iffa Credo SA regarding continuation of services provided by Iffa Credo SA to Chrysalis and its subsidiaries; - repayment by Phoenix of bank and subordinated indebtedness of Chrysalis immediately after the merger; and - assumption by Phoenix of obligations of Chrysalis under employment and severance agreements. 50 NO SOLICITATION Chrysalis has agreed that it will not directly or indirectly: - take any action to solicit, initiate or encourage any offer or proposal for, or any indication of interest in, a merger or other business combination in any manner of an equity interest in an amount equal to or greater than 20% of the outstanding shares of any equity security or a substantial portion of the assets of Chrysalis or any subsidiary (an "Acquisition Proposal"); or - disclose any non-public information, or afford access to the properties, books or records of Chrysalis to any person that has informed Chrysalis that it is considering making, or has made, an Acquisition Proposal. Chrysalis may, in response to an unsolicited bona fide written proposal regarding an Acquisition Proposal by any person, disclose non-public information to or engage in negotiations with the person, if the Chrysalis Board determines in good faith, based on the written advice of an investment banking firm, that the Acquisition Proposal is reasonably likely to be more favorable and provide greater value to Chrysalis' stockholders than the merger (a "Superior Proposal"). CONDITIONS Neither Chrysalis nor Phoenix will have to complete the merger if any of the following occurs: - Chrysalis stockholders do not adopt the merger agreement; - any law or regulation, order, judgment, injunction or decree of a court of competent jurisdiction prohibits completion of the merger; - the waiting period applicable to the merger under the HSR Act and any other applicable pre-merger notification, has not terminated or expired; - any action has been instituted by any governmental authority seeking to prevent completion of the merger or seeking material damages in connection with the merger; - any action by or filings with any governmental authority required to permit the completion of the merger has not been obtained; - the Phoenix common shares to be issued in the merger and under options assumed by Phoenix have not been approved for quotation on the Nasdaq National Market or Phoenix has not received the approval of all other regulatory authorities required for the quotation; and - the Form F-4 is not effective or the Securities and Exchange Commission has entered an order, or started or threatened to start a proceeding to enter an order, suspending the effectiveness of the Form F-4. ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF PHOENIX Phoenix will not have to complete the merger if any of the following occurs: - The representations and warranties of Chrysalis in the merger agreement are not materially true and correct as of the merger date or Phoenix does not receive a certificate of an executive officer of Chrysalis regarding the material truth and accuracies of Chrysalis' representations and warranties; - Chrysalis has not materially performed or complied with its obligations under the merger agreement or Phoenix does not receive a certificate of an executive officer of Chrysalis regarding Chrysalis' material performance and compliance; 51 - a breach of a support/voting agreement by any of Chrysalis' stockholders signing these agreements occurs, unless the breach does not result in Chrysalis' stockholders not adopting the merger agreement; - Chrysalis or its subsidiaries has not obtained third-party consents required for the merger, including the consent of the Pennsylvania Industrial Development Authority, a lender to a subsidiary of Chrysalis; - specific liens on shares of subsidiaries of Chrysalis have not been released; - the letter agreement entered into between Chrysalis and Dr. Jack Barbut is not in full force and effect; or - any loan, other than specified loans, by or from Chrysalis or any subsidiary on the one hand, and any affiliate, on the other hand has not been repaid or any stockholder of any subsidiary of Chrysalis has not assigned his ownership interests in any subsidiary of Chrysalis to Phoenix or its designee; or - Chrysalis has not satisfied its obligations to BML Japan. ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF CHRYSALIS Chrysalis will not have to complete the merger if any of the following occurs: - The representations and warranties of Phoenix or Phoenix Merger Sub in the merger agreement are not materially true and correct in all material respects as of the merger date or Chrysalis does not receive a certificate of an executive officer of Phoenix regarding the material truth and accuracies of Phoenix's and Phoenix Merger Sub's representations and warranties; or - Phoenix has not materially performed or complied with its obligations under the merger agreement or Chrysalis does not receive a certificate of an executive officer of Phoenix regarding Phoenix's material performance and compliance. AMENDMENT; TERMINATION Phoenix, Chrysalis and Phoenix Merger Sub must all agree in writing to any amendment to the merger agreement. After the merger agreement is adopted by the stockholders of Chrysalis, the parties cannot amend the merger agreement without the further approval of the Chrysalis stockholders if the amendment would (1) alter or change the consideration to be received by Chrysalis stockholders in the merger or (2) adversely effect the stockholders of Chrysalis. Phoenix and Chrysalis can mutually agree to terminate the merger agreement at any time prior to the merger. Otherwise, the merger agreement may be terminated only in a very limited number of circumstances: (1) Phoenix or Chrysalis can terminate the merger agreement if the other party breaches or fails to comply with any of its representations, warranties or agreements under the merger agreement, and the breach or failure would result in the failure of a condition to the merger that is not cured prior to April 30, 1999; (2) Phoenix or Chrysalis can terminate the merger agreement if any law or final court order prohibits the merger; (3) Chrysalis can terminate the merger agreement if a third party has made a Superior Proposal and as a result of the Superior Proposal the Chrysalis Board decides not to hold the special meeting or withdraws or modifies its recommendation that Chrysalis stockholders adopt the merger agreement; 52 (4) Phoenix can terminate the merger agreement if the Chrysalis Board determines not to hold the special meeting or withdraws or modifies its recommendation that Chrysalis stockholders adopt the merger agreement; (5) Phoenix or Chrysalis can terminate the merger agreement if the Chrysalis stockholders do not adopt the merger agreement; (6) The merger agreement will terminate automatically if, without Phoenix's consent, the Chrysalis Board or the board of directors of any Chrysalis subsidiary adopts a resolution authorizing a liquidation or the filing of a bankruptcy petition; and (7) Phoenix can terminate the merger agreement upon the earlier to occur of April 30, 1999 or 60 days after a bankruptcy petition regarding Chrysalis is filed by a Chrysalis creditor, other than Phoenix, and the petition results in an order for relief or Chrysalis is unable to have the petition dismissed within 60 days. EFFECT OF TERMINATION If the merger agreement is terminated, it shall become void and of no effect with no liability on the part of any party except as described below in "--Termination Fees; Expenses." Nothing in the merger agreement, however, relieves any party to the merger agreement of liability for a willful breach of any provision of the merger agreement. TERMINATION FEES; EXPENSES The merger agreement requires Chrysalis to pay to Phoenix $1.5 million if the merger agreement terminates under the circumstances described in clauses (3), (4), (5), (6) or (7) under "--Amendment; Termination" above. The merger agreement requires Phoenix to pay to Chrysalis $1.5 million if Chrysalis terminates the merger agreement under the circumstances described in clause (1) under "Amendment; Termination" above. Except as provided above, each of Phoenix and Chrysalis will bear its own expenses incurred in connection with the merger, whether or not the merger is completed. However, each of Phoenix and Chrysalis will pay one-half of the costs and expenses, including Securities and Exchange Commission filing fees but excluding legal and accounting fees, incurred in connection with the filing, printing and mailing of the Form F-4 and the Chrysalis proxy statement. OTHER AGREEMENTS SUPPORT/VOTING AGREEMENTS As an inducement to Phoenix to enter into the merger agreement, and in reliance on representations and warranties of Phoenix contained in the merger agreement, ten Chrysalis stockholders entered into support/voting agreements with Phoenix. As of March 1, 1999, the Chrysalis stockholders who signed support/voting agreements collectively owned 2,695,958 outstanding shares of Chrysalis common stock. Those shares represent 23.1% of the outstanding shares of Chrysalis common stock on that date. Each Chrysalis stockholder who signed a support/voting agreement agreed to support and vote for the adoption of the merger agreement. If the merger agreement is terminated in accordance with its terms, the Chrysalis support/voting agreements will terminate. 53 FORBEARANCE AGREEMENT At September 30, 1998, Chrysalis was in default under its loan agreement with the Bank. The defaults arose from the failure by Chrysalis to meet required financial ratios contained in the loan agreement. The Bank refused to waive the defaults. Instead, Chrysalis, the Bank and Phoenix entered into the forbearance agreement concurrently with the merger agreement. Under the forbearance agreement, the Bank agreed not to exercise its rights and remedies with respect to existing defaults under the loan agreement until January 31, 1999. The forbearance agreement required Chrysalis to place $3.0 million in U.S. Treasury Securities in a pledge account as cash collateral for the benefit of the Bank. A portion of the pledged amount would have been used to pay the $312,500 principal installment due on December 31, 1998. The forbearance agreement also provides that if Phoenix guaranteed repayment of the outstanding loan amount and secured the guaranty with a cash collateral pledge, then the Bank would: - extend the forbearance period until March 31, 1999; - release the $3.0 million pledge of Chrysalis; and - waive the December 1998 principal payment. GUARANTY; PLEDGE AND ASSIGNMENT AGREEMENT; OPTION LETTER In connection with the merger agreement and the forbearance agreement, Phoenix entered into an unconditional guaranty in favor of the Bank. Under the guaranty, Phoenix guaranteed payment of Chrysalis' outstanding indebtedness to the Bank under the loan agreement. As of January 31, 1999, the outstanding principal balance under the loan agreement was US$4,687,500. To secure its obligations under the guaranty, Phoenix delivered US$4,724,975 to a pledged collateral account for the benefit of the Bank. That amount was equal to the outstanding principal amount and accrued interest owed to the Bank by Chrysalis. In the event of a default under the guaranty, the Bank can foreclose on the pledged collateral. In consideration of the delivery by Phoenix to the Bank of the guaranty and the pledged cash collateral, the Bank granted Phoenix the option to acquire from the Bank all of its right, title and interest under the loan agreement and related documents, and all liens, mortgages and security interests that secure any obligations under the loan agreement and related documents. If Phoenix exercises its option, Phoenix will pay to the Bank the payment of the outstanding principal indebtedness under the loan agreement plus all accrued interest. As a result of the delivery of the guaranty and the pledged cash collateral: - the forbearance period was extended until March 31, 1999; - the Bank released Chrysalis' $3.0 million pledge; and - the December 31, 1998 principal payment owed by Chrysalis to the Bank was waived. AMENDMENT TO FORBEARANCE AGREEMENT On March 31, 1999, Chrysalis, the Bank and Phoenix executed an amendment to the forbearance agreement under which: - the forbearance period was extended until April 30, 1999; and - the scope of the forbearance agreement was broadened to cover any defaults as of March 31, 1999. 54 THE SPECIAL MEETING DATE, TIME AND PLACE The special meeting will be held at the Somerset Hills Hotel, 200 Liberty Corner Road, Warren, New Jersey, at 9:00 a.m., local time, on April 30, 1999. MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING At the special meeting, holders of Chrysalis common stock are being asked to adopt the merger agreement. See "The Merger" and "The Merger Agreement." RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM Only holders of record of Chrysalis common stock at the close of business on March 1, 1999, the record date for the special meeting, are entitled to notice of and to vote at the special meeting. On the record date, 11,666,480 shares of Chrysalis common stock were issued and outstanding and held by approximately 208 holders of record, including banks, brokerage firms and other nominees. A majority of the shares of Chrysalis common stock issued and outstanding and entitled to vote on the record date must be represented in person or by proxy at the special meeting in order for a quorum to be present for purposes of transacting business at the special meeting. In the event that a quorum is not present at the special meeting, it is expected that the meeting will be adjourned or postponed to solicit additional proxies. Holders of record of Chrysalis common stock on the record date are each entitled to one vote per share on each matter to be considered at the special meeting. The adoption of the merger agreement requires the affirmative vote of the holders of record of at least a majority of the shares of Chrysalis common stock outstanding on the record date. AN ABSTENTION OR A BROKER NON-VOTE WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE PROPOSAL TO ADOPT THE MERGER AGREEMENT. SHARE OWNERSHIP OF CHRYSALIS MANAGEMENT At the close of business on the record date, directors and executive officers of Chrysalis beneficially owned and were entitled to vote 1,761,983 shares of Chrysalis common stock. These shares represented approximately 15.1% of the shares of Chrysalis common stock outstanding on that date. Each of those directors and executive officers has executed a support/voting agreement with Phoenix that requires them to vote the Chrysalis common stock owned by them FOR adoption of the merger agreement at the special meeting. See "Other Agreements." VOTING OF PROXIES SUBMITTING PROXIES Chrysalis stockholders may vote by attending the special meeting and voting their shares in person at the meeting, or by completing the enclosed proxy card, signing and dating it and mailing it in the enclosed postage pre-paid envelope. If a proxy card is signed by a stockholder and returned without instructions, the shares represented by the proxy will be voted for adoption of the merger agreement. Chrysalis stockholders whose shares are held in "street name," in other words in the name of a broker, bank or other record holder, must either direct the record holder of their shares regarding how to vote their shares or obtain a proxy from the record holder to vote at the special meeting. Chrysalis stockholders whose shares are held in the Chrysalis' employee savings plan must direct the trustee under the plan regarding how to vote their shares. 55 REVOKING PROXIES Chrysalis stockholders of record may revoke their proxies at any time prior to the time their proxies are voted at the special meeting. A stockholder may revoke a proxy by: - sending a written notice, including by telegram or telecopy, to the corporate Secretary of Chrysalis; - mailing a later-dated signed proxy; or - attending the special meeting and voting in person. Attendance at the special meeting will not in and of itself constitute a revocation of a proxy. Any written notice of a revocation of a proxy must be sent so as to be delivered before the taking of the vote at the special meeting as follows: Chrysalis International Corporation 575 Route 28 Raritan, NJ 08869 908/722-7900 908/722-6677 (FAX) Stockholders who require assistance in changing or revoking a proxy should contact Kissel Blake at the address or phone number provided in this proxy statement/prospectus under the caption "Who Can Help Answer Your Questions." GENERAL INFORMATION Brokers who hold shares in street name for customers who are the beneficial owners of those shares are prohibited from giving a proxy to vote those customers' shares with respect to adoption of the merger agreement in the absence of specific instructions from the customer. Stockholders can choose to abstain by marking the proxy card accordingly. Shares of Chrysalis common stock represented by returned proxies that are marked "Abstain" will be treated as present at the special meeting for purposes of determining the presence or absence of a quorum for the transaction of all business. An abstention or a broker non-vote will have the same effect as a vote against the proposal to adopt the merger agreement. Chrysalis will pay the costs of solicitation of proxies. However, Phoenix will pay one-half of the costs of filing, printing and mailing this proxy statement/prospectus. In addition to solicitation by mail, the directors, officers and employees of Chrysalis may also solicit proxies from stockholders by telephone, telecopy, telegram or in person. Arrangements will also be made with brokerage houses and other custodians, nominees and fiduciaries to send the proxy materials to beneficial owners. Chrysalis will, upon request, reimburse those brokerage houses and custodians for their reasonable expenses in so doing. Phoenix will reimburse Chrysalis for one-half of these costs. Chrysalis has retained Kissel Blake, a division of Shareholder Communications Corporation to aid in the solicitation of proxies and to verify certain records related to the solicitations. Kissel Blake will receive a fee of $7,500 as compensation for its services and reimbursement for its related out-of-pocket expenses. Chrysalis has agreed to indemnify Kissel Blake against specified liabilities arising out of or in connection with its engagement. 56 FINANCIAL STATEMENT PRESENTATION AND EXCHANGE RATES Phoenix expects that after the merger it will be a "foreign private issuer" under the Securities Exchange Act of 1934. As a foreign private issuer, Phoenix will be able to file reports under the Securities Exchange Act pursuant to the multi-jurisdictional disclosure system. The system permits eligible companies in the U.S. and Canada to offer securities in each other's country using the disclosure documents of their home country. Under Canadian corporate and securities law, Phoenix is required to prepare and file financial information under Canadian GAAP. The differences between Canadian GAAP and U.S. GAAP may result in material differences for Phoenix. For a reconciliation to U.S. GAAP of Phoenix's financial statements for each of the three years ended August 31, 1998, see Note 15 to the consolidated financial statements of Phoenix beginning on page F-2. Phoenix will continue to report its results under Canadian GAAP after the merger, and will continue providing a reconciliation to U.S. GAAP. The following table presents, for each period indicated: - the high and low exchange rates for one U.S. dollar expressed in Canadian dollars; - the average of those exchange rates on the last day of each month during each period; and - the exchange rate at the end of each period. The exchange rates are based upon the noon buying rate determined by the Federal Reserve Bank of New York.
(IN CANADIAN DOLLARS) ------------------------------------------------------------------- THREE MONTHS ENDED YEAR ENDED AUGUST 31, NOVEMBER 30, ----------------------------------------------------- 1998 1998 1997 1996 1995 1994 ------------ --------- --------- --------- --------- --------- High........................................ $ 1.5570 $ 1.5770 $ 1.3995 $ 1.3822 $ 1.4238 $ 1.3954 Low......................................... $ 1.5012 $ 1.3713 $ 1.3310 $ 1.3285 $ 1.3373 $ 1.2935 Average..................................... $ 1.5310 $ 1.4490 $ 1.3707 $ 1.3634 $ 1.3742 $ 1.3573 Period End.................................. $ 1.5230 $ 1.5745 $ 1.3890 $ 1.3685 $ 1.3432 $ 1.3712
The following table presents, for each period indicated: - the high and low exchange rates for one Canadian dollar expressed in U.S. dollars: - the average of those exchange rates on the last day of each month during each period; and - the exchange rate at the end of each period. The exchange rates are based upon the noon buying rate determined by the Federal Reserve Bank of New York.
(IN U.S. DOLLARS) ------------------------------------------------------------------- THREE MONTHS ENDED YEAR ENDED AUGUST 31, NOVEMBER 30, ----------------------------------------------------- 1998 1998 1997 1996 1995 1994 ------------ --------- --------- --------- --------- --------- High........................................ $ 0.6423 $ 0.6341 $ 0.7145 $ 0.7235 $ 0.7023 $ 0.7166 Low......................................... $ 0.6661 $ 0.7292 $ 0.7513 $ 0.7527 $ 0.7478 $ 0.7731 Average..................................... $ 0.6532 $ 0.6901 $ 0.7296 $ 0.7335 $ 0.7277 $ 0.7368 Period End.................................. $ 0.6564 $ 0.6351 $ 0.7199 $ 0.7307 $ 0.7445 $ 0.7293
57 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION The unaudited pro forma consolidated financial information is derived from the financial information listed below, adjusted to give effect to the transactions described below: - audited historical consolidated information of Phoenix as at and for the year ended August 31, 1998 - unaudited interim historical consolidated information of Phoenix as at and for the three months ended November 30, 1998 - unaudited historical consolidated financial information of Chrysalis for the 12 months ended September 30, 1998 - unaudited historical consolidated financial information of Chrysalis for the 3 months ended December 31, 1998 - audited historical consolidated balance sheet financial information in U.S. GAAP and in U.S. dollars of Chrysalis as at December 31, 1998 The historical unaudited consolidated income statement of Chrysalis for the 12 months ended September 30, 1998 was calculated from Chrysalis' unaudited financial statements for the quarter ended December 31, 1997 and the Chrysalis unaudited interim financial statements for the nine months ended September 30, 1998. The unaudited pro forma consolidated statements of income (loss) for the year ended August 31, 1998 and the three month period ended November 30, 1998 give effect to the following transactions as if they had occurred on September 1, 1997: - Phoenix's acquisition of IBRD-Rostrum during the year ended August 31, 1998; and - the merger and certain related transactions. The unaudited pro forma consolidated balance sheet gives effect to the merger and related transactions as if they had occurred on November 30, 1998. The IBRD-Rostrum transactions include the Phoenix acquisition of IBRD-Rostrum and the assumption of indebtedness and the necessary purchase accounting and elimination entries. The IBRD-Rostrum acquisition was completed on February 6, 1998. The Chrysalis transactions include: - the merger, including the repayment of indebtedness, and the preliminary purchase accounting and elimination entries; - the conversion of each share of Chrysalis common stock, including stock options, into approximately 1,001,208 Phoenix common shares and approximately 154,000 Phoenix stock options; and - the incurrence of indebtedness relating to the repayment of the Chrysalis indebtedness referred to in the first bullet point above. The IBRD-Rostrum transactions and the Chrysalis transactions have been accounted for using the purchase method of accounting under both Canadian GAAP and U.S. GAAP in the unaudited pro forma consolidated financial information. The unaudited pro forma consolidated financial information does not necessarily represent what Phoenix's results of operations or financial condition would have been had the IBRD-Rostrum transactions and Chrysalis transactions actually occurred on the dates indicated and is not a prediction of Phoenix's results of operations or financial condition in the future. You should read the unaudited pro forma consolidated financial information in conjunction with the historical consolidated financial statements of Phoenix, IBRD-Rostrum and Chrysalis and the notes thereto, "Management's Discussion and Analysis 58 of Financial Condition and Results of Operations of Phoenix" and "Management's Discussion and Analysis of Financial Condition and Results of Operations of Chrysalis." The unaudited pro forma consolidated financial information has been prepared in accordance with Canadian GAAP, which differs in certain material respects from U.S. GAAP. Note 15 to the consolidated financial statements of Phoenix describes the principal differences between Canadian GAAP and U.S. GAAP as they relate to Phoenix. Note 10 to the unaudited pro forma consolidated financial information includes a reconciliation of the unaudited pro forma consolidated balance sheet and unaudited pro forma consolidated statements of income (loss) from Canadian GAAP to U.S. GAAP. The unaudited pro forma consolidated financial information is presented in Canadian dollars. The audited historical financial statements of Phoenix are presented in Canadian dollars and are in accordance with Canadian GAAP. The unaudited historical consolidated financial statements of Chrysalis are presented in U.S. dollars and are in accordance with U.S. GAAP. For the purpose of presenting the unaudited pro forma consolidated financial information, the Chrysalis statement of income for the three months ended December 31, 1998 was translated into Canadian dollars at a rate of 1.5310 Canadian dollars per 1.00 U.S. dollar. The Chrysalis statement of income for the 12 months ended September 30, 1998 was translated into Canadian dollars at a rate of 1.4490 Canadian dollars per 1.00 U.S. dollar. Phoenix has translated the audited historical consolidated balance sheet of Chrysalis at December 31, 1998 into Canadian dollars at a rate of 1.5230 Canadian dollars for 1.00 U.S. dollar. You should not view Phoenix's use of these exchange rates in the unaudited pro forma consolidated financial information as a representation that the U.S. dollar amounts actually represent these Canadian dollar amounts or could be converted into Canadian dollars at the rate indicated or at any other rate, at any time. In preparing the pro forma adjustments reflected in the accompanying notes, Phoenix made estimates and assumptions that it believes to be reasonable. The unaudited pro forma consolidated statements of income (loss) do not include adjustments for any synergies, including cost savings, or restructuring costs, which may occur or are expected to occur as a result of the IBRD-Rostrum or Chrysalis transactions. See also Note 6 to the unaudited pro forma consolidated financial information. The pro forma adjustments do not reflect the acquisitions by Phoenix of either Clinserve or McKnight because they are not significant to the consolidated financial statements of Phoenix. The Phoenix common shares currently trade on the Montreal Exchange and Toronto Stock Exchange and are traded in Canadian dollars. Phoenix calculated the approximate number of 1,001,208 Phoenix common shares and 154,000 Phoenix stock options to be issued in the merger using the formula described in "The Merger Agreement--Effect on Chrysalis Common Stock and Outstanding Options." 59 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME (LOSS) FOR THE THREE MONTH PERIOD ENDED NOVEMBER 30, 1998 (AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS) UNAUDITED
HISTORICAL HISTORICAL HISTORICAL PHOENIX CHRYSALIS CHRYSALIS THREE MONTH THREE MONTH THREE MONTH ADJUSTMENTS FOR PERIOD ENDED PERIOD ENDED PERIOD ENDED 1998 CHRYSALIS PRO FORMA NOVEMBER 30, 1998 DECEMBER 31, 1998 DECEMBER 31, 1998 TRANSACTION PHOENIX CDN $ US $ CDN $ CDN $ CDN $ ----------------- ----------------- ----------------- ---------------- ------------ (NOTE 5) Gross revenues................. 74,163 11,329 17,345 91,508 Reimbursed costs............... 15,502 709 1,085 16,587 ----------------- ----------------- ----------------- ---------------- ------------ Net revenues................... 58,661 10,620 16,260 74,921 Direct costs--net of refundable tax credits.................. 34,695 7,395 11,322 46,017 ----------------- ----------------- ----------------- ---------------- ------------ Gross profit................... 23,966 3,225 4,938 28,904 ----------------- ----------------- ----------------- ---------------- ------------ Expenses--net of refundable tax credits Selling, general and administrative............... 17,520 4,134 6,329 23,849 Internal research and development.................. 866 -- -- 866 Interest expense............... 1,425 434 663 (498)(8) 1,876 286(8) Amortization of goodwill and -- other intangible assets...... 732 -- -- 256(9) 988 Restructuring costs............ -- 3,872 5,928 5,928 Non-refundable tax credits..... (1,500) -- (1,500) ----------------- ----------------- ----------------- ---------------- ------------ 4,923 (5,215) (7,982) (44) (3,103) ----------------- ----------------- ----------------- ---------------- ------------ Interest and other income...... 246 254 387 633 ----------------- ----------------- ----------------- ---------------- ------------ Income (loss) before income taxes........................ 5,169 (4,961) (7,595) (44) (2,470) Income taxes................... 2,315 512 782 3,097 ----------------- ----------------- ----------------- ---------------- ------------ Net income (loss).............. 2,854 (5,473) (8,377) (44) (5,567) ----------------- ----------------- ----------------- ---------------- ------------ ----------------- ----------------- ----------------- ---------------- ------------ Weighted Average Shares Outstanding.................. 25,155,226 11,523,105 1,001,208(6) 26,156,434 (11,523,105)(6) ----------------- ----------------- ---------------- ------------ ----------------- ----------------- ---------------- ------------ Basic Earnings (Loss) Per Share........................ 0.11 (0.73) (0.21) ----------------- ----------------- ------------ ----------------- ----------------- ------------
60 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME (LOSS) FOR THE YEAR ENDED AUGUST 31, 1998 (AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS) UNAUDITED
12 MONTH PERIOD ENDED YEAR ENDED AUGUST 31, 1998 SEPTEMBER 30, 1998 --------------------------------------- --------------------------- ADJUSTMENTS ADJUSTMENTS FOR 1998 PRO FORMA FOR 1998 HISTORICAL IBRD- ROSTRUM HISTORICAL HISTORICAL HISTORICAL CHRYSALIS PRO FORMA PHOENIX TRANSACTION PHOENIX CDN CHRYSALIS US CHRYSALIS TRANSACTION PHOENIX CDN CDN $ CDN $ $ $ CDN $ CDN $ $ ----------- ------------- ----------- ------------- ------------ ------------ ----------- (NOTE 1) (NOTE 5) Gross revenues........... 218,360 41,367 259,727 45,631 66,119 325,846 Reimbursed costs......... 47,122 15,301 62,423 5,243 7,597 70,020 ----------- ------ ----------- ------ ------------ ------------ ----------- Net revenues............. 171,238 26,066 197,304 40,388 58,522 255,826 Direct costs--net of refundable tax credits................ 99,971 22,993 122,964 31,448 45,568 168,532 ----------- ------ ----------- ------ ------------ ------------ ----------- Gross profit............. 71,267 3,073 74,340 8,940 12,954 87,294 ----------- ------ ----------- ------ ------------ ------------ ----------- EXPENSES--NET OF REFUNDABLE TAX CREDITS Selling, general and administrative......... 51,855 4,341 56,196 14,963 21,683 77,879 Internal research and development............ 3,698 -- 3,698 -- -- 3,698 Interest expense......... 3,323 1,175(3) 4,498 1,280 1,855 (1,261)(8) 6,235 1,143(8) Amortization of goodwill and other intangible assets................. 2,164 472(2) 2,636 -- -- 1,021(9) 3,657 Write-off of deferred start up costs......... 932 -- 932 -- -- 932 Non-refundable tax credits................ (5,000) -- (5,000) -- -- (5,000) ----------- ------ ----------- ------ ------------ ------------ ----------- 14,295 (2,915) 11,380 (7,303) (10,584) (903) (107) ----------- ------ ----------- ------ ------------ ------------ ----------- Interest and other income................. 1,282 40 1,322 334 484 1,806 Share in earnings of equity accounted investees.............. 114 -- 114 -- -- 114 ----------- ------ ----------- ------ ------------ ------------ ----------- Income (loss) before income taxes........... 15,691 (2,875) 12,816 (6,969) (10,100) (903) 1,813 Income taxes............. 6,624 172(4) 6,796 363 526 7,322 ----------- ------ ----------- ------ ------------ ------------ ----------- Net income (loss)........ 9,067 (3,047) 6,020 (7,332) (10,626) (903) (5,509) ----------- ------ ----------- ------ ------------ ------------ ----------- Weighted Average Shares Outstanding............ 24,478,111 11,432,141 1,001,208(6) 25,479,319 ----------- ------------ ----------- Basic Earnings (Loss) Per Share.................. 0.37 (0.93) (11,432,141)(6) (0.22) ----------- -----------
61 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS AT NOVEMBER 30, 1998 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) UNAUDITED
HISTORICAL HISTORICAL PHOENIX CHRYSALIS CDN $ US $ AS AT AS AT HISTORICAL CHRYSALIS PRO FORMA NOVEMBER 30, DECEMBER 31, CHRYSALIS TRANSACTION PHOENIX 1998 1998 CDN $ CDN $ CDN $ ------------- ------------- ------------- ------------- ----------- (NOTE 5) ASSETS Current Cash...................................... 18,329 6,705 10,212 28,541 Marketable securities..................... 2,000 -- -- 2,000 Accounts receivable....................... 56,459 8,766 13,351 69,810 Investment tax credits recoverable........ 3,886 -- -- 3,886 Costs and estimated profit in excess of progress billings on contracts in progress................................ 28,147 -- -- 28,147 Other..................................... 8,741 1,928 2,936 11,677 ------------- ------------- ------------- ------------- ----------- 117,562 17,399 26,499 144,061 ------------- ------------- ------------- ------------- ----------- Capital assets............................ 59,624 15,686 23,890 1,874(6) 85,388 Goodwill and other long term assets....... 126,729 1,496 2,278 16,699(6) 145,706 ------------- ------------- ------------- ------------- ----------- 303,915 34,581 52,667 18,573 375,155 ------------- ------------- ------------- ------------- ----------- ------------- ------------- ------------- ------------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Bank indebtedness......................... 3,565 2,931 4,464 8,029 Accounts payable and accrued liabilities............................. 56,768 12,384 18,861 4,103(6) 79,732 Current portion of long-term debt, related party note and capital lease obligations............................. 8,382 5,140 7,828 (7,626)(6) 16,210 7,626(8) Progress billings in excess of costs and estimated profit on contracts in progress................................ 42,334 5,297 8,067 -- 50,401 ------------- ------------- ------------- ------------- ----------- 111,049 25,752 39,220 4,103 154,372 ------------- ------------- ------------- ------------- ----------- Long-term debt and capital lease obligations............................. 41,843 6,010 9,153 (6,051)(6) 52,560 6,051(8) 1,564(6) Other long term liabilities............... 3,718 2,557 3,894 7,612 ------------- ------------- ------------- ------------- ----------- 156,610 34,319 52,267 5,667 214,544 ------------- ------------- ------------- ------------- ----------- ------------- ------------- ------------- ------------- ----------- Shareholders' equity Capital stock............................. 125,027 115 175 (175)(7) 138,293 13,266(6) Additional paid in capital................ -- 59,003 89,862 (89,862)(7) -- Stock options............................. -- -- -- 40(6) 40 Cumulative translation adjustment......... 1,165 (108) (164) 164(7) 1,165 Retained earnings (deficit)............... 21,113 (58,748) (89,473) 89,473(7) 21,113 ------------- ------------- ------------- ------------- ----------- 147,305 262 400 12,906 160,611 ------------- ------------- ------------- ------------- ----------- 303,915 34,581 52,667 18,573 375,155 ------------- ------------- ------------- ------------- ----------- ------------- ------------- ------------- ------------- -----------
62 NOTES TO UNAUDITED PRO-FORMA CONSOLIDATED FINANCIAL INFORMATION [AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS EXCEPT PER SHARE AMOUNTS] NOTE 1 Reflects the operations of IBRD-Rostrum from September 1, 1997 to February 6, 1998. Phoenix has translated amounts into Canadian dollars at the rate of 1.42 Canadian dollars for each U.S. dollar. That rate is the average exchange rate for the period September 1, 1997 to February 6, 1998 used by Phoenix in the preparation of the Phoenix consolidated financial statements. NOTE 2 Reflects the net pro forma amount of goodwill amortization of $472 following the revaluation of the assets and liabilities of IBRD-Rostrum: Goodwill amortization of purchased businesses of IBRD-Rostrum as reflected in Note 1 $ 1,715 Reversal of goodwill amortization (1,715) Amortization of goodwill of Phoenix incurred in connection with the IBRD-Rostrum transactions 472 --------- PRO FORMA AMORTIZATION OF GOODWILL $ 472 --------- ---------
NOTE 3 Reflects the amount of pro forma interest expense of $1,175 related to the borrowings for the IBRD-Rostrum transactions: Interest expense of purchased businesses as reflected in Note 1 $ 102 Reversal of interest for debt repaid in connection with IBRD-Rostrum transaction (102) Interest expense that would have been incurred on borrowings of approximately U.S. $26.3 million to effect the IBRD-Rostrum transaction, bearing interest at approximately 7.5% 1,175 --------- NET INCREASE IN INTEREST EXPENSE $ 1,175 --------- ---------
NOTE 4 Reflects the assumed tax effect of results of the operations of IBRD-Rostrum as defined in notes 1, 2, and 3. NOTE 5 Phoenix has reclassified the Chrysalis historical unaudited consolidated financial information to conform to Phoenix's presentation. NOTE 6 To record (1) $4,103 of additional Phoenix accounts payable necessary to fund certain obligations of the merger, (2) the issuance of 1,001,208 Phoenix common shares in the merger having an aggregate value of $13,266 based on the closing value of the Phoenix common shares of $13.25 per share on the 63 Toronto Stock Exchange on April 1, 1999, (3) the issuance of approximately 154,000 options to purchase Phoenix common shares with a fair value of approximately $40 and (4) goodwill, which is the excess of purchase price over the assumed fair value of the identifiable net assets acquired. Phoenix assumed that the historical carrying value of the tangible and intangible assets of Chrysalis approximated fair value, except for those assets identified in the following table: Phoenix calculated goodwill as follows: PRO FORMA CARRYING VALUE: Carrying value of Chrysalis before pro forma adjustments 400 PRO FORMA ADJUSTMENTS: Fair value adjustments Patent license-excess of fair value over carrying value 1,568(d) Land-excess of fair value over carrying value 1,874(e) MDS note-increase in value of liability (1,564) Intangible asset -- AAALAC accreditation 185(g) Intangible asset -- Senior scientific staff 270(h) Repayment of indebtedness: Payment of current portion of long-term debt and related party note 7,626(a) Payment of long-term debt 6,051(a) Payment of fair value increment on MDS note 1,564(a) --------- Pro forma carrying value 17,974 --------- --------- CONSIDERATION EXCHANGED: Assumed fair value of Phoenix common shares issued 13,266 Assumed fair value of Phoenix stock options issued 40(f) Debt incurred on acquisition for the following: Current portion of long-term debt 7,626 Long-term debt 6,051 MDS note 1,564 --------- Total consideration exchanged 28,547 --------- --------- Liabilities assumed on acquisition for estimated costs of the merger 4,103(b) --------- Pro forma goodwill 14,676(c) --------- ---------
a. The merger agreement requires Phoenix to repay substantially all of the short-term debt and long-term debt of Chrysalis, except for mortgages on Chrysalis' Scranton, Pennsylvania properties. b. This amount includes legal, financial, accounting, and other costs incurred by Phoenix and Chrysalis to complete the merger. These fees are non-recurring. Therefore, no adjustment has been made to the unaudited pro-forma statements of income (loss). c. Phoenix has not made any adjustments for any synergies, including cost savings, or restructuring costs, which may or are expected to occur as a result of the merger. Chrysalis expects to incur approximately $5,924, or US$3,872, in severance and restructuring costs relating to restructuring plans and has accrued this amount in its historical audited financial statements for the year ended December 31, 1998, which were used in compiling the unaudited pro-forma consolidated financial information. Phoenix anticipates that there will be additional restructuring costs to be incurred by Phoenix as a result of the merger. These costs may form part of the purchase price allocation which would increase goodwill by a corresponding amount. 64 d. Phoenix has computed the fair value for the DNA microinjection patent license by calculating the net present value of the expected net cash flows generated by the patent license over the remainder of its seven year life, using a discount rate of 10%. e. An independent appraiser engaged by Phoenix has determined that the fair value of certain of Chrysalis' land exceeds the book value by $1,874. f. In accordance with the merger agreement, Phoenix will issue approximately 154,000 Phoenix stock options in exchange for approximately 1,800,000 stock options of Chrysalis. The fair value of these options, $40, has been included as part of the consideration paid by Phoenix. The fair value of each option was estimated as the amount by which the Phoenix share price of $13.25 on April 1, 1999, exceeded the exercise price of the Phoenix stock option to be granted. g. Phoenix estimated the fair value associated with the American Association Of Accreditation of Laboratory Animal Colonies (AAALAC) accreditation to be $185, based on an estimate of the costs associated with obtaining this accreditation. h. Phoenix estimated the fair value of hiring and training the qualified expert scientific staff required to perform transgenic/genomic services to be $270, based on the costs that would be incurred to hire and train this staff. NOTE 7 To eliminate equity accounts on the consolidation of Chrysalis. NOTE 8 Additional debt incurred to repay the following indebtedness: Current portion of long-term debt, including related party note $ 7,626 Long-term debt 6,051 Increment on MDS note 1,564 --------- $ 15,241 --------- ---------
An assumption was made that interest on the additional debt would be at 7.5%. The assumption results in additional interest expense of $1,143 for the 12 months ended August 31, 1998, and $286 for the 3 months ended November 30, 1998. NOTE 9 To record the amortization of goodwill and the fair value increment related to identifiable intangible assets in accordance with the following table:
AMORTIZATION PERIOD ANNUAL QUARTERLY DESCRIPTION OF INTANGIBLE COST (YEARS) AMORTIZATION AMORTIZATION - ---------------------------------------- --------- --------------- ------------ --------------- Goodwill................................ $ 14,676 20 $ 734 $ 184 Microinjection Patent................... 1,568 7 224 56 AAALAC accreditation.................... 185 20 9 2 Expert scientific staff................. 270 5 54 14 --------- --- ------------ ----- 16,699 1,021 256
The actual amortization of goodwill recorded upon consummation of the merger will differ from this amount because of differences between the estimated and final allocation of the purchase price to the net assets acquired. The differences may be material. 65 NOTE 10 The unaudited pro forma consolidated financial information has been prepared in accordance with Canadian GAAP. Note 15 to the consolidated financial statements of Phoenix sets out the material adjustments to Phoenix's reported net income and balance sheet in order to conform to U.S. GAAP and the practices and principles required by the Securities and Exchange Commission. None of the pro forma adjustments made under Canadian GAAP would be different under U.S. GAAP except as described in the paragraph below. Under Canadian GAAP, the aggregate value for accounting purposes of the Phoenix common shares and stock options to be issued in the merger will only be known with certainty once the Chrysalis transactions are consummated. Phoenix will calculate the value for accounting purposes by referring to the prevailing value of the Phoenix common shares for a short period of time before and after the date the merger is completed. Therefore, the estimated values for the Phoenix common shares and stock options contained in the unaudited pro forma consolidated financial information will differ from actual values. These differences may be material. This differs from U.S. GAAP which requires the value of the Phoenix common shares and stock options for accounting purposes to be determined by reference to the market value of the Phoenix common shares for a short period of time both before and after the date the merger was announced. The following tables summarize selected U.S. GAAP pro forma balance sheet and statement of income (loss) data, but do not reflect adjustments for this difference because it is not currently possible to quantify this difference. For U.S. GAAP purposes, the estimated value of the Phoenix common shares and stock options would be approximately $13,200 based on the average Phoenix common share value for the 5 days before and after November 18, 1998. 66 UNAUDITED PRO FORMA STATEMENT OF INCOME (LOSS) AND COMPREHENSIVE LOSS
3 MONTHS ENDED YEAR ENDED NOVEMBER 30, 1998 AUGUST 31, 1998 ---------------------------- ---------------------------- THOUSANDS OF CANADIAN THOUSANDS OF CANADIAN DOLLARS DOLLARS EXCEPT PER SHARE AMOUNTS EXCEPT PER SHARE AMOUNTS Net income of Phoenix in accordance with U.S. GAAP $ 2,691 $ 11,501 PRO FORMA ADJUSTMENTS UNDER U.S. AND CANADIAN GAAP: Adjustments for historical Chrysalis Statement of Income (8,377) (10,626) Adjustments for the 1998 IBRD-Rostrum transaction -- (3,047) Adjustments for the Chrysalis transactions (44) (903) ----------- ----------- Pro forma net loss in accordance with U.S. GAAP (5,730) (3,075) Foreign currency translation adjustment of Phoenix.... 30 1,135 Foreign currency translation adjustment of Chrysalis........................................... 365 (186) ----------- ----------- Pro forma comprehensive loss in accordance with U.S. GAAP................................................ (5,335) (2,126) ----------- ----------- Pro forma weighted average shares outstanding 27,048,397(a) 25,829,753(a) ----------- ----------- Pro forma basic and diluted loss per share $ (0.21) $ (0.12) ----------- ----------- ----------- -----------
- ------------------------ (a) Pro forma weighted average shares outstanding under U.S. GAAP exceeds the number under Canadian GAAP because business combinations occurred in both periods. The purchase method was applied to all of these business combinations for Canadian GAAP. Under the purchase method, Phoenix common shares issued in the business combinations are considered outstanding from the date of the business combination. The pooling of interests method was applied to some of these business combinations for U.S. GAAP. Under the pooling of interests method, Phoenix common shares issued in the business combinations are considered outstanding as of September 1, 1997. 67 UNAUDITED PRO FORMA BALANCE SHEET
NOVEMBER 30, 1998 ------------------------------------------------------------------ PRO FORMA ADJUSTMENTS ---------------------------------- [IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS] ADJUSTMENTS FOR HISTORICAL HISTORICAL ADJUSTMENTS FOR PHOENIX CHRYSALIS 1998 CHRYSALIS U.S.GAAP U.S.GAAP ACQUISITION PRO FORMA NOVEMBER 30, 1998 DECEMBER 31, 1998 TRANSACTIONS U.S. GAAP ----------------- ----------------- --------------- ----------- Current assets............................... $ 117,562 $ 26,499 -- $ 144,061 Non-current assets 118,729 26,168 $ 18,573 163,470 -------- -------- --------------- ----------- TOTAL ASSETS................................. 236,291 52,667 18,573 307,531 -------- -------- --------------- ----------- -------- -------- --------------- ----------- Current liabilities.......................... 111,049 39,220 4,103 154,372 Non-current liabilities 45,561 13,047 1,564 60,172 -------- -------- --------------- ----------- TOTAL LIABILITIES............................ 156,610 52,267 5,667 214,544 -------- -------- --------------- ----------- Capital stock................................ 57,100 175 13,091 70,366 Cumulative translation adjustment............ 714 (164) 164 714 Additional paid-in capital................... 1,686 89,862 (89,862) 1,686 Stock options................................ -- -- 40 40 Retained earnings............................ 20,181 (89,473) 89,473 20,181 -------- -------- --------------- ----------- TOTAL SHAREHOLDERS' EQUITY................... 79,681 400 12,906 92,987 -------- -------- --------------- ----------- $ 236,291 $ 52,667 $ 18,573 $ 307,531 -------- -------- --------------- ----------- -------- -------- --------------- -----------
68 DESCRIPTION OF PHOENIX OVERVIEW Phoenix is one of the largest contract research organizations in the world, providing a comprehensive range of research and development services to the pharmaceutical and biotechnology industries. Phoenix's largest single business measured by revenues is Phase II-IV clinical research services, for which it believes it is a leading provider with operations in the United States, Canada and Europe. Phoenix is also one of the world's leading contract research organization providers of bioanalytical services to drug companies, based on laboratory throughput capacity. Phoenix believes it is also a leading provider of Phase I clinical research services, with over 500 beds located in the United States, Canada and Germany. In addition to these core services, Phoenix offers a variety of related services and products, and is a pioneer in the development of emerging services, such as drug discovery support. With the proposed acquisition of Chrysalis, Phoenix believes that, unlike most other contract research organizations, it will be able to provide all major functions required for drug development, from just after drug discovery through to registration of the final product and post-marketing studies. Phoenix believes that the breadth and depth of its service offerings distinguish it from its competitors, while providing a diversified revenue base and portfolio of business. Moreover, Phoenix believes that the acquisition of Chrysalis will add further balance to its service profile, with the business distributed between four main lines of business: - discovery support/preclinical; - Phase I clinical studies; - Phase II-IV clinical studies; and - laboratory services. Phoenix believes that balancing its business mix in this way will lessen the financial impact of a possible downturn in any one service area, and will decrease the financial impact of possible cancellation of major contracts in Phase II-IV clinical research. Phoenix emphasizes scientific expertise and innovation throughout its operations. Phoenix pioneered, and is a leader in, the use of liquid chromatography/mass spectrometry instruments, which analyze drugs in biological fluids. These bioanalytical methods combine accuracy and sensitivity with high throughput capabilities that at times can significantly reduce test times from a month to a week. In the emerging field of drug discovery support, Phoenix has developed new methods for accelerating drug candidate optimization. Phoenix believes that it has built a scientific organization with quality and depth that is widely recognized in the drug development industry. Phoenix also believes this scientific organization possesses the expertise to conduct scientifically challenging laboratory and clinical studies. Of the 2,036 people employed by Phoenix on November 30, 1998, 179 held medical degrees or Ph.D.'s and 230 held masters degrees. Phoenix's employees include: - chemists; - biochemists; - clinical researchers; - pharmacokineticists; - physicians; - pharmacologists; - statisticians; and - computer software specialists with expertise in various aspects of the drug development process. 69 Phoenix is headquartered in Montreal. Phoenix began operations in 1989 and became a public company listed on the Toronto Stock Exchange and the Montreal Exchange in 1994. Phoenix has expanded its core bioanalytical and Phase I businesses primarily through internal growth. Phoenix has grown rapidly in the Phase II-IV market, primarily through acquisitions. In August 1997, Phoenix acquired ITEM, a leading European Phase II-IV contract research organization. In February 1998, Phoenix acquired IBRD-Rostrum, an international contract research organization with Phase II-IV operations in the United States, the United Kingdom and continental Europe, and a presence in South Africa. Phase II-IV is now Phoenix's largest single business. Over the last two years, Phoenix has provided bioanalytical or Phase I services to 18 of the largest 20 pharmaceutical companies in the world, as ranked by revenues, and believes it provided these services to all of the major generic drug companies in North America. During the same time period, Phoenix, ITEM and IBRD-Rostrum together have provided Phase II-IV services to 17 of the largest 20 pharmaceutical companies in the world. Over the last two years Phoenix, ITEM and IBRD-Rostrum have performed one or more of its services for 19 of the 20 largest pharmaceutical companies in the world, as rated by 1997 revenues. INDUSTRY OVERVIEW GENERAL The contract research organization industry provides independent drug research and drug development services for the pharmaceutical and biotechnology industries. Companies in these industries outsource these services to contract research organizations in order to manage the drug development process more efficiently and cost effectively. The contract research organization industry has evolved since the 1970s. It began with a small number of companies that provided limited pre-clinical and clinical services. The industry has grown into a larger number of contract research organizations that offer a range of services encompassing most of the research and development process, including: - drug discovery support; - pre-clinical development; - bioanalysis; - clinical studies; - clinical data management; - study design; - biostatistical analysis; - pharmaceutical product analysis; and - regulatory affairs services. Contract research organizations derive a significant portion and in many cases substantially all of their revenue from the research and development expenditures of pharmaceutical and biotechnology companies. Phoenix estimates that 1997 worldwide expenditures by pharmaceutical and biotechnology companies on drug research and development were at least US$35 billion, of which approximately US$23 billion were for services of the type offered by contract research organizations. Phoenix further estimates that in 1997, pharmaceutical and biotechnology companies outsourced approximately US$3.9 billion of these expenditures to contract research organizations. The contract research organization industry is highly fragmented with hundreds of small, limited-service providers, a limited number of contract research organizations with multinational operations, and fewer still that offer a comprehensive range of services. Phoenix believes that there are significant barriers to 70 becoming a full-service contract research organization with multinational capabilities. These barriers include: - the experience and infrastructure necessary to meet the demands of clients; - the ability to manage simultaneously complex clinical trials in numerous countries; - the ability to provide expertise across a broad range of therapeutic areas; - the ability to provide a wide range of services; - the capability to make large-scale investments in information technology; - the high cost of compliance with government regulations; - capital constraints; and - the time it takes to build a scientific organization and accumulate scientific and technical know-how. In recent years, the contract research organization industry has experienced consolidation, leading to the emergence of a small group of contract research organizations that have the capital, technical resources, multinational capabilities and expertise to conduct multiple phases of clinical and other studies. Phoenix believes that in order to reduce administrative burdens and enhance quality, large pharmaceutical companies are increasingly selecting from a limited number of multi-service contract research organizations with which to work. Phoenix believes that industry consolidation will lead to further opportunities for larger contract research organizations with a track record of: - quality; - speed; - flexibility; - responsiveness; - multinational capabilities; and - scientific expertise. TYPES OF CONTRACT RESEARCH ORGANIZATION SERVICES Although demand has grown for a variety of contract research organization services over the years, individual contract research organizations have historically provided a limited range of services that encompass only specific phases of the drug development process. This is because the skills and expertise required to address different phases of the drug development process vary markedly. The principal types of services of the contract research organization market are: PHASE I CLINICAL STUDIES SERVICES. Phase I clinical studies play a critical role in: (1) screening new drug candidates for human safety; and (2) establishing initial doses in patients prior to entering more expensive, later phase clinical trials involving much larger groups of people. Phase I clinical studies are typically conducted on small groups of 20 to 80 healthy human volunteers and generally take six months to one year to complete. According to industry sources, Phase I clinical studies accounted for approximately 8% of contract research organization industry revenue in 1997. Phase I clinical studies fall into three broad categories: (1) early Phase I studies to determine the safety and pharmacokinetics of a drug candidate being tested on humans for the first time; (2) later Phase I studies to further evaluate the pharmacokinetics and pharmacodynamics of the drug candidate; and 71 (3) bioequivalence studies to compare two different formulations of the same drug. Since early Phase I studies involve the introduction of new drug candidates into humans for the first time, they are typically conducted in a highly controlled environment similar to that which exists in the intensive care unit of a hospital. On site medical doctors, registered nurses and clinical investigators constantly monitor the subjects. Later Phase I studies are conducted in a somewhat less rigorous but still highly controlled environment. Bioequivalence studies involve comparing two formulations of the same drug, with the test drugs being new formulations of either: - experimental or brand name drugs; or - generic formulations of approved drugs for which patents are expiring. Bioequivalence studies are usually conducted in less medically intensive, but still rigorous settings. The European market for Phase I contract research organization services benefits from a regulatory environment that is less strict than in the United States. The European regulatory environment allows pharmaceutical companies to launch early Phase I clinical studies. For example, in Germany, a Phase I study can be launched as soon as the regulatory authority has been notified. In the U.K., a Phase I study can be launched as soon as the institutional review board has approved the trial with no need of informing the regulatory agency whatsoever. The standards are in contrast to the 30-day statutory review period required in the United States or the 60-day regulatory review period required in Canada. Global pharmaceutical companies often initiate early Phase I studies in Europe to speed the early phases of drug development and then conduct subsequent phases in North America. According to a report of the Drugs Directorate Clinical Trial Working Group (Health Canada, January 22, 1997), Canadian regulatory authorities have received a recommendation to shorten the review period for Phase I clinical studies, virtually eliminating the waiting period and matching the 24-hour European standard. Phoenix believes that if regulatory changes implementing this proposal are adopted, the number of Phase I clinical studies conducted in Canada could significantly increase. There can be no assurance, however, that the proposed changes will be adopted. Currently, the market for Phase I clinical studies is made up of many small providers, with only a few large providers operating in North America and Europe. Barriers to entry include: - the capital investment required to build and equip a Phase I clinical facility; - the need for experienced and knowledgeable staff to design, manage and interpret the studies; and - the sophisticated computerized databases required to identify and recruit healthy volunteers and patient populations. PHASE II-IV CLINICAL STUDIES SERVICES. Phase II-IV clinical studies involve administering a new drug candidate to individuals who suffer from a target disease or condition to: - develop the drug's safety profile; - assess side effects; and - determine its effectiveness and optimum dosage. These studies involve testing groups typically ranging from 100 to many thousands of patients and generally require an average of six years to complete. Phase II-III clinical studies are conducted prior to regulatory approval of the drug in order to demonstrate safety and efficacy. Phase IV clinical studies are conducted after regulatory approval of the drug in order to expand the drug's approved uses or to demonstrate its effectiveness relative to a competing product. According to industry sources, Phase II-IV clinical studies accounted for approximately 62% of contract research organization industry revenue in 1997. 72 The market for Phase II-IV clinical studies is consolidating. Increasingly, pharmaceutical and biotechnology clients are contracting with the larger contract research organizations capable of conducting clinical studies in several countries simultaneously. Barriers to entry include: - the experience and infrastructure necessary to meet the demands of clients; - international networks and expertise extending to many countries; - the ability to provide expertise across many therapeutic areas; and - the need for large-scale investments in information technology. BIOANALYTICAL SERVICES. Bioanalysis involves the utilization of precision instruments to quantify trace levels of drugs and metabolites in body fluids such as blood or urine. This information is typically used to determine the rate and extent of drug absorption and metabolism in the body. While all phases of pre-clinical and clinical studies use bioanalysis, Phase I clinical studies of new drugs and bioequivalence studies of generic drugs currently account for the majority of bioanalytical tests. Phoenix believes that the bioanalytical services sector is growing faster than the contract research organization industry overall due in part to the increasing number of drug compounds being tested. Bioanalytical services are capital and science intensive. The instruments used in bioanalysis generally range in cost from $50,000 to as much as $650,000 per instrument. In addition, the test for each drug is different. In order to quantify the levels of a drug in body fluids, scientists must develop and validate an assay specific to that drug. Scientists have several analytical techniques available to determine how best to perform an assay. The important considerations involved in choosing a technique include: - specificity; - accuracy; - precision; - sensitivity; - cost of the assay; and - the time it takes to complete the assay. Currently, the market for bioanalytical services is geographically fragmented, with no single company providing the full range of bioanalytical services globally. Clients typically prefer suppliers located on the same continent. Several companies, including Phoenix, have significant market shares in North America. Barriers to entry include: - capital constraints; and - the time and know-how required to - recruit and train scientists, - design appropriate laboratory procedures, - develop or acquire the software necessary to process data efficiently, and - become generally accepted in the pharmaceutical industry as a reputable laboratory. DRUG DISCOVERY SUPPORT SERVICES. Drug discovery services are a small but growing component of the contract research organization industry. These services are designed to screen large numbers of new compounds for pharmacological activity, safety and therapeutic suitability at a very early stage in the drug development process. Drug discovery services therefore evaluate a new compound's potential for later clinical success. Drug discovery support services have taken on increased importance in recent years as the rate of new drug discovery has accelerated due to advances in: - human genomics; - combinatorial chemistry; and 73 - high-throughput screening. These advances have led to rapid increases in the number of compounds that need to be screened and analyzed. Drug discovery support services include: - chemical services for optimizing lead drug candidates; - high throughput tests to - identify active compounds, - screen out inactive compounds, and - screen out compounds with inappropriate metabolic, absorption or toxicity characteristics; and - animal studies for further pharmacologic, metabolic and pharmacokinetic profiling, including pharmacologic tests in animals with modified genetic makeup. Some tests can be used to screen several drug candidates simultaneously. This enables pharmaceutical and biotechnology companies to: - avoid costly clinical studies by eliminating unsuitable drug candidates or guiding chemical modification of these compounds; - target their resources on drug candidates with the greatest potential for success; and - reduce the time required to submit new drug applications to the FDA in the United States and other similar regulatory authorities. PRE-CLINICAL AND ANIMAL SAFETY STUDIES SERVICES. Pre-clinical and animal safety studies involve the thorough screening of drug candidates that are selected for further development during the earlier drug discovery and screening phase. These studies identify, quantify and evaluate the risks to humans. The FDA requires these studies before a drug can be moved to the clinical phase of development. Animal toxicity testing, which is used to predict and characterize potential adverse effects in humans is a key part of the pre-clinical phase. To be successful in applying for permission to move a drug into the clinical phase of development, companies must provide data on: - acute toxicity; - subacute and chronic toxicity; - reproductive and developmental toxicology; - neurotoxicology; - genetic toxicology; - capacity of the drug to act as a mutagen; and - carcinogenicity testing. According to industry sources, pre-clinical and animal safety services account for approximately 15% of contract research organization industry revenue. TRENDS AFFECTING THE CONTRACT RESEARCH ORGANIZATION INDUSTRY Phoenix believes that the following trends are influencing the overall growth of the contract research organization industry: INCREASING DRUG DEVELOPMENT ACTIVITY. Recent improvements in the understanding of disease, in biotechnology and in drug discovery and screening technologies have reduced the time required to discover new drug candidates. These improvements, combined with impending patent expirations on existing brand-name drugs, have led drug developers to increase the rate at which they are creating new drug 74 candidates. As the number of studies that need to be performed increases, Phoenix believes that drug developers will rely more on contract research organizations to conduct and/or manage these studies. Drug developers will therefor continue to focus on drug discovery and downstream product marketing. PRESSURE TO CONTAIN COSTS AND ACCELERATE TIME TO MARKET; GLOBALIZATION OF THE MARKET. Over the last several years, pharmaceutical companies have faced significant margin pressures. Those pressures include market acceptance of generic drugs and pressure to reduce drug prices from consumers, governments and the managed care industry. The pharmaceutical industry is consolidating as companies seek to reduce costs and increase revenue through business combinations. In addition, there is a pressing need to increase the speed of new product development in order to maximize the period of marketing exclusivity for patent-protected products. As a result, many pharmaceutical companies have focused on more efficient ways of conducting business and on research innovation to ensure development of their product pipelines. They use contract research organizations as a means both to reduce fixed costs and to accelerate the drug development process. Pursuing regulatory approvals in multiple markets simultaneously provides better economic returns. Phoenix believes that contract research organizations with the ability to provide a broad range of services in many countries will benefit from this trend. PATENT EXPIRATIONS AND INCREASED GENERIC PRODUCT DEVELOPMENT. Upcoming patent expirations are prompting pharmaceutical companies to develop new products or modify existing products to maintain market share against generic product competition. At the same time, generic companies are increasing demand for specialized bioequivalence testing of their products, which must meet stringent regulatory standards. Phoenix believes that because many generic drug companies do not have bioanalytical and clinical testing infrastructures, they will continue to use contract research organizations for this purpose. REGULATORY FACTORS. Phoenix believes that regulatory agencies are generally becoming more demanding with regard to the quality of data required to support new drug approvals. This has increased the number and complexity of clinical studies and the size of regulatory submissions. INCREASING SIZE OF CONTRACTS. Phoenix believes that the contract research organization industry has matured and large contract research organizations have emerged with multinational capabilities and significant infrastructures. As a result, many pharmaceutical companies have become more willing to outsource larger projects to contract research organizations. In addition, an increasing number of large clinical studies are being conducted as pharmaceutical companies seek simultaneous approvals in multiple countries. NEED FOR SCIENTIFIC AND TECHNICAL EXPERTISE. Phoenix believes that pharmaceutical companies are increasingly turning to contract research organizations to benefit from their recognized experience, expertise and/or proprietary science in specific areas. Generic drug companies take particular advantage of the bioanalytical and specialized clinical study expertise of contract research organizations. EMPHASIS ON QUALITY IN CONTRACT RESEARCH ORGANIZATION SELECTION. Phoenix believes that many drug companies are placing increased emphasis on quality in selecting their preferred contract research organization suppliers. This emphasis reflects the importance of a contract research organization's scientific and technical expertise. In addition, a primary factor affecting the overall costs and economic returns of drug companies is the time it takes to bring a new drug to market. Consequently, the price of a specific contract research organization service may be less important to customers than the contribution which the contract research organization can make to acceleration of the drug development process and reducing time to market. Contract research organizations can make contributions by: - providing expert assistance in increasing the success rates of drug candidates in testing; - ensuring fast turnaround times for conducting studies; and - rapidly producing reliable study results that are readily accepted by regulatory agencies. 75 76 STRATEGY Phoenix's strategy is to provide, on a global basis, a comprehensive range of contract services that spans the drug development process. Phoenix believes that providing a comprehensive range of services: - enables it to better address its clients' needs; - provides cross-selling opportunities; and - results in a balanced business model which is less vulnerable to downturns in any one service area. Phoenix strives to make its key differentiating factor the added value that a high technology contract research organization with an extensive knowledge and experience base brings to the drug development process. Phoenix believes that it is recognized in the pharmaceutical industry for its scientific and technical expertise as well as for its scientific innovation. EXTEND LEADERSHIP IN PHASE I CLINICAL STUDIES. Phoenix intends to continue to expand its leading Phase I clinical studies capacity in order to take advantage of both its expertise in this field and market growth. Phoenix is one of the world's leading providers of Phase I clinical research services with over 500 beds located in the United States, Canada and Germany. Phoenix intends to focus its expansion efforts on the fragmented European market and on its Canadian operations. LEVERAGE REPUTATION AND GLOBAL PRESENCE TO EXPAND PHASE II-IV BUSINESS. Phoenix intends to continue to expand its Phase II-IV operations by using its reputation for scientific excellence and its multinational presence. Phoenix significantly expanded its Phase II-IV service capabilities through the acquisitions of ITEM in August 1997 and of IBRD-Rostrum in February 1998. These companies have together conducted over 1,400 Phase II-IV studies in virtually all therapeutic areas since 1975. Phoenix intends to continue to focus on its existing national and regional markets in the United States, Canada, the United Kingdom, France, Spain and other European countries. Phoenix has positioned itself to manage global clinical studies by harmonizing quality standards, clinical research procedures and business systems across all of its Phase II-IV operations. EXTEND LEADERSHIP IN BIOANALYTICAL SERVICES. Phoenix intends to maintain its leadership position in the bioanalytical services marketplace by building on its record of client-focused innovation and fast, accurate laboratory work. In April 1998, Phoenix established bioanalysis capacity in Europe through its acquisition of Anawa Holding AG of Zug, Switzerland, which has particular expertise in immunochemistry and capabilities in the high performance liquid and gas chromatography fields. Phoenix intends to capitalize on this capacity, in combination with its North American bioanalysis expertise, to continue expanding its European bioanalysis operations. In addition, Phoenix intends to continue using growth in its Phase I business to support growth of bioanalytical business volumes. CREATE NEW GROWTH OPPORTUNITIES THROUGH INNOVATION. Phoenix seeks to create new growth opportunities through scientific innovation. In the emerging field of drug discovery support, for instance, Phoenix is developing new approaches to accelerating drug candidate optimization. These drug discovery support services employ new and innovative applications of Phoenix's liquid chromatography/mass spectrometry instruments. In addition, Phoenix recently developed an innovative method of analyzing individual responses to generic drugs that are being tested in bioequivalence studies. CONTINUE TO DEVELOP INFORMATION TECHNOLOGY BASE. Phoenix believes that advanced, integrated information systems are critical to success in the contract research organization industry. Both regulators and pharmaceutical companies view the increased use of information technology as a means of: - streamlining the drug approval process; - reducing costly paperwork; and - improving data management and the evaluation of study results. 75 Phoenix has developed a proprietary suite of software packages for automation of pharmaceutical laboratory processes, having incurred approximately $22 million of expenditures as of November 30, 1998 in this development. Phoenix's separate Scientific Software Division works with large pharmaceutical clients to test and apply the software modules as they are developed. Phoenix intends to continue investing in this area and is considering the transfer of this activity into a separately capitalized entity. Phoenix would maintain an ownership interest in this entity. Phoenix's Scientific Software Division is working actively on the development of a new scalable electronic data capture and data handling system for clinical studies. Another key initiative is the harmonization of the information technologies and databases used to support Phase II-IV clinical studies currently in progress. This ongoing initiative is designed to create a single company-wide infrastructure for global clinical studies. SERVICES Phoenix provides a comprehensive range of services, including: - Phase I-IV clinical study design; - clinical study management; - clinical data management and biostatistical analysis; - regulatory affairs; and - bioanalytical services. Phoenix also provides a variety of services to assist clients in both the pre-clinical and very early stages of drug development, including drug discovery support services, and offers proprietary scientific software packages for the automation of pharmaceutical laboratory processes. Phoenix provides all of the major services required by pharmaceutical and biotechnology companies except for pre-clinical toxicology studies, which would be provided by Chrysalis' operations if the merger is completed. Phoenix provides its services individually or as an integrated package. Phoenix's broad service offering and multinational capabilities are designed to complement the research and development organizations of Phoenix's pharmaceutical and biotechnology clients. PHASE I CLINICAL STUDIES SERVICES Phoenix is one of the world's leading providers of Phase I clinical studies services. Phoenix's Phase I clinical studies services include: - study design; - patient recruitment; - study management; and - data collection and analysis. In conjunction with its Phase I services, Phoenix also conducts bioanalysis of patient samples. Phoenix has over 500 beds in seven specialized Phase I clinics in the United States, Canada and Germany. Phoenix conducts studies in each of the three main Phase I categories of study: - early studies to determine drug safety and pharmacokinetics of new drug candidates; - later studies to further evaluate drug pharmacokinetics and pharmacodynamics; and - bioequivalence studies to compare two different formulations of the same drug. Pharmacokinetic studies evaluate the effects of the body on the drug, focusing on the extent to which it is absorbed, distributed, metabolized and excreted in humans. Bioequivalence studies are specialized pharmacokinetic studies that compare the rate and extent of absorption of different formulations of the same drug. These studies are typically performed in comparison studies of drugs on the market with 76 generic equivalent formulations, in preparation for commercial launch of the generic drug. Phoenix has conducted more than 900 pharmacokinetic and bioequivalence studies since its inception. In the case of specialized drug bioequivalence studies, such as, inhaled drugs for asthma and hormone replacements for post-menopausal women, Phoenix has developed expertise that it believes is recognized in the industry. Pharmacodynamic studies evaluate the effects of the drug on the human body, focusing on the changes in physiological functions and/or body chemicals in human subjects upon administration of a drug. Phoenix has extensive experience in pharmacodynamic studies of asthma medications, gastrointestinal evaluations and skin blanching by topical steroids, ophthalmic drugs, analgesics, drugs for dementia and anticonvulsants. As part of its Phase I operations, Phoenix provides study design services intended to ensure that all relevant scientific, ethical and regulatory standards are met. Phoenix recruits healthy human study subjects from its database of over 118,000 people, which includes various specific groups such as asthmatics and post-menopausal women. After tests and medical examinations, Phoenix houses these study participants in one of its Phase I trial facilities. Phoenix has over 500 beds at specialized clinics in Cincinnati, Ohio, Neptune, New Jersey, Montreal, Canada, Hamburg, Germany and Munich, Germany. - The Montreal Clinical Research Centers are comprised of three facilities with a total of 164 beds that perform pharmacokinetic and bioequivalence studies primarily for the generic drug industry, with particular expertise in specialty clinical studies, such as asthma therapeutics. - The 232-bed Cincinnati Clinical Research Center principally serves the Phase I needs of U.S.-based clients engaged in the development of non-generic drugs. - A 36-bed Phase I facility in Neptune, which was acquired in February 1998 as part of the IBRD-Rostrum acquisition. - A 12-bed facility in Munich, which was acquired in April 1998 as part of the IPR acquisition and conducts highly specialized Phase I studies of the pharmacological effects of new drugs on the central nervous system. - 30- and 40-bed facilities in Germany acquired as part of the McKnight acquisition, which are equipped for and have extensive experience in first in man studies for new drugs, and specialized cardiovascular, neurophysiological and endocrine studies. Because the drugs being tested in Phoenix's Phase I facilities may have no established clinical safety profile in humans, these facilities are equipped much like hospital intensive care units to respond to unexpected and potentially life-threatening side effects. Phoenix has recently expanded its Canadian Phase I facilities in anticipation that regulatory changes will be adopted to effectively eliminate, for most Phase I clinical studies, the current 60-day regulatory review period currently required to gain approval to initiate Phase I clinical studies in Canada. Phoenix believes this change, if adopted, could significantly increase the number of most Phase I clinical studies conducted in Canada and create a new market for its Phase I services. In fiscal 1996, 1997, 1998 and the three months ended November 30, 1998, revenues from Phase I clinical trial services represented approximately 30%, 34%, 24% and 22% of Phoenix's net revenues. On a U.S. GAAP basis, as restated to reflect the ITEM and Anawa pooling of interests acquisitions, Phase I clinical trial services net revenues represented approximately 20%, 25%, 23% and 25% of total net revenues in fiscal 1996, 1997, 1998 and the three months ended November 30, 1998. 77 PHASE II-IV CLINICAL STUDIES SERVICES Phoenix provides services for the design, initiation and management of Phase II-IV clinical trial programs. Phoenix has the expertise to manage every aspect of clinical studies in Phase II-IV of the drug development process, including: - study design; - case report form design; - site and investigator recruitment; - clinical study management and monitoring; - clinical data management; and - biostatistical analysis. Phoenix also offers a full range of regulatory affairs services in North America and Europe, as well as quality assurance services. Phoenix's Phase II-IV services capabilities were significantly expanded as a result of the acquisitions of ITEM in August 1997 and of IBRD-Rostrum in February 1998. Prior to these acquisitions, Phoenix provided Phase II-IV services on a limited scale in North America to meet selected client needs. As a result of these acquisitions, Phoenix has multinational Phase II-IV capabilities, with operations in: - the United States; - Canada; - the United Kingdom; - Germany; - France; - Belgium; - Spain; and - Italy. Phoenix also has a presence in Poland, Israel and South Africa, as well as strategic relationships with contract research organizations in Scandinavia, Bulgaria, Hungary and Australia. In the United States, Phoenix has a major presence on both the east and west coasts as well as a network of clinical research associates providing national coverage. Together, Phoenix, ITEM and IBRD-Rostrum have conducted over 1,400 Phase II-IV studies covering virtually all drug categories and disease areas. Phoenix provides its customers with one or more of the following core Phase II-IV clinical studies services: STUDY DESIGN. Phoenix has broad experience in the preparation of study protocols. The study protocol defines: - the medical issues to be examined in evaluating the safety and efficacy of the drug under study; - the number of patients required to produce statistically valid results; - the clinical tests to be performed in the study; - the time period over which the study will be conducted; - the frequency and dosage of drug administration; - the inclusion and exclusion criteria to be met for the patients enrolled in the study; and 78 - the planned data summarization, statistical analysis and interpretation of the results of the study. CASE REPORT FORM DESIGN. Once the study protocol is finalized, Phoenix develops case report forms for investigators to record the desired information obtained from the clinical studies. Phoenix organizes all disciplines involved in the clinical research process to assure a design that is efficient for subsequent data entry, management and reporting. Proper case report form design is critical for investigators and field monitors to conduct their respective jobs quickly, accurately and effectively. SITE AND INVESTIGATOR RECRUITMENT. Phoenix solicits the participation of physician investigators to supervise the administration of the drug under development at investigational sites. Phoenix uses computerized databases of approximately 7,000 investigators in the United States and Canada and 5,700 in Europe that include information regarding their qualifications, research interests and ability to conduct clinical studies. CLINICAL STUDY MANAGEMENT AND MONITORING. Phoenix provides an experienced project team to oversee the conduct of clinical programs. Contract research assistants ensure that data is collected and recorded according to: - good clinical practices; - the study protocol; - the requirements of the customer; and - applicable regulations. CLINICAL DATA MANAGEMENT AND BIOSTATISTICAL ANALYSIS. Phoenix provides assistance to customers in all areas of clinical data management and biostatistical analysis, including: - sample size determinations; - database design and construction; - data entry; - database quality assurance audits; - data assessment for accuracy and consistency; and - statistical analysis of all study types. These services are provided by professionals employed by Phoenix in North America and Europe who have extensive pharmaceutical industry experience in processing data from both local and multinational trials. These professionals have experience in many therapeutic areas and can work with customers in all phases of drug development. Phoenix conducts data management and biostatistical projects as stand-alone contracts or as part of complete drug development programs. REGULATORY AFFAIRS. Phoenix provides strategic and practical regulatory affairs expertise. Regulatory specialists offer a full range of services, including: - pre-clinical planning; - clinical trial approvals; - marketing authorization applications; and - interaction with key regulatory agencies. In fiscal 1996, 1997, 1998 and the three months ended November 30, 1998, revenues from Phase II-IV clinical studies services represented approximately 7%, 7%, 42% and 45%, of Phoenix's net revenues. On a U.S. GAAP basis, as restated to reflect the ITEM and Anawa pooling of interests acquisitions, 79 Phase II-IV clinical studies services net revenues represented approximately 27%, 23%, 41% and 43% of total net revenues in fiscal 1996, 1997, 1998 and the three months ended November 30, 1998. BIOANALYTICAL SERVICES Bioanalytical services primarily measure drug concentrations in blood and urine samples produced by pre-clinical and clinical studies. These measurements are used to calculate the rate and extent of drug absorption, metabolism and excretion in the body, which in turn govern the subsequent amount and frequency of the administration of a drug. In all phases of drug development, the drugs under study are measured in the parts-per-million to parts-per-trillion range, requiring expensive, high technology equipment and highly trained scientists. Phoenix's bioanalytical operations are staffed by scientific and technical personnel with expertise in particularly sensitive methods of bioanalysis. Phoenix is one of the world's leading providers of bioanalytical services to the drug development industry, based on laboratory throughput. Phoenix believes it has the world's largest single-site bioanalytical laboratory in Montreal, and worldwide it has 129 bioanalytical instruments operated by a scientific staff of more than 184 people, including a research and development staff of 61 scientists. Phoenix has been a consistent innovator in the development of highly sensitive, high-throughput methods for measuring fluid samples with extremely low drug concentrations. Phoenix's bioanalytical services support all phases of clinical and pre-clinical studies and complement Phoenix's Phase I and Phase II-IV clinical trial services as well as its drug discovery and other pre-clinical support services. In fiscal 1998, Phoenix analyzed approximately 830,000 samples. The most labor intensive process is extracting the drug from the fluid and isolating it from the potentially thousands of other fluid components. Phoenix has developed a proprietary process using a multi-component cartridge and automated device to produce extracts with unusually low contamination levels at the rate of 120 samples per hour. This compares to a typical manual rate of 100 samples per day. Phoenix routinely uses this technique in its bioanalytical laboratories and continually seeks to develop more accurate and efficient extraction techniques. Phoenix has four main lines of bioanalytical service: LIQUID CHROMATOGRAPHY/MASS SPECTROMETRY. Phoenix scientists pioneered the use of this instrument for high-volume, high-sensitivity quantification of trace levels of drugs in biological fluids. Phoenix currently has 39 liquid chromatography/mass spectrometry instruments and is promoting this service as a growth area for a wide diversity of drugs. HIGH PERFORMANCE LIQUID CHROMATOGRAPHY. High performance liquid chromatography provides reliable, high quality bioanalytical results for a wide variety of drugs and diseases. Phoenix has particular expertise in using high performance liquid chromatography for the analysis of chiral drugs, which are drugs that can occur in one of two mirror-image molecular configurations. IMMUNOCHEMISTRY. Immunochemistry techniques are used primarily for testing drugs under development by the biotechnology industry. Phoenix's expertise in this area allows it to support the emerging bioanalytical service needs resulting from rapid innovation in the biotechnology sector. GAS CHROMATOGRAPHY/MASS SPECTROMETRY. Gas chromatography/mass spectrometry is used to measure trace levels of specialty drug products, such as steroids and hormones for post-menopausal therapies. In April 1998, Phoenix established bioanalysis capacity in Europe by acquiring Anawa which has particular expertise in immunochemistry and capabilities in the liquid and gas chromatography fields. Phoenix intends to capitalize on this additional capacity, in combination with its North American bioanalysis expertise, to expand its European bioanalysis operations. In fiscal 1996, 1997, 1998 and the three months ended November 30, 1998, revenues from bioanalytical services represented approximately 57%, 56%, 32% and 31% of Phoenix's net revenues. On a U.S. 80 GAAP basis, as restated to reflect the ITEM and Anawa pooling of interests acquisitions, bioanalytical services net revenues represented approximately 48%, 48%, 34% and 30% of total net revenues in fiscal 1996, 1997, 1998 and the three months ended November 30, 1998. DRUG DISCOVERY SUPPORT SERVICES Phoenix provides drug discovery support services to pharmaceutical and biotechnology clients, primarily in North America. These services are designed to assess a prospective drug's potential for clinical success at a very early stage in the development process, prior to pre-clinical studies. Phoenix uses innovative methods that combine the speed and sensitivity of its liquid chromatography/mass spectrometry instruments with laboratory animal studies and cellular and cell fraction studies to evaluate how the body processes drug candidates. This enables pharmaceutical and biotechnology companies to: - avoid costly preclinical and clinical studies by eliminating unsuitable drug candidates or guiding chemical modification of these compounds; - target their resources on drug candidates with the greatest potential for success; - reduce the time required to submit new drug applications to the FDA in the United States and other similar regulatory authorities; and - expedite the evaluation of increasingly large numbers of new potential drug compounds being produced by technological advances in the drug discovery field. One of the most important of Phoenix's drug discovery support services is high-throughput pharmacokinetic screening, which entails the use of laboratory animal studies. These studies, known as IN VIVO studies, include the administration of one or several drugs simultaneously to animals to provide rapid information on: - drug absorption; - distribution; - metabolism; and - excretion. Animal studies are complemented with cell and cell fraction studies which determine drug breakdown profiles in human liver microsomes. This provides an assessment of a compound's suitability as a human drug. Both tests are made possible by the liquid chromatography/mass spectrometry instruments' capability of measuring quickly and with great sensitivity the drug candidate and its breakdown compounds in complex mixtures. Phoenix also tests how readily and effectively a drug is made pharmacologically available in the body based on the other components present in the drug product. Determining the most effective drug formulation is a crucial, early decision in drug development. A recent service provided by Phoenix predicts the efficiency of drug absorption in the human alimentary tract through the use of special human cells in laboratory cultures followed by liquid chromatography/mass spectrometry. Phoenix also offers drug discovery support services in Europe, where its specialized French subsidiary, Phoenix Pharmacology S.A., provides IN VIVO pharmacology services using a number of different animal models to study drug mechanisms of pharmacological action and possible adverse reactions in different organs. The techniques utilized in the highly computerized laboratory provide essential data on: - dose-response relationships; - variability of drug response; and - effective dose and drug therapeutic index. 81 This laboratory specializes in central nervous system, cardiovascular, gastrointestinal and respiratory disease conditions. In fiscal 1996, 1997, 1998 and the three months ended November 30, 1998, revenues from drug discovery services represented approximately 0%, 0%, 1% and 1% of Phoenix's net revenues. On a U.S. GAAP basis, as restated to reflect the ITEM and Anawa pooling of interests acquisitions, drug discovery net revenues represented approximately 1%, 1%, 1% and 1% of total net revenues in fiscal 1996, 1997, 1998 and the three months ended November 30, 1998. OTHER SERVICES In addition to the services described above, Phoenix offers a variety of related services and products, including pharmaceutical product analysis and training services. PHARMACEUTICAL PRODUCT ANALYSIS. Phoenix provides pharmaceutical manufacturers with analyses of drug raw material and finished drug products needed to complete the data requirements in filing for drug registration. Phoenix performs a number of tests for clients, such as: - quality control release testing; - batch uniformity testing; - stability testing; and - the isolation and identification of impurities in drugs. TRAINING SERVICES. Rostrum Personal Development, a division of Phoenix UK, offers a wide range of courses designed for the pharmaceutical industry, including: - good clinical practices; - good laboratory practices; - introduction to contract research assistant monitoring; and - communication/presentation skills. In fiscal 1996, 1997, 1998 and the three months ended November 30, 1998, these other services represented approximately 6%, 3%, 1% and 1% of Phoenix's net revenues. On a U.S. GAAP basis, as restated to reflect the ITEM and Anawa pooling of interests acquisitions, these other services net revenues represented approximately 3%, 3%, 1% and 1% of the total net revenues in fiscal 1996, 1997, 1998 and the three months ended November 30, 1998. 82 INFORMATION TECHNOLOGY GENERAL Phoenix is committed to investing in information technology designed to help it provide high quality services in a cost-effective manner and to manage its internal resources. Phoenix focuses its investment program on building a global information technology network that effectively links its operating units. It also focuses on developing a number of proprietary information systems that address critical aspects of its business. Phoenix's main proprietary systems are a suite of bioanalytical and metabolism software packages, a specialized Phase I system and a number of software applications that support many aspects of Phase II-IV studies. Phoenix's information technology strategy is to build its information systems around open standards and to combine its proprietary laboratory and clinical applications with leading off-the-shelf commercial software. Phoenix develops proprietary software using an adaptive system development process which emphasizes joint user-developer participation. Phoenix designed this process to enable applications to be built rapidly and maintained using a minimum of software development personnel. Recognizing that each client has its own requirements and systems, Phoenix seeks to ensure a flexible approach to client needs, linking directly to client systems if necessary. Phoenix's information systems group, including the scientific software division, currently has approximately 150 employees. This group is responsible for technology procurement, applications development and management of Phoenix's multinational computer network. Phoenix's wide area network links ten local area networks, interconnecting approximately 1,800 computers worldwide. Phoenix's information systems are designed to work in support of and reinforce Phoenix's standard operating procedures. Phoenix also designed its information systems to be open, flexible and adaptable to the multiple needs of different regulatory systems and clients. Through the IBRD-Rostrum and ITEM acquisitions, Phoenix has acquired a variety of proprietary software packages, information systems and databases for the effective management of Phase II-IV clinical studies. Priority is being given to the integration and harmonization of all information technologies and databases used to support Phase II-IV studies in Europe, the United States and Canada, with the aim of creating a single company-wide infrastructure for global clinical studies. For a discussion of Year 2000 Compliance, see "Management's Discussion and Analysis of Financial Condition and Results of Operations of Phoenix." SCIENTIFIC SOFTWARE Phoenix has developed a suite of proprietary scientific software packages called LIMS, which stands for laboratory information management system, for the automation of pharmaceutical laboratory processes. Phoenix has incurred approximately $22 million of expenses in its software development effort through November 30, 1998. As of that date, there were 35 Phoenix software packages installed in 12 client companies in eight countries. Phoenix is engaged in an interactive development process with certain of these clients, prototyping, testing, applying and improving package modules. Phoenix has copyrights pending on its scientific software packages. The laboratory information management system consists of a modular, integrated software package which includes each of the following functions: - bioanalytical reporting; - acquiring and evaluating chromatographic data; - pharmacokinetic evaluation of the data; - processing drug metabolism studies; and 84 - detailed sample tracking and laboratory management. The laboratory information management system automatically tabulates study results in report-ready format in conformity with either FDA or Canadian Bureau of Pharmaceutical Assessment requirements. Because the laboratory information management system reports are produced by scientifically validated computer programs: - errors are minimized; - manual changes are readily checked through an automatic computerized quality assurance log; and - regulatory compliance is built into the process. Phoenix is considering the transfer of its scientific software division into a separately capitalized entity, in which it intends to retain an ownership interest. Phoenix believes this entity would permit focused development of the scientific software business by a dedicated management and development team while permitting Phoenix continued early access to new software. There can be no assurance, however, that any transaction will be completed or, if completed, on what terms it would be completed. CLINICAL STUDIES SOFTWARE Phoenix is currently extending the scope of its information technology investment program to include the development of a proprietary package to support Phase I clinical studies. The package, called PhORCE, is designed to be a scalable data handling system supporting all of Phoenix's Phase I units in North America and Europe. Its business objectives are to: - decrease unit costs; - increase throughput in the clinics; - reduce study turnaround times; and - increase business volumes. Phoenix designed the PhORCE package to support many Phase I operations including: - data capture; - assessment of protocol compliance; - scheduling; - resource allocation and the optimization of clinic facilities; and - quality assurance. Phoenix also designed the PhORCE package to streamline the recruiting and screening processes, enabling Phase I clinics to launch projects more quickly and accelerate responses to customer inquiries during studies. The system is scheduled to be implemented in stages during the fiscal year ending August 31, 1999. If it proves its business value internally, the package could be sold commercially along with Phoenix's suite of scientific software packages. PROPRIETARY RIGHTS Phoenix holds four United States patents relating to the method of extracting components from fluids, which are used in aspects of Phoenix's bioanalytical services. These patents are scheduled to expire in 2116 and 2117. 85 Phoenix relies on a combination of registered and common law copyrights and trademarks, as well as trade secret and trade dress laws, confidentiality procedures and contractual provisions to protect its proprietary rights in its other products and technology. Phoenix generally enters into confidentiality agreements with its employees, consultants, clients and potential clients and limits access to, and distribution of, its proprietary information. Phoenix believes, however, that the foregoing measures afford only limited protection and there can be no assurance that these measures will be adequate. Phoenix also may be subject to additional risks as it continues to expand into foreign countries where intellectual property laws are not well developed or are poorly enforced. Legal protections of Phoenix's rights may be ineffective in these countries. Despite Phoenix's efforts to safeguard and maintain its proprietary rights, there can be no assurance that Phoenix will be successful in doing so or that the steps taken by Phoenix in this regard will be adequate to deter misappropriation or independent third party development of Phoenix's technology or to prevent an unauthorized third party from copying or otherwise obtaining and using Phoenix's technology. In addition, policing unauthorized use of Phoenix's technology is difficult. Litigation to defend and enforce Phoenix's intellectual property rights could result in substantial costs and diversion of resources. Litigation also could have a material adverse effect on Phoenix's business, financial condition or results of operations, regardless of the final outcome of this litigation. RECENT ACQUISITIONS Since August 1997, Phoenix has completed a series of acquisitions designed to leverage its core expertise and capitalize on global consolidation opportunities in the contract research organization industry in order to become a balanced, multinational contract research organization. The acquisitions completed during this period are described below. These acquired companies are now managed as wholly-owned, integrated subsidiaries operating under the Phoenix name. - ITEM. In August 1997, Phoenix acquired ITEM, a leading European contract research organization based in Paris. ITEM, now operating as Phoenix International France SA, specializes in all aspects of Phase II-IV clinical trial management, including site monitoring, database management and biostatistics. It has extensive operations in France and Spain and a presence in Italy, Poland, Belgium and Romania. The acquisition included the ITEM Labo facility, now operating as Phoenix International Pharmacology SA, which is an animal pharmacology unit. ITEM began operations in 1982. As of November 30, 1998, this subsidiary employed 218 people. - IBRD-ROSTRUM. In February 1998, Phoenix acquired IBRD-Rostrum, a leading international contract research organization with operations in the United States, the United Kingdom, Germany and a presence in Israel and South Africa, as well as strategic relationships in other European countries. IBRD-Rostrum specializes in all aspects of Phase II-IV clinical study management for pharmaceutical and biotechnology clients. The acquisition included IBRD Center for Clinical Research, in Neptune, New Jersey, a Phase I clinical studies facility with 36 beds. IBRD-Rostrum began operations in 1975. As of November 30, 1998, this subsidiary employed 512 people. - ANAWA. In April 1998, Phoenix acquired Anawa. Anawa provides bioanalytical services with particular expertise in immunochemistry analysis for drugs and biopharmaceuticals. Anawa began operations in 1985. As of November 30, 1998, this subsidiary employed 39 people. - INSTITUTE FOR PHARMACODYNAMIC RESEARCH (INSTUT FUR PHARMAKODYNAMISCHE FORSCHRUNG--DR. KLAUS SCHAFFLER) (KNOWN AS IPR). In April 1998, Phoenix acquired the operations of IPR, a contract research organization based in Munich. IPR conducts highly specialized Phase I clinical studies of the pharmacological effects of new drugs on the central nervous system at a 12-bed facility in Munich. IPR began operations in 1976 and, as of November 30, 1998, employed ten people. 86 - MCKNIGHT. In November 1998, Phoenix acquired McKnight and its wholly owned subsidiary, IPHAR. McKnight and IPHAR provide Phase I clinical studies services, primarily to continental European pharmaceutical companies, with the McKnight operation in Hamburg conducting primarily bioequivalence studies. The IPHAR operation in Munich performs more sophisticated studies on new drugs, including first-in-man studies. As of November 30, 1998, McKnight employed 57 people. - CLINSERVE. In November 1998, Phoenix acquired Clinserve, based in Switzerland and providing central clinical laboratory services for Phase I-IV clinical studies from a laboratory in Hamburg, Germany. Phoenix intends to refer its Phase II-IV clients to Clinserve, thereby increasing Clinserve's business volume and Clinserve's computer software and systems in Phoenix's North America operations. As of November 30, 1998, Clinserve employed 28 people. Phoenix believes that these acquired businesses, combined with its existing operations, provide it with the breadth of services, depth of personnel and scientific expertise necessary to compete effectively on a multinational basis. Phoenix intends to consider additional acquisitions on an opportunistic basis. Phoenix routinely enters into discussions with potential acquisition candidates and from time to time enters into confidentiality agreements in connection therewith. However, Phoenix is not a party to any definitive agreements or letters of intent for any material acquisitions as of the date hereof other than the merger agreement. Phoenix's acquisitions have changed significantly the geographic profile of its revenues. During the first quarter of fiscal 1999, Phoenix earned approximately 30% of its consolidated net revenues in the United States, 42% in Canada and 28% in Europe, as compared with approximately 16%, 61% and 23% in the comparable period of fiscal 1998. As of August 31, 1998, Phoenix earned approximately 27% of its net revenues in the United States, 50% in Canada and 23% in Europe, as compared with approximately 16%, 82% and 2%, in fiscal 1997. In fiscal 1996, Phoenix earned approximately 12% of its net revenues in the United States, 88% in Canada and 0% in Europe. The acquisitions have also changed the service profile of Phoenix's net revenues. In the first quarter of fiscal 1999, Phoenix earned approximately 23% of its consolidated net revenues from Phase I studies, 44% from Phase II-IV clinical studies, 31% from bioanalytical studies and 2% from other sources, as compared with 30%, 25%, 40% and 5% in the first quarter of fiscal 1998 on a Canadian GAAP basis. In fiscal 1998, Phoenix earned approximately 24% of its net revenues from Phase I clinical studies, 42% from Phase II-IV clinical studies, 32% from bioanalytical studies and 2% from other sources, as compared with 34%, 7%, 56% and 3% in fiscal 1997. In fiscal 1996, Phoenix's revenue profile by service category was 30%, 7%, 57% and 6%, respectively. On a U.S. GAAP basis, as restated to reflect the ITEM and Anawa pooling of interests acquisitions, the service profile of Phoenix's net revenues are as follows: in the first quarter of fiscal 1999, Phoenix earned approximately 25% of its consolidated net revenues from Phase I studies, 42% from Phase II-IV clinical studies, 31% from bioanalytical studies and 2% from other sources, as compared with 32%, 23%, 41% and 4% in the first quarter of fiscal 1998. In fiscal 1998, on a U.S. GAAP basis, Phoenix earned approximately 23% of its net revenues from Phase I clinical studies, 41% from Phase II-IV clinical studies, 34% from bioanalytical studies and 2% from other sources as compared with 25%, 23%, 48% and 4%, respectively, in fiscal 1997. In fiscal 1996, on a U.S. GAAP basis, Phoenix's net revenue profile by service category was 21%, 27%, 48% and 4%, respectively. PROPERTIES Phoenix leases all of its facilities in Canada. Phoenix's principal executive offices are located in Greater Montreal where it leases an office facility of approximately 40,000 square feet under a lease expiring in April 2009. Phoenix's laboratory in Greater Montreal is approximately 77,000 square feet. Phoenix also maintains leased North American offices in: 87 - Blue Bell, Pennsylvania, which is approximately 22,000 square feet, under a lease expiring in August 2000; - Irvine, California, which is approximately 30,000 square feet, under a lease expiring in January 2004; - Bedminster, New Jersey, which is approximately 3,000 square feet, under a lease expiring in April 1999 with an option allowing an extension until 2004; and - Neptune, New Jersey, which is approximately 11,000 square feet, under a lease expiring in 2002. Phoenix is currently building a new state of the art 145,000 square feet analytical laboratory in Montreal, which is expected to be completed by September 1999. Phoenix's analytical laboratories in Greater Montreal are equipped with state-of-the art analytical instrumentation. As of November 30, 1998, Phoenix had 129 chromatographs, including 37 liquid chromatography/mass spectrometry and eight Hewlett Packard MS engines, which are combination gas chromatography/mass spectrometry, at these facilities. The facilities also include: - an organic chemistry laboratory for synthesis of drug metabolites and analytical chemistry reagents; - a self-contained infected samples laboratory for analysis of drugs in samples contaminated with pathogens such as the HIV and hepatitis B viruses; - an immunochemistry laboratory equipped with radioactivity counters for the analysis of biological molecules; - animal rooms; and - a laboratory for animal pharmacokinetic and metabolism studies, also equipped with radioactivity counters. The Montreal facilities also house a Phase I clinical trial research center with a combined capacity of 158 beds. Phoenix owns a Clinical Research Center in Cincinnati, Ohio. It is one of the world's largest clinical pharmacology units with an aggregate of 232 beds in seven clinical wards and a volunteer/patient database of over 40,000 people. The 75,000 square foot center has specialized equipment and facilities that allow it to handle large, contained Phase I clinical studies in healthy volunteers as well as Phase II clinical studies involving patients. Its central feature is a large 130-bed unit for a variety of Phase I studies, including: - early safety and rising dose tolerance; - pharmacokinetic; - pharmacodynamic; and - bioequivalence/bioavailability. Its specialized facilities include a barrier unit for tests of vaccines and drugs against viruses and toxins, and a unit with intensive monitoring equipment. The center focuses on three major disease areas: - cardiovascular and heart; - central nervous system; and - diabetes. 88 In addition, the center contains a laboratory with a broad radiolabeled study licence that permits on-site counting and analysis of radiolabeled compounds in mass balance and excretion studies. Phoenix's European headquarters is located in Brussels in a 2,400 square foot office facility. This lease expires February 2007. The principal operating facility in Europe is located in Paris. In January 1999, Phoenix moved its Paris operations to a 37,620 square foot facility, which lease expires in December 2004. Phoenix also owns a 21,100 square foot Phase II-IV center in Madrid. MARKETING AND SALES Phoenix's marketing strategy is to focus on its reputation for scientific excellence and innovation together with the quality of service provided. Phoenix also seeks to capitalize on the breadth and depth of the services it provides by cross-selling appropriate services to existing clients. For instance, Phoenix believes that its drug discovery support services provide significant business development opportunities for bioanalytical studies in Phoenix's laboratories. Phoenix conducts its sales activities by teams located in Canada, the United States and Europe. In North America, sales offices are located in New Jersey, Pennsylvania and Ohio, with business development personnel working either from these offices, or out of home offices near key geographic markets with high concentrations of potential and existing clients. A team of 12 business development scientists, managed by a senior vice-president based in Bedminster, New Jersey, draw from their specialized scientific backgrounds when promoting Phoenix's services to pharmaceutical and biotechnology companies. They concentrate their efforts on a select group of clients, most of whom work in the same scientific fields in which the business development scientists are trained. Another U.S. business development group with nine staff members, headed by a Vice-President, Business Development, and based in Blue Bell, Pennsylvania, focuses primarily on promoting Phase II-IV services to the top 20 pharmaceutical companies and selected mid-sized drug and biotechnology firms. Two other business development professionals are based in Phoenix's Phase I Clinical Research Center in Cincinnati, Ohio, concentrating on obtaining contracts for this facility, as well as for Phoenix's Phase I facility in Neptune, New Jersey. Phoenix's European sales efforts are handled by a team of 15 professionals based in Paris, Brussels, Madrid, Milan and Romford, Essex. The group focuses on promoting Phase II-IV services and covers the needs of the pharmaceutical industry for both local and global clinical study projects. Phoenix's specialized bioanalytical and Phase I subsidiaries, Anawa in Zug, Switzerland and IPR in Munich, Germany, currently manage their own targeted marketing and sales programs. Phoenix's worldwide sales efforts are monitored by an integrated computerized system, and core promotional campaigns are supplemented by contributions to scientific journals and industry conferences, such as Phoenix's annual scientific symposium. Sponsored by Phoenix, and held every year in Montreal, this event promotes personal contact and scientific interaction between Phoenix's sales and scientific staff, and both existing and prospective clients. It also provides an opportunity for attendees to visit Phoenix's facilities in Greater Montreal. The speakers, chosen from among the pharmaceutical industry's scientific leaders, focus on trends in the drug development industry, notably on those where Phoenix is developing services to meet emerging needs. In June 1998, the symposium was attended by more than 210 persons. In 1997 and 1998, similar scientific symposia were hosted by Phoenix's Cincinnati Clinical Research Center. Phoenix has also hosted scientific software symposia. CLIENTS Over the last two years, Phoenix has provided bioanalytical or Phase I services to 18 of the largest 20 pharmaceutical companies in the world, as ranked by revenues, and Phoenix believes that it has provided these services to all of the major generic drug companies in North America. During the same 89 time period, Phoenix, ITEM and IBRD-Rostrum together have provided Phase II-IV Services to 17 of the largest 20 pharmaceutical companies in the world. Over the last two years, Phoenix, ITEM and IBRD-Rostrum have performed one or more of its services for 19 of the largest 20 pharmaceutical companies in the world, as ranked by 1997 revenues. Phoenix's client base also includes a small but growing number of major and medium-sized biotechnology firms. As of August 31, 1998, Phoenix provided services to 287 clients, of which approximately 71% were multinational pharmaceutical and biotechnology companies and 29% were generic drug manufacturers, including the generic subsidiaries of multinational companies. Phoenix believes that it has a more diversified client base than many other contract research organizations, which often derive a significant portion of their net revenues from a relatively limited number of major projects or clients. In fiscal 1996, 1997, and 1998 and the three-month period ended November 30, 1998, no single customer accounted for more than 10% of consolidated net revenue. In fiscal 1996, 1997 and 1998 and the three-month period ended November 30, 1998, Phoenix's top five customers accounted for 25%, 26%, 29% and 31% of Phoenix's consolidated net revenue. Phoenix's portfolio of business could change over time. Concentrations of business in the contract research organization industry are not uncommon, and Phoenix may experience concentrations of business in the future. Although Phoenix seeks to maintain balance in its service offerings and a diversified client base to reduce this dependence, the loss of a major project or any significant client could materially and adversely affect Phoenix. Phoenix's contracts are generally fixed price, with some variable components, and generally range in duration from six weeks to several years. A portion of the contract fee is typically required to be paid at the signing of the agreement, and the balance is received in installments over the contract's duration. Installment payments are typically tied to the achievement of identified milestones or activity levels. Most of Phoenix's contracts are terminable by the client on 30 days notice. Customers may terminate or delay contracts for a variety of reasons, many of which are not under the control of Phoenix including: - the failure of a product to satisfy safety requirements; - unexpected or undesired clinical results; - the client's decision to forego a particular study; - insufficient patient enrollment or investigator recruitment; or - production shortages. Any of these events could result in a reduction or elimination of revenue under the related contract. See "Management Discussion and Analysis of Financial Condition and Results of Operations of Phoenix--Recent Developments." COMPETITION The market for contract research services is highly competitive. Phoenix competes against traditional contract research organizations and the in-house research and development departments of pharmaceutical companies, as well as universities and teaching hospitals. Some of these competitors have greater capital, technical and other resources than Phoenix. Contract research organizations generally compete on: - the basis of the quality and breadth of services provided; - medical, scientific and technical expertise in specific therapeutic areas; - the quality of contract research; 90 - the ability to organize and manage large scale and global trials; - database management capabilities; - the ability to provide statistical and regulatory services; - the ability to recruit investigators; - the ability to integrate information technology with systems to improve the effectiveness of contract research; and - price. Phoenix's failure to compete effectively in any one or more of these areas could have a material adverse effect on Phoenix. Expansion by Phoenix's competitors into other areas in which Phoenix operates could affect Phoenix's competitive position. Increased competition may lead to price and other forms of competition that may affect Phoenix's margins. Consolidation within the pharmaceutical industry, as well as a trend by pharmaceutical companies to outsource to fewer organizations, has heightened the competition for contract research services. As a result, consolidation also has occurred among the providers of contract research services, and several large multi-service providers have emerged. If these consolidation trends continue, they may result in price erosion and greater competition among the larger contract research providers for clients and acquisition candidates. There can be no assurance that competition in the contract research organization industry will not have a material adverse effect on Phoenix. Because Phoenix is a multi-service company, it competes across most of the sectors of the contract research organization industry. Phoenix estimates that there are hundreds of contract research organizations worldwide, of which approximately 20 companies provide significant competition in Phoenix's principal markets. Many contract research organizations consist of only a few scientists. Others provide services in only one or two market segments, particularly pre-clinical toxicology or Phase II-IV clinical research. There are numerous companies that compete with Phoenix in one or more market segments. Among these are several large multi-service companies providing a comprehensive range of services in most segments, often with facilities in several countries. Phoenix's principal competitors include: - Covance Inc.; - IBAH (Omnicare); - MDS, Inc.; - PAREXEL International Corp.; - Pharmaceutical Product Development, Inc.; and - Quintiles Transnational Corp. RESEARCH AND DEVELOPMENT Phoenix actively pursues new procedures and products. Phoenix believes that its focus on internal research and development provides it with superior technology and improved competitiveness. In fiscal 1996, 1997, 1998, and the first quarter of fiscal 1999, Phoenix's internal research and development expenses totaled $3.7 million, $3.3 million, $3.7 million and $866,000 net of refundable tax credits. Ongoing research and development projects in 1998 included: - Phase I clinical research including the identification of genotypes and phenotypes; - innovative techniques in synthetic organic chemistry; 91 - new biostatistical approaches to bioequivalence studies and bioanalysis acceptance criteria; - novel drug metabolic profiling techniques; - drug bioanalysis such as separation techniques for drugs in biological fluids and electrochemiluminescence; and - scientific software development. Phoenix views these internal research and development expenditures as critical to Phoenix's ongoing competitive success and expects to continue to make significant expenditures in this area in the future. HUMAN RESOURCES AND TRAINING Phoenix employed 2,036 persons at November 30, 1998. Of these, 1,006 employees were located in Canada, 465 were located in the United States and 565 were located in Europe. Phoenix believes that the scientific and technological expertise of its personnel provides it with a competitive advantage. At November 30, 1998, Phoenix's staff included 179 holders of Ph.D.'s or medical degrees and 230 holders of masters degrees. None of Phoenix's employees are covered by collective bargaining agreements, and Phoenix considers its relationship with its employees to be good. Phoenix's management believes that success largely depends on the prudent application of the accumulated knowledge, experience, imagination and skills of its scientists, managers and technical personnel. Phoenix provides extensive training and development programs for employees engaged in laboratory and clinical research. Full-time training officers generally perform this training. The training program encompasses initial general training and then specialized training in relevant laboratory and clinical techniques. Phoenix frequently offers external training for projects involving highly technical instrumentation. Phoenix's performance depends greatly on its ability to attract, develop, motivate, and retain qualified professional, scientific and technical staff. Phoenix faces significant competition for employees from other contract research organizations as well as from in-house research departments of pharmaceutical and biotechnology companies. Consequently, Phoenix has an active, ongoing recruitment program to attract and retain qualified professionals. GOVERNMENT REGULATION DRUG REGULATORY MATTERS Before a new drug may be marketed in North America or Europe, the drug must undergo extensive testing and regulatory review in order to determine that the drug is safe and effective. The stages of this drug development process are as follows: PRE-CLINICAL RESEARCH (1 TO 3.5 YEARS). IN VITRO ("test tube") and animal studies to establish the relative toxicity of the drug over a wide range of doses and to detect any potential to cause birth defects or cancer. If results warrant continuing development of the drug, the manufacturer will file for an investigational new drug application or comparable application with the relevant regulatory authority, upon which permission to begin human trials may be granted. 92 CLINICAL TRIALS (3.5 TO 6 YEARS). PHASE I (6 MONTHS TO 1 YEAR). Basic safety and pharmacology testing in small groups of human subjects, usually healthy volunteers, including studies to determine: - how the drug works; - how it is affected by other drugs; - where it goes in the body; - how long it remains active; and - how it is broken down and eliminated from the body. PHASE II (1 TO 2 YEARS). Basic efficacy and dose-range testing in 100 to 200 afflicted volunteers to help determine: - the best effective dose; - confirm that the drug works as expected; and - provide additional safety data. PHASE III (2 TO 3 YEARS). Efficacy and safety studies in hundreds or thousands of patients at many investigational sites. These trials can be placebo-controlled trials, in which the new drug is compared with a "sugar pill," or studies comparing the new drug with one or more drugs with established safety and efficacy profiles in the same therapeutic category. NEW DRUG APPLICATION PREPARATION AND SUBMISSION. Upon completion of Phase III trials, the manufacturer assembles the statistically analyzed data from all phases of development into a large document, the new drug application or comparable application, which today comprises, on average, roughly 100,000 pages. REVIEW AND APPROVAL (6 MONTHS TO 3 YEARS OR MORE). Careful scrutiny of data from all phases of development to confirm that the manufacturer has complied with regulations and that the drug is safe and effective for the specific use or "indication" under study. POST-MARKETING SURVEILLANCE AND PHASE IV STUDIES. Existing regulation requires the manufacturer to collect and periodically report to the applicable regulatory authority additional safety and efficacy data on the drug for as long as the manufacturer markets the drug. Additional Phase IV studies may be undertaken after initial approval to: - find new uses for the drug; - test new dosage formulations; or - confirm selected non-clinical benefits, such as increased cost-effectiveness or improved quality of life. The research, testing, manufacture and marketing of drug products are subject to extensive regulation in the United States, Canada and other countries. The statutes and regulations governing the pharmaceutical products intended for therapeutic or diagnostic use are administered principally by the FDA in the United States, by the Therapeutic Products Program in Canada and by the European Medicines Evaluation Agency in the European Union. GOOD LABORATORY PRACTICES. Pre-clinical and laboratory testing of new drug products is conducted under good laboratory practices regulations in the United States and similar requirements in Canada and the European Union. Good laboratory practices regulations stipulate requirements for: 93 - facilities; - equipment; - supplies; and - personnel. The regulations require that written, standardized procedures be followed during the conduct of studies and for the recording, reporting and retention of study data and records. GOOD CLINICAL PRACTICES. The conduct of Phases I-IV studies is subject to good clinical practices in the United States and similar requirements in Canada and the European Union. These requirements are designed to assure the quality and integrity of data obtained from clinical testing and to protect the rights and safety of human subjects who participate in clinical trials. These provisions include: - complying with specific regulations governing the selection of qualified investigators; - obtaining specific written commitments from the investigators; - verifying that patients' informed consent is obtained; - instructing investigators to maintain records and reports; - verifying drug or device accountability; - reporting clinical subjects' adverse reactions to drugs; and - permitting appropriate governmental authorities access to data for their review. Records for clinical studies must be maintained for specified periods for inspection by study sponsors and regulatory authorities. In the United States, good clinical practices are implemented in part through regulations and in part through guidelines promulgated by the FDA. These regulations and guidelines serve as a basis for Phoenix's North American standard operating procedures. Within Europe, all work is carried out in accordance with the European Community Note for Guidance "Good Clinical Practice for Trials on Medicinal Products in the European Community." Studies beginning after January 17, 1997 to be submitted to the European Medicines Evaluation Agency are being performed according to the requirements of the International Conference on Harmonization--good clinical practices guideline. Phoenix is introducing common standard operating procedures across regions, based on this guideline, to assure consistency whenever it is feasible to do so. Phoenix's standard operating procedures will take into account the regulations and guidelines appropriate to the region where they will be used. Phoenix has established quality assurance programs to monitor ongoing compliance with good laboratory practices and good clinical practices requirements by auditing study data and conducting regular inspections of testing procedures. The Therapeutic Products Program in Canada is considering a proposal to shorten the review period required to gain approval to initiate most Phase I clinical studies. The proposed changes, if adopted, would effectively eliminate the current regulatory review period of 60 days. Phoenix believes that if regulatory changes implementing this proposal are adopted, the number of most Phase I clinical studies conducted in Canada could significantly increase. There can be no assurance, however, that the proposed changes will be adopted. Phoenix may be audited or inspected by the FDA and other regulatory authorities to ensure compliance with good laboratory practices and good clinical practices and other applicable regulations and guidelines. Although Phoenix believes that it is currently in compliance in all material respects with these requirements, failure to comply could result in: 94 - the termination of ongoing research; - the disqualification of data for submission to regulatory authorities; - the denial of the right to conduct business; - fines; - criminal penalties; and - other enforcement actions. Any of the foregoing consequences could have a material adverse effect on Phoenix. For a description of regulatory and law enforcement proceedings concerning Phoenix's Cincinnati facility, see "--Legal Proceedings." ENVIRONMENTAL, HEALTH AND SAFETY REGULATION UNITED STATES Phoenix's laboratories in the United States are subject to federal, and in some cases, state, and local laws and regulations governing the use, handling, transportation and disposal of hazardous chemicals and radioactive materials, and regulating the emission of air pollutants into the atmosphere and the discharge of wastewater to public sewer systems. Phoenix operates all of its U.S. laboratories in material compliance with all of these applicable laws and regulations. Phoenix's use of radioactive materials is pursuant to a materials license issued by the United States Nuclear Regulatory Commission. Phoenix's storage and disposal or medical specimens and hazardous waste is regulated by the U.S. Environmental Protection Agency and state environmental agencies in the jurisdictions in which Phoenix operates its laboratories. Emissions from laboratory hoods and other sources of air pollution are required to be licensed under federal and state air pollution laws. Transportation by Phoenix of laboratory specimens, radioactive materials, and other hazardous materials are regulated by one or more of the U.S. Environmental Protection Agency, the U.S. Department of Transportation, the U.S. Public Health Service, and the U.S. Nuclear Regulatory Commission. Phoenix is also subject to laws, rules and regulations governing worker health and safety. Use of hazardous chemicals and pathogens in the Phoenix's laboratories is regulated by the federal Occupational Health and Safety Administration. Phoenix is subject to regulations which specify communications regarding chemical hazards to employees and regarding the degree of allowable exposure to chemical or biological hazards in the workplace, and impose specific employee training requirements. Similar regulations are imposed by the U.S. Nuclear Regulatory Commission for radioactive materials. Phoenix believes it is in material compliance with all of these laws, rules and regulations. Environmental laws in the United States impose liability on the generators of hazardous substances for disposal or accidental releases to the environment of hazardous substances at locations that require environmental remediation, even if there has been no violation of law or other culpable conduct on the part of the generator of the waste. Phoenix has not received any notice that it is considered to be potentially liable at any location. However, since Phoenix generates hazardous wastes, which are disposed of by licensed contractors, there exists the possibility that Phoenix could incur environmental liability in the future. CANADA Phoenix's Canadian operations are subject to various environmental laws and regulations, including: - air pollution; 95 - wastewater discharge, storage tanks and storage; and - management and disposal of biomedical, hazardous and radioactive materials and waste. Phoenix's Greater Montreal facility holds permits for emissions from its laboratory extraction hoods, a certificate of authorization for the operation of a biomedical research center and the storage and management of hazardous waste and licences for the storage and management of radioactive materials on its premises in Saint Laurent, Quebec. Phoenix has applied for, but has not yet received, a permit authorizing the discharge of wastewater from its expanded Saint Laurent operation into the city sewer system and a permit for new extraction hoods and bio-safety cabinets at the Saint Laurent facility. Phoenix is in the process of determining whether it needs additional permits, licenses or other authorizations under applicable environmental laws and regulations for its Saint Laurent operations. If additional permits are needed, Phoenix will apply for these required permits, licenses or other authorizations and it has no reason to believe it could not obtain the same. Notwithstanding the foregoing, Phoenix believes it currently has all permits material to its Canadian operations. Phoenix employs the services of certified biomedical, hazardous, and radioactive waste transporters. Phoenix believes it is in material compliance with all federal, provincial, and municipal environmental, health and safety laws and regulations that are applicable to its Canadian operations. EUROPE Phoenix's Swiss operations are subject to various environmental laws and regulations, including with respect to wastewater discharge, and laws and regulations that regulate the storage and management of biomedical, hazardous and radioactive materials and waste. Anawa's various permits include licenses to handle toxic substances, radioactive compounds and pharmaceutical substances. Phoenix employs the services of certified biomedical, hazardous and toxic transporters both in Anawa's and ITEM Labo's laboratories. Phoenix believes that these facilities and its other European operations are in material compliance with all applicable environmental and health and safety laws and regulations. POTENTIAL LIABILITY AND INSURANCE Clinical studies involve the testing of approved and experimental drugs on human subjects, including patients who are seriously ill. These studies create a risk of liability for personal injury or even death to participants due to an adverse reaction to the test drug or as a result of negligence or misconduct. In addition, although Phoenix does not believe it is legally accountable for the medical care rendered by third party investigators, it is possible that Phoenix could be subject to claims and expenses arising from any professional malpractice of the investigators. Phoenix also could be held liable for errors or omissions in connection with the services it performs. Phoenix believes that the risk of liability to patients in clinical trials is mitigated by various regulatory requirements, including the role of institutional review boards and the need to obtain each patient's informed consent. The FDA requires each human clinical trial to be reviewed and approved by the institutional review board. An institutional review board is an independent committee that includes both medical and non-medical personnel and is obligated to protect the interests of patients enrolled in the trial. After the trial begins, the institutional review board monitors the study progress with measures designed to protect patients. To reduce its potential liability, Phoenix seeks to obtain indemnity provisions in its contracts with clients and with investigators hired by Phoenix on behalf of its clients. These indemnities generally do not, however, protect Phoenix against negligence or wilfull misconduct. Moreover, these indemnities are contractual arrangements that are subject to negotiation with individual clients, and the terms and scope of these indemnities vary from client to client and from study to study. Finally, the financial performance of these indemnities is not secured, so that Phoenix bears the risk that an indemnifying party may not have the financial ability to fulfill its indemnification obligations. Phoenix could be 96 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 where the indemnity, although applicable, is not performed in accordance with its terms. Phoenix currently maintains an errors and omissions professional liability insurance policy. There can be no assurance that this insurance coverage will be adequate, or that insurance coverage will continue to be available on terms acceptable to Phoenix. Any successful claim asserted against Phoenix not covered by or in excess of its insurance coverage could have a material adverse effect on Phoenix. LEGAL PROCEEDINGS As is routine for North American contract research organizations, Phoenix's Cincinnati facility has been inspected by the FDA several times between 1995 and 1998. In the 1997 inspection, the inspectors cited deficiencies regarding some anomalous data connected with repeated height and weight measurements of some healthy volunteers screened for clinical studies. These studies were conducted in 1995 and early 1996, shortly after the Cincinnati facility opened. In response to these FDA observations, Phoenix retained outside consultants to evaluate the FDA observations and make recommendations to Phoenix for improvements in Phoenix's procedures, if appropriate. Following the report of the outside consultants, these procedures were changed to ensure greater rigor in the screening process. A formal response describing these changes and responding to the FDA observations was submitted to the FDA in February 1998. In early March 1998, Phoenix received a grand jury subpoena, requesting documents from Phoenix, including documents relating to studies conducted during the early phase of the Cincinnati facility's development, including the period covered by the 1997 inspection. Phoenix has complied with the subpoena and no further communications have been received by Phoenix from the FDA relating to this matter. To the knowledge of Phoenix, to date a target of this investigation has not been identified by authorities. While Phoenix believes it has taken all necessary measures to ensure a favorable outcome to the 1997 inspection, Phoenix cannot at this time predict the ultimate resolution of the 1997 inspection or the final outcome of any proceedings relating to the grand jury subpoena. An adverse resolution of the 1997 inspection or an adverse outcome of any proceedings relating to the grand jury subpoena could result in substantial fines or penalties, the effect of which could be material to Phoenix's business, financial condition, or results of operations. In addition, there can be no assurance that the pendency of the proceedings will not have a material adverse effect on Phoenix. Phoenix is not a party to any other legal proceedings that it believes are reasonably likely, individually or in the aggregate, to have a material adverse effect on its financial position or results of operations, nor, except as described above, is it a party to, or aware of, any proceeding or investigation involving any material claims arising out of any clinical trial that it managed or monitored. 97 SELECTED CONSOLIDATED FINANCIAL INFORMATION OF PHOENIX The following table sets forth selected consolidated financial information of Phoenix in Canadian dollars. The selected consolidated financial information for the five years ended August 31, 1998 is derived from the consolidated financial statements of Phoenix which have been prepared in accordance with Canadian GAAP and audited by Ernst & Young LLP, independent chartered accountants. The selected consolidated financial information for the three months ended November 30, 1998 and 1997, have been derived from the unaudited consolidated financial statements of Phoenix. The selected consolidated financial information as at August 31, 1997 and 1998 and for the three year period ended August 31, 1998 in accordance with U.S. GAAP are derived from note 15 to the consolidated financial statements of Phoenix. The following information should be read in conjunction with the consolidated financial statements, "Management's Discussion and Analysis of Financial Condition and Results of Operations of Phoenix," and "Unaudited Pro Forma Consolidated Financial Information" included elsewhere in this proxy statement/prospectus. See also "Financial Statement Presentation and Exchange Rates." The consolidated financial statements of Phoenix have been prepared in accordance with Canadian GAAP. Canadian GAAP differs from U.S. GAAP. See note 15 to the consolidated financial statements of Phoenix included elsewhere in the proxy statement/prospectus for a description of material differences between U.S. GAAP and Canadian GAAP as they relate to the consolidated financial statements of Phoenix and a reconciliation to U.S. GAAP of Phoenix's financial position, net income and shareholders' equity. You should be aware of the following factors that affect comparisons from year to year: (a) In the quarter ended November 30, 1998, Phoenix completed the acquisition of Clinserve AG. This acquisition was accounted for under the pooling of interests method under U.S. GAAP. The pooling of interests method requires the restatement of financial statements of periods prior to the pooling transaction in a manner that assumes the two companies had always been combined. As a result, the U.S. GAAP data presented below has been restated to reflect this transaction. (b) During August 1997 and February 1998, Phoenix acquired two significant Phase II-IV operations, ITEM and IBRD-Rostrum respectively. These acquisitions accounted for incremental net revenues of approximately $67 million for the year ended August 31, 1998. The acquisition of ITEM through the issuance of 4,690,142 Phoenix common shares resulted in an increase in consolidated assets of approximately $54 million and an increase of $48.5 million in shareholders' equity under Canadian GAAP (approximately $4 million and nil respectively under U.S. GAAP). In February 1998, Phoenix acquired 100% of IBRD-Rostrum for approximately $44 million. This resulted in an increase in consolidated assets of approximately $63 million under both Canadian and U.S. GAAP. (c) In the year ended August 31, 1994, Phoenix benefited from research and development financing available under relevant Quebec tax legislation, which gave rise to financing income of $1,152,000. Because of changes in related income tax legislation, these transactions have not recurred. (d) In accordance with accepted Canadian practice, the basic and fully-diluted earnings and pre-tax earnings per share amounts for the year ended August 31, 1994 are based on the weighted average number of Phoenix common shares outstanding as at August 31, 1995, due to the changes in Phoenix's capital structure which occurred when Phoenix became a public company on October 24, 1994. 98
THREE MONTHS ENDED NOVEMBER 30 (UNAUDITED) YEAR ENDED AUGUST 31 -------------------- ----------------------------------------------------- 1998 1997 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS) STATEMENTS OF INCOME (LOSS) DATA AMOUNTS IN ACCORDANCE WITH CANADIAN GAAP Gross revenues.......................... 74,163 35,536 $ 218,360 $ 86,736 $ 64,182 $ 47,452 $ 33,872 Net revenues............................ 58,661 31,679 171,238 82,477 63,082 46,651 33,197 Income (loss) before income taxes....... 5,169 2,732 15,691 5,188 (5,181) 7,001 9,922 Net income (loss)....................... 2,854 1,830 9,067 2,349 (5,361) 4,941 7,030 STATEMENTS OF INCOME (LOSS) DATA AMOUNTS IN ACCORDANCE WITH U.S. GAAP Gross revenues.......................... 76,216 38,618 228,226 125,533 106,127 Net revenues............................ 60,714 34,761 181,104 115,966 97,569 Income (loss) before income taxes....... 5,025 3,230 18,271 5,885 (2,643) Net income (loss)....................... 2,691 2,314 11,603 2,014 (3,751) PER COMMON SHARE AMOUNTS IN ACCORDANCE WITH CANADIAN GAAP Basic and fully-diluted earnings (loss)................................ 0.11 0.08 0.37 0.12 (0.29) 0.30 0.43 Pre-tax earnings (loss)................. 0.21 0.11 0.64 0.26 (0.28) 0.42 0.60 Dividends............................... -- -- -- -- -- 0.07 -- PER COMMON SHARE AMOUNTS IN ACCORDANCE WITH U.S. GAAP Basic and diluted earnings (loss)....... 0.10 0.09 0.46 0.08 (0.16) Pre-tax earnings (loss)................. 0.19 0.13 0.73 0.23 (0.11) Dividends............................... -- -- -- -- -- BALANCE SHEET DATA (AT PERIOD-END) AMOUNTS IN ACCORDANCE WITH CANADIAN GAAP Working capital......................... 6,513 9,942 16,498 17,425 8,367 6,500 Total assets............................ 303,915 271,470 160,858 89,570 66,282 34,648 Total debt.............................. 53,790 50,351 11,672 11,210 13,695 15,842 Long-term debt.......................... 41,843 42,440 4,058 9,226 10,158 9,899 Shareholders' equity.................... 147,305 129,953 112,265 61,248 39,352 12,027 BALANCE SHEET DATA (AT PERIOD-END) AMOUNTS IN ACCORDANCE WITH U.S. GAAP Working capital......................... 6,513 9,942 17,986 Total assets............................ 236,291 217,924 114,285 Shareholders' equity.................... 79,681 76,407 63,840
99 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PHOENIX OVERVIEW THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES OF PHOENIX INCLUDED ELSEWHERE HEREIN, AND IS BASED ON THE CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH CANADIAN GAAP UNLESS OTHERWISE NOTED. ALL DOLLAR AMOUNTS ARE IN CANADIAN DOLLARS UNLESS OTHERWISE NOTED. Phoenix believes it is one of the largest contract research organizations in the world, providing a comprehensive range of research and development services to pharmaceutical and biotechnology industries. Phoenix serves principally an American client base, reflected by the fact that 65% of its revenues were derived from U.S. client-based contracts for the year ended August 31, 1998 compared to 76% in fiscal 1997. As at August 31, 1996 and 1997 the U.S. dollar denominated accounts receivable of the Canadian operations of Phoenix aggregated US$11,605,000 and US$9,886,000. These amounts were not hedged. As at August 31, 1998 and November 30, 1998 the U.S. dollar denominated accounts receivable of the Canadian operations of Phoenix aggregated US$12,003,000 and US$10,398,000. These accounts receivable were hedged entirely by foreign exchange forward contracts. Based on Phoenix's overall currency exposure at November 30, 1998, including derivative positions, currency movements are projected to affect after-tax cash flow by less than $2 million on an annual basis. Phoenix is headquartered in Montreal, Canada. Phoenix began operations in June 1989 and became a public company listed on the Toronto Stock Exchange and the Montreal Exchange in 1994. Phoenix's revenues have grown at a compounded rate of 52% over the last five fiscal years, reflecting its recent acquisitions and both an expansion of Phoenix's client base and an increase in the number and size of projects under management. Over that time, assets have grown more than thirteen times from $20.4 million at August 31, 1993 to $271.5 million at August 31, 1998. Phoenix recognizes revenues for contracts on the percentage of completion basis determined by reference to work performed. Customer advances and billings in excess of costs and estimated profit on contracts in progress are shown as liabilities. Losses, if any, are provided for in full as soon as they are anticipated. Phoenix's research contracts generally call for an amount to be paid at or near signature of the contract and the balance in installments thereafter as milestones are achieved. Consistent with industry counterparts, Phoenix routinely subcontracts with third party investigators in connection with clinical trials. These and other reimbursable costs are paid by Phoenix and reimbursed by clients. In accordance with industry practice, reimbursed costs are included in gross revenue. Accordingly, Phoenix views net revenue, which consists of gross revenue less reimbursed costs, as its primary measure of revenue growth. Direct labor, including fringe benefits, is the largest single component of direct costs, reflecting approximately 50% of the total amount for the first quarter of fiscal 1999 compared to 52% in the comparable period of fiscal 1998, 50% in fiscal 1998 and 48% in fiscal 1997. Other significant direct costs include laboratory and chemical supplies, amortization of capital and other assets, equipment maintenance, study subject fees, physician fees and laboratory testing. In fiscal 1998, Phoenix acquired IBRD-Rostrum for US$28.5 million cash, and Anawa for Phoenix common shares valued at $7.2 million. Phoenix has historically prepared and filed its consolidated financial statements in accordance with Canadian GAAP. Commencing in fiscal 1998, Phoenix has also reconciled its results to U.S. GAAP, although still keeping the Canadian dollar as its reporting currency, in order to present the financial results consistently with Phoenix's industry counterparts and competitors. The significant differences between U.S. GAAP and Canadian GAAP are described in note 15 of the consolidated financial statements of Phoenix. 100 RECENT DEVELOPMENTS SALE OF KANSAS CITY ANALYTICAL SERVICES. On September 15, 1998, Phoenix sold its 44% interest in the common stock of Kansas City Analytical Services, a contract research organization located in Kansas City. Phoenix acquired Kansas City Analytical Services as part of the IBRD-Rostrum acquisition for US$2.4 million. Phoenix used the proceeds to repay a portion of the related outstanding indebtedness. CLINSERVE AND MCKNIGHT ACQUISITIONS. In November 1998, Phoenix acquired 100% of the outstanding common stock of Clinserve (Switzerland and Germany) for 316,805 Phoenix common shares and McKnight (Germany) for 873,325 Phoenix common shares. Clinserve provides central clinical laboratory services for European Phase I-IV clinical studies. McKnight provides Phase I clinical studies to European pharmaceutical companies. Several events in the second quarter of fiscal 1999, primarily a substantial reduction of bioanalytical service business from a major liquid chromatography/mass spectrometry client which has insourced most of its liquid chromatography/mass spectrometry work, together with a temporary downturn in liquid chromatography/mass spectrometry business in February 1999 and delays in the start-up of several European Phase II-IV projects, are expected to materially adversely affect Phoenix's earnings for its second fiscal quarter and is expected to have a lesser adverse impact on third quarter earnings. These adverse effects are expected to reduce Phoenix's fiscal 1999 net income by approximately $4.0 million. RESULTS OF OPERATIONS FIRST QUARTER FISCAL 1999 COMPARED TO THE FIRST QUARTER FISCAL 1998 REVENUES Net revenues for the first quarter of fiscal 1999 were $58.7 million, representing an increase of 85% over the net revenues of $31.7 million in the comparable quarter of fiscal 1998. Net revenues for the first quarter were $60.7 million under U.S. GAAP, representing an increase of 75% over net revenues of $34.8 million for the comparable period of fiscal 1998, restated to reflect the Anawa and Clinserve poolings of interests. This significant increase resulted primarily from Phoenix's acquisition of IBRD-Rostrum in the second quarter of fiscal 1998 as well as an overall organic revenue growth of 23%. Net gains from foreign currency fluctuations were $29,000 for the first quarter of fiscal 1999 compared to $705,000 in the comparable quarter of fiscal 1998. In the first quarter of fiscal 1999, Phoenix earned approximately 25% of its consolidated net revenues from Phase I studies, 43% from Phase II-IV clinical studies, 30% from bioanalytical studies and 2% from other sources, as compared with 30%, 25%, 40% and 5%, respectively, in the first quarter of fiscal 1998. During the first quarter of fiscal 1999, Phoenix earned approximately 30% of its consolidated net revenues in the United States, 42% in Canada and 28% in Europe, as compared with approximately 16%, 61% and 23% respectively in the comparable period of fiscal 1998 on a Canadian GAAP basis. On a U.S. GAAP basis, during the first quarter of fiscal 1999, Phoenix earned approximately 30% of its consolidated net revenues in the United States, 40% in Canada and 30% in Europe, as compared with approximately 13%, 59% and 28%, respectively, in the comparable period of fiscal 1998 as restated to reflect the Anawa and Clinserve poolings of interests. DIRECT COSTS Direct costs increased 87% to $34.7 million from $18.5 million in the comparable quarter of fiscal 1998, and increased as a percentage of net revenues to 59% from 58% in the first quarter of fiscal 1999 101 primarily as a result of the IBRD-Rostrum acquisition. Consequently, the gross profit margin decreased from 42% in fiscal 1998 to 41% in fiscal 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased 80% to $17.5 million from $9.7 million in the first quarter of fiscal 1998. The selling, general and administrative expenses as a percentage of net revenue, decreased from 31% in the first quarter of fiscal 1998 to 29% in fiscal 1999. The overall increase is primarily attributable to the IBRD-Rostrum acquisition and the organic increase in personnel costs and other general and administrative costs given Phoenix's increased growth and geographic expansion. INTERNAL RESEARCH AND DEVELOPMENT Internal research and development costs decreased 4% to $866,000 from $902,000 in the first quarter of fiscal 1998. Phoenix views these internal research and development expenditures as critical to Phoenix's ongoing competitive success and expects to continue to make significant expenditures in this area in the future. INTEREST ON LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS AND AMORTIZATION Interest on long-term debt and capital lease obligations increased significantly to $1.4 million from $199,000 in the comparable period of fiscal 1998, primarily as a result of the assumption of US $28 million term debt in February 1998, in connection with the IBRD-Rostrum acquisition. The increase is also partially attributable to the assumption of US$4.7 million term debt in connection with the merger. Phoenix believes that an instantaneous increase or decrease of one percentage point in interest rates applicable to the aggregate of its floating rate financial instruments would not have a material impact on its financial position or results of operations. In the aggregate, amortization of capital assets increased 43% to $3.0 million from $2.1 million in the first quarter of fiscal 1998. This increase was the result of the additional purchases of capital assets, totaling $3.9 million as compared to $1.7 million in the first quarter of 1998. Additionally, the amortization of goodwill on acquisitions increased to $732,000 in the first quarter of fiscal 1999 compared to $322,000 in the comparable period of fiscal 1998 as a result of the IBRD-Rostrum, Anawa, Clinserve and McKnight acquisitions. On a U.S. GAAP basis, the amortization of goodwill on acquisitions amounted to $321,000 of amortization in the first quarter of fiscal 1999, a significant increase over the $48,000 in the comparable period of fiscal 1998, due to the IBRD-Rostrum acquisition. As previously disclosed, the ITEM, Anawa, Clinserve and McKnight business combinations are accounted for under the pooling of interests method under U.S. GAAP. FISCAL 1998 COMPARED TO FISCAL 1997 REVENUES Net revenues for fiscal 1998 were $171.2 million, representing an increase of 108% over net revenues of $82.5 million for fiscal 1997. This significant increase resulted primarily from Phoenix's recent acquisitions of ITEM at the end of fiscal 1997 and IBRD-Rostrum in the second quarter of fiscal 1998, as well as revenue growth in several organic business areas. Net gains from foreign currency fluctuations were $1.1 million for fiscal 1998 compared to $221,000 for fiscal 1997. In fiscal 1998, Phoenix earned approximately 24% of its consolidated net revenues from Phase I clinical studies, 42% from Phase II-IV clinical studies, 32% from bioanalytical studies and 2% from other sources, as compared with 34%, 7%, 56% and 3% in fiscal 1997. 102 During fiscal 1998, Phoenix earned approximately 27% of its consolidated net revenues in the United States, 50% in Canada and 23% in Europe, as compared with approximately 16%, 82% and 2% in fiscal 1997. DIRECT COSTS Direct costs increased 89% to $100 million from $53 million in fiscal 1997, and decreased as a percentage of net revenues to 58% from 64% in fiscal 1997. The increase in the gross profit margin is partially attributable to the ITEM and IBRD-Rostrum acquisitions, as well as the continued net revenue growth in the organic Phase I and bioanalytical sectors during the year. The decrease in direct costs relative to net revenue was principally due to Phoenix's recent acquisitions and its ability to perform contracts more efficiently realizing economies of scale through the allocation of fixed costs over a larger net revenue base. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased 127% to $51.9 million from $22.9 million in fiscal 1997. The selling, general and administrative expenses as a percentage of net revenue increased from 28% in fiscal 1997 to 30% in fiscal 1998, primarily attributable to the ITEM and IBRD-Rostrum acquisitions. The overall increase is primarily attributable to the increase in personnel costs and other general and administrative costs given Phoenix's increased growth and geographic expansion. INTERNAL RESEARCH AND DEVELOPMENT Internal research and development costs increased 12% to $3.7 million from $3.3 million in fiscal 1997 as a result of Phoenix's growth, expansion and commitment to process and product research and development. INTEREST ON LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS AND AMORTIZATION Interest on long-term debt and capital lease obligations increased significantly by 404% to $3.3 million from $659,000 in the comparable period of fiscal 1997, primarily as a result of the assumption of US$28 million term debt, in connection with the IBRD-Rostrum acquisition referred to in more detail above. In the aggregate, amortization of capital assets increased 35% to $9.4 million from $6.9 million in fiscal 1997. This increase was the result of additional purchases of capital assets, totaling $13.2 million, as compared to $6.2 million in fiscal 1997. Additionally, the amortization of goodwill on acquisitions increased to $2.2 million in fiscal 1998, compared to $204,000 in fiscal 1997 as a result of the ITEM, IBRD-Rostrum and Anawa acquisitions. On a U.S. GAAP basis, the amortization of goodwill amounted to $812,000 in fiscal 1998, as the ITEM and Anawa business combinations are accounted for under the pooling of interests method under U.S. GAAP. FISCAL 1997 COMPARED TO FISCAL 1996 REVENUES Net revenues for the year ended August 31, 1997 were $82.5 million, representing an increase of 31% over net revenues of $63.1 million for fiscal 1996. This increase resulted from improvements in several business areas, particularly the clinical area, where the increase in operating volume of the Cincinnati facility contributed 28% of the fiscal 1997 net revenue increase. Revenues in the bioanalytical area accounted for 56% of net revenue in 1997, 57% in fiscal 1996, with its principal division liquid chromatography/mass spectrometry experiencing a 56% increase in net revenues as compared to fiscal 1996. Net gains from foreign currency fluctuations were $221,000 for fiscal 1997 and $126,000 for fiscal 1996. 103 DIRECT COSTS Direct costs increased 21% to $53.0 million from $43.9 million for the comparable period in 1996, and decreased as a percentage of net revenues to 64% from 70% in fiscal 1996. The increase in the gross profit margin is partially attributable to the improvements in the results of the Cincinnati operations, as well as the significant net revenue growth in the liquid chromatography/mass spectrometry sector during the year. The decrease in direct costs relative to net revenue was principally due to Phoenix's ability to perform its contracts more efficiently and the economies of scale realized through the allocation of fixed costs over a larger net revenue base. Direct labor costs totaled $ 25.2 million in 1997 compared to $22.0 million in fiscal 1996. Other direct costs include laboratory and chemical supplies, amortization of certain capital and other assets, equipment maintenance, study subject fees, physician fees and laboratory testing. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased 16% to $23 million from $19.9 million in fiscal 1996. Labor costs, the primary component, increased 10% to $9.5 million from $8.6 million in the prior period. The selling, general and administrative expenses as a percentage of net revenue, decreased from 31.5% in fiscal 1996 to 28% in fiscal 1997 primarily due to the increase in net revenue. The overall increase is primarily attributable to the increase in labor costs and other general and administrative costs given Phoenix's increased growth. INTERNAL RESEARCH AND DEVELOPMENT Internal research and development costs decreased 11% to $3.3 million from $3.7 million in fiscal 1996, as a result of Phoenix's ability to increase revenues captured in this sector, resulting in a decrease in the net costs, while still expanding the commitment to process and product research and development. INTEREST ON LONG TERM DEBT AND CAPITAL LEASE OBLIGATIONS AND AMORTIZATION Interest on long-term debt and capital lease obligations decreased by 33% to $659,000 from $981,000 for fiscal 1996 as a result of the share issuance proceeds in May 1996 and the related debt repayment of $18 million at that time. In the aggregate, amortization of capital assets increased 24% to $6.9 million from $5.6 in fiscal 1996. This increase was the result of additional purchases of capital assets, totaling $6.2 million in fiscal 1997 compared to $18.6 million in fiscal 1996. Additionally, the amortization of intellectual property and goodwill on acquisitions described below, amounted to an additional $204,000 of amortization in fiscal 1997. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES Phoenix continues to generate strong cash flow from operations. Phoenix generated operating cash flows of $6.1 million in the first quarter of fiscal 1999, up significantly from $1.9 million in the comparable period of fiscal 1998. Phoenix generated operating cash flows of $14.9 million in fiscal 1998, as compared to $7.7 million in fiscal 1997 and a usage of $3.6 million in fiscal 1996. Phoenix's consolidated backlog consists of anticipated revenues from clients in connection with net revenues which have been contracted for or orally committed to but that have not been completed, or in some cases, started. Phoenix's consolidated net revenue backlog as at January 31, 1999 was approximately $173.6 million compared to $88.7 million as at January 31, 1998. Approximately 58% of the consolidated net revenue backlog as at January 31, 1999 represents anticipated contract revenues to be realized by the end of fiscal 1999. Although backlog represents only business which is considered to be firm, there is no assurance that cancellations or decreases in the size of the involved contracts will not occur. 104 INVESTING ACTIVITIES In fiscal 1997 and 1998, Phoenix increased its net revenues with a lower-than-historical level of capital expenditures by exploiting its capacity and achieving economies of scale. Capital asset additions for fiscal 1998 amounted to $13.2 million, as compared to $6.2 million in fiscal 1997, primarily relating to information technology products and research equipment. Capital asset additions for the first quarter of fiscal 1999 amounted to $3.9 million as compared to $1.7 million in the first quarter of fiscal 1998, primarily relating to information technology products and research equipment. Phoenix's 1999 capital expenditure plan calls for over $20 million in capital asset additions. Phoenix is currently building a new state-of-the-art 145,000 square foot laboratory in Montreal (Saint-Laurent, Quebec) which is expected to be completed by September 1999. Phoenix plans to finance the cost of the facility through a sale/leaseback financing arrangement and with funds from operations. FINANCING ACTIVITIES At November 30, 1998 the Company's principal indebtedness consisted of bank revolving credit indebtedness in the amount of $3.6 million, bank term loans of $44.8 million, 50% maturing in February 2001 and 50% maturing in February 2002, capital lease obligations of $350,000, a low interest loan from the state of Ohio in the amount of $1.7 million, a note payable of $1 million maturing in July 2000, low interest bearing government loans of $861,000 and other debts in the amount of approximately $1.5 million. Phoenix also has revolving lines of credit to meet its liquidity needs totaling approximately $17 million. As at November 30, 1998 Phoenix had drawn $3.6 million of these facilities. In addition, Phoenix has available capital expenditure and other lines of credit totaling $21.6 million. As of November 30, 1998, $7.2 million (US$4.7 million) had been drawn on these lines to finance the cash collateral pledge to the Bank. On September 15, 1998, Phoenix sold its 44% interest in the common stock of Kansas City Analytical Services, a contract research organization located in Kansas City. Phoenix acquired Kansas City Analytical Services as part of the IBRD-Rostrum acquisition, for US$2.4 million, the proceeds of which were used to repay a portion of outstanding indebtedness. Phoenix financed its pledge of approximately US$4.7 million cash collateral to the Bank to secure the guaranty under the forbearance agreement by borrowing under its existing revolving line of credit. Upon consummation of the merger, Phoenix will repay an additional approximately US$10.0 million in indebtedness of Chrysalis. The cash collateral pledge was financed through existing Phoenix bank revolving credit facilities and Phoenix has negotiated the re-financing of the assumed Chrysalis debt with its current lenders. Based on its current operating plan, Phoenix's management believes that its available cash and cash equivalents, together with cash flow operations, and credit available under its operating lines of credit will be sufficient to meet its operating cash flow and capital expenditure needs for at least the next 12 months. However, in order to support future growth, either internally or through acquisitions, Phoenix may need to obtain additional debt or equity financing. 105 QUARTERLY RESULTS Phoenix's quarterly operating results have been and will continue to be subject to variation, depending on factors such as: - the initiation and progress of significant projects; - exchange rate fluctuations; - the costs associated with integrating acquisitions; and - the start-up costs incurred in connection with the introduction of new services. The following table presents unaudited quarterly operating results for Phoenix, for each of the nine most recent fiscal quarters in accordance with Canadian GAAP. The operating results for any quarter are not necessarily indicative of the results of any future period.
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER YEAR ----------- ----------- ----------- ----------- --------- (IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS) THREE MONTHS ENDED NOVEMBER 30, 1998 (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (AUDITED) - -------------------------------------------------- Gross revenues.................................... 74,163 n/a n/a n/a n/a Net revenues...................................... 58,661 n/a n/a n/a n/a Pre-tax earnings.................................. 5,169 n/a n/a n/a n/a Net earnings...................................... 2,854 n/a n/a n/a n/a Pre-tax earnings per common share................. 0.21 n/a n/a n/a n/a Basic earnings per common share................... 0.11 n/a n/a n/a n/a FISCAL YEAR ENDED AUGUST 31, 1998 Gross revenues.................................... 35,536 39,744 66,816 76,264 218,360 Net revenues...................................... 31,679 32,495 48,605 58,459 171,238 Pre-tax earnings.................................. 2,732 803 6,556 5,600 15,691 Net earnings...................................... 1,830 195 3,126 3,916 9,067 Pre-tax earnings per common share................. 0.12 0.04 0.27 0.21 0.64 Basic earnings per common share................... 0.08 0.01 0.13 0.15 0.37 FISCAL YEAR ENDED AUGUST 31, 1997 Gross revenues.................................... 17,588 19,527 22,711 26,910 86,736 Net revenues...................................... 17,127 19,095 21,731 24,524 82,477 Pre-tax earnings (loss)........................... (1,284) 189 2,416 3,867 5,188 Net earnings (loss)............................... (1,374) 99 1,748 1,876 2,349 Pre-tax earnings (loss) per common share.......... (0.07) 0.01 0.12 0.19 0.26 Basic earnings (loss) per common share............ (0.07) 0.01 0.09 0.09 0.12
RECENT ACQUISITIONS On November 6, 1998, Phoenix acquired 100% of the outstanding common stock of McKnight (Germany) in exchange for 873,325 Phoenix common shares issued from treasury, valued at approximately $10.7 million. Under Canadian GAAP, the transaction is accounted for under the purchase method. Under U.S. GAAP, this transaction has been accounted for on a pooling of interests basis. On November 5, 1998, Phoenix acquired 100% of the outstanding common stock of Clinserve (Switzerland and Germany) in exchange for 316,805 Phoenix common shares issued from treasury, valued at approximately $3.8 million. Under Canadian GAAP, the transaction is accounted for under the purchase method. Under U.S. GAAP, this transaction has been accounted for on a pooling of interests basis. 106 On April 30, 1998, Phoenix acquired 100% of the outstanding common stock of Anawa in exchange for 525,651 Phoenix common shares issued from treasury, valued at approximately $7.2 million and acquisition costs of approximately $368,000. Under Canadian GAAP, the transaction is accounted for under the purchase method. Under U.S. GAAP, this transaction is accounted for on a pooling of interests basis. On February 7, 1998, Phoenix acquired 100% of the outstanding common stock of IBRD-Rostrum in exchange for cash of US$28.5 million, primarily financed through the assumption of term debt, and acquisition costs of approximately $2 million. The purchase agreement also provides for a contingent payment of nine times the "EBITDA," which is consolidated earnings before interest, taxes, depreciation and amortization, of the acquired operations for the 12 month period ending December 31, 1998 in excess of US$3 million. Under both Canadian and U.S. GAAP, the acquisition is accounted for under the purchase method. On August 7, 1997, Phoenix acquired 100% of the outstanding common stock and convertible debentures of ITEM Holding SA in exchange for 4,690,142 Phoenix common shares issued from treasury, valued at approximately $48.5 million and acquisition costs of approximately $2.3 million. Under Canadian GAAP, the transaction is accounted for under the purchase method. Under U.S. GAAP, this transaction is accounted for on a pooling of interests basis. GEOGRAPHICAL SEGMENT INFORMATION The following table sets forth net revenues, income (loss) before income taxes and total assets by geographic region:
QUARTER ENDED NOVEMBER 30 YEAR ENDED AUGUST 31 -------------------- ------------------------------- 1998 1997 1998 1997 1996 --------- --------- --------- --------- --------- (IN THOUSANDS OF CANADIAN DOLLARS) NET REVENUES FROM Canadian operations............................................... $ 24,917 $ 20,132 $ 86,556 $ 68,042 $ 55,756 European operations............................................... 16,271 6,947 38,730 1,536 -- United States operations.......................................... 17,473 4,600 45,952 12,899 7,326 --------- --------- --------- --------- --------- $ 58,661 31,679 171,238 82,477 63,082 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES FROM Canadian operations............................................... $ 4,972 $ 2,347 $ 14,141 $ 9,522 $ (352) European operations............................................... (908) 168 2,018 0 -- United States operations.......................................... 1,105 217 (468) (4,334) (4,829) --------- --------- --------- --------- --------- 5,169 2,732 15,691 5,188 (5,181) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ASSETS FROM Canadian operations............................................... $ 93,768 $ 73,065 $ 82,788 $ 72,529 $ 69,704 European operations............................................... 129,819 73,628 107,799 73,424 -- United States operations.......................................... 81,328 17,161 80,883 14,905 19,866 --------- --------- --------- --------- --------- 303,915 163,854 271,470 160,858 89,570 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
CANADIAN FEDERAL AND QUEBEC TAX CREDITS Phoenix continues to benefit from government tax incentives to encourage research and development consisting of Canadian federal investment tax credits and Quebec labor tax credits. The federal credits are currently 20% of eligible expenses. For federal purposes, eligible expenses consist of Phoenix's capital and current expenditures on research and development that are made on behalf of non-resident sponsoring clients and internal research and development, less Quebec credits 107 and government and non-government assistance. These credits are not refundable but are available to reduce current and future income taxes payable. Quebec credits are applicable only to eligible labor expenses, to the extent of 20% of labor costs that are made on behalf of non-resident sponsoring clients and internal research and development, less government and non-government assistance. Quebec credits are fully refundable if not used to offset income and capital taxes otherwise payable. During fiscal 1998, Phoenix earned and recorded in income $3.7 million of Quebec credits as compared to $3.5 million in fiscal 1997 and $3.4 million in fiscal 1996. In fiscal 1998 Phoenix recognized $5.0 million of non-refundable tax credits on the basis that it was more likely than not that these credits will be utilized through the reversal of existing deferred income tax liabilities. During fiscal 1997, Phoenix recognized $2.4 million of the non-refundable federal credits on the same basis. As at August 31, 1998, Phoenix has unrecognized non-refundable federal credits of $25.2 million which may be carried forward and used to reduce federal income taxes payable in future years. These federal non-refundable credits expire in the years ending 2003 to 2008. As at August 31, 1998 Phoenix also has a pool of research and development expenses available, without expiry, to reduce future provincial taxable income of $16.9 million. Phoenix also has unrecognized net operating loss carryforwards of approximately $31.7 million for U.S. federal tax purposes expiring in the years 2007 to 2012, and approximately $6.2 million for UK tax purposes expiring in the years 2005 to 2008. When recording expenses and capital asset additions, in order to reflect the impact of refundable and non-refundable tax credits on its results, Phoenix has adopted the cost reduction approach, consistent with the recommendations of The Canadian Institute of Chartered Accountants. As a result, these tax credits are subtracted from the applicable expenses and capital asset additions. YEAR 2000 COMPLIANCE Computer systems that use only the final two digits to represent years are unable to distinguish between years beginning with 19 and those that begin with 20. If not corrected, many computer applications could fail or create erroneous results when dealing with dates later than December 31, 1999. The Year 2000 problem is believed to affect virtually all companies and organizations. Phoenix has created a Corporate Year 2000 Project Office which is coordinating Phoenix's efforts to evaluate, identify, correct or reprogram, and test its existing systems for Year 2000 compliance. Phoenix is taking the required steps to make its existing systems Year 2000 ready at a total estimated cost of $1.5 million, $550,000 of which has been incurred through November 30, 1998 and $950,000 of which is expected to be incurred in the remainder of fiscal 1999. Phoenix believes it is on schedule to complete its remediation efforts by June 30, 1999. If these efforts are not completed timely, the Year 2000 issue could have some impact on the operations of Phoenix. Phoenix's efforts are focused on Year 2000 compliance in the following six principal areas: - Application software, including operating systems and applications for personal computers; - Network and communication software, including business offices, home offices and field locations; - Computer equipment, including server, router and personal computers; - Telecommunications equipment, including telephone, fax copier and emergency alert devices; - Facilities, including building security, building control and environmental systems; and - Procedures, including forms, reports and customer service operations. These activities are intended to encompass all major categories of systems in use by Phoenix, including sales, distribution, finance and human resources. These activities are being conducted simultaneously with the modifications to, and consolidation of, Phoenix's information technology systems as part of 108 Phoenix's ongoing integration of recent acquisitions. See "Description of Phoenix--Information Technology." In addition to addressing the Year 2000 issue, Phoenix's Year 2000 Project Office has and will continue to survey its key suppliers and customers to determine the extent to which the systems of these suppliers and customers are Year 2000 compliant and the extent to which Phoenix could be affected by the failure of these third parties to be Year 2000 compliant. Phoenix cannot presently estimate the impact of the failure of these third parties to be Year 2000 compliant. The general phases of the Year 2000 Project are: (1) Year 2000 methodology training for key information technology personnel, and inventorying known Year 2000 items, internally and externally; (2) assigning priorities to identified items; (3) assessing the Year 2000 compliance of known items determined to be material to Phoenix; (4) attempting to remediate or replace material items that are determined not to be Year 2000 compliant; (5) testing material items; and (6) designing and implementing contingency plans to the extent deemed necessary. Phoenix has completed phases (1), (2) and (3) and is presently conducting phases (4) and (5). Assessment and testing is ongoing as hardware or system software is remediated, upgraded or replaced. Phoenix believes that it will be Year 2000 compliant by June 1999. Phoenix's Year 2000 Project Office believes that the high-risk area in Phoenix's core operation regarding Year 2000 is the data acquisition function. Phoenix has a contingency plan to implement a back-up Year 2000 ready solution that ensures that the core data acquisition process will function properly in case of project delay. Phoenix will monitor its Year 2000 compliance progress and adjust the implementation of the phases and the necessity of contingency planning as it deems appropriate. The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, normal business activities or operations such as incorrect scientific data interpretation. These failures could materially and adversely affect Phoenix's results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third-party suppliers and customers, Phoenix is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on Phoenix's results of operations, liquidity or financial condition. Phoenix believes that, with the completion of the Year 2000 Project as scheduled and the ongoing modifications to, and consolidation of, Phoenix's IT systems, the possibility of significant interruptions of normal operations due to Year 2000 problems should be reduced. EURO CONVERSION On January 1, 1999, eleven of the fifteen member countries of the European Union established fixed conversion rates between their sovereign currencies and the euro. As of that date, the participating countries have agreed to adopt the euro as their common legal currency. However, the legacy currencies will also remain legal tender in the participating countries for a transition period between January 1, 1999 and January 1, 2002. During this transition period, public and private parties may elect to pay or charge for goods and services using either the euro or the participating country's legacy currency. Phoenix cannot reasonably determine the effect of the recent establishment of the euro on Phoenix's financial condition or results of operations. Due to numerous uncertainties, Phoenix is not sure what the effects one common currency will have on pricing or what the resulting impact, if any, will be on Phoenix's financial condition or results of operations. 109 DIRECTORS AND OFFICERS OF PHOENIX AFTER THE MERGER After the merger, none of Chrysalis' directors will be directors of Phoenix or any of its subsidiaries. In addition, Mr. Schmitt and Mr. Cooper will not remain employees of Chrysalis, Phoenix or any other of its subsidiaries after the merger. Although Dr. Modeweg is expected to remain an officer of Chrysalis after the merger, he is not expected to perform policy-making functions on behalf of Phoenix and therefore will not be an executive officer of Phoenix. It is currently anticipated that the current directors and executive officers of Phoenix will continue to be the only directors and executive officers of Phoenix after the merger. DIRECTORS The following table contains, for each director of Phoenix, as at November 30, 1998, his name, municipality of residence, the year in which he became a director, his principal occupation and the number of Phoenix common shares beneficially owned by this person. Directors are elected until the next annual meeting of shareholders or, in the case of a vacancy or resignation, until a successor is elected or appointed:
COMMON SHARES BENEFICIALLY OWNED OR OVER WHICH CONTROL NAME AND DIRECTOR OR MUNICIPALITY OF RESIDENCE SINCE PRINCIPAL OCCUPATION DIRECTION IS EXERCISED - ------------------------------------ ----------- ------------------------------------ ---------------------------- John Hooper, Ph.D. 1988 Chairman and Chief Executive Officer 1,001,812 Hudson, Quebec of Phoenix Claude E. Forget 1989 Chairman, Look TV 13,900 Montreal, Quebec (Radiocommunication distributor) Lucien Steru, M.D. 1997 President and Chief Operating 3,336,325 Brussels, Belgium Officer- Phoenix International (Europe) and Director Bertram A. Spilker, Ph.D., M.D. 1997 Senior Vice President Scientific and -- Bethesda, Maryland Regulatory Affairs, Pharmaceutical Research Manufacturers Association (Pharmaceutical research) Robert Raich, B.C.L. 1997 Senior Partner Spiegel Sohmer, -- Westmount, Quebec Attorneys (Law firm) David Goldman 1997 Executive Vice President and Chief -- Toronto, Ontario Operating Officer, Noranda Inc. (Mining and metal producer) Cornelius P. McCarthy III 1998 Managing Director, Corporate Finance 1,000 Devon, Pennsylvania Pennsylvania Merchant Group Ltd (Investment bankers)
Messers. Forget, Raich and Goldman are members of the Audit Committee. Messers. Hooper, Raich and Goldman are members of the Human Resources Committee. All of the directors have been engaged in their present occupation or in other executive capacities with the companies or firms with which they currently hold positions for more than five years except for: 110 - Mr. Forget who was Vice President, Corporate Affairs, The Laurentian Group Corporation, from 1989 to 1994. From 1994 to 1997, Mr. Forget served as President of C.E.F. Ganesh Corporation. He has acted as the Chairman of Look Communications Inc. since August 1997 and has been a consultant to Teleglobe Canada Inc. since 1994. He also continues to act as Chairman of Canadian Medical Research Associates Inc. Mr. Forget serves on the board of Royal Victoria Hospital and Look Communications Inc.; - Dr. Steru who was the President and Chief Executive Officer of ITEM from inception in 1982 until August 1997 when ITEM was acquired by Phoenix; - Dr. Spilker was Executive Director Orphan Medical, a division of CHRONIMED, Inc. from 1993 to 1997, and served as Interim President of Phoenix International Life Sciences (IBRD) Inc. from February 1998 until March 1998; - Mr. Goldman was Executive Vice President, Metallurgical Operations of Noranda Minerals Inc. from 1991 to 1994. In 1994 he was appointed President and Chief Executive Officer of Noranda Metallurgy Inc. Since November of 1997, he has acted as Executive Vice President and Chief Operating Officer of Noranda Inc. Mr. Goldman serves on the board of Tritech Precision Inc. and Falconbridge Ltd.; and - Mr. McCarthy has served, since December 1996, as an investment banker for Pennsylvania Merchant Group, where he is a Senior Vice President, Corporate Finance. From December 1993 through December 1996, he served as a Managing Director of Corporate Finance for Laidlaw & Company, an investment banking firm. From December 1992 to December 1993, Mr. McCarthy was the President of McCarthy & Company, a financial consulting firm serving the pharmaceutical industry. Mr. McCarthy has served as a member of the Board of Directors of Bonded Motors, Inc. since 1996 and of Laser Pacific Media Corporation since October 1996. He was previously a Director of Phoenix from 1994 to 1997. 111 EXECUTIVE OFFICERS The following table contains, for each person who is an executive officer of Phoenix, as at November 30, 1998, his or her name, municipality of residence, the first year of employment with Phoenix and position with Phoenix and the number of common shares beneficially owned, directly or indirectly, or over which control or direction was exercised by this person. The Phoenix common shares beneficially owned or over which control or direction is exercised includes options exercisable within 60 days.
COMMON SHARES WITH BENEFICIALLY OWNED OR NAME AND PHOENIX OVER WHICH CONTROL OR MUNICIPALITY OF RESIDENCE SINCE POSITION DIRECTION IS EXERCISED - --------------------------------------- ----------- --------------------------------------- ----------------------- John Hooper 1988 Chairman and Chief Executive Officer 1,001,812 Hudson, Quebec Jean-Yves Caloz 1993 Senior Vice President, International 144,297 Los Angeles, California Finance and Acquisitions, and Secretary George Engelberg 1997 Vice President, Information Technology -- Cote St-Luc, Quebec Lucien Steru 1997 President and Chief Operating 3,336,325 Brussels, Belgium Officer--Phoenix International (Europe) Stephane Huguet 1998 President and Chief Operating Officer -- Town of Mount-Royal, Quebec Phoenix International, Canada Susan Thornton 1998 President and Chief Operating Officer -- Blue Bell, Pennsylvania Phoenix International (US), Phase II-IV James J. Conklin 1998 Senior Vice President, General Manager -- Yardley, Pennsylvania Scientific Software Division David Moszkowski 1998 Senior Vice President and Chief -- Dollar des Orneaux, Quebec Financial Officer
Dr. Hooper founded Phoenix in 1988. He has 28 years of experience in pharmaceutical research and development and regulatory affairs. From 1970 to 1973, Dr. Hooper was a laboratory scientist with Bristol Laboratories of Canada, a pharmaceutical manufacturer. From 1973 to 1979, Dr. Hooper was Assistant Director, Clinical Research and subsequently Director Scientific Affairs in charge of the Medical, Clinical Research and Drug Regulatory Departments at Squibb Canada, a pharmaceutical manufacturer. From 1979 to 1987, Dr. Hooper was first Director, Scientific Affairs, and then Vice President and subsequently Senior Vice President at Bio Research Laboratories Ltd., a contract research laboratory. Dr. Hooper holds a Doctorate in chemistry from the School of Pharmacy, University of London, England. Mr. Caloz has been associated with Phoenix since its inception, first as a financial advisor and since June 1993, as an executive. From April 1993 to November 1998 Mr. Caloz was Vice President, Finance, then Senior Vice President and Chief Financial Officer. In November 1998, Mr. Caloz became Senior Vice President, International Finance and Acquisitions. Prior to joining Phoenix, Mr. Caloz was a partner in the accounting firm of Rooney, Greig & Assoc., having joined in 1984. During 1984, 112 Mr. Caloz worked as an associate at the accounting firm of Richter, Usher & Vineberg. From 1976 to 1984 Mr. Caloz worked for Roger Caloz and Company, chartered accountants. He earned a Bachelor of Arts from York University, Canada, and is a Chartered Accountant. On March 25, 1999, Mr. Caloz gave Phoenix 30 days' notice of termination as required under his employment agreement. Dr. George Engelberg joined Phoenix in 1997. He has over 20 years of experience in implementing large-scale information technology systems in industry. From 1976 to 1979, he was associated with Domtar Ltd., a major forestry and paper company. Dr. Engelberg then worked at Canadian National Railways as Senior Project Manager from 1979 to 1987, implementing automated freight year and main line signaling systems, and large-scale plant capacity simulation systems. From 1987 to 1988 he worked at Future Electronics as Vice President, MIS. He then served as Vice President, Information Services at Astral Communications, a diverse media and communications company, from 1988 to February 1997, where he implemented manufacturing, distribution, retail and advanced broadcasting systems. Dr. Engelberg holds a Doctoral degree in electrical engineering from the University of California, Santa Barbara. Dr. Lucien Steru is President and Chief Operating Officer of Phoenix International (Europe). Dr. Steru founded ITEM Europe SA in 1982, one of the first contract research organizations in Europe. Before 1982, Dr. Steru was an assistant professor in pharmacology and resident in psychiatry (Pitie- Salpetriere). Dr. Stephane Huguet has close to ten years of product development and pharmaceutical marketing experience in the U.S.A., Europe and Japan. Prior to joining Phoenix, Dr. Huguet was President of Fournier Pharma Inc., and was based in Montreal from 1996 to 1998. From 1993 to 1995, Dr. Huguet acted as Director of Global Marketing for Laboratoire Fournier in Dijon, France. Dr. Huguet holds a medical degree as well as a Master of Business Administration degree from INSEAD. Dr. Susan C. Thornton has been an officer of Phoenix International GB Limited, formerly IBRD-Rostrum since 1992, responsible for its U.S. operations. From 1984 until 1992 Dr. Thornton held various senior management positions with SmithKline Beecham Corporation, and from 1975 until 1978 she was a research and development scientist with Merck Sharp and Dohme. Dr. Thornton obtained a Doctoral degree in molecular biology from the University of Pennsylvania in 1984. Dr. Conklin joined Phoenix in 1998. From 1990 to 1998 he was Chairman, Founder and Chief Scientific Officer of Bio-Imaging Technologies, Inc. In 1998, Dr. Conklin joined Convergent Consulting Corporation. Prior to Bioimaging Dr. Conklin was Vice-President of Product Development at Cytogen Corp., held a senior position at Centocor, and was Director of the Armed Forces Radiobiology Research Institute. Dr. Conklin is a Johns Hopkins trained internist and nuclear medicine physician with undergraduate and graduate training in electrical engineering. Mr. Moszkowski joined Phoenix in 1998. From 1997 until November 1998, he was Chief Financial Officer for VELAN Inc. From 1994 to 1996, Mr. Moszkowski was Chief Financial Officer for Volcano International, Inc. From 1992 to 1994, he was Vice President Finance for the Manson Group. From 1988 to 1992, Mr. Moszkowski was Vice President Finance for the MIL Group. He earned a Bachelor of Commerce from Concordia University, Canada, and is a Chartered Accountant. PRINCIPAL SHAREHOLDERS AND HOLDINGS OF OFFICERS AND DIRECTORS OF PHOENIX The following table contains the number and percentage of shares of Phoenix common shares which, according to information supplied to Phoenix, are beneficially owned by: - each person who is the beneficial owner of more than 5% of Phoenix common shares; - each of Phoenix's directors and executive officers; and - all directors and executive officers as a group. 113 Under rules of the Securities and Exchange Commission, a person is deemed to be the beneficial owner of Phoenix common shares with respect to which the person has or shares voting power or investment power. A person is also deemed to be the beneficial owner of shares of Phoenix common shares as of a given date with respect to which this person has the right to obtain voting or investment power within 60 days of this given date, such as upon the exercise of options or warrants. Unless otherwise indicated, the information in the following table is as of December 15, 1998. As of January 31, 1999, Phoenix had 26,066,989 common shares outstanding. Outstanding shares of Phoenix common shares owned beneficially are listed in one column. Shares of Phoenix common shares owned beneficially through stock options that can be exercised by May 1, 1999 are shown in a separate column. The percentage column reflects all shares owned benefially. An asterisk in the percent column means the person owns less than one percent of the Phoenix common shares.
SHARES BENEFICIALLY OWNED ----------------------------------------- OUTSTANDING NAMES AND ADDRESSES SHARES OPTIONS PERCENT - ------------------------------------------------------------------------- ----------- ------------- ------------- Van Berkom & Associates Inc.............................................. 3,737,395 0 14.3% 1130 Sherbrooke Street West Suite 1005 Montreal, Quebec H3A 2M8 Canada Lucien Steru, M.D........................................................ 3,336,325 2,500 12.8% Avenue Louise 1050 Brussels, Belgium TAL Investments Inc...................................................... 3,032,167 0 11.6% 1000 de la Gauchetiere West Suite 3100 Montreal, Quebec H3B 4W5 Canada Canadian Medical Research Associates..................................... 1,650,000 0 6.3% 300-1118 Saint Catherine Street West Montreal, Quebec H3B 1H5 Canada John W. Hooper, Ph.D..................................................... 1,001,812 25,600 3.9% 2350 Cohen Street Saint-Laurent (Montreal) Quebec H4R 2N6 Canada Jean-Yves Caloz.......................................................... 144,297 16,000 * 22248 Cairnloch Street Calabasas, CA 91302 Claude Forget............................................................ 13,700 7,200 * 1000 de la Gauchetiere West Suite 3100 Montreal, Quebec H3B 4W5 Canada
114
SHARES BENEFICIALLY OWNED ----------------------------------------- OUTSTANDING NAMES AND ADDRESSES SHARES OPTIONS PERCENT - ------------------------------------------------------------------------- ----------- ------------- ------------- Cornelius P. McCarthy, III............................................... 1,000 6,600 * Four Falls Corporate Center West Conshohocken, PA 19004 Robert Raich............................................................. 0 1,200 * 1203-5 Place Ville Marie Montreal, Quebec N3B 2G2 Canada David Goldman............................................................ 0 1,000 * 191 Bay Street, Suite 4100 BCC Place Toronto, Ontario M5J 2T3 Canada Bertram A. Spilker....................................................... 0 1,000 * 1100, 15th Street NW Washington, DC 20005 James J. Conklin......................................................... 0 0 * 4800 Dobrin Saint-Laurent (Montreal), Quebec H4R 2P8 Canada David Moszkowski......................................................... 0 0 * 2350 Cohen Street Saint-Laurent (Montreal) Quebec H4R 2N6 Canada George Engelberg......................................................... 0 5,600 * 2350 Cohen Street Saint-Laurent (Montreal) Quebec H4R 2N6 Canada Stephane Huguet, MD...................................................... 0 0 * 2350 Cohen Street Saint-Laurent (Montreal) Quebec H4R 2N6 Canada Susan Thornton, Ph.D..................................................... 0 0 * 1777 Sentry Parkway Place West Blue Bell, PA 19422 All executive officers and directors as a group (13 persons)................................................ 4,497,034 66,800 17.5%
115 COMPENSATION OF EXECUTIVE OFFICERS OF PHOENIX EXECUTIVE COMPENSATION The following table contains compensation paid in respect of the named executive officers (being the Chief Executive Officer and the seven other most highly compensated executive officers of Phoenix whose total salary and bonus exceeded $100,000) for the last three completed fiscal years. When reviewing the table you should be aware of the following: - "Other Annual Compensation" represents interest benefits on interest free loans and car allowances. - "All Other Compensation" represents premiums paid in respect of disability insurance. - Dr. Susan Thornton joined Phoenix on February 6, 1998, and her salary is US$250,000. - Dr. Huguet joined Phoenix on January 2, 1998. His annual salary is approximately $240,000. - Dr. Huguet's 1998 bonus includes a signing bonus of $100,000. - Dr. Huguet's employment agreement provides for a maximum housing allowance of $4,000 per month. - Mr. Moszkowski joined Phoenix in November 1998, and his annual salary is $200,000. - Dr. Conklin joined Phoenix in September 1998 and his annual salary is US$220,000. 116 SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION/AWARDS ----------------------------------------- COMMON SHARES ANNUAL COMPENSATION UNDERLYING ------------------------------- OTHER ANNUAL OPTIONS ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION GRANTED COMPENSATION - ------------------------------------------- --------- --------- --------- ------------- ----------- ------------- (CDN$) (CDN$) (CDN$) (#) (CDN$) John Hooper, Ph.D. 1998 364,510 186,189 13,425 -- 12,910 Chairman and Chief Executive Officer 1997 242,124 46,123 11,650 -- 3,736 1996 239,615 -- 11,500 -- 3,958 Lucien Steru, M.D. 1998 421,860 131,907 -- 62,500 -- President and Chief Operating Officer, 1997 25,644 -- -- -- -- Phoenix International (Europe) 1996 -- -- -- -- -- Jean-Yves Caloz 1998 229,074 77,677 10,648 -- 1,845 Senior Vice President and Secretary 1997 175,835 37,891 9,895 -- 1,129 1996 172,523 -- 9,724 -- 1,129 Susan Thornton, Ph.D., 1998 208,250 79,957 5,814 125,000 -- President and Chief Operating Officer, 1997 -- -- -- -- -- Phoenix International (US), Phase II-IV 1996 -- -- -- -- -- Stephane Huguet, MD. 1998 192,708 210,671 3,333 250,000 36,773 President and Chief Operating Officer 1997 -- -- -- -- -- 1996 -- -- -- -- -- George Engelberg 1998 158,662 18,988 -- 1,845 Senior Vice President, Information 1997 -- -- 5,000 -- -- -- Technology 1996 -- -- -- -- -- David Moszkowski 1998 -- -- -- -- -- Senior Vice President and Chief Financial 1997 -- -- -- -- -- Officer 1996 -- -- -- -- -- James J. Conklin, M.D. 1998 -- -- -- -- -- Senior Vice President and General Manager 1997 -- -- -- -- -- of Scientific Software Division 1996 -- -- -- -- --
ANNUAL BONUS PLAN Phoenix has performance based annual bonus plans for executives and employees. LONG TERM INCENTIVE PLAN There is no long term incentive plan for the benefit of employees of Phoenix. 117 SHARE OPTION PLAN On October 24, 1994, Phoenix established a Key Employee Share Option Plan in order to attract and retain highly qualified directors and employees who are motivated toward the success of Phoenix and to encourage share ownership in Phoenix by these persons. The individuals who are eligible to receive options to purchase Phoenix common shares under the share option plan are directors, senior executives and key employees of Phoenix, as determined from time to time by the Human Resources Committee of the Board of Directors which administers the share option plan. All options granted under the share option plan are eligible to be exercised within ten years of the date of grant. Under the terms of the share option plan, the vesting periods for the options are as follows: - up to 4% of the options are exercisable after one year from the date of their grant; - up to 16%, after two years from the date of their grant; - up to 36%, after three years from the date of their grant; - up to 64%, after four years from the date of their grant; and - up to 100% after five years from the date of their grant. The price at which Phoenix common shares may be purchased is determined by the Human Resources Committee but may not be less than the average of the market price of Phoenix common shares on the Montreal Exchange and the Toronto Stock Exchange at the time of their grant. Financial assistance for the purchase of Phoenix common shares under the share option plan is not currently provided. The maximum number of Phoenix common shares that may be issued under the share option plan may not exceed 2,428,920 Phoenix common shares. The maximum number of Phoenix common shares that may be optioned to any single individual may not exceed five percent of the total of all of the outstanding number of Phoenix common shares. As of February 26, 1999, 87 key employees of Phoenix held options to purchase 2,182,483 Phoenix common shares, at prices ranging from $5.00 to $16.69 per Phoenix common share. Options granted in 1996, 1997 and 1998 to the named executive officers are mentioned in the tables entitled "Summary Compensation Table" and "Option Grants During the 1998 Financial Year." OPTION GRANTS DURING THE 1998 FISCAL YEAR Some options were granted during the 1998 fiscal year to the following named executive officers: - Dr. Stephane Huguet was granted 250,000 options upon becoming President and Chief Operating Officer of Phoenix; - Dr. Lucien Steru was granted 62,500 options on September 1, 1997; and - Dr. Susan Thornton was granted 125,000 upon beginning her employment with Phoenix. The following table contains the option grants during the 1998 fiscal year in respect of these executives. When reviewing the table you should be aware of the following: - The average closing market price of Phoenix common shares on August 31, 1998 on the Montreal Exchange and the Toronto Stock Exchange was $9.375 and $9.933 per share; - Dr. John Hooper, Mr. Jean-Yves Caloz, Mr. David Moszkowski, Dr. James Conklin and Mr. George Engelberg did not receive option grants during fiscal 1998; and - Dr. John Hooper, Dr. Lucien Steru, Dr. Susan Thornton, Dr. Stephane Huguet, Mr. Jean-Yves Caloz and Mr. George Engelberg were granted 28,213 options, 21,768 options, 10,746 options, 118 9,944 options, 7,801 options and 4,093 options at an exercise price of $8.54 and Mr. David Moszkowski was granted 50,000 options at an exercise price of $12.67 pursuant to the share option plan in the first quarter of fiscal 1999. OPTION GRANTS DURING THE 1998 FISCAL YEAR
COMMON SHARES % OF TOTAL OPTION EXERCISE OR UNDER GRANTED TO BASE PRICE NAMED OPTIONS EMPLOYEES IN (CDN/COMMON EXECUTIVE OFFICERS GRANTED FISCAL YEAR SHARES) EXPIRATION DATE - ---------------------------------------------- --------- ----------------- --------------- --------------------- Dr. Stephane Huguet........................... 250,000 35.31% $ 10.17 January 2, 2008 Dr. Susan Thornton............................ 125,000 17.66% $ 11.35 July 14, 2008 Dr. Lucien Steru.............................. 62,500 -- $ 11.55 September 1, 2007
EMPLOYMENT CONTRACTS Dr. John Hooper's employment contract dated September 23, 1988 states that he was hired as President, Scientific Director and Chief Executive Officer of Phoenix at a starting base salary of $110,000. Dr. Hooper was also provided with an interest-free loan of $100,000. In addition, on June 2, 1998, Dr. Hooper entered into a new employment agreement with Phoenix. Dr. Hooper undertook to continue to provide his services for an indeterminate period at a base salary of $400,000 per year, this period to continue until either party provides to the other three months' notice of his or its intent to terminate his employment, which notice may not be given prior to September 30, 1999. During fiscal 1998, Dr. Hooper was provided with an additional interest-free loan in the amount of $250,000. A severance sum will be provided to Dr. Hooper in the event he ceases to be an employee of Phoenix. The monetary compensation will be determined as follows: - $750,000 if a new employment agreement is not entered into between Dr. Hooper and Phoenix before the termination of the term of his present employment agreement; - $700,000 if a new employment agreement is terminated prior to the day that is one year from the beginning of this agreement; - $600,000 if a new agreement is terminated on or after the day that is one year from the beginning of such agreement but prior to the day that is two years; or - $500,000 if a new agreement is terminated on or after the day that is two years from the beginning of this agreement. Mr. Caloz's employment contract dated April 13, 1993 states that he was hired as Vice President, Finance and Corporate Development of Phoenix at a starting base salary of $115,000, subject to upward adjustments to be determined annually by the Board of Directors of Phoenix. Mr. Caloz was provided an interest-free loan in the amount of $75,000. On November 18, 1998, Mr. Caloz entered into a new employment agreement with Phoenix, pursuant to which Mr. Caloz obtained his title of Senior Vice President, International Finance and Acquisitions and continues to receive the same compensation as under his previous employment agreement with Phoenix, except that he is no longer eligible for annual stock option awards. Mr. Caloz's employment with Phoenix will not terminate prior to March 1, 1999. Thereafter, the employment agreement shall terminate on the earlier of August 31, 1999 or the provision of 30-days notice of termination by Mr. Caloz to Phoenix. All of Mr. Caloz's outstanding options not otherwise vested shall vest upon the date of termination of the new employment agreement and all these options shall expire as of December 1, 1999, regardless of the date of 119 this termination. On March 25, 1999, Mr. Caloz gave Phoenix 30 days' notice of termination as required under his employment agreement. Dr. Steru's employment contract dated August 7, 1997 states that he was hired as President and Chief Operating Officer of ITEM Europe S.A., a subsidiary of Phoenix at a starting base salary of FFr 1,580,000. Dr. Huguet's employment contract dated November 7, 1997 states that he was hired as President and Chief Operating Officer of Phoenix Canada, a division of Phoenix at a starting base salary of $240,000. In the event Dr. Huguet ceases to be an employee of Phoenix following: - a successful take-over bid; - any change in salary, responsibility, status, benefits or residence made without Dr. Huguet's prior written consent; - any act on the part of Phoenix amounting to constructive dismissal according to a Court of competent jurisdiction; or - a change of control of Phoenix, he will receive monetary compensation. This monetary compensation includes an amount equal to a maximum 18 months of Dr. Huguet's gross base salary. Dr. Thornton's employment contract dated June 1, 1998 states that she was hired as President and Chief operating Officer of Phoenix International US, Phase II-IV, a subsidiary of Phoenix at a starting base salary of US$250,000. In the event Dr. Thornton ceases to be an employee of Phoenix following: - a successful take-over bid; - any change in salary, responsibility, status, benefits or residence made without Dr. Thornton's prior written consent; - any act on the part of Phoenix amounting to constructive dismissal according to a Court of competent jurisdiction; or - a change of control of Phoenix, she will receive monetary compensation. This monetary compensation includes a minimum amount equal to Dr. Thornton gross annual salary divided by 12 and multiplied by the number of years of employment at Phoenix International. Mr. Moszkowski's employment contract dated October 5, 1998 states that he was hired, effective November 16, 1998, as Vice President and Chief Financial Officer of Phoenix at a starting base salary of $200,000. In addition, Phoenix granted Mr. Moszkowski options to purchase 50,000 Phoenix common shares at an exercise price of $12.67 per share. In the event Mr. Moszkowski ceases to be an employee of Phoenix following: - a successful take-over bid; - any change in salary, responsibility, status, benefits or residence made without Mr. Moszkowski's prior written consent; - any act on the part of Phoenix amounting to constructive dismissal according to a Court of competent jurisdiction; - termination of his employment by Phoenix without cause; or - a change of control of Phoenix, 120 he will receive monetary compensation. This monetary compensation includes an amount equal to a maximum 12 months of Mr. Moszkowski's gross base salary. Mr. Engelberg's employment agreement dated January 7, 1997 states that he was hired by Phoenix as Vice President, Information Technology at a starting base salary of $160,000, subject to upward adjustment consistent with Phoenix's salary administration policies. In addition, Mr. Engelberg was granted options to purchase 35,000 Phoenix common shares at an exercise price of $10.30 per share. In the event Mr. Engelberg ceases to be an employee of Phoenix following: - a successful take-over bid; - any change in salary, responsibility, status, benefits or residence made without Mr. Engelberg's prior written consent; - any act on the part of Phoenix amounting to constructive dismissal according to a court of competent jurisdiction; - termination of his employment by Phoenix without cause; or - a change of control of Phoenix, he will receive monetary compensation. This monetary compensation includes an amount equal to a maximum 12 months of Mr. Engelberg's gross base salary. Dr. Conklin's employment agreement dated September 1, 1998 states that he was hired by Phoenix International Life Sciences (IBRD) Inc., a subsidiary of Phoenix U.S., as Senior Vice President and General Manager, Scientific Software Division at a starting base salary of US$220,000, subject to upward adjustment at the discretion of the Phoenix Board. In the event Dr. Conklin ceases to be an employee of Phoenix International Life Sciences (IBRD) Inc. following: - any material and adverse diminution on an accumulative basis of his duties, position, compensation, benefits, or title, which is not applied to all other executives of Phoenix; - any act on the part of Phoenix International Life Sciences (IBRD) Inc. amounting to a breach of the terms of the employment agreement; or - termination of his employment by Phoenix International Life Sciences (IBRD) Inc. without cause, he will receive monetary compensation in an amount equal to 12 months of Dr. Conklin's gross base salary (plus a prorated portion of any bonus otherwise payable to Dr. Conklin during the year of his termination). Dr. Conklin may terminate the employment agreement for any reason upon 120 prior notice. Concurrently with the execution of their employment contracts, each of the named executive officer has signed a confidentiality, proprietary rights, regulatory compliance and non-competition agreement with Phoenix, the violation thereof giving rise to damages ranging from $50,000 to $100,000. COMPENSATION OF DIRECTORS An annual remuneration of $10,000 was paid to each director who was not a full time employee of Phoenix. In addition, fees of $750 were paid to any director who attended a meeting of the Board of Directors or of a committee of the Board of Directors. All directors are also entitled to the reimbursement of their traveling expenses when attending Board or committee meetings. In addition, each director who was not a full-time employee of Phoenix had been granted options for the purchase of 10,000 common shares at $5.00 on October 24, 1994. In January 1997, the Board increased these options by awarding Messrs. McCarthy and Forget additional 5,000 options each. On 121 November 11, 1997, the Board awarded a further 15,000 options to Mr. Forget, 30,000 options to Mr. Raich, 25,000 options to Dr. Spilker and 25,000 options to Mr. Goldman. For the financial year ended August 31, 1998, the total cash compensation paid to directors was $70,230, including reimbursement of their expenses. Phoenix carries directors' and officers' liability insurance in an amount limited to $25.0 million. For Fiscal 1998, the total annual premium in respect to directors' and officers' liability insurance was approximately $48,907, all of which was paid by Phoenix and charged to income. In fiscal year 1999, the total annual premium in respect of directors' and officers' liability insurance is $61,000. CERTAIN TRANSACTIONS During fiscal 1998, Phoenix paid $794,000 to Pennsylvania Merchant Group for financial advisory services. Cornelius P. McCarthy, III, a member of the Phoenix Board of Directors, is a Managing Director of Pennsylvania Merchant Group. In the event the merger is consummated, Phoenix will pay Pennsylvania Merchant Group an additional fee of $400,000. Dr. Hooper owes Phoenix $325,000 and Mr. Caloz owes Phoenix $60,000, as of November 30, 1998. The loans are non-interest bearing. Principal is paid in ten equal annual installments with the final installment due November 2004. During fiscal 1998, Phoenix paid $101,000 for legal services provided by Spiegel, Sohmer GP, a law firm. Robert Raich, a director of Phoenix, is a senior partner of this firm. 122 DESCRIPTION OF CHRYSALIS GENERAL Chrysalis, incorporated in 1988, is an international contract research organization. Chrysalis provides drug development services primarily to the pharmaceutical and biotechnology industries. Chrysalis' services include: - transgenic discovery research; - preclinical development; and - clinical capabilities. In addition, Chrysalis uses its proprietary transgenic and licensed gene targeting technology to provide services for its clients that require transgenic animal models. Chrysalis' clients use these models to: - determine the function of human genes and identify therapeutic targets implicated in disease; and - to evaluate therapeutic lead compounds for further development. On November 18, 1998, Chrysalis and Phoenix executed the merger agreement under which Phoenix will acquire Chrysalis. The merger is subject to a number of conditions. See "The Merger" and "The Merger Agreement." RESTRUCTURING OF CLINICAL OPERATIONS The merger agreement requires Chrysalis to shut down and discontinue providing clinical services in the United States and at several of its clinical operations in Europe. Chrysalis has begun to shut down its clinical operations in Austin, Texas, Dusseldorf, Germany and Cham, Switzerland. As a result of these shut downs, Chrysalis will no longer provide services for Phase I clinical studies. It will focus on providing services for Phase II or Phase III clinical studies in Germany, Eastern Europe and Israel. These shut downs in Dusseldorf, Germany and Austin, Texas and a significant downsizing of Chrysalis' European clinical operations will occur even if the merger is not completed. If the merger is not completed, Chrysalis expects to continue to provide Phase II and Phase III clinical services in Eastern Europe and Israel, as well as in Western Europe on a significantly downsized basis. Chrysalis will perform fully or transfer existing clinical studies at shut down and downsized locations to other Chrysalis locations. After the merger, existing clinical studies may be transferred to Phoenix locations. OTHER MATTERS On March 16, 1998, Chrysalis issued a $5.0 million subordinated note to a wholly-owned subsidiary of MDS Inc., a Canadian corporation. As part of this transaction, Chrysalis also issued to MDS's subsidiary a warrant to purchase 2,000,000 shares of Common Stock for $2.50 per share. In addition, Chrysalis and MDS entered into a standstill agreement which governs the ownership and acquisition of securities of Chrysalis by MDS and its affiliates. On December 18, 1996, Chrysalis issued 2,632,600 shares of Common Stock in connection with the acquisition by Chrysalis of all of the outstanding 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 "BioClin Group"). Chrysalis recorded the BioClin Group acquisition 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 is the process widely used in the pharmaceutical and biotechnology industries to develop transgenic animal models. Chrysalis uses this process for its transgenic research and drug discovery services. Chrysalis also grants several types of sublicenses for the use of this technology by commercial firms and academia. Chrysalis receives revenues from these sublicenses consisting of fees and, in some cases, royalties. 123 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. Two of the most critical stages of this process are 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. These tests typically progress 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 FDA or other regulatory agencies. In the United States, preclinical and clinical testing must comply with the requirements of good laboratory practices and good clinical practices and other standards established by the FDA and other federal and state governmental authorities. The FDA pioneered the use of clinical trials for new drug development. 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, commenced discussions to develop common standards for the conduct of preclinical and clinical studies. In addition, these regulatory agencies had discussions on the format and content of applications for new drug approvals. Data from multi-national studies adhering to good clinical practices are now generally acceptable to the FDA and the governments within the European Union. In the United States, a drug sponsor must file an investigational new drug application with the FDA before the commencement of human testing of a drug. The investigational new drug application includes preclinical testing results. It also describes 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 conduct safety and efficacy testing in humans. In efficacy studies, drug candidates are evaluated in animal models that simulate human disease conditions. These screens are used primarily by pharmaceutical and biotechnology companies. In toxicology studies, drug candidates are tested in normal, healthy animals to determine their potential harmful effects to humans. In addition, new industrial and agricultural chemicals often require extensive toxicology testing before they may be sold. Therefore, 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. 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 long-term side effects and efficacy on a larger scale. 124 PHASE IV. As a condition of granting marketing approval, the FDA may require a sponsor to continue to conduct additional clinical trials, known as Phase IV trials. Phase IV trials are designed to (1) monitor long-term risks and benefits, (2) study different dosage levels, or (3) evaluate different safety and efficacy parameters in target patient populations. The increasing importance of Phase IV trials results in increased numbers of patients tested and increased numbers 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 to the FDA. The new drug application is a comprehensive filing that includes the results of all preclinical and clinical studies and information about the drug's composition. The application also contains the sponsor's plans for producing, packaging and labeling the drug. Most of the clinical data contained in a new drug application is generated during the Phase II and III trials. Drugs that successfully complete FDA review may be marketed in the United States, subject to any conditions imposed by the FDA. INDUSTRY OVERVIEW The contract research organization industry provides independent product development services primarily for the pharmaceutical and biotechnology industries. Companies in these industries outsource product development services to contract research organizations that manage the drug development process. Contract research organizations derive substantially all of their revenue from the research and development expenditures of pharmaceutical and biotechnology companies. See "--Competition." SERVICES The major categories of drug development services offered by Chrysalis are: TRANSGENIC SERVICES Chrysalis 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. As a result of this acceptance, Chrysalis is able to use its proprietary DNA microinjection technology to offer its specialty transgenic-based contract research services. These services are used by companies electing to outsource all or a portion of their transgenic animal model needs. These transgenic-based specialty contract research services include gene function assessment, custom model development programs, molecular biology services and other related services. In the area of genomics research, Chrysalis' 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. Worldwide efforts to map and sequence the human genome have resulted in the identification of new genes. These newly-identified genes and transgenic animal technology allow 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. PRECLINICAL SERVICES Chrysalis believes it offers clients, on an international basis, a broad range of preclinical drug development services. Chrysalis also believes it can provide a majority of the preclinical testing requirements necessary to secure approval to initiate human clinical trials from the FDA and regulators in the European community and Japan. Chrysalis 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. Chrysalis provides the toxicology testing services in the areas of mutagenesis/ 125 genetic toxicology, teratology, reproduction/fertility, immunotoxicology, continuous infusion, carcinogenesis, and acute, subacute and chronic evaluations. Chrysalis 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. Chrysalis provides testing in therapeutic areas involving the central nervous system, cardiovascular, pulmonary, anti-inflammatory, gastrointestinal, cardiopulmonary and analgesia. In addition, Chrysalis provides safety pharmacology studies. These studies include the evaluation of possible effects on the central nervous system, cardiovascular, gastrointestinal, pulmonary and renal function and 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 substance's ability to affect the immune system of humans. CLINICAL SERVICES Chrysalis' clinical services include clinical trial management 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 used for the development and execution of a new drug application. However, Chrysalis has begun to shut-down and discontinue providing clinical services in the United States and several of its clinical operations in Europe. Even if the merger is not consummated, the clinical services offered by Chrysalis will be reduced significantly. Therefore, Chrysalis no longer provides Phase I clinical services. In addition, its ability to provide some of the other services described below has been severely restricted and will be severely restricted if the merger is not consummated. See "--General--Restructuring of Clinical Operations." CLINICAL TRIAL MANAGEMENT SERVICES. Chrysalis offers complete services for the design, placement, performance and management of clinical trial programs. These programs are critical elements in obtaining regulatory approval for drugs. Chrysalis has performed services in connection with trials in many therapeutic areas. Chrysalis' 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 to ascertain evidence of the product's safety and efficacy. Chrysalis' services include management of Phase II through IV trials and, until recently, included management of Phase I trials. Management services include: - design of operations manuals; - identification and recruitment of trial investigators; - initiation of sites; - ]monitoring for strict adherence to good clinical practices; - site visits to ensure compliance with protocol procedures and proper collection of data; - interpretation of trial results; and - report preparation. If the merger is not consummated, Chrysalis expects to continue to provide Phase II and Phase III clinical services in Eastern Europe and Israel, and in Western Europe on a significantly downsized basis. See "--General--Restructuring of Clinical Operations" above. PHASE I SERVICES. Before the shut-downs that Chrysalis is currently conducting, Chrysalis provided a number of Phase I services. They included: 126 - computerized volunteer databases; - a clinical pharmacology unit; - access to special populations; - vital signs; - telemetry; and - statistical evaluation. PHASE II--PHASE IV SERVICES. Chrysalis provides Phase II through Phase IV services. These services include: - efficacy testing; - additional safety data; and - long-term risks and side effects. Chrysalis maintains a network of physicians who serve as investigators at hospitals and university centers for in- and outpatient studies. Chrysalis also maintains a network of established research sites performing special investigations and a selection of centralized laboratories. Until the shut-downs, these sites were located in each country across Europe, Israel and North America. However, Chrysalis has begun the process of shutting down its clinical operations in North America and significantly downsizing its European clinical operations. See "--General--Restructuring of Clinical Operations" above. In connection with Phase II through Phase IV services, Chrysalis provides project management, monitoring and data management. Monitoring is handled under traditional methods or by fax or remote/direct data entry. MONITORING FOR STRICT ADHERENCE TO GOOD CLINICAL PRACTICES. Efficient data collection, form design, detailed operations manuals and site visits by Chrysalis' contract research assistants are used to determine whether clinical investigators and their staff follow established protocols and accurately record the findings of the trials. In addition, Chrysalis has quality assurance auditors that provide additional internal and external auditing. In connection with its services, Chrysalis assists clients with one or more of the following: (1) STUDY PROTOCOL. The protocol defines the medical issues the study seeks to examine and the statistical tests to be conducted. Examples include: - 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. (2) 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. (3) 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 Chrysalis. Generally, the investigators contract directly with Chrysalis. 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. (4) PATIENT RECRUITMENT AND ENROLLMENT. Prior to the shut downs, Chrysalis recruited Phase I volunteers and maintained a database of those 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. Prospective patients are also required to sign an informed consent to record their 127 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. (5) STUDY MONITORING AND DATA COLLECTION. As patients are examined and tests are conducted in accordance with the study protocol, data are recorded on case report forms and laboratory reports. The data are collected from study sites by contract research assistants. Contract research assistants visit sites regularly to ensure that the case report forms are completed correctly and that all data specified in the protocol are collected. Case report forms are reviewed for consistency and accuracy before their data are entered into an electronic database. (6) MEDICAL AFFAIRS. Throughout the course of a clinical trial, Chrysalis may provide various medical research and services. These services include: - medical monitoring of clinical trials; - interpretation of clinical trial results; and - preparation of clinical study reports. (7) REPORT WRITING. The results of statistical analysis of data collected during the trial, together with other clinical data, are included in a final report to be included in a regulatory document. (8) INFORMATION TECHNOLOGY. Prior to the shut downs, Chrysalis maintained a fully networked information system to facilitate complete computerized data management of Phase II through Phase IV trials. Laboratory data was on-line for review by physicians and project managers. Chrysalis' ability to provide information technology services has been materially adversely impacted by the restructuring of its clinical operations. If the merger is not completed, Chrysalis will have only a small operation in Eastern Europe to perform these services. Chrysalis would have to expand its facilities significantly to continue to provide these services. CLINICAL DATA MANAGEMENT AND BIOSTATISTICAL SERVICES. Prior to the shut downs, Chrysalis had experience in creating scientific databases for all phases of the drug development process. These databases provided clients with data abstraction, data review and coding, data verification and editing and problem data resolution capabilities. Chrysalis used an imaging technology process which eliminates time and minimizes potential data entry errors. This was accomplished by electronically routing, tracking and querying optically scanned case report forms. Chrysalis' data management professionals also assisted in the design and development of study protocols and case report forms, training manuals and training sessions for investigators and coordinators. Prior to the shutdowns, Chrysalis' biostatistics professionals provided biostatistical consulting, database design, data analysis and statistical reporting. Chrysalis' biostatisticians provided clients with assistance in all phases of drug development. These professionals developed and reviewed protocols. They also designed appropriate analysis plans and report formats to address the objectives of the study protocol and the client's individual objectives. Chrysalis' ability to provide clinical data management and biostatistical services has been materially adversely impacted by the restructuring of its clinical operations. If the merger is not completed, Chrysalis will have only a small operation in Eastern Europe to perform these services. Chrysalis would have to expand its facilities significantly to continue to provide these services. PRODUCT REGISTRATION SERVICES/REGULATORY AFFAIRS. The pharmaceutical companies have their own regulatory expertise and generally register their products without the assistance of third parties. In connection with its Phase II through Phase IV services to these pharmaceutical companies, Chrysalis provides regulatory strategy formulation and consultation. If requested, Chrysalis also acts as a liaison with the FDA and other international regulatory agencies. Until the shutdowns, Chrysalis provided similar services in connection with its Phase I services. 128 MARKETING The majority of new studies conducted by Chrysalis are derived from existing clients. To obtain new clients, Chrysalis contacts potential clients directly through its marketing and sales representatives and its senior business management. Chrysalis also participates in various scientific association and/or business symposia. In addition, Chrysalis contacts potential clients indirectly through other media, including scientific and trade journal advertising, brochures and direct mailings. Further, Chrysalis' sales and marketing representatives target promotion efforts to potentially new clients who are not familiar with Chrysalis' services. These representatives also target the expansion of services for existing clients. In addition, Chrysalis' scientific personnel participate in a variety of business/scientifically oriented endeavors. These endeavors include publishing scientific papers and making presentations at scientific meetings. Chrysalis also participates in commercial conferences and advertises at these conferences. Further, Chrysalis also attends and provides exhibits at selected industry trade shows in the United States and Europe. Chrysalis' 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. However, Chrysalis' ability to coordinate its marketing efforts and cross-sell other services has been materially adversely affected by its liquidity constraints and shutdowns. See "--General--Restructuring of Clinical Operations" and "Management's Discussion and Analysis of Financial Condition and Results of Operations of Chrysalis." LOSS OF A LARGE CLINICAL TRIAL One of Chrysalis' largest clients, a leading pharmaceutical company, notified Chrysalis that it decided to delay a large clinical trial originally expected to begin during the fourth quarter of 1997. In April 1998, the client informed Chrysalis that the drug being developed in this trial would be out-licensed or co-developed with a partner. In December 1998, the client advised Chrysalis that the drug had been out-licensed to another company that did not intend to use Chrysalis' services. During 1997, Chrysalis incurred significant expenses to expand its infrastructure to support the clinical trial. These expenses primarily consisted of additional operational, managerial and administrative personnel and facility expansion costs. Chrysalis leased additional real estate and acquired or leased additional office and computer equipment in anticipation of this trial. Chrysalis estimates that its clinical cost structure would have increased annually by approximately $5 million through expansion activities undertaken to accommodate the trial. After being notified in December 1997 of the delay in the trial, Chrysalis decided to maintain this additional infrastructure to improve its ability to compete for other large global studies. However, shortly after receiving the April 1998 notice, Chrysalis began to reduce this infrastructure. As a result of the expenses associated with the expanded infrastructure, Chrysalis' results for the fourth quarter of 1997 and for fiscal year 1998 were negatively impacted. Although Chrysalis obtained additional clients and contracts during 1998, these new clients and contracts did not and will not result in significant revenue in the near term. Revenues from these additional contracts will not be sufficient to offset the significant expenses associated with the expanded infrastructure. See "--Backlog," and "Management's Discussion and Analysis of Financial Condition and Results of Operations of Chrysalis." 129 CUSTOMERS Chrysalis 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. Contract research organizations often have customer concentrations. Concentrations are increasing as large pharmaceutical and biotechnology companies are outsourcing larger clinical trials and large multiple site trials to fewer contract research organizations. For the year ended December 31, 1998, Chrysalis' top five customers accounted for approximately 37% of Chrysalis' combined net service revenue. One customer of Chrysalis, a large international pharmaceutical company with revenues in excess of $10 billion, accounted for approximately 13% of net service revenues for the year ended December 31, 1998. This customer delayed the large clinical trial which was originally expected to begin during the fourth quarter of 1997. See "--Loss of a Large Clinical Trial" above. Chrysalis believes that the loss of any of these customers would have a material adverse effect on Chrysalis unless it was able to replace the customer or expand services provided to other customers. Chrysalis may not be able to replace the loss of any of those customers or expand services to existing customers on terms acceptable to Chrysalis. BACKLOG Chrysalis reports backlog based on anticipated net revenues from uncompleted projects which have been authorized by the client. The authorization may be through a written contract or by other means . 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, Chrysalis 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 Chrysalis' control. Delayed contracts remain in Chrysalis' backlog until a determination is made to continue, modify or cancel the contract. Chrysalis believes that its backlog as of any date is not necessarily a meaningful indicator of future results. Chrysalis may not be able to realize net service revenue included in backlog. As of December 31, 1998, Chrysalis' backlog was approximately $14.5 million compared to approximately $41 million at December 31, 1997 and approximately $25 million at December 31, 1996. The increase in backlog from December 31, 1996 to December 31, 1997 reflects primarily the addition of the large clinical trial that was originally expected to begin during the fourth quarter of 1997 but was delayed. In April 1998, the customer informed Chrysalis that the drug being developed in this trial would be out-licensed or co-developed with a partner. As a result of this information, Chrysalis removed from its backlog the anticipated revenue associated with this large clinical trial. This removal accounts for a majority of the decrease in backlog from December 31, 1997 to December 31, 1998. See "--Loss of a Large Clinical Trial" above. COMPETITION Chrysalis competes primarily against pharmaceutical companies' own in-house research departments, other contract research organizations and universities and teaching hospitals. The contract research organization industry includes several hundred small, limited-service providers, several medium-sized clinical research organizations, and a few full service global drug development companies. The clinical research organization industry is consolidating as a result of competitive pressures and economies of scale. Mergers and acquisitions have resulted in the emergence of full service contract research organizations 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. These large, full service competitors may have substantially greater capital, technical and other resources, may be better known, and may have more experienced personnel than Chrysalis. Chrysalis' major competitors include: Covance, Inc.; Parexel International Corporation; Quintiles Transnational 130 Corporation; ClinTrials Research Inc.; Pharmaceutical Products Development Corporation; Huntington Life Sciences Ltd.; Kendle International, Inc. and Phoenix. Contract research organizations 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 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; and - financial viability. In some markets, price also is a significant factor. Chrysalis has begun to shut down certain of its facilities and to downsize significantly its international clinical operations. Chrysalis expects these activities to materially adversely affect its ability to compete if the merger is not completed. MICROINJECTION PATENT LICENSING Chrysalis possesses an exclusive license to a U.S. patent awarded to Ohio University. The patent covers DNA microinjection. Chrysalis uses DNA microinjection to provide its specialty transgenic-based services. Chrysalis 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 Chrysalis to receive revenues consisting of fees and, in some cases, royalties. While Chrysalis 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. These applications include the development, use and sale of other commercial transgenic animal-based products and transgenic animal models. In those instances where Chrysalis grants a sublicense for commercial applications, Chrysalis receives an annual license fee and revenue-based royalties upon commercialization of the products and services. In the case of sublicenses for noncommercial applications, Chrysalis generally receives an annual license fee. Chrysalis 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 Chrysalis. GOVERNMENT REGULATION Chrysalis' 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. The following information describes current statutory or regulatory provisions. Any change in applicable law or regulation may have a material effect on the business and prospects of Chrysalis. 131 The industry standard for conducting biological testing is embodied in regulations called "good laboratory practices." Good laboratory practices has been adopted by the Environmental Protection Agency and the FDA in the United States and the Minister des Affaires Sociales et de la Solidarite Nationale in France. Good laboratory practices 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. Any governmental agency with the authority to control marketing approval for new products can reject test results if they do not comply with good laboratory practices. Chrysalis monitors ongoing compliance with good laboratory practices standards. In addition, Chrysalis is subject to scrutiny by many regulators regarding its laboratories and materials. On the federal level in the United States, Chrysalis is regulated by the Department of Transportation, Occupational Safety and Health Administration, Nuclear Regulatory Commission and the Drug Enforcement Administration. At the state level, Chrysalis is monitored by the Commonwealth of Pennsylvania Department of Labor and Industry and the Pennsylvania Department of Environmental Resources. In addition, some of Chrysalis' European operations are subject to regulations in France similar to the federal and state regulations in the United States. In addition to the regulatory framework and good laboratory practices standards for preclinical drug development services, Chrysalis is subject to other regulations under federal, state and foreign law. These regulations include 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. Chrysalis may be subject to other current 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 Chrysalis are ultimately subject to FDA regulation in the United States and comparable agencies in other countries. The level of regulation in other countries is generally less comprehensive than regulation 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 good clinical practices guideline, some provisions of good clinical practices have been included in FDA regulations. In Europe, all work is carried out in accordance with the European Union 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 good clinical practice. These regulations include: - complying with FDA regulations governing the selection of qualified investigators; - obtaining specific written commitments from the investigators; - verifying that the patient's informed consent is obtained; - monitoring the validity and accuracy of data; - verifying drug or device accountability; and - instructing investigators to maintain records and reports. 132 Chrysalis must also maintain reports for each study for specified periods for inspection by the study sponsor and the applicable regulatory authorities. Non-compliance with good clinical practices can result in the disqualification of data collected during the clinical trial. Chrysalis' standard operating procedures are written in accordance with regulations and guidelines appropriate to the region where they will be used. Chrysalis' North American standard operating procedures are based on FDA regulations and guidelines. Chrysalis has developed operating procedures in accordance with local requirements and in harmony with the North American and European operations. Chrysalis has implemented common standard operating procedures across geographic regions to assure consistency whenever feasible and appropriate. INTELLECTUAL PROPERTY Chrysalis has an exclusive commercial license to a U.S. patent awarded to Ohio University in October 1989. As Chrysalis becomes aware of activities potentially infringing on its commercial rights it takes appropriate action to curtail infringing activities. However, Chrysalis' actions may not result in proof of infringement or curtailment of the potentially infringing party's activities. The potentially infringing party may not become properly licensed and financially obligated to Chrysalis. In addition, technology circumventing the DNA microinjection process may be developed in the future. If new technology is developed, Chrysalis may not be able to continue to practice the processes contained in the DNA microinjection patent. In addition, Chrysalis may not be able to obtain licenses for the new technology on reasonable terms or 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. The license can be terminated earlier by either party for cause. POTENTIAL LIABILITY AND INSURANCE Chrysalis attempts to manage its potential liability by obtaining indemnity provisions in its contracts with clients and investigators hired by Chrysalis on behalf of its clients. These indemnities generally do not, however, protect Chrysalis against some of its own actions, including those involving negligence. Moreover, these indemnities are contractual arrangements that are subject to negotiation with individual clients. The terms and scope of these indemnities can vary from client to client and from study to study. Finally, the financial performance of these indemnities is not secured. As a result, Chrysalis bears the risk that an indemnifying party may not have the financial ability to fulfill its indemnification obligations. In addition to indemnification provisions, Chrysalis maintains limited coverage for professional service liability insurance. Chrysalis 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. In addition, Chrysalis could be materially adversely affected if a client or investigator failed to honor its indemnification obligations. Chrysalis believes that the risk of liability to patients in clinical trials is mitigated by various regulatory requirements. These requirements include the role of institutional review boards and the need to obtain each patient's informed consent. The FDA requires each human clinical trial to be reviewed and approved by the institutional review board at each study site. An institutional review board is an independent committee that includes both medical and nonmedical personnel. It is obligated to protect the interests of patients enrolled in the trial. After the trial begins, the institutional review board monitors the protocol and the measures designed to protect patients, including the requirement to obtain informed consent. 133 NEXTRAN On August 29, 1994, Chrysalis entered into a Joint Venture Agreement with Baxter Transplant Holdings, Inc., a wholly-owned subsidiary of Baxter Healthcare Corporation, which is a subsidiary of Baxter International, Inc. Under the joint venture agreement, Chrysalis and Baxter Transplant formed Nextran, a Delaware general partnership. Chrysalis had a 30% partnership interest and Baxter Transplant had a 70% partnership interest. Chrysalis contributed to Nextran $2.5 million in cash and specified rights under patent licenses, research agreements, and other intangible assets related to its xenograft, meaning animal to human organ transplantation, and blood substitute programs. The contributed assets included limited rights to practice under the DNA microinjection patent specifically within the xenograft and hemoglobin blood substitute fields of use. Chrysalis also 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 Healthcare contributed to Nextran $20 million in cash and specified rights under research and product marketing programs between Baxter Healthcare and various third parties related to certain of its transplantation programs. In September 1995, Chrysalis sold its 30% partnership interest in Nextran to Transplant Acquisition Inc., a wholly-owned subsidiary of Baxter Healthcare, for a cash purchase price of $18 million. In connection with this sale, Chrysalis eliminated its investment in Nextran and recorded an estimated nonrecurring gain, net of expenses, income taxes and related accruals, of approximately $17.3 million. If Nextran develops and commercializes hemoglobin blood substitutes using technologies licensed to Nextran by Chrysalis, Chrysalis will receive royalty income equal to 3% of end product sales. EMPLOYEES As of January 31, 1999, Chrysalis employed approximately 365 individuals on a full-time basis. None of Chrysalis' 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 that is subject to annual renegotiation. Although no employees of the European clinical operations are covered by a trade union, many of them have written contracts with Chrysalis in accordance with local law. The recent uncertainty regarding Chrysalis' future and the announcement of the proposed merger have contributed to the departure of a number of employees of Chrysalis. In addition, the restructuring of Chrysalis' clinical operations has and will continue to result in the termination or departure of a number of other employees. Chrysalis may not be able to retain a sufficient number of skilled personnel to continue adequately providing services to its customers, whether or not the merger occurs. SEGMENT AND GEOGRAPHIC INFORMATION Note 20 to the audited consolidated financial statements of Chrysalis includes information about revenue, operating profit and identifiable assets attributable to Chrysalis' segments. Note 20 also includes information regarding geographic breakdowns. PROPERTIES Chrysalis' corporate headquarters are located in Raritan, New Jersey. Chrysalis, under an option provision of the lease agreement, extended its lease on this facility through February 2000. If the merger is completed, Phoenix expects to eventually shut down Chrysalis' corporate headquarters. Chrysalis' U.S. preclinical operations are located in two adjacent facilities near Scranton, Pennsylvania. Chrysalis leases one facility with approximately 21,000 square feet. This lease expires after August 1999. Chrysalis has not yet decided whether it will renew this lease or pursue other alternatives. Chrysalis owns the other facility with 20,000 square feet, subject to a mortgage. Chrysalis owns and operates 134 approximately 100,000 square feet of facilities on approximately nine acres near Lyon, France for its preclinical operations in Europe. Chrysalis has an option to purchase land adjacent to these facilities. Chrysalis' specialty transgenic services business operates in Princeton, New Jersey. Chrysalis leases a facility for administrative offices and research laboratories. This lease expires in May 2000. In addition, until August 1999 Chrysalis shares an adjacent facility pursuant to an agreement with Nextran. Chrysalis has entered into a lease for one facility under construction near Princeton, New Jersey to replace these two facilities. Chrysalis expects the new lease to begin during the second half of 1999. The new lease will have a ten-year term. Chrysalis' U.S. clinical operations are conducted in a leased facility in Austin, Texas. This lease expires in February 2001. Chrysalis expects to terminate or sublet this lease. Chrysalis leases its European clinical headquarters in Cham, Switzerland. This lease expires in March 2000. Chrysalis expects to terminate or sublet this lease. Chrysalis also maintains offices in Mannheim, Germany; Sweden; Denmark; Norway; Finland; Israel; Vilnius, Lithuania; Poland; Russia; and the Ukraine for its clinical operations. In connection with the restructuring of its clinical operations, Chrysalis has begun to shut down its offices at the following locations: Canada; France; Belgium; The Netherlands; the United Kingdom; Spain; and Italy. See "--General--Restructuring of Clinical Operations." Chrysalis also leases a facility in Dusseldorf, Germany which it uses for Phase II trials. The facility is Chrysalis' information systems, data management and biostatistical center. This lease expires in August 2001. Chrysalis expects to terminate or sublet this lease. See "--General--Restructuring of Clinical Operations." Chrysalis has included expected lease termination costs for the facilities in Germany, Switzerland and Austin, Texas in the restructuring charge that it took in the fourth quarter of 1998. Chrysalis has included expected lease termination costs for its corporate headquarters in the estimated restructuring charge it expects to take in the second quarter of 1999. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of Chrysalis." LEGAL PROCEEDINGS Chrysalis is not currently a party to any material legal proceedings. 135 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CHRYSALIS GENERAL SUMMARY Chrysalis is an international contract research organization. Chrysalis provides drug development services primarily to the pharmaceutical and biotechnology industries. Chrysalis' services include transgenic discovery research, preclinical development and clinical capabilities. Chrysalis' financial condition and results of operation since January 1, 1996 have been affected by a number of factors described under "Other Agreements" and "Description of Chrysalis." These factors include: - Chrysalis' downsizing and restructuring of its clinical operations; - Chrysalis' default under its senior secured loan; - Execution of the merger agreement, forbearance agreement and the guaranty and cash collateral pledge related to the forbearance agreement; - Chrysalis' issuance of a $5.0 million subordinated note and warrant to an MDS subsidiary; - Chrysalis' acquisition of the Bioclin Group; - Chrysalis' client concentration; - The formation of Nextran and Chrysalis' subsequent sale of its interest in Nextran; and - The delay and loss of a large clinical trial. Chrysalis took a charge of $3,872,000 in the fourth quarter of 1998 related to the downsizing and restructuring. This restructuring charge related primarily to employee termination costs, provisions for real estate termination expenses and asset write downs. Chrysalis expects to take an additional charge of $825,000 in the second quarter of 1999 related to the downsizing and restructuring. The second quarter charge relates primarily to additional employee termination costs and the anticipated closing of its executive offices as a result of the merger. Chrysalis' financial statements are denominated in U.S. dollars. Changes in the exchange rate between non-U.S. currencies and the U.S. dollar affect the translation of non-U.S. revenues and operating results into U.S. dollars for purposes of reporting Chrysalis' financial results. Fluctuations in the exchange rate between the French Franc and the U.S. dollar may have a material effect on Chrysalis' operating results. See "--Liquidity and Capital Requirements--Exchange Rate Fluctuations." Most of Chrysalis' contracts are fixed price contracts that require a portion of the contract amount to be paid at or near the time the trial is initiated. Chrysalis generally bills its clients upon the completion of negotiated performance requirements and, to a lesser extent, on a date certain basis. Some of Chrysalis' contracts are subject to cost limitations, which cannot be exceeded without client approval. Because, in many cases, Chrysalis bears the risk of cost overruns, unbudgeted costs in connection with performing these contracts may have a detrimental effect on the financial results of Chrysalis. If Chrysalis determines that a loss will result from the performance of a contract, it charges the entire amount of the estimated loss against income in the period in which it makes the determination. Chrysalis' contracts generally may be terminated with or without cause. In the event of termination, Chrysalis is typically entitled to receive 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. Change orders include changes in the scope of the trial and in the services to be provided by Chrysalis. Therefore, compensation under a contract may increase or decrease during the duration of a contract. In addition, termination or delay in the performance of a contract may occur for various reasons. These reasons include: 136 - unexpected or undesired results from studies conducted by Chrysalis or others; - inadequate patient enrollment or investigator recruitment; - production problems resulting in shortages of the drug being tested; - adverse patient reactions to the drug being tested; and - the client's decision to de-emphasize a particular trial. Chrysalis' service contracts contain provisions designed to address the negative impact on Chrysalis' revenues and profitability as a result of non-controllable delays. These provisions, however, may not be included in all of Chrysalis' service contracts. Chrysalis attempts to negotiate reimbursement of fees whether or not these provisions are included in the service contract. However, Chrysalis is not always successful in negotiating reimbursement. The loss of or delay of a large contract or multiple contracts could adversely affect Chrysalis' future revenues and results of operations. 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. Chrysalis incurs travel costs and may subcontract with third-party investigators in connection with multi-site clinical trials. These costs are passed through to clients and are included in service revenue. Costs may vary significantly from contract to contract. Therefore, changes in service revenue may not be indicative of trends in revenue growth. Chrysalis considers net service revenue, which equals service revenue less these costs, as its primary measure of revenue growth. Between July 1997 and June 1998, Chrysalis incurred expenses to expand and retain its infrastructure, primarily in the clinical operations. Chrysalis expanded and retained infrastructure to support global drug development capabilities. Management primarily communicated these expanded capabilities to its existing client base and the pharmaceutical and biotechnology industries. However, Chrysalis has begun to shut down and discontinue providing services at several of its clinical operations in Europe and the United States. Even if the merger is not consummated, Chrysalis will discontinue operations in Dusseldorf, Germany and Austin, Texas and downsize significantly its European clinical operations. See "Description of Chrysalis--General--Restructuring of Clinical Operations" and "--Loss of a Large Clinical Trial." Chrysalis' future operating results will be contingent upon successfully controlling its expenses and using its transgenics, preclinical and remaining clinical infrastructure. This will require Chrysalis to convert proposals into contracts and revenues. Chrysalis may not be able to successfully use its remaining clinical infrastructure in a cost efficient manner or convert proposals into revenues in a timely manner. Chrysalis' ability to convert its remaining clinical infrastructure into future operating results may also be affected by other factors. These factors include: - 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 these factors may be beyond the control of Chrysalis. See "--Quarterly Results." As a result of the Nextran transactions, Chrysalis no longer funds the development of organ transplantation or blood substitute programs. Historically, these programs accounted for a substantial portion of Chrysalis' research and development expenses, capital expenditures, working capital and accumulated deficit. 137 RESULTS OF OPERATIONS (1998, 1997 AND 1996) REVENUES BY BUSINESS AND GEOGRAPHIC REGION
REVENUES ($000'S) ------------------------------- 1998 1997 1996 --------- --------- --------- Transgenics/Preclinical.......................................................... $ 30,157 $ 27,258 $ 29,090 Clinical......................................................................... 8,361 14,244 11,883 Licensing/Other.................................................................. 866 796 514 --------- --------- --------- Total........................................................................ $ 39,384 $ 42,298 $ 41,487 --------- --------- --------- --------- --------- --------- International.................................................................... $ 23,998 $ 26,778 $ 28,322 United States.................................................................... 14,520 14,724 12,651 Licensing/Other.................................................................. 866 796 514 --------- --------- --------- Total........................................................................ $ 39,384 $ 42,298 $ 41,487 --------- --------- --------- --------- --------- ---------
FISCAL YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO THE FISCAL YEARS ENDED DECEMBER 31, 1997 AND 1996. REVENUES. Revenues were $39,384,000 for 1998 compared to $42,298,000 for 1997 and $41,487,000 for 1996. Excluding the impact of foreign currency translations, revenues for 1997 would have been approximately $46,204,000. The decrease in revenues for 1998 as compared to 1997 was primarily the result of a decrease in the worldwide clinical business that resulted from: - the completion in the second quarter of 1998 of a large global clinical study with one of Chrysalis' largest customers that generated $3.0 million more revenue in 1997 compared to 1998; and - the cancellation in April 1998 of a large clinical trial, that generated $4.0 million of revenue in 1997, with the same customer. Chrysalis was unable to replace completely this revenue from new contracts. This decrease was slightly offset by an increase in Chrysalis' transgenic services, particularly those supporting functional genomics research programs. However, as a result of the discovery of short-term disease in some of the animal models used by Chrysalis' transgenic services, revenues for transgenic services will be negatively impacted during the second and third quarters of 1999. The increase in revenues from 1996 to 1997 was primarily the result of the following: - an increase in the clinical business, including services provided under contracts with Chrysalis' largest customer; - an increase in Chrysalis' specialty transgenic and molecular biology services; and - an increase in preclinical business in Europe. This increase was offset by the unfavorable impact of foreign currency translations and a decrease in the preclinical business in North America and the Phase I clinical business in Europe. Chrysalis believes that revenue growth for the clinical business for 1997 and 1998 was adversely affected by: - the long lead times in Chrysalis' conversion of proposals into contracts and revenues; and - the continuing impact, as a result of these long lead times, of clinical senior management's focus on negotiating and consummating the BioClin Group acquisition during 1996. 138 This focus prevented them from devoting efforts to business development and marketing the clinical business. See "--Liquidity and Capital Resources--Exchange Rate Fluctuations," and "Description of Chrysalis--Loss of Large Clinical Trial." OPERATING EXPENSES. Direct costs were $31,041,000 or 79% of net revenues for 1998 compared to $29,383,000 or 69% of net revenues for 1997. For 1996, direct costs were $27,841,000 or 67% of net revenues. Direct costs for 1997 and 1996 include research and development expenses. The increase in direct costs in 1998 as compared to 1997 was primarily due to: - incremental investments of approximately $5.0 million on an annualized basis made between July 1997 and June 1998 to expand and maintain Chrysalis' clinical personnel and infrastructure to support its business strategy at that time to accommodate global clinical trials, including the large clinical trial that was discontinued in April 1998; and - investments in personnel and infrastructure to support the growth in Chrysalis' transgenics services, particularly those supporting functional genomics research programs. The increase in these costs, as a percent of revenues, is due to a base cost structure, primarily in the clinical business, of personnel, facilities and related expenses capable of supporting a higher level of revenues. In June 1998, Chrysalis began to reduce its clinical infrastructure by approximately $1.5 million on an annualized basis. After execution of the merger agreement, Chrysalis began to shut down and discontinue providing clinical services in North America and at some of its European locations. Excluding the impact of foreign currency translations, the 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: - investment in personnel and infrastructure to support Chrysalis' long-term business expansion strategy and to accommodate the large clinical trial which was delayed in the last quarter of 1997; and - increased variable costs as a result of increased business activity in Chrysalis' European preclinical services and specialty transgenic and molecular biology services in 1997. The increase in these costs in 1997 as a percent of revenues is due to a base cost structure of personnel, facilities and related expenses capable of supporting a higher level of revenues. The majority of the expanded infrastructure related to the large clinical trial was in place by the fourth quarter of 1997. This expanded infrastructure increased costs by approximately $1.2 million in 1997. See "Description of Chrysalis--Loss of a Large Clinical Trial." General, administrative and marketing expenses were $12,828,000 in 1998 compared to $12,416,000 in 1997 and $10,942,000 in 1996. Chrysalis incurred approximately $320,000 in 1998 for professional fees in connection with the merger agreement. Chrysalis anticipates that it will incur approximately $1,050,000 for professional fees in 1999 prior to the merger. Excluding these professional fees, general, administrative and marketing expenses in 1998 would have increased only slightly compared to 1997. These costs did not decrease along with revenues because Chrysalis maintained its personnel and related costs for marketing and business development, information systems, accounting and general management. Excluding the impact of foreign currency translation, the increase of $1,474,000, for 1997 compared to 1996 would have been approximately $2,590,000. This increase in expenses for 1997 was primarily due to: - the increase in personnel and related costs for marketing and business development, information systems, general management and financial management activities; 139 - the increase in personnel and related costs associated with the management of the European clinical business; and - the increase in personnel and facility costs associated with the increase in Chrysalis' specialty transgenic and molecular biology services. Depreciation and amortization expense decreased to $2,092,000 for 1998 compared to $2,699,000 for 1997 and $2,780,000 for 1996. This decrease resulted from the full depreciation prior to 1998 of assets, primarily associated with Chrysalis' European preclinical operations. BUSINESS COMBINATION COSTS. Chrysalis incurred costs in 1996 associated with the BioClin Group acquisition. These costs totaled $3,649,000. These costs included expenses associated with the acquisition of the clinical business, the name change from DNX Corporation to Chrysalis and other related items. RESTRUCTURING COSTS. In connection with the merger agreement, Chrysalis agreed to shut down and discontinue providing clinical services in North America and at several of its European locations. Chrysalis incurred $3,872,000 of expenses related to this restructuring in the fourth quarter of 1998. See "--General Summary" and "Description of Chrysalis--General--Restructuring of Clinical Operations." OTHER INCOME (EXPENSE). Other income (expense) was expense of $992,000 in 1998 compared to income of $390,000 in 1997 and income of $742,000 for 1996. The increase in expense for 1998 compared to 1997 primarily resulted from: - a settlement agreement with Virginia Commonwealth University signed in the third quarter of 1997 which resulted in a $700,000 gain in 1997; - an increase in interest expense resulting from higher outstanding debt balances and the amortization of the MDS warrant; and - a decrease in interest income earned as a result of a decrease in average available cash and other investment balances. The decrease from 1996 to 1997 was partially due to a decrease in interest expense resulting from lower outstanding debt balances. The decrease in interest expense was offset by a decrease in interest income earned in 1997 resulting from a decrease in cash and other investment balances. Other income in 1997 also included the $700,000 nonrecurring gain resulting from the settlement agreement. Other income in 1996 primarily consisted of interest from higher cash balances primarily resulting from (1) the proceeds from the Nextran sale in the third quarter of 1995 and (2) a foreign currency gain of $517,000. The foreign currency gain resulted primarily from exchange rate fluctuations between the German Mark and Swiss Franc associated with short-term borrowings of Chrysalis' German operations denominated in Swiss Francs. Chrysalis repaid this debt denominated in Swiss Francs in 1997. The interest income for 1996 was offset primarily by interest expense of $1,445,000 on outstanding debt. TAXES. Chrysalis' foreign subsidiaries are subject to foreign income taxes under foreign tax laws on the profits generated in those countries. In general, these tax laws do not permit profits generated in those countries to be offset by losses from operations in other countries. As a result, primarily for its French operations, Chrysalis recorded an income tax expense of $716,000 in 1998 compared to $240,000 in 1997 and $477,000 in 1996. These expenses are primarily due to profits generated by Chrysalis' French operations. These profits are partially offset by tax benefits recorded as a result of losses in other European operations. Included in 1998 is a charge of $214,000 for the write-down of deferred tax assets impaired by the shut down of some European clinical operations. The impact from United States federal income taxes is currently not significant because Chrysalis has available net operating loss carryforwards. At December 31, 1998, Chrysalis' available net operating loss carryforwards were approximately $34,873,000 for United States federal income tax purposes. These 140 loss carryforwards expire through 2012. Chrysalis also has research and development tax credit carryforwards of approximately $2,932,000 for U.S. federal income tax reporting purposes. These tax credit carry forwards are available to reduce U.S. federal income taxes, if any, through 2012. Chrysalis 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. Chrysalis' acquisition of the Bioclin Group resulted in an ownership change under the Internal Revenue Code. Accordingly, Chrysalis' ability to use its net operating loss carryforwards to offset operating profits may be limited in the future by the Internal Revenue Code. Chrysalis may not use these net operating loss carryforwards to offset profit in other countries. QUARTERLY RESULTS Chrysalis' operating results vary from quarter to quarter. Variations are caused by factors that include: - delays in initiating or completing significant preclinical and clinical trials; - termination of preclinical and clinical trials; - acquisitions; and - exchange rate fluctuations. Clients or regulatory authorities often cause delays in or terminate studies or trials. Chrysalis typically cannot control these actions. Because a large portion of Chrysalis' operating costs are relatively fixed while its revenues are subject to fluctuation, minor variations in the commencement, progress or completion of trials may cause significant variations in quarterly operating results. Chrysalis took a restructuring charge in the fourth quarter of 1998 and expects to take an additional restructuring charge in the second quarter of 1999. See "--General Summary." The following table presents Chrysalis' unaudited quarterly operating results for each of the fiscal quarters of 1997 and 1998. In the opinion of Chrysalis, 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. You should read this quarterly financial data in conjunction with Chrysalis' consolidated financial statements and notes thereto. The operating results for any quarter are not necessarily indicative of the results to be expected in any future period. 141 QUARTER ENDED ($000'S) (UNAUDITED)
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 1997 1997 1997 1997 1998 1998 1998 1998 ----------- ----------- ----------- --------- ----------- ----------- ----------- --------- Net Revenues................... $ 9,905 $ 10,145 $ 10,623 $ 11,624 $ 9,673 $ 10,292 $ 8,799 $ 10,620 Operating Expenses: Direct costs................. 6,970 7,054 7,392 7,802 7,702 8,112 7,832 7,395 Research and development..... 52 47 31 36 -- -- -- -- General, administrative and marketing.................. 2,874 2,976 3,123 3,442 3,223 3,110 2,924 3,571 Depreciation and amortization............... 638 654 708 699 493 514 522 563 Restructuring costs.......... -- -- -- -- -- -- -- 3,872 ----------- ----------- ----------- --------- ----------- ----------- ----------- --------- 10,534 10,731 11,254 11,979 11,418 11,736 11,278 15,401 Loss from operations........... (629) (586) (631) (355) (1,745) (1,444) (2,479) (4,781) Other income (expenses): Interest Income.............. 181 123 93 72 127 56 87 46 Interest expenses............ (191) (165) (206) (213) (248) (420) (399) (434) Foreign currency gain........ -- -- -- 11 -- -- -- -- Other........................ 4 (6) 692 (4) (7) (5) (3) 208 ----------- ----------- ----------- --------- ----------- ----------- ----------- --------- (6) (48) 579 (134) (128) (369) (315) (180) Loss before income taxes....... (635) (634) (52) (489) (1,873) (1,813) (2,794) (4,961) Income tax expense (benefit)... 9 31 41 159 129 (11) 86 512 ----------- ----------- ----------- --------- ----------- ----------- ----------- --------- Net loss....................... $ (644) $ (665) $ (93) $ (648) $ (2,002) $ (1,802) $ (2,880) $ (5,473) ----------- ----------- ----------- --------- ----------- ----------- ----------- --------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
REVENUES BY BUSINESS AND GEOGRAPHIC REGION BY QUARTER QUARTER ENDED ($000'S) (UNAUDITED)
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 1997 1997 1997 1997 1998 1998 1998 1998 ----------- ----------- ----------- --------- ----------- ----------- ----------- --------- Transgenics/Preclinical........ $ 6,720 $ 6,708 $ 6,476 $ 7,355 $ 6,043 $ 7,466 $ 7,394 $ 9,254 Clinical....................... 2,909 3,277 3,972 4,085 3,406 2,624 1,180 1,151 Licensing/Other................ 276 160 175 184 224 202 225 215 ----------- ----------- ----------- --------- ----------- ----------- ----------- --------- Total.......................... 9,905 10,145 10,623 11,624 9,673 10,292 8,799 10,620 ----------- ----------- ----------- --------- ----------- ----------- ----------- --------- ----------- ----------- ----------- --------- ----------- ----------- ----------- --------- International.................. 6,779 6,661 6,168 7,170 5,952 6,554 5,194 6,298 United States.................. 2,850 3,324 4,280 4,270 3,497 3,536 3,380 4,107 Licensing/Other................ 276 160 175 184 224 202 225 215 ----------- ----------- ----------- --------- ----------- ----------- ----------- --------- Total.......................... $ 9,905 $ 10,145 $ 10,623 $ 11,624 $ 9,673 $ 10,292 $ 8,799 $ 10,620 ----------- ----------- ----------- --------- ----------- ----------- ----------- --------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
142 LIQUIDITY AND CAPITAL REQUIREMENTS DEFAULT At December 31, 1998, Chrysalis failed to satisfy certain financial covenants contained in the loan agreement related to its senior secured term loan and, therefore, was in default under the loan agreement. This loan is classified as a current liability on the balance sheet at December 31, 1998. See "Other Agreements." As a result of this default and the other factors affecting Chrysalis, the auditors' opinion for Chrysalis contained in this proxy statement/prospectus contains an explanatory paragraph stating as follows: "The consolidated financial statements have been prepared assuming that [Chrysalis] and its subsidiaries will continue as going concerns. [Chrysalis] has suffered recurring losses from operations, has a net working capital deficiency and is in default of [some of its] debt covenants which raise substantial doubt about their ability to continue as going concerns. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty." CASH RESERVES Chrysalis finances its operations and activities by relying on cash flows from operating activities, cash reserves and available lines of credit. As of December 31, 1998, Chrysalis had cash reserves of $6,705,000. Cash reserves consists of cash and cash equivalents and short-term investments. Chrysalis 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. Chrysalis' cash reserves decreased by $680,000 during 1998 from 1997 primarily due to: - $2,950,000 of net cash used in operating activities; - $2,391,000 of net cash used for capital expenditures; and - $464,000 of principal repayments on long-term debt. This decrease was offset partially by the receipt of $5,000,000 for the subordinated note issued to MDS's subsidiary on March 16, 1998. CAPITAL EXPENDITURES In 1998, Chrysalis invested approximately $2,391,000 in property and equipment compared to approximately $3,281,000 for 1997. The 1998 increase was primarily associated with: - solidifying and expanding Chrysalis' position in preclinical continuous infusion capabilities; - updating and expanding information systems; and - supporting the growth of the transgenic/gene targeting services business. DEBT Chrysalis has a working line of credit with a Swiss bank. As of December 31, 1998, the outstanding balance under this line of credit was approximately $2,931,000. This line is secured by the European clinical operation's trade accounts receivable. Chrysalis maintains a cash balance at this Swiss Bank in the amount of $2,661,000 as of December 31, 1998. Chrysalis and the Swiss Bank expect the cash balance to satisfy the majority of the outstanding amount under the line of credit. Chrysalis also has lines of credit and overdraft privileges with French banks in the aggregate amount of 10.5 million French Francs. At the exchange rate in effect on December 31, 1998, the amount was US $1.9 million. At December 31, 1998, there were no short-term borrowings outstanding under these French facilities. On March 16, 1998, Chrysalis issued, in exchange for $5,000,000 cash, a subordinated note and a warrant to purchase 2,000,000 shares of Common Stock at an exercise price of $2.50 per share, to a wholly-owned subsidiary of MDS. The terms of the subordinated note provide for semi-annual interest 143 payments with the aggregate principal amount payable on March 16, 2001. This note is subordinate to some outstanding indebtedness of Chrysalis, including its existing bank debt and mortgages. In addition, a portion or the entire principal amount of the note may, at the option of the holder, be satisfied by issuance of the shares of Chrysalis common stock, in accordance with the terms of the warrant. Chrysalis failed to make a semi-annual interest payment on the subordinated note in March 1999. The MDS subsidiary has agreed to waive its rights arising from the failure under the conditions that (1) the unpaid interest bears interest at the rate of 6% per annum, and (2) the unpaid interest is paid by April 30, 1999 or, if earlier, the date of the merger. In the third quarter of 1997, Chrysalis entered into a five-year $5.0 million senior secured term loan with the Bank with the principal payable in quarterly installments beginning September 1998. The balance outstanding at December 31, 1998 is $4,687,500. Interest is paid monthly over the life of the loan. This loan is secured by substantially all of Chrysalis' domestic assets, including the capital stock of its subsidiaries. At December 31, 1998, Chrysalis was in default under this loan. See "Other Agreements." In connection with its U.S. preclinical facility, Chrysalis secured a $1.5 million mortgage with a bank and a $1.2 million mortgage from a Pennsylvania agency, which required cash collateral of $450,000. These two loans are due in monthly installments through 2009. As of December 31, 1998, the aggregate outstanding balance under these mortgages was approximately $2,170,000. The cash collateral of $450,000 on the mortgage loan with the Pennsylvania agency was classified on the balance sheet as restricted cash as of December 31, 1997. In July 1998, Chrysalis satisfied the financial covenants related to the cash collateral and the $450,000 was released. The favorable interest rate on the mortgage with the Pennsylvania agency is subject to change upon review by the agency of future conditions. CAPITAL REQUIREMENTS The ability of Chrysalis to meet ongoing debt service requirements, to meet cash funding requirements and to otherwise satisfy its obligations to vendors and lenders from cash solely provided by operations has been adversely affected by significant losses from clinical operations. In response to these liquidity constraints, Chrysalis has begun to discontinue some of its clinical operations. See "Description of Chrysalis--General--Restructuring of Clinical Operations." Chrysalis anticipates that its capital requirements through April 30, 1999 will include: - satisfying working capital needs; - costs to shut down certain of its European and United States clinical operations; - capital expenditures for the preclinical and transgenic businesses; and - meeting its principal and interest requirements under debt arrangements. Chrysalis will use cash and cash equivalents, which was $6,705,000 as of December 31, 1998, and cash provided by operations to fund some of these cash requirements. If the forbearance agreement does not terminate, Chrysalis believes that it will have sufficient cash to continue to fund operating activities through April 1999. However, if the forbearance agreement terminates, Chrysalis will not have sufficient cash to satisfy its obligations to its creditors and fund operating activities. The forbearance agreement will terminate prior to April 30, 1999 if: - Chrysalis breaches the documents related to the term loan; - either Chrysalis or Phoenix materially breaches the merger agreement; or - the merger agreement terminates. As a result of these issues, Chrysalis must consummate the merger in a timely manner. Although Chrysalis has been exploring various strategic alternatives for some period of time, it now believes that an outright sale of Chrysalis through a vehicle other than the merger is unlikely. After evaluating a 144 number of strategic alternatives with the assistance of Vector Securities, Chrysalis currently believes that the merger agreement offers the most viable solution to Chrysalis' financial condition. However, the merger may not be consummated in a timely manner. If Chrysalis cannot consummate the merger or otherwise resolve its liquidity constraints by April 30, 1999, Chrysalis will likely not have sufficient liquidity both to operate its business and to satisfy its obligations to various creditors. In addition, if the forbearance agreement were to terminate, other of Chrysalis' debt would also be in default. Chrysalis intends to pursue alternatives outside of bankruptcy. However, alternative strategies may not be successful. It is possible that Chrysalis could be forced into bankruptcy by its creditors. Although Chrysalis currently intends, if necessary, to seek reorganization under chapter 11 of the Bankruptcy Code, it also believes that a successful reorganization would likely require a transaction involving a sale of one or more of Chrysalis' facilities or operations to generate a source of liquidity during any bankruptcy proceeding. EXCHANGE RATE FLUCTUATIONS Chrysalis derived approximately 61% of its net revenues for 1998, 63% of its net revenues for 1997 and 68% of its net revenues for 1996 from operations outside the United States. Chrysalis' consolidated financial statements are denominated in U.S. dollars. Changes in exchange rates between the applicable foreign currency and the U.S. dollar affect the translation of some subsidiary's financial results into U.S. dollars for purposes of Chrysalis' consolidated financial results. Translation adjustments are reported as a separate section of stockholders' equity. Chrysalis may be subject to foreign currency transaction risks when Chrysalis' multi-country contracts are denominated in a currency other than the currency in which Chrysalis incurs the expenses related to these contracts. For these multi-country contracts, Chrysalis seeks to impose on its client the effect of fluctuations in the relative values of the contract currency and the currency in which the expenses are incurred. To the extent Chrysalis is unable to impose on its clients the effects of currency fluctuations, these fluctuations could have a material effect on the results of operations of Chrysalis. Chrysalis generally does not hedge its currency translation and transaction exposure. The percentage of Chrysalis' total revenues recorded in French francs is significant because Chrysalis' preclinical operations in France account for a significant portion of total revenues. Chrysalis' French operations accounted for approximately 46% of revenues in 1998, 44% of revenues in 1997 and 48% of revenues in 1996. Fluctuations in the exchange rate between the French franc and the U.S. dollar affect the translation of the French preclinical operation's revenues and operating results into U.S. dollars for purposes of Chrysalis' consolidated financial results. Fluctuations also affect the U.S. dollar amounts actually received by Chrysalis from the French preclinical operations. If the French preclinical operations continue to represent a significant portion of Chrysalis' business, the appreciation of the U.S. dollar against the French franc would have an unfavorable impact on Chrysalis' revenues and a favorable impact on Chrysalis' operating expenses. However, the depreciation of the U.S. dollar against the French franc would have a favorable impact on Chrysalis' revenues and an unfavorable impact on Chrysalis' operating expenses. The net effect of these impacts cannot be predicted with certainty. For purposes of Chrysalis' 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 - --------------------------------- ------------------- ------------------- YEARS 1998............................. 5.5980 .1786 1997............................. 5.8364 .1713 1996............................. 5.1187 .1954
145
FRENCH FRANC U.S. DOLLAR PER PERIOD PER U.S. DOLLAR FRENCH FRANC - --------------------------------- ------------------- ------------------- QUARTERS 1st quarter 1997 5.6038 .1785 2nd quarter 1997 5.7831 .1729 3rd quarter 1997 6.0838 .1644 4th quarter 1997 5.8817 .1700 1st quarter 1998 6.0948 .1641 2nd quarter 1998 6.0157 .1662 3rd quarter 1998 5.8835 .1700 4th quarter 1998 5.5854 .1790
The rates in the above tables represent an average exchange rate calculated using rates quoted in The Wall Street Journal. As of March 26, 1999, the French franc per U.S. dollar rate was 6.0917. ACCUMULATED DEFICIT From its inception in 1988 until the formation in 1994 and subsequent sale of its ownership interest in Nextran in 1995, Chrysalis expended substantial funds for research and development and capital expenditures. A significant portion of these expenditures were made to support Chrysalis' organ transplantation and blood substitute research and development programs. Chrysalis transferred these programs to Nextran. Historically, these expenditures accounted for a substantial portion of Chrysalis' accumulated deficit. Costs associated with the prior strategy to develop a worldwide clinical business also contributed to the accumulated deficit. See "Description of Chrysalis--Loss of a Large Clinical Trial" and "--Nextran." INFLATION Chrysalis believes that inflation has not had a material impact on its results of operations. YEAR 2000 Information technology systems are an integral part of the services Chrysalis provides. Non-information technology systems play a nominal role in Chrysalis' operations. Chrysalis has been assessing Year 2000 compliance issues from an internal, supplier and customer perspective and has been actively involved in resolving related issues since 1997. Chrysalis is in the process of undertaking actions to ensure that its information technology systems are Year 2000 compliant. It expects to finish this process by the end of the second quarter of 1999. Chrysalis has not yet determined whether a testing phase of its information technology systems will be necessary or, if necessary, when testing would be undertaken or completed. Any failure of Chrysalis to adequately correct its information technology systems or any failure of any supplier or customer on whom Chrysalis is dependent to be Year 2000 compliant could materially adversely affect Chrysalis' ability to conduct operations and, therefore, could materially adversely affect its financial condition, results of operations and cash flows. Chrysalis currently estimates that costs and expenses of assessment and corrective activities will be approximately $1,000,000, of which approximately $475,000 has been spent through December 31, 1998. However, Chrysalis' current financial condition may prevent it from expending sufficient sums to adequately resolve in a timely manner all Year 2000 issues. Further, Chrysalis is dependent on the efforts of a limited number of key employees to address Year 2000 compliance issues. The loss of one or more of these employees could materially adversely impact Chrysalis' ability to assess and resolve Year 2000 issues in a timely manner. Chrysalis may not have the resources or ability to resolve in a timely manner the Year 2000 compliance of its information technology systems and third parties on which it depends. In addition, Chrysalis may not be able to retain the services of the key employees addressing Year 2000 compliance issues. Further, the costs related to assessing and resolving Year 2000 issues may be material. Finally, Chrysalis' operations, financial condition and results of operations may be materially adversely impacted by a failure to achieve any of the foregoing. See "--Liquidity and Capital Requirements--Capital Requirements." 146 EURO CONVERSION On January 1, 1999, eleven of the fifteen countries that are members of the European Union introduced a new currency unit called the "euro ." The euro will ultimately replace the national currencies of these eleven countries. The conversion rates between the euro and the participating countries' currencies were fixed irrevocably as of January 1, 1999. The participating countries' national currencies will be removed from circulation between January 1, 1999 and June 30, 2002 and replaced by euro notes and coinage. During the "transition period" from January 1, 1999 through December 31, 2001, public and private entities and individuals may pay for goods and services using either checks, drafts or wire transfers denominated in euro or the participating country's national currency. Under the regulations governing the transition to the euro, there is a "no compulsion, no prohibition" rule which states that no one is obligated to use the euro until the notes and coinage have been introduced on January 1, 2002. In keeping with this rule, Chrysalis is able to: - receive euro denominated payments; - invoice in euro as requested by customers and suppliers; and - perform appropriate conversion and rounding calculations. Chrysalis expects to complete full conversion of all affected country operations to the euro by the time national currencies are removed from circulation. Chrysalis does not expect software and business process conversion costs required to achieve these abilities to be material. Chrysalis does not anticipate that the introduction and use of the euro will materially affect Chrysalis' foreign exchange and hedging activities or Chrysalis' use of derivative instruments. Chrysalis does not anticipate that the euro will have a material adverse effect on its operating results, financial condition or cash flows. However, Chrysalis cannot yet determine the ultimate effect that the euro will have on competition due to price transparency, foreign currency risks and relationships and transactions with third parties. Chrysalis continues to monitor and assess the potential risks imposed by the euro. NEW ACCOUNTING PRONOUNCEMENTS In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1 provides guidance for the accounting treatment of various costs typically incurred during the development or purchase of computer software for internal use. SOP 98-1 is effective for fiscal periods beginning after December 15, 1998. Chrysalis does not expect the application of SOP 98-1 to have a material impact on its consolidated results of operations, financial position or cash flows. In April 1998, the AcSEC issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5 provides guidance on the financial reporting of start-up and organization costs and requires these costs be expensed as incurred. SOP 98-5 is effective for fiscal periods beginning after December 15, 1998. Chrysalis does not expect the application of SOP 98-5 to have a material impact on its consolidated results of operations, financial position or cash flows. In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities and requires all derivatives to be recorded on the balance sheet at fair value. This statement is effective for years beginning after June 15, 1999. Chrysalis does not expect the adoption of this statement to have a material impact on its consolidated results of operations, financial position or cash flows. 147 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Chrysalis is exposed to market risk from changes in interest rates on some portions of its long-term debt. Currently, Chrysalis does not use derivative financial instruments to manage its interest rate risk. The $5.0 million term loan and the mortgage with a commercial bank both had a variable interest rate of 9.25% at December 31, 1998. The carrying interest rate on the term loan and mortgage with a commercial bank bears interest at market rates and therefore, the carrying value approximates fair value. Chrysalis conducts business in foreign countries and international operations were material to Chrysalis' consolidated financial position, results of operations and cash flows as of December 31, 1998. Accordingly, Chrysalis is subject to material foreign currency exchange risk. Approximately 61%, 63% and 68% of Chrysalis' net revenues for 1998, 1997 and 1996, respectively, were derived from Chrysalis' operations outside the United States. Chrysalis' 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 Chrysalis' consolidated financial results. Translation adjustments are reported as a separate section of stockholders' equity. Chrysalis may be subject to foreign currency transaction risks when Chrysalis' multi-country contracts are denominated in a currency other than the currency in which Chrysalis incurs the expenses related to such contracts. For such multi-country contracts, Chrysalis 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 Chrysalis 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 Chrysalis. Chrysalis does not hedge its currency translation and transaction exposure. 148 SELECTED FINANCIAL DATA OF CHRYSALIS The following table contains selected consolidated financial data for Chrysalis as of the dates and for the periods indicated, and have been prepared in accordance with U.S. GAAP and are presented in US dollars. The financial data for each of the five years ended December 31, 1998 are derived from Chrysalis' audited financial statements. You should be aware of the following factors that affect comparisons from year to year: - In 1994, Chrysalis entered into the Nextran joint venture, in which it held a minority interest. In 1995, Chrysalis sold its minority interest for $18 million. The sale resulted in a nonrecurring gain, net of expenses, income taxes and related accruals of approximately $17.3 million. See "Description of Chrysalis--Nextran." - In 1996, Chrysalis recorded business combination costs of approximately $3.6 million related to the acquisition of the Bioclin Group. See "Description of Chrysalis--General--Other Matters." - In the fourth quarter of 1998, Chrysalis recorded a restructuring charge of $3,872,000 in connection with the restructuring of its clinical operations. Chrysalis expects to record an additional restructuring charge of $825,000 in the second quarter of 1999 in connection with this restructuring. See "Description of Chrysalis--General--Restructuring of Clinical Operations" and "Management's Discussion and Analysis of Financial Condition and Results of Operations of Chrysalis--General Summary." - As a result of Chrysalis' default under its senior term loan, the principal amount of the loan is classified as short-term debt at December 31, 1998. See "Other Agreements." You should read the data set forth below in conjunction with the consolidated financial statements of Chrysalis and the related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations of Chrysalis."
YEARS ENDED DECEMBER 31, ----------------------------------------- 1998 1997 1996 1995 1994 -------- ------- ------ ------ ------ (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net revenues.................................................................... $ 39,384 $42,298 41,487 39,609 36,188 Operating costs and expenses: Direct costs.................................................................. 31,041 29,217 27,313 27,691 25,499 Research and development...................................................... -- 166 528 1,063 3,940 General, administrative and marketing......................................... 12,828 12,416 10,942 9,631 9,975 Depreciation and amortization................................................. 2,092 2,699 2,780 2,907 3,594 Business combination costs.................................................... -- -- 3,649 -- -- Restructuring costs........................................................... 3,872 -- -- -- -- -------- ------- ------ ------ ------ 49,833 44,498 45,212 41,292 43,008 Loss from operations.......................................................... (10,449) (2,200) (3,725) (1,683) (6,820) -------- ------- ------ ------ ------ Other income (expense), net................................................... (992) 390 742 (635) (525) Net loss before equity in net loss of Nextran, gain on sale of Nextran and taxes....................................................................... (11,441) (1,810) (2,983) (2,318) (7,345) Equity in net loss of Nextran................................................. -- -- -- (2,700) (1,329) Gain on sale of Nextran, net of income taxes.................................. -- -- -- 17,266 -- Income tax expense (benefit).................................................. 716 240 477 (177) 390 -------- ------- ------ ------ ------ Net income (loss)........................................................... $(12,157) $(2,050) (3,460) 12,425 (9,064) -------- ------- ------ ------ ------ -------- ------- ------ ------ ------ Basic earnings (loss) per share............................................... $ (1.06) $ (0.18) (0.31) 1.12 (0.82) -------- ------- ------ ------ ------ -------- ------- ------ ------ ------ Diluted earnings (loss) per share............................................. $ (1.06) $ (0.18) (0.31) 1.06 (0.82) -------- ------- ------ ------ ------ -------- ------- ------ ------ ------
149
YEARS ENDED DECEMBER 31, ----------------------------------------- 1998 1997 1996 1995 1994 -------- ------- ------ ------ ------ (IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA (AT YEAR END): Cash, cash equivalents and investments.......................................... $ 6,705 $ 6,925 13,470 23,102 6,234 Restricted cash................................................................. -- 460 5,010 777 1,724 Accounts receivable, net........................................................ 8,766 9,669 10,788 10,907 9,340 Property, equipment and leasehold improvements, net............................. 15,686 15,127 15,963 17,806 18,548 Intangible assets, net.......................................................... 809 805 953 1,035 991 Investment in Nextran........................................................... -- -- -- -- 3,844 Other assets.................................................................... 2,615 2,254 1,759 1,797 1,454 -------- ------- ------ ------ ------ Total assets................................................................ $ 34,581 $35,240 47,943 55,424 42,135 -------- ------- ------ ------ ------ -------- ------- ------ ------ ------ Current liabilities, excluding debt............................................. 17,681 12,295 17,501 15,292 16,047 Short-term debt................................................................. 3,250 2,668 11,238 11,559 9,876 Current portion of long-term debt............................................... 4,821 768 180 744 784 Long-term debt, excluding current portion....................................... 6,010 6,561 2,376 7,830 8,502 Deferred income taxes........................................................... 1,832 1,646 2,053 2,059 2,075 Other liabilities............................................................... 725 633 1,054 948 1,180 Total stockholders' equity...................................................... 262 10,669 13,541 16,992 3,671 -------- ------- ------ ------ ------ Total liabilities and stockholders' equity.................................. $ 34,581 $35,240 47,943 55,424 42,135 -------- ------- ------ ------ ------ -------- ------- ------ ------ ------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF CHRYSALIS The following contains information regarding the beneficial ownership of Chrysalis common stock as of March 1, 1999, by (1) each person known to Chrysalis to be a beneficial owner of more than five percent of Chrysalis common stock, (2) each of Chrysalis' directors and executive officers and (3) all directors and executive officers of Chrysalis as a group. The directors and executive officers have furnished their information. Chrysalis obtained the information in the table regarding share ownership of other persons beneficially owning five percent or more of Chrysalis common stock from required filings with the Securities and Exchange Commission. Mr. Hackel, Dr. Barbut and Dr. Jensen have filed a Schedule 13D disclosing that they intend to vote all shares owned beneficially by them as a group. MDS Inc., MDS Washington, Inc. and Panlabs International Inc. have filed a Schedule 13D disclosing that they share the power to vote and dispose of the 2,000,000 shares shown as beneficially owned by them. These 2,000,000 shares are issuable under a warrant granted to Panlabs. Otherwise, each of the persons named below has sole voting and investment power over the shares indicated in the table. Outstanding shares of Chrysalis common stock owned beneficially are listed in one column. Shares of Chrysalis common stock owned beneficially through stock options and warrants that can be exercised by April 30, 1999 are shown in a separate column. The percentage column reflects all shares owned beneficially. An asterisk in the percent column means the person owns less than one percent of the 150 Chrysalis common stock. Each of the persons listed on the table below, other than MDS, has entered into a support/voting agreement with Phoenix. See "Other Agreements--Support/Voting Agreements.".
SHARES BENEFICIALLY OWNED ------------------------------------ NAMES AND ADDRESSES OUTSTANDING SHARES OPTIONS/WARRANTS PERCENT - ------------------------------------------------------------------ ------------------ ---------------- ----------- Jack Barbut, Sc.D. 933,974 0 8.0 1 El Camino Bueno Ross, CA 94957 Alec Hackel 933,975 0 8.0 Flueliweg 3 6045 Meggan, Switzerland MDS Inc. 0 2,000,000 14.6 MDS Washington, Inc. Panlabs International Inc. 11804 North Creek Parkway South Bothell, WA 98011 J. Christian Jensen 622,649 0 5.3 Speedel Pharma Inc. Petersgraben 35 4051 Basel Switzerland Paul J. Schmitt 155,881 297,500 3.8 John G. Cooper 8,259 292,500 2.5 Leif Modeweg, D.V.M. 0 250,000 2.1 Desmond H. O'Connell 35,220 69,000 * Photios T. Paulson 6,000 60,000 * W. Leigh Thompson, Ph.D., M.D. 0 30,000 * Barry M. Sherman, M.D. 0 30,000 * All directors and executive officers as a group (9 persons) 1,761,983 1,029,000 22.0
151 COMPARISON OF STOCKHOLDERS' RIGHTS AND DESCRIPTION OF PHOENIX COMMON SHARES AND CHRYSALIS COMMON STOCK The rights of stockholders of Chrysalis are currently governed by: - the Delaware General Corporation Law; - Chrysalis' Third Amended and Restated Certificate of Incorporation; and - Chrysalis' Third Amended and Restated By-Laws. After the merger, these stockholders will become shareholders of Phoenix, and their rights will be governed by: - the Canada Business Corporations Act; - Phoenix's certificate and articles of amalgamation and certificates and articles of amendments; and - Phoenix's by-laws as in effect at the merger date. The following are summaries of material differences between the rights of Chrysalis stockholders and Phoenix shareholders. On March 1, 1999, there were 208 record holders of Chrysalis common stock, including banks, brokerage firms and other nominees, and 163 record holders of Phoenix common shares. CLASSES AND SERIES OF CAPITAL STOCK CHRYSALIS Under Chrysalis' Third Amended and Restated Certificate of Incorporation, Chrysalis may issue up to 20,000,000 shares of common stock and 5,000,000 shares of preferred stock. As of the record date, 11,666,480 shares of Chrysalis common stock were outstanding. As of the record date, no shares of Chrysalis preferred stock were issued and outstanding. In July 1998, Chrysalis adopted a rights agreement and issued, as a dividend, one preferred stock purchase right for each outstanding share of Chrysalis common stock. Chrysalis has also issued one preferred stock purchase right for each share of Chrysalis common stock issued since the record date for that dividend. Each Chrysalis purchase right entitles the holder to buy one-hundredth of a share of Chrysalis Series A Junior Participating Preferred Stock at a purchase price of $11.00 for each one-hundredth of a share of Series A preferred stock. The number and type of securities for which a right is exercisable and the exercise price of the rights are subject to adjustment. Chrysalis may not redeem the Series A preferred stock. If Chrysalis declares a dividend on its common stock, each share of Series A preferred stock is entitled to a preferential dividend equal to $1.00 per share or, if greater than $1.00, 100 times the dividend declared on the common stock. If Chrysalis liquidates, each share of Series A preferred stock is entitled to a preferential payment equal to $100 or, if greater than $100, 100 times the per share payment made with respect to the common stock. Each share of Series A preferred stock has 100 votes on all matters submitted to the vote of Chrysalis stockholders. The nature of the dividend, liquidation and voting rights of the Series A preferred stock make each right approximately equivalent in value to the value of a share of Chrysalis common stock. A holder of the rights may exercise his rights only if a person or group acquires a specified percentage or more of the outstanding shares of Chrysalis common stock or announces a tender or exchange offer, following which, the person or group would hold at least a specified percentage of the outstanding Chrysalis common stock. Except for the shares held by Messrs. Hackel, Barbut and Jensen, the specified percentage is 15%. For the shares held collectively by Messrs. Hackel, Barbut and Jensen, the 152 specified percentage is 25%, as long as they collectively continue to own 15% or more of the outstanding Chrysalis common stock. If a person or group acquires the specified percentage of the outstanding shares of Chrysalis common stock, or that person or group engages in specified self-dealing transactions or merges into Chrysalis in a transaction in which Chrysalis' common stock is not changed or exchanged, the rights will become exercisable for common stock instead of preferred stock. Specifically, each holder of a right will receive, upon exercise of each right, shares of Chrysalis common stock with a market value of two times the exercise price of the right, except that rights owned by that person or group will be void. If Chrysalis is acquired in a merger or other business combination or 50% or more of its assets or earning power is sold, each holder of a right will receive, upon exercise of the right, common stock of the acquiring company with market value of two times the exercise price of the right, except that rights owned by that person or group will be void. Chrysalis may redeem the rights at a price of $.01 per right prior to the time the rights become exercisable. The rights will expire on July 20, 2008, unless redeemed or exchanged by the Chrysalis Board before that date. In connection with the negotiation of the merger agreement, Chrysalis and Phoenix agreed that the Chrysalis Board would amend the rights agreement prior to signing the merger agreement to permit the merger to be completed, without triggering the exercise of the rights. In addition, they agreed that the amendment would cause the rights to expire immediately prior to the merger. The Chrysalis Board adopted that amendment on November 13, 1998 and the amendment became effective on November 18, 1998. PHOENIX Phoenix's certificate and articles of amalgamation incorporation permit Phoenix to issue common shares without nominal or par value, and preferred shares issuable in series without nominal or par value. There is no limit on the number of common shares or preferred shares that Phoenix can issue. As of March 31, 1999, 26,068,989 common shares were issued and outstanding and no Phoenix preferred shares were issued and outstanding. The following is a summary of the attributes of the different classes and series of shares Phoenix may issue. PHOENIX COMMON SHARES Phoenix common shares entitle the holder to one vote per share at all meetings of shareholders except meetings at which only holders of a specified class or series of shares are entitled to vote. Phoenix common shares, subject to the priority of the holders of Phoenix preferred shares, entitle their holders to receive dividends and to share the balance of the property of Phoenix or other distribution of its assets on an equal basis upon liquidation, dissolution or winding-up of Phoenix. PHOENIX PREFERRED SHARES PRIORITY. The class provisions of Phoenix preferred shares provide that each series of Phoenix preferred shares ranks equally with every other series of Phoenix preferred shares. In addition, Phoenix preferred shares have priority over Phoenix common shares with respect to the payment of dividends and the distribution of assets in the event of the liquidation, dissolution or winding-up of Phoenix or other distribution of its assets. VOTING RIGHTS. The holders of Phoenix preferred shares are not entitled to vote at any meetings of the shareholders of Phoenix other than as provided by law with respect to, among other things: - amendments to the articles; - the execution of an amalgamation agreement, which is similar to a merger agreement, which contains a provision that, if contained in a proposed amemdment to the articles, would entitle the holders of preferred shares to vote as a class or series; 153 - the continuance of the corporation; - the voluntary liquidation of dissolution of the corporation; and - extraordinary sales, leases or exchanges. ANNUAL MEETING OF STOCKHOLDERS CHRYSALIS Under the Delaware General Corporation Law, if a corporation does not hold an annual meeting for the election of directors on the date, if any, designated in the corporation's certificate of incorporation or by-laws, the directors must hold the meeting as soon after that date as may be convenient. If they fail to do so for a period of thirty days after the designated date, or if no date has been designated for a period of thirteen months after the last annual meeting or written consent to elect directors in lieu of an annual meeting, the Delaware Court of Chancery may summarily order a meeting to be held upon application of any stockholder or director. The shares of stock represented at this meeting either in person or by proxy and entitled to vote at the meeting, constitute a quorum for the purposes of the meeting, even if the corporation's certificate of incorporation or by-laws provides for a different quorum requirement. The Delaware General Corporation Law does not permit a stockholder to call an annual meeting other than by application to the Delaware Court of Chancery. PHOENIX Under the Canada Business Corporations Act, the directors of Phoenix must call an annual meeting of shareholders not later than fifteen months after holding the last preceding annual meeting of Phoenix shareholders. If an annual meeting is not called at the required time by the directors, it may be called by the holders of not less than 5% of the issued and voting shares of Phoenix. The Canada Business Corporations Act gives this power to call a meeting of shareholders, as set forth under the caption "--Special Meetings of Stockholders" below. If for any reason it is impracticable to call a meeting or to conduct a meeting in the manner prescribed by Phoenix by-laws or the Canada Business Corporations Act, any director or shareholder entitled to vote at such a meeting or the director appointed under section 260 of the Canada Business Corporations Act may apply to a court for an order calling the meeting and setting forth the manner to hold and conduct the meeting. SPECIAL MEETINGS OF STOCKHOLDERS CHRYSALIS Under the Delaware General Corporation Law, special meetings of stockholders may be called only by the board of directors or other persons authorized by the certificate of incorporation or by-laws. The Chrysalis by-laws only permit the following persons to call a special meeting: - the Chairman of the Board, if one is selected; - the Chief Executive Officer or the President; or - the Secretary, within 10 days after receipt of the written request of a majority of the Chrysalis Board. PHOENIX Under the Phoenix by-laws, special meetings of shareholders may be called at any time by order of the Chairman of the Board or the President or any Vice President of Phoenix. Under the Canada Business Corporations Act, special meetings of shareholders may be called by the board of directors. In addition, the holders of not less than 5% of the issued and voting shares of Phoenix may request that the 154 directors call a meeting of shareholders for any purpose. If the directors do not call a meeting within 21 days after receiving the requisition, any shareholders who requested the directors to call the meeting may call the meeting. QUORUM OF STOCKHOLDERS CHRYSALIS Under the Delaware General Corporation Law, a quorum consists of a majority of shares entitled to vote present in person or represented by proxy unless the certificate of incorporation or by-laws provide otherwise. The Chrysalis by-laws do not alter the majority requirement of this statutory quorum requirement. PHOENIX The Phoenix by-laws provide that a quorum at any meeting of shareholders will be shareholders present in person and personally holding or represented by proxy not less than twenty-five percent (25%) of the issued and outstanding shares of Phoenix entitled to vote at the meeting. STOCKHOLDER ACTION WITHOUT A MEETING CHRYSALIS As permitted by the Delaware General Corporation Law, the Chrysalis certificate of incorporation and by-laws prohibit written actions by the Chrysalis stockholders. As a result, all actions of Chrysalis stockholders are required to be taken at an annual or special meeting. PHOENIX Under the Canada Business Corporations Act, shareholder action may be taken without a meeting by written resolution signed by all shareholders who would be entitled to vote on the matter at a meeting except with respect to a meeting called for the purpose of (1) removing a director or the auditor or (2) electing or appointing a director or auditor following the resignation, removal or expiry of term of office of a director or auditor who has submitted a written statement giving the reasons why he opposes proposed action or resolution. NOTICE OF STOCKHOLDER PROPOSALS CHRYSALIS The Chrysalis by-laws do not contain provisions governing shareholder proposals other than nominations of persons for election as directors. Under the Chrysalis by-laws, to nominate a person for election as a director, a stockholder generally must give notice to Chrysalis that is received by Chrysalis not less than 60 days prior to the meeting. The notice must contain specified information concerning the nominee and the stockholder submitting the proposal. PHOENIX Under the Canada Business Corporations Act, shareholder proposals may be submitted only at annual meetings of shareholders. A shareholder entitled to vote at an annual meeting of shareholders may submit to Phoenix notice of any matter that the shareholder proposes to raise at the meeting provided that the proposal is submitted to Phoenix at least ninety days before the anniversary date of Phoenix's previous annual meeting of shareholders. Phoenix expects to hold its next annual meeting of shareholders in December 1999. Any Phoenix shareholder who intends to submit a proposal for inclusion in the 155 management proxy material for the 1999 annual meeting of Phoenix must submit the proposal to the Secretary of Phoenix by September 15, 1999. ACCESS TO CORPORATE RECORDS AND FINANCIAL STATEMENTS CHRYSALIS Under the Delaware General Corporation Law, any stockholder may for any proper purpose, inspect the corporation's stock ledger, a list of stockholders and its other books and records, and may make copies of and extracts from the record. To exercise this right, a stockholder must demand the right in writing under oath. The inspection must occur during regular business hours. PHOENIX Under the Canada Business Corporations Act, a corporation is required to make available to its shareholders and creditors, their agents and legal representatives, specified books and records during usual business hours of the corporation. These persons may, free of charge, take extracts from these books and records. Any other person may take extracts from these books and records upon payment of a reasonable fee. A Phoenix shareholder may also obtain a list of Phoenix's shareholders by paying a reasonable fee and submitting an affidavit. As well, in the case of a corporation, such as Phoenix, shareholders and creditors, their agents and legal representatives, and any other person, upon payment of a reasonable fee and sending to the corporation of an affidavit, may require a corporation to furnish a list of shareholders. In addition, directors of a corporation are entitled to examine additional records, documents and instruments of the corporation. CHARTER AMENDMENTS CHRYSALIS Under the Delaware General Corporation Law, unless its certificate of incorporation or by-laws otherwise provide, amendments to a corporation's certificate of incorporation generally require the approval of the holders of a majority of the outstanding stock entitled to vote. In addition, if the amendments would affect rights of holders of a particular class of stock, the approval of a majority of the outstanding stock of that class may also be required. The Chrysalis certificate of incorporation requires some amendments to be approved by an affirmative vote of at least 66 2/3% of the Chrysalis stock generally entitled to vote for the election of directors. Amendments to the following provisions require the 66 2/3% vote: - requiring a super-majority stockholder vote to amend specified provisions of the Chrysalis by-laws; - prohibiting stockholder action by written consent; - governing who can call special stockholders meetings; - providing for a classified Chrysalis Board and governing removal of directors and filling vacancies on the Chrysalis Board; - requiring a super-majority stockholder vote for some business combinations with interested stockholders; and - providing indemnification for Chrysalis directors and officers. PHOENIX Under the Canada Business Corporations Act, any amendment to a corporation's articles of incorporation generally requires approval by special resolution. This resolution must be passed by a majority of 156 not less than two-thirds of the votes cast by shareholders of all shareholders who voted in respect of the resolution. If the amendment affects rights of holders of a particular class of shares, the holders of that particular class must approve a separate special resolution by the same vote. BY-LAW AMENDMENTS CHRYSALIS Under the Delaware General Corporation Law, the power to adopt, amend or repeal by-laws is vested in the voting stockholders. The corporation may, however, in its certificate of incorporation, permit the directors, in addition to the stockholders, to adopt, amend or repeal by-laws. The Chrysalis certificate of incorporation expressly grants the Chrysalis Board the power to adopt, amend and repeal the Chrysalis by-laws. The Chrysalis certificate of incorporation also requires the holders of 66 2/3% of the Chrysalis stock generally entitled to vote for the election of directors to approve amendments to the provisions of the Chrysalis by-laws governing: - who can call special stockholders meetings; - the classification of the Chrysalis Board; - the removal of directors; and - the filling of vacancies on the Chrysalis Board. PHOENIX The Phoenix Board may, by resolution, make, amend or repeal any by-laws that regulate the business or affairs of Phoenix. The directors are required to submit a by-law, or an amendment or a repeal of a by-law, to the shareholders at the next meeting of shareholders of Phoenix. At this meeting, the shareholders may pass by a majority of votes cast, confirm, reject or amend the by-law, amendment or repeal. A by-law, or an amendment or a repeal of a by-law, is effective from the date of the resolution of the directors until it is confirmed, confirmed as amended or rejected by the shareholders of Phoenix or until it ceases to be effective. A shareholder entitled to vote at an annual meeting of shareholders of Phoenix may make a proposal to make, amend or repeal a by-law. SALE OR LEASE OF ASSETS CHRYSALIS Under the Delaware General Corporation Law, the Chrysalis Board may by resolution sell, lease or exchange all or substantially all the corporation's property and assets, if the transaction is authorized by the holders of a majority of the outstanding stock. However, the Delaware General Corporation Law or the Chrysalis certificate of incorporation may require a super-majority vote for any of those transactions if an interested stockholder is involved. See "--Anti-Takeover Provisions." PHOENIX Under the Canada Business Corporations Act, the sale, lease or exchange of all or substantially all the property of a corporation other than in the ordinary course of business requires, in addition to a resolution of Phoenix Board, the general approval of the shareholders by special resolution. The resolution must be approved by a majority of not less than two-thirds of the votes cast by the shareholders, each share carrying the right to vote whether or not it otherwise carries the right to vote. A separate special resolution is also required from the holders of each class of shares which is particularly affected by the transaction. 157 PREEMPTIVE RIGHTS CHRYSALIS The Delaware General Corporation Law provides that security holders of a corporation only have preemptive rights if these rights are specifically provided in the corporation's certificate of incorporation. The Chrysalis certificate of incorporation does not provide for preemptive rights. PHOENIX The Canada Business Corporations Act provides that shareholders may have a preemptive right if this right is specifically provided in the corporation's articles. Phoenix's articles do not provide for preemptive rights. DIVIDENDS AND DISTRIBUTIONS CHRYSALIS Under the Delaware General Corporation Law, subject to any restriction contained in a corporation's certificate of incorporation, the board of directors may declare, and the corporation may pay, dividends or other distributions upon the shares of its capital stock either: - out of "surplus;" or - if there is no surplus, out of the net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year, unless net assets are less than the capital of all outstanding preferred stock. "Surplus" is defined as the excess of the net assets of the corporation over the amount determined to be the capital of the corporation by the board of directors. The capital of the corporation cannot be less than the aggregate par value of all issued shares of capital stock. Net assets equals total assets minus total liabilities. The Chrysalis certificate of incorporation does not alter these provisions of the Delaware General Corporation Law. PHOENIX Under the Canada Business Corporations Act, Phoenix may declare or pay a dividend unless there are reasonable grounds for believing that Phoenix is or would after the payment be unable to pay its liabilities as they become due or the realizable value of Phoenix's assets would be less than the aggregate of Phoenix's liabilities and stated capital of all classes of shares of Phoenix. APPRAISAL AND DISSENT RIGHTS CHRYSALIS Stockholders of a Delaware corporation who dissent from a merger or consolidation of the corporation that requires a stockholder vote are generally entitled to appraisal rights. Appraisal rights require the surviving corporation to purchase the dissenting shares at fair value. However, stockholders do not have the appraisal rights if the shares they hold, at the record date for the determination of stockholders entitled to vote at the meeting of stockholders to act upon the merger or consolidation, or on the record date with respect to action by written consent, are either: - listed on a national securities exchange or designated as a Nasdaq National Market security; or - held of record by more than 2,000 stockholders. Those stockholders will have appraisal rights unless their shares are converted into anything other than: 158 - stock of the surviving corporation; - stock of another corporation which is either listed on a national securities exchange or designated as a Nasdaq National Market security or held of record by more than 2,000 stockholders; - cash in lieu of fractional shares; or - some combination of the above. Because the Chrysalis common stock is listed on the Nasdaq National Market and the Phoenix Common Stock will be listed on the Nasdaq National Market on or before the merger, holders of Chrysalis common stock are not entitled to appraisal rights in connection with the merger. The Chrysalis certificate of incorporation and the Chrysalis by-laws do not contain any additional provisions relating to dissenters' rights of appraisal. PHOENIX The Canada Business Corporations Act provides that shareholders of a corporation constituted under the Canada Business Corporations Act entitled to vote on specified matters are entitled to exercise dissent rights and to be paid the fair value of their shares in connection therewith. These matters include: - any amalgamation, which is similar to a merger, with another corporation other than with certain affiliated corporations; - an amendment to the corporation's articles to add, change or remove any provisions restricting the issue, transfer or ownership of shares; - an amendment to the corporation's articles to add, change or remove any restriction upon the business or businesses that the corporation may carry on; - a continuance under the laws of another jurisdiction; - a sale, lease or exchange of all or substantially all the property of the corporation other than in the ordinary course of business; - a court order permitting a shareholder to dissent in connection with an application to the court for an order approving an arrangement proposed by the corporation; or - other amendments to the articles of a corporation which require a separate class or series vote, provided that a shareholder is not entitled to dissent if an amendment to the articles is effected by a court order approving a reorganization, as defined in the Canada Business Corporations Act, or by a court order made in connection with an action for an oppression remedy. Under the Canada Business Corporations Act, a shareholder may, in addition to or instead of exercising dissent rights, seek an oppression remedy as described below for any act or omission of a corporation which is oppressive, unfairly prejudicial to or that unfairly disregards a shareholder's interest. STOCK REPURCHASES CHRYSALIS Under the Delaware General Corporation Law, a corporation may not purchase or redeem its shares of capital stock when the capital of the corporation is impaired or if the purchase or redemption would cause any impairment of the capital of the corporation. However, a corporation may purchase or redeem out of capital any of its preferred shares if the shares will be retired upon acquisition and the capital of the corporation will be reduced. 159 PHOENIX Under the Canada Business Corporations Act, Phoenix may purchase or otherwise acquire its shares unless there are reasonable grounds for believing that Phoenix is or would after the purchase be unable to pay its liabilities as they become due or the realizable value of Phoenix's assets would after the purchase be less than the aggregate of Phoenix's liabilities and stated capital of all classes of shares. Canadian securities laws restrict the ability of Phoenix to selectively repurchase its securities. Open market purchases of securities by Phoenix may be made as long as these purchases do not exceed the limits of 5% of the outstanding shares on an annual basis and 2% of the outstanding shares on a monthly basis. Otherwise, issuer bid purchases must be made pursuant to an offer extended on identical terms to all holders of those securities. NUMBER AND QUALIFICATION OF DIRECTORS CHRYSALIS The Delaware General Corporation Law provides that the minimum number of directors is one. The number of directors is fixed by or in the manner provided in the by-laws, unless the certificate of incorporation fixes the number of directors. If the certificate of incorporation fixes the number, a change in the number may only be made by amendment to the certificate of incorporation. The Chrysalis by-laws provide that Chrysalis must have at least three directors and that the majority of the Chrysalis Board determines the exact number. The Chrysalis certificate of incorporation and the Chrysalis by-laws provide for a classified board, with each class being as nearly equal in number as possible. There are three classes of directors. Each class serves a three-year term. PHOENIX Under the Canada Business Corporations Act, the Phoenix Board must have not fewer than three members, at least two of whom are not officers or employees of Phoenix or its affiliates. Under Phoenix's articles, the minimum number of directors is three and the maximum number of directors is 15. A majority of directors of Phoenix must be resident Canadians under the Canada Business Corporations Act and, except in limited circumstances, directors may not transact business at a meeting of directors or a committee of directors at which a majority of the directors present are not resident Canadians under the Canada Business Corporations Act. FILLING VACANCIES ON THE BOARD OF DIRECTORS CHRYSALIS The Delaware General Corporation Law provides that vacancies and newly created directorships may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director, unless otherwise provided in the certificate of incorporation or by-laws. If the certificate of incorporation directs that a particular class is to elect one or more directors, however, the vacancy may be filled only by a majority of the other directors elected by that class then in office, or by a sole remaining director elected by that class. If, at the time of filling any vacancy or newly created directorship, the directors then in office constitute less than a majority of the entire board, the Delaware Court of Chancery may, upon application of stockholders holding at least 10% of the total number of shares outstanding and having the right to vote for these directors, order an election to be held to fill any vacancy or newly created directorship or to replace the directors chosen by the directors then in office. The Chrysalis certificate of incorporation does not permit stockholders to fill vacancies or newly created directorships. It provides that vacancies and newly created directorships may be filled solely by a majority of the remaining directors then in office, even though less than a quorum, or by a sole remaining director. 160 PHOENIX Under the Canada Business Corporations Act, a quorum of directors may appoint one or more directors to fill a vacancy among the directors as long as the director or directors so appointed holds office for a term expiring at the close of the next annual meeting of shareholders. Under Phoenix's articles, the directors of Phoenix may also appoint one or more directors, who will hold office for a term expiring not later than the close of the next annual meeting of shareholders. The total number of additional directors appointed by the directors may not exceed one-third of the number of directors elected at the previous annual meeting of shareholders. REMOVAL OF DIRECTORS CHRYSALIS Under the Delaware General Corporation Law, directors may be removed with or without cause by a majority of the stockholders entitled to vote at an election of directors. However, unless the certificate of incorporation otherwise provides, if the board of directors is classified, removal may be for cause only. In addition, where a corporation has cumulative voting, if less than the entire board of directors is removed, no director may be removed without cause if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire board of directors. Stockholders of Chrysalis do not have the right to cumulate their votes in the election of directors. Directors are elected by a plurality vote of all of the votes cast at the annual meeting of stockholders. However, the Chrysalis Board is classified. The Chrysalis certificate of incorporation does not permit directors to be removed for any reason other than cause. In addition, removal of a director for cause requires the affirmative vote of at least 66 2/3% of the voting stock generally entitled to vote in the election of directors. PHOENIX Under the Canada Business Corporations Act, the shareholders of Phoenix may by ordinary resolution at a special meeting remove any director or directors from office. TRANSACTIONS WITH DIRECTORS CHRYSALIS Under the Delaware General Corporation Law, no contract or transaction between a corporation and one or more of its directors or officers, or between a corporation and any other entity of which one or more of its directors or officers are directors or officers, or in which one or more of its directors or officers have a financial interest, is void or voidable if: - the material facts regarding the director's or officer's relationship or interest and the contract or transaction are disclosed or known to the board of directors, or a committee, which authorizes the contract or transaction in good faith by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors are less than a quorum; - the material facts regarding the director's or officer's relationship or interest and the contract or transaction are disclosed or known to the stockholders entitled to vote on the contract or transaction and the contract or transaction is specifically approved in good faith by the stockholders; or - the contract or transaction is fair to the corporation as of the time it is authorized, approved or ratified by the board of directors, a committee, or the stockholders. 161 A corporation may make loans to, guarantee the obligations of or otherwise assist its officers or other employees and those of a subsidiary, including directors who are also officers or employees of the corporation or a subsidiary, if the directors determine the action may reasonably be expected to benefit the corporation. PHOENIX Under the Canada Business Corporations Act no material contract between Phoenix and one or more of its directors or officers or between Phoenix and another entity of which a director or officer of Phoenix is a director or officer or in which one or more of its directors or officers has a material interest, is void or voidable as a result of that relationship or because that director is present at or is counted to determine the presence of a quorum at a meeting of directors or committee if: - the director or officer disclosed his interest; - the contract was approved by the directors or the shareholders; and - the contract was reasonable and fair to Phoenix at the time the contract was approved. Under the Canada Business Corporations Act, Phoenix may not give financial assistance by way of loan, guarantee or otherwise to any director, officer or employee of the corporation or of an affiliated corporation or to an associate of any director, officer or employee of the corporation or an affiliated corporation where there are reasonable grounds for believing that Phoenix is, or would be after giving the financial assistance, unable to pay its liabilities as they become due. In addition, Phoenix may not give this financial assistance if the realizable value of Phoenix's assets, excluding the amount of a financial assistance in the form of a loan or in the form of assets pledged to secure a guarantee, after giving the financial assistance, would be less than the aggregate of Phoenix's liability and stated capital of all classes. DIRECTOR AND OFFICER LIABILITY AND INDEMNIFICATION CHRYSALIS The Delaware General Corporation Law allows a Delaware corporation to include a provision in its certificate of incorporation limiting or eliminating the liability of directors for monetary damages for a breach of their fiduciary duty, if the directors acted in good faith. However, Chrysalis may not provide for limitation of liability for: - breaches of duty of loyalty; - acts or omissions involving intentional misconduct or knowing violations of law; - the payment of unlawful dividends, stock repurchases or redemptions; or - any transaction in which the director received an improper personal benefit. Delaware corporations may also indemnify directors, officers and agents. The Delaware General Corporation Law mandates indemnification under limited circumstances. Indemnification against expenses incurred by an officer, director or agent in connection with a proceeding against a person for actions in his or her capacity as an officer, director or agent is mandatory to the extent that a person has been successful on the merits. Advancement of expenses is permissive only. The indemnified person must reimburse expenses if it is ultimately determined that the person is not entitled to indemnification. Under the Delaware General Corporation Law, a corporation may indemnify a director, officer or agent for fines, judgments or settlements, as well as expenses in the context of third-party actions, if that person acted in good faith and in a manner that person reasonably believed to be in or not opposed to the best interest of the corporation. In the case of a criminal action, a corporation may 162 indemnify this person if he or she had no reasonable cause to believe his or her conduct was unlawful. Indemnification in the context of derivative actions is restricted to expenses only. Further, if an officer, director or agent is adjudged liable to the corporation, payment of expenses is not allowable, unless a court deems the award of expenses appropriate. Determinations regarding permissive indemnification are to be made by the majority vote of disinterested directors, even if less than a quorum, or, if there are no disinterested directors, or if the disinterested directors so direct, by independent legal counsel or by the stockholders. The Delaware General Corporation Law expressly authorizes Delaware corporations to purchase and maintain insurance for director and officer liability. The insurance may be purchased for any officer, director or agent, even if that individual is otherwise eligible for indemnification by the corporation. The Chrysalis certificate of incorporation provides that, to the full extent permitted by law, a director will not be personally liable to the corporation or its stockholders for any act or omission in the performance of his or her duties as a director. It also provides that no amendment or repeal of this provision relating to limitation on director liability will adversely affect any right or protection of any directors existing immediately prior to the amendment or repeal. The Chrysalis certificate of incorporation also provides that the corporation will indemnify, to the fullest extent permitted by law, each person who is or was a director or officer or agreed to serve at the request of the Chrysalis Board or an officer of Chrysalis as a director or officer, of another corporation, partnership, joint venture, trust or other enterprise. PHOENIX Under the Canada Business Corporations Act, directors have fiduciary obligations to their corporation and must act in accordance with the so-called duties of "care" and "loyalty." The duty of care requires that the directors act in an informed and deliberative manner and inform themselves, prior to making a business decision, of all material information reasonably available to them. The duty of loyalty is the duty to act in good faith in a manner which the directors reasonably believe to be in the best interests of the corporation. Under the Canada Business Corporations Act, a corporation may not, in its articles, limit the liability of its directors for breaches of their fiduciary duties. However, the corporation may indemnify a director or officer, a former director or officer or a person who acts or acted at the corporation's request as a director or officer of a body corporate of which the corporation is or was a shareholder or creditor, and his or her heirs and legal representatives, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him or her because of any civil, criminal or administrative action or proceeding to which he or she is made a party by reason of being or having been a director or officer of the corporation or such body corporate, if: (1) such person acted honestly and in good faith with a view to the best interests of the corporation; and (2) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, such person had reasonable grounds for believing that his or her conduct was lawful. These people are entitled to the indemnity from the corporation if the person was substantially successful on the merits of his or her defense of the action or proceeding and fulfilled the conditions set out in (1) and (2) above. A corporation may, with the approval of a court, also indemnify a person regarding an action by or on behalf of the corporation or body corporate to procure a judgment in its favor, to which the person is made a party by reason of being or having been a director or an officer of the corporation or body corporate, if he or she fulfills the conditions set out in (1) and (2) above. Phoenix has provided for indemnification of directors and officers to the fullest extent authorized by the Canada Business Corporations Act. 163 OPPRESSION REMEDY CHRYSALIS The Delaware General Corporation Law does not provide for an oppression remedy as discussed in relation to Phoenix below. PHOENIX The Canada Business Corporations Act provides an oppression remedy that enables the court to make any order, both interim and final, to rectify the matters complained of if the court is satisfied upon application by a person that: - any act or omission of the corporation or of its affiliates effects a result; - the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner; or - the powers of the directors of the corporation or any of its affiliates are or have been exercised in a manner, that is oppressive or unfairly prejudicial to or that unfairly disregards the interest of any security holder, creditor, director or officer of the corporation. The person pursuing this remedy must be: - a present or former registered holder or beneficial owner of securities of a corporation or any of its affiliates; - a present or former officer or director of the corporation or any of its affiliates; - the director appointed under Section 260 of the Canada Business Corporations Act; or - any other person who in the discretion of the court is a proper person to make this application. Because of the breadth of the conduct which can be complained of and the scope of the court's remedial powers, the oppression remedy is very flexible and is sometimes relied upon to safeguard the interests of shareholders and other persons with a substantial interest in the corporation. Under the Canada Business Corporations Act, it is not necessary to prove that the directors of a corporation acted in bad faith in order to seek an oppression remedy. Furthermore, the court may order the corporation to pay the interim costs of a person seeking an oppression remedy, including legal fees and disbursements, but the person may be held accountable for these interim costs on final disposition of the complaint, as in the case of a derivative action. DERIVATIVE ACTION CHRYSALIS A stockholder may bring a derivative action in Delaware on behalf of the corporation. The Delaware General Corporation Law requires a stockholder to state in the complaint that he or she was a stockholder of the corporation at the time of the transaction of which he or she complains. A stockholder may not sue derivatively unless he or she has made demand on the corporation that it bring suit and the demand has been refused, unless it is shown that the demand would have been futile. PHOENIX Under the Canada Business Corporations Act, a person may apply to the applicable court for leave to bring an action in the name of and on behalf of a corporation or any subsidiary, or to intervene in an existing action to which the corporation or a subsidiary is a party, for the purpose of prosecuting, 164 defending or discontinuing the action on behalf of the corporation. Under the Canada Business Corporations Act, no action may be brought and no intervention in an action may be made unless the court is satisfied that: - the complainant has given reasonable notice to the directors of the corporation or its subsidiary of the person's intention to apply to the court and if the directors of the corporation or its subsidiary do not bring, diligently prosecute or defend or discontinue the action; - the person is acting in good faith; and - it appears to be in the interests of the corporation or its subsidiary that the action be brought, prosecuted, defended or discontinued. Under the Canada Business Corporations Act, the court in a derivative action may make any order it thinks fit. Additionally, under the Canada Business Corporations Act, a court may order a corporation or its subsidiary to pay the person's interim costs, including reasonable legal fees. ANTI-TAKEOVER PROVISIONS CHRYSALIS Section 203 of the Delaware General Corporation Law restricts the ability of an "interested stockholder" to merge with or enter into other business combinations with a corporation for a period of three years after becoming an "interested stockholder." A person is deemed to be an "interested stockholder" upon acquiring 15% or more of the outstanding voting stock of the target corporation. However, Section 203 does not apply if: - before the date the person became an interested stockholder, the board of directors of the target corporation approves either the combination or the transaction which results in the stockholder becoming an interested stockholder; - upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding shares owned by directors, officers and certain employee stock plans; or - the combination is approved by the corporation's board of directors and the holders of two-thirds of the corporation's voting stock at an annual or special meeting of the stockholders, excluding shares owned by the interested stockholder. Section 203 applies to a Delaware corporations if its stock is (1) listed on a national securities exchange, (2) designated as a Nasdaq National Market security or (3) held of record by more than 2,000 stockholders. However, Section 203 does not apply, if; - the corporation's original certificate of incorporation contains a provision expressly electing not to be governed by Section 203; - the corporation, by action of its board of directors, adopted within ninety days following the enactment of Section 203 an amendment to its by-laws expressly electing not to be governed by the statute; - the corporation, by action of a majority of its stockholders, adopts an amendment to its certificate of incorporation or by-laws expressly electing not to be governed by the statute; or - the stockholder becomes an interested stockholder inadvertently and divests itself of sufficient shares so that the stockholder ceases to be an interested stockholder. 165 This exception applies only if the stockholder would not have been an interested stockholder, but for the inadvertent acquisition, at any time within the three-year period immediately prior to a business combination between the corporation and the stockholder. A Delaware corporation may elect, by amendment to its certificate of incorporation, not to be governed by Section 203. Because none of the exceptions is applicable to Chrysalis, Section 203 applies. The Chrysalis certificate of incorporation requires the approval of the holders of 66 2/3% of Chrysalis' voting stock, other than voting stock held by an "interested stockholder," for a merger or for other business transactions with an "interested stockholder." However, stockholder approval is not required if the merger or other business transaction in approved by a majority of the "disinterested directors." An "interested stockholder" is defined generally as a holder of 15% or more of Chrysalis' outstanding stock. A "disinterested director" is a director who is not an "interested stockholder" or affiliated with an "interested stockholder" and who was a member of the Chrysalis Board prior to the time the "interested stockholder" became an "interested stockholder" or any member of the Board of Directors who is a successor to a "disinterested director" and whose nomination or election to the Board of Directors is recommended or approved by a majority of the "disinterested directors." The "disinterested directors" of Chrysalis have approved the transactions contemplated by the merger agreement for purposes of this provision of the Chrysalis certificate of incorporation. PHOENIX The Canada Business Corporations Act does not contain a comparable provision to Section 203 with respect to business combinations. However, policies of Canadian securities regulatory authorities, including the Ontario Securities Commission and the Commission des valeurs mobilieres du Quebec contain requirements in connection with related party transactions. A related party transaction means, any transaction by which an issuer directly or indirectly: - acquires or transfers an asset; - acquires or issues treasury securities; or - assumes or transfers a liability from or to, as the case may be, a related party by any means in any one or any combination of transactions. "Related party" is defined in the Ontario Securities Commission Policy 9.1 and Commission des valeurs mobilieres du Quebec Policy Statement Q-27 to include directors, senior officers and holders of at least 10% of the voting securities of the issuer. Policy 9.1 and Policy Statement Q-27 require: - more detailed disclosure in the proxy material sent to security holders in connection with a related party transaction; - subject to exceptions, the preparation of a formal valuation of the subject matter of the related party transaction and any related non-cash consideration; and - the inclusion of a summary of the valuation in the proxy material. Policy 9.1 and Policy Statement Q-27 also require, subject to exceptions, that the minority shareholders of the issuer separately approve the transaction, by either a simple majority or two-thirds of the votes cast, depending on the circumstances. 166 VOLUNTARY DISSOLUTION CHRYSALIS Under the Delaware General Corporation Law, a dissolution of a corporation requires the written consent of stockholders holding 100% of the total voting power of the corporation. However, the approval by 100% of the stockholders is not required if the board of directors approve dissolution. If the dissolution is initiated by the board of directors, it need only be approved by a majority of the outstanding stock of the corporation entitled to vote on the dissolution. PHOENIX Under the Canada Business Corporations Act, the directors may propose or a shareholder who is entitled to vote at an annual meeting of shareholders of Phoenix may make a proposal for the voluntary liquidation and dissolution of Phoenix. A voluntary dissolution of Phoenix would require approval by special resolution of the holders of each class of shares, whether or not they are otherwise entitled to vote, of Phoenix. A special resolution is a resolution passed at a meeting by not less than two-thirds of the votes cast by the shareholders who voted in respect of the resolution. VOTE ON EXTRAORDINARY CORPORATE TRANSACTIONS CHRYSALIS Under the Delaware General Corporation Law, mergers or consolidations require the approval of the holders of a majority of the outstanding stock of the corporation entitled to vote on the transaction unless otherwise required by its certificate of incorporation. Approval is not required by the holders of a corporation surviving a merger if: - the merger will not result in the issuance of more than 20% of the corporation's common shares outstanding immediately prior to the merger; - each share of stock of the corporation outstanding prior to the merger is to be an identical share of stock of the surviving corporation following the merger; and - the merger agreement does not amend in any respect the survivor's certificate of incorporation. In addition, stockholder approval is not required for either the acquired or surviving corporation if the corporation surviving the merger is a 90% parent of the other corporation. However, mergers or consolidations with interested stockholders may require a super-majority stockholder vote. See "--Anti-Takeover Provisions." PHOENIX Under the Canada Business Corporations Act, extraordinary corporate actions require authorization by special resolution or by the written consent of each shareholder entitled to vote. These extraordinary corporate actions include amalgamations, continuances, sales of substantially all the assets of a corporation other than in the ordinary course of business, amendments to the articles of incorporation, liquidations and dissolutions. 167 LEGAL OPINIONS McCarthy Tetrault, a general partnership, Montreal, Quebec, Canada, will pass upon the legality of Phoenix common shares to be issued in the merger. Pepper Hamilton LLP, counsel to Phoenix, has given its opinion that, based on factual representations and covenants made by Phoenix and Chrysalis, the merger will be a nontaxable reorganization under the U.S. Internal Revenue Code. EXPERTS The consolidated financial statements of Chrysalis as of December 31, 1997 and 1998 and for each of the years in the three year period ended December 31, 1998 have been audited by KPMG LLP, independent certified public accountants, as stated in their report, which is included elsewhere in this proxy statement/prospectus and have been so included in reliance upon the report of KPMG LLP given upon their authority as experts in accounting and auditing. The report of KPMG LLP covering the December 31, 1998 consolidated financial statements of Chrysalis contains an explanatory paragraph that states that Chrysalis' recurring losses from operations, net working capital deficiency and default of some of its debt covenants raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The financial statements of Phoenix as of August 31, 1997 and 1998 and for each of the years in the three-year period ended August 31, 1998, and of IBRD-Rostrum Global, Inc. as of and for the year ended December 31, 1997 have been audited by Ernst & Young LLP, independent auditors, as stated in their report, which is included elsewhere in this proxy statement/prospectus, and have been so included in reliance upon the report of Ernst & Young LLP given upon their authority as experts in accounting and auditing. The financial statements of IBRD-Rostrum Global, Inc. as of and for the years ended December 31, 1996 and 1995 have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report, which is included elsewhere in this proxy statement/prospectus, and has been so included in reliance upon the report of Deloitte & Touche LLP given their authority as experts in accounting and auditing. ANNUAL STOCKHOLDERS MEETING Chrysalis has generally held an annual stockholders' meeting in June of each year. Chrysalis typically circulated an annual report and a proxy statement to its stockholders in late April. As a result of the pending merger, Chrysalis does not currently intend to hold an annual stockholders' meeting in 1999. However, if the merger is not consummated, Chrysalis will hold an annual stockholders' meeting in June 1999. Proposals of stockholders intended to be included in Chrysalis's proxy statement for the 1999 annual meeting under Rule 14a-8 under the Exchange Act had to be received by Chrysalis no later than January 1, 1999 to be considered for inclusion in Chrysalis' proxy statement and proxy for the 1999 annual meeting. Any proposal of stockholders submitted outside the processes of Rule 14a-8 of the Exchange Act in connection with the 1999 annual meeting must be received by Chrysalis by March 21, 1999 or the proposal will be considered untimely. Chrysalis' proxy for the 1999 annual meeting will give discretionary authority to the proxy holders to vote with respect to all proposals outside the processes of Rule 14a-8 and received after March 21, 1999. In addition, any Chrysalis stockholder wishing to nominate a person for election as a director at the 1999 annual meeting must also comply with the notice and other requirements contained in the Chrysalis certificate of incorporation and Chrysalis by-laws. Stockholders should address proposals and notices and requests for copies of the Chrysalis certificate of incorporation and Chrysalis by-laws to the Secretary, Chrysalis International Corporation, 575 Route 28, Raritan, New Jersey, 08869. Stockholders should send notices and 168 proposals by certified mail, return receipt requested to eliminate controversy as to the date of receipt by Chrysalis. WHERE YOU CAN FIND MORE INFORMATION Chrysalis files annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission. In addition, Phoenix files similar reports with the Canadian securities authorities. You may read and copy any reports, statements or other information that the companies file with the Securities and Exchange Commission at the Securities and Exchange Commission's public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the public reference rooms. These filings are also available to the public from commercial document retrieval services and at the Internet web site maintained by the Securities and Exchange Commission at "http://www.sec.gov." You are also invited to read and copy any reports, statements or other information that Phoenix files with the any of the Canadian securities authorities at its public reference rooms. The Commission des valeurs mobilieres du Quebec public reference room is located in Montreal, Quebec. These Phoenix filings are also electronically available to the public from the Canadian system for electronic document analysis and retrieval, the Canadian equivalent of the Securities and Exchange Commission's electronic document gathering and retrieval system at "http://www.sedar.com". Phoenix's filings after the merger will not necessarily be available on the Securities and Exchange Commission's website. However, the filings will be available on the Canadian equivalent. After the merger, Phoenix will file with the Securities and Exchange Commission and continue to furnish to its shareholders the same periodic reports that are currently furnished to Phoenix shareholders as required by, and in compliance with, Canadian law. Not all of Phoenix's filings will be electronically available through EDGAR, but these filings will be available through SEDAR. Phoenix filed a Registration Statement on Form F-4 to register with the Securities and Exchange Commission Phoenix common shares to be issued to Chrysalis stockholders in the merger. This proxy statement/prospectus is a part of the Form F-4 and constitutes a prospectus of Phoenix. As allowed by Securities and Exchange Commission rules, this proxy statement/prospectus does not contain all the information you can find in Phoenix's Registration Statement or the exhibits to the Registration Statement. Phoenix has supplied all information contained in this proxy statement/prospectus relating to Phoenix. Chrysalis has supplied all information contained in this proxy statement/prospectus relating to Chrysalis. You should rely only on the information contained in this proxy statement/prospectus. We have not authorized anyone to provide you with information that is different from what is contained in this proxy statement/prospectus. This proxy statement/prospectus is dated April 9, 1999. You should not assume that the information contained in this proxy statement/ prospectus is accurate as of any date other than that date. Neither the mailing of this proxy statement/prospectus to stockholders nor the issuance of Phoenix common shares in the merger creates any implication to the contrary. 169 INDEX TO FINANCIAL STATEMENTS
PAGE --------- PHOENIX INTERNATIONAL LIFE SCIENCES INC. Management's Responsibility For Consolidated Financial Reporting........................................... F-2 Report of Independent Chartered Accountants (Ernst & Young LLP)............................................ F-3 Consolidated Balance Sheet as at August 31, 1997 and 1998.................................................. F-4 Consolidated Statements of Retained Earnings for the Years Ended August 31, 1996, 1997 and 1998............ F-5 Consolidated Statements of Income (Loss) for the Years Ended August 31, 1996, 1997 and 1998..................................................................................................... F-5 Consolidated Statements of Changes in Financial Position for the Years Ended August 31, 1996, 1997 and 1998..................................................................................................... F-6 Notes to Consolidated Financial Statements................................................................. F-7 Unaudited Consolidated Statements of Income in Accordance with Canadian GAAP for the First Quarter ended November 30, 1998 and 1997............................................................................... F-35 Unaudited Consolidated Statements of Retained Earnings in Accordance with Canadian GAAP for the three months ended November 30, 1998 and 1997.................................................................. F-35 Unaudited Consolidated Balance Sheets in Accordance with Canadian GAAP as at November 30, 1998 and August 31, 1998................................................................................................. F-36 Unaudited Consolidated Statements of Cash Flow in Accordance with Canadian GAAP for the three months ended November 30, 1998 and 1997............................................................................... F-37 Unaudited Consolidated Statements of Income and Comprehensive Income in Accordance with U.S. GAAP, for the First Quarter ended November 30, 1998 and 1997........................................................... F-38 Notes to Unaudited Consolidated Financial Statements....................................................... F-39 IBRD-ROSTRUM GLOBAL, INC. Report of Independent Auditors (Ernst & Young LLP)......................................................... F-41 Consolidated Balance Sheet as of December 31, 1997......................................................... F-42 Consolidated Statement of Operations for the Year Ended December 31, 1997.................................. F-43 Consolidated Statement of Stockholders' Equity for the Year Ended December 31, 1997........................ F-44 Consolidated Statement of Cash Flows for the Year Ended December 31, 1997.................................. F-45 Notes to Consolidated Financial Statements................................................................. F-46 Independent Auditors' Report (Deloitte & Touche LLP)....................................................... F-53 Consolidated Balance Sheets as of December 31, 1996 and 1995............................................... F-54 Consolidated Statements of Operations for the Years Ended December 31, 1996 and 1995....................... F-55 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996 and 1995............. F-56 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996 and 1995....................... F-57 Notes to Consolidated Financial Statements................................................................. F-59 Unaudited Consolidated Statement of Operations for the 37-Day Period Ended February 6, 1998................ F-66 Unaudited Consolidated Statement of Stockholders' Equity for the 37-Day Period Ended February 6, 1998...... F-67 Unaudited Consolidated Statement of Cash Flows for the 37-Day Period Ended February 6, 1998................ F-68 Notes to Unaudited Interim Consolidated Financial Statements............................................... F-69 CHRYSALIS INTERNATIONAL CORPORATION Independent Auditors' Report (KPMG LLP).................................................................... F-70 Consolidated Balance Sheets as of December 31, 1998 and 1997............................................... F-71 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996..................................................................................................... F-72 Consolidated Statements of Stockholders' Equity and Comprehensive Loss for the Years Ended December 31, 1998, 1997 and 1996...................................................................................... F-73 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996..................................................................................................... F-74 Notes to Consolidated Financial Statements................................................................. F-75
F-1 MANAGEMENT'S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL REPORTING The consolidated financial statements of Phoenix International Life Sciences Inc. are the responsibility of management and have been approved by the Board of Directors. This responsibility includes the selection of appropriate accounting principles and the exercise of a careful judgment in establishing reasonable estimates in accordance with generally accepted accounting principles appropriate in the circumstances. Financial information shown elsewhere in this annual report is consistent with that contained in the consolidated financial statements. Management of Phoenix International Life Sciences Inc. and its subsidiaries has developed and maintains accounting systems and internal controls designed to provide reasonable assurance that assets are safeguarded from loss or unauthorized use, and that the financial records are reliable for preparing the consolidated financial statements. The Board of Directors carries out its responsibility with regards to the consolidated financial statements primarily through its Audit Committee. The Audit Committee meets periodically with the external auditors and management to discuss accounting policies and practices, internal control systems, financial reporting issues, the scope of the annual audit and other matters. The management's selection of external auditors is recommended to the Board of Directors by this Committee. The external auditors have direct access to the Committee to discuss the results of their audit and any recommendations they have for improvements in internal controls, the quality of financial reporting and any other matters of interest. The Committee reviews the Company's quarterly and annual consolidated financial statements before recommending them to the Board of Directors for approval. It also reviews the Annual Information Form before it is filed with securities regulators and stock exchanges. These consolidated financial statements have been audited by Ernst & Young, Chartered Accountants on behalf of the Directors and their report stating the scope of their audit examination and their opinion on the consolidated financial statements is presented hereafter. Dr. John Hooper Jean-Yves Caloz, C.A. Chairman and Chief Executive Officer Senior Vice-President International Finance and Acquisitions
December 18, 1998 F-2 TO THE DIRECTORS OF PHOENIX INTERNATIONAL LIFE SCIENCES INC. We have audited the consolidated balance sheets of PHOENIX INTERNATIONAL LIFE SCIENCES INC. as at August 31, 1998 and 1997 and the consolidated statements of income (loss), retained earnings and changes in financial position for each of the years in the three year period ended August 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance 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. In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at August 31, 1998 and 1997 and the results of its operations and the changes in its financial position for each of the years in the three-year period ended August 31, 1998 in accordance with accounting principles generally accepted in Canada. ERNST & YOUNG LLP Chartered Accountants Montreal, Canada, October 9, 1998 [Except for Note 18 which is as of December 18, 1998] F-3 CONSOLIDATED BALANCE SHEETS
1998 1997 AS AT AUGUST 31, (IN THOUSANDS OF CANADIAN DOLLARS) $ $ - -------------------------------------------------------------------------------------------- --------- --------- ASSETS [NOTE 8] CURRENT Cash...................................................................................... 17,009 2,530 Marketable securities [note 5]............................................................ 2,000 9,390 Accounts receivable [note 4].............................................................. 47,712 26,080 Investment tax credits recoverable [note 11].............................................. 3,362 3,416 Costs and estimated profit in excess of progress billings on contracts in progress........ 27,847 15,105 Prepaid expenses and other current assets................................................. 5,924 1,060 Future income taxes [note 11]............................................................. 922 -- --------- --------- TOTAL CURRENT ASSETS...................................................................... 104,776 57,581 --------- --------- Capital assets [note 6]................................................................... 56,638 46,745 Goodwill and other long-term assets [note 7].............................................. 110,056 56,532 --------- --------- 271,470 160,858 --------- --------- --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT Bank indebtedness [note 8]................................................................ 831 693 Accounts payable and accrued liabilities [note 14]........................................ 52,041 22,467 Current portion of long-term debt and capital lease obligations [note 8].................. 7,080 6,921 Progress billings in excess of costs and estimated profit on contracts in progress [note 2]....................................................................... 34,882 11,002 --------- --------- TOTAL CURRENT LIABILITIES................................................................. 94,834 41,083 --------- --------- Long-term debt and capital lease obligations [note 8]..................................... 42,440 4,058 Other long-term liabilities............................................................... 3,718 3,128 Future income taxes [note 11]............................................................. 525 324 --------- --------- 141,517 48,593 --------- --------- --------- --------- SHAREHOLDERS' EQUITY Capital stock [note 9].................................................................... 110,559 103,073 Cumulative translation adjustment......................................................... 1,135 -- Retained earnings......................................................................... 18,259 9,192 --------- --------- TOTAL SHAREHOLDERS' EQUITY................................................................ 129,953 112,265 --------- --------- 271,470 160,858 --------- --------- --------- ---------
See accompanying notes On behalf of the Board: Claude Forget, Robert Raich, Director Director
F-4 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
1998 1997 1996 YEARS ENDED AUGUST 31 (IN THOUSANDS OF CANADIAN DOLLARS) $ $ $ - -------------------------------------------------------------------------------------- --------- --------- --------- RETAINED EARNINGS, BEGINNING OF YEAR.................................................. 9,192 6,843 13,476 Net income (loss)..................................................................... 9,067 2,349 (5,361) Share issue costs..................................................................... -- -- (1,272) --------- --------- --------- Retained earnings, end of year........................................................ 18,259 9,192 6,843 --------- --------- --------- --------- --------- ---------
See accompanying notes CONSOLIDATED STATEMENTS OF INCOME (LOSS)
1998 1997 1996 YEARS ENDED AUGUST 31 (IN THOUSANDS OF CANADIAN DOLLARS EXCEPT PER SHARE AMOUNTS) $ $ $ - ------------------------------------------------------------------------------------ --------- --------- --------- REVENUES............................................................................ 218,360 86,736 64,182 Reimbursed costs.................................................................... 47,122 4,259 1,100 --------- --------- --------- NET REVENUES........................................................................ 171,238 82,477 63,082 Direct costs--net of refundable tax credits [note 11]............................... 99,971 52,992 43,911 --------- --------- --------- 71,267 29,485 19,171 EXPENSES--NET OF REFUNDABLE TAX CREDITS [NOTE 11] Selling, general and administrative................................................. 51,855 22,853 19,782 Internal research and development................................................... 3,698 3,328 3,726 Interest on long-term debt and capital lease obligations............................ 3,323 659 981 Amortization of goodwill............................................................ 2,164 204 57 Write-off of deferred start-up costs [note 7]....................................... 932 -- -- Non-refundable tax credits [note 11]................................................ (5,000) (2,400) -- --------- --------- --------- 14,295 4,841 (5,375) --------- --------- --------- Interest and other income........................................................... 1,282 347 194 Share in earnings of equity accounted investees..................................... 114 -- -- --------- --------- --------- Income (loss) before income taxes................................................... 15,691 5,188 (5,181) --------- --------- --------- Provision for income taxes [note 11]................................................ 6,624 2,839 180 --------- --------- --------- NET INCOME (LOSS) FOR THE YEAR...................................................... 9,067 2,349 (5,361) --------- --------- --------- BASIC AND FULLY DILUTED EARNINGS (LOSS) PER SHARE [NOTE 9].......................... 0.37 0.12 (0.29) --------- --------- ---------
See accompanying notes F-5 CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
1998 1997 1996 FOR THE YEARS ENDED AUGUST 31, (IN THOUSANDS OF CANADIAN DOLLARS) $ $ $ - ---------------------------------------------------------------------------------- --------- --------- --------- OPERATING ACTIVITIES Net income (loss)................................................................. 9,067 2,349 (5,361) --------- --------- --------- Items not affecting cash Amortization of capital assets.................................................. 9,375 6,929 5,579 Amortization of other long-term assets.......................................... 2,815 950 709 Write off of deferred start-up costs............................................ 932 -- -- Share of earnings in equity accounted investee.................................. (114) -- -- Future income taxes............................................................. 526 1,379 -- Nonrefundable tax credits....................................................... (5,000) (2,400) -- Change in operating assets and liabilities Accounts receivable............................................................. (13,061) 3,651 (5,368) Investment tax credits recoverable.............................................. 3,807 (610) 910 Costs and estimated profits in excess of progress billings on contracts in process....................................................................... (6,727) 5,192 (1,390) Prepaid expenses and other current assets....................................... (1,021) 218 (113) Accounts payable and accrued liabilities........................................ 14,755 (8,844) (1,419) Progress billings in excess of costs and estimated profit on contracts in process....................................................................... (493) (1,097) 2,844 --------- --------- --------- CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES................................... 14,861 7,717 (3,609) --------- --------- --------- --------- --------- --------- INVESTING ACTIVITIES Business acquisitions [note 3].................................................... (35,439) (49,348) -- Capital asset additions........................................................... (13,224) (6,240) (18,642) Proceeds from disposal of marketable securities................................... 7,390 -- -- Decrease in loans receivable...................................................... 309 -- -- Other long-term assets............................................................ 91 (276) (1,696) --------- --------- --------- Cash used in investing activities................................................. (40,873) (55,864) (20,338) --------- --------- --------- --------- --------- --------- FINANCING ACTIVITIES Issue of common shares............................................................ 7,486 48,668 28,529 Share issue costs................................................................. -- -- (1,272) Repayment of long-term debt and capital lease obligations......................... (3,817) (1,933) (10,916) Other deferred credits and long-term liabilities.................................. 590 (28) 2,452 Proceeds of long-term debt and capital lease obligations.......................... 44,132 -- 10,199 Repayment of debentures........................................................... (5,250) -- -- --------- --------- --------- Cash provided by (used in) financing activities................................... 43,141 46,707 28,992 --------- --------- --------- Effect of exchange rate changes on cash........................................... (2,788) -- -- --------- --------- --------- Increase (decrease) in cash position during the year.............................. 14,341 (1,440) 5,045 --------- --------- --------- Cash position, beginning of period................................................ 1,837 3,277 (1,768) --------- --------- --------- Cash position, end of period...................................................... 16,178 1,837 3,277 --------- --------- --------- Cash position is comprised of: Cash.............................................................................. 17,009 2,530 3,277 Bank indebtedness................................................................. (831) (693) -- --------- --------- --------- 16,178 1,837 3,277 --------- --------- ---------
See accompanying notes F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] The consolidated financial statements of the Company have been prepared by management in accordance with accounting principles generally accepted in Canada ["Canadian GAAP"]. The consolidated financial statements have, in management's opinion, been properly prepared using careful judgment within reasonable limits of materiality and within the framework of the accounting policies summarized in note 2. As further described under note 15, the accounting policies followed by the Company differ in certain respects from those that would have been followed had these consolidated financial statements been prepared in conformity with accounting principles generally accepted in the United States ["U.S. GAAP"]. 1. DESCRIPTION OF BUSINESS AND BASIS OF FINANCIAL STATEMENT PRESENTATION The Company is a multiservice contract research organization which provides bioanalytical research, clinical studies as well as regulatory affairs services to pharmaceutical and biotechnology companies, the majority of which are located in the United States. The remaining customers are located in Europe and Canada. These consolidated financial statements include the accounts of Phoenix International Life Sciences Inc. and the following significant consolidated subsidiaries:
1998 1997 1996 OWNERSHIP AS AT AUGUST 31 $ $ $ - ------------------------------------------------------------------- --------- --------- --------- Phoenix International Life Sciences (U.S.) Inc. "Phoenix U.S."].................................................. 100% 100% 100% Phoenix International Life Sciences (IBRD) Inc. "[IBRD"]........... 100% -- -- Phoenix International Life Sciences (ICCR) Inc. ["ICCR"]........... 100% -- -- I.T.E.M. Holding S.A. ["I.T.E.M."]................................. 100% 100% -- Phoenix International U.K.--(IBRD-Rostrum Global) Ltd. "Phoenix U.K."]........................................................... 100% -- -- Anawa Holding AG ["Anawa"]......................................... 100% -- -- --------- --------- --------- --------- --------- ---------
2. SIGNIFICANT ACCOUNTING POLICIES INCOME TAXES Effective September 1, 1997, the Company changed its method of accounting for income taxes from the deferral method to the liability method of tax allocation with the early adoption of Section 3465 of the Canadian Institute of Chartered Accountants' Handbook "Accounting for Income Taxes". The Company has applied the new recommendations retroactively. This change had no material impact on opening retained earnings as at September 1, 1995 or on any of the financial statements presented. Under the liability method, future income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using substantively enacted tax rates and laws that are expected to be in effect in the periods in which the future tax assets or liabilities are expected to be realized or settled. A valuation allowance is provided to the extent that it is more likely than not that future income tax assets will not be realized. F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION Contract revenues are recognized on a percentage of completion basis determined by reference to work performed. Customer advances and billings in excess of costs and estimated profit on contracts in progress are shown as liabilities. Losses, if any, are provided for in full as soon as they are anticipated. The percentage of completion method necessarily requires the use of estimates to determine the recorded amount of revenues and contracts in progress. Given this estimation process, it is reasonably possible that changes in future conditions could require a change in the recognized amount of revenue and contracts in progress. CAPITAL ASSETS Capital assets are recorded at cost, net of investment tax credits. Amortization is provided on a straight-line basis over their estimated useful lives as follows:
YEARS --------------------------- Buildings........................................................ 20-25 Analytical research equipment.................................... 6-10 Clinical research equipment...................................... 10 Office equipment, computers and software......................... 4-10 Leasehold improvements........................................... Remaining term of lease
Costs relating primarily to the development of new software applications which are considered management information systems are deferred until the software is ready for its intended use. Amortization commences with commercial use using the straight-line method over 5 years. OTHER LONG-TERM ASSETS Goodwill and intellectual property are recorded in the accounts at cost and are amortized on a straight-line basis over the expected useful lives of such assets. The amortization periods are as follows:
YEARS --------- Goodwill.............................................................................. 30-40 Intellectual property................................................................. 5
The unamortized balances of goodwill and intellectual property are periodically reviewed to determine whether deferral criteria continue to be satisfied by reference to expected future undiscounted cash flows over the remaining amortization period. Should the deferral criteria cease to be satisfied, the unamortized portion would be charged to income during the period. INTERCORPORATE INVESTMENTS Investments over which the Company exercises significant influence are accounted for using the equity method. F-8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVESTMENT TAX CREDITS Investment tax credits are accounted for under the cost reduction method and are recorded as reductions of related capital assets or operating expenses. Such credits are recognized in the accounts when earned and when there is reasonable assurance as to their realization. OTHER LONG-TERM LIABILITIES Other long-term liabilities consist primarily of leasehold inducements and are amortized to income on the same basis as the related capital assets or expense items. FOREIGN CURRENCY TRANSLATION [A] TRANSLATION OF FINANCIAL STATEMENTS OF FOREIGN SUBSIDIARIES As at August 31, 1998, the financial statements of all foreign subsidiaries are self-sustaining and are translated using the current rate method, whereby all assets and liabilities are translated at year-end exchange rates and revenues and expenses at the actual exchange rates during the year. Adjustments arising from the translation of these financial statements are included as a separate component of shareholders' equity. In February 1998, given a change in economic circumstances following the acquisition of IBRD Rostrum Global Ltd., the Company changed the method of translating the financial statements of Phoenix U.S. from the temporal to the current rate method. The change in functional currency of this subsidiary to the U.S. dollar has been applied prospectively. Prior to the change, Phoenix U.S. was considered an integrated subsidiary whose functional currency was the Canadian dollar. As such, monetary assets and liabilities were translated at the current exchange rate at each period end and non-monetary assets were translated at their historical exchange rates. Exchange gains or losses arising from the translation of the foreign currency balances were included in net income. [B] FOREIGN CURRENCY TRANSACTIONS Translation gains and losses are included in income except for unrealized gains or losses arising from the translation of long-term monetary assets and liabilities, which are deferred and amortized over the remaining lives of the related items. Realized gains and losses on foreign exchange forward contracts that hedge anticipated revenues are included in earnings when that revenue is recognized. F-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) [C] FOREIGN EXCHANGE RATES The relevant foreign exchange rates used in the preparation of these financial statements are as follows, expressed as the foreign currency equivalent of one Canadian dollar:
1998 1997 1996 FOR THE YEAR ENDED AUGUST 31, YEAR-END EXCHANGE RATES $ $ $ - ------------------------------------------------------------ ---------- ---------- --------- U.S. dollar................................................. 0.6376 0.7205 0.7330 French franc................................................ 3.7495 4.3840 N/A Spanish peseta.............................................. 94.9668 109.8757 N/A British pound............................................... 0.3795 N/A N/A Swiss franc................................................. 0.9168 N/A N/A ---------- ---------- ---------
1998 1997 1996 FOR THE YEAR ENDED AUGUST 31, AVERAGE EXCHANGE RATES $ $ $ - ------------------------------------------------------------ ---------- ---------- --------- US dollar................................................... 0.6950 0.7307 0.7335 French franc................................................ 4.1684 4.0681 N/A Spanish peseta.............................................. 105.3741 101.5993 N/A British pound............................................... 0.4157 N/A N/A Swiss franc................................................. 1.0075 N/A N/A ---------- ---------- ---------
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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. EARNINGS PER SHARE Basic earnings per share are calculated using the weighted average number of voting shares outstanding during the period. Fully diluted earnings per share are calculated taking into consideration the dilutive effect of the potential exercise of stock options. 3. BUSINESS ACQUISITIONS [A] IBRD ROSTRUM GLOBAL LTD. Effective February 7, 1998, the Company acquired all of the issued and outstanding share capital of IBRD Rostrum Global Ltd., a privately held contract research organization with operations in the United States and Europe. The IBRD Rostrum Global Ltd. operations are carried out through IBRD, ICCR, Phoenix U.K. and Kansas City Analytical Services ("KCAS") a company owned 44% by IBRD Rostrum Global Ltd. at the acquisition date. The acquisition has been accounted for using the purchase method and, accordingly, the purchase price was allocated to the acquired assets and liabilities based on their estimated fair value as at the acquisition date. The excess of the purchase price over the fair value of the identifiable net assets acquired has been recorded as goodwill and is being amortized on a straight-line basis over a period of 40 years. F-10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 3. BUSINESS ACQUISITIONS (CONTINUED) The results of operations related to this acquisition have been included in these consolidated financial statements from the effective date of acquisition. Details of the acquired assets and liabilities at fair value are as follows:
$ --------- Cash................................................................................ 13,713 Capital assets...................................................................... 3,230 Other long-term assets.............................................................. 2,507 Current liabilities net of other current assets..................................... (20,763) --------- Long-term debt...................................................................... (232) --------- IDENTIFIABLE LIABILITIES IN EXCESS OF IDENTIFIABLE ASSETS........................... (1,545) Consideration paid Cash consideration.................................................................. 41,818 Acquisition costs................................................................... 1,958 Total consideration paid............................................................ 43,776 --------- Goodwill on acquisition............................................................. 45,321 ---------
In connection with the above acquisition, IBRD, ICCR and Phoenix U.K. undertook a rationalization program which included the following: a) the involuntary termination of certain senior executives as well as certain operational personnel of the acquired business whose services were no longer required. b) the closing of certain extraneous facilities relating to the acquired business. The related restructuring costs approximated $4,599,000 and have been included in the above purchase price allocation. The disposition of these amounts to August 31, 1998 can be summarized as follows:
$ --------- Total restructuring costs capitalized in the purchase price allocation at February 6, 1998................................................................................ 4,599 Amount of restructuring costs for the period February 6 to August 31, 1998............ 2,016 --------- Remaining liability included on the August 31, 1998 consolidated balance sheet........ 2,583 ---------
Should any adjustments arise from pre-acquisition contingencies identified after August 31, 1998, they will be credited or charged to income in the period in which they were identified. The purchase and sale agreement also provides for additional consideration to be paid in the event that certain earnings targets are met. The additional consideration is based on an earnings measure for the 12 month period ended December 31, 1998. As the amount of additional consideration is not determinable until the end of this contingency period, no liability has been recorded in these financial statements. The cost of the purchase will be increased by the amount of such additional consideration in the period during which the amount becomes determinable. Note 10[a] provides a definition of the earnings measure which will be used to determine the contingent payment. F-11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 3. BUSINESS ACQUISITIONS (CONTINUED) [B] ANAWA HOLDING, AG Effective April 30, 1998, the Company acquired all of the issued and outstanding shares of Anawa, a privately held Swiss contract research organization in exchange for 525,651 common shares of the Company. The acquisition has been accounted for using the purchase method and, accordingly, the purchase price was allocated to the acquired assets and liabilities based on their estimated fair value as at the acquisition date. The excess of the purchase price over the fair value of the identifiable net assets acquired has been recorded as goodwill and is being amortized on a straight-line basis over a period of 30 years. The results of operations related to this acquisition have been included in these consolidated financial statements from the effective date of acquisition. Details of the acquired assets and liabilities at fair value are as follows:
$ --------- Cash.................................................................................. 558 Other current assets net of current liabilities....................................... 603 Capital and other long-term assets.................................................... 1,169 Long-term debt........................................................................ (207) --------- IDENTIFIABLE ASSETS IN EXCESS OF IDENTIFIABLE LIABILITIES............................. 2,123 --------- CONSIDERATION PAID 525,651 common shares of the Company.................................................. 7,243 Acquisition costs..................................................................... 368 --------- TOTAL CONSIDERATION PAID.............................................................. 7,611 --------- GOODWILL ON ACQUISITION............................................................... 5,488 --------- ---------
For the purpose of measuring the consideration paid, the common shares of the Company were valued at $13.78 each, this being the average value of the common shares for the five trading days before and the five trading days after the transaction on the Toronto and Montreal Stock Exchanges. [C] I.T.E.M. HOLDING SA Effective August 7, 1997, the Company acquired all of the issued and outstanding shares of I.T.E.M., a privately held European contract research organization in exchange for 4,690,142 common shares of the Company. The acquisition was accounted for using the purchase method and, accordingly, the purchase price was allocated to the acquired assets and liabilities based on their estimated fair value as at the acquisition date. The excess of the purchase price over the fair value of the identifiable net assets acquired has been recorded as goodwill and is being amortized on a straight-line basis over a period of 40 years. The results of operations related to this acquisition have been included in these consolidated financial statements from the effective date of acquisition. F-12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 3. BUSINESS ACQUISITIONS (CONTINUED) Details of the acquired assets and liabilities at fair value are as follows:
$ --------- Cash................................................................................. 1,577 Capital assets and other long-term assets............................................ 1,597 Other long-term liabilities net of other long-term assets............................ (134) Short-term liabilities net of other short-term assets................................ (2,002) Long-term debt....................................................................... (1,702) --------- IDENTIFIABLE LIABILITIES IN EXCESS OF IDENTIFIABLE ASSETS............................ (664) --------- CONSIDERATION PAID 4,690,142 common shares of the Company............................................... 48,496 Acquisition costs.................................................................... 2,312 --------- TOTAL CONSIDERATION PAID............................................................. 50,808 --------- GOODWILL ON ACQUISITION.............................................................. 51,472 ---------
For the purpose of measuring the consideration paid, the common shares of the Company were valued at $10.34 each, this being the average value of the common shares for the five trading days before and the five trading days after the transaction on the Toronto and Montreal Stock Exchanges. [D] OTHER In addition to the above acquisitions, the Company has completed other acquisitions during the three year period ended August 31, 1998 which are immaterial to the consolidated financial statements. 4. ACCOUNTS RECEIVABLE
1998 1997 YEARS ENDED AUGUST 31, (IN THOUSANDS OF CANADIAN DOLLARS) $ $ - --------------------------------------------------------------------------- --------- --------- Trade...................................................................... 46,512 24,240 Due from related parties................................................... 1,105 1,612 Other...................................................................... 789 428 Allowance for doubtful accounts............................................ (694) (200) --------- --------- 47,712 26,080 --------- --------- --------- ---------
Amounts due from related parties include amounts due from employees, directors, shareholders and affiliated companies. F-13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 5. MARKETABLE SECURITIES
1998 1997 YEARS ENDED AUGUST 31, $ $ - ----------------------------------------------------------------------------- --------- --------- Money market funds and shares of publicly traded corporations denominated in Spanish pesetas............................................................ 528 330 Money market funds denominated in French francs.............................. 1,472 3,838 Corporate bond, which matured in September 1997.............................. -- 5,222 --------- --------- 2,000 9,390 --------- --------- --------- ---------
The cost of the above marketable securities approximates their market value. 6. CAPITAL ASSETS
ACCUMULATED GROSS AMORTIZATION NET $ $ $ --------- ------------- --------- AUGUST 31, 1998 Analytical research equipment............................... 22,620 11,248 11,372 Land and buildings.......................................... 15,539 1,454 14,085 Clinical research equipment................................. 3,568 1,508 2,060 Office equipment, computers and software.................... 34,482 18,777 15,705 Leasehold improvements...................................... 15,845 4,776 11,069 Assets under capital leases................................. 6,759 4,412 2,347 --------- ------ --------- 98,813 42,175 56,638 --------- ------ --------- --------- ------ --------- AUGUST 31, 1997 Analytical research equipment............................... 18,022 7,531 10,491 Land and buildings.......................................... 11,232 817 10,415 Clinical research equipment................................. 2,003 838 1,165 Office equipment, computers and software.................... 19,825 7,681 12,144 Leasehold improvements...................................... 12,443 2,018 10,425 Assets under capital leases................................. 5,766 3,661 2,105 --------- ------ --------- 69,291 22,546 46,745 --------- ------ --------- --------- ------ ---------
INTERNALLY DEVELOPED SOFTWARE As at August 31, 1998, the Company had deferred approximately $549,000 ($210,000 and nil as at August 31, 1997 and 1996 respectively) of internally developed software costs which are included as part of capital assets. F-14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 7. GOODWILL AND OTHER LONG-TERM ASSETS
1998 1997 AS AT AUGUST 31 $ $ - ------------------------------------------------------------------------- --------- --------- Goodwill [note 7a]....................................................... 104,796 52,941 Investment in KCAS [note 7b]............................................. 2,760 -- Deferred start-up costs [note 7c]........................................ -- 1,448 Other.................................................................... 2,500 2,143 --------- --------- 110,056 56,532 --------- --------- --------- ---------
[a] Goodwill is presented net of accumulated amortization of $2,425,000 [$261,000 at August 31, 1997, $57,000 at August 31, 1996]. [b] The investment in KCAS represents a 44% interest in the common stock of KCAS, a contract research organization located in Kansas City, U.S.A. The investment is accounted for using the equity method. On September 15, 1998 the investment was sold for proceeds of U.S. $2.4 million which was used to repay a portion of the U.S. dollar denominated term acquisition loans. [c] The deferred start-up costs relate primarily to the Company's Cincinnati facility, which commenced commercial operations on September 1, 1995. The deferred start-up costs have been written down to their net recoverable amount. 8. FINANCING ARRANGEMENTS The Company's principal lenders are located in Canada and the United States. The Company has available facilities for bank indebtedness and term loans with these principal lenders of approximately $20,000,000 and $70,000,000 respectively. Approximately $850,000 and $49,000,000 respectively had been drawn at August 31, 1998 [$1,200,000 as at August 31, 1997]. The Company's bank indebtedness, denominated primarily in Canadian dollars, bears interest at the Canadian prime rate and is due on demand. The Company's U.S. dollar term acquisition loans bear interest at either the U.S. prime rate plus 1/2%, or alternatively the LIBOR rate plus 1/2%. For the period February 6, 1998--August 31, 1998 the Company borrowed using both the U.S. prime rate and LIBOR rate options. The applicable year-end interest rates are as follows:
AS AT AUGUST 31 1998 1997 - ---------------------------------------------------------------------------- --------- --------- Canadian prime.............................................................. 6.5% 4.75% U.S. prime.................................................................. 8.5% N/A LIBOR....................................................................... 6.1% N/A --------- ---------
F-15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 8. FINANCING ARRANGEMENTS (CONTINUED) The principal components of long--term debt are as follows:
1998 1997 AS AT AUGUST 31 $ $ - --------------------------------------------------------------------------- --------- --------- U.S. dollar denominated term acquisition loans [NOTE 8A]................... 41,281 -- Other term loan [NOTE 8B].................................................. 2,500 -- State of Ohio loan [NOTE 8C]............................................... 1,686 1,848 Zero coupon balance of sale payable [NOTE 8D].............................. 1,029 1,318 Mortgage payable [NOTE 8E]................................................. 1,285 -- Obligations under capital leases [NOTE 8F]................................. 364 1,239 Government loans [NOTE 8G]................................................. 861 861 Other...................................................................... 514 463 Debentures payable [NOTE 8H]............................................... -- 5,250 --------- --------- 49,520 10,979 Less current portion....................................................... (7,080) (6,921) --------- --------- 42,440 4,058 --------- --------- --------- ---------
[a] Term acquisition loans totalling U.S. $26,319,000 used to finance the acquisition of IBRD Rostrum Global Ltd. These loans are collateralized by substantially all of the assets of the Company's Canadian and United States operations. The related debt agreements contain restrictive financial covenants including net worth, debt service coverage and current ratio tests. Furthermore, the agreements contain restrictions in respect of dividend payments, capital expenditures, the assumption of additional indebtedness and the continued employment of certain executives. All restrictive covenants have been adhered to in the period to August 31, 1998. The loans are repayable in quarterly instalments of U.S. $870,000 with the balance repayable in February 2000. [b] Term loan denominated in Canadian dollars bearing interest at prime plus 1/2%, repayable by February 2000 collateralized as noted in note 8[a] above. [c] U.S. $1,075,000 State of Ohio loan, bearing interest at 2.25%, repayable in sixty monthly instalments of U.S. $24,000 commencing in August 1997, collateralized by a promissory note in the amount of U.S. $1,353,000. [d] Zero coupon balance of sale payable denominated with Spanish Pesetas, with an effective interest rate of 5%, repayable upon maturity in July 2000, collateralized by the shares of a subsidiary of ITEM. [e] Mortgage payable denominated in Spanish pesetas bearing interest at 5%, collateralized by a building in Madrid, Spain with a net book value of $2,000,000, maturing May 2008. [f] Obligations under capital leases, interest rates varying between 8.2% and 10.7%, maturing on various dates up to 2001, collateralized by the related capital assets. [g] Government loans, non-interest bearing, repayable in annual instalments commencing September 1998 and January 1999. F-16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 8. FINANCING ARRANGEMENTS (CONTINUED) [h] Debentures bearing interest at 3% per annum, which matured in September 1997, collateralized by an investment. Scheduled maturity of long-term debt excluding capital lease obligations for each of the next five years ending August 31 and thereafter are as follows:
$ --------- 1999................................................................................. 6,835 2000................................................................................. 38,457 2001................................................................................. 1,497 2002................................................................................. 1,783 2003 and thereafter.................................................................. 584 --------- TOTAL................................................................................ 49,156 --------- ---------
Future minimum lease payments under capital lease obligations are as follows:
$ --------- 1999.................................................................................. 275 2000.................................................................................. 126 --------- Total minimum payments............................................................ 401 Less: interest included in minimum lease payments..................................... 37 --------- Present value of minimum lease payments............................................... 364 Less: current portion................................................................. 245 --------- LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS........................................ 119 --------- ---------
9. CAPITAL STOCK AUTHORIZED An unlimited number of: Common shares-- voting, participating. Preferred shares-- non-voting preferred, discretionary preferential dividend rights to be determined by the Board of Directors at the issue date of such shares without nominal or par values, issuable in series.
F-17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 9. CAPITAL STOCK (CONTINUED) The table below summarizes the changes in the Company's capital stock for the years indicated:
1998 1997 1996 NUMBER NUMBER NUMBER YEARS ENDED AUGUST 31 OF SHARES $ OF SHARES $ OF SHARES $ - ---------------------------------------- ------------ --------- ------------ --------- ------------ --------- Common shares Issued and outstanding, beginning of year.................................. 24,289,208 103,073 19,579,696 54,405 17,675,000 25,876 Issued in public offering, for cash..... -- -- -- -- 1,803,278 27,500 Issued on acquisitions.................. 525,651 7,243 4,700,912 48,610 96,618 1,000 Issued for cash pursuant to stock options............................... 42,200 243 8,600 58 4,800 29 ------------ --------- ------------ --------- ------------ --------- ISSUED AND OUTSTANDING, END OF YEAR..... 24,857,059 110,559 24,289,208 103,073 19,579,696 54,405 ------------ --------- ------------ --------- ------------ --------- ------------ --------- ------------ --------- ------------ ---------
The weighted average number of shares outstanding for the calculation of basic earnings per share was 24,478,111 for the year ended August 31, 1998; [19,911,199 for the year ended August 31, 1997 and 18,282,596 for the year ended August 31, 1996]. Certain directors, officers and employees of the Company have options to purchase common shares from the Company at prices ranging from $5.00 to $14.04 per share. These options have expiry dates extending to May 2008 and vest on a progressive scale over 5 years and are eligible to be exercised within 10 years of the date of grant, based on continued employment. The changes in the number of options to purchase common shares can be summarized as follows:
1998 1997 1996 YEAR ENDED AUGUST 31 (NUMBER OF OPTIONS) $ $ $ - ---------------------------------------------------------- ---------- ---------- --------- Outstanding, beginning of year............................ 887,000 737,250 576,250 Granted................................................... 796,350 395,000 210,000 Exercised................................................. (42,200) (8,600) (4,800) Cancelled................................................. (179,650) (236,650) (44,200) ---------- ---------- --------- OUTSTANDING, END OF YEAR.................................. 1,461,500 887,000 737,250 ---------- ---------- --------- ---------- ---------- ---------
10. COMMITMENTS AND CONTINGENCIES [a] In accordance with the terms of the IBRD Rostrum Global Ltd. business acquisition, the vendors are entitled to a contingent payment equal to the amount by which nine times EBITDA ("earnings before interest, taxes, depreciation and amortization" adjusted for certain non-recurring and other items as outlined in the agreement) of the acquired entity for the 12 month period ending December 31, 1998 exceeds U.S. $3.0 million. In 1996, the Company purchased certain assets of a research clinic located in Montreal, Canada. Contingent consideration to a maximum of $1,000,000 is payable over a five-year period ending 2001 in the event that the specified levels of earnings as set out in the purchase agreement are satisfied. F-18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) At present it is not determinable if any amounts will be payable under these earn-out arrangements. Any amounts ultimately payable will be accounted for as an increase to the cost of these acquisitions. [b] The Company leases certain office space and equipment under long-term operating leases. Annual minimum operating lease and rental commitments of the Company for the next five years ending August 31 and thereafter are as follows:
$ --------- 1999................................................................................. 3,494 2000................................................................................. 3,511 2001................................................................................. 3,739 2002................................................................................. 3,680 2003................................................................................. 3,648 Thereafter........................................................................... 15,326 --------- 33,398 --------- ---------
[c] In the normal course of operations, the Company is subject to certain litigation. It is the opinion of management that the resolution of such litigation will not have a material adverse effect on the Company. [d] In accordance with the terms of a loan agreement, the Company issued a promissory note in favour of a lender in the amount of U.S. $1,353,000 (see note 8). [e] The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the Year 2000 as 1900 or some other date, resulting in errors when information using Year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000, and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect the Company's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting the Company including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. [f] The Company is subject to regular inspections by the United States Food and Drug Administration [the "FDA"]. In a 1997 inspection, the FDA raised certain issues to which the Company has formally responded. In March 1998, the Company received a United States grand jury subpoena requesting documents from the Company including documents relating to the period covered by the inspection referred to above. To date, the Company has not been informed that it is a target of this investigation nor is the Company aware that any of its current or former employees have been informed that they are targets of such investigation. It is not possible to predict with any degree of certainty the outcome of these proceedings and there can be no assurance that the outcome of the proceedings will not have a material adverse impact on the Company. F-19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 11. INCOME TAXES AND INVESTMENT TAX CREDITS [a] Significant components of the provision for income taxes consist of the following:
1998 1997 1996 YEAR ENDED AUGUST 31 $ $ $ - ---------------------------------------------------------------------- --------- --------- ----- Current income tax expense before the following:...................... 6,814 1,790 180 Benefit of previously unrecognized losses and temporary differences....................................................... (716) (330) -- Current income tax expense............................................ 6,098 1,460 180 Future income tax expense............................................. 526 1,379 -- --------- --------- --- PROVISION FOR INCOME TAXES............................................ 6,624 2,839 180 --------- --------- --- --------- --------- ---
[b] The income tax provision reported differs from the amount computed by applying Canadian income tax rates to income (loss) before income taxes. The reason for the difference and the related tax effects are as follows:
1998 1997 1996 YEARS ENDED AUGUST 31 $ $ $ - ------------------------------------------------------------------ --------- --------- --------- Income (loss) before income taxes................................. 15,691 5,188 (5,181) Canadian statutory income tax rate................................ 38.22% 38.22% 38.02% --------- --------- --------- Expected income tax expense (benefit)............................. 5,997 1,983 (1,970) Adjustments Effect of foreign tax rates..................................... (231) (66) (96) Unrecognized income tax benefit on losses and temporary differences................................................... 748 1,512 2,307 Benefit of previously unrecognized losses and temporary differences................................................... (716) (330) -- Tax credits not taxable in Quebec............................... (756) (543) (305) Tax effect related to non-deductible goodwill amortization...... 703 40 -- Foreign exchange gain on intercompany debt...................... 560 -- -- Large corporation tax and other................................. 319 243 244 --------- --------- --------- PROVISION FOR INCOME TAXES...................................... 6,624 2,839 180 --------- --------- --------- --------- --------- ---------
F-20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 11. INCOME TAXES AND INVESTMENT TAX CREDITS (CONTINUED) [c] The tax effects of temporary differences and net operating losses that give rise to future income tax assets and liabilities are as follows:
1998 1997 YEAR ENDED AUGUST 31 $ $ - -------------------------------------------------------------------------- --------- --------- Future income tax liabilities Carrying values of capital assets in excess of tax bases................ 7,073 7,234 Investment tax credits.................................................. 3,682 2,567 Other................................................................... 405 687 --------- --------- TOTAL FUTURE INCOME TAX LIABILITIES....................................... 11,160 10,488 --------- --------- Future income tax assets Net operating losses carried forward.................................... 14,294 4,753 Research & development (Quebec)......................................... 1,523 2,468 Provisions and other.................................................... 4,457 966 --------- --------- Total future income tax assets............................................ 20,274 8,187 Valuation allowance....................................................... (17,167) (5,803) --------- --------- Net future income tax assets.............................................. 3,107 2,384 --------- --------- Future income tax liabilities in excess of future income tax assets....... 8,053 8,104 Recognized non-refundable investment tax credits [see note [d]below]...... (8,450) (7,780) --------- --------- NET FUTURE INCOME TAX LIABILITY (ASSET)................................... (397) 324 --------- --------- --------- ---------
The net future income tax liability (asset) is presented as follows on the consolidated balance sheet:
1998 1997 YEAR ENDED AUGUST 31 $ $ - -------------------------------------------------------------------------------- --------- ----- Future income tax asset......................................................... (922) -- Future income tax liability..................................................... 525 324 --- --- (397) 324 --- --- --- ---
The company has unrecognized net operating loss carryforwards of approximately $31,700,000 for U.S. federal tax purposes, which expire in the years 2007 to 2012, and approximately $6,200,000 for UK tax purposes, which expire in the years 2005 to 2007. Approximately $25,100,000 of US net operating federal loss carryforwards and temporary differences and $10,000,000 of U.K. loss carryforwards and temporary differences resulted from the Company's 1998 acquisition of IBRD. These tax loss carryforwards and temporary differences were not included in the preliminary purchase price allocation set out in note 3, as a valuation allowance of approximately $12,154,000 had been provided for the entire amount of the related tax benefits. Accordingly, once it is more likely than not that the tax benefits of these unrecognized loss carryforwards and temporary differences will be realized, they will be applied to reduce unamortized goodwill related to the acquisition of IBRD. During the year, approximately $270,000 of these tax benefits were realized and reduced the unamortized goodwill balance related to the acquisition. F-21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 11. INCOME TAXES AND INVESTMENT TAX CREDITS (CONTINUED) [d] Investment tax credits Investment tax credits recoverable represent non-refundable federal investment tax credits earned on both current and capital research and development expenditures incurred by the company and Quebec tax credits earned on labour costs attributed to research and development activities. As at August 31, 1998, the company had non-refundable investment tax credits of approximately $33,680,000 available to be carried forward and used to reduce Canadian federal income taxes payable in future years. The company has recorded approximately $8,450,000 of these credits as at August 31, 1998 as a reduction of future income tax liabilities. These federal tax credits will be taxable at applicable income tax rates in the year following the year in which they are claimed. The unrecognized research and development tax credits and those recognized to the extent of existing future income tax liabilities expire as follows:
$ --------- 2003................................................................................ 2,538 2004................................................................................ 516 2005................................................................................ 5,158 2006................................................................................ 8,299 2007................................................................................ 7,669 2008................................................................................ 9,500 33,680 --------- Less: unrecognized investment tax credits......................................... (25,230) --------- Recognized investment tax credits............................................. 8,450 --------- ---------
In addition, the Company has a pool of expenses available, without expiry, to reduce future taxable income for provincial income tax purposes of approximately $16,900,000. The Company has recorded the following refundable investment tax credits:
1998 1997 1996 YEARS ENDED AUGUST 31 $ $ $ - --------------------------------------------------------------------- --------- --------- --------- Refundable Quebec investment tax credits recorded as a reduction of related expenses................................................... 3,700 3,500 3,425 --------- --------- --------- --------- --------- ---------
12. SEGMENTED INFORMATION [a] The Company operates in one industry segment, being a multiservice contract research organization providing services to the pharmaceutical and biotechnology industries. F-22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 12. SEGMENTED INFORMATION (CONTINUED) [b] Geographic segmentation:
1998 1997 AS AT AUGUST 31 $ $ - ------------------------------------------------------------------------ --------- --------- ASSETS FROM Canadian operations..................................................... 82,788 72,529 European operations..................................................... 107,799 73,424 United States operations................................................ 80,883 14,905 --------- --------- 271,470 160,858 --------- --------- --------- ---------
1998 1997 1996 FOR THE YEARS ENDED AUGUST 31 $ $ $ - ---------------------------------------------------------------- --------- --------- --------- NET REVENUES FROM Canadian operations............................................. 86,556 68,042 55,756 European operations............................................. 38,730 1,536 -- United States operations........................................ 45,952 12,899 7,326 --------- --------- --------- 171,238 82,477 63,082 --------- --------- --------- --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES Canadian operations............................................. 14,141 9,522 (352) European operations............................................. 2,018 -- -- United States operations........................................ (468) (4,334) (4,829) --------- --------- --------- 15,691 5,188 (5,181) --------- --------- --------- --------- --------- ---------
[c] Net revenues from Canadian operations by market destination.
1998 1997 1996 FOR THE YEARS ENDED AUGUST 31 $ $ $ - ----------------------------------------------------------------- --------- --------- --------- United States.................................................... 65,350 49,671 44,047 Canada........................................................... 21,206 18,371 11,709 --------- --------- --------- 86,556 68,042 55,756 --------- --------- --------- --------- --------- ---------
13. FINANCIAL INSTRUMENTS [A] FAIR VALUES The carrying amounts and fair values of those financial liabilities whose fair values differ materially from their carrying values are as follows:
1998 1997 ---------------------- ---------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE AS AT AUGUST 31 $ $ $ $ - -------------------------------------------------------- ----------- --------- ----------- --------- Government loans........................................ 861 742 861 746 State of Ohio loan...................................... 1,686 1,383 1,848 1,586 ----- --------- ----- --------- ----- --------- ----- ---------
F-23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 13. FINANCIAL INSTRUMENTS (CONTINUED) The methods and assumptions used to estimate the fair value of each class of financial instruments for which it is practicable to estimate a fair value are as follows: SHORT-TERM FINANCIAL ASSETS AND LIABILITIES The carrying amounts of these financial assets and liabilities are a reasonable estimate of the fair values because of the short maturity of the instruments on normal commercial terms and conditions. Short-term financial assets comprise cash, accounts receivable and marketable securities. Short-term financial liabilities comprise bank indebtedness and accounts payable and accrued liabilities. U.S. DOLLAR DENOMINATED TERM ACQUISITION LOANS, AND OTHER TERM LOAN The carrying amount of these financial liabilities are a reasonable estimate of the fair values of the instruments as the liabilities were incurred shortly prior to period end and there has been no significant change in the underlying economic conditions. ZERO COUPON BALANCE OF SALE PAYABLE AND MORTGAGE PAYABLE The carrying amounts of these financial liabilities are a reasonable estimate of their fair values. GOVERNMENT LOANS AND STATE OF OHIO LOANS The fair value of the government loans and state of Ohio loan in above table are based on estimated future cash flows discounted using the current market rate for debt of the same remaining maturities, as advised by the Company's bankers. FORWARD FOREIGN EXCHANGE CONTRACTS The Company enters into forward foreign exchange contracts that oblige it to sell specific amounts of U.S. dollars at set future dates at predetermined exchange rates. The contracts are matched with anticipated U.S. dollar cash flows resulting from the receipt of accounts receivable and future revenues from export sales to the United States. The Company enters into the forward foreign exchange contracts to partially protect itself from currency exchange risk between the Canadian and US dollars. The following table sets out the Canadian dollar amounts to be received, the contractual exchange rates and the settlement dates of outstanding contracts:
1998 1997 --------- --------- $ $ Less than one year, at rates averaging C$1.3970 (1997: C$1.3610)........... 52,470 51,037 One to two years, at rates averaging C$1.4728 (1997: nil).................. 15,454 -- --------- --------- Total...................................................................... 67,924 51,037 --------- --------- --------- ---------
At August 31, 1998, accounts receivable included $12 million of amounts due in U.S. dollars which had been hedged with forward foreign exchange contracts included in the table above. The net unrealized loss on hedges of anticipated future U.S. dollar sales revenues relates entirely to signed contracts and approximates $5.2 million at August 31, 1998 (1997: $1.0 million). F-24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 13. FINANCIAL INSTRUMENTS (CONTINUED) The Company is exposed to credit-related losses in the event of non-performance by the counterparties to derivative financial instruments, but it does not expect any counterparties to fail to meet their obligations. As at August 31, 1998, the sole counterparty was a Canadian financial institutions. [B] CREDIT AND CURRENCY RISK ACCOUNTS RECEIVABLE The Company enters into contracts with customers primarily in the United States and Europe. Allowances are maintained for potential credit losses. It is reasonably possible that the actual amount of loss incurred, if any, will differ from management's estimates. CONCENTRATION OF CREDIT RISK No customer accounted for more than 10% of total net revenues for the twelve months ended August 31, 1998. Two customers accounted for approximately 25% of accounts receivable at August 31, 1998. As at August 31, 1997 and for the years ended August 31, 1997 and 1996 no customer accounted for more than 10% of total net revenues or accounts receivable. 14. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
AS AT AUGUST 31 1998 1997 - --------------------------------------------------------------------------- --------- --------- $ $ Trade...................................................................... 17,957 6,922 Wages and benefits......................................................... 12,025 7,520 Other accruals and reserves................................................ 22,059 8,025 --------- --------- 52,041 22,467 --------- --------- --------- ---------
F-25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 15. ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES The consolidated financial statements have been prepared in accordance with Canadian GAAP. The following summary sets out the material adjustments to these consolidated financial statements which would be made in order to conform with U.S. GAAP. [A] CONSOLIDATED STATEMENT OF INCOME (LOSS) The consolidated statements of income (loss) in accordance with U.S. GAAP is presented below. The notes that follow describe the material differences between U.S. GAAP and Canadian GAAP in this regard.
1998 1997 1996 FOR THE YEAR ENDED AUGUST 31 $ $ $ - --------------------------------------------------------------------------------- --------- --------- --------- Revenues [1]..................................................................... 223,281 120,115 100,385 Reimbursed costs [1]............................................................. 47,122 9,567 8,558 --------- --------- --------- Net revenues..................................................................... 176,159 110,548 91,827 Direct costs--net of refundable tax credits [1][4]............................... 103,080 67,614 59,601 --------- --------- --------- 73,079 42,934 32,226 Expenses--net of refundable tax credits Selling, general and administrative [1][3]....................................... 52,967 33,361 29,423 Internal research and development................................................ 3,698 3,328 3,726 Interest on long-term debt and capital lease obligations [1].................................................................. 3,352 794 1,214 Amortization of goodwill [3]..................................................... 941 404 753 Nonrefundable tax credits........................................................ (5,000) (2,400) (206) --------- --------- --------- 17,121 7,447 (2,684) Interest and other income [1].................................................... 1,285 526 363 Merger costs [2]................................................................. (368) (2,464) -- Share of earnings in equity accounted for investees [1].......................... 114 350 130 --------- --------- --------- Income (loss) before income taxes [1]............................................ 18,152 5,859 (2,191) Provision for income taxes [1]................................................... 6,651 3,841 1,068 --------- --------- --------- Net income (loss) for the year................................................... 11,501 2,018 (3,259) --------- --------- --------- Basic earnings (loss) per share [1].............................................. $ 0.46 $ 0.08 ($ 0.14) Diluted earnings (loss) per share [1]............................................ $ 0.46 $ 0.08 ($ 0.14) --------- --------- --------- --------- --------- ---------
F-26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 15. ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED) The following reconciliation of the Company's reported net income (loss) under Canadian GAAP to net income (loss) under U.S. GAAP summarizes the material adjustments which were included in the previous table:
1998 1997 1996 FOR THE YEAR ENDED AUGUST 31 $ $ $ - ----------------------------------------------------------------- --------- --------- --------- Net income (loss) in accordance with Canadian GAAP............... 9,067 2,349 (5,361) Adjustments [5] Net income of pooled entities [1]................................ 52 1,392 1,636 Merger costs [2]................................................. (368) (2,312) -- Amortization of goodwill [3]..................................... 1,352 123 -- Amortization of deferred start-up costs [4]...................... 466 466 466 Write-off of deferred start-up costs [note 7c][4]................ 932 -- -- --------- --------- --------- Net income (loss) in accordance with U.S. GAAP................... 11,501 2,018 (3,259) --------- --------- --------- --------- --------- ---------
- ------------------------ [1] The acquisition of ITEM described in note 3 was accounted for using the purchase method under Canadian GAAP. Under U.S. GAAP, this transaction is accounted for using the pooling of interests method, which requires restating the financial statements of periods prior to the pooling transaction date in a manner such that the two companies had always been combined. As ITEM's year end was December 31, and the Company's year-end is (and continues to be) August 31, the pooled data presented for the year ended August 31, 1996 includes ITEM's December 31, 1996 fiscal year data in combination with the Company's August 31, 1996 fiscal year data. The pooled data presented as at August 31, 1997 and for the year then ended, includes ITEM's twelve months ended August 31, 1997 data in combination with the Company's August 31, 1997 fiscal year data. Due to the difference between ITEM's fiscal year end and that of the Company, ITEM's results of operations for the 4 month period ended December 31, 1996 are included in the Company's pooled data for both 1996 and 1997. As a result, retained earnings under U.S. GAAP as at August 31, 1997 has been reduced by $377,000, which represents the net income of ITEM for the four-month period in question. Under U.S. GAAP, the Company is required to disclose the following additional information concerning the operating results of the two previous separate companies.
COMPANY COMBINED ITEM $ $ PERIOD SEPTEMBER 1, 1996 TO AUGUST 7, 1997 $ (UNAUDITED) (UNAUDITED) - ------------------------------------------------------------------------ --------- ----------- ----------- Net revenues............................................................ 19,904 74,351 94,255 Net income.............................................................. 1,098 340 1,438 --------- ----------- ----------- --------- ----------- -----------
The acquisition of Anawa described in Note 3 was accounted for using the purchase method under Canadian GAAP. Under U.S. GAAP, this transaction is accounted for using the pooling of interests method, which requires restating the financial statements of periods prior to the pooling transaction date in a manner such that the two companies had always been combined. As Anawa's year-end was December 31, and the Company's year-end is (and continues to be) August 31, the pooled data presented for the year ended August 31, 1996 includes Anawa's F-27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 15. ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED) December 31, 1996 fiscal year data in combination with the Company's August 31, 1996 fiscal year data. The pooled data presented as at August 31, 1997 and for the year then ended, includes Anawa's December 31, 1997 fiscal year data in combination with the Company's August 31, 1997 fiscal year data. The pooled data presented as at August 31, 1998 and for the year then ended, includes Anawa's twelve months ended August 31, 1998 data in combination with the Company's August 31, 1998 fiscal year data. Due to the difference between Anawa's fiscal year-end and that of the Company, Anawa's results of operations for the 4 month period ended December 31, 1997 are included in the Company's pooled data for both 1997 and 1998. As a result, retained earnings under U.S. GAAP as at August 31, 1998 has been reduced by $142,000, which represents the net income of Anawa for the 4 month period in question. Under U.S. GAAP, the Company is required to disclose the following additional data concerning the operating results of the two previous separate companies:
COMPANY COMBINED ANAWA $ $ PERIOD SEPTEMBER 1, 1997 TO APRIL 30, 1998 $ (UNAUDITED) (UNAUDITED) - ---------------------------------------------------------- ----------- ----------- ----------- Net revenues.............................................. 4,921 99,606 104,527 Net income................................................ 52 5,369 5,421
[2] Under Canadian GAAP, the costs incurred to effect the acquisition of both Anawa and ITEM were included in the determination of the cost of the purchase. Costs incurred to effect pooling transactions are expensed in accordance with U.S. GAAP. These costs include all advisory, legal, accounting and related costs. [3] Under Canadian GAAP, the application of the purchase method of accounting to the acquisitions of both Anawa and ITEM resulted in the revaluation of the acquiree's assets and liabilities to their fair value, including an allocation to goodwill. As the ITEM and Anawa transactions are treated as pooling of interests transactions under U.S. GAAP, there would be no change in the accounting basis of the underlying assets and liabilities of ITEM and Anawa. [4] Under Canadian GAAP, certain costs incurred to start up a new facility may be deferred and amortized over future periods. In the year ended August 31, 1995 the Company incurred approximately $2,330 of such start-up costs, which under U.S. GAAP, would have been expensed as incurred (amortization of the amounts under Canadian GAAP commenced on September 1, 1995). The aggregate of the reconciling amounts identified in the table above under the captions "amortization of deferred start-up costs" and "write-off of deferred start-up costs" represent amounts which would have been expensed in the year ended August 31, 1995 under U.S. GAAP. [5] As described in note 2[a] to the financial statements, the temporal method, which uses the Canadian dollar as the unit of measure (and functional currency), was used to translate the financial statements of Phoenix U.S. prior to February 1998 under Canadian GAAP. This does not differ from U.S. GAAP which would also require the financial statements of Phoenix U.S. to be translated using the Canadian dollar as the functional currency prior to February 1998. F-28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 15. ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED) [B] CONSOLIDATED BALANCE SHEETS The following table outlines the impact of the application of U.S. GAAP on the following summarized balance sheet accounts:
AUGUST 31, ---------------------------------------------- 1998 1997 ---------------------- ---------------------- CANADIAN US CANADIAN US GAAP GAAP GAAP GAAP ----------- --------- ----------- --------- $ $ $ $ Current assets................................... 104,776 104,776 57,581 60,757 Non-current assets [1][2]........................ 166,694 113,148 103,277 53,528 ----------- --------- ----------- --------- Total assets..................................... 271,470 217,924 160,858 114,285 ----------- --------- ----------- --------- ----------- --------- ----------- --------- Current liabilities.............................. 94,834 94,834 41,083 42,771 Non-current liabilities.......................... 46,683 46,683 7,510 7,674 ----------- --------- ----------- --------- Total liabilities................................ 141,517 141,517 48,593 50,445 ----------- --------- ----------- --------- ----------- --------- ----------- --------- Capital stock [1][4]............................. 110,559 54,421 103,073 54,178 Cumulative translation adjustment................ 1,135 651 -- (314) Additional paid in capital [3]................... -- 1,686 -- 1,686 Retained earnings [5] 18,259 19,649 9,192 8,290 ----------- --------- ----------- --------- Total shareholders' equity....................... 129,953 76,407 112,265 63,840 ----------- --------- ----------- --------- ----------- --------- ----------- --------- 271,470 217,924 160,858 114,285 ----------- --------- ----------- --------- ----------- --------- ----------- ---------
- ------------------------ [1] See note [a][3] above. Furthermore, the absence of such revaluation under U.S. GAAP would also apply to the consideration paid, being the common shares of the company. [2] See note [a][4] above. [3] Under Canadian GAAP, the redemption of certain preferred shares at less than their stated value gives rise to financing income. In Fiscal 1993, the Company redeemed $5,590 of preferred shares for $4,754, giving rise to $836 of financing income. In fiscal 1994, the Company redeemed $5,593 of preferred shares for $4,743 giving rise to $850 of financing income. Under U.S. GAAP, such transactions are accounted for by increasing additional paid-in capital. As these transactions took place prior to September 1, 1995, there is no impact on the U.S. GAAP consolidated statements of income (loss). [4] In Fiscal 1996 and 1995, the Company incurred $1,272 and $2,391 respectively of share issue costs in connection with public offerings. Under Canadian GAAP, the Company has chosen to account for share issue costs as a charge to retained earnings. Under U.S. GAAP, share issue costs are accounted for as a reduction of the related capital stock. F-29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 15. ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED) [5] The following reconciliation of the Company's reported retained earnings under Canadian GAAP to retained earnings under U.S. GAAP summarizes the material adjustments which were included in the above table:
1998 1997 AS AT AUGUST 31 $ $ - ------------------------------------------------------------------- --------- --------- Regained earnings in accordance with Canadian GAAP................. 18,259 9,192 Adjustments: Pre-merger retained earnings of ITEM at August 7, 1997............. see note [a][1] above 1,091 1,091 Pre-merger deficit of Anawa at April 30, 1998 and December 31, 1997 respectively..................................................... see note [a][1] above (473) (383) Cumulative merger costs............................................ see note [a][2] above (2,680) (2,312) Cumulative amortization of goodwill................................ see note [a][3] above 1,475 123 Deferred start-up costs at August 31, 1997......................... see note [a][4] above -- (1,398) Cumulative financing income........................................ see note [b][3] above (1,686) (1,686) Cumulative share issue costs....................................... see note [b][4] above 3,663 3,663 ------------------------ --------- --------- Retained earnings in accordance with U.S. GAAP..................... 19,649 8,290 --------- --------- --------- ---------
[C] CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION The consolidated statement of changes in financial position which are subject to material differences under U.S. GAAP are restated below:
1998 1997 1996 ---------------------- ---------------------- ---------------------- CANADIAN CANADIAN CANADIAN YEAR ENDED AUGUST 31 GAAP US GAAP GAAP US GAAP GAAP US GAAP - --------------------------------------------------------- ----------- --------- ----------- --------- ----------- --------- $ $ $ $ $ $ Cash provided by (used in) operating activities [1][2] 14,861 14,642 7,717 10,522 (3,609) (7,573) Cash used in investing activities [1][2]................. (40,873) (33,262) (55,864) (10,398) (20,338) (20,850) Cash provided by (used in) financing activities [1][2][3] 43,141 35,898 46,707 (170) 28,992 28,979 Effect of foreign currency change rates on cash [1]...... (2,788) (2,799) -- (841) -- (129) Net Increase (decrease) in cash [1][3]................... 14,341 14,479 (1,440) (887) 5,045 427 Cash position beginning of year [1][3]................... 1,837 2,530 3,277 3,951 (1,768) 3,972 Cash position end of year [1][3]......................... 16,178 17,009 1,837 3,064 3,277 4,399
- ------------------------ [1] See note b[1] above. [2] See notes a[2] and a[3] above. [3] In these financial statements, the definition of cash used in the measurement of cash flows includes bank indebtedness. Under U.S. GAAP, changes in short-term borrowings would be excluded from the definition of cash and presented as financing transactions. F-30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 15. ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED) Additional information required in the statement of cash flows under U.S. GAAP is as follows:
FOR THE YEAR ENDED AUGUST 31 1998 1997 1996 - --------------------------------------------------------------------- --------- --------- --------- $ $ $ Cash Interest paid................................................... 3,354 842 1,179 Cash Income taxes paid............................................... 1,630 1,448 960
[D] ACCOUNTING FOR STOCK-BASED COMPENSATION Under U.S. GAAP, the Company accounts for compensation expense associated with Stock options in accordance with accounting principles Board Opinion No. 25. In accordance with both Canadian GAAP and U.S. GAAP, the Company has not recognized compensation expense for stock option grants in the statements of income (loss) as the market price of the underlying stock on the grant dates did not exceed the exercise price of the options granted. Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
1998 1997 1996 FOR THE YEAR ENDED AUGUST 31 $ $ $ - --------------------------------------------------------------- --------- --------- --------- Risk free interest rates....................................... 6.5% 6.5% 6.5% Dividend yields................................................ 0% 0% 0% Volatility factors of expected market price of company's shares....................................................... 41.5 41.5 41.5 Weighted average expected life of the options.................. 5 years 5 years 5 years
The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially effect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the option is amortized to expense over the options' vesting period. The pro forma impact of FAS 123 on the Company's net income (loss) and basic earnings per share would be as follows:
1998 1997 1996 FOR THE YEAR ENDED AUGUST 31 $ $ $ - ------------------------------------------------------------------ --------- --------- --------- Net income (loss) as reported..................................... 11,501 2,018 (3,259) Pro forma stock compensation expense.............................. (899) (516) (446) --------- --------- --------- Pro Forma net income (loss)....................................... 10,602 1,502 (3,705) --------- --------- --------- --------- --------- --------- Basic earnings (loss) per share As reported..................................................... 0.46 0.08 (0.14) Pro forma....................................................... 0.43 0.06 (0.16)
F-31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 15. ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED) [E] EARNINGS PER SHARE The following table presents the earnings per share computations in accordance with U.S. GAAP.
1998 1997 1996 FOR THE YEAR ENDED AUGUST 31 $ $ $ - ---------------------------------------------------- ------------ ------------ ------------ Numerator for basic and diluted earnings per share income (loss) available to common stockholders.... 11,501 2,018 (3,259) ------------ ------------ ------------ Denominator Denominator for basic earnings per share weighted-average shares outstanding............... 24,828,545 25,126,992 23,498,389 Effect of dilutive stock options.................... 272,993 157,862 * ------------ ------------ ------------ Denominator for diluted earnings per share -- adjusted weighted-average shares.................. 25,101,538 25,284,854 23,498,389 ------------ ------------ ------------ Basic earnings per share............................ 0.46 0.08 (0.14) ------------ ------------ ------------ Diluted earnings per share.......................... 0.46 0.08 (0.14)
* Options to purchase 737,250 shares of common stock at exercise prices ranging from $5.00 to $13.90 per share were outstanding during the year ended December 31, 1996 but were not included in the computation of diluted earnings per share because they had an anti-dilutive effect given the loss for this period. The weighted average shares issued and outstanding for the years ended August 31, 1997 and 1996 have been restated to reflect the shares issued on the acquisition of ITEM. The weighted average shares issued and outstanding for the years ended August 31, 1998, 1997 and 1996 have been restated to reflect the shares issued upon the acquisition of Anawa. [F] ACCOUNTING FOR INCOME TAXES The following presents certain information related to accounting for income taxes under U.S. GAAP. Income tax expense and significant components of the provision for income taxes under U.S. GAAP consists of the following:
1998 1997 1996 YEAR ENDED AUGUST 31 $ $ $ - --------------------------------------------------------------------- --------- --------- --------- Current income tax expense before the following:..................... 6,841 2,792 615 Benefit of previously unrecognized temporary differences............. (716) (330) -- --------- --------- --------- Current income tax expense........................................... 6,125 2,462 615 Deferred income tax expense.......................................... 526 1,379 453 --------- --------- --------- Income tax expense................................................... 6,651 3,841 1,068 --------- --------- --------- --------- --------- ---------
F-32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 15. ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED) The income tax provision reported under U.S. GAAP differs from the amount computed by applying Canadian income tax rates to income (loss) before income taxes. The reason for the difference and the related tax effects are as follows:
1998 1997 1996 YEAR ENDED AUGUST 31 $ $ $ - ------------------------------------------------------------------ --------- --------- --------- Income (loss) before income taxes................................. 18,152 5,859 (2,191) Canadian statutory income tax rate................................ 38.22% 38.22% 38.02% --------- --------- --------- Expected income tax expense (benefit)............................. 6,938 2,239 (833) Adjustments Effect of foreign tax rates....................................... (231) 9 (125) Unrecognized income tax benefit on losses and temporary differences..................................................... 214 1,334 1,951 Benefit of previously unrecognized losses and temporary differences..................................................... (716) (330) -- Tax credits not taxable in Quebec................................. (756) (543) (305) Foreign exchange gain on intercompany debt........................ 560 -- -- Tax effect related to non-deductible goodwill amortization........ 186 -- -- Large corporations tax & other.................................... 456 1,132 380 --------- --------- --------- Provision for income taxes........................................ 6,651 3,841 1,068 --------- --------- --------- --------- --------- ---------
[G] RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, FASB issued Statement No. 130, "Reporting Comprehensive Income' which is effective for fiscal years beginning after December 15, 1997. Statement No. 130 establishes standards for reporting and displaying comprehensive income and its components in financial statements. The Company will adopt Statement No. 130 in the first quarter of fiscal 1999 and will provide the financial statement disclosures as required. The application of the new rules will not have an impact on the Company's reported financial position or results of operations. In June 1997, FASB issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" which is effective for fiscal years beginning after December 15, 1997. Statement No. 131 changes the way public companies report segment information in annual financial statements and also requires those companies to report selected segment information in interim financial statements to shareholders. Statement No. 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company will adopt Statement No. 131 in fiscal 1999, which may result in additional disclosures. The application of the new rules will not have an impact on the Company's reported financial position or results of operations. In June 1998, FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Company is required to adopt this standard in the first quarter of fiscal 2000. The Company is currently assessing the impact that this standard will have on its reported financial position and results of operations. F-33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [TABULAR FIGURES ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE INDICATED] 16. RELATED PARTY TRANSACTIONS During the year ended August 31, 1998, $794,000 [$315,000 in the year ended August 31, 1997 and nil in the year ended August 31, 1996]was paid to an investment advisory firm, of which a member of the Company's board of directors is an officer. These fees are included as part of the cost of acquisitions related to ITEM, Anawa and IBRD. 17. COMPARATIVE FIGURES Certain of the comparative figures have been reclassified to conform to the presentation adopted in the current year. 18. SUBSEQUENT EVENTS [a] On November 5, 1998, the Company completed the acquisition of Clinserve Laboratories in exchange for 316,805 common shares of the Company with an approximate value of $3.8 million. [b] On November 6, 1998, the Company completed the acquisition of McKnight Laboratories GmbH in exchange for 873,325 common shares of the Company with an approximate value of $10.7 million. [c] On November 18, 1998, the Company entered into an agreement and plan of merger to acquire 100% of the issued and outstanding capital stock of Chrysalis International Corporation. The details with respect to the proposed merger are set out in the related Proxy Statement/Prospectus. [d] On December 15, 1998, the Company announced plans to build a new laboratory which will house a portion of the Company's bioanalytical operations. The facility, which will be built on land adjacent to the Company's headquarters in Montreal, Canada is expected to cost $56 million (consisting of $15 million for the building and $41 million for equipment purchases over five years). F-34 CONSOLIDATED STATEMENTS OF INCOME IN ACCORDANCE WITH CANADIAN GAAP UNAUDITED
FIRST QUARTER, ENDED NOVEMBER 30 1998 1997 (IN THOUSANDS OF CANADIAN DOLLARS EXCEPT PER SHARE AMOUNTS) $ $ - -------------------------------------------------------------------------------------- ------------ ------------ Gross revenues........................................................................ 74,163 35,536 Reimbursed costs...................................................................... 15,502 3,857 ------------ ------------ NET REVENUES.......................................................................... 58,661 31,679 Direct costs--net of refundable tax credits........................................... 34,695 18,531 ------------ ------------ Gross profit.......................................................................... 23,966 13,148 ------------ ------------ ------------ ------------ EXPENSES--NET OF REFUNDABLE TAX CREDITS Selling, general and administrative................................................... 17,520 9,745 Internal research and development..................................................... 866 902 Interest expense...................................................................... 1,425 199 Amortization of goodwill.............................................................. 732 322 ------------ ------------ 20,543 11,168 ------------ ------------ Other income.......................................................................... 246 152 Non-refundable tax credits............................................................ 1,500 600 ------------ ------------ Income before income taxes............................................................ 5,169 2,732 Income taxes.......................................................................... 2,315 902 ------------ ------------ NET INCOME FOR THE PERIOD............................................................. 2,854 1,830 ------------ ------------ ------------ ------------ BASIC AND FULLY DILUTED EARNINGS PER SHARE............................................ 0.11 0.08 ------------ ------------ ------------ ------------ Weighted average shares outstanding................................................... 25,155,226 24,289,208 ------------ ------------ ------------ ------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS IN ACCORDANCE WITH CANADIAN GAAP UNAUDITED
1998 1997 FOR THE THREE MONTHS ENDED NOVEMBER 30 (IN THOUSANDS OF CANADIAN DOLLARS) $ $ - -------------------------------------------------------------------------------------- ------------ ------------ RETAINED EARNINGS, BEGINNING OF PERIOD................................................ 18,259 9,192 Net income............................................................................ 2,854 1,830 ------------ ------------ Retained earnings, end of period...................................................... 21,113 11,022 ------------ ------------ ------------ ------------
F-35 CONSOLIDATED BALANCE SHEETS IN ACCORDANCE WITH CANADIAN GAAP UNAUDITED
NOVEMBER 30 AUGUST 31 1998 1998 AS AT, (IN THOUSANDS OF CANADIAN DOLLARS) $ $ - ---------------------------------------------------------------------------------------- ------------ ----------- ASSETS Current Cash.................................................................................... 18,329 17,009 Marketable securities................................................................... 2,000 2,000 Accounts receivable..................................................................... 56,459 47,712 Investment tax credits recoverable...................................................... 3,886 3,362 Costs and estimated profit in excess of progress billings on contracts in progress................................................................. 28,147 27,847 Others.................................................................................. 8,741 6,846 ------------ ----------- 117,562 104,776 ------------ ----------- Capital assets.......................................................................... 59,624 56,638 Other assets............................................................................ 126,729 110,056 ------------ ----------- 303,915 271,470 ------------ ----------- ------------ ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Bank indebtedness....................................................................... 3,565 831 Accounts payable and accrued liabilities................................................ 56,768 52,041 Progress billings in excess of costs and estimated profit on contracts in progress................................................................. 42,334 34,882 Current portion of long-term debt and capital lease obligations......................... 8,382 7,080 ------------ ----------- 111,049 94,834 ------------ ----------- Long-term debt and capital lease obligations............................................ 41,843 42,440 Other deferred credits.................................................................. 3,718 4,243 ------------ ----------- 156,610 141,517 Shareholders' equity Capital stock........................................................................... 125,027 110,559 Retained earnings....................................................................... 21,113 18,259 Cumulative translation adjustment....................................................... 1,165 1,135 ------------ ----------- 147,305 129,953 ------------ ----------- 303,915 271,470 ------------ ----------- ------------ -----------
F-36 CONSOLIDATED STATEMENTS OF CASH FLOW IN ACCORDANCE WITH CANADIAN GAAP UNAUDITED
1998 1997 FOR THE THREE MONTHS PERIOD ENDED NOVEMBER 30 (IN THOUSANDS OF CANADIAN DOLLARS) $ $ - ----------------------------------------------------------------------------------------------- --------- --------- OPERATING ACTIVITIES Net income..................................................................................... 2,854 1,830 Items not affecting cash Amortization................................................................................... 3,733 2,398 --------- --------- 6,587 4,228 --------- --------- Net change in non-cash working capital items related to operations............................. (456) (2,291) --------- --------- Cash provided by operating activities.......................................................... 6,131 1,937 --------- --------- INVESTING ACTIVITIES Capital asset additions........................................................................ (3,931) (1,682) Investment in Chrysalis........................................................................ (7,246) -- Proceeds on disposal of Kansas City Analytical Services........................................ 3,672 -- Other assets................................................................................... (220) (50) --------- --------- Cash used in investing activities.............................................................. (7,725) (1,732) --------- --------- FINANCING ACTIVITIES Assumption of long-term debt................................................................... 7,200 4,228 Repayment of long-term debt.................................................................... (6,495) (599) Other deferred credits and long-term liabilities............................................... (525) 367 Increase (decrease) in bank indebtedness....................................................... 2,734 (690) Proceeds on sale of marketable securities...................................................... -- 5,250 Repayment of debentures........................................................................ -- (5,250) --------- --------- Cash provided by financing activities.......................................................... 2,914 3,306 --------- --------- Increase in cash position during the period.................................................... 1,320 3,511 Cash beginning of period....................................................................... 17,009 2,530 --------- --------- Cash end of period............................................................................. 18,329 6,041 --------- --------- --------- ---------
F-37 THE FOLLOWING PRESENTS THE CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME IN ACCORDANCE WITH U.S. GAAP UNAUDITED
FIRST QUARTER, ENDED NOVEMBER 30 1998 1997 (IN THOUSANDS OF CANADIAN DOLLARS EXCEPT PER SHARE AMOUNTS) $ $ - -------------------------------------------------------------------------------------- ------------ ------------ Gross revenues........................................................................ 76,216 38,618 Reimbursed costs...................................................................... 15,502 3,857 ------------ ------------ NET REVENUES.......................................................................... 60,714 34,761 Direct costs--net of refundable tax credits........................................... 35,838 20,611 ------------ ------------ Gross profit.......................................................................... 24,876 14,150 ------------ ------------ ------------ ------------ EXPENSES--NET OF REFUNDABLE TAX CREDITS Selling, general and administrative................................................... 18,160 10,496 Internal research and development..................................................... 866 902 Interest expense...................................................................... 1,450 227 Amortization of goodwill.............................................................. 321 48 ------------ ------------ 20,797 11,673 ------------ ------------ Other income.......................................................................... 246 153 Merger costs.......................................................................... 800 -- Non-refundable tax credits............................................................ 1,500 600 ------------ ------------ Income before income taxes............................................................ 5,025 3,230 Income taxes.......................................................................... 2,334 916 ------------ ------------ Net income for the period............................................................. 2,691 2,314 ------------ ------------ ------------ ------------ Foreign currency translation adjustment............................................... 30 -- ------------ ------------ Comprehensive income.................................................................. 2,721 2,314 ------------ ------------ ------------ ------------ BASIC AND DILUTED EARNINGS PER SHARE.................................................. 0.10 0.09 ------------ ------------ ------------ ------------ Weighted average shares outstanding................................................... 26,047,189 25,131,664 ------------ ------------ ------------ ------------
F-38 PHOENIX INTERNATIONAL LIFE SCIENCES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOVEMBER 30, 1998 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada ("Canadian GAAP") for interim financial information. Accordingly, they do not include all of the information and footnotes required by Canadian GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ending November 30, 1998 are not necessarily indicative of the results that may be expected for the year ended August 31, 1999. For further information, refer to the Consolidated Financial Statements and notes thereto included in the Prospectus/Proxy Circular for the year ended August 31, 1998 of Phoenix International Life Sciences Inc. (the "Company"). 2. MERGERS AND ACQUISITIONS The Company acquired the following companies in the three month period ended November 30, 1998 in transactions that were accounted for under the purchase method under Canadian GAAP and as poolings of interests under US GAAP.
APPROXIMATE COST OF PURCHASE FOR CANADIAN ACQUIRED COMPANY DATE ACQUIRED SHARES ISSUED* GAAP PURPOSES - -------------------------------------------------- ---------------------- -------------- --------------------- Clinserve AG...................................... November 5, 1998 316,805 $3.8 million McKnight GmBH..................................... November 6, 1998 873,325 $10.7 million
- ------------------------ * The Company's Common Stock was issued in exchange for all the outstanding shares of each of the acquired companies. All consolidated financial data under US GAAP have been restated to include the results of Clinserve AG on a retroactive basis. The financial data of McKnight GmBH was not materially different from that previously reported by the Company, and thus previous years' US GAAP data of Phoenix has not been restated. 3. STOCK OPTIONS Subsequent to August 31, 1998, the Company issued 731,983 stock options to certain directors, officers and employees of the Company. The options have exercise prices ranging from $8.54 to $16.69 and expire in the years 2008 and 2009. 4. ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES COMPREHENSIVE INCOME The Company adopted Financial Accounting Standard Board Statement No. 130, "Reporting Comprehensive Income" for US GAAP purposes in the first quarter of fiscal 1999. F-39 PHOENIX INTERNATIONAL LIFE SCIENCES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOVEMBER 30, 1998 EARNINGS PER SHARE The following table presents the earnings per share computations in accordance with U.S. GAAP.
FOR THE THREE MONTH PERIOD ENDED NOVEMBER 30 1998 1997 - -------------------------------------------------------------------------------------- ------------ ------------ $ $ Numerator for basic and diluted earnings per share income (loss) available to common stockholders........................................................................ 2,691 2,314 ------------ ------------ Denominator Denominator for basic earnings per share weighted-average shares outstanding........ 26,047,189 25,131,664 Effect of dilutive stock options.................................................... 240,992 173,441 ------------ ------------ Denominator for diluted earnings per share--adjusted weighted-average shares.......... 26,288,181 25,305,105 ------------ ------------ Basic and diluted earnings per share.................................................. 0.10 0.09 ------------ ------------
The weighted average shares issued and outstanding for the quarters ended November 30, 1998 and 1997 have been restated to reflect the shares issued on the acquisitions of ITEM, Clinserve, and ANAWA, as applicable. MATERIAL VARIATIONS FROM US GAAP WHICH HAVE ARISEN IN THE FIRST QUARTER OF 1999 As a result of the McKnight GmbH and the Clinserve AG acquisitions being accounted for using the pooling of interests method under US GAAP and the purchase method under Canadian GAAP, the following material adjustments would be required to reconcile the Canadian GAAP balance sheet to US GAAP: a. Reduce other assets by approximately $14,800, which represents the goodwill recorded on the transactions; b. Reduce capital stock by approximately $11,800; c. Reduce retained earnings by approximately $3,000. F-40 REPORT OF INDEPENDENT AUDITORS The Board of Directors IBRD--Rostrum Global, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheet of IBRD--Rostrum Global, Inc. and Subsidiaries as of December 31, 1997 and the related statements of operations, stockholder's equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 audit of the financial statements provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above presents fairly, in all material respects, the consolidated financial position of IBRD--Rostrum Global, Inc. and Subsidiaries at December 31, 1997, and the consolidated results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Irvine, California December 10, 1998 F-41 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 1997 ASSETS Current assets: Cash......................................................................... $11,068,033 Contract receivables, net.................................................... 10,624,921 Prepaid investigator costs................................................... 612,658 Prepaid expenses and other current assets.................................... 961,052 ----------- Total current assets........................................................... 23,266,664 Property and equipment Furniture and equipment...................................................... 2,473,284 Computer equipment........................................................... 3,861,937 Leasehold improvements....................................................... 529,294 ----------- 6,864,515 Less accumulated depreciation and amortization............................... (4,521,972) ----------- 2,342,543 Goodwill, net of accumulated amortization of $11,731,032....................... 19,250,200 Covenant not-to-compete, net of accumulated amortization of $1,211,274......... 34,608 Other assets................................................................... 114,065 Investment in KCAS............................................................. 2,139,502 ----------- Total assets................................................................... $47,147,582 ----------- ----------- LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable............................................................. $ 1,603,552 Accrued expenses............................................................. 3,567,876 Accrued direct contract costs................................................ 4,868,780 Deferred contract revenues................................................... 13,905,423 Current maturities of notes payable and other borrowings..................... 11,571,196 Taxes payable................................................................ 421,207 ----------- Total current liabilities...................................................... 35,938,034 Capital leases, net of current maturities...................................... 203,167 ----------- Total liabilities.............................................................. 36,141,201 Commitments and contingencies Stockholder's equity: Common stock, $.01 par value: Authorized shares--4,000,000 Issued and outstanding shares--10,000...................................... 100 Additional paid-in capital................................................... 48,574,817 Accumulated deficit.......................................................... (37,578,857) Cumulative foreign currency translation...................................... 10,321 ----------- Total stockholder's equity..................................................... 11,006,381 ----------- Total liabilities and stockholder's equity..................................... $47,147,582 ----------- -----------
See accompanying notes. F-42 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 Gross revenue.................................................. $61,149,608 Reimbursable costs............................................. 20,765,719 ---------- Net revenue.................................................... 40,383,889 Service costs.................................................. 32,644,835 ---------- Net contract margin............................................ 7,739,054 Kuraya administrative fees..................................... 315,614 Selling, general and administrative expenses................... 7,584,109 Amortization of intangible assets.............................. 2,478,368 ---------- Operating loss................................................. 2,639,037 Interest and other expenses, net............................... (419,222) ---------- Loss before provision for income taxes......................... (3,058,259) Provision for income taxes..................................... 52,000 ---------- Net loss....................................................... $(3,110,259) ---------- ----------
See accompanying notes. F-43 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
CUMULATIVE COMMON STOCK ADDITIONAL FOREIGN ---------------------- PAID-IN ACCUMULATED CURRENCY SHARES AMOUNT CAPITAL DEFICIT TRANSLATION TOTAL --------- ----------- ------------- -------------- ----------- ------------- Balance at January 1, 1997................. 10,000 $ 100 $ 48,574,817 $ (34,468,598) $ (62,524) $ 14,043,795 Foreign currency translation............. -- -- -- -- 72,845 72,845 Net loss................................. -- -- -- (3,110,259) -- (3,110,259) --------- ----- ------------- -------------- ----------- ------------- Balance at December 31, 1997............... 10,000 $ 100 $ 48,574,817 $ (37,578,857) $ 10,321 $ 11,006,381 --------- ----- ------------- -------------- ----------- ------------- --------- ----- ------------- -------------- ----------- -------------
See accompanying notes. F-44 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1997 OPERATING ACTIVITIES Net loss........................................................................ $(3,110,259) Adjustments to reconcile net loss to net cash provided by operating activities: Amortization of intangible assets............................................. 2,478,368 Depreciation and amortization of property and equipment....................... 1,131,866 Loss on disposition of furniture and equipment................................ 51,540 Equity in earnings of KCAS.................................................... (15,501) Changes in operating assets and liabilities: Contract receivables, net................................................... 1,002,593 Prepaid investigator costs.................................................. (480,094) Prepaid expenses and other current assets................................... 158,087 Other assets................................................................ 35,877 Accounts payable and accrued expenses....................................... 18,021 Accrued direct contract costs............................................... 1,808,344 Deferred contract revenues.................................................. 2,827,454 ---------- Net cash provided by operating activities....................................... 5,906,296 INVESTING ACTIVITIES Proceeds from sale of property and equipment.................................... 16,429 Payments for purchases of property and equipment................................ (837,417) ---------- Net cash used in investing activities........................................... (820,988) FINANCING ACTIVITIES Proceeds from notes payable and other borrowings................................ 2,600,000 Repayments on notes payable and other borrowings................................ (2,707,218) ---------- Net cash used in financing activities........................................... (107,218) Effect of exchange rate on cash................................................. (44,605) Net increase in cash............................................................ 4,933,485 Cash at beginning of year....................................................... 6,134,548 ---------- Cash at end of year............................................................. $11,068,033 ---------- ---------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest........................................................................ $ 609,669 ---------- ---------- Income taxes.................................................................... $ 93,663 ---------- ----------
See accompanying notes. F-45 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 1. BUSINESS IBRD--Rostrum Global, Inc. and Subsidiaries (IBRD--Rostrum or the Company) provides independent clinical research and clinical design management services to customers in the pharmaceutical industry for the evaluation and certification of new pharmaceutical compounds, primarily in the United States and Europe. The Company is a wholly-owned subsidiary of Kuraya American Systems Inc. (KAS or the Parent) which is a subsidiary of Kuraya Corporation (Kuraya). The Company had certain intercompany relationships with KAS during the year, and as such, the accompanying consolidated financial statements may not be indicative of the Company on a stand-alone basis. On December 24, 1997, KAS entered into an agreement to sell the common stock of the Company to Phoenix International Life Sciences, Inc. (Phoenix) (NOTE 10). The transaction was completed on February 6, 1998. 2. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of IBRD--Rostrum and its wholly-owned subsidiaries, IBRD--Rostrum Europe, Inc. (Europe, Inc.) and IBRD Center for Clinical Research, Inc. (ICCR) (collectively, the Company). All significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of the 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. PREPAID INVESTIGATOR COSTS Prepaid investigator costs represent amounts paid up front to investigators who are engaged in clinical research. These amounts are used by investigators to fund the costs of the projects. Reimbursable revenue is recognized and costs are expensed as the funds are earned. CONTRACT RECEIVABLES Contract receivables arise in the normal course of performing services for customers. The Company performs credit evaluations of its customers and does not require collateral. The Company maintains allowances for potential credit losses. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation of furniture and equipment is provided on the straight-line method over the estimated useful lives of the assets or the related lease term, generally three to five years. Amortization of leasehold improvements is provided over the shorter of the related lease terms or the estimated useful lives of the improvements. F-46 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) GOODWILL Goodwill is being amortized on the straight-line method over 15 years. Recoverability of this asset is dependent on future operating cash flows of the Company. Management periodically evaluates the potential impairment of goodwill. Such evaluation is based on undiscounted expected future operating cash flows. INVESTMENTS The Company accounts for its investments that are 50% or less owned under the equity method of accounting, because the Company does not exercise control over the investees. REVENUE RECOGNITION The Company recognizes contract revenues using the percentage-of-completion method principally based on costs incurred to total estimated contract costs at completion or the achievement of milestones. As such, revisions in estimates during the course of completing the contract are reflected in the accounting period in which the revision becomes known. At the time a loss on a contract becomes known, the entire amount of the estimated loss on the contract is accrued. Amounts billed and cash advances received in excess of earnings on contracts are recorded as deferred contract revenues and recognized as contract revenues when earned. INCOME TAXES The Company is included in the consolidated federal and state income tax returns of KAS. The Company accounts for income taxes in accordance with SFAS No. 109, ACCOUNTING FOR INCOME TAXES, as if it filed a separate tax return. SFAS No. 109 requires the recognition of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company's financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and the tax bases of the assets and liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or all of the deferred tax asset will not be realized. FOREIGN CURRENCY TRANSLATION In accordance with the provisions of SFAS No. 52, FOREIGN CURRENCY TRANSLATION, the assets and liabilities located outside the United States are generally translated into U.S. dollars at the rates of exchange in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the period. Gains and losses resulting from foreign currency transactions are recognized currently in the results of operations, and those resulting from translation of financial statements are accumulated as a separate component of stockholder's equity. F-47 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. This statement is effective for fiscal years beginning after December 15, 1997. 3. TRANSACTIONS WITH RELATED PARTIES The Company has a management agreement with KAS whereby KAS provides services such as the translation of documents, communications with Kuraya and attendance at various meetings. The Company was charged $315,614 for management fees and other expenses incurred by KAS on behalf of the Company and has included these amounts in selling, general and administrative expenses. During the year, interest expense of $60,000 was incurred related to KAS borrowings. At December 31, 1997, accrued interest payable to KAS was $302,500 (NOTE 6). 4. INVESTMENT IN KCAS The Company has a 44% investment in Kansas City Analytical Services (KCAS), an analytical and pharmacokinetics consulting business. 5. CONTRACT RECEIVABLES Contract receivables consisted of the following: Billed......................................................... $8,162,316 Unbilled....................................................... 2,641,224 Allowance for doubtful accounts................................ (178,619) ---------- $10,624,921 ---------- ----------
The Company records a deferred contract revenue liability when billed amounts exceed revenue recognized for a contract. At December 31, 1997, deferred contract revenues totaled $13,905,423. 6. NOTES PAYABLE AND OTHER BORROWINGS In connection with the sale to Phoenix (NOTE 10), the Company repaid its notes payable and other borrowings, except for its capital leases, as of February 6, 1998. Accordingly, the Company recorded all such notes payable and other borrowings as current liabilities. F-48 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 6. NOTES PAYABLE AND OTHER BORROWINGS (CONTINUED) Notes payable and other borrowings consisted of the following: Line of credit with bank, interest at 7.215%, guaranteed by KAS........................................................... $3,000,000 Note payable to bank, interest at 5.85% payable semi-annually in arrears, guaranteed by KAS.................................... 2,400,000 Notes payable to KAS, interest at 3%............................ 2,000,000 Line of credit with bank, interest at 6.42%; guaranteed by KAS........................................................... 1,600,000 Note payable to bank, interest at 6.55% payable semi-annually in arrears, guaranteed by KAS.................................... 1,300,000 Line of credit with bank, interest at 7.78%, guaranteed by KAS........................................................... 500,000 Line of credit with bank, interest at 6.48%, guaranteed by KAS........................................................... 500,000 Capital leases (NOTE 7)......................................... 474,363 --------- 11,774,363 Less current maturities......................................... 11,571,196 --------- $ 203,167 --------- ---------
7. LEASING ARRANGEMENTS The Company is obligated under long-term, operating leases for office space and office equipment which expire at various dates through 2004. The terms of the Company's office leases include fixed rental payment increases. Accordingly, rent expense has been recognized on the straight-line basis over the term of the lease. Deferred rent of $346,536 is included in accrued expenses in the accompanying consolidated balance sheet. Additionally, the Company is obligated under long-term, capital leases for equipment which expire at various dates through 1999. The Company has recorded the capital lease obligations at the present value of the future minimum lease payments. Equipment included in the accompanying consolidated balance sheet under capital leases was as follows: Computer equipment.............................................. $1,023,899 Less accumulated amortization................................... (470,308) --------- $ 553,591 --------- ---------
Amortization of equipment held under capital leases is included in selling, general and administrative expenses in the accompanying consolidated financial statements. F-49 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 7. LEASING ARRANGEMENTS (CONTINUED) Future minimum lease payments at December 31, 1997 and the present value of the capital lease obligations are as follows:
CAPITAL OPERATING LEASES LEASES ----------- ------------ Year ending December 31: 1998............................................................. $ 310,997 $ 1,456,158 1999............................................................. 201,439 1,408,275 2000............................................................. 26,807 1,174,886 2001............................................................. 5,893 823,915 2002............................................................. -- 701,973 Thereafter....................................................... -- 727,979 ----------- ------------ Total future minimum lease payments.............................. 545,136 $ 6,293,186 ------------ ------------ Less amount representing interest................................ (70,773) ----------- Present value of future minimum payments......................... 474,363 Less current portion............................................. (271,196) ----------- Long-term portion of capital lease obligations................... $ 203,167 ----------- -----------
Rent expense incurred under the Company's operating lease obligations was $1,553,773 for the year. The Company has subleased office space with sublease income of approximately $62,817 for the year. 8. INCOME TAXES The reconciliation of the provision for income taxes to taxes computed at U.S. federal statutory rates is as follows: Income tax benefit at statutory rates........................... $(1,014,000) Amortization of intangible assets............................... 473,000 Foreign income taxes............................................ 52,000 Losses recorded without benefit................................. 541,000 ---------- $ 52,000 ---------- ----------
F-50 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 8. INCOME TAXES (CONTINUED) The components of deferred tax assets and liabilities are as follows: Deferred tax assets: Net operating loss carryforwards.............................. $5,640,000 Nonqualifying revenue......................................... 755,000 Reserves...................................................... 513,000 Bonus accrual................................................. 389,000 Depreciation.................................................. 218,000 Other, net.................................................... 36,000 ---------- Total deferred tax assets....................................... 7,551,000 Valuation allowance for deferred tax assets..................... (7,551,000) ---------- Net deferred tax assets......................................... $ -- ---------- ----------
At December 31, 1997, the Company had approximately $11,072,000, $4,239,000 and $5,390,000 of federal, foreign, and state net operating loss carryforwards, respectively, which expire in various years through 2012. 9. BENEFIT PLANS 401(K) SAVINGS PLAN In January 1989, the Company adopted a 401(k) Savings Plan (the Plan). The Plan is a defined contribution plan for all employees located in the United States who are at least age 18 and have met the required service of one year. Employer contributions, which are made at the discretion of the Company's Board of Directors, vest at a rate of 40% beginning the second year of participation and increase by 20% per year thereafter. During the year, employer contributions to the Plan were $183,285. IBRD--ROSTRUM GLOBAL LIMITED PENSION PLAN The Company contributes 3% of gross income to personal pension accounts for participants located in the United Kingdom, of the IBRD--Rostrum Global Limited Pension Plan (the Pension Plan). The plan participants must be employees of IBRD--Rostrum Global Limited, a wholly-owned subsidiary of IBRD--Rostrum Group Limited, which is a wholly-owned subsidiary of Europe, Inc., for over one year and have an annual salary greater than approximately $27,000. During the year, employer contributions to the Pension Plan were $96,907. 10. SUBSEQUENT EVENT On December 24, 1997, KAS entered into an agreement to sell the common stock of the Company to Phoenix International Life Sciences, Inc. (the Transaction). The Transaction was completed on February 6, 1998. In connection with the Transaction, the Company liquidated a foreign subsidiary whereby all of the assets and liabilities including all of the issued and outstanding common stock of the foreign F-51 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 10. SUBSEQUENT EVENT (CONTINUED) subsidiaries were distributed to IBRD--Rostrum Global, Inc. In addition, Phoenix International Life Sciences (U.S.) Inc. repaid its notes payable and other borrowings. F-52 INDEPENDENT AUDITORS' REPORT The Board of Directors IBRD--Rostrum Global, Inc. and subsidiaries Irvine, California We have audited the accompanying consolidated balance sheets of the IBRD--Rostrum Global, Inc. and subsidiaries (the Company) as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These 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, such consolidated financial statements present fairly, in all material respects, the financial position of the IBRD--Rostrum Global, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Deloitte & Touche LLP Costa Mesa, California March 4, 1997 F-53 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995
1996 1995 ------------- ------------- ASSETS CURRENT ASSETS: Cash............................................................................... $ 6,134,548 $ 7,745,085 Contract receivables, net (Note 5)................................................. 11,727,902 10,950,101 Prepaid investigator costs......................................................... 220,990 1,074,334 Prepaid expenses and other current assets.......................................... 1,070,816 472,173 ------------- ------------- Total current assets............................................................. 19,154,256 20,241,693 PROPERTY AND EQUIPMENT, net (Note 7): Furniture and equipment............................................................ 2,465,473 2,193,494 Computer equipment................................................................. 3,412,553 2,568,813 Leasehold improvements............................................................. 539,026 489,795 ------------- ------------- 6,417,052 5,252,102 Less accumulated depreciation and amortization..................................... (3,888,327) (3,022,615) ------------- ------------- Property and equipment, net...................................................... 2,528,725 2,229,487 GOODWILL, net of accumulated amortization of $9,662,258 (1996) and $7,583,829 (1995) (Note 8).................................................................. 21,318,974 23,620,125 COVENANTS NOT-TO-COMPETE, net of accumulated amortization of $795,980 (1996) and $4,240,674 (1995) (Notes 1 and 8)................................................ 449,902 865,196 OTHER ASSETS....................................................................... 130,020 88,792 INVESTMENT IN KCAS (Note 4)........................................................ 2,124,001 2,032,990 ------------- ------------- $ 45,705,878 $ 49,078,283 ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable................................................................... $ 1,296,389 $ 1,628,388 Accrued liabilities (Notes 3 and 7)................................................ 3,691,256 2,946,950 Accrued direct contract costs...................................................... 3,207,549 4,145,225 Deferred contract revenues (Note 5)................................................ 11,222,747 9,206,825 Current maturities of notes payable and other borrowings (Notes 6 and 7)........... 6,600,187 4,931,787 Current maturity of liability to former stockholder (Note 6)....................... 1,170,946 Taxes payable (Note 8)............................................................. 520,580 449,120 ------------- ------------- Total current liabilities........................................................ 26,538,708 24,479,241 NOTES PAYABLE AND OTHER BORROWINGS, net of current maturities (Notes 6 and 7)...... 5,004,625 6,451,068 LIABILITY TO FORMER STOCKHOLDERS (Note 6).......................................... 3,431,806 OTHER LONG-TERM LIABILITIES........................................................ 118,750 182,500 ------------- ------------- Total liabilities................................................................ 31,662,083 34,544,615 COMMITMENTS AND CONTINGENCIES (Notes 4 and 7) STOCKHOLDERS' EQUITY (Notes 9 and 10): Common stock--$.01 par value; authorized, 4,000,000 shares; issued and outstanding, 10,000 shares.................................................................... 100 100 Additional paid-in capital......................................................... 48,574,817 42,838,488 Accumulated deficit................................................................ (34,468,598) (28,433,157) Cumulative foreign currency translation............................................ (62,524) 128,237 ------------- ------------- Total stockholders' equity....................................................... 14,043,795 14,533,668 ------------- ------------- $ 45,705,878 $ 49,078,283 ------------- ------------- ------------- -------------
See notes to consolidated financial statements. F-54 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995 ------------- ------------- GROSS REVENUE...................................................................... $ 59,766,765 $ 49,828,546 REIMBURSABLE COSTS................................................................. 26,003,808 21,089,038 ------------- ------------- NET REVENUE........................................................................ 33,762,957 28,739,508 SERVICE COSTS...................................................................... 28,502,379 21,947,935 ------------- ------------- Contract margin.................................................................. 5,260,578 6,791,573 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Notes 3, 7 and 10).............................................................. 7,575,221 7,394,209 ------------- ------------- OPERATING LOSS..................................................................... (2,314,643) (602,636) EQUITY IN EARNINGS OF KCAS (Note 4)................................................ 91,010 146,507 OTHER EXPENSES: Interest and other expense, net.................................................... (307,234) (422,936) Amortization of intangible assets.................................................. (2,494,712) (3,175,588) Compensation expense due to settlement of acquisition obligations (Notes 1 and 9)............................................................................... (1,009,862) (132,553) ------------- ------------- NET LOSS........................................................................... $ (6,035,441) $ (4,187,206) ------------- ------------- ------------- -------------
See notes to consolidated financial statements. F-55 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
CUMULATIVE FOREIGN COMMON STOCK ADDITIONAL CURRENCY TOTAL ---------------------- PAID-IN ACCUMULATED TRANSLATION STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT GAIN (LOSS) EQUITY --------- ----------- ------------- -------------- ----------- ------------- BALANCE, January 1, 1995................... 10,000 $ 100 $ 32,267,751 $ (24,245,951) $ -- $ 8,021,900 Contribution of capital to satisfy exercise of stock put agreement (Note 9).......... 2,742,222 2,742,222 Contributions from KAS (Note 1)............ 7,828,515 7,828,515 Foreign currency translation gain.......... 128,237 128,237 Net loss................................... (4,187,206) (4,187,206) --------- ----- ------------- -------------- ----------- ------------- BALANCE, December 31, 1995................. 10,000 100 42,838,488 (28,433,157) 128,237 14,533,668 Contributions from KAS (Note 1)............ 5,736,329 5,736,329 Foreign currency translation loss.......... (190,761) (190,761) Net loss................................... (6,035,441) (6,035,441) --------- ----- ------------- -------------- ----------- ------------- BALANCE, December 31, 1996................. 10,000 $ 100 $ 48,574,817 $ (34,468,598) $ (62,524) $ 14,043,795 --------- ----- ------------- -------------- ----------- ------------- --------- ----- ------------- -------------- ----------- -------------
See notes to consolidated financial statements. F-56 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss............................................................................ $ (6,035,441) $ (4,187,206) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Amortization of intangible assets................................................. 2,494,712 3,175,588 Depreciation and amortization of property and equipment........................... 980,054 920,540 (Gain) loss on disposition of furniture and equipment and other assets............ (18,641) 14,772 Interest expense on repurchase obligation......................................... 133,998 Equity in earnings of KCAS........................................................ (91,010) (146,507) Compensation expense due to settlement of acquisition obligations................. 1,018,560 (Increase) decrease in assets and increase (decrease) in liabilities: Contract receivables............................................................ (515,010) (4,164,494) Prepaid investigator costs...................................................... 853,344 (583,584) Prepaid expenses and other current assets....................................... (272,957) 659,061 Other assets.................................................................... (2,020) 316,213 Accounts payable and accrued liabilities........................................ 122,761 580,374 Accrued direct contract costs................................................... (1,006,261) 2,610,750 Deferred contract revenues...................................................... 1,631,997 2,172,301 Accrued interest on notes payable............................................... 15,635 34,650 ------------- ------------- Net cash (used in) provided by operating activities........................... (824,277) 1,536,456 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property and equipment........................................ 74,427 52,565 Payments for purchases of property and equipment.................................... (790,478) (866,513) Cash used to purchase additional 10% of KCAS........................................ (796,267) Cash used to purchase Rostrum, net of cash received................................. (6,916,798) Net payments to discontinue operations of IBRD Europe............................... (108,265) ------------- ------------- Net cash used in investing activities......................................... (716,051) (8,635,278)
See notes to consolidated financial statements. F-57 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995 ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under line of credit...................................................... $ 153,000 $ 1,619,000 Repayments on note payable to bank................................................... (200,000) Repayments to KAS.................................................................... (1,000,000) Repayments under capital lease obligation............................................ (207,764) (31,002) Contribution of capital by KAS....................................................... 5,736,329 8,251,470 Payments to satisfy exercise of stock put/call option................................ (422,955) Payments to former shareholders of Rostrum........................................... (5,736,329) ------------- ------------ Net cash (used in) provided by financing activities................................ (254,764) 8,416,513 EFFECT OF EXCHANGE RATE ON CASH...................................................... 184,555 9,000 ------------- ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................................. (1,610,537) 1,326,691 CASH, beginning of year.............................................................. 7,745,085 6,418,394 ------------- ------------ CASH, end of year.................................................................... $ 6,134,548 $ 7,745,085 ------------- ------------ ------------- ------------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION-- Cash paid during year: Interest........................................................................... $ 701,258 $ 734,751 ------------- ------------ ------------- ------------ Income taxes......................................................................... $ 42,339 $ 116,762 ------------- ------------ ------------- ------------
SCHEDULE OF NONCASH TRANSACTIONS-- In 1996, the Company acquired furniture and equipment and computer equipment in exchange for capital lease obligations with a principal balance of $467,430. See notes to consolidated financial statements. F-58 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 1. BUSINESS IBRD--Rostrum Global, Inc. and subsidiaries (IBRD--Rostrum or the Company) provides independent clinical research and clinical design management services to customers in the pharmaceutical industry for the evaluation and certification of new pharmaceutical compounds, primarily in the United States and Europe. Prior to February 1996, IBRD-Rostrum was a subsidiary of IBRD Holdings Co. (Holdings), a wholly-owned subsidiary of Kuraya American Systems Inc. (KAS or the Parent). In February 1996, Holdings was dissolved and the Company became wholly-owned by KAS. IBRD--Rostrum has significant intercompany relationships and depends on KAS for financing. As such, the accompanying consolidated financial statements may not be indicative of the Company on a stand-alone basis. During February 1995, IBRD--Rostrum acquired the stock of Rostrum Limited (Rostrum), a privately-held company that offers research and development services to the pharmaceutical industry, for aggregate cash payments of $7,600,857. Certain former stockholders of Rostrum, who remained on as employees of the Company, were to be paid a minimum liability in accordance with an earn-out clause under the purchase agreement. The present value of the minimum obligation due under earn-out clause was $4,737,148, which was recorded as part of the purchase price at the date of acquisition. Should future revenues and profits of Rostrum reach certain targets, additional amounts would then be paid to the former stockholders. In 1996, KAS contributed $5,736,329 to the Company, which the Company paid to the former stockholders of Rostrum as an early settlement of its obligations under the earn-out clause. The settlement amount exceeded the present value of the minimum estimated obligation under the earn-out clause by $1,018,560 which was recorded as compensation expense in 1996. This transaction was accounted for as a purchase and has been reflected in the consolidated financial statements subsequent to the date of acquisition. As a result of this acquisition, the Company recorded an excess of cost over net assets acquired (goodwill) of $10,345,552 in the transaction, which is being amortized on the straight-line basis over 15 years. The Company also entered into a covenant not-to-compete in the amount of $1,245,882 with one of the principals of Rostrum. The covenant not-to-compete is being amortized over its contract term of three years on a straight-line basis. 2. SIGNIFICANT ACCOUNTING POLICIES FISCAL YEAR--The Company utilizes a 4-4-5-week reporting period and has a calendar year-end. PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include the accounts of IBRD and its wholly-owned subsidiaries, IBRD-Rostrum Europe, Inc. (Europe, Inc.) and IBRD Center for Clinical Research, Inc. (ICCR) (collectively, the Company). All significant intercompany balances and transactions have been eliminated in consolidation. 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. PREPAID INVESTIGATOR COSTS--Prepaid investigator costs represent amounts paid up front to investigators who are engaged in clinical research. These amounts are used by investigators to fund the costs of the projects. Reimbursable revenue is recognized and costs are expensed as the funds are earned. F-59 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CONTRACT RECEIVABLES--Contract receivables arise in the normal course of performing services for customers. The Company performs credit evaluations of its customers and does not require collateral. The Company maintains allowances for potential credit losses. PROPERTY AND EQUIPMENT--Property and equipment are stated at cost. Depreciation of furniture and equipment is provided on the straight-line method over the estimated useful lives of the assets or the related lease term, generally three to five years. Amortization of leasehold improvements is provided over the shorter of the related lease terms or the estimated useful lives of the improvements. GOODWILL--Goodwill is being amortized on a straight-line basis over 15 years. Recoverability of this asset is dependent on future operating cash flows of the Company. Management periodically evaluates the potential impairment of goodwill and plans to continue doing so. Such evaluation is based on undiscounted expected future operating cash flows. In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF, which was adopted by the Company in 1996. SFAS No. 121 represented a change in the way the Company measures the recoverability of its intangible assets. The adoption of SFAS No. 121 did not have a material impact on the financial statements of the Company. INVESTMENTS--The Company accounts for its investments that are 50% or less owned under the equity method of accounting, because the Company does not exercise control over the investees. REVENUE RECOGNITION--The Company recognizes contract revenues using the percentage-of-completion method principally based on cost incurred to total estimated contract costs at completion or the achievement of milestones. As such, revisions in estimates during the course of completing the contract are reflected in the accounting period in which the revision becomes known. At the time a loss on a contract becomes known, the entire amount of the estimated loss on the contract is accrued. Amounts billed and cash advances received in excess of earnings on contracts are recorded as deferred contract revenues and recognized as contract revenues when earned. PROVISION (BENEFIT) IN LIEU OF INCOME TAXES--The Company is included in the consolidated federal and state income tax returns of KAS. For the years ended December 31, 1996 and 1995, the provision (benefit) in lieu of income taxes has been computed on the separate results of operations of the Company as if it filed a separate tax return. The Company accounts for income taxes in accordance with SFAS No. 109, ACCOUNTING FOR INCOME TAXES, as if it filed a separate tax return. SFAS No. 109 requires the recognition of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company's financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and the tax bases of the assets and liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or all of the deferred tax asset will not be realized. FOREIGN CURRENCY TRANSLATION--In accordance with the provisions of SFAS No. 52, FOREIGN CURRENCY TRANSLATION, the assets and liabilities located outside the United States are generally translated into U.S. F-60 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) dollars at the rates of exchange in effect at the balance sheet dates. Income and expense items are translated at the average exchange rates prevailing during the period. Gains and losses resulting from foreign currency transactions are recognized currently in income, and those resulting from translation of financial statements are accumulated as a separate component of stockholders' equity. RECLASSIFICATIONS--Certain reclassifications have been made to the 1995 consolidated financial statements to conform them to the 1996 consolidated financial statement presentation. 3. TRANSACTIONS WITH RELATED PARTIES IBRD entered into a management agreement with KAS whereby KAS would provide services such as the translation of documents, communications with Kuraya Corporation, Japan (the Parent), and attendance at various meetings. For the year ended December 31, 1996, management fees of $150,000 and KAS administrative expenses of $133,600 were included in selling, general and administrative expenses. No such fees were charged in the year ended December 31, 1995. For the years ended December 31, 1996 and 1995, interest expense of $60,000 and $68,000, respectively, was incurred related to KAS borrowings. At December 31, 1996, accrued interest payable to KAS was $242,500. The consolidated financial statements have been prepared on the basis that the Company will be able to continue as a going concern. This basis assumes that cash will be available to finance operations and that the realization of assets and the settlement of liabilities will occur in the normal course of business. The Company's ability to continue operations is dependent upon the financial support of the Parent and ultimately upon its ability to achieve profitable operations. Management has received representation from KAS stating that it will continue to provide the necessary financial support for the Company's operations through December 31, 1997. 4. INVESTMENT IN KCAS The Company acquired 34% of Kansas City Analytical Services (KCAS), an analytical and pharmacokinetics consulting business on September 30, 1992, for $850,000. Effective May 5, 1995, the Company acquired an additional 10% of KCAS for $446,267. The Company also contributed $350,000 in cash in accordance with the agreement, and KCAS entered into a five-year employment agreement with two KCAS employees. In the event that the Company exercises its option to purchase another 36% of KCAS on or after September 30, 1997, the $350,000 cash contribution will be credited against the stock purchase. Additionally, at that time, KCAS will pay bonuses in the amount of $350,000 to two KCAS employees. If the Company elects not to exercise such option, the contribution will be retained by KCAS. In connection with the agreement, IBRD and KAS will assist KCAS in obtaining financing for capital expenditures and will provide guarantees up to $1,500,000 following a formal request and plan from KCAS. No such request or plan has been received by the Company. The Company has the option to purchase the remaining stock of KCAS in increments of 36% and 20% at September 30, 1997 and any time after September 30, 1999, respectively. F-61 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 5. CONTRACT RECEIVABLES Contract receivables consisted of the following at December 31:
1996 1995 ------------- ------------- Billed......................................................... $ 8,725,010 $ 6,604,369 Unbilled....................................................... 3,237,740 4,544,181 Allowance for doubtful accounts................................ (234,848) (198,449) ------------- ------------- $ 11,727,902 $ 10,950,101 ------------- ------------- ------------- -------------
The Company records a deferred contract revenue liability when billed amounts exceed revenue recognized for a contract. At December 31, 1996 and 1995, deferred contract revenues totaled $11,222,747 and $9,206,825, respectively. 6. NOTES PAYABLE AND OTHER BORROWINGS Notes payable and other borrowings consisted of the following at December 31:
1996 1995 ------------- ------------- Note payable to bank, due in semi-annual principal payments of $200,000, with the balance to be paid in full September 2000; interest at 5.85% payable semi-annually in arrears; guaranteed by KAS............................................ $ 2,800,000 $ 3,000,000 Note payable to bank, due in semi-annual principal payments of $100,000, beginning January 1997 with the balance to be paid in full January 2001; interest at 6.55% payable semi-annually in arrears; guaranteed by KAS................................ 1,500,000 1,500,000 Line of credit with bank, principal and interest due June 1997; interest at 6.25%; guaranteed by KAS......................... 1,000,000 1,000,000 Line of credit with bank, principal and interest due June 1997; interest at 6.39%; guaranteed by KAS......................... 3,000,000 3,000,000 Notes payable to KAS, principal payments of $1,000,000 due November 1997 and January 1998; interest at 3%............... 2,000,000 2,000,000 Amount due to former stockholder of Rostrum Limited............ 4,602,752 Line of credit with bank, principal and interest due March 1997; interest at 7%......................................... 774,700 619,200 Capital leases (Note 7)........................................ 530,112 263,655 ------------- ------------- 11,604,812 15,985,607 Less current maturities........................................ (6,600,187) (6,102,733) ------------- ------------- $ 5,004,625 $ 9,882,874 ------------- ------------- ------------- -------------
F-62 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 6. NOTES PAYABLE AND OTHER BORROWINGS (CONTINUED) Maturities for notes payable and other borrowings, excluding capital leases (Note 7), as of December 31, 1996 are as follows: 1997 $6,374,700 1998 1,600,000 1999 600,000 2000 1,800,000 2001 700,000 ---------- Thereafter $11,074,700 ---------- ----------
7. LEASING ARRANGEMENTS The Company is obligated under long-term, operating leases for office space and office equipment which expire at various dates through 2005. The terms of the Company's office leases include fixed rental payment increases. Accordingly, rental expense has been recognized on the straight-line basis over the term of the lease. Deferred rent included in the accompanying consolidated balance sheets as accrued liabilities was $275,600 and $423,261 at December 31, 1996 and 1995, respectively. Additionally, the Company is obligated under long-term, capital leases for equipment which expire at various dates through 1999. The Company has recorded the capital lease obligations at the present value of the future minimum lease payments. Equipment included in the accompanying consolidated balance sheet under capital leases as of December 31, 1996 is as follows: Furniture and equipment and computer equipment................... $ 952,723 Less accumulated amortization.................................... (354,988) --------- $ 597,735 --------- ---------
F-63 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 7. LEASING ARRANGEMENTS (CONTINUED) Future minimum lease payments (net of sublease income) at December 31, 1996 and the present value of the capital lease obligations are as follows:
CAPITAL OPERATING LEASES LEASES ----------- ------------ Year ending December 31: 1997............................................................... $ 266,303 $ 1,226,302 1998............................................................... 225,737 1,030,523 1999............................................................... 113,147 1,003,310 2000............................................................... 9,165 855,491 2001............................................................... 6,111 635,484 Thereafter......................................................... 1,354,399 ----------- ------------ Total future minimum lease payments................................ 620,463 $ 6,105,509 ------------ ------------ Less amount representing interest.................................. (90,351) ----------- Present value of future minimum payments........................... 530,112 Less current portion............................................... (225,487) ----------- Long-term portion of capital lease obligation...................... $ 304,625 ----------- -----------
The Company has subleased office space with sublease income of approximately $63,000 for the year ending December 31, 1997. Rent expense incurred under the Company's operating lease obligations was $1,286,280 and $1,311,274 for the years ended December 31, 1996 and 1995, respectively. 8. INCOME TAXES The Company has estimated net deferred tax assets of approximately $7,238,000, which are offset by a corresponding full valuation allowance. The gross deferred tax assets relate principally to the net operating losses, deferred revenue and certain accrued liabilities. The Company has federal, state and foreign net operating loss carryforwards of approximately $11,900,000, $4,600,000 and $4,000,000, respectively, which expire at various times through 2010. KAS has had correspondence with the Internal Revenue Service which may preclude the deduction of amortization for the covenant not-to-compete taken in prior years. KAS intends to contest such position when the net operating loss is utilized. The net operating loss carryforwards differ from the Company's accumulated deficit due to amortization of goodwill and certain temporary differences including nonqualified revenue, accrued vacation, deferred rent and depreciation. Principally all of these temporary differences will reverse in 1997, except for depreciation and deferred rent. 9. STOCK PUT AGREEMENT As part of the purchase of the Company by KAS, KAS had the option to purchase all or part of the surviving stockholders' stock and each stockholder also had the right to require KAS to purchase his stock in the future. The Company initially recorded an accrued liability of $2,614,000, representing the present value of the minimum repurchase obligation under this agreement. F-64 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 9. STOCK PUT AGREEMENT (CONTINUED) In September 1995, KAS exercised its option and purchased the remaining shares and stock options and satisfied its obligations with an aggregate payment of $2,319,266. KAS then made a capital contribution which relieved the accrued liability established by the Company. Interest expense related to the stock put agreements was $133,998 for the year ended December 31, 1995. 10. BENEFIT PLANS 401(K) SAVINGS PLAN--In January 1989, the Company adopted a 401(k) Savings Plan (the Plan). The Plan is a defined contribution plan for all employees of the IBRD and ICCR who are at least age 18 and have met the required service of one year. Employer contributions, which are made at the discretion of the Company's Board of Directors, vest at a rate of 40% beginning the second year of participation and increase by 20% per year thereafter. During the years ended December 31, 1996 and 1995, employer contributions to the Plan were $208,899 and $177,293, respectively. IBRD--ROSTRUM GLOBAL LIMITED PENSION PLAN--The Company contributes 3% of gross income to personal pension accounts for participants of the IBRD--Rostrum Global Limited Pension Plan (the Pension Plan). The plan participants must be employees of IBRD--Rostrum Global Limited, a wholly-owned subsidiary of IBRD--Rostrum Group Limited, which is a wholly-owned subsidiary of Europe, Inc., for over one year and have an annual salary greater than approximately $27,000. During the year ended December 31, 1996, employer contributions to the Pension Plan were $83,396. PHANTOM STOCK PLAN--In December 1990, the Company adopted a phantom stock plan (Phantom Plan) whereby key employees of the Company will receive shares of common stock (Phantom Stock Units). The Phantom Plan is administered by the Company's Board of Directors and is limited to 10% of the issued and outstanding shares of IBRD as of December 1990 (plan adoption date). Phantom Stock Units vest over 60 months of employment and are subject to maturity provisions. Certain Phantom Stock Units have been issued to various key employees of the Company. The issuance of such units did not result in a liability or expense for the years ended December 31, 1996 and 1995. F-65 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS FOR THE 37-DAY PERIOD ENDED FEBRUARY 6, 1998
37 DAYS FEBRUARY 6, 1998 $ ----------- (UNAUDITED) Gross revenue........................................................................................ 7,268,110 Reimbursable costs................................................................................... 3,585,148 ----------- Net revenue.......................................................................................... 3,682,962 Service costs........................................................................................ 3,671,565 ----------- Net contract margin.................................................................................. 11,397 Kuraya administrative fees........................................................................... -- Selling, general and administrative expenses......................................................... 820,122 Amortization of intangible assets.................................................................... 260,411 ----------- Operating loss....................................................................................... 1,069,136 Interest and other expenses, net..................................................................... (11,253) ----------- Loss before provision for income taxes............................................................... (1,080,389) Provision for income taxes........................................................................... 5,625 ----------- Net loss............................................................................................. (1,086,014) ----------- -----------
F-66 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE 37-DAY PERIOD ENDED FEBRUARY 6, 1998
CUMULATIVE COMMON STOCK ADDITIONAL FOREIGN ---------------------- PAID-IN ACCUMULATED CURRENCY AMOUNT CAPITAL DEFICIT TRANSLATION TOTAL SHARES $ $ $ $ $ --------- ----------- ------------ ------------- ----------- ------------ Balance at January 1, 1998..................... 10,000 100 48,574,817 (37,578,857) 10,321 11,006,381 Foreign currency translation (unaudited)................................ -- -- -- -- (6,784) (6,784) Net loss (unaudited)......................... -- -- -- (1,086,014) -- (1,086,014) --------- --- ------------ ------------- ----------- ------------ Balance at February 6, 1998 (unaudited)................................ 10,000 100 48,574,817 (38,664,871) 3,537 9,913,583 --------- --- ------------ ------------- ----------- ------------ --------- --- ------------ ------------- ----------- ------------
F-67 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE 37-DAY PERIOD ENDED FEBRUARY 6, 1998
37 DAYS FEBRUARY 6, 1998 $ ------------- (UNAUDITED) OPERATING ACTIVITIES Net loss........................................................................................... (1,086,014) Adjustments to reconcile net loss to net cash provided by operating activities: Amortization of intangible assets................................................................ 260,411 Depreciation and amortization of property and equipment.......................................... 117,913 (Gain)/loss on disposition of furniture and equipment............................................ (516) Equity in earnings of KCAS....................................................................... -- Changes in operating assets and liabilities: Contract receivables, net...................................................................... 1,342,624 Prepaid investigator costs..................................................................... (395,489) Prepaid expenses and other current assets...................................................... 114,601 Other assets................................................................................... -- Accounts payable and accrued expenses.......................................................... 175,089 Accrued direct contract costs.................................................................. 573,623 Deferred contract revenues..................................................................... (2,428,793) Taxes payable.................................................................................. (68,466) Accrued interest in notes payable.............................................................. 5,684 ------------- Net cash provided by operating activities.......................................................... (1,389,333) INVESTING ACTIVITIES Proceeds from sale of property and equipment....................................................... 49,641 Payments for purchases of property and equipment................................................... (61,772) ------------- Net cash used in investing activities.............................................................. (12,131) FINANCING ACTIVITIES Proceeds from notes payable and other borrowings................................................... -- Repayments under capital lease obligations......................................................... (39,089) Repayments on notes payable and other borrowings................................................... (100,000) ------------- Net cash used in financing activities.............................................................. (139,089) Effect of exchange rate on cash.................................................................... (4,511) Net increase (decrease) in cash.................................................................... (1,545,064) Cash at beginning of period........................................................................ 11,068,033 ------------- Cash at end of period.............................................................................. 9,522,969 ------------- ------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest........................................................................................... 61,802 ------------- ------------- Income taxes....................................................................................... 73,661 ------------- -------------
F-68 IBRD--ROSTRUM GLOBAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS 1. STATEMENT OF ACCOUNTING PRESENTATION In the opinion of IBRD-Rostrum Global, Inc. and its subsidiaries (the "Company"), the accompanying unaudited consolidated financial statements include all significant adjustments (consisting only of normal recurring accruals) necessary to fairly state the consolidated results of operations and changes in cash flows and stockholder's equity for the 37 day period ended February 6, 1998. The unaudited consolidated financial statements do not include all disclosures of financial information required by generally accepted accounting principles. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 1997 included elsewhere in this proxy statement/prospectus. Interim results are not necessarily indicative of the results for the full year. 2. BUSINESS IBRD--Rostrum Global, Inc. and Subsidiaries (IBRD--Rostrum or the Company) provides independent clinical research and clinical design management services to customers in the pharmaceutical industry for the evaluation and certification of new pharmaceutical compounds, primarily in the United States and Europe. The Company is a wholly-owned subsidiary of Kuraya American Systems Inc. (KAS or the Parent) which is a subsidiary of Kuraya Corporation (Kuraya). The Company had certain intercompany relationships with KAS during the period, and as such, the accompanying consolidated financial statements may not be indicative of the Company on a stand-alone basis. On December 24, 1997, KAS entered into an agreement to sell the common stock of the Company to Phoenix International Life Sciences, Inc. The transaction was completed on February 6, 1998. These financial statements present the results of operations and changes in cash flows and stockholder's equity for the 37 day period ending immediately prior to this transaction. F-69 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, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and comprehensive loss and cash flows for each of the years in the three-year period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that Chrysalis International Corporation and its subsidiaries will continue as going concerns. As discussed in Note 5 to the financial statements, the Company has suffered recurring losses from operations, has a net working capital deficiency and is in default of certain of its debt covenants which raise substantial doubt about their ability to continue as going concerns. Management's plans in regard to these matters are also described in Note 5. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. KPMG LLP Philadelphia, Pennsylvania February 5, 1999 F-70 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
1998 1997 ------------- --------- ASSETS Current assets Cash and cash equivalents............................................................. $ 6,705 6,925 Trade accounts receivable, net (note 7)............................................... 8,766 9,669 Prepaid expenses and other current assets............................................. 1,928 1,916 ------------- --------- Total current assets.............................................................. 17,399 18,510 Property and equipment, net (note 9).................................................... 15,686 15,127 Intangible assets, net (note 10)........................................................ 809 805 Other assets............................................................................ 687 338 Restricted cash (note 12)............................................................... -- 460 ------------- --------- $ 34,581 35,240 ------------- --------- ------------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term borrowings (note 11)....................................................... 2,931 2,377 Note payable--related party (note 16)................................................. 319 291 Current portion of long-term debt (notes 4 and 12).................................... 4,821 768 Accounts payable...................................................................... 3,490 3,204 Accrued expenses (note 8)............................................................. 8,894 5,567 Deferred revenue...................................................................... 5,297 3,524 ------------- --------- Total current liabilities......................................................... 25,752 15,731 Long-term debt, excluding current portion (note 12)..................................... 6,010 6,561 Deferred income taxes (note 15)......................................................... 1,832 1,646 Other liabilities....................................................................... 725 633 ------------- --------- Total liabilities................................................................. 34,319 24,571 ------------- --------- Stockholders' equity (notes 13 and 14): 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 11,518,105 in 1998 and 11,430,764 in 1997........................................... 115 114 Additional paid-in capital............................................................ 59,089 57,768 Cumulative comprehensive loss......................................................... (108) (536) Employee stock purchase loans......................................................... (86) (86) Accumulated deficit................................................................... (58,748) (46,591) ------------- --------- Total stockholders' equity........................................................ 262 10,669 ------------- --------- Commitments and contingencies (notes 17 and 19)......................................... $ 34,581 35,240 ------------- --------- ------------- ---------
See accompanying notes to consolidated financial statements. F-71 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS EXPECT PER SHARE AMOUNTS)
1998 1997 1996 ---------- --------- --------- Revenues: Service revenue............................................................... $ 43,426 47,271 47,398 Less: reimbursed costs........................................................ (4,908) (5,769) (6,425) ---------- --------- --------- Net service revenue......................................................... 38,518 41,502 40,973 License fees.................................................................. 866 796 514 ---------- --------- --------- 39,384 42,298 41,487 ---------- --------- --------- Operating expenses: Direct costs.................................................................. 31,041 29,383 27,841 General, administrative and marketing......................................... 12,828 12,416 10,942 Depreciation and amortization................................................. 2,092 2,699 2,780 Business combination costs (note 6)........................................... -- -- 3,649 Restructuring costs (note 3).................................................. 3,872 -- -- ---------- --------- --------- 49,833 44,498 45,212 ---------- --------- --------- Loss from operations........................................................ (10,449) (2,200) (3,725) ---------- --------- --------- Other income (expense): Interest income............................................................... 316 465 1,187 Interest expense (notes 11 and 12)............................................ (1,501) (769) (1,445) Foreign currency gain, net.................................................... -- 11 517 Other (note 19)............................................................... 193 683 483 ---------- --------- --------- (992) 390 742 ---------- --------- --------- Loss before income taxes.................................................... (11,441) (1,810) (2,983) Income tax expense (note 15).................................................... 716 240 477 ---------- --------- --------- Net loss.................................................................... $ (12,157) (2,050) (3,460) ---------- --------- --------- ---------- --------- --------- Basic loss per share............................................................ $ (1.06) (0.18) (0.31) ---------- --------- --------- ---------- --------- --------- Basic weighted average shares outstanding....................................... 11,467 11,396 11,307 ---------- --------- --------- ---------- --------- --------- Diluted loss per share.......................................................... $ (1.06) (0.18) (0.31) ---------- --------- --------- ---------- --------- --------- Diluted weighted average shares outstanding..................................... 11,467 11,396 11,307 ---------- --------- --------- ---------- --------- ---------
See accompanying notes to consolidated financial statements. F-72 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS EXCEPT SHARE AMOUNTS)
ACCUMULATED EMPLOYEE ADDITIONAL OTHER STOCK COMMON PAID-IN COMPREHENSIVE PURCHASE ACCUMULATED STOCK CAPITAL LOSS LOAN DEFICIT ----------- ----------- ----------------- ------------- ------------- Balance, December 31, 1995....................... $ 112 57,291 763 (93) (41,081) Issuance of 101,650 shares of common stock upon exercise of stock options (note 14)............ 1 112 -- -- -- Issuance of 18,065 shares of common stock pursuant to 401(k) plan (note 18).............. -- 95 -- -- -- Cash received on employee stock purchase loan.... -- -- -- 7 -- Comprehensive income Translation adjustment....................... -- -- (224) -- -- Increase in net unrealized gain on marketable debt securities............................ -- -- 18 -- -- Net Loss..................................... -- -- -- -- (3,460) -- ----- ----------- --- ------------- Total comprehensive loss......................... Balance, December 31, 1996....................... 113 57,498 557 (86) (44,541) Issuance of 26,006 shares of common stock upon exercise of stock options and warrants (note 14)............................................ -- 82 -- -- -- Issuance of 45,037 shares of common stock pursuant to 401(k) plan (note 18).............. 1 188 -- -- -- Comprehensive income Translation adjustment....................... -- -- (998) -- -- Decrease in net unrealized gain on marketable debt securities............................ -- -- (95) -- -- Net loss..................................... -- -- -- -- (2,050) -- ----- ----------- --- ------------- Total comprehensive loss......................... Balance, December 31, 1997....................... 114 57,768 (536) (86) (46,591) Issuance of 2,864 shares of common stock upon exercise of stock options and warrants (note 14)............................................ -- 1 -- -- -- Issuance of 141,328 shares of common stock pursuant to 401(k) plan (note 18).............. 1 204 -- -- -- Receipt and retirement of 56,581 shares (note 16)............................................ -- (284) -- -- -- Issuance of 2,000,000 warrants convertible to common stock upon exercise..................... -- 1,400 -- -- -- Comprehensive income Translation adjustment....................... -- -- 428 -- -- Net loss..................................... -- -- -- -- (12,157) -- ----- ----------- --- ------------- Total comprehensive loss......................... Balance, December 31, 1998....................... $ 115 59,089 (108) (86) (58,748) -- -- ----- ----------- --- ------------- ----- ----------- --- ------------- TOTAL STOCK- HOLDERS' EQUITY ----------- Balance, December 31, 1995....................... 16,992 Issuance of 101,650 shares of common stock upon exercise of stock options (note 14)............ 113 Issuance of 18,065 shares of common stock pursuant to 401(k) plan (note 18).............. 95 Cash received on employee stock purchase loan.... 7 Comprehensive income Translation adjustment....................... (224) Increase in net unrealized gain on marketable debt securities............................ 18 Net Loss..................................... (3,460) ----------- Total comprehensive loss......................... (3,666) ----------- Balance, December 31, 1996....................... 13,541 Issuance of 26,006 shares of common stock upon exercise of stock options and warrants (note 14)............................................ 82 Issuance of 45,037 shares of common stock pursuant to 401(k) plan (note 18).............. 189 Comprehensive income Translation adjustment....................... (998) Decrease in net unrealized gain on marketable debt securities............................ (95) Net loss..................................... (2,050) ----------- Total comprehensive loss......................... (3,143) ----------- Balance, December 31, 1997....................... 10,669 Issuance of 2,864 shares of common stock upon exercise of stock options and warrants (note 14)............................................ 1 Issuance of 141,328 shares of common stock pursuant to 401(k) plan (note 18).............. 205 Receipt and retirement of 56,581 shares (note 16)............................................ (284) Issuance of 2,000,000 warrants convertible to common stock upon exercise..................... 1,400 Comprehensive income Translation adjustment....................... 428 Net loss..................................... (12,157) ----------- Total comprehensive loss......................... (11,729) ----------- Balance, December 31, 1998....................... 262 ----------- -----------
See accompanying notes to consolidated financial statements. F-73 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
1998 1997 1996 --------- --------- --------- Cash flows from operating activities: Net loss............................................................................ $ (12,157) (2,050) (3,460) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Non-cash items: Depreciation and amortization................................................... 2,092 2,699 2,958 Foreign currency transaction loss............................................... -- (11) (517) Deferred income tax expense (benefit)........................................... 482 (306) (37) Loss on disposal of property and equipment...................................... 3 4 12 Impairment of property and equipment............................................ 815 -- -- Amortization of premium on short and long-term investments...................... -- -- 195 Amortization of warrant value................................................... 372 -- -- Return of common stock held in escrow........................................... (284) -- -- Non-cash charges................................................................ 204 188 96 Gain on settlement.............................................................. -- (700) -- Change in operating assets and liabilities: (Increase) decrease in accounts receivable, net................................. 1,277 207 (460) Increase in prepaid expenses and other current assets........................... (343) (461) (22) Increase in other assets........................................................ (348) (68) (179) Increase in accounts payable.................................................... 162 66 590 Increase (decrease) in accrued expenses......................................... 3,034 (1,528) 2,271 Increase (decrease) in deferred revenue......................................... 1,583 (1,847) 30 Increase (decrease) in other liabilities........................................ 158 (212) 502 --------- --------- --------- Net cash provided by (used in) operating activities........................... (2,950) (4,019) 1,979 --------- --------- --------- Cash flows from investing activities: Decrease in restricted cash......................................................... 460 -- 317 (Increase) decrease in cash in escrow............................................... -- 4,550 (4,550) Purchases of property and equipment................................................. (2,391) (3,281) (1,815) Proceeds from disposal of property and equipment.................................... (3) -- 73 Purchases of intangible assets...................................................... (4) (22) (31) Purchases of investments............................................................ -- -- (5,409) Proceeds from maturities of investments............................................. -- 2,518 3,697 --------- --------- --------- Net cash provided by (used in) investing activities........................... (1,938) 3,765 (7,718) --------- --------- --------- Cash flows from financing activities: Proceeds from short-term borrowings................................................. 548 2,398 660 Payments on short-term borrowings................................................... -- (5,401) (5,130) Proceeds from borrowings of long-term debt.......................................... 5,000 5,000 -- Principal payments on long-term debt................................................ (464) (5,203) (1,014) Proceeds from stock options exercised and warrants issued........................... 1 82 113 Payments received on employee stock purchase loans.................................. -- -- 7 Increase in note payable--related party............................................. -- -- 17 --------- --------- --------- Net cash provided by (used in) financing activities........................... 5,085 (3,124) (5,347) --------- --------- --------- Effect of exchange rate changes on cash............................................... (417) (152) 373 --------- --------- --------- Decrease in cash and cash equivalents................................................. (220) (3,530) (10,713) Cash and cash equivalents, beginning of year.......................................... 6,925 10,455 21,168 --------- --------- --------- Cash and cash equivalents, end of year................................................ $ 6,705 6,925 10,455 --------- --------- --------- --------- --------- --------- Supplemental disclosure of cash flow information Cash paid during the year for: Interest.......................................................................... $ 977 769 1,005 Income taxes...................................................................... 570 1,093 57 --------- --------- --------- Noncash investing and financing activities: Unrealized gain on marketable debt securities..................................... $ -- -- 95 --------- --------- ---------
See accompanying notes to consolidated financial statements. F-74 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION: Chrysalis International Corporation, a Delaware corporation incorporated in 1988, (the "Company"), formerly DNX Corporation ("DNX"), is an international contract research organization ("CRO") providing 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. In addition, Chrysalis uses 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. Chrysalis generates substantially all of its revenues from its drug development services. Chrysalis is also the exclusive commercial licensee of a U.S. patent covering 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. 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 (collectively, the "BioClin Group"). This transaction was recorded using the "pooling-of-interests" method of accounting (note 6). 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 that 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 7). 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 F-75 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. 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 that 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. 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. F-76 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. 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 were 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 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. In computing diluted earnings per share for the years ended December 31, 1998, 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 189,000, 339,000 and 561,000 shares for 1998, 1997 and 1996, respectively. This increase in shares represents the inclusion of stock options and warrants outstanding at December 31, 1998, 1997 and 1996 with an exercise price less than the average market price of Chrysalis' common stock during 1998, 1997 and 1996, respectively. F-77 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. STOCK OPTION PLANS: The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations, in accounting for its fixed plan stock options. 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. Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," established accounting and disclosure requirements using a fair value based method of accounting for stock based employee compensation plans. The Company has elected to remain on its current method of accounting, as described above, and has adopted the disclosure requirements of SFAS No. 123. 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. COMPREHENSIVE INCOME: On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". This Statement establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Components of comprehensive income include net income (loss) and all other nonowner changes in equity such as the change in the cumulative translation adjustment. In accordance with SFAS No. 130, total comprehensive income (loss), is ($11,729,000), ($3,143,000), F-78 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ($3,666,000) for the years ended December 31, 1998, 1997 and 1996, respectively. The Company's total comprehensive income represents net income (loss) plus the changes in the cumulative translation adjustment equity account and unrealized gain on marketable securities for the periods presented. RECLASSIFICATION: Certain amounts contained in the 1996 and 1997 consolidated financial statements have been reclassified to conform to the 1998 presentation. NEW ACCOUNTING PRONOUNCEMENTS: In March 1998, the Accounting Standards Executive Committee ("AcSEC") of the American Institute of Certified Public Accountants issued Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance for the accounting treatment of various costs typically incurred during the development or purchase of computer software for internal use. SOP 98-1 shall be effective for fiscal periods beginning after December 15, 1998. Application of SOP 98-1 is not expected to have a material impact on the Company's consolidated results of operations, financial position or cash flows. In April 1998, The AcSEC issued Statement of Position 98-5, Reporting on the Costs of Start--Up Activities ("SOP 98-5"). SOP 98-5 provides guidance on the financial reporting of start--up and organization costs and requires such costs be expensed as incurred. SOP 98-5 shall be effective for fiscal periods beginning after December 15, 1998. Application of SOP 98-5 is not expected to have a material impact on the Company's consolidated results of operations, financial position or cash flows. In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities and requires all derivatives to be recorded on the balance sheet at fair value. SFAS 133 is effective for years beginning after June 15, 1999. Adoption of SFAS 133 is not expected to have a material impact on the Company's consolidated results of operations, financial position or cash flows. (2) POTENTIAL MERGER On November 18, 1998, the Company executed an agreement and plan of merger (the "Merger Agreement") pursuant to which the Company will be acquired by Phoenix International Life Sciences Inc. ("Phoenix") pursuant to a merger of a wholly owned subsidiary of Phoenix with and into the Company (the "Merger"). Pursuant to the Merger, each outstanding share of the Company's Common Stock will be converted into Phoenix Common Shares and cash in lieu of fractional shares having a value, determined under the Merger Agreement, equal to approximately $0.71. Consummation of the Merger is subject to receipt of necessary regulatory approvals, a proxy solicitation to obtain the adoption of the Merger Agreement (and receipt of such adoption) by the Company's stockholders and other closing conditions, some of which are beyond the control of the Company and Phoenix. The Merger Agreement contains a number of covenants restricting the Company's ability to conduct its operations. These covenants include restrictions on the Company's ability to increase compensation to employees, make capital expenditures and enter into or amend real property leases. F-79 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 (2) POTENTIAL MERGER (CONTINUED) The merger agreement also requires the Company to pay to Phoenix a termination fee of $1.5 million if the Merger Agreement terminates under certain circumstances described in the Merger Agreement. These circumstances include the failure of the Company's stockholders to adopt the Merger Agreement and certain bankruptcy or dissolution events involving the Company or its subsidiaries. There can be no assurance that the Merger will be consummated. The Company has expensed approximately $320,000 in "General, administrative and marketing expenses" in the fourth quarter of 1998 for professional fees incurred in connection with the Merger Agreement. Additionally, the Company anticipates incurring approximately $1,050,000 for professional fees in the period or periods prior to the consummation of the Merger. (3) RESTRUCTURING OF CLINICAL OPERATIONS In connection with the execution of the Merger Agreement, the Company agreed to shut down and discontinue providing clinical services in the United States and at several of its clinical operations in Europe. The Merger Agreement contemplates the shut down of the Company's clinical operations in Austin, Texas, Dusseldorf, Germany and Cham, Switzerland. As a result of these shut downs, the Company will no longer provide services for Phase I clinical studies and it will focus on providing services for any Phase II or Phase III clinical studies in Germany, Eastern Europe and Israel. The Company has implemented plans for shut downs in Dusseldorf, Germany, Austin, Texas and a significant downsizing of European Clinical operations which will be executed even if the Merger is not consummated. If the Merger is not consummated, the Company expects to continue to provide Phase II and Phase III clinical services focused on Eastern Europe and Israel, as well as in Western Europe on a significantly downsized basis. If the Merger is consummated, the Company's principal executive offices are also likely to be shut down. In connection with the restructuring of the clinical operations, $3,872,000 of costs were expensed in the fourth quarter of 1998. These restructuring expenses primarily consist of personnel related charges, provisions for real estate leases, write downs of certain fixed assets and other related expenses. See table below for further detail. In addition to the fourth quarter expense, the Company expects to incur approximately $825,000 at the time the merger is consummated primarily related to additional personnel related expenses and corporate office shut down expenses. Related expenses in connection with the restructuring of the clinical operations consists of the following:
1998 ------------- (IN THOUSANDS) Severance and related.......................................................... $ 1,249 Lease termination.............................................................. 1,211 Fixed asset impairment......................................................... 815 Other.......................................................................... 597 ------ 3,872 Paid (including asset write-down) as of December 31, 1998...................... 1,110 ------ Remaining costs to be paid..................................................... $ 2,762 ------ ------
F-80 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 (3) RESTRUCTURING OF CLINICAL OPERATIONS (CONTINUED) The total number of employees to be terminated, as a result of the restructuring is 75, of which 18 have been terminated as of December 31, 1998. The balance of the terminations will occur by June 30, 1999. (4) FORBEARANCE AGREEMENT At September 30, 1998 and at December 31, 1998 the Company failed to satisfy certain financial covenants contained in the loan agreement related to its senior secured term loan and, thus, was in default under the loan agreement. The amount outstanding under this loan was $4,687,500 at December 31, 1998. As a result of the default, the entire outstanding amount of the senior secured term loan is classified as a current liability at December 31, 1998. In connection with the execution of the Merger Agreement on November 18, 1998, the Company's senior secured lender (the "Bank"), the Company and Phoenix executed a Forbearance Agreement, pursuant to which the Bank (i) agreed not to accelerate the term loan or otherwise exercise its remedies with respect to the September 30 and December 31 defaults so long as the Merger is consummated by March 31, 1999 and the Company does not otherwise default on its obligations under the loan agreement and (ii) waived the principal payment due in December 1998. In connection with the Forbearance Agreement, Phoenix delivered to the Bank a guaranty of the Company's obligations to the Bank and a cash pledge to secure such guaranty. In addition, Phoenix obtained an option to purchase the Company's debt to the Bank. (5) LIQUIDITY The Company anticipates that its capital requirements through March 31, 1999 will include satisfying working capital needs, costs to shut down certain of its European and United States clinical operations, capital expenditures for its preclinical and transgenic businesses and meeting its principal and interest requirements under debt arrangements. Cash and cash equivalents (which was $6,705,000 as of December 31, 1998) and cash provided by operations is expected to fund certain of these cash requirements, including satisfying the outstanding balance of $2,931,000 as of December 31, 1998 under a line of credit with a Swiss bank. If the Forbearance Agreement does not terminate, the Company believes that it will have sufficient cash to continue to fund operating activities through March 1999. However, if the Forbearance Agreement terminates (because of an additional default by the Company under the loan agreement, a material breach by the Company or Phoenix of the Merger Agreement or termination of the Merger Agreement), the Company will not have sufficient cash to satisfy its obligations to its creditors and fund operating activities. There can be no assurance that the Forbearance Agreement will not terminate. As a result of these issues, the Company must consummate the Merger in a timely manner. While the Company has been exploring various strategic alternatives for some period of time, it now believes that an outright sale of the Company through a vehicle other than the Merger is unlikely. After evaluating a number of strategic alternatives with the assistance of Vector Securities International, Inc., the Company currently believes that the Merger Agreement offers the most viable solution to the Company's financial condition. There can be no assurance, however, that the Merger will be consummated in a timely manner. If the Company cannot consummate the Merger or otherwise resolve its liquidity constraints by March 31, 1999, the Company will likely not have sufficient liquidity both to operate its business and to satisfy its obligations to various lenders. In addition, if the Forbearance Agreement F-81 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 (5) LIQUIDITY (CONTINUED) were to terminate, $5.0 of other Company debt would also be in default. It is the intention of the Company to pursue alternatives outside of bankruptcy; however, alternative strategies may not be successful, and it is possible that the Company could be forced into bankruptcy by its creditors. In these circumstances, the Company would most likely seek reorganization under chapter 11 of the Bankruptcy Code. Although it would be the intention of the Company to seek reorganization under chapter 11 of the Bankruptcy Code, it currently believes that a successful reorganization would likely require a similar strategic transaction involving a sale of one or more of the Company's facilities or operations to generate a source of liquidity during any bankruptcy proceeding. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses from operations, has a net working capital deficiency and is in default of its debt covenants which raise substantial doubt about their ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. (6) 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 that reflect the elimination of the nonrecurring business combination costs in 1996.
1996 ------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenue DNX (predecessor of Chrysalis)......................................... $ 29,604 BioClin Group.......................................................... 11,883 ------- Total................................................................ $ 41,487 ------- ------- Net income (loss) DNX (predecessor of Chrysalis)......................................... $ 474 BioClin Group.......................................................... (285) ------- Proforma net income (loss)............................................. 189 Merger costs........................................................... (3,649) ------- Net income (loss), as reported......................................... $ (3,460) ------- ------- Diluted Earnings (loss) per share As reported............................................................ $ (0.31) Pro forma.............................................................. 0.02
F-82 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 (6) MERGER WITH THE BIOCLIN GROUP (CONTINUED) 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. (7) TRADE ACCOUNTS RECEIVABLE Trade accounts receivable as of December 31, 1998 and 1997 consist of the following:
1998 1997 --------- --------- (IN THOUSANDS) Trade accounts receivable--billed.......................................... $ 7,180 6,500 Trade accounts receivable--unbilled........................................ 1,848 3,310 --------- --------- 9,028 9,810 Less: allowance for doubtful accounts...................................... 262 141 --------- --------- $ 8,766 9,669 --------- --------- --------- ---------
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, 1998 and 1997, there were no prerequisites for billing such unbilled trade accounts receivable. (8) SUPPLEMENTAL BALANCE SHEET INFORMATION Accrued expenses as of December 31, 1998 and 1997 consist of the following:
1998 1997 --------- --------- (IN THOUSANDS) Payroll and fringe benefits................................................ $ 2,284 2,735 Value-added taxes.......................................................... 1,036 605 Investigator payment and contract expenses................................. 664 575 Restructuring costs........................................................ 2,762 -- Other...................................................................... 2,148 1,652 --------- --------- $ 8,894 5,567 --------- --------- --------- ---------
F-83 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 (9) PROPERTY AND EQUIPMENT A summary of property and equipment as of December 31, 1998 and 1997 is as follows:
1998 1997 --------- --------- (IN THOUSANDS) Land..................................................................... $ 546 501 Buildings and improvements............................................... 12,725 11,620 Leasehold improvements................................................... 746 837 Laboratory equipment..................................................... 8,646 7,497 Office and computer equipment, software and furniture.................... 5,410 6,379 --------- --------- 28,073 26,834 Less accumulated depreciation and amortization........................... 12,387 11,707 --------- --------- $ 15,686 15,127 --------- --------- --------- ---------
(10) INTANGIBLE ASSETS Intangible assets consist of the following components at December 31, 1998 and 1997:
1998 1997 --------- --------- (IN THOUSANDS) Costs in excess of net assets acquired..................................... $ 1,055 983 Licensed technology........................................................ 61 61 Patent application costs................................................... 96 91 --------- --------- 1,212 1,135 Less accumulated amortization.............................................. 403 330 --------- --------- $ 809 805 --------- --------- --------- ---------
(11) 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 ($1,876,000 at the exchange rates in effect on December 31, 1998). At December 31, 1998 and 1997 there were no outstanding borrowings under these credit facilities. To support its European clinical operations, the Company has a line of credit arrangement with a Swiss bank totaling $3,000,000. The clinical operation's trade accounts receivable and a guarantee by the Company secures his line. The amount outstanding under this line of credit was approximately $2,931,000 and $2,377,000 at December 31, 1998 and 1997, respectively. F-84 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (12) LONG-TERM DEBT Long-term debt consists of the following components at December 31, 1998 and 1997:
1998 1997 --------- --------- (IN THOUSANDS) Term loan with a large commercial bank bearing interest at the prime rate plus 1.0% (9.25% and 9.5% as of December 31, 1998 and 1997) with interest payable monthly, and principal payable in quarterly installments beginning September 1998................................................. $ 4,688 5,000 Note payable to MDS Inc. bearing interest at 6.0% with interest payable semi annually and the principal payable March 16, 2001................... 3,973 -- Mortgage with a commercial bank, bearing interest at the prime rate plus 1.5% (9.25% as of December 31, 1998) due in monthly installments through 2009..................................................................... 1,270 1,348 Mortgage with a Pennsylvania state agency, bearing interest at 2%, due in monthly installments through 2009........................................ 900 975 Obligation under capital lease............................................. -- 6 --------- --------- 10,831 7,329 Less: Current portion...................................................... 4,821 768 --------- --------- $ 6,010 6,561 --------- --------- --------- ---------
Future principal maturities of long-term debt at December 31, 1998 are as follows:
(IN THOUSANDS) ------------- 1999........................................................................... 4,821 2000........................................................................... 158 2001........................................................................... 5,168 2002........................................................................... 178 2003........................................................................... 202 Thereafter..................................................................... 1,331 Less unamortized warrant value................................................. (1,027) ------------- $ 10,831 ------------- -------------
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 of 1997, 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. 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, 1998 under certain financial covenants set forth in the credit agreement with respect to this term loan and accordingly the outstanding amount of this note amounting to approximately $4,688,000 is classified as current. See also footnote (4) "Forebearance Agreement". F-85 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (12) LONG-TERM DEBT (CONTINUED) On March 16, 1998, the Company issued, in exchange for $5,000,000 cash, a subordinated note 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. ("MDS"). The terms of the subordinated note provide for semi-annual interest payments with the aggregate principal amount of $5.0 million payable on March 16, 2001. The note is subordinate to certain outstanding indebtedness of the Company, including its existing bank debt and mortgages. In addition, the principal amount of the note may, at the option of the holder, be satisfied by issuance of shares of Common Stock in accordance with the terms of the warrant. The Company will also incur non-cash charges to interest expense over the life of the note related to the amortization of the value of the warrants. The value of the warrants was determined based upon the relative fair values of the two securities at the time of issuance. As of December 31, 1998, the unamortized value of the warrants was $1,027,000. When considering the amortization of the warrant value, the effective interest rate on this note payable is approximately 15%. 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 was classified as restricted cash as of December 31, 1997. Upon the achievement of certain financial milestones in 1998, this $450,000 of cash collateral was 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. (13) STOCKHOLDERS' EQUITY Warrants: In March 1998, in conjunction with the $5.0 million subordinated debenture with a wholly-owned subsidiary of MDS, the Company issued a warrant to purchase 2,000,000 shares of Common Stock at an exercise price of $2.50 per share. The warrant is currently exercisable. It will expires in March 2001 or, if the Merger is consummated, on the day before the Merger. (14) 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 equal to or above the fair market value of such common shares at the date of grant. 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 $3.40, $3.91 and $3.75 per share at December 31, 1998, 1997 and 1996, respectively. F-86 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (14) STOCK OPTION PLANS (CONTINUED) A summary of activity under the Plans for the years ending December 31, 1998, 1997 and 1996 are as follows:
COMMON STOCK OPTIONS OUTSTANDING -------------------------- PRICE PER SHARES SHARE ---------- -------------- Balance, December 31, 1995....................................... 1,603,394 $ 0.40-7.25 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 0.40-7.25 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 0.40-7.25 ---------- Granted........................................................ 481,915 1.13-2.98 Exercised...................................................... (2,864) 0.40 Canceled....................................................... (344,375) 3.50-7.25 ---------- Balance, December 31, 1998....................................... 2,059,851 0.40-7.25 ---------- ---------- Shares exercisable at December 31, 1998.......................... 1,955,801 ---------- ----------
In June 1998, the Company authorized the repricing of potentially 524,000 stock options, held by non-officer employees, under the Company's 1991 and 1996 Stock Option Plans. The repricing excluded officers, directors and all non-employee option holders. This repricing, with the agreement of the affected employees, was a 2 for 1 exchange in option shares. Pursuant to the repricing 208,100 options were repriced at $1.6875, the fair value at the date of the repricing, resulting in 104,050 new options. One-half of these options will vest one year after the date of the agreement and the remaining one-half will vest daily for a period of one year beginning June 25, 1999. 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:
1998 1997 1996 ---------- --------- --------- (IN THOUSANDS) Net income (loss) As reported................................................ $ (12,157) $ (2,050) $ (3,460) Pro forma.................................................. (13,233) (2,669) (3,827) Loss per share: As reported................................................ $ (1.06) $ (0.18) $ (0.31) Pro forma loss per share................................... (1.15) (0.23) (0.34)
The pro forma net income (loss) reflects only the options granted in 1998, 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 F-87 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (14) STOCK OPTION PLANS (CONTINUED) 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. For purposes of pro forma disclosure requirements of SFAS 123, the weighted average fair values of stock options granted during 1998, 1997 and 1996 were $1.91, $3.11 and $2.77 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 1998, dividend yield of 0%; expected volatility of 75%; risk-free interest rates of 5.28%; and expected lives of 7 years. In 1997 the assumptions were: dividend yield of 0%; expected volatility of 66%; risk-free interest rates of 6.25%; and expected lives of 7 years. In 1996 the assumptions were dividend yield of 0%; expected volatility of 35%; risk-free interest rates of 7%; and expected lives of 7 years. Summary information about the Company's stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------- --------------------------- RANGE NUMBER OF NUMBER WEIGHTED-AVG. EXERCISABLE EXERCISE OUTSTANDING REMAINING WEIGHTED-AVG. AT WEIGHTED-AVG. PRICE AT 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE 12/31/98 EXERCISE PRICE - ------------- ----------- ------------------- --------------- ---------- --------------- $ 0.40-0.50 229,143 0.62 $ 0.41 229,143 $ 0.41 1.13-1.69 460,300 9.50 1.63 356,250 1.61 2.50-3.88 487,472 5.50 3.22 487,472 3.22 4.00-5.00 484,186 5.66 4.53 484,186 4.53 5.06-7.25 398,750 6.51 5.68 398,750 5.68 ----------- ---------- 2,059,851 1,955,801
(15) INCOME TAXES Income tax expense (benefit) attributable to the net income (loss) consists of the following during the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 --------- --------- ----- (IN THOUSANDS) Current U.S. Federal.............................................................................. $ -- -- -- State and local........................................................................... -- -- -- Foreign................................................................................... 121 756 514 --------- --- --- 121 756 514 Deferred U.S. Federal.............................................................................. -- -- -- State and local........................................................................... -- -- -- Foreign................................................................................... 595 (516) (37) --------- --- --- 595 (516) (37) --------- --- --- $ 716 240 477 --------- --- --- --------- --- ---
F-88 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (15) INCOME TAXES (CONTINUED) Income tax expense (benefit) attributable to the net income (loss) for the years ended December 31, 1998, 1997 and 1996 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:
1998 1997 1996 --------- --------- --------- (IN THOUSANDS) Computed "expected" income tax expense (benefit).................. $ (3,890) (615) (1,014) 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................................................... 4,129 326 206 Nondeductible reorganization expenses........................... -- -- 1,241 Foreign tax rate differential................................... 479 499 82 Changes in enacted tax rates.................................... -- 30 -- Alternative minimum taxes....................................... -- -- -- Other, net...................................................... (2) -- (38) --------- --- --------- $ 716 240 477 --------- --- --------- --------- --- ---------
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are presented below:
1998 1997 --------- --------- (IN THOUSANDS) Deferred tax assets: Retirement indemnities................................................. $ -- 192 Property and equipment................................................. 982 -- Intangible assets...................................................... 392 -- Other.................................................................. 55 139 Deferred revenue....................................................... 752 288 Accrued expenses....................................................... 645 223 Capitalized research and development costs............................. 525 643 Net operating loss carryforwards....................................... 14,375 13,547 Tax credit carryforward................................................ 2,932 3,179 --------- --------- Total gross deferred tax assets.................................... 20,658 18,211 Less valuations allowance.............................................. 20,658 17,803 --------- --------- Net deferred tax assets............................................ -- 408 --------- --------- 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................................................. (1,736) (1,259) Other.................................................................. (96) (387) --------- --------- Total gross deferred liabilities................................... (1,832) (1,646) --------- --------- Net deferred tax liability......................................... $ (1,832) (1,238) --------- --------- --------- ---------
F-89 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (15) INCOME TAXES (CONTINUED) 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, 1998, 1997 and 1996 were increases of $3,181,000, $326,000, and $206,000, respectively. At December 31, 1998, the Company has net operating loss carryforwards for Federal income tax purposes of approximately $34,873,000 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 $2,932,000 for federal income tax reporting purposes which are available to reduce federal income taxes, if any, through 2012. 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. (16) RELATED PARTY TRANSACTIONS NOTE PAYABLE--RELATED PARTY: As of December 31, 1998 and 1997, the Company owed approximately $319,000 and $291,000, respectively, to a relative of a former officer and major shareholder. The note payable bears interest at a rate of 6.75%, is unsecured, and due the earlier of October 29, 1999 or consummation of sale, merger, reorganization or other arrangement resulting in a change of control of the Company. Amounts outstanding as of December 31, 1998 and 1997 include accrued interest of approximately $9,400 and $17,000, respectively. INDEMNIFICATION BY CERTAIN STOCKHOLDERS: Pursuant to the acquisition agreement related to the acquisition of the Bioclin Group (note 6), certain stockholders indemnify the Company for certain named litigation costs. As a result of this indemnification, the Company established a receivable due from the stockholders in the amount of $284,000 as of December 31, 1997 payable in Common Stock at $5.0625 per share, the closing price at December 18, 1996. In November of 1998 this receivable was satisfied by the delivery and cancellation of 56,851 shares of common stock to the Company. (17) COMMITMENTS AND CONTINGENCIES The Company leases office and laboratory facilities and equipment under various noncancellable operating lease agreements. In September 1998, the Company entered into an operating lease for a facility under construction for its Transgenics business. The new lease is expected to commence during the summer of 1999 and will have a ten year term. The following table includes an estimate of these F-90 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (17) COMMITMENTS AND CONTINGENCIES (CONTINUED) annual lease commitments. Future minimum rental commitments for the next five years as of December 31, 1998 on the aforementioned operating leases are as follows:
OPERATING LEASES ------------- (IN THOUSANDS) 1999........................................................................... $ 1,693 2000........................................................................... 1,579 2001........................................................................... 996 2002........................................................................... 843 2003........................................................................... 784 Thereafter..................................................................... 4,994 ------------- Total minimum lease payments................................................... $ 10,889 ------------- -------------
Rental expense aggregated $1,853,000, $1,493,000, and $1,312,000 in 1998, 1997 and 1996, respectively. (18) 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 $0, $158,000, and $104,000 for the years ended December 31, 1998, 1997 and 1996, 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 French preclinical operation at their normal retirement date. Net periodic pension cost, related to the French preclinical operations, for 1998, 1997 and 1996 includes the following components:
1998 1997 1996 --------- ----- ----- (IN THOUSANDS) Service costs-benefits earned during the period......................... $ 198 32 34 Interest cost on projected benefit obligation........................... 165 26 25 Net amortization and deferral........................................... (140) (18) 25 -- -- --------- Net periodic pension cost........................................... $ 223 40 84 -- -- -- -- --------- ---------
F-91 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (18) EMPLOYEE BENEFITS (CONTINUED) The present value of benefit obligations and the funded status of the French preclinical operation's retirement indemnities recognized in the Company's consolidated balance sheets as of December 31, 1998 and 1997 are as follows:
1998 1997 --------- ----- (IN THOUSANDS) Actuarial present value of accumulated benefit obligations (no amounts are vested)................................................................... $ 490 418 Additional amounts related to salary increases.............................. 40 38 --------- --- Total projected benefit obligation........................................ 530 456 --------- --- Plan assets at fair value................................................... -- -- Accrued pension cost...................................................... $ 530 456 --------- --- --------- ---
Assumptions used in the actuarial computations for 1998, 1997 and 1996 are as follows:
1998 1997 1996 ----- ----- ----- Discount rate............................................................ 5.0% 6.0% 6.0% Rate of compensation increases........................................... 2.5% 2.0% 2.0%
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 1998, 1997 and 1996, profit sharing costs aggregated $0, $199,000 and $181,000, 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, 1998, 1997 and 1996, the Company issued 141,328, 45,037 and 18,065 shares of common stock, respectively, to participants in the Savings Plan. Charges to operations for the years ended December 31, 1998, 1997 and 1996 aggregated $204,000, $188,000 and $95,000, respectively, under this plan. (19) 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-92 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (20) GEOGRAPHICAL SEGMENT, BUSINESS SEGMENT AND CUSTOMER INFORMATION GEOGRAPHICAL SEGMENT INFORMATION: The Company operates in two geographic areas. Information on the Company's geographic operations is set forth in the table below.
1998 1997 1996 ---------- --------- --------- (IN THOUSANDS) Net revenues: United States operations..................................... $ 15,386 15,520 13,165 International operations..................................... 23,998 26,778 28,322 ---------- --------- --------- Total net revenues....................................... $ 39,384 42,298 41,487 ---------- --------- --------- ---------- --------- --------- Identifiable assets: United States operations..................................... $ 9,566 11,017 9,388 International operations..................................... 22,678 19,839 24,129 General corporate............................................ 2,337 4,384 14,426 ---------- --------- --------- Total identifiable assets................................ $ 34,581 35,240 47,943 ---------- --------- --------- ---------- --------- ---------
BUSINESS SEGMENT INFORMATION: The Company has three reportable segments: Transgenics, Preclinical and Clinical services. Transgenic services include the use of transgenic laboratory animal model technology as a tool to improve drug discovery programs. Preclinical services include a broad range of preclinical drug development services that 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. Clinical services include clinical trial management services, clinical data management and biostatistical services, and product registration and regulatory services.
1998 1997 1996 ---------- --------- --------- (IN THOUSANDS) Net Revenues: Transgenics.................................................. $ 4,735 2,066 1,150 Preclinical.................................................. 25,422 25,192 27,940 Clinical..................................................... 8,361 14,244 11,883 Licensing/Other.............................................. 866 796 514 ---------- --------- --------- Total net revenues....................................... $ 39,384 42,298 41,487 ---------- --------- --------- ---------- --------- --------- Operating Income (loss): Transgenics.................................................. $ 811 (386) (433) Preclinical.................................................. 444 424 1,606 Clinical..................................................... (9,464) (1,123) (1,415) Licensing/Other.............................................. (2,240) (1,115) (3,483) ---------- --------- --------- Total operating loss..................................... $ (10,449) (2,200) (3,725) ---------- --------- --------- ---------- --------- ---------
F-93 CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (20) GEOGRAPHICAL SEGMENT, BUSINESS SEGMENT AND CUSTOMER INFORMATION (CONTINUED)
1998 1997 1996 ---------- --------- --------- (IN THOUSANDS) Identifiable assets: Transgenics.................................................. $ 2,726 2,445 745 Preclinical.................................................. 24,418 20,895 25,430 Clinical..................................................... 5,100 7,516 7,342 Licensing/Other.............................................. 2,337 4,384 14,426 ---------- --------- --------- Total identifiable assets................................ $ 34,581 35,240 47,943 ---------- --------- --------- ---------- --------- ---------
CUSTOMER INFORMATION: For the year ended December 31, 1998 net revenues from one customer aggregated approximately $5,166,000 or 13% of the Company's total net revenues. 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. (21) 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 based 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 $900,000 and $975,000 while the fair value approximated $601,000 and $605,000 as of December 31, 1998 and 1997, respectively. F-94 APPENDIX A COMPOSITE COPY - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER DATED AS OF NOVEMBER 18, 1998 AND AS AMENDED BY AMENDMENT NO. 1 DATED AS OF MARCH 24, 1999 AMONG PHOENIX INTERNATIONAL LIFE SCIENCES INC. CHRYSALIS INTERNATIONAL CORPORATION AND PHOENIX MERGER SUB CORP. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE --------- ARTICLE 1 THE MERGER.................................................................................. A-1 Section 1.01 Merger......................................................................... A-1 Section 1.02 Surrender and Payment.......................................................... A-2 Section 1.03 The Merger Date................................................................ A-3 Section 1.04 Stock Options and Warrants of the Company...................................... A-3 Section 1.05 Adjustments.................................................................... A-5 Section 1.06 Fractional Shares.............................................................. A-5 Section 1.07 Failure to Obtain Approval for Listing; Cash Merger Consideration.............. A-5 Section 1.08 Dissenting Shares.............................................................. A-6 Section 1.09 Purchase Price; Exchange Ratio; Valuation of Buyer Common Stock................ A-6 ARTICLE 2 THE SURVIVING CORPORATION................................................................... A-7 Section 2.01 Certificate of Incorporation; Bylaws........................................... A-7 Section 2.02 Directors and Officers......................................................... A-7 Section 2.03 Subscription................................................................... A-7 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................................... A-8 Section 3.01 Corporate Existence and Power.................................................. A-8 Section 3.02 Corporate Authorization........................................................ A-8 Section 3.03 Governmental Authorization..................................................... A-9 Section 3.04 Non-Contravention.............................................................. A-9 Section 3.05 Capitalization................................................................. A-9 Section 3.06 Subsidiaries................................................................... A-10 Section 3.07 SEC Filings.................................................................... A-11 Section 3.08 Financial Statements........................................................... A-11 Section 3.09 Disclosure Documents........................................................... A-11 Section 3.10 Information Supplied........................................................... A-12 Section 3.11 Absence of Certain Changes..................................................... A-12 Section 3.12 No Undisclosed Material Liabilities............................................ A-13 Section 3.13 Litigation; Investigations; Orders and Decrees................................. A-13 Section 3.14 Taxes.......................................................................... A-14 Section 3.15 ERISA and Labor Matters........................................................ A-15 Section 3.16 Compliance with Laws........................................................... A-16 Section 3.17 Intellectual Property Rights................................................... A-17 Section 3.18 Environmental Matters.......................................................... A-18 Section 3.19 Opinion of Financial Advisor................................................... A-19 Section 3.20 Antitakeover Statutes and Certificate of Incorporation Provisions.............. A-20 Section 3.21 Rights Agreement............................................................... A-20 Section 3.22 Finders Fees................................................................... A-20 Section 3.23 Title to and Condition of Properties........................................... A-20 Section 3.24 Contracts...................................................................... A-20 Section 3.25 Accounts Receivable............................................................ A-21 Section 3.26 Relationships.................................................................. A-21 Section 3.27 Product Warranties and Liabilities............................................. A-21 Section 3.28 Affiliate Transactions......................................................... A-22 Section 3.29 Insurance...................................................................... A-22
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PAGE --------- ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER..................................................... A-22 Section 4.01 Corporate Existence and Power.................................................. A-22 Section 4.02 Corporate Authorization........................................................ A-23 Section 4.03 Governmental Authorization..................................................... A-23 Section 4.04 Non-Contravention.............................................................. A-23 Section 4.05 Capitalization................................................................. A-23 Section 4.06 Public Filings................................................................. A-23 Section 4.07 Financial Statements........................................................... A-24 Section 4.08 Disclosure Documents........................................................... A-24 Section 4.09 Information Supplied........................................................... A-24 Section 4.10 Absence of Certain Changes..................................................... A-25 Section 4.11 No Undisclosed Material Liabilities............................................ A-25 Section 4.12 Ownership of Company Stock..................................................... A-25 Section 4.13 Finders Fees................................................................... A-25 Section 4.14 Sufficient Cash to Repay Certain Debt.......................................... A-25 ARTICLE 5 COVENANTS OF THE COMPANY.................................................................... A-26 Section 5.01 Conduct of the Company......................................................... A-26 Section 5.02 Stockholder Meeting; Proxy Materials........................................... A-29 Section 5.03 Other Offers................................................................... A-29 Section 5.04 Shut-Downs..................................................................... A-30 Section 5.05 Intellectual Property Matters.................................................. A-30 Section 5.06 Notice of Prepayment........................................................... A-30 Section 5.07 Shared Services................................................................ A-30 Section 5.08 Hackel Affiliate Letter and Support/Voting Agreement........................... A-30 ARTICLE 6 COVENANTS OF BUYER.......................................................................... A-31 Section 6.01 Conduct of Buyer............................................................... A-31 Section 6.02 Listing of Stock............................................................... A-31 Section 6.03 Repayment of Certain Debt...................................................... A-31 Section 6.04 Financing...................................................................... A-31 ARTICLE 7 COVENANTS OF BUYER AND THE COMPANY.......................................................... A-31 Section 7.01 Commercially Reasonable Efforts................................................ A-31 Section 7.02 Cooperation.................................................................... A-31 Section 7.03 Public Announcements........................................................... A-32 Section 7.04 Access to Information.......................................................... A-32 Section 7.05 Further Assurances............................................................. A-32 Section 7.06 Notices of Certain Events...................................................... A-32 Section 7.07 Director and Officer Liability................................................. A-33 Section 7.08 Registration Statement......................................................... A-34 Section 7.09 Governmental Authorization..................................................... A-34 Section 7.10 Certain Corporate Matters...................................................... A-34 Section 7.11 Employment..................................................................... A-34
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PAGE --------- ARTICLE 8 CONDITIONS TO THE MERGER.................................................................... A-34 Section 8.01 Conditions to the Obligations of Each Party.................................... A-34 Section 8.02 Conditions to the Obligations of Buyer......................................... A-35 Section 8.03 Conditions to the Obligations of the Company................................... A-36 ARTICLE 9 TERMINATION................................................................................. A-36 Section 9.01 Termination.................................................................... A-36 Section 9.02 Effect of Termination.......................................................... A-37 Section 9.03 Termination Upon Bankruptcy.................................................... A-37 ARTICLE 10 MISCELLANEOUS............................................................................... A-38 Section 10.01 Notices....................................................................... A-38 Section 10.02 Entire Agreement; Non-Survival of Representations and Warranties; No Third Party Beneficiaries........................................................... A-39 Section 10.03 Amendments; No Waivers........................................................ A-39 Section 10.04 Expenses...................................................................... A-39 Section 10.05 Dollar Amounts................................................................ A-40 Section 10.06 Successors and Assigns........................................................ A-40 Section 10.07 Governing Law................................................................. A-40 Section 10.08 Jurisdiction.................................................................. A-40 Section 10.09 Counterparts; Effectiveness................................................... A-40 Section 10.10 Relief from Automatic Stay.................................................... A-40 EXHIBITS EXHIBIT A--Form of Support/Voting Agreement EXHIBIT B--Form of Affiliate Letter EXHIBIT C--Form of Representation Related to D&O Insurance
A-iii TABLE OF DEFINITIONS
TERM SECTION - ----------------------------------------------------------------------------------------- ----------------------- 191 Patent............................................................................... 3.17 1933 Act................................................................................. 3.03 1934 Act................................................................................. 3.03 Acquisition Proposal..................................................................... 3.03 Action................................................................................... 3.13 Adjusted Option.......................................................................... 1.04(a)(i) Adjusted Warrant......................................................................... 1.04(a)(i) Affiliate................................................................................ 1.01(b) Affiliate Letter......................................................................... 3.02(c) Applicable Laws.......................................................................... 3.16(a) Barbut Agreement......................................................................... 3.02(a) Benefit Arrangements..................................................................... 3.15(d) Buyer.................................................................................... Preamble Buyer Balance Sheet...................................................................... 4.07 Buyer Balance Sheet Date................................................................. 4.07 Buyer Common Stock....................................................................... 1.01(b)(ii) Buyer Disclosure Documents............................................................... 4.08(a) Buyer Disclosure Schedule................................................................ Article 4 Buyer Option Plan........................................................................ 1.04(c) Buyer Party.............................................................................. 4.02 Buyer Preferred Stock.................................................................... 4.05 Buyer Prospectus......................................................................... 4.08(b) Buyer Public Documents................................................................... 4.06 Buyer SEC Disclosure Documents........................................................... 4.08(a) Buyer Common Stock....................................................................... 1.01(b)(ii) Canadian GAAP............................................................................ 4.07 Canadian Securities Commission........................................................... 4.06 Certificate of Merger.................................................................... 1.03 Chrysalis DNX............................................................................ 3.13 Claim.................................................................................... 7.07(a) Code..................................................................................... 1.04(b) Company.................................................................................. Preamble Company 10-K............................................................................. 3.07 Company 10-Qs............................................................................ 3.07 Company Balance Sheet.................................................................... 3.08 Company Balance Sheet Date............................................................... 3.08 Company Disclosure Documents............................................................. 3.09(a) Company Disclosure Schedule.............................................................. Article 3 Company Proxy Statement.................................................................. 3.09(a) Company SEC Documents.................................................................... 3.07 Company Securities....................................................................... 3.05 Company Stockholder Meeting.............................................................. 5.02(a) Company Stock............................................................................ 1.01(b)(i) Company Stock Options.................................................................... 1.04(a)(i) Company Stock Plans...................................................................... 1.04(a)(i) Company Subsidiary Securities............................................................ 3.06(b) Company Warrants......................................................................... 1.04(a)(i) Confidentiality Agreement................................................................ 5.03 Contract................................................................................. 3.24
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TERM SECTION - ----------------------------------------------------------------------------------------- ----------------------- Costs.................................................................................... 9.02 DEA...................................................................................... 3.16(a) D&O Insurance............................................................................ 7.08(c) Delaware Law............................................................................. 1.03 EMEA..................................................................................... 3.16(a) Employee Plans........................................................................... 3.15(a) Environmental Laws....................................................................... 3.18(f)(i) Environmental Permits.................................................................... 3.18(f)(ii) ERISA.................................................................................... 3.15(a) ERISA Affiliate.......................................................................... 3.15(a) Excess Shares............................................................................ 1.06 Exchange Agent........................................................................... 1.02(a) Exchange Ratio........................................................................... 1.09(b) FDA...................................................................................... 3.16(a) FDCA..................................................................................... 3.16(b) First Union.............................................................................. 5.06 First Union Agreements................................................................... 5.06 Forbearance Agreement.................................................................... 3.02(a) Form F-4................................................................................. 4.08(a) Governmental Authority................................................................... 3.03 Hazardous Substance...................................................................... 3.18(f)(iii) HSR Act.................................................................................. 3.03 Iffa..................................................................................... 5.07 Indemnified Party........................................................................ 7.07(a) Intellectual Property.................................................................... 3.17(a) Lien..................................................................................... 3.04 Listing Failure.......................................................................... 1.07 Listing Period........................................................................... 1.07 MDS Amendment............................................................................ 3.02(a) MDS Note................................................................................. 6.03 Material Adverse Effect.................................................................. 3.01 Material Insolvency Event................................................................ 9.03(b) Merger................................................................................... 1.01(a) Merger Consideration..................................................................... 1.01(b)(ii) or 1.07(a) Merger Date.............................................................................. 1.03 Phoenix Merger Sub....................................................................... Preamble Phoenix Merger Sub Common Stock.......................................................... 1.02(b)(iii) NMS...................................................................................... 6.02 Nasdaq................................................................................... 1.06 Nasdaq Letter............................................................................ 1.07 Organizational Documents................................................................. 4.01 Pension Plans............................................................................ 3.15(a) Person................................................................................... 1.01(b) Pre-Merger Matters....................................................................... 7.08(a) Product Liability........................................................................ 3.27 Providing Party.......................................................................... 7.04 Purchase Price........................................................................... 1.09(a) Receiving Party.......................................................................... 7.04 Regulation S-X........................................................................... 3.11(i) Required Stockholder Vote................................................................ 3.02(a) Rights Agreement......................................................................... 3.21(a)
A-v
TERM SECTION - ----------------------------------------------------------------------------------------- ----------------------- SEC...................................................................................... 3.07 Shut-Downs............................................................................... 5.04 Subscription Stock....................................................................... 2.03 Subsequent Buyer Public Documents........................................................ 4.06 Subsequent Company SEC Documents......................................................... 3.07 Subsidiary............................................................................... 1.01(b) Superior Proposal........................................................................ 5.03 Support/Voting Agreement................................................................. 3.02(c) Surviving Corporation.................................................................... 1.01(a) Surviving Corporation Common Stock....................................................... 1.01(b)(iii) Tax Return............................................................................... 3.14(b) Taxes.................................................................................... 3.14(b) Taxing Authorities....................................................................... 3.14(b) USDA..................................................................................... 3.16(a) US GAAP.................................................................................. 3.08
A-vi AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of November 18, 1998, among Phoenix International Life Sciences Inc., a corporation constituted under the laws of Canada ("Buyer"), Chrysalis International Corporation, a Delaware corporation (the "Company"), and Phoenix Merger Sub Corp., a Delaware corporation and a wholly-owned subsidiary of Buyer ("Phoenix Merger Sub"). The parties intend that the Merger (as defined herein) be the adoption of a plan of reorganization qualifying under Section 368(a) of the Code (as defined herein). The parties hereto agree as follows: ARTICLE 1 THE MERGER Section 1.01. Merger. (a) Upon the terms and subject to the conditions set forth herein, on the Merger Date, Phoenix Merger Sub shall merge into the Company (the "Merger") and the separate existence of Phoenix Merger Sub shall cease. The Company shall be the surviving corporation in the Merger (hereinafter sometimes referred to as the "Surviving Corporation") and its separate corporate existence, with all its purposes, objects, rights, privileges, powers and franchises, shall continue unaffected and unimpaired by the Merger. (b) Pursuant to the Merger: (i) Each share of common stock, $.01 par value, of the Company (the "Company Stock") held by the Company or any Subsidiary of the Company as treasury stock or by Buyer, in each case immediately prior to the Merger Date, shall be canceled and no payment shall be made with respect thereto; (ii) Subject to Section 1.07, each share of Company Stock outstanding immediately prior to the Merger Date shall, except as otherwise provided in Section 1.01(b)(i), be converted into the right to receive a number of common shares of Buyer ("Buyer Common Stock") equal to the Exchange Ratio (the "Merger Consideration") (determined in accordance with Section 1.09(b)); and (iii) At the Merger Date, each share of common stock, par value $0.01 per share, of Phoenix Merger Sub ("Phoenix Merger Sub Common Stock") outstanding immediately prior to the Merger Date shall be converted into an equal number of shares of common stock, par value $.01 per share, of the Surviving Corporation ("Surviving Corporation Common Stock"). From and after the Merger Date, all shares of Company Stock converted in accordance with Section 1.01(b)(ii) shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of such shares shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration, the right to exercise appraisal rights in accordance with and subject to the provisions of the Delaware Law if Section 1.08 is applicable and the other rights specified in this Agreement. From and after the Merger Date, all certificates representing Phoenix Merger Sub Common Stock shall be deemed for all purposes to represent the number of shares of Surviving Corporation Common Stock into which they were converted in accordance with Section 1.01(b)(iii). For purposes of this Agreement, "Subsidiary", when used with respect to any Person, means any other Person, whether incorporated or unincorporated, of which securities or other ownership interests having ordinary power to elect a majority of the board of directors or other persons performing similar functions are directly or indirectly owned or controlled by such Person or by any one or more of its Subsidiaries. For purposes of this Agreement, "Person" means an individual, a corporation, a limited liability company, a partnership (general or limited), an association, a trust or A-1 any other entity or organization, including, without limitation, a government or political subdivision or any agency or instrumentality thereof. For purposes of this Agreement, an "Affiliate", when used with respect to any Person, means any other Person who is, or is deemed to be, an affiliate of such Person within the meaning of the 1933 Act. Section 1.02. Surrender and Payment. (a) Prior to the Merger Date, Buyer shall appoint an agent reasonably satisfactory to the Company (the "Exchange Agent") for the purpose of exchanging certificates representing shares of Company Stock for the Merger Consideration. Buyer will make available to the Exchange Agent, as needed, certificates representing the Buyer Common Stock (or, if a Listing Failure occurs, United States Dollars) in respect of the Merger Consideration to be paid in respect of shares of Company Stock, in accordance with the terms of Section 1.01(b), together with any Excess Shares (as defined below). The Exchange Agent shall invest any cash amounts delivered by Buyer to the Exchange Agent as directed by Buyer. Any interest and other income resulting from such investments shall be paid to Buyer pursuant to Section 1.02(e). Promptly after the Merger Date, Buyer shall send, or shall cause the Exchange Agent to send, to each holder of shares of Company Stock whose shares were converted into a right to receive the Merger Consideration in accordance with Section 1.01(b)(ii) at the Merger Date a letter of transmittal for use in such exchange (which shall specify that delivery of the Merger Consideration shall be effected, and risk of loss and title shall pass, only upon proper delivery of the certificates representing shares of Company Stock, to the Exchange Agent). (b) Each holder of shares of Company Stock that have been converted into a right to receive the Merger Consideration, upon surrender to the Exchange Agent of a certificate or certificates representing such shares of Company Stock, together with a properly completed letter of transmittal covering such shares of Company Stock, will be entitled to receive (i) the Merger Consideration payable in respect of such shares of Company Stock, (ii) subject to Section 1.07, cash in lieu of any fractional shares pursuant to Section 1.06 and (iii) subject to Section 1.07, certain dividends or other distributions in accordance with Section 1.02(g). Until so surrendered, each such certificate shall, after the Merger Date, represent for all purposes only the right to receive (i) the Merger Consideration, (ii) subject to Section 1.07, cash in lieu of any fractional shares pursuant to Section 1.06 and (iii) subject to Section 1.07, certain dividends or other distributions in accordance with Section 1.02(g). All Buyer Common Stock issued and/or cash paid pursuant to this Article 1 upon surrender of certificates representing shares of Company Stock shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Company Stock represented thereby. (c) If any portion of the Merger Consideration is to be paid to a Person other than the registered holder of the shares of Company Stock represented by the certificate or certificates surrendered in exchange therefor, it shall be a condition to such payment that the certificate or certificates so surrendered shall be properly endorsed or otherwise be in proper form for transfer and that the Person requesting such payment shall pay to the Exchange Agent any transfer or other taxes required as a result of such payment to a Person other than the registered holder of such shares of Company Stock or establish to the satisfaction of the Exchange Agent that such tax has been paid or is not payable. (d) After the Merger Date, there shall be no further registration of transfers of shares of Company Stock. If, after the Merger Date, certificates representing shares of Company Stock are presented to the Surviving Corporation, they shall be canceled and exchanged for the consideration provided for, and in accordance with the procedures set forth, in this Article 1. (e) Any portion of the Merger Consideration made available to the Exchange Agent pursuant to Section 1.02(a) that remains unclaimed by the holders of shares of Company Stock twelve months after the Merger Date shall be returned to Buyer, upon demand, and any such holder who has not exchanged his shares of Company Stock for the Merger Consideration in accordance with this Section 1.02 prior to that time shall thereafter look only to Buyer for his claim for (i) Merger Consideration, (ii) subject to Section 1.07, any cash in lieu of any fractional shares pursuant to Section 1.06 and A-2 (iii) subject to Section 1.07, certain dividends or other distributions in accordance with Section 1.02(g). Notwithstanding the foregoing, Buyer shall not be liable to any holder of shares of Company Stock for any amount paid to a public official pursuant to applicable escheat or abandoned property laws. Any amounts remaining unclaimed by holders of shares of Company Stock two years after the Merger Date (or such earlier date immediately prior to such time as such amounts would otherwise escheat to or become property of any governmental entity) shall, to the extent permitted by applicable law, become the property of Buyer free and clear of any claim or interest of any Person previously entitled thereto. (f) If a Listing Failure occurs, any portion of the Merger Consideration made available to the Exchange Agent pursuant to Section 1.02(a) to pay for shares of Company Stock in respect of which appraisal rights have been perfected shall be returned to Buyer, upon demand. (g) No dividends or other distributions with respect to the Buyer Common Stock constituting all or a portion of the Merger Consideration shall be paid to the holder of any unsurrendered certificate representing Company Stock until such certificates are surrendered as provided in this Section 1.02. Subject to the effect of applicable laws and Section 1.07, following such surrender, there shall be paid, without interest, to the record holder of the certificates representing the Buyer Common Stock (i) at the time of such surrender, the amount of dividends or other distributions with a record date after the Merger Date payable prior to or on the date of such surrender with respect to such whole shares of Buyer Common Stock, and not paid, and the amount of cash payable in lieu of any fractional shares pursuant to Section 1.06, less the amount of any withholding taxes which may be required thereon under any provision of federal, state, local or foreign tax law, and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Merger Date but prior to the date of surrender and a payment date subsequent to the date of surrender payable with respect to such whole shares of Buyer Common Stock, less the amount of any withholding taxes which may be required thereon under any provision of federal, state, local or foreign tax law. Buyer shall make available to the Exchange Agent cash for these purposes. (h) If any certificate representing Company Stock that was converted into a right to receive the Merger Consideration in accordance with Section 1.01(b)(ii) shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such certificate to be lost, stolen or destroyed and, if required by Buyer, the posting by such Person of a bond in such reasonable amount as Buyer may direct as indemnity against any claim that may be made against it with respect to such certificate, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed certificate (i) the Merger Consideration, (ii) subject to Section 1.07, cash in lieu of any fractional shares pursuant to Section 1.06, and (iii) subject to Section 1.07 and if applicable, any unpaid dividends and distributions on shares of Buyer Common Stock deliverable in respect thereof in accordance with Section 1.02(g). Section 1.03. The Merger Date. As soon as practicable (but in no event more than two business days) after the satisfaction or, to the extent permitted hereunder or under applicable law, waiver of all conditions to the Merger, (a) Phoenix Merger Sub and the Company shall file a copy of this Agreement (or, to the extent permitted by the Delaware General Corporation Law ("Delaware Law"), a Certificate of Merger) (the "Certificate of Merger") with the Delaware Secretary of State and make all other filings or recordings required by the Delaware Law in connection with the Merger, and (b) the Merger shall become effective at such time as the Certificate of Merger is duly filed with the Secretary of State, or at such later date or time as Buyer and the Company shall agree and shall be specified in the Certificate of Merger (such time and date are referred to as the "Merger Date"). Section 1.04. Stock Options and Warrants of the Company. (a) As soon as practicable following the date of this Agreement, the Board of Directors of the Company (or, if appropriate, any committee of the Board of Directors administering the Company Stock Plans, as defined below) shall adopt such resolutions or take such other actions as may be required to effect the following: A-3 (i) adjust the terms of all outstanding options to purchase shares of Company Stock (the "Company Stock Options") granted under any plan or arrangement providing for the grant of options to purchase shares of Company Stock to current or former officers, directors, employees or consultants of the Company (the "Company Stock Plans"), whether vested or unvested, and all outstanding warrants to purchase shares of Company Stock (the "Company Warrants"), whether vested or unvested, as necessary to provide that, at the Merger Date, each Company Stock Option and Company Warrants outstanding immediately prior to the Merger Date shall be amended and converted into an option or warrant, as the case may be, to acquire, on the same terms and conditions as were applicable under the Company Stock Option or Company Warrant, as the case may be, the number of shares of Buyer Common Stock (rounded down to the nearest whole share) determined by multiplying the number of shares of Company Stock subject to such Company Stock Option or Company Warrant by the Exchange Ratio, at a price per share of Buyer Common Stock equal to (A) the aggregate exercise price for the shares of Company Stock otherwise purchasable pursuant to such Company Stock Option or Company Warrant divided by (B) the aggregate number of shares of Buyer Common Stock deemed purchasable pursuant to such Company Stock Option (each, as so adjusted, an "Adjusted Option") or Company Warrant (each as so adjusted, an "Adjusted Warrant"); provided that such exercise price shall be rounded up to the nearest whole cent; and (ii) make such other changes to the Company Stock Plans, Company Stock Options and Company Warrants as Buyer and the Company may agree are appropriate solely to give effect to the Merger. (b) Notwithstanding Section 1.04(a), the adjustments provided in Section 1.04(a) with respect to any Company Stock Options that are "incentive stock options" as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") shall be and are intended to be effected in a manner which is consistent, to the extent permitted by applicable law, with Section 424(a) of the Code. (c) Prior to the Merger Date, Buyer shall amend its option plan to provide, or shall adopt an option plan which shall provide (in each case, the "Buyer Option Plan"), for the issuance of the Adjusted Options at the Merger Date and by virtue of the Merger and without the need of any further corporate action, Buyer shall assume all obligations of the Company under the Company Stock Plans, including with respect to the Company Stock Options outstanding at the Merger Date. (d) Within two (2) business days after the Merger Date, Buyer shall prepare and file with the SEC a registration statement on Form S-8 (or another appropriate form) registering a number of shares of Buyer Common Stock equal to the number of shares subject to the Adjusted Options. Such registration statement shall be kept effective (and the current status of the initial offering prospectus or prospectuses required thereby shall be maintained) at least for so long as any Adjusted Options may remain outstanding. (e) As soon as practicable after the Merger Date, Buyer shall deliver to the holders of Company Stock Options appropriate notices setting forth such holders' rights pursuant to the respective Company Stock Plans and the agreements evidencing the grants of such Company Stock Options and that such Company Stock Options and agreements shall be assumed by Buyer and shall continue in effect on the same terms and conditions (subject to the adjustments required by this Section 1.04 after giving effect to the Merger). (f) A holder of an Adjusted Option may exercise such Adjusted Option in accordance with its terms. (g) Buyer shall issue the Adjusted Warrants, if any, at the Merger Date and by virtue of the Merger and without the need for any further corporate action, Buyer shall assume all obligations of the Company under any Company Warrant outstanding at the Merger Date. A-4 (h) As soon as practicable after the Merger Date, Buyer shall deliver to any holders of Company Warrants, upon due surrender of the Company Warrants, warrants evidencing the Assumed Warrants. (i) Except to the extent required under the respective terms of the Company Stock Options or Company Warrants or other applicable agreements, all restrictions or limitations on transfer and vesting with respect to Company Stock Options awarded under the Company Stock Plans or any other plan, program or arrangement of the Company, and with respect to Company Warrants, to the extent that such restrictions or limitations shall not have already lapsed, shall remain in full force and effect with respect to such options or warrants after giving effect to the Merger and the assumption by Buyer as set forth above. Section 1.05. Adjustments. If at any time during the period between the date of this Agreement and the Merger Date, any change in the outstanding shares of Buyer Common Stock shall occur by reason of any reclassification, recapitalization, stock split or combination, exchange or readjustment of shares, or any stock dividend thereon with a record date during such period or any similar transaction or event, the Merger Consideration shall be appropriately adjusted to provide to the holders of Company Stock the same economic effect as contemplated prior to such change or dividend. If at any time during the period between the date of this Agreement and the Merger Date, any change in the outstanding shares of Company Stock shall occur by reason of any reclassification, recapitalization, stock split or combination, exchange or readjustment of shares, or any stock dividend thereon with a record date during such period or any similar transaction or event, the Merger Consideration shall be appropriately adjusted to provide to the Buyer the same economic effect as contemplated prior to such change or dividend. Section 1.06. Fractional Shares. No fractional shares of Buyer Common Stock shall be issued in the Merger, but in lieu thereof each holder of Company Stock otherwise entitled to a fractional share of Buyer Common Stock will be entitled, subject to Section 1.07, to receive, from the Exchange Agent in accordance with the provisions of this Section 1.06, a cash payment in lieu of such fractional shares of Buyer Common Stock representing such holder's proportionate interest, if any, in the net proceeds from the sale by the Exchange Agent in one or more transactions (which sale transactions shall be made at such times, in such manner and on such terms as the Exchange Agent shall determine in its reasonable discretion) on behalf of all such holders of the aggregate of the fractional shares of Buyer Common Stock which would otherwise have been issued (the "Excess Shares"). The sale of the Excess Shares by the Exchange Agent shall be executed on The Nasdaq Stock Market ("Nasdaq") through one or more member firms of the National Association of Securities Dealers, Inc. and shall be executed in round lots to the extent practicable. Until the net proceeds of such sale or sales have been distributed to the appropriate holders of shares of Company Stock, the Exchange Agent will hold such proceeds in trust for the appropriate holders of Company Stock. Buyer shall pay all commissions, transfer taxes and other out-of-pocket transaction costs, including, without limitation, the expenses and compensation of the Exchange Agent, incurred in connection with such sale of the Excess Shares. As soon as practicable after the determination of the amount of cash, if any, to be paid to holders of Company Stock in lieu of any fractional shares of Buyer Common Stock the Exchange Agent shall make available such amounts to such holders of shares of Company Stock without interest. Section 1.07 Failure to Obtain Approval for Listing; Cash Merger Consideration. If Buyer is unable to obtain, within sixty (60) days after the filing of the applications and forms referred to in Section 6.02 ("Listing Period"), a letter from Nasdaq ("Nasdaq Letter") indicating that the Buyer Common Stock has been approved for listing on the Nasdaq NMS subject to customary conditions to be contained in such approval letter for a transaction of this type (a "Listing Failure"), then: (a) Section 1.01(b)(ii) shall be deemed to be amended and restated in its entirety as follows without any action by the parties hereto: A-5 "(ii) Each share of Company Stock outstanding immediately prior to the Merger Date shall, except as otherwise provided in Section 1.01(b)(i) or in Section 1.08 with respect to shares of Company Stock as to which appraisal rights have been exercised (which shares shall be treated in accordance with Section 262 of the Delaware Law), be converted into the right to receive an amount of cash (in United States dollars and rounded to the nearest cent) equal to (A) the Purchase Price (as determined in accordance with Section 1.09) divided by (B) (x) the number of shares of Company Stock outstanding on the date immediately prior to the Merger Date plus (y) the number of shares of Company Stock subject to Company Options and Company Warrants that have an exercise or conversion price less than $.71 minus (z) the number of shares of Company Stock owned by Buyer. As of the date of this Agreement, (B) in the immediately preceding sentence would be 11,695,549 (the "Merger Consideration"). (b) Section 1.02(g) shall be deemed to be deleted in its entirety without any action by the parties hereto; (c) Section 1.06 shall be deemed to be deleted in its entirety without any action by the parties hereto; and (d) (i) The (A) representations and warranties of the Company contained in Section 3.10(i), (B) representations and warranties of Buyer contained in Sections 4.05 through 4.08 and Sections 4.10 through 4.11, (C) covenants contained in Sections 6.01, 6.02, the last sentence of Section 7.02 and Section 7.08 and (D) the closing conditions set forth in Sections 8.01(e) and 8.01(f) shall cease to be applicable, and (ii) the accuracy of any such representation and warranty or failure to comply with any such covenant will not be a condition to the closing of the Merger and the breach of any such representation and warranty or failure to perform any such covenant shall not serve as the basis for any termination right set forth in Section 9.01. Section 1.08 Dissenting Shares. Notwithstanding Section 1.01, in the event of a Listing Failure, shares of Company Stock outstanding immediately prior to the Merger Date and held by a holder who has not voted in favor of the Merger and who has exercised appraisal rights in respect of such shares of Company Stock in accordance with the Delaware Law shall not be converted into a right to receive the Merger Consideration unless such holder fails to perfect or withdraws or otherwise loses his appraisal or objecting stockholders' rights. Shares of Company Stock in respect of which appraisal rights have been exercised shall be treated in accordance with Section 262 of the Delaware Law. If after the Merger Date such holder fails to perfect or withdraws or otherwise loses his right to demand the payment of fair value for shares of Company Stock under Delaware Law, such shares of Company Stock shall be treated as if they had been converted as of the Merger Date into a right to receive the Merger Consideration. The Company shall give Buyer prompt notice of any demands received by the Company for the exercise of appraisal rights with respect to shares of Company Stock and Buyer shall have the right to participate in all negotiations and proceedings with respect to such demands. The Company shall not, except with the prior written consent of Buyer, make any payment with respect to, or settle or offer to settle, any such demands. In the event any amounts shall become due and payable in respect of any such demands, such amounts shall be paid by the Surviving Corporation. Section 1.09 Purchase Price; Exchange Ratio; Valuation of Buyer Common Stock. (a) For purposes of this Agreement, the term "Purchase Price" shall mean Eight Million Two Hundred Ninety Thousand United States Dollars (U.S.$8,290,000). On or before the date immediately prior to the Merger Date, Buyer and the Company shall agree on the appropriate calculation of the Merger Consideration (pursuant to Section 1.01(b)(ii)) and the Exchange Ratio (pursuant to Sections 1.09(b) and (c)) and will cause the Merger Consideration (as so calculated) to be reflected correctly in the Certificate of Merger to be effective on the Merger Date. (b) For purposes of this Agreement, the term "Exchange Ratio" shall mean a fraction of which (i) the numerator shall be (x) the Purchase Price divided by (y) (A) the number of shares of Company Stock A-6 outstanding on the date immediately prior to the Merger Date plus (B) the number of shares of Company Stock subject to Company Options and Company Warrants that have an exercise or conversion price less than $.71 minus (C) the number of shares of Company Stock owned beneficially by Buyer other than beneficial ownership arising from the execution of the Support/Voting Agreements, and (ii) the denominator shall be the value of Buyer Common Stock (determined in accordance with Section 1.09(c)). As of the date of this Agreement, (y) in the immediately preceding sentence is 11,695,549. (c) For purposes of Section 1.09(b), the value of Buyer Common Stock shall be determined by dividing by two the following sum: (I) the average of the closing prices for the Buyer Common Stock on the Toronto Stock Exchange for each business day commencing on the 30th day prior to the public announcement of the transactions contemplated by this Agreement and (II) the average of the closing prices for the Buyer Common Stock on the Toronto Stock Exchange for each business day commencing on the day immediately following such announcement and ending on the 30th day following such public announcement. Such value shall then be converted from Canadian dollars into U.S. dollars based upon the average applicable exchange rate for such calculation period as published in The Wall Street Journal (Exchange Rate table in Currency Trading section). ARTICLE 2 THE SURVIVING CORPORATION Section 2.01. Certificate of Incorporation; Bylaws. The certificate of incorporation and bylaws of the Phoenix Merger Sub in effect at the Merger Date shall be the certificate of incorporation and bylaws, respectively, of the Surviving Corporation until amended in accordance with applicable law, except for Article I thereof which shall include the name of the Surviving Corporation designated by Buyer. The Surviving Corporation shall succeed to all of the rights, privileges, powers and franchises, of a public as well as of a private nature, of the Company and Phoenix Merger Sub, all of the properties and assets and all of the debts of the Company and Phoenix Merger Sub, choses in action and other interests due or belonging to the Company and Phoenix Merger Sub and shall be subject to, and responsible for, all of the debts, liabilities and duties of the Company and Phoenix Merger Sub with the effect set forth in the Delaware Law. Section 2.02. Directors and Officers. From and after the Merger Date, until successors are duly elected or appointed and qualified in accordance with applicable law, (a) the directors of Phoenix Merger Sub immediately prior to the Merger Date shall be the directors of the Surviving Corporation, and (b) the officers of Phoenix Merger Sub immediately prior to the Merger Date shall be the officers of the Surviving Corporation. On or prior to the Merger Date, the Company shall deliver to Buyer evidence satisfactory to Buyer of the resignations (to be effective as of the Merger Date) of each of the directors of the Company and/or its Subsidiaries, and, without affecting their employment status or any rights they may have under any severance agreement, employment agreement or similar arrangement disclosed in the Company Disclosure Schedule, each of the officers of the Company and/or its Subsidiaries. Section 2.03. Subscription. As part of the overall transactions described in this Agreement, in consideration of Buyer agreeing to issue and deliver Buyer Common Stock in accordance with Section 1.02 of this Agreement, Buyer will be entitled to subscribe and agrees to subscribe, at the Merger Date, for a number of shares of common stock ( par value $.01 per share), of the Surviving Corporation equivalent to the number of shares of Company Stock outstanding immediately prior to the Merger Date (the "Subscription Stock"). The acquisition of the Subscription Stock shall occur simultaneously with the conversions provided for under Sections 1.01(b)(ii) and 1.01(b)(iii) of this Agreement. The Subscription Stock will, at the Merger Date, have been duly authorized and, when issued to Buyer pursuant to this Agreement, will be validly issued and outstanding, fully paid and non-assessable. A-7 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as set forth in the disclosure schedule (each section of which qualifies the correspondingly numbered representation and warranty only, except where the information in any such section is disclosed in such a way to make its relevance to any other representation or warranty readily apparent, in which case, such section shall be deemed to also qualify such other representation and warranty) of the Company attached hereto (the "Company Disclosure Schedule") (and except as to any matter set forth in or contemplated by Section 2.03 hereof as to which the representations and warranties in this Article 3 do not apply) or as otherwise provided herein, the Company represents and warrants to Buyer that: Section 3.01. Corporate Existence and Power. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, and has all corporate powers required to carry on its business as now conducted and is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, except for those jurisdictions where the failure to be so qualified or in good standing is not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect on the Company. For purposes of this Agreement, a "Material Adverse Effect" means, with respect to any Person, a material adverse effect on the financial condition, business, operations, assets or results of operations of such Person and its Subsidiaries taken as a whole or on the ability of such Person to perform its obligations under this Agreement in all material respects. Section 3.01(a) of the Company Disclosure Schedule includes true and complete copies of the Company's certificate of incorporation and bylaws as currently in effect. Section 3.01(b) of the Company Disclosure Schedule includes a list of all jurisdictions in which the Company or any Subsidiary of the Company is duly qualified to conduct business. Section 3.02. Corporate Authorization. (a) The execution, delivery and performance by the Company of each of (I) this Agreement, (ii) the letter agreement dated October 29, 1998 between the Company and Dr. Jack Barbut (the "Barbut Agreement"), (iii) the Agreement dated November 16, 1998 among the Company, Panlabs International, Inc. and MDS, Inc. (the "MDS Amendment") and (iv) the Forbearance Agreement dated the date hereof among the Company, its Subsidiaries named therein and First Union National Bank (the "Forbearance Agreement") and the consummation by the Company of the transactions contemplated by this Agreement, the Barbut Agreement, the MDS Amendment and the Forbearance Agreement are within the Company's corporate powers and, except for the required approval of the stockholders of the Company in connection with the consummation of the Merger, have been duly authorized by all necessary corporate action. The affirmative vote of a majority of the shares of Company Stock outstanding as of the record date for the Company Stockholder Meeting (the "Required Stockholder Vote") is the only vote of any class or series of the Company's capital stock necessary to approve and adopt this Agreement and the transactions contemplated by this Agreement. This Agreement has been duly executed and delivered by the Company and constitutes a valid and binding agreement of the Company enforceable against the Company in accordance with its terms. (b) The Board of Directors of the Company, at a meeting duly called and held, has (i) determined that this Agreement and the transactions contemplated by this Agreement (including the Merger) are fair to and in the best interests of the stockholders of the Company, (ii) approved this Agreement and the transactions contemplated by this Agreement (including the Merger), and (iii) resolved to recommend adoption of this Agreement and the transactions contemplated hereby by the stockholders of the Company, subject to the terms hereof. A-8 (c) Each of the persons identified in Section 3.02(c) of the Company Disclosure Schedule has (i) entered into a Support/Voting Agreement in the form attached hereto as Exhibit A (each a "Support/Voting Agreement"), whereby each such individual has agreed, among other things, to vote all shares of Company Stock beneficially owned by them in favor of adoption of this Agreement and (ii) a written undertaking in the form attached hereto as Exhibit B (each an "Affiliate Letter"), whereby each such individual has agreed, among other things, to comply with the requirements of Rule 145 under the 1933 Act with respect to public sales of Buyer Common Stock received by them in the Merger. The persons identified in Section 3.02(c) are the only persons which the Company believes may be Affiliates of the Company. Section 3.03. Governmental Authorization. The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the transactions contemplated by this Agreement require no action, by or in respect of, or filing with, any federal, state, local or foreign governmental body, agency, official or authority ("Governmental Authority") other than (a) the filing of the Certificate of Merger in accordance with the Delaware Law; (b) compliance with any applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"); (c) compliance with any applicable requirements of the Securities and Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (the "1934 Act"); (d) compliance with any applicable requirements of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the "1933 Act"); (e) compliance with any applicable foreign or state securities or Blue Sky laws; and (f) immaterial actions or filings relating to ordinary operational matters. Section 3.04. Non-Contravention. The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the transactions contemplated by this Agreement do not and will not, assuming receipt of the Required Stockholder Vote, (a) contravene or conflict with the certificate of incorporation or bylaws of the Company or any Subsidiary of the Company, (b) assuming compliance with the matters referred to in Section 3.03 and Section 3.03 of the Company Disclosure Schedule, contravene or conflict with or constitute a violation of any provision of any law, regulation, judgment, injunction, order or decree binding upon or applicable to the Company or any Subsidiary of the Company, (c) constitute a default (or an event which with notice, the lapse of time or both would become a default) under or give rise to a right of termination, cancellation or acceleration of any right or obligation of the Company or any Subsidiary of the Company or to a loss of any benefit to which the Company or any Subsidiary of the Company is entitled under any provision of any agreement, contract or other instrument binding upon the Company or any Subsidiary of the Company or any license, franchise, permit or other similar authorization held by the Company or any Subsidiary of the Company, (d) require any action or consent or approval of any Person other than a Governmental Authority or (e) result in the creation or imposition of any Lien on any asset of the Company or any Subsidiary of the Company, other than, (i) in the case of the events specified in clauses (b), (c), and (e) (other than indebtedness of the Company or any Subsidiary of the Company) and (ii) in the case of the events specified in clause (d) (other than indebtedness of the Company and licenses and sublicenses related to the 191 patent to which the Company or any Subsidiary is a party on the date hereof), any such event which, individually or in the aggregate, has not had, and is not reasonably likely to have, a Material Adverse Effect on the Company. For purposes of this Agreement, "Lien" means, with respect to any asset, any mortgage, claim, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. Section 3.05. Capitalization. The authorized capital stock of the Company consists of 20,000,000 shares of Company Stock and 5,000,000 shares of serial preferred stock. As of September 30, 1998, there were (i)11,523,257 shares of Company Stock (together with associated Rights as described in Section 3.21) outstanding and (ii) no shares of serial preferred stock outstanding. As of September 30, 1998, there were (i) employee and director stock options to purchase an aggregate of 1,962,851 shares of Company Stock outstanding (none of which options were exercisable, other than options in respect of 1,367,241 A-9 shares of Company Stock) and (ii) warrants to purchase 2,110,000 shares of Company Stock outstanding (all of which were exercisable). All outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable and, as to shares issued and sold by the Company within the three years prior to the date of this Agreement, to the Company's knowledge, have been issued in compliance with all federal and state securities laws. Except (i) as set forth in this Section 3.05, (ii) for changes since September 30, 1998 resulting from the expiration, vesting, termination or exercise in accordance with their respective terms of stock options or warrants outstanding on such date, (iii) modifications of the Rights as described in Section 3.21, (iv) acceleration of vesting of stock options resulting from the execution of this Agreement as set forth in Section 3.04 of the Company Disclosure Schedule, and (v) issuances after September 30, 1998 in the ordinary course of business consistent with past practice of shares of Company Stock to the Company's 401(k) plan, there are outstanding (a) no shares of capital stock or other voting securities of the Company, (b) no securities of the Company convertible into or exchangeable for shares of capital stock or voting securities of the Company, and (c) no options, warrants, calls, subscriptions or other rights to acquire from the Company, and no obligation of the Company to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of the Company (the items in clauses (a), (b) and (c) being referred to collectively as the "Company Securities"). There are no outstanding obligations of the Company or any Subsidiary of the Company to repurchase, redeem or otherwise acquire any Company Securities. Section 3.05 of the Company Disclosure Schedule sets forth, with respect to each stock option and warrant for Company Stock outstanding at September 30, 1998, the name of the optionee or warrant holder, as the case may be, the number of shares of Company Stock subject thereto, the per share exercise price thereof and the initial vesting date thereof. Section 3.05 of the Company Disclosure Schedule sets forth (i) every agreement pursuant to which the Company has granted to any Person registration rights related to shares of Company Stock and (ii) every agreement of which the Company has knowledge relating to the voting of any shares of Company Stock. Section 3.06. Subsidiaries. (a) Each Subsidiary of the Company is duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, has all corporate powers to carry on its business as now conducted and is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, except for those jurisdictions where failure to be so qualified or licensed is not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect on the Company. (b) The Company does not own, directly or indirectly, any equity or other ownership interest in any corporation, partnership, joint venture or other entity or enterprise, except for the Subsidiaries of the Company set forth in Section 3.06 of the Company Disclosure Schedule. Except as set forth in Section 3.06 of the Company Disclosure Schedule, the Company is not subject to any obligation or requirement to provide funds to or make any investment (in the form of a loan, capital contribution or otherwise) in any such entity. The ownership interests having by their terms ordinary voting power to elect a majority of directors (or others performing similar functions with respect to such Subsidiary) of each of the Company's Subsidiaries is held of record by the Company or one of its other Subsidiaries, free and clear of any Liens. Each of the outstanding shares of capital stock of each of the Company's Subsidiaries is duly authorized, validly issued, fully paid and nonassessable. The following information for each Subsidiary of the Company is set forth in Section 3.06 of the Company Disclosure Schedule, as applicable: (i) its name and jurisdiction of incorporation or organization; (ii) its authorized capital stock or share capital; and (iii) the number of issued and outstanding shares of capital stock or share capital and the record owner(s) thereof. There are no outstanding subscriptions, options, warrants, puts, calls, agreements, understandings, claims or other commitments or rights of any type relating to the issuance, sale or transfer of any securities of any Subsidiary of the Company (collectively, the "Company Subsidiary Securities"), nor are there outstanding any securities which are convertible into or exchangeable for A-10 any Company Subsidiary Securities; and no Subsidiary of the Company has any obligation of any kind to issue any additional Company Subsidiary Securities or to pay for any Company Subsidiary Securities. Section 3.07. SEC Filings. The Company has delivered to Buyer (i) the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "Company 10- K"), (ii) its Quarterly Reports on Form 10-Q for its fiscal quarters ended after December 31, 1997 and filed with the Securities and Exchange Commission (the "SEC") prior to the date of this Agreement (the "Company 10-Qs"), and (iii) its proxy or information statements relating to meetings of, or actions taken without a meeting by, the stockholders of the Company held since December 31, 1997, and (iv) all of its other reports, statements, schedules and registration statements filed with the SEC since January 1, 1998 and through the date of this Agreement. The Company has timely filed all required reports, schedules, forms, statements and other documents with the SEC since January 1, 1998 (collectively, the "Company SEC Documents"). As of their respective dates, or if amended, as of the date of the last such amendment, the Company SEC Documents complied, and all documents required to be filed by the Company with the SEC after the date hereof and prior to the Merger Date (the "Subsequent Company SEC Documents") will comply, in all material respects with the requirements of the 1933 Act or the 1934 Act, as the case may be, and the applicable rules and regulations promulgated thereunder, and none of the Company SEC Documents contained, and the Subsequent Company SEC Documents when filed will not contain, any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. Section 3.08. Financial Statements. The audited consolidated financial statements and unaudited consolidated interim financial statements of the Company included in the Company SEC Documents at the time such Company SEC Documents were filed with the SEC complied as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, were prepared in accordance with generally accepted accounting principles applied in the United States ("U.S. GAAP") applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto or, in the case of the unaudited statements, as permitted by Form 10-Q of the SEC), and fairly present (subject in the case of unaudited statements to normal, recurring audit adjustments) the consolidated financial position of the Company as at the dates thereof and the consolidated results of its operations and cash flows for the periods then ended. For purposes of this Agreement, "Company Balance Sheet" means the consolidated balance sheet of the Company as of December 31, 1997 set forth in the Company 10-K and "Company Balance Sheet Date" means December 31, 1997. For purposes of financial presentation, the Company and its Subsidiaries recognize net revenue from their contracts on a percentage of completion basis as work is performed. The percentage of completion, and consequently the revenue to be recorded, of each individual contract is determined through detailed analysis and discussion between all appropriate operational and financial department management. Although the Company and its Subsidiaries do not require collateral for unpaid balances, credit losses have consistently been within management's expectations. Certain contracts contain provisions for price adjustment for cost overruns. Such adjusted amounts are included in service revenue when realization is assured and the amounts can be reasonably determined. In the period in which it is determined that a loss will result from the performance of a contract, the entire amount of the estimated ultimate loss is charged against income. Section 3.09. Disclosure Documents. (a) Each document required to be filed by the Company with the SEC in connection with the transactions contemplated by this Agreement (the "Company Disclosure Documents"), including, without limitation, the proxy or information statement of the Company (the "Company Proxy Statement") to be filed with the SEC in connection with the adoption of this Agreement by the holders of Company Stock, and any amendments or supplements thereto, will, when filed, comply as to form in all material respects with the applicable requirements of the 1934 Act. A-11 (b) At the time the Company Proxy Statement or any amendment or supplement thereto is first mailed to stockholders of the Company, and at the time such stockholders vote on the adoption of this Agreement, the Company Proxy Statement, as supplemented or amended, if applicable, will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. At the time of the filing of any Company Disclosure Document other than the Company Proxy Statement and at the time of any distribution thereof, such Company Disclosure Document will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties contained in this Section 3.09(b) will not apply to statements included in or omissions from the Company Disclosure Documents based upon information furnished to the Company by Buyer specifically for use therein. Section 3.10. Information Supplied. The information supplied or to be supplied by the Company for inclusion or incorporation by reference in (i) the Buyer's Form F-4 or any amendment or supplement thereto will not, at the time the Form F-4 or any amendment or supplement thereto becomes effective under the 1933 Act and on the Merger Date, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (ii) any Buyer Disclosure Documents (other than the Form F-4 and any amendments or supplements to either) will not, at the time of effectiveness of such Buyer Disclosure Document and at the time of any distribution thereof, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. Section 3.11. Absence of Certain Changes. From the Company Balance Sheet Date, except (i) as set forth in the Company SEC Documents, (ii) as contemplated by this Agreement (including, without limitation, Sections 1.04 and 3.21 hereof) or (iii) related to the Shut-Downs, the Company and its Subsidiaries have conducted their business in the ordinary course consistent with past practice and there has not been: (a) any event, occurrence or development of a state of circumstances or facts which has had or is reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on the Company other than any of the foregoing (i) relating to the economy or securities markets in general, (ii) relating to the Company's industry in general or (iii) arising from the announcement or thereafter the pendency of this Agreement or the transactions contemplated by this Agreement; (b) any declaration, setting aside or payment of any dividend or other distribution with respect to any shares of capital stock of the Company, or any repurchase, redemption or other acquisition by the Company or any Subsidiary of the Company of any amount of outstanding shares of capital stock or other securities of, or other ownership interests in, the Company or any of its Subsidiaries; (c) any amendment of any material term of any outstanding security of the Company or any Subsidiary of the Company; (d) any incurrence, assumption or guarantee by the Company or any Subsidiary of the Company of any indebtedness from any third party for borrowed money; (e) any creation or assumption by the Company or any Subsidiary of the Company of any Lien on any material asset other than Liens arising solely by operation of applicable law; (f) any making of any loan, advance or capital contribution to or investment in any Person other than (i) loans and advances to any employees of the Company in an amount not in excess of $5,000 per employee and (ii) loans, advances or capital contributions to or investments in wholly-owned Subsidiaries of the Company; A-12 (g) any damage, destruction or other casualty loss (whether or not covered by insurance) affecting the business or assets of the Company or any Subsidiary of the Company which, individually or in the aggregate, has had or is reasonably likely to have a Material Adverse Effect on the Company; (h) any transaction or commitment made, or any contract or agreement entered into, by the Company or any Subsidiary of the Company relating to its assets or business (including, without limitation, the acquisition or disposition of any assets) (other than transactions and commitments contemplated by this Agreement) inconsistent with the Company's budget and/or spending plans disclosed to Buyer prior to the date of this Agreement or any relinquishment by the Company or any Subsidiary of the Company of any material contract, license or right; (i) any change in any method of accounting or accounting principle or practice by the Company or any Subsidiary of the Company, except for any such change required by U.S. GAAP or SEC Regulation S-X promulgated under the 1934 Act and, as to changes occurring prior to the date of this Agreement, as set forth in Section 3.11 of the Company Disclosure Schedule ("Regulation S-X"); (j) any (i) grant by the Company or any of its Subsidiaries of any severance or termination pay to, or entry into any employment, termination or severance arrangement with, any director, officer or employee of the Company or any Subsidiary of the Company; (ii) entering into of any employment, deferred compensation or other similar agreement (or any amendment to any such existing agreement) with any director, officer or employee of the Company or any Subsidiary, (iii) increase in benefits payable under any existing severance or termination pay policies or employment agreements or (iv) increase in compensation, bonus or other benefits payable to directors, officers or employees of the Company or any Subsidiary of the Company, other than in the ordinary course of business and consistent with past practice. Section 3.12. No Undisclosed Material Liabilities. There are no liabilities, commitments or obligations (whether pursuant to contracts or otherwise) of the Company or any Subsidiary of the Company of any kind whatsoever which, individually or in the aggregate, have had or are reasonably likely to have a Material Adverse Effect on the Company, whether accrued, contingent, absolute, determined, determinable or otherwise, and there is no existing condition, situation or set of circumstances which is reasonably likely to result in such a liability, commitment or obligation, including, without limitation, any fines, disciplinary actions or other adverse actions that may be taken or reported concerning the conduct of the Company or any of its Subsidiaries, other than: (a) liabilities, commitments or obligations disclosed or provided for in the Company Balance Sheet (including the notes thereto) or disclosed in the Company SEC Documents; (b) liabilities, commitments or obligations incurred in the ordinary course of business consistent with past practice since the Company Balance Sheet Date; (c) liabilities, commitments or obligations arising from the Shut-Downs and disclosed to Buyer; and (d) liabilities, commitments or obligations under this Agreement. Section 3.13. Litigation; Investigations; Orders and Decrees. There is no action, claim, suit, investigation, proceeding or examination ("Action") pending against or affecting, or to the knowledge of the Company, threatened or reasonably likely to be brought against or affecting, the Company or any Subsidiary of the Company or any of their respective properties before any arbitrator or any Governmental Authority which, individually or in the aggregate, has had or is reasonably likely to have a Material Adverse Effect on the Company or on Chrysalis DNX Transgenic Sciences Corporation ("Chrysalis DNX"). The foregoing representation and warranty does not include or relate to any Action, pending or threatened, challenging or seeking to prevent, enjoin, alter or delay the Merger or any of the transactions contemplated by this Agreement. Neither the Company nor any Subsidiary is subject to any outstanding order, writ, injunction or decree which, individually or in the aggregate, A-13 would have a Material Adverse Effect on the Company or Chrysalis DNX. Since December 31, 1993, (i) there has not been any Action asserted or, to the knowledge of the Company, threatened before any Governmental Authority against the Company or any Subsidiary of the Company relating to the Company or any of its Subsidiary's method of doing business or its relationship with past, existing or future users or purchasers of any goods or services of the Company or any Subsidiary of the Company which has had, individually or in the aggregate, a Material Adverse Effect on the Company and (ii) neither the Company nor any Subsidiary of the Company has been subject to any outstanding order, writ, injunction or decree relating to the Company's or any of its Subsidiary's method of doing business or its relationship with past, existing or future lessees, users, purchasers, licensees or sublicensees of any Intellectual Property, goods or services of the Company or any Subsidiary of the Company which has had, individually or in the aggregate, a Material Adverse Effect on the Company. Section 3.14. Taxes. (a) Except as set forth in the Company Balance Sheet (including the notes thereto), (i) all Tax Returns for the Company or any Subsidiary of the Company required to be filed with any taxing authority by, or with respect to, the Company and its Subsidiaries have been filed in accordance with all applicable laws and are true, correct and complete in all material respects; (ii) the Company and its Subsidiaries have timely paid all Taxes shown as due and payable on the Tax Returns for the Company or any Subsidiary of the Company that have been so filed; (iii) the Company and its Subsidiaries have made provision for all Taxes payable by the Company and its Subsidiaries for which no Tax Return for the Company or any Subsidiary of the Company has yet been filed; (iv) there is no action, suit, proceeding, audit or claim now proposed or pending against or with respect to the Company or any of its Subsidiaries in respect of any Tax where there is a reasonable possibility of an adverse determination; (v) neither the Company nor any of its Subsidiaries has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code; (vi) neither the Company nor any of its Subsidiaries has been a member of an affiliated, consolidated, combined or unitary group other than one of which the Company was the common parent and no members of that group have left the group; (vii) all Tax Returns filed with respect to tax years of the Company and its Subsidiaries through the tax year ended December 31, 1994, have been examined and closed or are returns with respect to which the applicable period for assessment under applicable law, after giving effect to extensions or waivers, has expired; (viii) neither the Company nor any Subsidiary (or any member of any affiliated, consolidated, combined or unitary group of the Company or any Subsidiary of the Company is or has been a member) has been granted any extension or waiver of the statute of limitations period applicable to any Tax Return, which period (after giving effect to such extension or waiver) has not yet expired; and (ix) neither the Company nor any Subsidiary of the Company is a party to a tax sharing agreement, including, without limitation, any agreement with respect to the shifting of losses or income among parties or has been a party to a tax sharing agreement that imposes obligations of the Company or any Subsidiary of the Company as of the date of this Agreement. For purposes of the representations contained in this Section 3.14, none of these representations shall be deemed to have been breached unless such breach would have, individually or in the aggregate, a Material Adverse Effect on the Company. (b) For purposes of this Agreement, "Taxes" means all United States Federal, state, local and foreign taxes, levies and other assessments, including, without limitation, all income, sales, use, goods and services, value added, capital, capital gains, net worth, transfer, profits, withholding, payroll, PAYE, employer health, unemployment insurance payments, excise, real property and personal property taxes, and any other taxes, assessments or similar charges in the nature of a tax, including, without limitation, interest, additions to tax, fines and penalties, imposed by a governmental or public body, agency, official or authority (the "Taxing Authorities"). "Tax Return" means any return, report, information return or other document (including any related or supporting information) required to be filed with any Taxing Authority in connection with the determination, assessment, collection, administration or imposition of any Taxes. A-14 Section 3.15. ERISA and Labor Matters. (a) Section 3.15(a) of the Company Disclosure Schedule contains a list identifying each "employee benefit plan", as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), which is subject to any provision of ERISA and is maintained, administered or contributed to by the Company or any ERISA Affiliate of the Company and covers any employee or former employee of the Company or any Subsidiary of the Company or in connection with which the Company or any Subsidiary of the Company has any liability. Copies of such plans (and, if applicable, related trust agreements) and all amendments thereto and written interpretations thereof, if any, have been furnished to Buyer together with the three most recent annual reports (Form 5500 including, if applicable, Schedule B thereto) prepared in connection with, and any favorable determination letter issued in connection with, any such plan. Such plans are referred to collectively herein as the "Employee Plans". For purposes of this Section, "ERISA Affiliate" of the Company means any other Person which, together with the Company, would be treated as a single employer under Section 414 of the Code. The only Employee Plans which individually or collectively would constitute an "employee pension benefit plan" as defined in Section 3(2) of ERISA (the "Pension Plans") are identified as such in the list referred to above. (b) Neither the Company nor any ERISA Affiliate has ever maintained or been obligated to contribute to or had any liability in connection with any "multiemployer plan", as defined in Section 3(37) of ERISA, or any "defined benefit plan", as defined in Section 3(35) of ERISA. Nothing done or omitted to be done and no transaction or holding of any asset under or in connection with any Employee Plan has or will make the Company or any Subsidiary of the Company, any officer or director of the Company or any Subsidiary of the Company subject to any liability under Title I of ERISA or liable for any tax pursuant to Section 4975 of the Code that is reasonably likely to have a Material Adverse Effect on the Company. (c) Each Employee Plan which is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the IRS that it is so qualified. The Company has furnished to Buyer copies of the most recent IRS determination letters with respect to each such Employee Plan. Each Employee Plan has been maintained in compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations, including but not limited to ERISA and the Code, which are applicable to the Employee Plan, excluding any instances of non-compliance that would not individually or in the aggregate be reasonably likely to have a Material Adverse Effect on the Company. (d) Section 3.15(d) of the Company Disclosure Schedule contains a list of each employment, severance (including the duration of severance periods or, in the case of stay bonuses, the amount) or other similar contract, arrangement or policy and each plan or arrangement (written or oral) providing for insurance coverage (including any self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits or for deferred compensation, profit-sharing, bonuses, stock options, stock appreciation or other forms of incentive compensation or post-retirement insurance, compensation or benefits which is not an Employee Plan, is entered into, maintained or contributed to, as the case may be, by the Company or any Subsidiary of the Company and covers any employee or former employee of the Company or any of its Subsidiaries or in connection with which the Company or any Subsidiary of the Company could have liability. Such contracts, plans and arrangements as are described above, copies or descriptions of all of which have been furnished previously to Buyer, are referred to collectively herein as the "Benefit Arrangements". Each Benefit Arrangement has been maintained in substantial compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations that are applicable to such Benefit Arrangement, excluding any instances of non-compliance that would not individually or in the aggregate be reasonably likely to have a Material Adverse Effect on the Company. A-15 (e) Except as would not be reasonably likely to have a Material Adverse Effect on the Company, no Employee Plan, Benefit Arrangement or related document contains any provision that would prevent the Company or any Subsidiary of the Company from amending or terminating any post-retirement health, medical or life insurance benefits and no agent or representative of the Company or of any Subsidiary of the Company has made any statements that would limit the ability of the Company or any of its Subsidiaries to amend or terminate any such benefits. (f) There has been no amendment to, written interpretation or announcement (whether or not written) by the Company or any Subsidiary of the Company relating to, or change in employee participation or coverage under, any Employee Plan or Benefit Arrangement which would increase materially the expense of maintaining such Employee Plan or Benefit Arrangement above the level of the expense incurred in respect thereof for the fiscal year ended on the Company Balance Sheet Date. (g) The execution of, and performance of the transactions contemplated in, this Agreement will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any Employee Plan, Benefit Arrangement, trust or loan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any employee or former employee of the Company or any of its Subsidiaries, or result in the triggering or imposition of any restrictions or limitations on the right of Buyer, the Company or any Subsidiary of the Company to amend or terminate any Employee Plan and receive the full amount of any excess assets remaining or resulting from such amendment or termination, subject to applicable taxes. Except as otherwise identified in Section 3.15(d) of the Company Disclosure Schedule, there is no contract, agreement, plan or arrangement covering any employee or former employee of the Company or any Subsidiary that, individually or collectively, could give rise to the payment of any amount that would not be deductible pursuant to the terms of Sections 162(a)(1), 162(a)(2) or 280G of the Code. (h) Neither the Company nor any of its Subsidiaries is a party to any collective bargaining agreement. There are no labor unions voluntarily recognized or certified to represent any bargaining unit of employees at the Company or any of its Subsidiaries. No work stoppage, labor strike or slowdown against the Company or any of its Subsidiaries is pending or threatened nor has any of the foregoing occurred since December 18, 1996. Neither the Company nor any of its Subsidiaries is involved in or threatened with any labor dispute or grievance which individually or in the aggregate has had or is reasonably likely to have a Material Adverse Effect on the Company. To the knowledge of the Company, there is no organizing effort or representation question at issue with respect to any employee of the Company or any of its Subsidiaries. No collective bargaining agreement to which the Company or any of its Subsidiaries is or may be a party is currently under negotiation or renegotiation and no existing collective bargaining agreement is due for expiration, renewal or renegotiation within the one year period after the date hereof. Section 3.16. Compliance with Laws. (a) Each of the Company and its Subsidiaries has all permits, licenses, authorizations, consents, approvals and franchises necessary to own, lease and operate its respective properties and to carry on its respective business as it is now being conducted except for any of the foregoing, the absence of which would not, individually or in the aggregate, have a Material Adverse Effect on the Company or Chrysalis DNX. The Company and each Subsidiary is in compliance in all material respects with the terms and conditions of all such permits, licenses, authorizations, consents, approvals and franchises. Section 3.16 of the Company Disclosure Schedule sets forth, as of the date of this Agreement, a list of all material permits, licenses, authorizations, consents, approvals and franchises of the Company and each Subsidiary of the Company along with their expiration dates, each one of which is currently valid and in full force. The Company and each Subsidiary has filed such timely and complete renewal applications as may be required with respect to its material permits, licenses, authorizations, consents, approvals and franchises. No suspension, revocation, cancellation or A-16 withdrawal of, or any Action related to, any material permits, licenses, authorizations, consents, approvals or franchises of the Company and any Subsidiary of the Company has been filed or, to the knowledge of the Company or its Subsidiaries, has been commenced or is threatened. The Company and each Subsidiary is currently in compliance with, and at all times since December 31, 1993, has been in compliance with, all applicable federal, state, local or foreign laws, statutes, orders, judgments, decisions, rules, regulations, policies or guidelines (collectively "Applicable Laws"), including those promulgated or entered by the United States Food and Drug Administration ("FDA"), United States Department of Agriculture ("USDA"), United States Drug Enforcement Agency ("DEA"), European Medicines Evaluation Agency ("EMEA"), relating to the Company, any Subsidiary of the Company or its respective businesses or properties, except for any non-compliance which has not had, and is not reasonably likely to have, a Material Adverse Effect on the Company. (b) As to each product or service (including preclinical and clinical trials) subject to the jurisdiction of any Governmental Authority that is manufactured, tested, distributed, held, performed, offered and/or marketed by the Company or its Subsidiaries, such product or service is being, and since December 31, 1993 has been, manufactured, tested, distributed, held, performed, offered and/or marketed in compliance, to the extent required, with all Applicable Laws including, but not limited to, those provisions of the Federal Food, Drug and Cosmetic Act ("FDCA") relating to investigational use, informed consent, premarket clearance, good manufacturing practices, good laboratory practices, good clinical practices, labeling, advertising, record keeping, filing of report and security, except for any non-compliance which has not had, and is not reasonably likely to have, a Material Adverse Effect on the Company, and during the past five years there have been no deaths or serious adverse events, as defined in Title 21 of CFR, related or alleged to have been related to any drug, device or biologic product being studied in any such clinical trials or to the negligence of the Company or any of its Subsidiaries or agents. (c) Section 3.16(c) of the Company Disclosure Schedule lists (i) all notices of violation issued by the FDA, USDA, DEA or EMEA during the five years prior to the date of this Agreement to the Company or any of its Subsidiaries; (ii) all audit reports performed during the five years prior to the date of this Agreement by the Company, any Subsidiary, or any outside consultant retained by the Company or one of its Subsidiaries with respect to matters over which the FDA, USDA, DEA or EMEA has jurisdiction; and (iii) any document concerning any oral or written communication received from the FDA, the USDA, the DEA or the Department of Justice during the five years prior to the date of this Agreement. Section 3.17. Intellectual Property Rights. (a) Set forth in Section 3.17 of the Company Disclosure Schedule is a true and complete list, as of the date of this Agreement, of (i) all of the Company's and each of its Subsidiary's foreign and domestic material patents, patent applications, invention disclosures, trademarks, service marks, trade names (and any registrations or applications for registration for any of the foregoing) and all material design right and copyright applications and registrations, including all patents, trademarks, copyrights and applications under which the Company or any Subsidiary has obtained rights from others, and (ii) all material agreements to which the Company or any Subsidiary of the Company is a party which may concern any of the Intellectual Property. "Intellectual Property" shall mean all intellectual property or other proprietary rights of every kind, including, without limitation, all domestic or foreign patents, patent applications, inventions (whether or not patentable) processes, products, technologies, discoveries, copyrightable and copyrighted works, apparatus, trade secrets, trademarks and trademark applications and registrations, service marks and service mark applications and registrations, trade names, trade dress, copyright regulations, design rights, customer list, marketing and customer information, mask works rights, know-how, licenses, technical information (whether confidential or otherwise), software, and all documentation thereof). Other than the Intellectual Property set forth in Section 3.17 of the Company Disclosure Schedule, no name, patent invention, trade secret, proprietary right, computer software, trademark, trade name, service mark, logo, copyright, franchise, license, sublicense, or other such right is necessary for the operation of the business of the A-17 Company or any Subsidiary in substantially the same manner as such business is presently or proposed to be conducted. Except as set forth in Section 3.17 of the Company Disclosure Schedule, (i) the Company or its Subsidiaries, as applicable, owns, free and clear of any Liens the Intellectual Property set forth in Section 3.17 of the Disclosure Schedule and has the exclusive right to bring actions for the infringement thereof; (ii) no person or entity has asserted to the Company or any Subsidiary of the Company (and the Company or any Subsidiary is not otherwise aware) that, with respect to the Intellectual Property and the research, development and commercial activities of the Company or any Subsidiary, the Company or any Subsidiary of the Company is infringing or has infringed any domestic or foreign patent, trademark, service mark, trade name, or copyright or design right or misappropriated or improperly used or disclosed any trade secret, or know-how, (iii) all working requirements and all maintenance fees, annuities, and other payments which are due from or controlled by the Company or any Subsidiary of the Company on or before the date of this Agreement for any of the Intellectual Property, including, without limitation, all material foreign or domestic patents, patent applications, trademarks registrations service mark registrations, copyright registrations and any applications for any of the preceding, have been met or paid; (iv) the Company is not aware of any part of the Intellectual Property having been obtained through inequitable conduct or fraud in the United States Patent and Trademark Office or any foreign Governmental Authority; (v) neither the Company nor any Subsidiary of the Company is aware of any conduct or use by the Company or any Subsidiary of the Company that would, to the Company's knowledge, void or invalidate or constitute misuse of, any of the Intellectual Property (vi) the execution, delivery and performance of this Agreement by the Company, and the consummation of the transactions contemplated by this Agreement will not materially impair the right of Buyer or the Surviving Corporation, after the Merger Date, to use, sell, license or dispose of, or to bring any action for the infringement of, any Intellectual Property; (vii) the Company or any Subsidiary of the Company is not aware of any prior art that has been identified to the Company or any Subsidiary of the Company as invalidating or potentially invalidating prior art with respect to U.S. Patent No. 4,873,191 (the "191 Patent"); (viii) the Company or any Subsidiary of the Company is not aware of any Person who has made or asserted a claim of ownership, inventorship, license or material interest in the 191 patent; and (ix) there are no material royalties, honoraria, fees or other payments payable to any Person by reason of the ownership, use, license, sublicense, sale or disposition of the Intellectual Property. Section 3.18. Environmental Matters. (a) (i) No notice, notification, demand, request for information, citation, summons or order has been received by the Company, no complaint has been filed, no penalty has been assessed, no Action or review is pending before any Governmental Authority or, to the knowledge of the Company or any Subsidiary of the Company, threatened by any Governmental Authority or other Person with respect to any matters relating to the Company or any Subsidiary of the Company and arising out of any Environmental Law or Environmental Permit which, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect on the Company; and (ii) the Company and each Subsidiary of the Company are in compliance with all Environmental Laws and have, and are in compliance with, all Environmental Permits, except where any noncompliance or failure to obtain or comply with Environmental Permits is not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect on the Company; and (iii) there are no liabilities of, or relating to, the Company or any Subsidiary of the Company of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, arising under or relating to any Environmental Law or Environmental Permit which, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect on the Company. (b) There are no liabilities disclosed in any environmental assessment, investigation, study, audit, test, review or other analysis conducted at the request of the Company or any Subsidiary of the Company in relation to the current or prior business of the Company or any Subsidiary of the Company or any property or facility now or previously owned, leased or operated by the Company or any Subsidiary of A-18 the Company and of which the Company has knowledge which individually or in the aggregate are reasonably likely to exceed $25,000 which have not been disclosed to Buyer in writing as of the date hereof. (c) Neither the Company nor any Subsidiary of the Company has knowledge in relation to the current or prior business of the Company or any Subsidiary of the Company owning or operating or having owned or operated any underground storage tank which has been closed or abandoned in place, other than in compliance with Environmental Laws and Environmental Permits, as in effect on the date of such closure or abandonment, and each underground storage tank presently owned, leased or operated by the Company or any Subsidiary of the Company is in compliance with Environmental Laws and Environmental Permits and, as of the date hereof, meets applicable local, state, federal and foreign standards, including new system performance standards and upgrading requirements contained in Subtitle I of the Resource Conservation and Recovery Act, 42 U.S. C. 6991, et seq., as amended, and any rules or regulations promulgated thereunder, including 40 C.F.R. Section 280.20, et seq., except to the extent that any non-compliance, assessment or remediation costs arising from or relating to underground storage tanks would not, individually or in the aggregate, be reasonably likely to result in liabilities in excess of $10,000. (d) Neither the Company nor any Subsidiary of the Company has knowledge of any releases of Hazardous Substances at, to or from a facility or property while owned or operated by the Company or any Subsidiary that either (i) required reporting to a Governmental Authority under Environmental Laws or Environmental Permits, or (ii) are reasonably likely, individually or in the aggregate, to have a Material Adverse Effect on the Company. (e) To the knowledge of the Company or any Subsidiary of the Company, no Hazardous Substances (exclusive of inventory and finished products) have been transferred from any facility or property while owned or operated by the Company or any Subsidiary of the Company to any off-site location for treatment, storage, disposal, recycling or other waste management activity. (f) For purposes of this Section 3.18, the following terms shall have the meanings set forth below: (i) "Environmental Laws" means any federal, state, local and foreign law (including, without limitation, common law), treaty, judicial decision, regulation, rule, judgment, order, decree, injunction, agreement or contract with any Governmental Authority relating to protection of human health and safety, the environment or to the regulation or remediation of pollutants, contaminants, wastes or chemicals or toxic, radioactive, ignitable, corrosive, reactive or otherwise hazardous substances, wastes or materials; (ii) "Environmental Permits" means all permits, licenses, franchises, certificates, approvals and other similar authorizations of Governmental Authorities relating to or required by Environmental Laws for operation of the business of the Company or any Subsidiary of the Company as currently conducted; (iii) "Hazardous Substance" means any material, substance, chemical, raw material, product, byproduct or waste whose release to the environment, including remediation of such releases, is regulated under any Environmental law or Environmental Permit; and (iv) "Company" and "Subsidiary of the Company" shall include any entity which is, in whole or in part, a predecessor of the Company or any Subsidiary of the Company. Section 3.19. Opinion of Financial Advisor. The Board of Directors of the Company has received the opinion of Vector Securities International, Inc., financial advisor to the Company, to the effect that, as of the date of this Agreement, the Merger Consideration (whether in the form of Buyer Common Stock or United States dollars) is fair to the stockholders of the Company from a financial point of view, and such opinion has not been withdrawn. A-19 Section 3.20. Antitakeover Statutes and Certificate of Incorporation Provisions. The Board of Directors of the Company have taken all appropriate and necessary actions such that, assuming the truth and accuracy of the representations and warranties contained in Section 4.12, Section 203 of the Delaware Law and Article Eighth of the Company's Third Amended and Restated Certificate of Incorporation will not have any effect (including, without limitation, a required vote of the stockholders of the Company owning more than a majority of the outstanding shares of Company Stock as of the record date for the Company Stockholder Meeting) on the Merger or the other transactions contemplated by this Agreement. No other "fair price," "moratorium," "control share acquisition," or other similar antitakeover statute or regulation of the Delaware Law or, to the knowledge of the Company, any other jurisdiction is applicable to the Merger or the other transactions contemplated by this Agreement. Section 3.21. Rights Agreement. (a) The Company has adopted an amendment to the Rights Agreement, dated July 1, 1998, between the Company and American Stock Transfer & Trust Company (the "Rights Agreement") with the effect that as a result of entering into this Agreement or consummating the Merger and/or the other transactions contemplated by this Agreement in accordance with the terms of this Agreement (i) neither Buyer nor Phoenix Merger Sub shall be deemed to be an Acquiring Person (as defined in the Rights Agreement), (ii) neither the Distribution Date (as defined in the Rights Agreement) nor a Flip-In Event or Flip-Over Event (each as defined in the Rights Agreement) shall be deemed to occur, (iii) the Rights (as defined in the Rights Agreement) will not separate from the Company Stock, and (iv) the Rights will expire immediately prior to the Merger Date. (b) The Company has taken or will take all necessary action with respect to all of the outstanding Rights (as defined in the Rights Agreement) so that, as of immediately prior to the Merger Date, as a result of entering into this Agreement and/or consummating in accordance with the terms of this Agreement the Merger and/or the other transactions contemplated by this Agreement, (i) neither the Company nor Buyer will have any obligations under the Rights or the Rights Agreement as a result of the Merger and (ii) the holders of the Rights will have no rights under the Rights or the Rights Agreement as a result of the Merger. Section 3.22. Finders Fees. Except for Vector Securities International, Inc., a copy of whose engagement agreement has been provided to Buyer, there is no investment banker, broker, finder or other intermediary which has been retained by or is authorized to act on behalf of the Company or any of its Subsidiaries who might be entitled to any fee or commission in connection with the transactions contemplated by this Agreement. Section 3.23. Title to and Condition of Properties. The Company and each Subsidiary owns or holds under valid leases all real property, plants, machinery and equipment necessary for the conduct of the business of the Company and such Subsidiary as presently conducted, except where the failure to own or hold such property, plants, machinery and equipment would not have a Material Adverse Effect on the Company. Section 3.23 of the Company Disclosure Schedule lists, and the Company has furnished to Buyer copies of, all appraisals and valuations prepared by or on behalf of the Company during the two years preceding the date of this Agreement with respect to the real property owned, leased or used by the Company or any Subsidiary. There are no Liens on any assets, rights or properties of the Company or any Subsidiary other than Liens arising solely by operation of law. Section 3.24. Contracts. Schedule 3.24 lists all written or oral contracts, agreements, guarantees, leases and executory commitments (each a "Contract") to which the Company or any Subsidiary is a party as of the date of this Agreement and which fall within any of the following categories: (a) contracts not entered into in the ordinary course of the Company's or any of its Subsidiary's business; (b) joint venture, partnership and like agreements; (c) Contracts which are service contracts (excluding contracts for delivery services entered into in the ordinary course of business) or equipment leases involving payments by the Company or any Subsidiary of more than $250,000 per year, (d) Contracts containing A-20 covenants purporting to limit the freedom of the Company or any Subsidiary of the Company to compete in any line of business in any geographic area or to hire any individual or group of individuals, (e) Contracts which contain minimum purchase conditions or requirements or other terms that restrict or limit the purchasing relationships of the Company or any Subsidiary of the Company, (f) Contracts relating to any outstanding commitment for capital expenditures of the Company or any Subsidiary of the Company in excess of $50,000, (g) indentures, mortgages, promissory notes, loan agreements, guarantees, in each case involving amounts in excess of $50,000, letters of credit or other agreements or instruments of the Company or any Subsidiary of the Company or commitments for the borrowing or the lending of amounts, in each case in excess of $50,000, by the Company or any Subsidiary of the Company or providing for the creation of any charge, security interest, encumbrance or lien upon any of the assets of the Company or any Subsidiary of the Company, (h) Contracts relating to the lease or sublease of or sale or purchase of real or personal property involving any annual expense or price in excess of $50,000 and not cancelable by the Company or any Subsidiary (without premium or penalty) within one month, (i) Contracts involving annual revenues or expenditures to the business of the Company or any Subsidiary of the Company in excess of 1.0% of the Company's consolidated annual revenues, and (j) Contracts providing for "earn-outs" or other contingent payments involving more than $20,000 over the term of the Contract. All such Contracts are valid and binding obligations of the Company and its Subsidiaries, as applicable, and, to the knowledge of the Company, the valid and binding obligation of each other party thereto except such Contracts which if not so valid and binding would not, individually or in the aggregate, have a Material Adverse Effect on the Company. None of the Company, any Subsidiary of the Company nor, to the knowledge of the Company, any other party thereto is in violation of or in default in respect of, nor has there occurred any event or condition which with the passage of time or giving of notice (or both) would constitute a default under, any such Contract except such violations or defaults under such Contracts which, individually or in the aggregate, would not have a Material Adverse Effect on the Company. Section 3.25 Accounts Receivable. All accounts receivable and accrued interest receivable of the Company and its Subsidiaries have arisen out of the ordinary course of business and the accounts receivable reserves reflected on the consolidated balance sheet of the Company as of September 30, 1998 are as of such date established in accordance with U.S. GAAP and to the knowledge of the Company will be collectible in the aggregate, in an amount not less than the amounts carried on the balance sheet of the Company as of such date, net of any reserves included therein, except for any uncollectible amounts which, individually or in the aggregate, would not have a Material Adverse Effect on the Company. Section 3.26 Relationships. As of the date of this Agreement, (i) to the Company's knowledge, the relationship of the Company and its Subsidiaries with its respective customers and suppliers are satisfactory and, (ii) to the Company's knowledge, the execution of this Agreement and consummation of the transactions contemplated by this Agreement to be undertaken by the Company will not have a Material Adverse Effect on the relationships of the Company or any Subsidiary with such customers or suppliers, the effect of which, individually or in the aggregate, would have a Material Adverse Effect on the Company or Chrysalis DNX. Section 3.27 Product Warranties and Liabilities. Neither the Company nor any Subsidiary of the Company has any forms of warranties or guarantees of its products and services that are in effect or proposed to be used by it. There are no pending or, to the knowledge of the Company, threatened Actions under any warranty or guaranty against the Company or any Subsidiary of the Company. Neither the Company nor any Subsidiary of the Company has incurred, nor does the Company know or have any reason to believe that there is any basis for alleging, any material liability, damage, loss, cost or expense as a result of any material defect or other deficiency (whether of design, materials, workmanship, labeling instructions or otherwise) ("Product Liability") with respect to any product sold or services rendered by or on behalf of the Company or any Subsidiary of the Company whether such Product Liability is incurred by reason of any express or implied warranty (including, without limitation, A-21 any warranty of merchantability or fitness), any doctrine of common law (tort, contract or other), any statutory provision or otherwise and irrespective of whether such Product Liability is covered by insurance, except for any Product Liability which would not have a Material Adverse Effect on the Company. Section 3.28 Affiliate Transactions. Except as contemplated by the transactions contemplated by this Agreement, there are no Contracts or other transactions between the Company or any Subsidiary of the Company, on the one hand, and any (i) officer or director of the Company or any Subsidiary of the Company, (ii) record or beneficial owner of five percent (5%) or more of the voting securities of the Company or (iii) affiliate (as such term is defined in Regulation 12b-2 promulgated under the Exchange Act) of any such officer, director or beneficial owner, on the other hand. Section 3.29 Insurance. The Company and its Subsidiaries are presently insured, and during each of the past five calendar years have been insured against such risks as companies engaged in a similar business would, in accordance with good business practice, customarily be insured. The policies of fire, theft, errors and omission, liability and other insurance maintained with respect to the assets or businesses of the Company and its Subsidiaries provide adequate coverage against loss and may be continued by the Company or any Subsidiary of the Company without modification or premium increase after the Merger Date and for the duration of their current terms. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER Except as set forth in the disclosure schedule (each section of which qualifies the correspondingly numbered representation and warrant only, except where the information in any such section is disclosed in such a way to make its relevance to any other representation or warranty readily apparent, in which case, such section shall be deemed to also qualify such other representation and warranty) of Buyer attached hereto (the "Buyer Disclosure Schedule"), Buyer represents and warrants to the Company that: Section 4.01. Corporate Existence and Power. (a) Buyer is a corporation duly incorporated, validly existing and in good standing under the Canada Business Corporations Act, and has all corporate powers and has or has applied for all permits, licenses, authorizations, consents, approvals and franchises necessary to own, lease and operate its properties and to carry on its business as it is now being conducted and is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, except (i) where the failure to have such permits, licenses, authorizations, consents, approvals and franchises and (ii) for those jurisdictions where the failure to be so qualified or in good standing is not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect on Buyer. Buyer has heretofore delivered to the Company true and complete copies of Buyer's Articles of Amalgamation and Certificate of Amalgamation ("Organizational Documents") as currently in effect. (b) Phoenix Merger Sub is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all permits, licenses, authorizations, consents, approvals and franchises required to carry on its business as it is now being conducted except where the failure to have such permits, licenses, authorizations, consents, approvals and franchises is not individually, or in the aggregate, reasonably likely to have a Material Adverse Effect on Phoenix Merger Sub. Since its date of incorporation, Phoenix Merger Sub has not engaged in any activities other than in connection with the transactions contemplated by this Agreement. A-22 Section 4.02. Corporate Authorization. The execution, delivery and performance by each of Buyer and Phoenix Merger Sub (each, a "Buyer Party") of this Agreement and the consummation by each Buyer Party of the transactions contemplated by this Agreement are within the corporate powers of such Buyer Party and have been duly authorized by all necessary corporate action. This Agreement has been duly executed and delivered by each Buyer Party and constitutes a valid and binding agreement of such Buyer Party enforceable against such Buyer Party in accordance with its terms. Section 4.03. Governmental Authorization. The execution, delivery and performance by each Buyer Party of this Agreement and the consummation by such Buyer Party of the transactions contemplated by this Agreement require no action, by or in respect of, or filing with, any Governmental Authority other than (a) the filing of the Certificate of Merger in accordance with the Delaware Law; (b) compliance with any applicable requirements of the HSR Act; (c) compliance with any applicable requirements of the 1934 Act; (d) compliance with any applicable requirements of the 1933 Act; (e) compliance with any applicable foreign or state securities or Blue Sky laws; (f) filings and notices not required to be made or given until on or after the Merger Date; and (g) immaterial actions or filings relating to ordinary operational matters. Section 4.04. Non-Contravention. The execution, delivery and performance by each Buyer Party of this Agreement and the consummation by such Buyer Party of the transactions contemplated by this Agreement do not and will not (a) contravene or conflict with the Organizational Documents or certificate of incorporation or bylaws, as the case may be, of such Buyer Party, (b) assuming compliance with the matters referred to in Section 4.03 and Section 4.03 of the Buyer Disclosure Schedule, contravene or conflict with or constitute a violation of any provision of any law, regulation, judgment, injunction, order or decree binding upon or applicable to Buyer or any Subsidiary of Buyer, (c) constitute a default (or an event which with notice, the lapse of time or both would become a default) under or give rise to a right of termination, cancellation or acceleration of any right or obligation of Buyer or any Subsidiary of Buyer or to a loss of any benefit to which Buyer or any Subsidiary of Buyer is entitled under any provision of any agreement, contract or other instrument binding upon Buyer or any Subsidiary of Buyer or any license, franchise, permit or other similar authorization held by Buyer or any Subsidiary of Buyer, (d) require any action or consent or approval of any Person other than a Governmental Authority, or (e) result in the creation or imposition of any Lien on any asset of Buyer or any Subsidiary of Buyer, other than, in the case of the events specified in clauses (b), (c), (d) and (e) (other than indebtedness of Buyer or any subsidiary of Buyer), any such event which, individually or in the aggregate, has not had, and is not reasonably likely to have, a Material Adverse Effect on Buyer. Section 4.05. Capitalization. The authorized capital stock of (a) Buyer consisted of (i) an unlimited number of shares of Buyer Common Stock and (ii) an unlimited number of preferred shares issuable in series ("Buyer Preferred Stock"), and (b) on the date hereof, Phoenix Merger Sub consisted of 3,000 shares of Phoenix Merger Sub Common Stock. As of August 31, 1998, there were 24,857,059 shares of Buyer Common Stock outstanding and no shares of Buyer Preferred Stock outstanding. As of August 31, 1998, an aggregate of 2,428,920 shares of Buyer Common Stock were reserved for issuance or issuable under employee benefit or other compensation plans or programs of Buyer. All outstanding shares of capital stock of each Buyer Party have been duly authorized and validly issued and are fully paid and nonassessable. All shares of Buyer Common Stock, when issued in the Merger, will be duly authorized and validly issued and will be fully paid and non-assessable. Section 4.06. Public Filings. Buyer has delivered to the Company all documents, reports, schedules, registration statements and proxy statements filed by Buyer with the Ontario Securities Commission or the Quebec Securities Commission (each, a "Canadian Securities Commission") on or after August 1, 1997. Buyer has filed all required documents, reports, schedules, forms and statements with either Canadian Securities Commission since August 1, 1997 (collectively, the "Buyer Public Documents"). As of their respective dates, or if amended, as of the date of the last such amendment, the Buyer Public A-23 Documents complied, and all documents required to be filed by Buyer with the either Canadian Securities Commission after the date hereof and prior to the Merger Date (the "Subsequent Buyer Public Documents") will comply, in all material respects with the requirements of the Ontario or Quebec securities laws, as the case may be, and none of the Buyer Public Documents contained, and the Subsequent Buyer Public Documents will not contain, any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. Section 4.07. Financial Statements. The audited consolidated financial statements and unaudited consolidated interim financial statements of Buyer included in the Buyer Public Documents at the time filed (and, in the case of registration statements and proxy statements, on the date of effectiveness and the date of mailing, respectively) complied as to form in all material respects with applicable accounting requirements of the Ontario or Quebec securities laws, as the case may be, were prepared in accordance with generally accepted accounting principles applied in Canada ("Canadian GAAP") applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly present (subject in the case of unaudited statements to normal, recurring audit adjustments) the consolidated financial position of Buyer as at the dates thereof and the consolidated results of its operations and cash flows for the periods then ended. For purposes of this Agreement, "Buyer Balance Sheet" means the consolidated balance sheet of Buyer as of August 31, 1998 set forth in the Buyer Annual Report filed with the Canadian Securities Commissions and "Buyer Balance Sheet Date" means August 31, 1998. Section 4.08. Disclosure Documents. (a) Each document required to be filed by Buyer with the SEC in connection with the transactions contemplated by this Agreement (the "Buyer SEC Disclosure Documents"), including, without limitation, the registration statement of Buyer to be filed with the SEC on Form F-4 (or other appropriate form) in connection with the issuance of Buyer Common Stock pursuant to this Agreement (the "Form F-4") and any amendments or supplements thereto, will, when filed, comply as to form in all material respects with the applicable requirements of the 1933 Act. Buyer is eligible to use Form F-4 for the registration of the Buyer Common Stock to be issued pursuant to the Merger. Each document required to be filed by Buyer under the Ontario or Quebec Securities laws in connection with the transactions contemplated by this Agreement (together with the Buyer SEC Disclosure Documents, the "Buyer Disclosure Documents"), will, when filed, comply as to form in all material respects with the applicable requirements of the Ontario or Quebec securities laws, as applicable. (b) At the time the prospectus which forms a part of the Form F-4 (the "Buyer Prospectus") or any amendment or supplement thereto is first mailed to stockholders of the Company, and at the time such stockholders vote on the Merger, and at the Merger Date the Buyer Prospectus, as supplemented or amended, if applicable, will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. At the time of the filing of any Buyer Disclosure Document and at the time of any distribution thereof, such Buyer Disclosure Document will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties contained in this Section 4.08 will not apply to statements included in or omissions from the Buyer Disclosure Documents based upon information furnished to Buyer by the Company specifically for use therein. Section 4.09. Information Supplied. The information supplied or to be supplied by Buyer for inclusion or incorporation by reference in (i) the Company Proxy Statement or any amendment or supplement thereto will not, at the time the Company Proxy Statement is first mailed to stockholders of the Company and at the time such stockholders vote on the adoption of this Agreement, contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading, A-24 and (ii) any Company Disclosure Document (other than the Company Proxy Statement, and any amendments or supplements thereto) will not, at the time of effectiveness of such Company Disclosure Document and at the time of any distribution by the Company thereof, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. Section 4.10. Absence of Certain Changes. Since the Buyer Balance Sheet Date and except as set forth in the Buyer Public Documents, Buyer and its Subsidiaries have conducted their business in the ordinary course consistent with past practice and there has not been: (a) any event, occurrence or development of a state of circumstances or facts which has had or is reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on Buyer other than any of the foregoing (i) relating to the economy or securities markets in general, (ii) relating to Buyer's industry in general or (iii) arising from the announcement or thereafter the pendency of this Agreement or the transactions contemplated by the Transaction Document; (b) any declaration, setting aside or payment of any dividend or other distribution with respect to any shares of capital stock of Buyer, or any repurchase, redemption or other acquisition by Buyer or any Subsidiary of Buyer of any amount of outstanding shares of capital stock or other securities of, or other ownership interests in, Buyer or any of its Subsidiaries; (c) any amendment of any material term of any outstanding security of Buyer or any Subsidiary of Buyer; or (d) any damage, destruction or other casualty loss (whether or not covered by insurance) affecting the business or assets of Buyer or any Subsidiary of Buyer which, individually or in the aggregate, has had or is reasonably likely to have a Material Adverse Effect on Buyer. Section 4.11. No Undisclosed Material Liabilities. There are no liabilities, commitments or obligations (whether pursuant to contracts or otherwise) of Buyer or any Subsidiary of Buyer of any kind whatsoever which, individually or in the aggregate, have had or are reasonably likely to have a Material Adverse Effect on Buyer, whether accrued, contingent, absolute, determined, determinable or otherwise, and there is no existing condition, situation or set of circumstances which is reasonably likely to result in such a liability, commitment or obligation, including, without limitation, any fines, disciplinary actions or other adverse actions that may be taken or reported concerning the conduct of Buyer or any of its Subsidiaries, other than: (a) liabilities, commitments or obligations disclosed or provided for in the Buyer Balance Sheet (including the notes thereto) or in the Buyer Public Documents; (b) liabilities, commitments or obligations incurred in the ordinary course of business consistent with past practice since the Buyer Balance Sheet Date; and (c) liabilities, commitments or obligations under this Agreement. Section 4.12. Ownership of Company Stock. None of Buyer nor its associates or affiliates (as such terms are defined in Section 203(c) of the Delaware Law) owns, or has owned (within the meaning of Section 203(c)(9) of the Delaware Law) at any time during the three years immediately prior to the date of this Agreement, any shares of Company Common Stock. Section 4.13. Finders Fees. Except for Pennsylvania Merchant Group, a copy of whose engagement agreement has been provided to the Company, there is no investment banker, broker, finder or other intermediary which has been retained by or is authorized to act on behalf of the Buyer or any of its Subsidiaries who might be entitled to any fee or commission in connection with the transactions contemplated by this Agreement. Section 4.14. Sufficient Cash to Repay Certain Debt. Buyer will have sufficient cash on hand (or amounts available for borrowing under loan facilities which would permit the borrowings to be used for such purpose) to pay immediately after the Merger Date the amounts referred to in Section 6.03. A-25 ARTICLE 5 COVENANTS OF THE COMPANY The Company agrees that: Section 5.01. Conduct of the Company. From the date hereof until the Merger Date, except (i) as provided in the Company Disclosure Schedule, (ii) actions related to the Shut-Downs contemplated by Section 5.04, or (iii) as otherwise consented to by Buyer (which consent shall not be unreasonably withheld or delayed), the Company shall, and shall cause its Subsidiaries to, conduct their business in the ordinary course consistent with past practice and use their commercially reasonable efforts to preserve intact their business organizations and relationships with third parties and to keep available the services of their present officers and employees. Without limiting the generality of the foregoing, except as expressly permitted in this Agreement (including, without limitation, the preceding sentence), from the date hereof until the Merger Date without prior consent of Buyer (which consent shall not be unreasonably withheld or delayed): (a) Neither the Company, nor any Subsidiary of the Company, will adopt or propose any change in its respective certificate of incorporation or bylaws; (b) The Company will not, and will not permit any Subsidiary of the Company to, merge or consolidate with any other Person or, other than as provided in the Company's capital expenditure budget (included as Section 5.01(b) of the Company Disclosure Schedule) in the ordinary course of business, acquire a material amount of assets of any other Person; (c) The Company will not, and will not permit any Subsidiary of the Company to, sell, lease, license or otherwise dispose of any material assets or property except pursuant to (i) existing contracts or commitments and (ii) any sale of operating procedures, computerized project tracking systems and training manuals to BML Japan (provided, however, that any such sale to BML Japan shall not obligate the Company to provide any services or training beyond January 31, 1999); provided, however, that the Company and its Subsidiaries may continue to grant non-exclusive sublicenses related to the 191 patent in the ordinary course of business consistent with past practice. (d) The Company will not, and will not permit any Subsidiary of the Company to, declare, set aside or pay any dividend or make any other distribution with respect to any shares of the capital stock of the Company or any Subsidiary of the Company or in respect of any securities convertible or exchangeable for, or any rights, options or warrants to acquire, any capital stock of the Company or any Subsidiary of the Company; (e) The Company will not, and will not permit any Subsidiary of the Company to, create or assume any Lien on any material asset other than Liens arising solely by operation of law; (f) The Company will not, and will not permit any Subsidiary of the Company to, issue, grant, deliver or sell, or authorize or propose the issuance, grant, delivery or sale of, any Company Securities, any Company Subsidiary Securities or any securities convertible into or exchangeable for, or any rights, warrants or options to acquire, any Company Securities or Company Subsidiary Securities other than (i) pursuant to the exercise of a stock option or warrant to purchase shares of Company Stock outstanding on the date of this Agreement, or (ii) the issuance in the ordinary course of business consistent with past practice of shares of Company Stock to the Company's 401(k) plan. (g) The Company (i) will not adjust, split, combine or reclassify, or take any other similar action with respect to, any capital stock of the Company, and (ii) the Company will not, and will A-26 not permit any Subsidiary of the Company to, directly or indirectly, repurchase, redeem or otherwise acquire an amount of shares of capital stock of, or in respect of any securities convertible or exchangeable for, or any rights, options or warrants to acquire, any capital stock of, or other ownership interests in, the Company or any Subsidiary of the Company, or (iii) enter into any agreement, understanding or arrangement with respect to the sale or voting of any capital stock of the Company or any Subsidiary; (h) The Company will not, and will not permit any Subsidiary of the Company to, incur or assume any indebtedness from any Person (other than, in the case of a Subsidiary of the Company, the Company or any other subsidiary of the Company) for borrowed money or guarantee any such indebtedness; (i) Except for (i) loans, advances or capital contributions to or investments in Subsidiaries of the Company, (ii) loans or advances to employees in the ordinary course of business consistent with past practice and in amounts not exceeding $5,000 per employee or (iii) investments in securities in the ordinary course of business consistent with past practices, the Company will not, and will not permit any Subsidiary of the Company to, make any material loans, advances or capital contributions to, or investments in, any other Person; (j) The Company will not, and will not permit any of its Subsidiaries to, (i) grant any severance or termination pay to, or enter into any employment, termination or severance arrangement with, any director, officer, consultant or employee of the Company or any Subsidiary of the Company, (ii) enter into any employment, deferred compensation or other similar agreement (or any amendment to any such existing agreement) with any director, officer or employee of the Company or any Subsidiary, (iii) increase or decrease benefits payable under any existing severance or termination pay policies or employment agreements, (iv) increase compensation, bonus or other benefits payable to directors, officers, consultant or employees of the Company or any Subsidiary of the Company, other than in the ordinary course of business consistent with past practice; (v) adopt any new Employee Plan or Benefit Arrangement; or (vi) otherwise amend or modify, any existing Employee Plan or Benefit Arrangement except to the extent required by applicable law; (k) The Company will not, and will not permit any of its Subsidiaries to, authorize, recommend, propose or announce an intention to adopt a plan of complete or partial liquidation or dissolution of the Company or any Subsidiary of the Company, or any plan of division or share exchange involving the Company or any of its Subsidiaries; (l) The Company will not, and will not permit any Subsidiary of the Company to, change any method of accounting or any accounting principle or practice used by the Company or any Subsidiary of the Company, except for any such change required by reason of a change in U.S. GAAP or Regulation S-X; (m) Neither the Company nor any Subsidiary shall, to the extent it may affect or relate to the Company or any Subsidiary, make or change any tax election, change any annual tax accounting period, adopt or change any method of tax accounting, file any amended Tax Return, enter into any closing agreement, settle any Tax claim or assessment, surrender any right to claim a Tax refund, consent to any extension or waiver of the limitations period applicable to any Tax claim or assessment or take or omit to take any other action, if any such action or omission would have the effect of, in the aggregate, increasing the Tax liability, or in the aggregate, reducing any Tax asset of the Company or any Subsidiary of the Company except to the extent such increase or reduction is adequately provided for, under U.S. GAAP, on the Company Balance Sheet; (n) All Tax Returns not required to be filed on or before the date hereof (i) shall be filed when due in accordance with all applicable laws and (ii) as of the time of filing, shall correctly reflect in all material respects the facts regarding the income, business, assets, operations, activities A-27 and status of the Company, its Subsidiaries and any other information required to be shown therein; (o) Neither the Company nor any Subsidiary of the Company shall reserve any amount for or make any payment of Taxes to any Person or any Taxing Authority, except for such Taxes as are due or payable or have been properly estimated in accordance with applicable law as applied in a manner consistent with past practice of the Company or any such Subsidiary, as the case may be; (p) Neither the Company nor any of its Subsidiaries will: (i) settle any Actions, whether now pending or hereafter made or brought, for an amount in excess of $25,000; (ii) modify, amend or terminate, or waive, release or assign any material rights or claims with respect to, any Contract set forth in Section 3.24 of the Company Disclosure Schedule, or, except to the extent required by Applicable Law and advised by outside counsel, any confidentiality agreement to which the Company or any Subsidiary of the Company is a party; (iii) incur or commit to any capital expenditures, obligations or liabilities in respect thereof which exceed or would exceed $10,000, individually, or $50,000 in the aggregate, other than capital expenditures related to the Company's on-going construction of facilities which do not exceed amounts previously disclosed by the Company to Buyer; (iv) make any material changes or modifications to any pricing policy or investment policy; (v) take any action that would result in the representations and warranties set forth in Article III being false or incorrect in any material respect, other than inadvertent actions that do not result in the representations and warranties being unable to be true and correct in all material respects by the Merger Date; (vi) enter into any customer contract or agreement, or any other contract, lease, agreement or commitment not otherwise specified in this Section 5.01, for an amount in excess of $100,000 individually; (vii) enter into, amend or terminate any real property lease or any commitment in respect thereof; (viii) terminate the employment or engagement of any employee or consultant or agent of the Company or any Subsidiary; or (ix) pay or approve any other expense or disbursement in excess of $25,000 individually (except for payroll and related tax withholding and other expenses (including insurance and 401(k) contributions), Tax liabilities, utilities, lease payments, principal and interest payments on outstanding indebtedness of the Company and/or any of its Subsidiaries, payments to suppliers, Shut-Down expenses, legal fees and expenses and, upon closing of the Merger, investment banking fees and expenses). (q) The Company will not, and will not permit any Subsidiary of the Company to, agree to do any of the foregoing. The Company and its Subsidiaries will consult regularly with the Buyer in respect of the operation of its business prior to the Merger Date; provided, however, that the provisions of this sentence will not be deemed to have been breached unless and until Buyer has notified the Company in writing of such breach and the Company and its Subsidiaries have failed to comply with the specific terms of such notice. A-28 Section 5.02. Stockholder Meeting; Proxy Materials. (a) Subject to Section 5.03, the Company shall cause a meeting of its stockholders (the "Company Stockholder Meeting") to be duly called and held as soon as reasonably practicable for the purpose of voting on the adoption of this Agreement and, to the extent submitted to the Company's stockholders for approval, the, transactions contemplated by this Agreement, and the Board of Directors of the Company shall recommend adoption of this Agreement by the Company's stockholders; provided that such mailing shall not in any event be mailed during the Listing Period unless Buyer has received the Nasdaq Letter; provided further that such meeting need not be called and held and, prior to the Company Stockholder Meeting, such recommendation may be withdrawn, modified or amended to the extent that, as a result of the commencement or receipt of an Acquisition Proposal with respect to the Company, the Board of Directors of the Company determines in good faith, in accordance with Section 5.03, that such Acquisition Proposal constitutes a Superior Proposal. (b) Subject to Section 5.03, in connection with the Company Stockholder Meeting, the Company will (i) promptly prepare and file with the SEC, will use commercially reasonable efforts to have cleared by the SEC and will thereafter mail to its stockholders as promptly as practicable after the time period referred to in Section 1.07 for determination of whether a Listing Failure has occurred the Company Proxy Statement and all other proxy materials for such meeting, (ii) use commercially reasonable efforts to obtain the necessary adoption by its stockholders of this Agreement and the approval of the transactions contemplated by this Agreement, and (iii) otherwise comply with all legal requirements applicable to such meeting. Section 5.03. Other Offers. From the date hereof until the termination of this Agreement, the Company will not, and will cause its Subsidiaries and the directors, officers, employees, financial advisors and other agents or representatives of the Company or any of its Subsidiaries not to, directly or indirectly, take any action to solicit, initiate or encourage any Acquisition Proposal with respect to the Company or engage in negotiations with, or disclose any non-public information relating to the Company or any Subsidiary of the Company or afford access to the properties, books or records of the Company or any Subsidiary of the Company to, any Person that has informed the Company that it is considering making, or has made, an Acquisition Proposal with respect to the Company, or any Person that the Company after reasonable inquiry believes is a potential purchaser of the Company, provided, however, that the Company may, in response to an unsolicited bona fide written proposal regarding an Acquisition Proposal by any Person, disclose such non-public information to or engage in negotiations with such Person, if the Board of Directors of the Company determines in good faith that such Acquisition Proposal is reasonably likely to be a Superior Proposal, and, provided further, that prior to furnishing non-public information to, or entering into discussions or negotiations with, such Person, the Company receives from such Person an executed confidentiality agreement with terms no less favorable to the Company than those contained in the Letter Agreement dated as of July 21, 1998 between Buyer and the Company ("Confidentiality Agreement"). The Company will promptly (and in no event later than 24 hours after receipt of the relevant Acquisition Proposal with respect to the Company), notify (which notice shall be provided orally and in writing and shall identify the Person making the relevant Acquisition Proposal with respect to the Company) Buyer after receipt of any Acquisition Proposal or any indication from any Person that such Person is considering making an Acquisition Proposal with respect to the Company or any request for non-public information relating to the Company or any Subsidiary of the Company or for access to any properties, books or records of the Company or any Subsidiary of the Company by any Person that may be considering making, or has made, an Acquisition Proposal with respect to the Company and will keep Buyer fully informed of the status of any such Acquisition Proposal with respect to the Company. The Company shall give Buyer at least one business day's advance notice of any information to be supplied to, and at least two days' advance notice of any agreement to be entered into with, any Person making such Acquisition Proposal with respect to the Company. Except as provided herein, the Company shall, and shall cause its A-29 Subsidiaries and the directors, officers, employees, financial advisors and other agents or representatives of the Company or any of its Subsidiaries to, cease immediately and cause to be terminated all activities, discussions or negotiations, if any, with any Persons conducted heretofore with respect to any Acquisition Proposal with respect to the Company. For purposes of this Agreement, "Acquisition Proposal" means any offer or proposal for, or any indication of interest in, (i) a merger or other business combination in any manner of an equity interest in an amount equal to or greater than 20% of the class of such equity security then outstanding or a substantial portion of the assets of, the Company or any Subsidiary of the Company, in each case other than the transactions contemplated by this Agreement. For purposes of this Agreement, "Superior Proposal" means an Acquisition Proposal with respect to the Company which the Board of Directors of the Company determines in good faith (based on the written advice of an investment banking firm of national reputation taking into account all of the terms and conditions of the Acquisition Proposal, including any conditions to consummation) to be more favorable and provide greater value to the Company's stockholders than the Merger. Section 5.04. Shut-Downs. After execution of this Agreement, the Company shall commence the process of shutting down its facilities located in Austin, Texas, Cham, Switzerland and Dusseldorf, Germany, and reducing expenses in respect of its operations in Mannheim, Germany, and Israel (collectively, the "Shut-Downs") with the goal of completing each of the Shut-Downs as soon as practicable (consistent with maintaining good client relationships). The Company shall accrue, in accordance with U.S. GAAP, all costs and expenses related to the ShutDowns. Notwithstanding the foregoing, Buyer acknowledges that the Shut-Downs in the time and in the manner agreed to by Buyer and the Company may not be completed prior to the Merger Date and that a significant portion of the activities, costs and expenses related to the Shut-Downs will occur after the Merger Date. The Company agrees to update Buyer on a regular basis (no less than every two (2) weeks and within one (1) business day of request by Buyer) prior to the Merger Date regarding the status, activities and costs and expenses (and related accounting therefor) of the Shut-Downs. Schedule 5.04 sets forth a good faith estimate of all costs and expenses (including reserves and accruals) the Company and its Subsidiaries expect to incur after the date hereof until the Merger Date in connection with the Shut-Downs, on a location-by-location and item-by-item basis. Section 5.05. Intellectual Property Matters. The Company and its Subsidiaries shall use its respective commercially reasonable efforts to preserve its ownership rights to the Intellectual Property free and clear of any Liens and shall use its commercially reasonable efforts to assert, contest and prosecute any infringement of any issued foreign or domestic patent, trademark, service mark, or copyright that forms a part of the Intellectual Property or any misappropriation or disclosure of any trade secret, confidential information or know-how that forms the Intellectual Property; provided, however, that the Company and its Subsidiaries need not preserve or prosecute any foreign trademark if the failure to preserve or prosecute such trademark would not have a Material Adverse Effect on the Company. Section 5.06. Notice of Prepayment. The Company will provide written notice of its intent to prepay immediately after the Merger Date all amounts outstanding under the Term Loan and Security Agreement dated as of August 29, 1997, as amended, among the Company, its Subsidiaries listed therein and First Union National Bank, as successor to CoreStates Bank, N.A. ("First Union"), and the ancillary documents, as amended, related thereto (the "First Union Agreements"). Section 5.07. Shared Services. The Company shall use commercially reasonably efforts to obtain written confirmation from Iffa Credo SA ("Iffa") reasonably satisfactory to Buyer that Iffa will continue to provide after the Merger Date to Buyer, the Surviving Corporation and/or its Subsidiaries services of the same nature, type, quantity and on the same terms as have been provided by Iffa to the Company and/or its Subsidiaries prior to the date of this Agreement and consistent with past practice. Section 5.08. Hackel Affiliate Letter and Support/Voting Agreement. The Company shall use commercially reasonable efforts to cause Alec Hackel to execute an Affiliate Letter and Support/Voting Agreement prior to the mailing of the Company Proxy Statement. A-30 ARTICLE 6 COVENANTS OF BUYER Buyer agrees that: Section 6.01. Conduct of Buyer. From the date hereof until the Merger Date, Buyer shall, and shall cause its Subsidiaries to, conduct their business in all material respects in the ordinary course consistent with past practice and use their commercially reasonable efforts to preserve intact their business organizations and relationships with third parties and to keep available the services of their present officers and employees. Without limiting the generality of the foregoing, except as expressly permitted in this Agreement, from the date hereof until the Merger Date: (a) Buyer will not adopt or propose any change in its Organizational Documents that would materially and adversely affect the rights of holders of Company Stock as anticipated holders of Buyer Common Stock; (b) Buyer will not declare, set aside or pay any dividend or make any other distribution with respect to any shares of Buyer's capital stock. Section 6.02. Listing of Stock. Within five (5) business days of the date of this Agreement, Buyer shall make application to Nasdaq and to all applicable regulatory authorities, including, without limitation, the filing of a Form 40-F with the SEC, for the listing on Nasdaq's National Market System ("NMS") of the Buyer Common Stock and to use its commercially reasonable efforts to cause such Buyer Common Stock to be approved for listing on Nasdaq's NMS effective on or prior to the Merger Date. Section 6.03. Repayment of Certain Debt. Immediately after the Merger Date, Buyer shall (or shall cause Phoenix Merger Sub to) repay or refinance all amounts outstanding under (i) the First Union Agreements and (ii) the 6% Subordinated Note due March 16, 2001 issued by the Company to Panlabs International, Inc., as amended (the "MDS Note"). Section 6.04. Financing. If a Listing Failure occurs, Buyer shall use its best efforts to secure any financing required to permit it to pay on the Merger Date the Merger Consideration. ARTICLE 7 COVENANTS OF BUYER AND THE COMPANY Section 7.01. Commercially Reasonable Efforts. (a) Subject to the terms and conditions of this Agreement, each party will use its commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate the Merger and the other transactions contemplated by this Agreement. (b) Neither Buyer nor the Company shall take any action, or omit to take any action, that would cause its representations and warranties contained herein to be inaccurate such that the conditions in Article 8 would not be satisfied. Section 7.02. Cooperation. Without limiting the generality of Section 7.01(a), Buyer and the Company shall together, or pursuant to an allocation of responsibility to be agreed between them, coordinate and cooperate (i) in connection with the preparation of the Company Disclosure Documents and the Buyer Disclosure Documents, (ii) in determining whether any action by or in respect of, or filing with, any Governmental Authority is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any material contracts, in connection with the consummation of the Merger or the other transactions contemplated by this Agreement, and (iii) in seeking any such actions, consents, A-31 approvals or waivers or making any such filings, furnishing information required in connection therewith or with the Company Disclosure Documents and the Buyer Disclosure Documents, and timely seeking to obtain any such actions, consents, approvals or waivers. Subject to the terms and conditions of this Agreement, Buyer and the Company will each use its reasonable best efforts to have the Form F-4 declared effective by the SEC under the 1933 Act as promptly as practicable after the Form F-4 is filed with the SEC. Section 7.03. Public Announcements. Upon execution of this Agreement, Buyer and the Company will each issue a press release, each in form satisfactory to the other party, announcing the transactions contemplated by this Agreement. Buyer and the Company will consult with each other before issuing any other press release or making any public statement with respect to this Agreement and the transactions contemplated by this Agreement and, except, as may be required by applicable law or any listing or similar agreement with any securities exchange on which the Buyer Common Stock is listed or Nasdaq, will not issue any such press release or make any such public statement prior to such consultation. Section 7.04. Access to Information. From the date hereof until the Merger Date, the Company and Buyer (each, in such capacity, a "Providing Party") will give (or cause to be given) to the other party (the "Receiving Party"), its counsel, financial advisors, auditors and other authorized representatives full access, during regular business hours, to the offices, properties, employees and consultants, books and records of the Providing Party, will furnish (or cause to be furnished) to the Receiving Party, its counsel, financial advisors, auditors and other authorized representatives such financial and operating data and other information as such Receiving Party may reasonably request and will instruct the employees, counsel and financial advisors of the Providing Party and its Subsidiaries to cooperate with the Receiving Party in its investigation of the business of the Providing Party and its Subsidiaries; provided that no investigation pursuant to this Section shall affect any representation or warranty given by the Providing Party to the Receiving Party hereunder. Unless otherwise required by applicable law, each party hereto agrees that it shall, and it shall cause its Subsidiaries and its and their respective officers, directors, employees, auditors and agents to, hold, in confidence all non-public information so acquired and to use such information solely for purposes of effecting the transactions contemplated by this Agreement. From the date hereof until the Merger Date, each Providing Party will cooperate with the efforts of the Receiving Party, its counsel, financial advisors, auditors and other authorized representatives to have reasonable access to the Providing Party's customers and suppliers. The information obtained pursuant to this Section shall be subject to any confidentiality agreements or other confidentiality obligations currently binding upon the Providing Party or any of its Subsidiaries; provided that the Providing Party shall use commercially reasonable efforts to obtain any waivers under such agreements or obligations to permit the Providing Party to comply with its obligations hereunder. Section 7.05. Further Assurances. At and after the Merger Date, the directors and officers of the Surviving Corporation will be authorized to execute and deliver, in the name and on behalf of (x) the Company or Phoenix Merger Sub, and (y) Buyer, any deeds, bills of sale, assignments or assurances and to take and do, in the name and on behalf of (x) the Company or Phoenix Merger Sub, and (y) Buyer, any other actions and things to vest, perfect or confirm of record or otherwise in the Surviving Corporation any and all right, title and interest in, to and under any of the rights, properties or assets of the Company acquired or to be acquired by the Surviving Corporation as a result of the Merger or otherwise carry out the provisions of the Agreement, and the Company and its officers and directors shall be deemed to have granted to the Surviving Corporation an irrevocable power of attorney in respect of the foregoing. Section 7.06. Notices of Certain Events. Each of the Company and Buyer shall promptly notify the other party of: A-32 (a) any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement; (b) any notice or other communication from any Governmental Authority in connection with the transactions contemplated by this Agreement; (c) any notice or any communication from any customer or supplier indicating that such customer or supplier intends to terminate or restrict its existing relationship as a result of the public announcement or the pendency of the transactions contemplated by this Agreement; (d) any Actions commenced or, to its knowledge threatened against, relating to or involving or otherwise affecting such party that, if pending on the date of this Agreement, would have been required to have been disclosed pursuant to Section 3.13 only or that relate to the consummation of the transactions contemplated by this Agreement; and (e)(i) the occurrence or nonoccurrence of any event the occurrence or nonoccurrence of which would cause any representation or warranty of such party contained in this Agreement to be untrue or inaccurate at or prior to the Merger Date, and (ii) any material failure of such party to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by its hereunder; provided, however, that the delivery of any notice pursuant to this Section 7.06(e) shall not limit or otherwise affect the remedies available hereunder to either Buyer or the Company, as applicable. Section 7.07. Director and Officer Liability. (a) From and after the Merger Date, Buyer shall cause the Surviving Corporation to indemnify, defend and hold harmless any Person who is on the date hereof, or has been at any time prior to the date hereof, or who becomes prior to the Merger Date, an officer, director, or employee or agent (the "Indemnified Party") of the Company or any of its Subsidiaries against all losses, claims, damages, liabilities, costs and expenses (including attorney's fees and expenses), judgments, fines, losses, and amounts paid in settlement in connection with any actual or threatened action, suit, claim, proceeding or investigation (each a "Claim") to the extent that any such Claim is based on, or arises out of, (i) the fact that such Person is or was a director, officer, employee or agent of the Company or any of its Subsidiaries at any time prior to the Merger Date or is or was serving at the request of the Company or any of its Subsidiaries as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise at any time prior to the Merger Date, or (ii) this Agreement or any of the transactions contemplated hereby or thereby in each case to the extent that any such Claim pertains to any matter or fact arising, existing, or occurring prior to or at the Merger Date, regardless of whether such Claim is asserted or claimed prior to, at or after the Merger Date (the matters described in clauses (i) and (ii) the "Pre-Merger Matters") to the fullest extent indemnified under the Company's certificate of incorporation, bylaws in effect as of the date hereof or indemnification agreements in effect at the date hereof, including provisions relating to advancement of expenses incurred in the defense of any action or suit; provided that such indemnification shall be subject to any limitation imposed from time to time under applicable laws. Buyer and the Surviving Corporation shall also honor the indemnification agreements between the Company or any of its Subsidiaries, as the case may be, and any current or former officer or director of the Company or any such Subsidiary, as the case may be, existing on the date of this Agreement and which are listed in the Company Disclosure Schedule (and a form of which has been provided to Buyer). (b) Buyer and the Surviving Corporation agree that all rights to indemnification and all limitations or exculpation of liabilities existing in favor of the Indemnified Party as provided in the Company's certificate of incorporation and bylaws as in effect as of the date hereof shall continue in full force and effect with respect to Pre-Merger Matters, without any amendment thereto, for a period of six years from the Merger Date to the extent such rights are consistent with Delaware Law; provided that, in the event any Claim or Claims with respect to any such Pre-Merger Matters are asserted or made within such six year period, all rights to indemnification in respect of any such Claim or Claims shall continue A-33 until disposition of any and all such Claims; provided however, that any determination required to be made with respect to whether an Indemnified Party's conduct complies with the standards set forth under Delaware Law, the Company's certificate of incorporation or bylaws or such agreements, as the case may be, shall be made by independent legal counsel selected by the Indemnified Party and reasonably acceptable to Buyer, retained at Buyer's expense; and provided further, that nothing in this Section 7.07 shall impair any rights or obligations of any present or former directors or officers of the Company. (c) Buyer or the Surviving Corporation shall provide directors and officers of the Company officers' and directors' liability insurance coverage as of the Merger Date ("D&O Insurance") with respect to Pre-Merger Matters for a period of not less than six years after the Merger Date which coverage will be substantially similar to the Company's existing D&O Insurance including, without limitation, (i) an overall coverage amount not less than the overall coverage amount under the Company's existing D&O Insurance and (ii) coverage for liability under the 1933 and 1934 Acts in an amount not less than the coverage amounts for such liabilities under the Company's existing D&O Insurance. Buyer's obligations hereunder shall be expressly conditioned on all directors and officers of the Company or any Subsidiary having executed representation letter agreements at Buyer's request in respect of such insurance in the form attached hereto as Exhibit C. Section 7.08. Registration Statement. Buyer shall (i) promptly prepare and file with the SEC the Form F-4 with respect to the Buyer Common Stock issuable in connection with the Merger and shall use its reasonable best efforts to cause the Form F-4 to be declared effective by the SEC as soon as practicable and (ii) take any action required to be taken under applicable Blue Sky law in connection with such issuance of Buyer Common Stock or pursuant to any Adjusted Option or Adjusted Warrant. Section 7.09. Governmental Authorization. Each of Buyer and the Company shall take all actions by or in respect of, or filing with, any Governmental Authority required for the execution, delivery and performance by Buyer and the Company of this Agreement and the consummation by Buyer and the Company of the transactions contemplated by this Agreement, including compliance with any requirements referred to in Section 3.03 or Section 3.03 of the Company Disclosure Schedule or Section 4.03 or Section 4.03 of the Buyer Disclosure Schedule Section 7.10. Certain Corporate Matters. Buyer shall take all necessary corporate action for the amendment to or establishment of the Buyer Stock Option Plan contemplated by Section 1.04 hereof. Section 7.11. Employment. As of the Merger Date, Buyer shall assume the obligation of the Company to perform any and all employment and severance agreements identified in the Company Disclosure Schedules. ARTICLE 8 CONDITIONS TO THE MERGER Section 8.01. Conditions to the Obligations of Each Party. The obligations of Buyer and the Company to consummate the Merger are subject to the satisfaction of the following conditions: (a) this Agreement and the transactions contemplated by this Agreement shall have been adopted by the stockholders of the Company in accordance with the Delaware Law; (b) any applicable waiting period under the HSR Act and any applicable pre-merger notification or similar statutes and rules listed in Section 3.03 of the Company Disclosure Schedule or Section 4.03 of the Buyer Disclosure Schedule shall have expired; (c) no provision of any applicable law or regulation and no judgment, injunction, order or decree of a court of competent jurisdiction shall prohibit the consummation of the Merger; A-34 (d) no Action shall be instituted by any Governmental Authority which seeks to prevent consummation of the Merger or seeking material damages in connection with the transactions contemplated hereby which continues to be outstanding. (e) the Form F-4 shall have been declared effective under the 1933 Act and no stop order suspending the effectiveness of the Form F-4 shall be in effect and no proceedings for such purpose shall be pending before or threatened by the SEC; (f) (i) the Buyer Common Stock shall have been approved for listing, effective on or before the Merger Date, on Nasdaq's NMS, (ii) Buyer shall have received the approval of all applicable regulatory authorities related to such listing; and (iii) Buyer's Common Stock shall have been registered with the SEC under the Exchange Act; and (g) all actions by or in respect of or filings with any Governmental Authority required to permit the consummation of the Merger shall have been made or obtained other than any such actions or filings, the failure of which to make or obtain shall not be reasonably likely to have a Material Adverse Effect on Buyer or the Company. Section 8.02. Conditions to the Obligations of Buyer. The obligations of Buyer to consummate the Merger are subject to the satisfaction of the following further conditions: (a) (i) The Company shall have performed in all material respects all of its obligations hereunder required to be performed by it at or prior to the Merger Date, (ii) the representations and warranties of the Company contained in this Agreement shall be true and correct at and as of the Merger Date, as if made at and as of the Merger Date (except to the extent expressly made as of an earlier date, in which case as of such date), except where the failure of such representations and warranties to be so true and correct (without giving effect to any limitation as to "materiality" or "Material Adverse Effect" set forth therein) is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on the Company (or to the extent expressly set forth in any specific representation or warranty, Chrysalis DNX) and (iii) Buyer shall have received a certificate signed by an executive officer of the Company to the foregoing effect. (b) There shall not have been a breach of any obligation by any stockholder which has entered into a Support/Voting Agreement other than any breach which (i) does not result in the failure of the Company to obtain the Required Stockholder Vote in favor of adoption of this Agreement and (ii) does not result in the exercise of appraisal rights by any such stockholder. (c) In the event of a Listing Failure, holders of no more than 10% in the aggregate of outstanding shares of Company Stock shall be eligible to exercise their appraisal rights. (d) The Liens on (i) 7,989 shares of Chrysalis International in favor of Institut Merieux and (ii) 11,995 shares of Chrysalis International in favor of International Laboratories Holdings shall have been released. (e) All consents and approvals of third parties (including, but not limited to PIDA) to the transactions contemplated by this Agreement shall have been obtained, and all notices with respect to the transactions contemplated by this Agreement and required to be delivered prior to the Merger Date shall have been delivered. (f) The Barbut Agreement shall be in full force and effect and shall not have been revoked by Dr. Barbut. All loans (other than the loan to the Company from Dr. Jules Barbut) by the Company or any Subsidiary to any shareholder or affiliate shall have been repaid in full and there shall be no outstanding debts (other than the debt of Dr. Jack Barbut which reduces amounts payable under the loan to the Company from Dr. Jules Barbut) due from any directors, shareholders or affiliates to the Company or any Subsidiary of the Company. All directors, shareholders and affiliates of the Subsidiaries shall have assigned their ownership interests (including but not limited A-35 to director qualifying shares) in any Subsidiary of the Company to Buyer or a Person designated by Buyer. (g) The losses of the Company and its Subsidiaries for the fiscal quarter ending December 31, 1998 shall not exceed $2,000,000 (excluding for purposes of this calculation any losses attributable to non-cash expenses required by U.S. GAAP or Regulation S-X to be expensed). (h) Buyer shall have received written confirmation from Iffa in respect of the matters set forth in Section 5.07 in form and substance reasonably satisfactory to Buyer. (i) Hackel shall have executed an Affiliate Letter. (j) The Company shall have satisfied all of its obligations to BML Japan. Section 8.03. Conditions to the Obligations of the Company. The obligations of the Company to consummate the Merger are subject to the satisfaction of the following further conditions: (a) (i) Buyer shall have performed in all material respects all of its obligations hereunder required to be performed by it at or prior to the Merger Date, (ii) the representations and warranties of Buyer and Phoenix Merger Sub contained in this Agreement shall be true and correct at and as of the Merger Date, as if made at and as of the Merger Date (except to the extent expressly made as of an earlier date, in which case as of such date), except where the failure of such representations and warranties to be so true and correct (without giving effect to any limitation as to "materiality" or "Material Adverse Effect" set forth therein) is not reasonably like to have, individually or in the aggregate, a Material Adverse Effect on Buyer or Phoenix Merger Sub and (iii) the Company shall have received a certificate signed by an executive officer of Buyer to the foregoing effect. (b) If a Listing Failure occurs, Buyer shall have secured any financing required to permit it to pay on the Merger Date the aggregate Merger Consideration. ARTICLE 9 TERMINATION Section 9.01. Termination. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Merger Date (notwithstanding any approval or adoption of this Agreement by the stockholders of the Company or the shareholders of Buyer): (a) by mutual written consent of the Company and Buyer; (b) by either the Company or Buyer, if there shall be any law or regulation that makes consummation of the Merger illegal or otherwise prohibited or if any judgment, injunction, order or decree enjoining Buyer or the Company from consummating the Merger is entered and such judgment, injunction, order or decree shall have become final and non-appealable; (provided that any judgment, injunction, order or decree other than a temporary restraining order shall be deemed to have become final and non-appealable thirty days following the entry thereof); (c) (i) by Buyer or, in connection with a Superior Proposal and upon satisfaction of its obligations under Section 10.04(c), by the Company, if the Board of Directors of the Company determines not to call or hold the Company Stockholders' Meeting as provided in Section 5.02 or (ii) by either the Company or Buyer if the adoption by the stockholders of the Company contemplated by this Agreement shall not have been obtained by reason of the failure to obtain the Required Stockholder Vote at a duly held meeting of stockholders of the Company or any adjournment thereof; A-36 (d) by the Company, if a Listing Failure occurs and, within two (2) business days of the satisfaction of all closing conditions other than the conditions set forth in Section 8.03, the condition set forth in Section 8.03(b) has not been satisfied; (e) by Buyer or, in connection with a Superior Proposal and upon satisfaction of its obligations under Section 10.04(c), by the Company, if prior to the Company Stockholder Meeting, the Board of Directors of the Company shall have withdrawn, modified or changed in a manner adverse to Buyer their approval or recommendation of this Agreement; (f) by Buyer, upon a breach of any representation, warranty, covenant or agreement of the Company, or if any representation or warranty of the Company shall become untrue, the effect of which is a Material Adverse Effect on the Company, in either case such that any of the conditions set forth in Section 8.02(a) would be incapable of being satisfied by April 30, 1999; and (g) by the Company, upon a breach of any representation, warranty, covenant or agreement of Buyer, or if any representation or warranty of Buyer shall become untrue, the effect of which is a Material Adverse Effect on Buyer, in either case such that any of the conditions set forth in Section 8.03(a) would be incapable of being satisfied by April 30, 1999. The party desiring to terminate this Agreement pursuant to this Section 9.01 shall give written notice of such termination to the other party in accordance with Section 10.01. Section 9.02. Effect of Termination. If this Agreement is terminated pursuant to Section 9.01, this Agreement shall become void and of no effect with no liability on the part of any party hereto, except that the agreements contained in the second sentence of Section 7.04, this Section 9.02 and Article 10 shall survive the termination hereof. Notwithstanding the foregoing, nothing in this Section 9.02 shall relieve any party to this Agreement of liability for a willful breach of any provision of this Agreement and provided further that if it shall be judicially determined that the termination of this Agreement was caused by a willful breach of this Agreement, then, in addition to other remedies at law or equity for breach of this Agreement, the party found to have willfully breached this Agreement shall be responsible for payment or reimbursement of the other parties' costs, fees and expenses related to the negotiation, preparation and execution of this Agreement and related consents and related to the calling, holding and preparing, printing and distributing of any documents related to a meeting of the other parties' stockholders ("Costs"). Section 9.03. Termination Upon Bankruptcy. (a) The affirmative vote upon, consent to or adoption of a resolution or similar act by the Board of Directors of the Company or any Subsidiary authorizing the filing or commencement by the Company or any Subsidiary of the Company of a voluntary petition for relief under title 11 of the United States Code or any other law providing for relief to or liquidation of debtors, and to which Buyer shall not have consented, shall cause this Agreement to be terminated immediately and without notice. (b) Upon the occurrence of a Material Insolvency Event, Buyer may immediately seek relief from any court, if required, to effectuate termination of this Agreement, provided, however, that termination of this Agreement due to a Material Insolvency Event shall not be effective until the earlier of (i) sixty (60) days after the occurrence of a Material Insolvency Event or (ii) April 30, 1999. A "Material Insolvency Event" shall mean any of the following: (i) the Company or any Subsidiary shall (A) apply for or consent to the appointment of a receiver, trustee, liquidator or custodian or the like of itself or its property, (B) admit in writing its inability to pay its debts generally as they become due, (C) make a general assignment for the benefit of creditors, or (D) if, without the application, approval or consent of the Company or any Subsidiary, a proceeding shall be instituted by any Person other than Buyer or any of its Affiliates in any court seeking in respect of the Company or any Subsidiary an order for relief under Title 11 of the United States Code, or an adjudication in bankruptcy, reorganization, dissolution, winding up, liquidation, a composition or arrangement with creditors, the appointment of a A-37 trustee, receiver, liquidator, custodian, fiscal agent or the like of the Company or any Subsidiary or all or any material part of the Company's or any Subsidiary's assets, and, if such proceeding is being contested by the Company, in good faith, the same shall (i) result in the entry of an order for relief or any such adjudication or appointment, or (ii) continue undismissed or pending for any period of sixty (60) consecutive days. ARTICLE 10 MISCELLANEOUS Section 10.01. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including telecopy or similar writing) and shall be given, if to either Buyer Party, to: Phoenix International Life Sciences Inc. 2350 Cohen Street Saint-Laurent, Montreal, Quebec Canada H4R 2N6 Fax: (514) 333-8861 Attention: Jean-Yves Caloz Senior Vice President, Chief Financial Officer and Secretary with a copy to: Pepper Hamilton LLP Suite 400 1235 Westlakes Drive Berwyn, PA 19312-2401 Fax: (610) 640-7835 Attention: Michael P. Gallagher, Esq. and McCarthy Tetrault 1170 Peel Street Montreal, Quebec Canada H38 4S8 Fax: (514) 397-4170 Attention: Hubert T. Lacroix if to the Company, to: Chrysalis International Corporation 575 Route 28 Raritan, New Jersey 08869 Fax: (908) 722-6677 Attention: President A-38 with a copy to: Jones, Day, Reavis & Pogue North Point 901 Lakeside Avenue Cleveland, Ohio 44114 Fax: (216) 579-0212 Attention: Thomas C. Daniels or to such other address or telecopy number as such party may hereafter specify for the purpose by notice to the other parties hereto. Each such notice, request or other communication shall be effective (a) if given by telecopy, when such telecopy is transmitted to the telecopy number specified in this Section and the appropriate telecopy confirmation is received (b) if by overnight delivery service, with proof of delivery, the next business day or (c) if given by any other means, when delivered at the address specified in this Section. Section 10.02. Entire Agreement; Non-Survival of Representations and Warranties; No Third Party Beneficiaries. (a) This Agreement and the Confidentiality Agreement constitute the entire agreement among the parties with respect to the subject matter hereof and thereof and supersede all prior agreements, understandings and negotiations, both written and oral, between the parties with respect to such subject matter. None of this Agreement or any other agreement contemplated hereby or thereby (or any provision hereof or thereof) is intended to confer on or give any Person other than the parties hereto or thereto any rights or remedies (except that Sections 7.07 and 7.11 are intended to confer rights and remedies on the respective Persons specified therein). (b) The representations and warranties contained herein shall not survive the Merger Date. Section 10.03. Amendments; No Waivers. (a) Any provision of this Agreement may be amended or waived prior to the Merger Date if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by the Company and Buyer or, in the case of a waiver, by the party against whom the waiver is to be effective; provided that after the adoption of this Agreement by (i) the stockholders of the Company, no such amendment or waiver shall, without the further approval of such stockholders, alter or change (A) the amount or kind of consideration to be received in exchange for any shares of capital stock of the Company, or (B) any of the terms or conditions of this Agreement if such alteration or change would adversely affect the holders of any shares of capital stock of the Company and (ii) the shareholders of Buyer, no such amendment or waiver shall, without the further approval of such shareholders, alter or change any of the terms or conditions of this Agreement if such alteration or change would adversely affect the holders of any shares of capital stock of Buyer. Notwithstanding the foregoing, the provisions of Section 8.01(b) may not be amended or waived. (b) No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. Section 10.04. Expenses. (a) Except as otherwise provided in this Section, all costs and expenses incurred in connection with this Agreement shall be paid by the party incurring such cost or expense. (b) Buyer agrees to pay to the Company, within three (3) business days of the date of any termination of this Agreement by the Company pursuant to Section 9.01(d) or 9.01(g), U.S. $1,500,000 (inclusive of the Company's Costs). (c) The Company agrees to pay to Buyer, within three (3) business days of the date of any termination of this Agreement by Buyer or the Company pursuant to Sections 9.01(c) or 9.01(e), or a termination of this Agreement pursuant to Section 9.03, U.S. $1,500,000 (inclusive of Buyer's Costs). A-39 (d) Buyer's right to receive any amounts contemplated by this Section 10.04, and its ability to enforce the provisions of Section 10.04 shall not be subject to approval by the stockholders of the Company. (e) Each of Buyer and the Company shall bear and pay one-half of the costs and expenses incurred in connection with the filing, printing and mailing of the Form F-4 and the Company Proxy Statement (including SEC filing fees but excluding legal and accounting fees related thereto). Section 10.05. Dollar Amounts. All dollar amounts in this Agreement refer to United States Dollars. Section 10.06. Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other parties hereto; provided further that Buyer may assign its rights, but not its obligations, under this Agreement to a wholly-owned subsidiary of Buyer. Section 10.07. Governing Law. This Agreement shall be construed in accordance with and governed by the law of the State of Delaware (without regard to principles of conflict of laws). Section 10.08. Jurisdiction. Any Action seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated by this Agreement may be brought against any of the parties in the United States District Court for the District of Delaware or any state court sitting in the City of Wilmington, Delaware and each of the parties hereto hereby consents to the exclusive jurisdiction of such courts (and of the appropriate appellate courts) in any such Action or waives any objection to venue laid therein. Process in any such Action proceeding may be served on any party anywhere in the world, whether within or without the State of Delaware. Without limiting the generality of the foregoing, each party hereto agrees that service of process upon such party at the address referred to in Section 10.01, together with written notice of such service to such party, shall be deemed effective service of process upon such party. Section 10.09. Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received counterparts hereof signed by all of the other parties hereto. Section 10.10. Relief from Automatic Stay. In the event the Company or any Subsidiary is the subject of an involuntary petition in bankruptcy, insolvency, receivership or similar law, and the transactions contemplated by this Agreement are subject to bankruptcy court approval, the Company or such Subsidiary shall seek to obtain bankruptcy court approval of the transactions contemplated by this Agreement, as soon as reasonably practicable, in accordance with and subject to its terms. [SIGNATURE PAGE FOLLOWS] A-40 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. PHOENIX INTERNATIONAL LIFE SCIENCES INC. By: /s/ JEAN-YVES CALOZ ----------------------------------------- Name: Jean-Yves Caloz Title: Senior Vice President and Secretary CHRYSALIS INTERNATIONAL CORPORATION By: /s/ PAUL J. SCHMITT ----------------------------------------- Name: Paul J. Schmitt Title: Chairman, President and Chief Executive Officer PHOENIX MERGER SUB CORP. By: /s/ JEAN-YVES CALOZ ----------------------------------------- Name: Jean-Yves Caloz Title: Treasurer and Secretary
A-41 APPENDIX B Vector VECTOR SECURITIES Securities INTERNATIONAL, INC. International 1751 LAKE COOK ROAD, SUITE 350 DEERFIELD, ILLINOIS 60015 TELEPHONE (847) 940-1970 FAX (847) 940-0774
November 13, 1998 The Board of Directors Chrysalis International Corporation 575 Route 25 Raritan, New Jersey 08869 Members of the Board: You have requested our opinion as investment bankers with respect to the fairness, from a financial point of view as of the date hereof, to the holders of common stock, par value $0.01 per share (the "Common Stock"), of Chrysalis International Corporation, a Delaware corporation ("Chrysalis"), of the consideration to be received by such stockholders pursuant to the terms of the draft Agreement and Plan of Merger, dated November 12, 1998 (the "Draft Agreement"), among (i) Phoenix International Life Sciences Inc., a public corporation constituted under the laws of Canada ("Phoenix"), (ii) Phoenix Merger Sub Corp., a Delaware corporation and a wholly-owned subsidiary of Phoenix ("Phoenix Merger Sub") and (iii) Chrysalis. Pursuant to the Draft Agreement and subject to the terms and conditions contained therein, Phoenix Merger Sub shall merge into Chrysalis (the "Merger") and, at the effective time of the Merger (the "Effective Time"), each outstanding share of Common Stock (a "Chrysalis Share") will be converted into the right to receive a fraction of a share of Phoenix (a "Phoenix Share"). Such fraction (the "Exchange Ratio") will have a numerator equal to $8,290,000 divided by (i) the number of shares of Common Stock outstanding at the Effective Time plus (ii) all in-the-money options outstanding at the Effective Time, and a denominator equal to a designated stock price for a Phoenix Share based on the average of the last closing sales price per share as reported on the Toronto Stock Exchange (the "Toronto Exchange") for the thirty days prior to and the thirty days following the public announcement of the Merger and converted from Canadian dollars into United States dollars at the prevailing exchange rates as of the end of the calculation period as reported in the Wall Street Journal. The closing sales price of a Phoenix Share on the Toronto Exchange on November 12, 1998 was US$8.07. This opinion assumes that the average closing sales price per Phoenix Share for the thirty days following the public announcement of the Merger is substantially equivalent to the average closing sales price per Phoenix Share for the thirty days prior to the public announcement of the Merger. If Phoenix is unable to obtain, within sixty days after filing the necessary applications and forms, a letter from Nasdaq indicating that Phoenix Shares have been approved for listing on the Nasdaq National Market System subject to customary conditions to be contained in such approval letter for a transaction of this type, the consideration for the Merger will be paid by Phoenix to Chrysalis' stockholders in cash. The terms and conditions of the Merger are more fully set forth in the Draft Agreement. In arriving at the opinion set forth herein, we among other things: (i) reviewed Chrysalis' Annual Reports, Forms 10-K and related financial information for the three fiscal years ended December 31, 1997, Form 10-Q and related unaudited financial information for the three and six months ended March 31, 1998 and June 30, 1998 and draft of Form 10-Q and related unaudited financial information B-1 Chrysalis International Corporation November 13, 1998 Page 2 for the nine months ended September 30, 1998; (ii) reviewed Phoenix's Annual Reports and related financial information for the three fiscal years ended August 31, 1998; (iii) reviewed certain information, including financial forecasts, relating to the respective businesses, earnings, cash flows, assets and prospects of Chrysalis and Phoenix furnished to us by Chrysalis and Phoenix; (iv) conducted discussions with members of senior management of Chrysalis and Phoenix concerning their respective businesses and prospects; (v) reviewed the historical market prices and trading activity for Chrysalis shares and Phoenix Shares and compared such prices and trading histories with those of certain publicly traded companies which we deemed to be relevant; (vi) compared the financial position and operating results of Chrysalis and Phoenix with those of certain other publicly traded companies which we deemed relevant; (vii) compared the proposed financial terms of the Merger with the financial terms of certain other transactions which we deemed to be relevant; (viii) reviewed the financial terms of the Merger as set forth in the Draft Agreement; and (ix reviewed such other financial studies and analyses and performed such other investigations and took into account such other matters as we deemed appropriate. In connection with our opinion, we have not assumed any responsibility for independent verification of any information publicly available or supplied or otherwise made available to us regarding Chrysalis and Phoenix and we have assumed and relied on such information being accurate and complete in all respects. We have not made or obtained any independent evaluation or appraisal of the assets of Chrysalis or Phoenix. With respect to the financial projections of Chrysalis and Phoenix referred to above, we have assumed that they have been reasonably prepared on bases reflecting the best available estimates and judgements of the managements of Chrysalis and Phoenix as to the future financial performance of Chrysalis and Phoenix, respectively. We assume no responsibility for and express no view as to such forecasts or the assumptions under which they are prepared. We note that, as of the date of this opinion, Chrysalis does not have sufficient funds to continue its operations beyond March 1999 and has no immediate sources of equity or other financing. Our conclusions are based solely on information available to us on or before the date hereof and reflect economic, market, and other conditions as of such date. In rendering our opinion, we have assumed that the Merger will be consummated on the terms described in the Draft Agreement, without any amendment or waiver of any material terms or conditions, and that obtaining any necessary regulatory approvals for the transaction will not have an adverse effect on Chrysalis or Phoenix. We are expressing no opinion as to what the value of Phoenix Shares to be issued to Chrysalis' common stockholders will actually be when issued pursuant to the Merger or the prices at which such Phoenix Shares will actually trade at any time following the date hereof. We note that the Merger is intended to qualify as a reorganization under the provisions of Section 368(a) of the United States Internal Revenue Code of 1986, as amended and we have assumed that the Merger will so qualify. Vector Securities International, Inc. is a full service securities firm, and in the course of its normal trading activities, may from time to time effect transactions and hold positions in securities of Chrysalis and/or Phoenix. We have performed investment banking services for Chrysalis in the past and have received customary compensation for such services. This opinion does not constitute a recommendation to any stockholder of Chrysalis as to how any such stockholder should vote on the Merger. This opinion does not address the relative merits of the Merger and any other transactions or business strategies discussed by the Board of Directors of Chrysalis as alternatives to the Merger or the decision of the Board of Directors of Chrysalis to proceed with the Merger. This opinion has been prepared at the request and for the use of the Board of Directors of Chrysalis and shall not be reproduced, summarized, described or referred to, or provided to any other person, B-2 Chrysalis International Corporation November 13, 1998 Page 3 without our prior written consent, except that this letter may be reproduced in full in the proxy statement of Chrysalis to be filed with the Securities and Exchange Commission in connection with the Merger. We are acting as financial advisor to Chrysalis in connection with the Merger and will receive a fee in connection therewith, with such fee being contingent upon consummation of the Merger. On the basis of and subject to the foregoing, including the various assumptions and limitations set forth herein, and based upon such other matters as we consider relevant, it is our opinion as of the date hereof that the consideration to be received by the holders of Common Stock of Chrysalis in the Merger is fair to such stockholders from a financial point of view. Very truly yours, VECTOR SECURITIES INTERNATIONAL, INC. By: /s/ SHAHAB FATHEAZAM ----------------------------------------- Shahab Fatheazam MANAGING DIRECTOR
B-3 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Under the Canada Business Corporations Act, as amended, the Registrant may indemnify a present or former director or officer or a person who acts or acted at the Registrant's request as a director or officer of another corporation of which the Registrant is or was a stockholder or creditor, and his heirs and legal representatives, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him in respect of any civil, criminal or administrative action or proceeding to which he is made a party by reason of his position with the Registrant or such other corporation; provided that the director or officer acted honestly and in good faith with a view to the best interests of the Registrant and, in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, had reasonable grounds for believing that his conduct was lawful. Such indemnification may be made in connection with a derivative action only with court approval. A director or officer is entitled to indemnification from the Registrant if he was substantially successful on the merits and fulfilled the conditions set forth above. In accordance with the Canada Business Corporations Act, the by-laws of the Registrant provide that the Registrant shall indemnify a director or officer, a former director or officer, or a person who acts or acted at the Registrant's request as a director or officer of a body corporate of which the Registrant is or was a shareholder or creditor (or a person who undertakes or has undertaken any liability on behalf of the Registrant or any such body corporate) and the heirs, executors, administrators and legal representatives of such person, from and against all costs, charges and expenses whatsoever, including all amounts paid to settle an action or satisfy a judgment sustained or reasonably incurred by him in respect of any civil, criminal or administrative action or proceeding to which he is made a party by reason of being or having been director or officer of the Registrant or such body corporate if he acted honestly and in good faith with a view to the best interest of the Registrant and in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, he had reasonable grounds for believing that his conduct was lawful. The Registrant maintains a policy of directors' and officers' liability insurance which insures directors and officers of the Registrant and its subsidiaries for losses as a result of claims based upon the acts or omissions as directors and officers of the Registrant, including liabilities arising under the Securities Act of 1933, and also reimburses the Registrant for payments made pursuant to the indemnity provisions under the Canada Business Corporations Act. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) The following exhibits are filed herewith or incorporated herein by reference:
EXHIBIT NO. DESCRIPTION - ----------- --------------------------------------------------------------------------------------------------------- 2.1 Share and Debenture Purchase Agreement among Phoenix, ITEM Holding SA, Lucien Steru, Dominique Steru, Domingos Martins, Roger Porsolt, CO.DE.MA, BNP Developpement, Siparex Developpement, Epicea and Natio Fonds Venture II dated as of August 7, 1997 including related escrow agreement. 2.2 Stock Purchase Agreement by and among Kuraya American Systems Inc., Kuraya Corporation, IBRD-Rostrum Global, Inc., IBRD-Rostrum Europe, Inc., Phoenix International Life Sciences (U.S.) Inc. and Phoenix dated December 24, 1997 including related escrow agreement.
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EXHIBIT NO. DESCRIPTION - ----------- --------------------------------------------------------------------------------------------------------- 2.3 Share Purchase Agreement among Phoenix, Dr. Johann Jakob Vollenweider, Albers & Co., Dr. Ernst Fischer, Innovent Capital Ltd., Werner Hassler, Dr. Peter Joller, Dr. David Karabelnik, Dr. Andeas Wicki and ANAWA Holding AG dated as of April 30, 1998 including related escrow agreement. 2.4 Agreement and Plan of Merger between Applied Analytical Industries, Inc., KCAS Acquisition, Inc. and Kansas City Analytical Services, Inc. dated as of September 2, 1998, including related indemnification agreement. 2.5 Share Purchase Agreement among Phoenix, Dr. Andre Von Froreich, Dr. Andreas Wicki and Clinserve A.G. dated November 5, 1998 and related escrow agreement. 2.6 Share Purchase Agreement among Phoenix, Prof. Dr. Klaus-Georg Buhrens, Martin Geist, Dr. Bernd Blohm, Christian Hilgenstock, Claus Hemker, Dr. Ivan Kozak, Dr. Bernhard Vens-Cappell, Wolfgang Tetzloff, Dr. Jurgen Henke, Dr. Lotte Henke, Trend Finanzanalysen GmbH and McKnight Laboratories GmbH dated as of November 6, 1998 and related escrow agreement. 2.7 Agreement and Plan of Merger, dated as of November 18, 1998, by and among Chrysalis, Phoenix and Phoenix Merger Sub Corp., as amended. 2.8 Purchase of Business Assets between Dr. Klaus Schaffler and Institute for Pharmacodynamic Research Phoenix International GmbH i.G. dated April 1, 1998. 3.1 Certificate of Incorporation of Phoenix, as amended (including the Certificate of Amalgamation of Phoenix International Life Sciences Inc. and PILS Investments Inc. dated October 21, 1994). 3.2 Bylaws of Phoenix. 4 Specimen Stock Certificate of Phoenix. 5 Opinion of McCarthy Tetrault. 8 Opinion of Pepper Hamilton LLP. 10.1 Worldwide Executive Renumeration Plan. 10.2 Plan for Incentive for Employees. 10.3 Key Employee Share Option Plan. 10.4 Employment Agreement between Phoenix and John Hooper, Ph.D. dated June 2, 1998. 10.5 Employment Agreement between Phoenix and Jean-Yves Caloz dated November 18, 1998. 10.6 Employment Agreement between Phoenix and Lucien Steru, M.D. dated August 7, 1997. 10.7 Employment Agreement between Phoenix and Stephane Huguet, M.D. dated November 7, 1997. 10.8 Employment Agreement between Phoenix and David Moszkowski dated October 5, 1998. 10.9 Employment Agreement between Phoenix and George Engelberg dated January 7, 1997. 10.10 Employment Agreement between Phoenix and Susan Thornton, Ph.D. dated June 1, 1998. 10.11 Employment Agreement between Phoenix and James J. Conklin, M.D. dated as of September 1, 1998. 10.12 Lease Agreement by and between Gamma Three Associates Limited Partnership and Institute for Biological Research and Development Inc. dated November 27, 1991 (Neptune Township, NJ).
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EXHIBIT NO. DESCRIPTION - ----------- --------------------------------------------------------------------------------------------------------- 10.13 Office Lease between Sentry West Joint Venture and Institute for Biological Research and Development dated as of February 1, 1994, including the First Amendment thereto (Blue Bell, PA). 10.14 Deed of Lease between Belcourt Inc., Les Investissements Renary Inc. and Phoenix dated February 28, 1989, as amended (2330 Cohen Street, St. Laurent, Quebec). 10.15 Lease Agreement between Amenagements Rovo Inc. and Phoenix dated April 18, 1995, as amended (2350 Cohen Street, St. Laurent, Quebec). 10.16 Memorandum to Agreement of Lease by and between Liberty Sites Ltd. and Phoenix dated as of March 3, 1995, as amended (4850 Dobrin Street and 4901 Levy Street, St. Laurent, Quebec). 10.17 Lease Agreement between Institute for Biological Research and Development, Inc. and Jamboree Associates dated September 30, 1993, including the Addendum thereto (Irvine, CA). 10.18 Civil Lease Agreement between Jeroun S.A. and Phoenix International (Brussels) dated February 13, 1998, as amended. 10.19 Commercial Lease between Lion SCPI, Societe Lyonnaise De Gerance Immobilier "Sligeri" S.A. and Phoenix International France, SA dated October 1, 1998. 10.20 Revolving Credit Agreement between IBRD-Rostrum Global Inc. and Banque Nationale de Paris (Los Angeles Branch) dated as of March 13, 1998. 10.21 Term Loan Agreement between Phoenix International Life Sciences (U.S.) Inc. and Banque Nationale de Paris (Los Angeles Branch) dated as of February 5, 1998. 10.22 Credit Agreement dated February 5, 1998 among Phoenix, Banque Nationale de Paris (Canada) and Royal Bank of Canada. 10.23 Unconditional Guaranty by Phoenix in favor of First Union National Bank dated November 18, 1998. 10.24 Pledge and Assignment Agreement dated November 18, 1998 by Phoenix in favor of First Union National Bank. 10.25 Letter Agreement dated November 18, 1998 between Phoenix and First Union National Bank. 10.26 Loan Agreement between the Director of Development of the State of Ohio and Phoenix International Life Sciences (U.S.) Inc. dated as of June 12, 1995. 21 Subsidiaries of Phoenix. 23.1 Consent of Ernst & Young LLP (Phoenix). 23.2 Consent of Ernst & Young LLP (IBRD-Rostrum Global, Inc.). 23.3 Consent of Deloitte & Touche LLP. 23.4 Consent of KPMG Peat Marwick LLP. 23.5 Consent of McCarthy Tetrault (included in Exhibit 5). 23.6 Consent of Vector Securities International, Inc. 23.7 Consent of Pepper Hamilton LLP (included in Exhibit 8). 24 Powers of Attorney (included in the signature page to the Registration Statement). 99.1 Opinion of Vector Securities International, Inc. (filed as Appendix B to the proxy statement/ prospectus which forms a part of this Registration Statement). 99.2 Form of Proxy. 99.3 Form of Letter to Participants in the Chrysalis Employee Savings Plan.
II-3 ITEM 22. UNDERTAKINGS. 1. The undersigned Registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this Registration Statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. 2. The Registrant undertakes that every prospectus: (i) that is filed pursuant to paragraph 1 immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Securities Act of 1933 and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the Registration Statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. 3. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 20 above, or otherwise, the Registrant has been advised that in the opinion of the United States Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. 4. The undersigned Registrant hereby undertakes: (i) to respond to requests for information that is incorporated by reference into the proxy statement/prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means; and (ii) to arrange or provide for a facility in the United States for the purpose of responding to such requests. The undertaking in clause (i) above include information contained in documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request. 5. The undersigned Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning the transaction and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended (the "Act") the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Saint-Laurent (Montreal), Province of Quebec, on April 6, 1999. PHOENIX INTERNATIONAL LIFE SCIENCES INC. By: /s/ JEAN-YVES CALOZ ----------------------------------------- Jean-Yves Caloz Senior Vice President, International Finance and Acquisitions and Secretary
Pursuant to the requirements of the Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Each of the undersigned directors and officers, of Phoenix International Life Sciences Inc. (the "Company"), does hereby authorize and appoint John W. Hooper and Jean-Yves Caloz, or either of them, his true and lawful attorneys and agents, to do any and all acts and all things and to execute any and all instruments which said attorneys and agents, or either of them, may deem necessary or desirable to enable the Company to comply with the Act, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder in connection with the registration under the Act of shares of common stock of the Company ("Common Shares"), including, without limitation, the power and authority to sign the name of each of the undersigned in the capacities indicated below to Registration Statements on Form F-4 and Form S-8 (or any other form) or a Registration Statement pursuant to Rule 462(b) of the Securities Act relating to the sale of such Common Shares, to be filed with the Securities and Exchange Commission with respect to such Common Shares, to any and all amendments or supplements to such Registration Statements, whether such amendments or supplements are filed before or after the effective date of such Registration Statements, and to any and all instruments or documents filed as part of or in connection with such Registration Statements or any and all amendments or supplements thereto; and each of the undersigned hereby ratifies and confirms all that said attorneys and agents, or either of them, shall do or cause to be done by virtue hereof. Date: April 6, 1999 /s/ JOHN W. HOOPER, PH.D. -------------------------------------------- John W. Hooper, Ph.D. Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) Date: April 6, 1999 /s/ DAVID MOSZKOWSKI -------------------------------------------- David Moszkowski Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
[SIGNATURES CONTINUED ON NEXT PAGE] II-5 Date: April 6, 1999 /s/ LUCIEN STERU, M.D. -------------------------------------------- Lucien Steru, M.D. President and Chief Operating Officer ITEM Europe SA and Director Date: April 6, 1999 /s/ CLAUDE E. FORGET -------------------------------------------- Claude E. Forget Director Date: April 6, 1999 /s/ DAVID GOLDMAN -------------------------------------------- David Goldman Director Date: April 6, 1999 /s/ ROBERT RAICH -------------------------------------------- Robert Raich Director Date: April 6, 1999 /s/ CORNELIUS P. MCCARTHY, III -------------------------------------------- Cornelius P. McCarthy, III Director Date: April 6, 1999 /s/ BERTRAM A. SPILKER, PH.D., M.D. -------------------------------------------- Bertram A. Spilker, Ph.D., M.D. Director
II-6 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- --------------------------------------------------------------------------------------------------------- 2.1 Share and Debenture Purchase Agreement among Phoenix, ITEM Holding SA, Lucien Steru, Dominique Steru, Domingos Martins, Roger Porsolt, CO.DE.MA, BNP Developpement, Siparex Developpement, Epicea and Natio Fonds Venture II dated as of August 7, 1997 including related escrow agreement. 2.2 Stock Purchase Agreement by and among Kuraya American Systems Inc., Kuraya Corporation, IBRD-Rostrum Global, Inc., IBRD-Rostrum Europe, Inc., Phoenix International Life Sciences (U.S.) Inc. and Phoenix dated December 24, 1997 including related escrow agreement. 2.3 Share Purchase Agreement among Phoenix, Dr. Johann Jakob Vollenweider, Albers & Co., Dr. Ernst Fischer, Innovent Capital Ltd., Werner Hassler, Dr. Peter Joller, Dr. David Karabelnik, Dr. Andeas Wicki and ANAWA Holding AG dated as of April 30, 1998 including related escrow agreement. 2.4 Agreement and Plan of Merger between Applied Anayltical Industries, Inc., KCAS Acquisition, Inc. and Kansas City Analytical Services, Inc. dated as of September 2, 1998, including related indemnification agreement. 2.5 Share Purchase Agreement among Phoenix, Dr. Andre Von Froreich, Dr. Andreas Wicki and Clinserve A.G. dated November 5, 1998 and related escrow agreement. 2.6 Share Purchase Agreement among Phoenix, Prof. Dr. Klaus-Georg Buhrens, Martin Geist, Dr. Bernd Blohm, Christian Hilgenstock, Claus Hemker, Dr. Ivan Kozak, Dr. Bernhard Vens-Cappell, Wolfgang Tetzloff, Dr. Jurgen Henke, Dr. Lotte Henke, Trend Finanzanalysen GmbH and McKnight Laboratories GmbH dated as of November 6, 1998 and related escrow agreement. 2.7 Agreement and Plan of Merger, dated as of November 18, 1998, by and among Chrysalis, Phoenix and Phoenix Merger Sub Corp., as amended. 2.8 Purchase of Business Assets between Dr. Klaus Schaffler and Institute for Pharmacodynamic Research Phoenix International GmbH i.G. dated April 1, 1998. 3.1 Certificate of Incorporation of Phoenix, as amended (including the Certificate of Amalgamation of Phoenix International Life Sciences Inc. and PILS Investments Inc. dated October 21, 1994). 3.2 Bylaws of Phoenix. 4 Specimen Stock Certificate of Phoenix. 5 Opinion of McCarthy Tetrault. 8 Opinion of Pepper Hamilton LLP. 10.1 Worldwide Executive Renumeration Plan. 10.2 Plan for Incentive for Employees. 10.3 Key Employee Share Option Plan. 10.4 Employment Agreement between Phoenix and John Hooper, Ph.D. dated June 2, 1998. 10.5 Employment Agreement between Phoenix and Jean-Yves Caloz dated November 18, 1998. 10.6 Employment Agreement between Phoenix and Lucien Steru, M.D. dated August 7, 1997 and supplement dated October 1, 1997. 10.7 Employment Agreement between Phoenix and Stephane Huguet, M.D. dated November 7, 1997.
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EXHIBIT NO. DESCRIPTION - ----------- --------------------------------------------------------------------------------------------------------- 10.8 Employment Agreement between Phoenix and David Moszkowski dated October 5, 1998. 10.9 Employment Agreement between Phoenix and George Engelberg dated January 7, 1997. 10.10 Employment Agreement between Phoenix and Susan Thornton, Ph.D. dated June 1, 1998. 10.11 Employment Agreement between Phoenix and James J. Conklin, M.D. dated as of September 1, 1998. 10.12 Lease Agreement by and between Gamma Three Associates Limited Partnership and Institute for Biological Research and Development Inc. dated November 27, 1991 (Neptune Township, NJ). 10.13 Office Lease between Sentry West Joint Venture and Institute for Biological Research and Development dated as of February 1, 1994, including the First Amendment thereto (Blue Bell, PA). 10.14 Deed of Lease between Belcourt Inc., Les Investissements Renary Inc. and Phoenix dated February 28, 1989, as amended (2330 Cohen Street, St. Laurent, Quebec). 10.15 Lease Agreement between Amenagements Rovo Inc. and Phoenix dated April 18, 1995, as amended (2350 Cohen Street, St. Laurent, Quebec). 10.16 Memorandum to Agreement of Lease by and between Liberty Sites Ltd. and Phoenix dated as of March 3, 1995, as amended (4850 Dobrin Street and 4901 Levy Street, St. Laurent, Quebec). 10.17 Lease Agreement between Institute for Biological Research and Development, Inc. and Jamboree Associates dated September 30, 1993, including the Addendum thereto (Irvine, CA). 10.18 Civil Lease Agreement between Jeroun S.A. and Phoenix International (Brussels) dated February 13, 1998, as amended. 10.19 Commercial Lease between Lion SCPI, Societe Lyonnaise de Gerance Immobilier "Sligeri" S.A. and Phoenix International France, SA dated October 1, 1998. 10.20 Revolving Credit Agreement between IBRD-Rostrum Global Inc. and Banque Nationale de Paris (Los Angeles Branch) dated as of March 13, 1998. 10.21 Term Loan Agreement between Phoenix International Life Sciences (U.S.) Inc. and Banque Nationale de Paris (Los Angeles Branch) dated as of February 5, 1998. 10.22 Credit Agreement dated February 5, 1998 among Phoenix, Banque Nationale de Paris (Canada) and Royal Bank of Canada. 10.23 Unconditional Guaranty by Phoenix in favor of First Union National Bank dated November 18, 1998. 10.24 Pledge and Assignment Agreement dated November 18, 1998 by Phoenix in favor of First Union National Bank. 10.25 Letter Agreement dated November 18, 1998 between Phoenix and First Union National Bank. 10.26 Loan Agreement between the Director of Development of the State of Ohio and Phoenix International Life Sciences (U.S.) Inc. dated as of June 12, 1995. 21 Subsidiaries of Phoenix. 23.1 Consent of Ernst & Young LLP (Phoenix). 23.2 Consent of Ernst & Young LLP (IBRD-Rostrum Global, Inc.).
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EXHIBIT NO. DESCRIPTION - ----------- --------------------------------------------------------------------------------------------------------- 23.3 Consent of Deloitte & Touche LLP. 23.4 Consent of KPMG LLP. 23.5 Consent of McCarthy Tetrault (included in Exhibit 5). 23.6 Consent of Vector Securities International, Inc. 23.7 Consent of Pepper Hamilton LLP (included in Exhibit 8). 24 Powers of Attorney (included in signature page to the Registration Statement). 99.1 Opinion of Vector Securities International, Inc. (filed as Appendix B to the proxy statement/ prospectus which forms a part of this Registration Statement). 99.2 Form of Proxy. 99.3 Form of Letter to Participants in the Chrysalis Employee Savings Plan.
II-9 EX-2.1 2 EXHIBIT 2.1 Exhibit 2.1 SHARE AND DEBENTURE PURCHASE AGREEMENT AMONG PHOENIX INTERNATIONAL LIFE SCIENCES INC. AND ITEM HOLDING AND LUCIEN STERU AND DOMINIQUE STERU AND DOMINGOS MARTINS AND ROGER PORSOLT AND CO.DE.MA. AND BNP DEVELOPPEMENT AND SIPAREX DEVELOPPEMENT AND EPICEA AND NATIO FONDS VENTURE II -------------------------- DATED AS OF AUGUST 7, 1997 -------------------------- SHARE AND DEBENTURE PURCHASE AGREEMENT dated as of August 7, 1997 AMONG: PHOENIX INTERNATIONAL LIFE SCIENCES INC., a corporation incorporated under the Canada Business Corporations Act, having its head office at 2350, Cohen Street, Saint-Laurent, Quebec, Canada, H4R 2N6, herein acting and represented by John W. Hooper and Jean-Yves Caloz, its duly authorized representatives; (hereinafter "Phoenix") AND: ITEM HOLDING S.A. a French SOCIETE ANONYME with capital of FF15,737,100, registered in the Paris commercial and companies register under number B 389 402 801 and having its head office at 93, Avenue de Fontainebleau, 94270, Le Kremlin-Bicetre, herein acting and represented by Lucien Steru, its duly authorized representative; (hereinafter "ITEM Holding") AND: LUCIEN STERU, executive, residing at 31, rue Robert de Flers, 75015, Paris, married under the matrimonial regime of COMMUNAUTE LEGALE to Dominique Steru; (hereinafter "Lucien Steru") AND: DOMINIQUE STERU, executive, residing at 31, rue Robert de Flers, 75015, Paris, married under the matrimonial regime of COMMUNAUTE LEGALE to Lucien Steru; (hereinafter "Dominique Steru") AND: DOMINGOS MARTINS, residing at rua do Arco Carvalhao No. 14, 3rd esq., 1071 Lisboa, Portugal, married under the matrimonial regime of COMMUNAUTE LEGALE to Manuela Viegas ; (hereinafter "Domingos Martins") AND: ROGER PORSOLT, executive, residing at 34, Avenue de la Porte Jaune, 92210, St. Cloud, married under the matrimonial regime of COMMUNAUTE UNIVERSELLE to Ursula Dorner, under a contract of marriage entered into before Maitre Marchand ; (hereinafter "Roger Porsolt") AND: CO.DE.MA., a Belgian corporation having its head office at 216 avenue Marcel Thiry, Bruxelles 1200, Belgique, herein acting and represented by its duly authorized representative, Lucien Steru; (hereinafter "Codema") - 2 - AND: BNP DEVELOPPEMENT, a French SOCIETE ANONYME, with capital of FF500,000,000, registered in the Paris commercial and companies register under number B 348 540 592 and having its head office at 1, boulevard Haussmann, 75009, Paris, herein acting and represented by its duly authorized representative, Josiane Raspiller; (hereinafter "BNP Developpement") AND: SIPAREX DEVELOPPEMENT, a French SOCIETE EN COMMANDITE PAR ACTIONS, with capital of FF196,489,400, registered in the Lyon commercial and companies register under number B 378 213 375 and having its head office at 114, rue de la Boetie, 75008, Paris, herein acting and represented by its duly authorized representative, Christian d'Argoubet; (hereinafter "Siparex Developpement") AND: EPICEA, a French SOCIETE ANONYME, with capital of FF67,000,000, registered in the Paris commercial and companies register under number B 319 308 615 and having its head office at 31-33, rue Federation, 75015, Paris, herein acting and represented by its duly authorized representative, Pascal Demichel; (hereinafter "Epicea") AND: NATIO FONDS VENTURE II, a French FONDS COMMUN DE PLACEMENT A RISQUE, herein acting and represented by its administrator BNP Gestions, a French SOCIETE ANONYME, with capital of FF 64,919,400, registered in the Paris commercial and companies register under number B 682 001 904 and having its head office at 150, rue du Faubourg Poissonniere, 75484 Paris Cedex 10, herein acting and represented by its duly authorized representative, Dominique Bellanger; (hereinafter "Natio Fonds Venture") (Lucien Steru, Dominique Steru, Domingos Martins, Roger Porsolt, Codema, BNP Developpement, Siparex Developpement, Epicea and Natio Fonds Venture are hereinafter collectively referred to as the "Vendors"). WHEREAS, the Vendors hold, directly or indirectly, as more fully set out in Schedule A, all of the outstanding convertible debentures and all of the outstanding shares and voting rights of ITEM Holding; WHEREAS, Institut Technique pour l'Etude du Medicament ("ITEM SA"), a French SOCIETE ANONYME, with capital of FF2,295,000, registered in the Creteil commercial and companies register under number B 326 152 195 and having its head office at 93, avenue de Fontainebleau, 94276, Le Kremlin Bicetre, France, is a subsidiary of ITEM Holding, held as to 99.99% by ITEM Holding and as to 0.01% by ITEM Labo. The capital structure of ITEM SA is set forth in Schedule B; - 3 - WHEREAS, Institut Technique pour l'Etude du Medicament - Laboratoire de Recherche ("ITEM Labo"), a French SOCIETE ANONYME, with capital of FF250,000, registered in the Laval commercial and companies register under number B 329 968 465 and having its head office at Z.I. des Suhards au Genest Saint Isle, 53940, Saint-Berthelin, France, is a subsidiary of ITEM Holding controlled as to 99.8% by ITEM Holding and as to 0.2% by ITEM SA. The capital structure of ITEM Labo is set forth in Schedule C; WHEREAS, S.C. VERUM I.T.E.M. Clinica SRL ("ITEM Clinica"), a Romanian societate cu rasponderer limitata, having its head office at 44 bd I.C. Bratianu, sc B, apt 69, sector 3, Bucarest, Romania, is a subsidiary of ITEM SA, controlled as to 100% by ITEM SA. The capital structure of ITEM Clinica is set forth in Schedule D; WHEREAS, VERUM I.T.E.M. Italia Srl ("ITEM Italia"), an Italian SOCIETE A RESPONSABILITE LIMITEE, having its head office at Via Cornaggia 10, Milan, Italy, is a subsidiary of ITEM SA, controlled as to 98% by ITEM SA and as to 2% by Lucien Steru. The capital structure of ITEM Italia is set forth in Schedule E; WHEREAS, ITEM International ("ITEM International"), a French SOCIETE A RESPONSABILITE LIMITEE, with capital of FF400,000, registered in the Laval commercial and companies register under number B 329 439 996 and having its head office at Z.I. des Suhards au Genest Saint Isle, 53940, Saint-Berthelin, France, is a subsidiary of ITEM SA controlled as to 100% by ITEM SA. The capital structure of ITEM International is set forth in Schedule F; WHEREAS, METI - Madrid, S.A. ("ITEM Spain"), a Spanish company, with capital of Pesetas 12,000,000, having its head office at calle Capitan Haya n. 60, 1st floor, Madrid, Spain, is a subsidiary of ITEM SA controlled as to 100% by ITEM SA. The capital structure of ITEM Spain is set forth in Schedule G; WHEREAS, I.T.E.M. - Pharma, S.A. ("ITEM Pharma"), a Spanish company, with capital of Pesetas 10,000,000, having its head office at calle Caleruega, 67, 5a Madrid, 28033, Spain, is a subsidiary of ITEM International and ITEM Spain controlled as to 50% by ITEM International and as to 50% by ITEM Spain. The capital structure of ITEM Pharma is set forth in Schedule H; WHEREAS, Verum TIL Occam Limited ("Verum TIL Occam"), a private company limited by shares incorporated in England, registered as no. 2317735 under the COMPANIES ACT 1985 and having its head office at 50 Occam Road, Surrey Research Park, Guildford, Surrey, GU2 5YN, England, is a subsidiary of ITEM SA controlled as to 50% by ITEM SA. The capital structure of Verum TIL Occam is set forth in Schedule I; WHEREAS, GEIE Verum ("GEIE Verum"), a Groupement Europeen d'Interets Economiques, having its head office at 50 Occam Road, Surrey Research Park, Guildford, Surrey, GU2 5YN, England, controlled as to 25% by ITEM International and as to 25% by Verum TIL Occam. The capital structure of GEIE Verum is set forth in Schedule J; WHEREAS, the principal activity of ITEM Holding, ITEM SA, ITEM Labo, ITEM Clinica, ITEM Italia, ITEM International, ITEM Spain, ITEM Pharma, Verum TIL Occam and GEIE Verum is the conduct of contract clinical research for the pharmaceutical industry and pharmaceutical research, primarily in phases II to IV; WHEREAS, Phoenix is a multi-service contract research organization which provides bioanalytical research, clinical studies, animal metabolism studies as well as regulatory affairs services to pharmaceutical and biotechnology companies in the United States and Canada; - 4 - WHEREAS the Vendors have agreed to sell all of the outstanding shares and all of the outstanding debentures of ITEM Holding to Phoenix in consideration for the issuance to the Vendors of common shares of Phoenix; NOW, THEREFORE, the parties hereto agree as follows: 1. INTERPRETATION AND DEFINITIONS Except as the context otherwise explicitly requires, (a) the capitalized term "Section" refers to sections of this Agreement; (b) the capitalized terms "Schedules" and "Exhibit" refer to schedules and exhibits to this Agreement; (c) references to a particular Section include all subsections thereof; (d) the word "including" shall be construed as "including without limitation"; (e) accounting terms not otherwise defined herein have the meaning provided under GAAP (as defined below); (f) references to a particular law, statute or regulation include all rules and regulations thereunder and any successor, law, statute, regulation or rules, in each case as from time to time in effect; (g) references to a particular Person include such Person's successors and assigns to the extent not prohibited by this Agreement; (h) references to dollars or $ in this Agreement are to Canadian dollars. In this Agreement, unless the context otherwise requires, the following terms shall have the respective meanings assigned to them:
1.1 "AFFILIATE" means, with respect to any Person, any Person which, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with such Person. 1.2 "ARTICLES" means the original or restated articles of incorporation, articles of amendment, articles of amalgamation, articles of continuance, articles of reorganization and articles of arrangement, including amendments thereto, as in effect from time to time, of ITEM Holding. 1.3 "COMPENSATION" as applied to any Person means the aggregate of all salaries, compensation, remuneration or bonuses of any character, retirement or pension benefits of any kind, or other payments of any kind whatsoever (other than health and medical benefits made available to employees generally and advances and reimbursements of business expenses) made directly or indirectly by ITEM Holding, any of the Subsidiaries or other specified Persons to such Person and affiliates of such Person. 1.4 "COMPLETION DATE" means the date of this Agreement, i.e. August 7, 1997. 1.5 "CONSOLIDATED", when used with reference to any term, means that term as applied to the accounts of ITEM Holding or other indicated Person and each of its respective Subsidiaries, consolidated or combined in accordance with GAAP after eliminating all inter-company operations and with appropriate deductions for minority interests in Subsidiaries. 1.6 "CONTRACTUAL OBLIGATION" means, with respect to any Person, any contracts, agreements, deeds, hypothecs, mortgages, indentures, leases, licenses, other instruments, commitments, undertakings, arrangements or understandings, written or oral, or other documents or instruments , including any provisions of its articles of incorporation or other constating documents or by-laws and any document or instrument evidencing Indebtedness, to which any
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such Person is a party or otherwise subject to or bound by or to which any property or asset of any such Person is subject. 1.7 "DEBENTURES" means FF 711,800 convertible debentures of ITEM Holding being all of the issued and outstanding convertible debentures of ITEM Holding. 1.8 "DISTRIBUTION" means (a) the declaration or payment of any dividend on or in respect of the shares of any class or series of shares of ITEM Holding, any of the Subsidiaries or other specified Person, other than dividends payable solely in common shares of the share capital of the payor; (b) the purchase, redemption or other retirement of any shares of any class of ITEM Holding, any of the Subsidiaries or other specified Person directly, or indirectly through a Subsidiary or otherwise; or (c) any other distribution on or in respect of any shares of any class or series of shares of ITEM Holding, any of the Subsidiaries or other specified Person. 1.9 "ESCROW AGENT" means Montreal Trust Company. 1.10 "ESCROW AGREEMENT" means the escrow agreement entered between the parties hereto and the Escrow Agent a copy of which is attached hereto as Schedule 1.10. 1.11 "ESCROWED SECURITIES" means the Phoenix Shares escrowed pursuant to Section 2.6 together with all Proceeds (as defined in the Escrow Agreement). 1.12 "ENVIRONMENTAL LAWS" means all Legal Requirements (including consent decrees, administrative orders and contractual obligations) relating to public health and safety, workers health and safety and pollution or protection of the environment. 1.13 "GAAP" means generally accepted accounting principles, as in effect from time to time, consistently applied. 1.14 "GUARANTEE" means (a) any guarantee of the payment or performance of, or any contingent obligation in respect of, any indebtedness or other obligation of any other Person, (b) any other arrangement whereby credit or financial assistance is extended to one obligor on the basis of any promise or undertaking of another Person (i) to pay the Indebtedness of such obligor, (ii) to purchase any obligation owed by such obligor, or (iii) to maintain the capital, working capital, solvency or general financial condition of such obligor, whether or not such arrangement is disclosed in the balance sheet of such other Person or is referred to in a footnote thereto or appears in a "keep well" agreement, "comfort letter" or "take or pay" agreement, and (c) any liability of ITEM Holding or any of the Subsidiaries or Significant Investments as general partner of a partnership or as a venturer in a joint venture in respect of Indebtedness or other obligations of such partnership or venture; provided, however, that in no event shall Guarantees include product warranties given or the endorsement of negotiable instruments for deposit or collection in the ordinary course of business. 1.15 "ITEM AFFILIATE" means any of Lucien Steru, Dominique Steru, Codema and Roger Porsolt. 1.16 "LEGAL REQUIREMENT" means any national, provincial, regional, municipal, local or foreign law, statute, standard, ordinance, code, order, rule, regulation, resolution, promulgation, by-
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law, policy, guideline, directive, standard and any other provision having the force or effect of law or any final order, judgment or decree of any court, arbitrator, tribunal or governmental authority, or any license, franchise, permit, certificate, authorization, registration or similar right granted under any of the foregoing. 1.17 "LIEN" means (a) any hypothec, priority, mortgage, pledge, lien, charge, security interest or other similar encumbrance upon any property or assets of any character, or upon the income or profits therefrom, whether arising by agreement or under law, or otherwise (b) any conditional sale or other title retention agreement or arrangement (including a capitalized lease); (c) any sale, assignment, pledge or other transfer for security of any accounts, general intangibles, or chattel paper, with or without recourse, or (d) any transaction (regardless of form) which is intended to create any charge or encumbrance on property to secure the payment or performance of an obligation. 1.18 "MANAGEMENT" means each of Lucien Steru, Dominique Steru, Roger Porsolt, Bruno Maugee, Grigore Voinov, Rene Lardinois. 1.19 "MATERIAL ADVERSE EFFECT" means any (a) material adverse effect whatsoever upon the validity, performance or enforceability of this Agreement, (b) material adverse effect upon the business, assets, financial condition, income or prospects of ITEM Holding, the Subsidiaries and the Significant Investments on a Consolidated basis, or (c) material adverse effect upon the ability of the Vendors to perform their obligations under this Agreement. 1.20 "PERMITTED LIEN" means those Liens indicated on Schedule 1.20. 1.21 "PERSON" means an individual, partnership, corporation, company, association, trust, joint venture, unincorporated organization, business trust, limited liability company and any governmental or administrative department or agency or political subdivision. 1.22 "PHOENIX AFFILIATES" means John Hooper, Heather Baker, Judy Zilber, Jean-Yves Caloz, Sue Campbell, Susan Baker, Dr. Richard Lalonde, Diane Bouchard, Diane Matheou, Todd Joron, Millicent Broderick, Blake Glover, Carmen Discenza, Richard L. Lalonde, Tom Pillsworth, Pamela Burnett, Ebi Kimanani, John Burrows, John Capicchioni, Chris Kemper, Martine Ortega and Louise Rochon. 1.23 "SEC" means the United States Securities and Exchange Commission. 1.24 "SECURITIES ACT" means the United States Securities Act of 1933, as amended, and all rules and regulations promulgated thereunder. 1.25 "SHARES" means 157,371 ordinary shares of ITEM Holding being all of the issued and outstanding shares of ITEM Holding. 1.26 "SIGNIFICANT INVESTMENTS" means Verum TIL Occam and GEIE Verum and "SIGNIFICANT INVESTMENT" means either Verum TIL Occam or GEIE Verum.
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1.27 "SUBSIDIARIES" means ITEM SA, ITEM Labo, ITEM Clinica, ITEM Italia, ITEM International, ITEM Spain and ITEM Pharma and "SUBSIDIARY" means any of the Subsidiaries on an individual basis. 2. SALE AND PURCHASE OF SHARES AND DEBENTURES 2.1 AGREEMENT TO PURCHASE AND SELL SHARES Upon the terms and subject to the conditions hereof and in reliance on the representations and warranties of Phoenix set forth in Section 4, Lucien Steru, Dominique Steru, Domingos Martins, Roger Porsolt, Codema, Siparex Developpement, BNP Developpement and Epicea hereby sell to Phoenix and, upon the terms and subject to the conditions hereof and in reliance on the representations and warranties of the Vendors set forth in Section 3, Phoenix hereby purchases from Lucien Steru, Dominique Steru, Domingos Martins, Roger Porsolt, Codema, Siparex Developpement, BNP Developpement and Epicea, the Shares, as set forth below:
VENDOR NUMBER OF ITEM HOLDING ORDINARY SHARES - ------ -------------------------------------- Lucien Steru 1 Dominique Steru 1 Domingos Martins 2,795 Roger Porsolt 13,000 Codema 116,295 Siparex Developpement 10,279 BNP Developpement 7,500 Epicea 7,500
2.2 PRICE OF SHARES The purchase price of the Shares is payable by the issuance by Phoenix to Lucien Steru, Dominique Steru, Domingos Martins, Roger Porsolt, Codema, Siparex Developpement, BNP Developpement and Epicea of an aggregate of 4,486,555 common shares of Phoenix being 28.509414 common shares of Phoenix for each Share. The aggregate purchase price for the Shares is to be allocated among Lucien Steru, Dominique Steru, Domingos Martins, Roger Porsolt, Codema, Siparex Developpement, BNP Developpement and Epicea as follows:
VENDOR NUMBER OF PHOENIX SHARES - ------ ------------------------- Lucien Steru 29 Dominique Steru 29 Domingos Martins 79,683 Roger Porsolt 370,622 Codema 3,315,502 Siparex Developpement 293,048 BNP Developpement 213,821 Epicea 213,821
-8- 2.3 AGREEMENT TO PURCHASE AND SELL THE DEBENTURES Upon the terms and subject to the conditions hereof and in reliance on the representations and warranties of Phoenix set forth in Section 4, Lucien Steru, Siparex Developpement, BNP Developpement and Natio Fonds Venture hereby sell to Phoenix and, upon the terms and subject to the conditions hereof and in reliance on the representations and warranties of the Vendors set forth in Section 3, Phoenix hereby purchases from Lucien Steru, Siparex Developpement, BNP Developpement and Natio Fonds Venture, the Debentures, as set forth below:
VENDOR AMOUNT OF ITEM HOLDING - ------ ---------------------- CONVERTIBLE DEBENTURES ---------------------- Lucien Steru 72,600 FF Siparex Developpement 277,900 FF BNP Developpement 192,500 FF Natio Fonds Venture 168,800 FF
2.4 PRICE OF THE DEBENTURES The purchase price of the Debentures is payable by the issuance by Phoenix to Lucien Steru, Siparex Developpement, BNP Developpement and Natio Fonds Venture of an aggregate of 203,587 common shares of Phoenix (the common shares of Phoenix referred to in Sections 2.2 and 2.4 being hereinafter collectively referred to as the "Phoenix Shares"). The aggregate purchase price for the Debentures is to be allocated among Lucien Steru, Siparex Developpement, BNP Developpement and Natio Fonds Venture as follows:
VENDOR NUMBER OF PHOENIX SHARES - ------ ------------------------ Lucien Steru 20,765 Siparex Developpement 79,484 BNP Developpement 55,058 Natio Fonds Venture 48,280
2.5 DELIVERY OF SHARES AND DEBENTURES AND PAYMENT OF PURCHASE PRICE 2.5.1 Phoenix hereby acknowledges receipt from Lucien Steru, Dominique Steru, Domingos Martins, Roger Porsolt, Codema, Siparex Developpement, BNP Developpement and Epicea of deeds of transfer of the Shares for transfer by Lucien Steru, Dominique Steru, Domingos Martins, Roger Porsolt, Codema, Siparex Developpement, BNP Developpement and Epicea to Phoenix. - 9 - 2.5.2 Phoenix hereby acknowledges receipt from Lucien Steru, Siparex Developpement, BNP Developpement and Natio Fonds Venture of deeds of transfer of the Debentures for transfer by Lucien Steru, Siparex Developpement, BNP Developpement and Natio Fonds Venture of the Debentures to Phoenix. 2.5.3 Lucien Steru, Dominique Steru, Domingos Martins, Roger Porsolt, Codema, Siparex Developpement, BNP Developpement and Epicea hereby acknowledge receipt from Phoenix of certificates registered in the names of Lucien Steru, Dominique Steru, Domingos Martins, Roger Porsolt, Codema, Siparex Developpement, BNP Developpement and Epicea representing an aggregate of 4,037,900 common shares of Phoenix in payment 90% of the purchase price for the Shares. 2.5.4 Lucien Steru, Siparex Developpement, BNP Developpement and Natio Fonds Venture hereby acknowledge receipt from Phoenix of certificates registered in the names of Lucien Steru, Siparex Developpement, BNP Developpement and Natio Fonds Venture representing an aggregate of 183,228 common shares of Phoenix in payment of 90% of the purchase price for the Debentures. 2.6 ISSUANCE INTO ESCROW Notwithstanding any provision of this Agreement, upon delivery of the Phoenix Shares pursuant to Section 2.5, 10% of the aggregate number of the common shares of Phoenix issuable in payment of the purchase price of the Shares and the Debentures shall be delivered immediately to the Escrow Agent, on a pro rata basis among the Vendors, to be held and released by the Escrow Agent pursuant to the terms of this Agreement and the Escrow Agreement. All such Phoenix Shares shall be issued in the name of the Escrow Agent, as escrow agent under the Escrow Agreement. The Vendors hereby acknowledge receipt of such 10% of the purchase price of the Shares and the Debentures on their behalf by the Escrow Agent. 2.7 TRANSFER TAXES The parties agree that, for purposes of transfer tax filings in France, a separate document in form and substance similar to Schedule 2.7 shall be prepared for the purposes of registration of each sale with French taxation authorities. The parties agree that such document shall not have precedence over this Agreement and shall not constitute a waiver of any of the terms and conditions, representations and warranties of this Agreement. The parties undertake not to disclose such document to any third parties with the exception of the relevant taxation authorities for purposes of registration. 2.8 UNDERTAKING RE TRANSFER OF ITEM ITALIA SHARES Lucien Steru hereby undertakes to transfer all of the shares of the share capital of ITEM Italia held by him to ITEM SA for no additional consideration, by no later than September 30, 1997. All expenses related to the transfer of such shares shall be borne by Lucien Steru. 2.8 UNDERTAKING RE RELEASE OF GUARANTEES AND INDEMNIFICATION - 10 - Phoenix hereby undertakes to use its best efforts to obtain the release by Banque Nationale de Paris of the guarantee given by Lucien Steru of the obligations of ITEM Holding under a loan of FF 2,200,000 pursuant to a loan agreement dated July 7, 1993. In the event that Lucien Steru is called upon to make any payment under the terms of such guarantee, Phoenix hereby agrees to defend, indemnify and hold harmless Lucien Steru from and against all claims made against him by Banque Nationale de Paris in connection with such guarantee. 3.1 REPRESENTATIONS AND WARRANTIES OF VENDORS For the purposes of this Section 3, "Significant Investments" shall not include Verum Til Occam. In order to induce Phoenix to enter into this Agreement and to purchase the Shares and the Debentures hereunder, the Vendors hereby make the following representations and warranties to Phoenix. The Vendors' liability for the following representations and warranties shall be joint, and not solidary, except in the event of fraud with respect thereto. 3.1 SHARES AND DEBENTURES Lucien Steru, Dominique Steru, Domingos Martins, Roger Porsolt, Codema, Siparex Developpement, BNP Developpement and Epicea own the Shares free and clear of all Liens and there are no rights or other obstacles of any nature whatsoever to the sale of the Shares to Phoenix and Lucien Steru, Siparex Developpement, BNP Developpement and Natio Fonds Venture own the Debentures free and clear of all Liens and there are no rights or other obstacles of any nature whatsoever to the sale of the Debentures to Phoenix. 3.2 ORGANIZATION 3.2.1 DUE INCORPORATION, ETC. Each of ITEM Holding, the Subsidiaries and the Significant Investments is duly incorporated or organised and validly exists under the laws of its jurisdiction of incorporation, and is in good standing under the laws applicable to it and has all necessary corporate capacity and power to own and lease its property and assets and to carry on the businesses now conducted or presently proposed to be conducted by it. 3.2.2 SUBSIDIARIES AND SIGNIFICANT INVESTMENTS. ITEM Holding does not own or control, directly or indirectly, or have an interest in, any other corporation, partnership, association or business entity other than the Subsidiaries and the Significant Investments. 3.2.3 MANAGEMENT. The management of ITEM Holding, the Subsidiaries and the Significant Investments is exclusively comprised of the Persons referred to in Section 1.18. 3.2.4 AUTHORIZATIONS AND APPROVALS. All authorizations, approvals, licences, permits, certificates, registrations, consents, exemptions or declarations required in order for each of ITEM Holding, the Subsidiaries and the Significant Investments to own or lease their property and assets and to carry on their business in all jurisdictions in which such property and assets are located or such business is carried on have been duly obtained or effected and are in full force and effect except for authorizations, - 11 - approvals, licences, permits, certificates, registrations, consents, exemptions or declarations, the absence of which, individually or in the aggregate, does not and shall not result in a Material Adverse Effect. In particular: (a) except for permits, certificates, licences, registrations and other authorizations, the absence of which, individually or in the aggregate, does not and shall not result in a Material Adverse Effect, each of ITEM Holding, the Subsidiaries and the Significant Investments hold all permits, certificates, licenses, registrations and other authorizations required under applicable Environmental Laws for their operations (the "Environmental Permits"); each such Environmental Permit is valid and in force and the operations of ITEM Holding, the Subsidiaries and the Significant Investments are in compliance with the conditions set out in such Environmental Permits; the Vendors and Management do not have any knowledge of any grounds for revocation, expiry or annulment of any such Environmental Permits; (b) except for permits, certificates, licences, registrations and other authorizations, the absence of which, individually or in the aggregate, does not and shall not result in a Material Adverse Effect, each of ITEM Holding, the Subsidiaries and the Significant Investments hold all permits, certificates, licenses, registrations and other authorizations required under applicable Legal Requirement for clinical research for the pharmaceutical industry and pharmaceutical research (the "Research Permits"); each such Research Permit is valid and in force and, to the Vendors' knowledge and to the knowledge of Management, the operations of ITEM Holding, the Subsidiaries and the Significant Investments are in compliance with the conditions set out in such Research Permits; the Vendors and Management do not have any knowledge of any grounds for revocation, expiry or annulment of any such Research Permits; 3.2.5 CORPORATE RECORDS. The Corporate minute books and records of ITEM Holding and each of the Subsidiaries and Significant Investments are complete and up to date. 3.2.6 OFFICERS AND DIRECTORS. The officers and directors of ITEM Holding and each of the Subsidiaries and Significant Investments have been properly elected or appointed in accordance with applicable laws and the relevant articles of incorporation or other constating documents. 3.2.7 CORPORATE ACTION. All necessary corporate action has been taken by ITEM Holding, to authorize the execution of this Agreement and the consummation of the transactions contemplated hereby. 3.3 CAPITALIZATION - 12 - 3.3.1 SHARE CAPITAL OF ITEM HOLDING. The authorized share capital of ITEM Holding is exhaustively set forth in Schedule A, all of which has been validly issued and is fully paid and non-assessable and, subject to no Lien, adverse claim or restriction on transfer, except restrictions on transfer under this Agreement. 3.3.2 OPTIONS, ETC. Other than as set forth in Schedule A and Schedule 3.3.5, ITEM Holding does not have outstanding (a) any rights (either preemptive or otherwise) or options to subscribe for or purchase, or any warrants or other agreements providing for or requiring the issuance of, any shares or any securities convertible into or exchangeable for its shares, (b) any obligation to redeem, purchase or otherwise acquire or retire any of its shares, any securities convertible into or exchangeable for its shares or any rights, options or warrants with respect thereto, (c) any rights to require ITEM Holding to qualify for distribution for securities laws purposes, or (d) any restrictions on voting. 3.3.3 CAPITAL STOCK OF THE SUBSIDIARIES. The authorized issued and outstanding share capital of each Subsidiary and Significant Investment is set forth in Schedules B to J. Other than as set forth in Schedule 3.3.3 and Schedule 3.19, the issued and outstanding share capital of each Subsidiary and Significant Investment is validly issued, and paid and non-assessable and subject to no Lien, adverse claim or restriction on transfer. 3.3.4 SUBSIDIARY AND SIGNIFICANT INVESTMENT OPTIONS, ETC. Other than as set forth in Schedule 3.3.4, none of the Subsidiaries and none of the Significant Investments has outstanding (a) any rights (either preemptive or otherwise) or options to subscribe for or purchase, or any warrants or other agreements providing for or requiring the issuance of, any shares or any securities convertible into or exchangeable for its shares, (b) any obligation to redeem, purchase or otherwise acquire or retire any of its shares, any securities convertible into or exchangeable for its shares or any rights, options or warrants with respect thereto, (c) any rights to require the Subsidiary or the Significant Investment to qualify for distribution for securities laws purposes, or (d) any restrictions on voting. 3.3.5 NO COMMITMENTS AFFECTING SHARE CAPITAL, ETC. Other than as set forth in Schedule 3.3.5 and Schedule 3.19, neither ITEM Holding nor any of the Subsidiaries or Significant Investments is a party to or bound by any agreement, commitment or understanding, whether verbal or written, affecting its share capital or the voting rights attached thereto. 3.4 REPORTS, FINANCIAL STATEMENTS AND OTHER DOCUMENTS Phoenix has been provided with complete and correct copies of consolidated financial statements of ITEM Holding and its Subsidiaries and the non consolidated financial statements of ITEM Holding and of each of its Subsidiaries, except ITEM Italia and ITEM Clinica, for which limited financial information is available and has been provided, and Significant Investments (balance sheet, statement of earnings and schedules) for both the year ended December 31, 1996, and for the period ended May 31, 1997, copies of which are attached hereto as Schedule 3.4A. - 13 - The consolidated financial statements and the non-consolidated financial statements of ITEM Holding, ITEM SA, ITEM Labo and ITEM International referred to above have been prepared in accordance with French GAAP, the non-consolidated financial statements of ITEM Pharma referred to above have been prepared in accordance with Spanish GAAP, the non-consolidated financial statements of Verum TIL Occam referred to above have been prepared in accordance with English GAAP, the non-consolidated financial statements ofGEIE Verum referred to above have been prepared in accordance with French GAAP and all such financial statements fairly present the financial condition of ITEM Holding, the Subsidiaries and the Significant Investments, other than ITEM Italia and ITEM Clinica, at the dates thereof and the results of their operations for the periods covered thereby. Other than as set forth in Schedule 3.5, neither ITEM Holding nor any of the Subsidiaries or Significant Investments has material liabilities, contingent or otherwise, which are not referred to in the financial statements. The financial statements for the year ended December 31, 1996, copies of which are attached hereto as Schedule 3.4A have been properly approved by the annual general meetings of shareholders of the relevant entities in due form without reservation, except the financial statements of Verum TIL Occam, which have been approved by its board of directors in due form without reservation. For purposes of financial presentation, ITEM Holding recognizes net revenue from its contracts on a percentage of completion basis as work is performed. The percentage of completion, and consequently the revenue to be recorded, of each individual contracts is determined through detailed analysis and discussion between all appropriate operational and financial department management. Although ITEM Holding does not require collateral for unpaid balances, credit losses have consistently been within Management's expectations. Certain contracts contain provisions for price adjustment for cost overruns. Such adjusted amounts are included in service revenue when realization is assured and the amounts can be reasonably determined. In the period in which it is determined that a loss will result from the performance of a contract, the entire amount of the estimated ultimate loss is charged against income. ITEM Holding backlog (calculated based on fee payments anticipated to be received under letters of intent and legally binding written agreements for the provision of contract research to third parties) ("Backlog") as of May 31, 1997 was as described in Schedule 3.4B, as certified by ITEM Holding's principal financial officer. 3.5 OFF BALANCE SHEET OBLIGATIONS Schedule 3.5 contains a complete list of the off-balance sheet obligations of ITEM Holding, the Subsidiaries and the Significant Investments, including all guarantees and obligations to the benefit of the Vendors, members of their families or third parties. 3.6 CHANGES IN CONDITION 3.6.1 MATERIAL ADVERSE EFFECT. Since May, 1997, no event having a Material Adverse Effect has occurred. 3.6.2 EXTRAORDINARY TRANSACTIONS, ETC. Since December 31, 1996, neither ITEM Holding nor any of the Subsidiaries or Significant Investments has (a) made any Distribution, (b) other than as set forth in Schedule 3.6. 2, made any payment (other - 14 - than Compensation of its directors, officers and employees in amounts in effect prior to December 31, 1996 or for bonuses accrued in accordance with normal practice prior to December 31, 1996) to any of the Vendors, (c) other than as set forth in Schedule 3.6.2, increased the Compensation, including bonuses, payable or to be payable to any of its directors, officers or employees by more than 5% (10% with respect to the directors, officers or employees of Verum TIL Occam), or (d) entered into any Contractual Obligation, or entered into or performed any other transaction, not in the ordinary and usual course of business and consistent with past practice. 3.6.3 INVENTORY AND WORK-IN-PROGRESS. The value of inventory and work-in-progress reflected in the financial statements of ITEM Holding, ITEM SA, ITEM Labo and ITEM International has been established in accordance with French GAAP and there has been no material change in the period subsequent to May 31, 1997. The value of inventory and work-in-progress reflected in the financial statements of ITEM Pharma and ITEM Spain have been established in accordance with Spanish GAAP and there has been no material change in the period subsequent to May 31, 1997. The value of inventory and work-in-progress reflected in the financial statements of Verum TIL Occam has been established in accordance with English GAAP and there has been no material change in the period subsequent to May 31, 1997. 3.7 (INTENTIONALLY OMITTED). 3.8 SOLVENCY After giving effect to the transactions contemplated hereby, ITEM Holding shall be able to pay its liabilities as they become due. 3.9 CONTRACTUAL OBLIGATIONS, ETC. 3.9.1 CERTAIN CONTRACTS. Schedule 3.9.1 contains, together with a reference to the subparagraph pursuant to which each item is being disclosed, a correct and complete list of all Contractual Obligations of ITEM Holding, the Subsidiaries and the Significant Investments of the types described below: (a) All collective bargaining agreements; all employment agreements, all profit sharing, profit participation, deferred compensation, bonus, stock option, stock purchase, pension, retainer, consulting, retirement, welfare or incentive plans or agreements; and all plans, agreements or practices which constitute Compensation or "fringe benefits" to any of the employees of ITEM Holding, the Subsidiaries or the Significant Investments, including vacation programs, sick leave programs, group medical insurance, group life insurance, disability insurance and related benefits. (b) All Contractual Obligations under which ITEM Holding, the Subsidiaries or the Significant Investments are restricted from carrying on any business, venture or other activities anywhere in the world. - 15 - (c) All Contractual Obligations (including options) to sell, lease (as lessor), exchange or otherwise dispose of or transfer any of the properties or assets of ITEM Holding, the Subsidiaries or the Significant Investments except in the ordinary course of business. (d) All Contractual Obligations pursuant to which ITEM Holding, the Subsidiaries or the Significant Investments guarantees or otherwise assumes any liability of or gives financial assistance to any Person, or pursuant to which any Person guarantees or otherwise assumes any liability of ITEM Holding, the Subsidiaries or the Significant Investments. (e) All Contractual Obligations constituting license agreements, service agreements, consulting agreements or other similar arrangements, the termination of which, individually or in the aggregate, would result in a Material Adverse Effect. (f) All Contractual Obligations under which ITEM Holding, any of the Subsidiaries and any of the Significant Investments leases immovable property or is obligated to lease or purchase immovable property or incur capital expenditures in excess of FF100,000. (g) All Contractual Obligations of ITEM Holding, any of the Subsidiaries or the Significant Investments relating to the borrowing of money or to the creation of a Lien, other than a Permitted Lien, on any property or asset of ITEM Holding, any of the Subsidiaries or the Significant Investments. (h) All Contractual Obligations of ITEM Holding, any of the Subsidiaries and any of the Significant Investments requiring a notice exceeding 6 (six) months for termination. (i) All Contractual Obligations of ITEM Italia and ITEM Clinica. 3.9.2 NATURE OF CONTRACTS. All of the Contractual Obligations of ITEM Holding, the Subsidiaries and the Significant Investments at the Completion Date are enforceable against ITEM Holding, the Subsidiaries and the Significant Investments and, to the Vendors' knowledge and to the knowledge of Management, the other parties thereto, in accordance with their terms; except for Contractual Obligations the failure of which to be so enforceable does not and shall not, individually or in the aggregate, result in a Material Adverse Effect. Except for breaches, defaults and liabilities which do not and shall not individually or in the aggregate result in a Material Adverse Effect, neither ITEM Holding nor any of the Subsidiaries or Significant Investments is now in default, and no event has occurred which with notice or lapse of time or both would constitute a default under, nor are there any liabilities arising from any breach or default by any of them or event which with notice or lapse of time or both would constitute a default by any of them prior to the Completion Date of, any provision of any such Contractual Obligation. - 16 - 3.9.3 ARTICLES. Except as set forth in Schedule 3.19, neither ITEM Holding nor any of the Subsidiaries or Significant Investments is in violation of, or in default under, any provision of its articles or constating documents and Phoenix has been provided with complete and correct copies of such articles or constating documents. 3.9.4 INSURANCE. Each of ITEM Holding, the Subsidiaries and the Significant Investments carries insurance policies with independent third party insurers which, with respect to their amounts and types of coverage, are adequate to insure against risks to which each of ITEM Holding, the Subsidiaries and the Significant Investments and their respective property and assets are normally exposed in the operation of their respective businesses, including without limitation professional liability. All policies, the absence of which, individually or in the aggregate, would result in a Material Adverse Effect, are in full force and effect and are free from any right of termination on the part of the applicable insurance carriers. To the knowledge of the Vendors and Management, there are no outstanding unpaid premiums except in the ordinary course of business, and neither ITEM Holding nor any Subsidiary or Significant Investment has received any notice of cancellation or non-renewal of any such policy. Neither ITEM Holding nor any Subsidiary or Significant Investment is aware of any risks, situations, occurrences or other matters which have been disclosed, or should have been disclosed, to insurance carriers or brokers in connection with any application for such insurance as a result of which an insurance carrier would have a right to cancel the corresponding insurance policy or deny coverage with respect to any rights under any such policies. There exists no event of default or event, occurrence, condition or act (including the transactions contemplated by this Agreement) which, with the giving of notice, the lapse of time or the happening of any further event or condition, would become a default or occasion a material premium increase under any such policy or give rise to, and neither ITEM Holding, nor any Subsidiary or Significant Investment has any anticipation of, any termination or cancellation thereof or material premium increase therefor. 3.9.5 DISPUTE. Neither ITEM Holding nor any of the Subsidiaries or the Significant Investments has received any notice from any supplier, vendor, contractor, customer or client with which ITEM Holding or such Subsidiary or Significant Investment has conducted business during the one-year period ending on the date of this Agreement confirming such Person's intention to reduce the volume under, terminate or otherwise alter any Contractual Obligation with ITEM Holding or any Subsidiary or Significant Investment, the effect of which, individually or in the aggregate, would result in a Material Adverse Effect. 3.10 OPERATIONS IN CONFORMITY WITH LAW, ETC. The operations of ITEM Holding, the Subsidiaries and the Significant Investments as now conducted, and their properties, assets, equipments, buildings, immoveables and leased or occupied properties, are not, and have not been, in violation of, nor is ITEM Holding or any of the Subsidiaries or Significant Investments in default and no event has occurred which with notice or lapse of time or both would constitute a default under, any Legal Requirements including, in particular, any Environmental Laws or Legal Requirements regarding clinical research and experimentation on - 17 - animals, except for such violations and defaults as do not and shall not, in the aggregate, have a Material Adverse Effect. Neither ITEM Holding nor any of the Subsidiaries or the Significant Investments has received notice of any such violation or default and neither the Vendors nor the Management have knowledge of any basis on which the operations of ITEM Holding or any of the Subsidiaries or Significant Investments, when conducted as currently proposed to be conducted after the Completion Date, would be held so as to violate or to give rise to any such violation or default. ITEM Holding, the Subsidiaries and the Significant Investments have all franchises, licenses, permits, certificates, authorizations, registrations or other authority presently necessary for the conduct of their business as now conducted, except for franchises, licences, permits, certificates, authorizations, registrations or other authority, the absence of which, individually or in the aggregate, does not and shall not result in a Material Adverse Effect. Based on the facts presently known to the Vendors and Management, all future expenditures on the part of ITEM Holding, the Subsidiaries and the Significant Investments required to meet the provisions of any presently existing Legal Requirements (including Legal Requirements relating to employment practices or to occupational or health standards or to environmental considerations) shall not, in the aggregate, have a Material Adverse Effect. To the knowledge of the Vendors and Management, ITEM Holding, the Subsidiaries and the Significant Investments have complied and are in compliance with applicable competition regulations and have never infringed fair competition in the markets where they operate, either with or towards third companies or between themselves. To the knowledge of the Vendors and Management, ITEM Holding, the Subsidiaries and the Significant Investments do not hold separately or together a dominant position on the markets involved and their market share and net aggregate turnover do not meet the European, French, Italian, Spanish, British and Romanian thresholds which authorizes European or domestic competition authorities to control the operation and impede the completion of the transaction contemplated hereby. 3.11 INTELLECTUAL PROPERTY Schedule 3.11 contains a list of all the trade-marks, trade names and patents used by any of ITEM Holding, the Subsidiaries or the Significant Investments (collectively "Used Intellectual Property"). The entity indicated in said Schedule as owner of Used Intellectual Property is the registered and beneficial owner of such Used Intellectual Property or the registration thereof, if applicable, (except as set forth in Schedule 3.11), with good and marketable title, unencumbered (except for Permitted Liens), and with full right to sell, assign or otherwise transfer or license to others and subject to no pending challenge, refutation, expiry or termination other than as set forth in Schedule 3.11. To the knowledge of Management and the Vendors, none of ITEM Holding, the Subsidiaries or the Significant Investments uses any intellectual property not owned by it, other than software purchased "off the shelf", except as set forth in Schedule 3.11, all of which each entity using said property has the right to use (collectively "Licenced Intellectual Property"). (Used Intellectual Property and Licensed Intellectual Property are sometimes hereinafter referred to collectively as "Intellectual Property"). To the knowledge of Management and the Vendors, none of ITEM Holding, the Subsidiaries or the Significant Investments is required to pay royalties, fees or other consideration to any other person with respect to the use of any of the Intellectual Property or in connection with the conduct of its business or otherwise. To the knowledge of Management, none of ITEM Holding, the Subsidiaries or the Significant Investments has infringed the intellectual or industrial property rights of any other person, nor has any of them used any intellectual or industrial property (including, without limitation, trade-marks, trade names, patents, models, designs and copyrights) which it does not own or have the right to use other than as set forth in Schedule 3.11. There are no outstanding claims asserted against any of ITEM Holding, the Subsidiaries or the Significant Investments alleging - 18 - the infringement or the misappropriation by any of them of any intellectual or industrial property. None of ITEM Holding, the Subsidiaries or the Significant Investments has granted any licences or sub-licences to third parties with respect to any of the Intellectual Property other than as set forth in Schedule 3.11 and neither the Vendors nor Management has any knowledge of any infringement or misappropriation by any other Person of any of the Intellectual Property. Neither the execution nor delivery of this Agreement will constitute a breach of or a default under any agreement relating to the Intellectual Property. 3.12 ENVIRONMENTAL MATTERS 3.12.1 ITEM Holding, the Subsidiaries and the Significant Investments, their employees, agents, shareholders, directors and officers have never been declared guilty of committing an offence for a violation of Environmental Laws and have never been fined for such an offence or have otherwise settled such a prosecution in connection with the activities of ITEM Holding, the Subsidiaries and the Significant Investments; 3.12.2 There are no contaminants, waste or pollutants of any kind whatsoever in, on or under the equipment, buildings, immoveables or properties owned, leased or occupied by ITEM Holding or any of the Subsidiaries or Significant Investments, the presence of which constitutes a violation of applicable Environmental Laws and the presence of which, individually or in the aggregate, constitutes a Material Adverse Effect; 3.12.3 Neither ITEM Holding nor any of the Subsidiaries or Significant Investments has received any written notice or request for information in the context of any national, supra-national, provincial, regional, local or municipal environmental investigation or inspection; 3.12.4 There are no PCBs, asbestos, urea formaldehyde or radioactive substances in, on or under the equipment, buildings, immoveables or properties owned, leased or occupied by ITEM Holding, the Subsidiaries or the Significant Investments; 3.12.5 There is no action, suit or proceeding pending in relation to environmental matters against ITEM Holding, the Subsidiaries or the Significant Investments, its employees, agents, shareholders, directors and officers, or involving ITEM Holding, the Subsidiaries or the Significant Investments or its assets, before any judicial body, tribunal, commission, agency or other governmental entity, and to the Vendors' knowledge and to the knowledge of Management, there is no threat of, or event or fact based on which, such action, suit or proceeding may be instituted. 3.12.6 To the knowledge of Management and the Vendors, ITEM Holding, the Subsidiairies and the Significant Investments are in compliance with all applicable environmental and health and safety laws and regulations, with the exception of instances of non- compliance which, individually or in the aggregate, do not constitute a Material Adverse Effect, and the absence of fire doors at the premises of ITEM SA in Paris and the non-conformity of the main entrance to the same premises to the requirements of the Labour Code concerning the size of such entrance. - 19 - 3.13 LABOUR AND EMPLOYMENT MATTERS 3.13.1 Without limiting the generality of Section 3.10, each of ITEM Holding, the Subsidiaries and the Significant Investments has complied with all laws relating to the employment of labour, including provisions thereof relating to wages, hours and collective bargaining rights. 3.13.2 Other than as set forth in Schedule 3.13.2, there is no collective agreement by which ITEM Holding or any of the Subsidiaries or Significant Investments is bound which relates to the employees of ITEM Holding, the Subsidiaries or the Significant Investments. To the knowledge of the Vendors and to the knowledge of Management, there are no threatened or pending attempts to organize or establish any labour union or employee association in connection with the business of ITEM Holding, any of the Subsidiaries or any of the Significant Investments. To the knowledge of the Vendors and to the knowledge of Management, there is no pending or threatened labour dispute, grievance, strike, or work stoppage materially affecting the business of any of ITEM Holding, any of the Subsidiaries or any of the Significant Investments. Neither ITEM Holding nor any of the Subsidiaries or Significant Investments is a party to any other written employment agreement, contract, arrangement, management contract or service contract affecting employees other than as set forth in Schedule 3.9.1, nor are any such contracts, agreements, arrangements, management contracts or service contracts being currently negotiated or proposed other than in the ordinary course of business. 3.13.3 There exist no retirement plans, profit sharing, option or incentive plans, or insurance disability, medical, surgical, dental or other employee benefit plans for employees of ITEM Holding, any of the Subsidiaries or any of the Significant Investments other than as set forth in Schedule 3.9.1 for which adequate arrangements have been made since December 31, 1996 to set aside the requisite amounts in the prescribed fashion, and neither ITEM Holding nor any of the Subsidiaries or Significant Investments has promised or intends to implement other such plans. 3.13.4 Other than as set forth in Schedule 3.13.4, neither ITEM Holding nor any of the Subsidiaries or Significant Investments has any employee who cannot be dismissed without further liability upon such notice period not exceeding what it is required by the Legal Requirement. 3.13.5 Each of ITEM Holding's or any of the Subsidiary's or Significant Investment's employees who is practising as a physician, nurse or pharmacist is identified in Schedule 3.13.5, and each such employee is duly licensed and in good standing to practice as a physician, nurse or pharmacist, as the case may be, in each jurisdiction in which such employee renders services for or on behalf of ITEM Holding or any Subsidiary or Significant Investment. None of the employees listed on Schedule 3.13.5 is or has been subject to any claim in connection with his or her practice as a physician, nurse or pharmacist while employed by ITEM Holding, the Subsidiary or the Significant Investment, as the case may be, and no fact or occurrence is known to the Management to exist which is likely to give rise to the revocation of any such licence. - 20 - 3.13.6 Each of ITEM Holding's or any of the Subsidiary's or Significant Investment's employees other than those identified in Schedule 3.13.6 has signed non-compete covenants in favour of ITEM Holding, the Subsidiary or the Significant Investment, as the case may be. 3.14 TAXES Other than as set forth in Schedule 3.14 and with respect to the specific tax related contingencies referred to in Section 8, all tax returns required to be filed by ITEM Holding, the Subsidiaries and the Significant Investments in any jurisdiction have been filed and all taxes, assessments, levies and other governmental charges upon ITEM Holding, the Subsidiaries and the Significant Investments or upon any of their properties or income, including any tax in respect of value added, have been duly paid unless such payment is being contested in good faith and by appropriate proceedings and adequate reserves with respect thereto determined in accordance with applicable policies have been established by ITEM Holding, the Subsidiaries and the Significant Investments. Other than as set forth in Schedule 3.14, there is no tax assessment threatened in writing against ITEM Holding and any of the Subsidiaries or Significant Investments and, to the knowledge of Management, there is no basis for such assessment. 3.15 WITHHOLDINGS Each of ITEM Holding, the Subsidiaries and the Significant Investments has withheld from each payment made to any of its shareholders, officers, directors, non-resident creditors and employees the amount of all taxes and other deductions required to be withheld and has remitted all such amounts to the appropriate authorities within the prescribed times, and has otherwise fulfilled all requirements of all Legal Requirements governing such deductions and withholdings. Each of ITEM Holding, the Subsidiaries and the Significant Investments has remitted to the proper authorities all employer contributions due and payable under all social security, occupational health and safety and pension plans. 3.16 GOOD TITLE Other than as set forth in Schedule 3.16 each of ITEM Holding, the Subsidiaries and the Significant Investments has good and marketable title to all of its property free and clear of Liens and other adverse claims. 3.17 LITIGATION Outstanding litigation is disclosed in Schedule 3.17. No litigation or proceeding before, or investigation by, any foreign, national, supra-national or municipal, judicial, tax or customs tribunal or board or other governmental or administrative agency or any arbitrator, is pending or to the knowledge of the Vendors and the knowledge of Management, threatened (or does any basis exist therefor), against ITEM Holding, the Subsidiaries or the Significant Investments or, to the Vendors' knowledge or to the knowledge of Management, any director or officer of ITEM Holding or any of the Subsidiaries or Significant Investments, which individually or in the aggregate could result in a Material Adverse Effect, or which seeks rescission of, seeks to enjoin the consummation of, or which - 21 - questions the validity of, this Agreement or any of the transactions contemplated hereby. Neither ITEM Holding nor the Subsidiaries or Significant Investments has been charged, nor to the Vendors' knowledge or to the knowledge of Management, is it threatened to be charged, with infringement of any trademark, trade name, service mark, copyright, patent, patent right or other proprietary right of any Person. 3.18 PRESS COVERAGE Neither ITEM Holding, nor any of the Subsidiaries or Significant Investments has been the object of any demonstrations, press campaigns or other attacks due to the nature of its activities, since January 1, 1994. 3.19 VIOLATION OF OTHER INSTRUMENTS Neither the execution and delivery of this Agreement by the Vendors or ITEM Holding, the consummation of any of the transactions contemplated hereby or in Schedule 3.19, shall (a) constitute a breach of or a default or an event which with notice or lapse of time or both would constitute a default under any Contractual Obligation of ITEM Holding or any of the Subsidiaries or Significant Investments or any officer of ITEM Holding, the Subsidiaries or Significant Investments, (b) result in acceleration in the time for performance of any obligation of ITEM Holding, the Subsidiaries or the Significant Investments under any such Contractual Obligation, (c) result in the creation of any Lien upon any property or asset of ITEM Holding, the Subsidiaries or the Significant Investments, (d) require any consent, waiver or amendment to any such Contractual Obligation that has not been obtained and remains in full force and effect, (e) give rise to any severance payment, right of termination, securities purchase or redemption right or other right under any such Contractual Obligation, or (f) violate or give rise to a default or an event which with notice or lapse of time or both could constitute a default under any Legal Requirements, except for events or conditions described in clauses (a) through (f) above which shall not, individually or in the aggregate, have any Material Adverse Effect or (g) result in any state of facts which could have a Material Adverse Effect. 3.20 APPROVALS, CONSENTS, ETC. Other than as set forth in Schedule 3.20, no approval, consent, authorization or other order of, and no declaration, filing, registration, qualification or recording with, any governmental authority or any other Person is required to be made by or on behalf of the Vendors, ITEM Holding or any of the Subsidiaries or Significant Investments in connection with the execution, delivery or performance of this Agreement or any of the transactions contemplated hereby. 3.21 INVESTMENT OR DIVESTITURE Schedule 3.21 contains a complete list of all investments and divestitures in process which are not mentioned in the financial statements of ITEM Holding, the Subsidiaries and the Significant Investments (balance sheet, statement of earnings and schedules) for the period ended May 31, 1997. 3.22 FULL DISCLOSURE To the knowledge of Management and the Vendors, there is no fact that the Vendors have not disclosed to Phoenix which could have a Material Adverse Effect on the properties, business, - 22 - prospects or condition (financial or otherwise) of ITEM Holding or any of the Subsidiaries or Significant Investments. Neither the reports, financial statements and other documents referred to in Section 3.4, nor any certificate, statement or document delivered by the Vendors to Phoenix in connection with this Agreement contains any untrue statement of a fact or omits to state any fact necessary to keep the statements contained herein or therein from being misleading in a manner that would constitute a Material Adverse Effect. 4. REPRESENTATIONS AND WARRANTIES OF PHOENIX Phoenix represents and warrants to the Vendors that: 4.1 DUE INCORPORATION, ETC. Phoenix is duly incorporated, validly exists and is in good standing under the Canada Business Corporations Act and has all necessary corporate capacity and power to own and lease its property and assets and to carry on the business now conducted by it. 4.2 SHARE CAPITAL OF PHOENIX The authorized share capital of Phoenix is composed of an unlimited number of common shares and an unlimited number of preferred shares issuable in series of which, as at August 4, 1997, there were 19,601,226 common shares issued and outstanding. 4.3 OPTIONS Other than the options to acquire common shares of Phoenix granted pursuant to Phoenix' Key Employee Share Option Plan and shares to be issued to Dorn Cook under an earn-out formula which has been disclosed to the Vendors, Phoenix does not have any rights or options to subscribe for, or any warrants or other agreements providing for or requiring the issuance of common shares or preferred shares. 4.4 DUE AUTHORIZATION All necessary corporate action has been taken by Phoenix to authorize the execution of this Agreement and the consummation of the transactions contemplated hereby, including the issuance of the Phoenix Shares as fully paid and non-assessable in consideration for the purchase of the Shares and Debentures. 4.5 CONFORMITY WITH APPLICABLE SECURITIES LAWS All documents have been filed, all requisite proceedings have been taken and all approvals, exemptions, consents, orders and authorizations required under applicable securities laws have been obtained in order to issue the Phoenix Shares issued hereunder and Phoenix is in full compliance with its continuous disclosure obligations under applicable securities laws. - 23 - 4.6 STOCK EXCHANGE APPROVALS The listing of the Phoenix Shares on The Montreal Exchange and the Toronto Stock Exchange has been approved by such exchanges, subject to Phoenix fulfilling all of the standard requirements of such exchanges before September 4, 1997. 5. POOLING OF INTERESTS 5.1 ACCOUNTING TREATMENT Phoenix, ITEM Holding and the Vendors intend and desire for the transactions contemplated by this Agreement to qualify for "pooling of interests" treatment for US GAAP purposes in accordance with Accounting Principles Board Opinion No. 16. 5.2 POOLING LETTERS On or prior to the Completion Date, ITEM Holding shall cause to be executed and delivered to Ernst & Young, auditors to Phoenix, and to Phoenix a letter or letters, dated the Completion Date, from ITEM Holding's management in form and substance reasonably satisfactory to Phoenix and its auditors relating to "pooling of interests" accounting. On or prior to the Completion Date, Phoenix shall deliver to Ernst & Young, auditors to Phoenix, a letter or letters, dated the Completion Date, from Phoenix's management in form and substance reasonably satisfactory to its auditors relating to "pooling of interests" accounting. 5.3 OPINIONS OF ACCOUNTANTS AND AUDITORS OF PHOENIX On or prior to the Completion Date, Phoenix shall have received a letter, dated the Completion Date, from Ernst & Young, accountants and auditors to Phoenix, in form and substance satisfactory to Phoenix, regarding the appropriateness of pooling of interests treatment for the transactions contemplated herein. 5.4 OPINIONS OF ACCOUNTANTS AND AUDITORS OF ITEM HOLDING On or prior to the Completion Date, ITEM Holding and Phoenix shall have received a letter, dated the Completion Date, from Claude Mayer et Associes, commissaire aux comptes accountants and auditors of ITEM Holding, attesting to the validity of the letter referred to in Section 5.2, in form and substance satisfactory to ITEM Holding and Phoenix. 5.5 PLACEMENT AND STOCK TRANSFER RESTRICTIONS AND RELATED MATTERS Each party to this Agreement agrees that from and after the date of this Agreement, such party shall not knowingly take any action, or knowingly fail to take any action, which action or failure is reasonably likely to disqualify the transactions contemplated by this Agreement from pooling of interests accounting treatment by Phoenix, and that such party shall take all reasonable actions necessary to cause the transactions contemplated by this Agreement to qualify as a pooling of interest, if such characterization shall be jeopardized by action taken by such party. Without limiting the foregoing, each Vendor who is a Pooling Affiliate of ITEM Holding agrees that such Vendor shall not - 24 - sell, transfer, pledge, or otherwise dispose of such Vendor's interests in or reduce such Vendor's risk relative to any of the Phoenix Shares until Phoenix shall have published financial results (including combined sales and net income) covering at least thirty (30) days of combined operations of Phoenix and ITEM Holding after the Completion Date. As soon as reasonably practicable following the first full month of combined operations of Phoenix and ITEM Holding after the Completion Date, Phoenix shall prepare and publish such financial results for the first full month of operations following the Completion Date. Each of the Vendors and ITEM Holding acknowledge and agree with Phoenix that none of the Vendors or ITEM Holding is a party to any agreement or arrangement among themselves or with third parties regarding the transactions contemplated by this Agreement or the subject matter hereof. Prior to the Completion Date, Phoenix shall deliver to ITEM Holding a list of names and addresses of those persons who are or may be, in Phoenix's reasonable judgement, Affiliates of Phoenix within the meaning of Rule 145 of the rules and regulations promulgated under the Securities Act or applicable SEC accounting releases with respect to pooling of interests accounting treatment (each such persons, a "Pooling Affiliate"). Phoenix also shall provide ITEM Holding with such information and documents as ITEM Holding shall reasonably request for purposes of reviewing such list. Prior to the Completion Date, Phoenix shall deliver to ITEM Holding an affiliate letter, in form and substance reasonably satisfactory to ITEM Holding, executed by each of the Pooling Affiliates identified in the foregoing list. Prior to the Completion Date, ITEM Holding shall deliver to Phoenix a list of names and addresses of those persons who are or may be, in ITEM Holding's reasonable judgment, Pooling Affiliates of ITEM Holding. ITEM Holding also shall provide Phoenix with such information and documents as Phoenix shall reasonably request for purposes of reviewing such list. Prior to the Completion Date, ITEM Holding shall deliver to Phoenix an affiliate letter, in form and substance reasonably satisfactory to Phoenix, executed by each of the Pooling Affiliate of ITEM Holding identified in the foregoing list. 6. EMPLOYMENT AGREEMENT 6.1 EMPLOYMENT AGREEMENT WITH LUCIEN STERU Lucien Steru and Phoenix shall execute an employment agreement, providing for Lucien Steru's employment as President of Phoenix Europe and ITEM SA (the name of which will be changed to Phoenix International (France)), which shall, among other things, include a non-competition provision for a period ending two years after the termination of his employment. 7. SURVIVAL OF REPRESENTATIONS; INDEMNITY 7.1 SURVIVAL OF REPRESENTATIONS The respective representations and warranties of the Vendors contained in this Agreement or in any schedule attached hereto shall survive the consummation of the transactions contemplated hereby and shall remain in full force and effect notwithstanding any investigation or examination of, or knowledge with respect to, the subject matter thereof by or on behalf of Phoenix until the earlier of November 30, 1997 or the date of completion of the audit of the combined financial statements of - 25 - Phoenix and ITEM Holding as at August 31,1997 (the period ending on such date being referred to herein as the "Representations Period"), except that such representations and warranties shall survive indefinitely in the event of fraud with respect thereto. No claim for indemnification pursuant to Section 7.2.1 below may be brought after the expiration of the Representations Period, except for claims made in good faith in writing prior to such expiration and setting forth in reasonable detail the claim, regardless of whether any action or demand has been commenced against Phoenix (it being understood without limitation, that any and all Losses (as defined below) arising after the expiration of the Representations Period shall be recoverable upon notice properly given prior to the expiration of the Representations Period in accordance with this Section 7.1). The representations and warranties of Phoenix contained in this Agreement or in any schedule attached hereto shall terminate upon and not survive the Completion Date, except in the event of fraud by Phoenix with respect thereto, in which case they shall survive indefinitely. 7.2 INDEMNIFICATION 7.2.1 From and after the Completion Date, Phoenix and its Affiliates (including ITEM Holding, the Subsidiaries and the Significant Investments) and all of their respective officers, directors, employees, agents and shareholders (each, an "Indemnitee") shall be defended, indemnified and held harmless by the Vendors pursuant to this Agreement and the Escrow Agreement to the full extent permitted by law, from and against any and all losses, claims, actions, damages, liabilities, costs and expenses (including attorneys' fees and expenses) (collectively, "Losses") relating to or arising from or in connection with (i) any misrepresentation or any non-fulfilment of any representation, warranty, covenant, obligation or agreement by any Vendor contained in or made pursuant to this Agreement or any other document, agreement, officer's certificate or other certificate delivered to Phoenix in connection with this Agreement, (ii) any statement contained in Section 3 which pertains to Significant Investments which would be untrue if such statement were to be made in respect of Verum TIL Occam, without regard to any knowledge qualifications contained in such statement, and (iii) the enforcement by Phoenix of its rights pursuant to this Section 7.2, or any litigation, proceeding or investigation relating to any of the foregoing. The indemnification obligations of the Vendors pursuant hereto shall be joint and not solidary. 7.2.2 Notwithstanding the foregoing provisions of this Section 7.2, but except with respect to any Losses resulting from or arising out of fraud or other intentional or knowing misconduct or misrepresentation, (i) the maximum aggregate recourse by the Indemnitees pursuant to subsection 7.2.1 above shall not exceed the aggregate value (calculated by adding together the opening and closing prices of the common shares of Phoenix on each of the Toronto Stock Exchange and The Montreal Exchange for each of the ten trading days preceding the Completion Date, and dividing this sum by 40) of the Escrowed Securities (the "Indemnity Cap"), (ii) the Indemnitees shall not be entitled to indemnification under subsection 7.2.1 above for any amount unless and until the aggregate of all amounts for which the Indemnitees otherwise would be entitled to be indemnified exceeds FF 300,000 or its equivalent (in the aggregate), after which the Indemnitees shall be indemnified in full for the full amount, up to the Indemnity Cap, and (iii) the sole recourse of any Indemnitee in respect of Losses (but not in respect of fraud or other intentional or knowing - 26 - misconduct or misrepresentation) shall be from, out of, and to the extent of the Escrowed Securities. Any indemnification shall be payable by the return of Escrowed Securities to Phoenix in accordance with the provisions of the Escrow Agreement. In particular, the number of Escrowed Shares to be remitted to Phoenix in payment of any indemnification obligation shall be calculated on the basis of the average price of the Escrowed Shares obtained by adding together the opening and closing prices of the common shares of Phoenix on each of the Toronto Stock Exchange and The Montreal Exchange for each of the ten trading days preceding the Completion Date, and dividing this sum by 40. All dividends or other distributions received by a Vendor in respect of common shares of Phoenix which are remitted to Phoenix in satisfaction of an indemnification obligation under this Section 7, shall also be repaid to Phoenix at the time of payment of indemnification. For purposes of determining whether the aggregate of all amounts for which the Indemnitees would otherwise be entitled to be indemnified exceed FF 300,000 or its equivalent, the amount of each indemnifiable claim and the aggregate amount of all indemnifiable claims shall not be limited by use of the term "material" or of the defined term Material Adverse Effect or its related forms in any representations or warranties, or by the establishment of any dollar threshold in any representation or warranty for inclusion of any event or matter herein. 7.2.3 Notwithstanding any other provision of this Agreement, as of and after the Completion Date, ITEM Holding shall not have any liability under this Agreement, and no Vendor shall threaten or bring any claim or action whatsoever against for contribution to any amounts payable under this Section 7.2 by such Vendor. 8. SPECIFIC CONTINGENCIES The Vendors hereby undertake to indemnify Phoenix in respect of the occurrence, in whole or in part, of any of the specific contingencies described below, each of which exists at the Completion Date and will only be finally resolved or determined at some time in the future. The provision for these contingencies is not made as an attempt to anticipate future events, but merely to provide for a reasonable period of time within which such contingencies may be resolved. Any indemnification pursuant to this Section shall be payable by all of the Vendors, pro rata to the number of common shares of Phoenix issuable to each of them pursuant to this Agreement. In the event of the realization of any of the specific contingencies contemplated in this Section 8, the Vendors shall indemnify Phoenix by remitting to Phoenix for cancellation such number of common shares of Phoenix as corresponds to the amount of indemnification owed (calculated on the basis of the average price of Phoenix common shares obtained by adding together the opening and closing prices of the common shares of Phoenix on each of the Toronto Stock Exchange and The Montreal Exchange for each of the ten trading days preceding the Completion Date, and dividing this sum by 40). Any obligation to remit common shares of Phoenix upon the occurrence of a specific contingency shall be satisfied by return of Escrowed Shares in accordance with the Escrow Agreement. In the event that there does not remain a sufficient number of Escrowed Shares or Proceeds to satisfy an an obligation under this Section, the balance of such indemnification obligation shall be paid in cash. All dividends or other distributions received by a Vendor in respect of common - 27 - shares of Phoenix which are remitted to Phoenix in satisfaction of an indemnification obligation under this Section 8, shall also be repaid to Phoenix at the time of payment of indemnification. 8.1 Any tax liability in France related to the dissolution of ITEM Phase I and its withdrawal from the relevant tax consolidation regime. The maximum amount payable in respect of this contingency is $55,000 plus any interest due to the relevant taxation authorities from the date of this Agreement to the final settlement of this specific contingency. Notwithstanding any other provision of this Agreement, the Vendors' indemnification obligation with respect to this contingency shall survive until any possible related claims by the relevant taxation authorities have been prescribed under applicable law. 8.2 Any tax liability in France in respect of the granting of certain indirect subsidies to nonmembers of the consolidation tax regime and the failure to properly report certain indirect subsidies to members of the consolidation tax regime. The maximum amount payable in respect of this contingency is $55,000 plus any interest due to the relevant taxation authorities from the date of this Agreement to the final settlement of this specific contingency. Notwithstanding any other provision of this Agreement, the Vendors' indemnification obligation with respect to this contingency shall survive until any possible related claims by the relevant taxation authorities have been prescribed under applicable law. 8.3 Any tax liability in Spain with respect to certain commissions paid by ITEM Pharma to Pharma Consult SA during 1995 and 1996. The maximum amount payable in respect of this contingency is $70,000 plus any interest due to the relevant taxation authorities from the date of this Agreement to the final settlement of this specific contingency. Notwithstanding any other provision of this Agreement, the Vendors' indemnification obligation with respect to this contingency shall survive until any possible related claims by the relevant taxation authorities have been prescribed under applicable law. 8.4 Any tax liability in France or the United Kingdom with respect to the non-deductibility of certain expenses incurred by GEIE Verum and rebilled to ITEM Holding or any of its Subsidiaries or Significant Investments. The maximum amount payable in respect of this contingency is $355,000 plus any interest due to the relevant taxation authorities from the date of this Agreement to the final settlement of this specific contingency. Notwithstanding any other provision of this Agreement, the Vendors' indemnification obligation with respect to this contingency shall survive until any possible related claims by the relevant taxation authorities have been prescribed under applicable law. - 28 - 9. NOTICES Any demand, notice or other communication to be given in connection with this Agreement shall be given in writing and shall be given by personal delivery, by registered mail or by electronic means of communication addressed to the recipient as follows: 9.1 To Phoenix: Phoenix International Life Sciences Inc. 2350, Cohen Street Saint-Laurent, Quebec H4R 2N6 Canada Telecopier No.: (514) 333-7306 ATTENTION: JEAN-YVES CALOZ 9.2 To ITEM Holding : ITEM Holding S.A. 93, avenue de Fontainebleau 94276 Le Kremlin-Bicetre Cedex France Telecopier No.: 01.49.59.25.70 ATTENTION: LUCIEN STERU 9.3 To Lucien Steru or Dominique Steru: Lucien Steru or Dominique Steru 31, rue Robert de Flers 75015 Paris France Telecopier No.: 01.40.58.15.14 - 29 - 9.4 To Domingos Martins: Domingos Martins rua do Arco Carvalhao No. 14 3rd esq. 1071 Lisboa Portugal 9.5 To Roger Porsolt: Roger Porsolt 34, avenue de la Porte Jaune 92210, St. Cloud France Telecopier No.: 01.46.02.20.33 9.6 To Siparex Developpement: Siparex Developpement 114, rue de la Boetie 75008 Paris France Attention: Christian d'Argoubet Telecopier No.: 01.53.93.02.30 9.7 To BNP Developpement: BNP Developpement 1, boulevard Haussmann 75009 Paris France Attention: Josiane Raspiller Telecopier No.: 01.40.14.51.37 - 30 - 9.8 To Epicea: EPICEA 31-33, rue de la Federation 75015 Paris France Attention: Pascal Demichel Telecopier No.: 01.40.56.19.19 9.9 To CO.DE.MA.: Avenue Marcel Thiry 216 1200 Bruxelles Belgique Attention: Lucien Steru Telecopier No.: (32) 2.774.42.99 9.10 To Natio Fonds Venture: Natio Fonds Venture II 12, rue Chauchat 75009 Paris France Attention: Dominique Bellanger Telecopier No.: 01.40.14.69.60 10. MODIFICATION All modifications or amendments of any provision of this Agreement shall be effective only if the same shall be in writing and then shall be effective only in the specific instance and for the purpose for which given. 11. WAIVER No failure to exercise, and no delay in exercising, on the part of a party hereto, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right. No waiver of any provision of this Agreement shall be effective unless in writing. No notice or demand given in any case shall constitute a waiver of the right to take other action in the same, similar or other instances without such notice or demand. - 31 - 12. CONFIDENTIALITY The parties agree to treat this Agreement as confidential and not to disclose its contents to third parties other than their advisers, except to the extent necessary to enforce performance of obligations hereunder, or as is required to comply with applicable laws or regulations, including regulations of any stock exchange on which the securities of Phoenix are listed following consultations with Lucien Steru. 13. FURTHER ASSURANCES The parties shall, with all reasonable diligence, do all such things and provide all such reasonable assurances as may be required to consummate the transactions contemplated hereby, and each party shall provide such further documents or instruments required by another party as may be reasonably necessary or desirable to give effect to the purpose of this Agreement and to carry out its provisions. 14. GOVERNING LAWS This Agreement shall be governed by the laws of the Province of Quebec and the laws of Canada applicable therein. 15. ARBITRATION Any dispute which arises in the course of or following the performance of this Agreement or any of the transactions contemplated herein will be definitively settled under the auspices of The Quebec National and International Commercial Arbitration Centre, by means of arbitration and to the exclusion of courts of law, in accordance with its General Commercial Arbitration Rules in force at the time this Agreement is signed and to which the parties declare they have adhered. 16. GENERAL The invalidity or unenforceability of any term or provision hereof shall not affect the validity or enforceability of any other term or provision hereof. The headings in this Agreement are for convenience of reference only and shall not alter or otherwise affect the meaning hereof. This Agreement and the other documents and instruments referred to herein constitute the entire understanding of the parties hereto with respect to the subject matter hereof and thereof and supersede all present and prior agreements, whether written or oral. No investigation made by or on behalf of a party hereto shall mitigate, diminish or affect the representations and warranties made herein by the Vendors. This Agreement may be executed in any number of counterparts which together shall constitute one instrument and shall be governed by and construed in accordance with the laws of the Province of Quebec and the laws of Canada applicable therein, and shall bind and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, personal representatives, successors and assigns. The parties hereto have expressly required that this Agreement and all documents and notices related hereto be drafted in English. LES PARTIES AUX PRESENTES ONT EXPRESSEMENT EXIGE QUE LE PRESENT CONTRAT ET TOUS LES DOCUMENTS ET AVIS Y AFFERENTS SOIENT REDIGES EN ANGLAIS. - 32 - IN WITNESS WHEREOF, the parties hereto caused this Agreement to be duly executed as of the Completion Date. PHOENIX INTERNATIONAL LIFE SCIENCES INC. By: /s/ John W. Hooper -------------------------------------------- John W. Hooper Title: -------------------------------------------- Chairman and Chief Executive Officer By: /s/ Jean-Yves Caloz --------------------------------------------- Jean-Yves Caloz Title: -------------------------------------------- Senior Vice-President and Chief Financial Officer ITEM HOLDING S.A. By: /s/ Lucien Steru --------------------------------------------- Lucien Steru Title: -------------------------------------------- /s/ Lucien Steru -------------------------------------------------- LUCIEN STERU /s/ Dominique Steru -------------------------------------------------- DOMINIQUE STERU /s/ Domingos Martins -------------------------------------------------- DOMINGOS MARTINS - 33 - /s/ Roger Porsolt -------------------------------------------------- ROGER PORSOLT CO.DE.MA. By: /s/ Lucien Steru ----------------------------------------------- Lucien Steru Title: -------------------------------------------- BNP DEVELOPPEMENT By: /s/ Josiane Raspiller ----------------------------------------------- Josiane Raspiller Title: -------------------------------------------- SIPAREX DEVELOPPEMENT By: /s/ Christian d'Argoubet ----------------------------------------------- Christian d'Argoubet Title: -------------------------------------------- EPICEA By: /s/ Pascal Demichel ----------------------------------------------- Pascal Demichel Title: -------------------------------------------- NATIO FONDS VENTURE II By: /s/ Dominique Bellanger ----------------------------------------------- Dominique Bellanger Title: -------------------------------------------- ESCROW AGREEMENT dated as of August 7, 1997 AMONG: PHOENIX INTERNATIONAL LIFE SCIENCES INC., a corporation incorporated under the CANADA BUSINESS CORPORATIONS ACT. having its head office at 2350 Cohen Street, Saint-Laurent, Quebec, Canada, H4R 2N6, herein acting and represented by John W. Hooper and Jean-Yves Caloz, its duly authorized representatives; (hereinafter "Phoenix") AND: LUCIEN STERU, executive, residing at 31, rue Robert de Flers, 75015 Paris, married under the matrimonial regime of COMMUNAUTE LEGALE to Dominique Steru; (hereinafter "Lucien Steru") AND: DOMINIQUE STERU, executive, residing at 31, rue Robert de Flers, 75015 Paris, married under the matrimonial regime of COMMUNAUTE LEGALE to Lucien Steru; (hereinafter "Dominique Steru") AND: CO.DE.MA., a Belgian corporation having its head office at Avenue Marcel Thiry 216, 1200 Bruxelles, Belgique, herein acting and represented by its duly authorized representative, Lucien Steru; (hereinafter "Codema") AND: DOMINGOS MARTINS, executive, residing at rua do Arco Carvalhao N1 14, 3rd esq., 107A Lisboa, Portugal, married under the matrimonial regime of COMMUNAUTE LEGALE TO Manuela Viegas; (hereinafter "Domingos Martins') AND: ROGER PORSOLT, executive, residing at 34, avenue de la Porte Jaime, 92210 Saint Cloud, married under the matrimonial regime of COMMUNAUTE UNIVERSELLE to Ursula Dorner; (hereinafter "Roger Porsolt") AND: BNP DEVELOPPEMENT, a French SOCIETE ANONYME, with issued capital of FF 500,000,000, registered in the Paris commercial and companies register under number B348 540 592 and having its head office at 1, boulevard Haussmann, 75009 Paris, herein acting and represented by its duly authorized representative, Josiane Raspiller; (hereinafter "BNP Developpement") AND: SEPAREX DEVELOPPEMENT, a French SOIETE EN COMMANDITE PAR ACTIONS, with issued capital of FF 196,489,400, registered in the Lyon commercial and companies register under number B378 213 375 and having its head office at 114, rue de la Boetie, 75008 Paris, herein acting and represented by its duly authorized representative, Christian D'Argoubert; (hereinafter "Siparex Developpement") AND: EPICEA, a French SOCIETE ANONYME, with issued capital of FF 67,000,000, registered in the Paris commercial and companies register under number B319 308 615 and having its head office at 31-33, rue de la Federation, 75015 Paris, herein acting and represented by its duly authorized representative, Pascal Demichel; (hereinafter "Epicea") AND: NATIO FONDS VENTURE II, a French fonds commun de placements a risques, herein acting and represented by its manager, BNP Gestion , a French SOCIETE ANONYME, with capital of FF 64,919,400, registered in the Paris commercial and companies register under number B682001904 and having its head office at 150, rue du Faubourg Poissonniere, 75484, Paris, Cedex 10, herein acting and represented by its duly authorized representatives and Dominique Bellanger; (hereinafter "Natio Fonds Venture") AND: MONTREAL TRUST COMPANY, 1800 McGill College Avenue, Montreal, Quebec, H3A 3K9, as escrow agent, herein represented by its duly authorized representative, Henri Beaudry Jr. (hereinafter the "Escrow Agent"). WHEREAS Phoenix and the Vendors are parties to a share and debenture purchase agreement dated August 7, 1997 (the "Purchase Agreement"). WHEREAS the Purchase Agreement provides that certain shares of Phoenix issued to the Vendors pursuant thereto are to be held in escrow for the purposes described therein. NOW THEREFORE the parties hereby agree as follows: 1 DEFINITIONS AND INTERPRETATION 1.1 Whenever used in this Agreement: 1.1.1 "Affiliate" means any of Lucien Steru, Dominique Steru, Codema and Roger Porsolt, and "Affiliates" means more than one of them. 1.1.2 1.1.2 "Claim" means any claim by Phoenix against the Vendors under Section 7.2 or a claim for a Specific Contingency under Section 8 of the Purchase Agreement; 1.1.3 "Distributions" has the meaning ascribed thereto in Section 3.1 hereof, 1.1.4 "Escrowed Shares" has the meaning ascribed thereto in Section 2.1 hereof; 1.1.5 "Escrowed Share Price" means, in respect of any Claim set forth in a Notice of Claim, the amount obtained by adding the opening and closing prices of the common shares of Phoenix on each of the Montreal Exchange and The Toronto Stock Exchange for the ten trading days preceding the date of execution of the Purchase Agreement, divided by 40; 1.1.6 "Notice of Claim" means a written notice of any Claim given by Phoenix setting forth the details of each Claim referred to therein including the amount thereof, if known to Phoenix, or Phoenix's reasonable estimate thereof, as well as the provisions of the Purchase Agreement upon which such Claim is based; 1.1.7 "Non-Affiliate" means Domingos Martins, BNP Developpement, Siparex Developpement, Epicea and Natio Fonds Venture II, and "Non-Affiliates" means more than one of them. 3 1.1.8 "Objection" means, in respect of any Claim, any objection raised in the Response by any of the Vendors to such Claim; 1.1.9 "Proceeds" has the meaning ascribed thereto in Section 3.2 hereof; 1.1.10 "Purchase Agreement" has the meaning ascribed thereto in the preamble to this Agreement; 1.1.11 "Released Shares" has the meaning ascribed thereto in Section 3.5.1.1 hereof; 1.1.12 "Response" means, in respect of any Claim, the written response of any of the Vendors indicating whether it accepts or disputes such Claim; and 1.1.13 "Specific Contingency" means any of the specific contingencies referred to in Section 8 of the Purchase Agreement; 1.1.14 "Vendors" means Lucien Steru, Dominique Steru, Codema, Domingos Martins, Roger Porsolt, BNP Developpement, Siparex Developpement, Epicea and Natio Fonds Venture. 1.2 Each capitalized term used in this Agreement but not defined herein has the meaning ascribed thereto in the Purchase Agreement. 1.3 In the event of (i) any subdivision, consolidation or reclassification of the class of shares comprising the Escrowed Shares or (ii) any REORGANIZATION of the share capital of Phoenix affecting the Escrowed Shares or (iii) the amalgamation of Phoenix with any other company, the number of Escrowed Shares and Escrowed Share Price shall be adjusted, if required, so that none of the parties hereto shall be in a position less favourable to it than as provided in this Agreement as a result of any of the foregoing actions. 1.4 For all purposes of this Agreement, the amount of any Claim in a currency other than Canadian dollars shall be converted to Canadian dollars at the exchange rate between Canadian and such currency shall be the "Spot Rate" of the alternate currency on the business day preceding the day as of which the conversion from one currency to the other is to be effected, as reported in the Financial Post on that day. 1.5 If any calculation hereunder of the applicable number of Escrowed Shares results in fractional shares, the result shall be rounded up or 4 down, as the case may be, to the nearest whole number and, if such result represents exactly one-half of a whole number, then such fraction shall be rounded up to the next whole number. 2 ESTABLISHMENT OF ESCROW 2.1 Phoenix hereby delivers in escrow to the Escrow Agent certificates representing an aggregate of 469,014 common shares of Phoenix registered in the name of the Escrow Agent, as escrow agent (the "Escrowed Shares"). The Vendors' interests in the Escrowed Shares are as set forth below:
VENDOR ESCROWED SHARES Lucien Steru 2,079 Dominique Steru 3 Codema 331,550 Domingos Martins 7,968 Roger Porsolt 37,062 Siparex Developpement 37,253 BNP Developpement 26,889 Epicea 21,382 Natio Fonds Venture 4,828
2.2 The Escrow Agent hereby accepts delivery of the Escrowed Shares and agrees to act as escrow agent and to hold, safeguard and release the Escrowed Shares in accordance with the provisions of this Agreement. The Escrowed Shares shall not be sold, assigned, hypothecated, alienated, released from escrow, transferred within escrow or dealt with in any manner whatsoever except as provided in this Agreement. 2.3 Notwithstanding the registration of the Escrowed Shares in the name of the Escrow Agent, the Vendors shall, subject to the provisions hereof, remain the owners thereof in the proportion contemplated by Section 2.1 hereof and be entitled to the exercise of all voting rights related thereto and to receive all dividends, income and other distributions in respect thereof (collectively, "Distributions"). In the event that any Escrowed 5 Shares are remitted to Phoenix for cancellation pursuant to the provisions of Section 3 hereof, the Vendors shall repay to Phoenix any Distributions received in respect of such Escrowed Shares. 3 INSTRUCTIONS TO ESCROW AGENT 3.1 At any time while the Escrowed Shares are held by the Escrow Agent, and provided that the Escrowed Shares are not then subject to any restrictions on transfer imposed by any Regulatory Authority, a Non-Affiliate my instruct the Escrow Agent in writing to sell all or part of such Non-Affiliate's portion of the Escrowed Shares. Upon receipt of such written instruction, the Escrow Agent shall sell such Escrowed Shares on the open market and shall retain the proceeds of sale, less any expenses incurred in realizing such sale (the "Proceeds") as escrowed property for such Non-Affiliate. The Escrow Agent shall invest such Proceeds in an interest-bearing account for the duration of the escrow. The Escrow Agent shall keep complete records of any such sales of Escrowed Shares. 3.2 At any time after receipt by the Escrow Agent of written notice by Phoenix of the release, in the format prescribed by the SEC, of at least 30 days of post-combination financial results of Phoenix and ITEM Holding, and provided that the Escrowed Shares are not then subject to any restrictions on transfer imposed by any Regulatory Authority, an Affiliate may also instruct the Escrow Agent to sell all or part of their portion of the Escrowed Shares in the manner set forth in section 3.2. In such event, the Escrow Agent shall proceed as set forth in section 3.2. 3.3 Whenever Phoenix has a Claim it shall give a Notice of Claim in respect thereof to Vendors and the Escrow Agent. Upon receipt of a Notice of Claim, the Escrow Agent shall immediately reserve for distribution in accordance with the provisions of paragraph 3.4 hereof (but shall not release from escrow except in accordance with the provisions hereof) that number of the Escrowed Shares which is equal in value to the amount provided for in the Notice of Claim, calculated on the basis of the Escrowed Share Price for such Notice of Claim; provided that, notwithstanding anything contained herein, the Escrow Agent shall not reserve any shares from the Escrowed Shares in respect of any Claim until the aggregate amount claimed by Phoenix under all Notices of Claim exceeds the amount of the Indemnity Cap set forth in paragraph 7.2.2 of the Purchase Agreement. 3.4 Within ten (10) days of receipt of a Notice of Claim, the Vendors (or any of them) shall give to Phoenix and the Escrow Agent a Response with 6 respect to each Claim set forth therein: If: 3.4.1 the Response indicates that the Vendors accept a Claim set forth in the Notice of Claim, or if the Escrow Agent does not receive a Response with respect to a Claim within said ten (10) day period, the Vendors shall be deemed to have irrevocably consented to each Claim so accepted or in respect of which no Response is so received, as made, and the Escrow Agent shall forthwith give written notice thereof to Phoenix: 3.4.1.1 setting forth the total amount of all Claims which have been consented. to and the number of shares from the Escrowed Shares to be released from escrow for the benefit of Phoenix (the "Released Shares"), being that number of the Escrowed Shares which is equal in value to the amount of the admitted Claims set forth in such Notice of Claim. calculated on the basis of the Escrowed Share Price for such Notice of Claim; and 3.4.1.2 surrender for cancellation to Phoenix the share certificate(s) in its possession representing the Released Shares, duly endorsed for transfer, and the Escrow Agent shall retain in its possession the other share certificate(s) representing the balance of the Escrowed Shares, if any, to be held by it in escrow and dealt with in accordance with the terms hereof, or 7 3.4.2 the Response indicates that the Vendors (or any of them) dispute a Claim set forth in the Notice of Claim (whether or not arbitration proceedings have been instituted), the Escrow Agent shall retain in its possession and continue to hold in escrow that number of the Escrowed Shares which is equal in value to the amount provided for in the disputed Claims, calculated on the basis of the Escrowed Share Price for such Notice of Claim: 3.4.2.1 until the Escrow Agent receives a joint written notice from Phoenix and the Vendors directing the Escrow Agent as to the manner in which such Escrowed Shares and the share certificate(s) representing same are to be dealt with, in which case the Escrow Agent shall deal with same in accordance with such joint written instructions; or 3.4.2.2 in the absence of such a joint written notice within ten (IO) business days of the Escrow Agent's receipt of the Response, the Escrow Agent shall deal with such Escrowed Shares and the share certificates) representing same in accordance with a final arbitration order in respect of such disputed Claim(s) pursuant to the arbitration contemplated by Section 12 hereof. Any arbitration order shall be accompanied by a legal opinion by counsel for the presenting party satisfactory to the Escrow Agent to the effect that the said order is final and non-appealable. 3.5 If, at the time of receipt by the Escrow Agent of any Notice of Claims as provided for in section 3.4 hereof, the number of Escrowed Shares remaining in escrow for the account of any Vendor is insufficient to meet such Vendor's pro rata portion of the number of Released Shares to be remitted to Phoenix, the balance of such Vendor's pro rata portion of the admitted Claims shall be satisfied by payment in cash from the Proceeds of those Escrowed Shares sold by the Escrow Agent at the direction of such Vendor pursuant to Section 3.1 or 3.2 hereof. 3.6 On the earlier of (i) November 30, 1997, or (ii) the date at which the Escrow receives a notice from Phoenix confirming that the audit of the combined financial statements of Phoenix and ITEM Holding as at August 31, 1997 has been completed, the Escrow Agent will deliver the Escrowed Shares and all Distributions and Proceeds with the exception of such number of Escrowed Shares as may be necessary to satisfy any obligation to indemnify for a Specific Contingency which has not yet occurred. The notice from Phoenix referred to above shall indicate the 8 maximum amount of Specific Contingencies which have not been prescribed or definitively settled and the number of Escrowed Shares, calculated on the basis of the Escrowed Share Price, which may not be released from the escrow for such Specific Contingencies. 3.7 Upon receipt by the Escrow Agent of a written notice instructing it to release, pro rata to the Vendors, such further number of Escrowed Shares as is no longer necessary to satisfy remaining indemnification obligations in respect of remaining Specific Contingencies which have been prescribed or definitively settled, the Escrow Agent shall release such number of Escrowed Shares to the Vendors, pro rata to their respective interests the Escrowed Shares, Distributions and Proceeds, if any. 4 VOTING RIGHTS 4.1 The Escrow Agent shall provide to each of the Vendors a proxy entitling such Vendor to vote those of the Escrowed Shares which are owned by it, forthwith upon the Escrow Agent's receipt thereof in its capacity as registered shareholder of Phoenix, in order to allow each Vendor to vote its Escrowed Shares in the same manner as if it were the registered owner thereof. 5 RIGHTS AND OBLIGATIONS OF THE ESCROW AGENT 5.1 The Escrow Agent is not a party to, and is not bound by, any provisions which may be evidenced by, or arise out of, any agreement other than as therein set forth under the express provisions of this Agreement. 5.2 The Escrow Agent acts hereunder as a depositary only and is not responsible or liable in any manner whatever for the sufficiency, correctness, genuineness or validity of any instrument deposited with it, or for the form of execution of such instrument or for the identity or authority or right of any person or party executing or depositing it. 1.1 5.3 The Escrow Agent shall not be under any duty to give the Escrowed Shares, Distributions and Proceeds, if any, held by it hereunder any greater degree of care than it gives its own similar property and shall not be required to invest any funds held hereunder except as directed in this Agreement. Uninvested funds held hereunder shall not earn or accrue interest. 5.4 The Escrow Agent shall not be liable, except for its own gross negligence 9 or willful misconduct and, except with respect to claims based upon such gross negligence or willful misconduct that are successfully asserted against the Escrow Agent, the other parties hereto shall solidarity indemnify and hold harmless the Escrow Agent (and any successor Escrow Agent) from and against any and all losses, liabilities, claims, actions, damages and expenses, including reasonable attorneys' fees and disbursements, arising out of and in connection with this Agreement. Without limiting the foregoing, the Escrow Agent shall in no event be liable in connection with its investment or reinvestment of any cash held by it hereunder in good faith, in accordance with the terms hereof. 5.5 The Escrow Agent shall be entitled to rely upon any order, judgment, certification, demand, notice, instrument or other writing delivered to it hereunder without being required to determine the authenticity or the correctness of any fact stated therein or the propriety or validity of the service thereof. The Escrow Agent may act in reliance upon any instrument or signature believed by it to be genuine and may assume that the person purporting to give receipt or advice or make any statement or execute any document in connection with the provisions hereof has been duly authorized to do so. The Escrow Agent may conclusively presume that the undersigned representative of any party hereto which is an entity other than a natural person has full power and authority to instruct the Escrow Agent on behalf of that party unless written notice to the contrary is delivered to the Escrow Agent. 5.6 The Escrow Agent may act pursuant to the advice of counsel with respect to any matter relating to this Agreement and shall not be liable for any action taken or omitted by it in good faith in accordance with such advice. 5.7 The Escrow Agent makes no representation as to the validity, value, genuineness or the collectability of any security or other document or instrument held by or delivered to it. 5.8 The Escrow Agent shall not be called upon to advise any party as to the wisdom in selling or retaining or taking or refraining from any action with respect to any securities or other property deposited hereunder. 5.9 The Escrow Agent (and any successor Escrow Agent) may at any time resign as such by delivering the Escrowed Shares, Distributions and Proceeds, if any, to any successor Escrow Agent jointly designated by the other parties hereto in writing, or to any court of competent jurisdiction, whereupon Escrow Agent shall be discharged of and from any and all 10 further obligations arising in connection with this Agreement. The resignation of Escrow Agent will take effect on the earlier of (a) the appointment of a successor (including a court of competent jurisdiction) or (b) the day which is 30 days after the date of delivery of its written notice of resignation to the other parties hereto. If at that time Escrow Agent has not received a designation of a successor Escrow Agent, Escrow Agent's sole responsibility after that time shall be to retain and safeguard the Escrowed Shares and Proceeds, if any, until receipt of a designation of successor Escrow Agent or a joint written disposition instruction by the other parties hereto or a final non-appealable order of a court of competent jurisdiction. 5.10 Phoenix and the Vendors shall pay Escrow Agent compensation (as payment in full) for the services to be rendered by Escrow Agent hereunder in the amount of $500 at the time of execution of this Agreement and agree to reimburse Escrow Agent for all reasonable expenses, disbursements and advances incurred or made by Escrow Agent in performance of its duties hereunder (including reasonable fees, expenses and disbursements of its counsel). 6 LIMITED RESPONSIBILITY This Agreement expressly sets forth all the duties of Escrow Agent with respect to any and all matters pertinent hereto. No implied duties or obligations shall be read into this Agreement against the Escrow Agent. The Escrow Agent shall not be bound by the provisions of any agreement among the other parties hereto except this Agreement. No trust is created by this Agreement and the Escrow Agent does not act in any capacity as a trustee. 7 NOTICES All notices, consents, waivers and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by telecopier (with written confirmation of receipt) provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and telecopier numbers set forth below (or to such other addresses and telecopier numbers as a party may designate by notice to the other parties): 11 7.1 To Phoenix: Phoenix International Life Sciences Inc. 2350, Cohen Street Saint-Laurent, Quebec H4R 2N6 Canada Telecopier No.: (514) 333-7306 Attention: Jean-Yves Caloz 7.2 To ITEM Holding: ITEM Holding S.A. 93, avenue de Fontainebleau 94276 Le Kremlin-Bicetre Cedex France Telecopier No.: 01.49.59.25.70 Attention: Lucien Steru 7.3 To Lucien Steru or Dominique Steru: Lucien Steru or Dorninique Steru 31, rue Robert de Flers 75015 Paris France Telecopier No.: 01.40.58.15.14 7.4 To CO.DE.MA.: Avenue Marcel Thiry 216 1200 Bruxelles Belgique Telecopier No.: (32) 2.774.42.99 Attention: Lucien Steru 7.5 To Domingos Martins: 12 Domingos Martins rua do Arco Carvalhao N1 14, 3rd esq. 107A Lisboa Portugal 7.6 To Roger Porsolt: Roger Porsolt 34, avenue de la Porte Jaune 92210 Saint-Cloud France Telecopier No.: 01.46.02.20.33 7.7 To Siparex Developpement: Siparex Developpement 114, rue de la Boetie 75008 Paris France Telecopier No.: (33) 1.53-93.02.30 Attention: Christian d'Argoubet 7.8 To BNP Developpement: BNP Developpement 1, boulevard Haussmann 75009 Paris France Telecopier No.: 01.40.14.51.37 Attention: Josiane Raspiller 7.9 To Epicea: EPICEA 31-33, rue de la Federation 75015 Paris 13 France Telecopier No.: 01.40.56.19.19 Attention: Pascal Demichel 7.10 To Natio Fonds Venture II: Natio Fonds Venture II 12, rue Chauchat 75009 Paris France Telecopier No.: 01.40.14.69.60 Attention: Dominique Bellanger 8 GOVERNING LAW This Agreement shall be governed by the laws of the Province of Quebec and the laws of Canada applicable therein. 9 COUNTERPARTS This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original and all of which, when taken together, will be deemed to constitute one and the same. 10 SECTION HEADINGS The headings of sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. 11 WAIVER The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither the failure nor any delay by any party in exercising any right, power, or privilege under this Agreement or the documents referred to in this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, 14 or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other parties, (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement. 12 ARBITRATION Any dispute which arises in the course of or following the performance of this Agreement or any of the transactions contemplated herein will be definitively settled under the auspices of The Quebec National and International Commercial Arbitration Centre, by means of arbitration and to the exclusion of courts of law, in accordance with its General Commercial Arbitration Rules in force at the time this Agreement is signed and to which the parties declare they have adhered. 13 CONFIDENTIALITY The parties agree to treat this Agreement as confidential and not to disclose its contents to third parties other than their advisers, except to the extent necessary to enforce performance of obligations hereunder, or as is required to comply with applicable laws or regulations, including regulations of any stock exchange on which the securities of Phoenix are listed, following consultations with Lucien Steru. 14 FURTHER ASSURANCES The parties shall, with all reasonable diligence, do all such things and provide all such reasonable assurances as may be required to consummate the transactions contemplated hereby, and each party shall provide such further documents or instruments required by another party as may be reasonably necessary or desirable to give effect to the purpose of this Agreement and to carry out its provisions. 15 GENERAL 15 The invalidity or unenforceability of any term or provision hereof shall not affect the validity or enforceability of any other term or provision hereof. This Agreement and the other documents and instruments referred to herein constitute the entire understanding of the parties hereto with respect to the subject matter hereof and thereof and supersede all present and prior agreements, whether written or oral. This Agreement shall bind and inure to the benefit of the parties hereto and their respective heirs. executors, administrators, personal representatives, successors and assigns. The parties hereto have expressly required that this Agreement and all documents and notices related hereto be drafted in English. LES PARTIES AUX PRESENTES ONT EXPRESSEMENT EXIGE QUE LE PRESENT CONTRAT ET TOUS LES DOCUMENTS ET AVIS Y AFFERENTS SOIENT REDIGES EN ANGLAIS. 16 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first written above. PHOENIX INTERNATIONAL LIFE SCIENCES INC By:/S/ John W. Hooper --------------------------------- John W. Hooper Title: ------------------------------ Chairman and Chief Executive Officer By:/S/ Jean-Yves Caloz --------------------------------- Jean-Yves Caloz Title: ----------------------------- Senior Vice President and Chief Financial Officer /S/ Lucien Steru ----------------------------------- LUCIEN STERU /S/ Dominque Steru ----------------------------------- DOMINIQUE STERU CO.DE.MA. By: /S/ Lucien Steru -------------------------------- Lucien Steru 17 Title: ----------------------------- /S/ Domingos Martins ----------------------------------- DOMINGOS MARTINS /S/ Roger Porsolt ----------------------------------- ROGER PORSOLT BNP DEVELOPPEMENT By: /S/ Josiane Raspiller -------------------------------- Josiane Raspiller Title: ----------------------------- SIPAREX DEVELOPPEMENT By: /S/ Christian D'Argoubert -------------------------------- Christian d'Argoubert Title: ----------------------------- EPICEA By: /S/ Pascal Demichel -------------------------------- Pascal Demichel Title: ----------------------------- NATIO FONDS VENTURE II By: /S/ Dominque Belanger -------------------------------- Dominique Bellanger 18 Title: ----------------------------- MONTREAL TRUST COMPANY By: /S/ Robert Sicotte -------------------------------- Robert Sicotte Title: ----------------------------- 19 EX-2.2 3 EXHIBIT 2.2 Exhibit 2.2 STOCK PURCHASE AGREEMENT BY AND AMONG KURAYA AMERICAN SYSTEMS INC., KURAYA CORPORATION, IBRD-ROSTRUM GLOBAL, INC., IBRD-ROSTRUM EUROPE, INC., PHOENIX INTERNATIONAL LIFE SCIENCES (U.S.) INC., AND PHOENIX INTERNATIONAL LIFE SCIENCES INC. DATED DECEMBER 24, 1997 TABLE OF CONTENTS
Page ARTICLE 1 SALE AND PURCHASE OF SHARES............................................... 2 1.1. Sale and Purchase of Shares............................... 2 1.2. Purchase Price............................................ 3 1.3. Earn-Out.................................................. 3 ARTICLE 2 CLOSINGS; EARN-OUT PAYMENT; PURCHASE PRICE ADJUSTMENT..................... 3 2.1. Closing Date.............................................. 3 2.2. Sellers' Deliveries....................................... 4 2.3. The Buyers' Deliveries.................................... 5 2.4. Earn-Out. ............................................... 5 2.5. Net Debt Adjustment....................................... 8 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF KAS AND KURAYA.......................... 9 3.1. Organization and Standing................................. 9 3.2. Authority................................................. 9 3.3. No Violation of Law....................................... 10 3.4. Capitalization............................................ 10 3.5. Subsidiaries.............................................. 11 3.6. Financial Statements...................................... 12 3.7. Books and Records. ...................................... 13 3.8. Accounts Receivable....................................... 13 3.9. No Undisclosed Liabilities................................ 13 3.10. Insurance................................................ 14 3.11. Absence of Certain Changes............................... 14 3.12. Compliance with Laws..................................... 14 3.13. Governmental Permits..................................... 14 3.14. Taxes and Tax Returns.................................... 15 3.15. Contracts................................................ 17 3.16. Personal Property........................................ 19 3.17. Real Property............................................ 19 3.18. Intellectual Property.................................... 19
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Page 3.19. Labor and Employment Matters............................. 20 3.20. Employee Licenses........................................ 20 3.21. Non-Competition.......................................... 20 3.22. Employee Benefit Plans................................... 20 3.23. Legal Proceedings and Compliance with Laws: Environmental Matters .................................. 22 3.24. Compensation Arrangements; Bank Accounts; Officers and Directors .......................................... 23 3.25. KAS's Brokers............................................ 24 3.26. Customers and Suppliers.................................. 24 3.27. Condition of Assets. .................................... 24 3.28. Completeness and Accuracy of Information................. 24 3.29. IBRD Japan............................................... 25 3.30. No Implied Representations............................... 25 3.31. Transactions with Related Parties........................ 25 3.32. IBRD-Europe Companies. .................................. 26 3.33. Clinical Trials. ........................................ 26 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE BUYERS.............................. 26 4.1. Organization and Standing................................. 26 4.2. Authority................................................. 26 4.3. No Violation of Law....................................... 27 4.4. The Buyers' Brokers....................................... 27 4.5. Investment Intention...................................... 27 4.6. Securities Filings........................................ 28 4.7. Financial Statements...................................... 28 ARTICLE 5 COVENANTS AND AGREEMENTS OF KAS........................................... 28 5.1. Required Actions.......................................... 28 5.2. Prohibited Transactions................................... 31 5.3. Efforts to Close.......................................... 32 5.4. Expenses.................................................. 32 5.5. Supplements to Schedules; Covenants....................... 33 5.6. Further Assurances........................................ 33 5.7. HSR Act and ISRA.......................................... 33 5.8. No Solicitation of Transactions........................... 33 5.9. Cooperation with Financing; Capital Contribution.......... 34 5.10. Liquidation.............................................. 34 5.11. Professional Liability Insurance Policy.................. 34
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Page ARTICLE 6 COVENANTS AND AGREEMENTS OF THE BUYERS.................................... 34 6.1. Efforts to Close.......................................... 34 6.2. Expenses.................................................. 34 6.3. Further Assurances........................................ 35 6.4. HSR Act................................................... 35 6.5. Records................................................... 35 6.6. Confidentiality Agreement................................. 35 6.7. Guaranties................................................ 35 ARTICLE 7 CONDITIONS TO THE OBLIGATIONS OF KAS...................................... 36 7.1. Representations and Covenants............................. 36 7.2. Compliance with Covenants................................. 36 7.3. Corporate Action.......................................... 36 7.4. Litigation................................................ 36 7.5. Absence of Adverse Governmental Action.................... 36 7.6. Filings; Consents; Waiting Periods........................ 36 7.7. Approval of Documentation................................. 37 7.8. Debt...................................................... 37 7.9. Legal Opinion............................................. 37 7.10. Professional Liability Insurance Policy.................. 37 ARTICLE 8 CONDITIONS TO THE OBLIGATIONS OF THE BUYERS............................... 37 8.1. Representations and Covenants............................. 38 8.2. Compliance with Covenants................................. 38 8.3. Corporate Action.......................................... 38 8.4. Litigation................................................ 38 8.5. Absence of Adverse Governmental Action.................... 38 8.6. No Material Adverse Effect or Damage...................... 38 8.7. Filings; Consents; Waiting Periods........................ 38 8.8. Approval of Documentation................................. 39 8.9. Resignations; Semler...................................... 39 8.10. Legal Opinions........................................... 39 8.11. Ancillary Documents...................................... 39 8.12. Consent and Release...................................... 39
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Page 8.13. Environmental Assessment................................. 39 8.14. Termination of Tax Sharing Agreement..................... 39 8.15. Professional Liability Insurance Policy.................. 39 8.16. IBRD Shares. ........................................... 40 8.17. Liquidation.............................................. 40 ARTICLE 9 COMPETITION AND CONFIDENTIALITY BY THE SELLING PARTIES.................... 40 9.1. Noncompetition............................................ 40 9.2. Confidentiality........................................... 41 9.3. Affiliates................................................ 41 9.4. Injunctive Relief......................................... 41 ARTICLE 10 INDEMNIFICATION........................................................... 41 10.1. Survival of Representations and Warranties............... 41 10.2. Indemnification by KAS and Kuraya........................ 42 10.3. Limitations on Obligation of KAS and Kuraya to Indemnify .............................................. 43 10.4. Indemnification by the Buyers............................ 45 10.5. Limitations on Obligation of the Buyers to Indemnify..... 46 10.6. Procedures for Indemnification........................... 46 10.7. Payment of Indemnification Obligations................... 48 10.8. Interest on Unpaid Obligations........................... 48 10.9. Exclusive Remedy. ...................................... 49 ARTICLE 11 TAXES..................................................................... 49 11.1. Final Tax Return......................................... 49 11.2. Audits and Tax Litigation................................ 51 11.3. Tax Indemnity............................................ 52 ARTICLE 12 TERMINATION OF AGREEMENT.................................................. 52 12.1. Termination............................................... 52 12.2. Survival.................................................. 53 12.3. Return of Materials....................................... 53
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Page ARTICLE 13 MISCELLANEOUS............................................................. 54 13.1. Notices................................................... 54 13.2. Taxes..................................................... 55 13.3. Entire Agreement.......................................... 55 13.4. Waivers and Amendments.................................... 55 13.5. Governing Law............................................. 55 13.6. Reference to U.S. Dollars................................. 56 13.7. Binding Effect; Assignment................................ 56 13.8. No Third Party Beneficiaries.............................. 56 13.9. Counterparts.............................................. 56 13.10. Schedules and Exhibits.................................... 56 13.11. Headings.................................................. 56 13.12. Publicity................................................. 56 13.13. Severability.............................................. 57 13.14. Confidential Information.................................. 57 13.15. Waiver of Conflict........................................ 57 13.16. Injunctive Relief......................................... 57 13.17. Venue..................................................... 58 ARTICLE 14 DEFINITIONS............................................................... 58 14.1. Certain Defined Terms..................................... 58 14.2. Other Defined Terms....................................... 63
-v- SCHEDULE INDEX Schedule A Subsidiaries Schedule 1.2 Allocation of IBRD-Europe Subsidiaries Schedule 2.3 IBRD-Europe Purchase Price Schedule 3.1 Jurisdiction of Incorporation Schedule 3.3(b) Violations (Laws) Schedule 3.3(c) Consents Schedule 3.4 Capitalization Schedule 3.5 Subsidiaries Schedule 3.6 Exceptions to Financial Statements Schedule 3.8 Accounts Receivable Schedule 3.9 Undisclosed Liabilities Schedule 3.10 Insurance Schedule 3.11 Absence of Certain Changes Schedule 3.12 Compliance with Laws Schedule 3.13 Governmental Permits Schedule 3.15 Contracts Schedule 3.16 Personal Property Schedule 3.17 Real Property Schedule 3.18 Intellectual Property Schedule 3.19 Labor and Employment Matters Schedule 3.20 Employee Licenses Schedule 3.21 Non-Competition Schedule 3.22 Employee Benefit Plans Schedule 3.23 Compliance with Laws; Environmental Matters Schedule 3.24 Compensation Arrangements; Bank Accounts; Officers and Directors Schedule 3.25 KAS's Brokers Schedule 3.26 Customers and Suppliers Schedule 3.28 Completeness of Information Schedule 3.29 IBRD-Japan Schedule 3.31 Transactions with Related Parties Schedule 3.33 Clinical Trials Schedule 4.3(b) Violations (Laws) Schedule 4.4 The Buyers' Brokers Schedule 5.2 Prohibited Transactions Schedule 6.7 Guaranties Schedule 7.8 Debt Schedule 10.2 Indemnifiable Disclosed Items
-vi- ATTACHMENTS - ----------- Attachment A U.K. Tax Representations and Warranties Attachment B U.K. and Europe General Compliance EXHIBITS - -------- Exhibit A Form of Escrow Agreement Exhibit B Form of Legal Opinion of Counsel to the Sellers and Kuraya Exhibit C-1 Form of Legal Opinion of Counsel to the Buyers (U.S.) Exhibit C-2 Form of Legal Opinion of Counsel to the Buyers (Canada) Exhibit D Form of Amended Tax Sharing Agreement
-vii- STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (this "Agreement") is entered into as of December 24, 1997 by and among PHOENIX INTERNATIONAL LIFE SCIENCES (U.S.), INC., a Delaware corporation ("Phoenix U.S."), PHOENIX INTERNATIONAL LIFE SCIENCES INC., a corporation constituted under the laws of Canada ("Phoenix Canada"), KURAYA AMERICAN SYSTEMS INC., a California corporation ("KAS"), KURAYA CORPORATION, a corporation organized under the laws of Japan ("Kuraya") IBRD-ROSTRUM GLOBAL, INC., a Delaware corporation (the "Company") and IBRD-ROSTRUM EUROPE, INC., a Delaware corporation ("IBRD-Rostrum"). Phoenix Canada and Phoenix U.S. are sometimes referred to hereinafter individually as a "Buyer" and together as the "Buyers." KAS and the Company are sometimes referred to hereinafter individually as a "Seller" and together as the "Sellers." BACKGROUND A. The Company, directly or indirectly, owns all of the entire issued and outstanding common stock of each entity listed in SCHEDULE A (collectively, the "Subsidiaries," and singly, a "Subsidiary"). B. Not later than five business days after the execution of this Agreement, IBRD-Rostrum shall adopt a Plan of Liquidation (the "Liquidation"). Under the Plan of Liquidation, IBRD-Rostrum, as the sole stockholder, will distribute to the Company not later than one business day prior to the closing date of the Canada Acquisition (as hereinafter defined) all of its assets and liabilities including all of the issued and outstanding common stock of the following entities: (i) IBRD-Rostrum Group Limited, a corporation organized under the laws of the England ("IBRD-U.K.") which directly owns all of the issued and outstanding common stock of IBRD-Rostrum Global Limited, a company organized under the laws of England, and indirectly owns 50% of Bath Clinical Trials Limited, a company organized under the laws of England ("Bath"), (ii) IBRD-Rostrum GmbH, a corporation organized under the laws of Germany ("IBRD-Germany"), and (iii) IBRD-Rostrum Sarl, a corporation organized under the laws of France ("IBRD-France"). IBRD-U.K., IBRD-Germany and IBRD-France are sometimes referred to hereinafter collectively as "IBRD-Europe," and the shares of IBRD-U.K., IBRD-Germany and IBRD-France distributed to the Company are sometimes referred to hereinafter collectively as the "IBRD-Europe Shares." C. Following the completion of the Liquidation and prior to the sale by KAS of the IBRD-U.S. Shares (as hereinafter defined), Phoenix Canada desires to purchase, and the Company desires to sell, the IBRD-Europe Shares on the terms and conditions set forth herein (the "Canada Acquisition"). The Company shall, immediately after the completion of the Canada Acquisition, declare and pay a distribution to KAS in the amount equal to the cash proceeds received by the Company from the Canada Acquisition to KAS (the "KAS Dividend"). D. Effective as of the business day immediately following the Canada Acquisition, Phoenix U.S. desires to purchase, and KAS desires to sell, all of the issued and outstanding common stock of the Company (the "IBRD-U.S. Shares") which will own all of the issued and outstanding common stock of IBRD Center for Clinical Research, Inc., a Delaware corporation, and 44% of the issued and outstanding stock of Kansas City Analytical Services, Inc., a Kansas corporation ("KCAS") on the terms and conditions set forth herein (the "U.S. Acquisition"). E. The IBRD-Europe Shares and the IBRD-U.S. Shares are sometimes referred to hereinafter together as the "Shares." The Canada Acquisition and the U.S. Acquisition are sometimes referred to hereinafter together as the "Acquisitions." F. Phoenix Canada, Phoenix U.S., KAS, the Company, IBRD-Rostrum and Kuraya each desire to effect the Acquisitions and the other transactions contemplated by this Agreement on the terms and conditions set forth herein. TERMS NOW THEREFORE, in consideration of the premises and the mutual covenants and agreements hereinafter set forth, intending to be legally bound, the parties hereby agree as follows (capitalized terms shall have the meanings ascribed to them in Article 14 hereof, unless otherwise indicated): ARTICLE 1 SALE AND PURCHASE OF SHARES 1.1. SALE AND PURCHASE OF SHARES. On the terms and subject to the conditions set forth herein, on the Closing Dates, the Sellers hereby agree to sell to the Buyers, and the Buyers hereby agree to purchase from the Sellers, the Shares, as described herein. 1.1.1. CANADA ACQUISITION - SALE AND PURCHASE OF IBRD-EUROPE SHARES. On the Canada Closing Date referred to in Section 2.1 below, the Company will sell and assign to Phoenix Canada, and Phoenix Canada will purchase and accept from the Company, the IBRD-Europe Shares. -2- 1.1.2. U.S. ACQUISITION - SALE AND PURCHASE OF IBRD-U.S. SHARES. On the U.S. Closing Date referred to in Section 2.1 below, KAS will sell and assign to Phoenix U.S., and Phoenix U.S. will purchase and accept from KAS, the IBRD-U.S. Shares. 1.2. PURCHASE PRICE. As payment for the Shares indicated below, the Buyers shall pay the following amounts to the Sellers (in the aggregate, the "Purchase Price") in the manner indicated and at the dates and times set forth in Article 2 below: (a) to KAS for the IBRD-U.S. Shares an amount equal to: (1) Twenty-Eight Million Five Hundred Thousand Dollars (U.S. $28,500,000) LESS (2) the IBRD-Europe Purchase Price, LESS (3) The Net Debt Amount The amount being paid in respect of the U.S. Acquisition is referred to herein as "U.S. Purchase Price"; and (b) to the Company Three Million Five Hundred Thousand Dollars ($3,500,000) for the IBRD-Europe Shares ("IBRD-Europe Purchase Price"), to be allocated among IBRD-U.K., IBRD-Germany and IBRD-France (based on their respective fair market values) in accordance with SCHEDULE 1.2, to be provided by Phoenix Canada not later than two (2) business days prior to the closing of the Canada Acquisition. 1.3. EARN-OUT. In addition, at the date and time set forth in Section 2.4 below, the Buyers shall pay to KAS an amount equal to nine (9) times the dollar amount by which the 1998 EBITDA exceeds the 1998 EBITDA Target (the "Earn-Out Payment"). The Earn-Out Payment shall be considered additional U.S. Purchase Price for all purposes. ARTICLE 2 CLOSINGS; EARN-OUT PAYMENT; PURCHASE PRICE ADJUSTMENT 2.1. CLOSING DATE. Subject to the satisfaction of the conditions set forth in Articles 7 and 8 hereof, the closing of the Canada Acquisition under this Agreement (the "Canada Closing") will take place on the later of (x) January 20, 1998 (effective 11:59 P.M.) and (y) the second business day after the later of (A) the day the waiting period under the HSR Act with respect to the U.S. Acquisition has passed or otherwise terminated, (B) the day all notices, consents and approvals -3- from any Governmental Authority have been provided or obtained, or at such date as the parties shall mutually agree to in writing. The closing of the U.S. Acquisition under this Agreement (the "U.S. Closing") will take place the business day following the Canada Closing, at 8:00 A.M., effective on 11:59 P.M. of that day provided, however, that the contribution made by Phoenix U.S. in accordance with Section 7.8 hereof shall be deemed to be made at the beginning of the day immediately following the U.S. Closing. The Canada Closing and the U.S. Closing are sometimes referred to hereinafter together as the "Closings" or the "Closing Dates." The Closings shall take place at the offices of Sheppard, Mullin, Richter & Hampton LLP, 333 South Hope Street Los Angeles, California 90071, at 8:00 a.m., or at such place or time as the parties may mutually agree to in writing. The "Closing Date" shall refer to the date on which the U.S. Closing occurs. Notwithstanding anything to the contrary contained herein, (a) the Closings shall not occur until after each of the conditions set forth in Articles 7 and 8 hereof have been satisfied or waived by the relevant party, and (b) in the event the U.S. Closing does not occur in accordance with this Agreement after the Canada Closing, Phoenix Canada and the Company each shall have the unconditional right to rescind the purchase and sale of the IBRD-Europe Shares, whereby Phoenix Canada would return the IBRD-Europe Shares to the Company and KAS would return the IBRD-Europe Purchase Price to Phoenix Canada. 2.2. SELLERS' DELIVERIES. 2.2.1. THE COMPANY'S DELIVERIES - CANADA CLOSING. At the Canada Closing the Company shall deliver: (a) to Phoenix Canada, certificates evidencing the IBRD-Europe Shares, duly endorsed for transfer to Phoenix Canada or accompanied by a stock power or assignment separate from certificate executed in favor of Phoenix Canada; and (b) such other documents, certificates and instruments as Phoenix Canada requests from the Company pursuant to the specific terms of this Agreement or as Phoenix Canada otherwise reasonably requests from the Company to effect completely the steps required to be taken by it at or before the Canada Closing in order to carry out the Transactions. 2.2.2. KAS'S DELIVERIES - U.S. CLOSING. At the U.S. Closing, KAS shall deliver: (a) to Phoenix U.S. a certificate evidencing the IBRD-U.S. Shares, duly endorsed for transfer to Phoenix U.S. or accompanied by a stock power or assignment separate from certificate duly executed in favor of Phoenix U.S.; (b) the Escrow Agreement, duly executed by KAS and Kuraya; and -4- (c) such other documents, certificates and instruments as the Buyers request from KAS pursuant to the specific terms of this Agreement or as the Buyers otherwise reasonably requests from KAS to effect completely the steps required to be taken by it at or before each Closing in order to carry out the Transactions. 2.3. THE BUYERS' DELIVERIES. 2.3.1. PHOENIX CANADA DELIVERIES - CANADA CLOSING. At the Canada Closing, Phoenix Canada shall deliver to the Company the portion of the IBRD-Europe Purchase Price by wire transfer in immediately available funds to an account designated in writing by the Company. The Company shall immediately after the completion of the Canada Closing declare and pay a distribution to KAS in respect of the IBRD-Europe Shares in the amount equal to the IBRD-Europe Purchase Price. 2.3.2. PHOENIX U.S. DELIVERIES - U.S. CLOSING. At the U.S. Closing Phoenix U.S. shall deliver: (a) to the Escrow Agent an amount equal to Five Million Dollars (U.S. $5,000,000) (the "Escrow Amount") to be held in accordance with the Escrow Agreement to secure the Sellers' indemnification obligations under Article 10 hereof; (b) to KAS an amount equal to (1) the U.S. Purchase Price minus (2) the Escrow Amount in U.S. dollars by wire transfer of immediately available funds to an account designated in writing by KAS; (c) the Escrow Agreement, duly executed by the Buyers; (d) the Net Debt Amount as a loan or capital contribution by Phoenix U.S. in accordance with Section 7.8 below; and (e) such other documents, certificates and instruments as KAS requests from the Buyers pursuant to the specific terms of this Agreement or as KAS otherwise reasonably requests from the Buyers to effect completely the steps required to be taken by it at or before each Closing in order to carry out the Transactions. 2.4. EARN-OUT. (a) As used herein, (i) "1998 EBITDA" means the combined earnings of the Company and the Subsidiaries before interest, taxes, depreciation and amortization, for the twelve month period ending December 31, 1998 and (ii) "1998 EBITDA Target" means -5- $3,000,000. The 1998 EBITDA shall be determined in accordance with GAAP, applied consistent with past practices of the Company; PROVIDED that to the extent included in the combined earnings of the Company and the Subsidiaries, excluding the effect of the following items: (i) the gain or loss from any sale, exchange or other disposition of assets other than in the ordinary course of business consistent with past practice; (ii) the gain or loss from the exchange of securities, or any increase or reduction in the carrying value of such securities, or any increase or reduction in the carrying value of such securities; (iii) any extraordinary gain or loss or expense; (iv) any expenses directly or indirectly incurred in connection with the acquisition or the financing of the acquisition of the Company or the Subsidiaries; (v) any gain, loss, income or expense resulting from a change in the Company's accounting methods, principles or practices or a change in GAAP or any GAAP election or treatment not made or utilized by the Company in its financial statements for the year ended December 31, 1996 or subsequently adopted by the Company prior to the date hereof; (vi) intercompany allocations of general overhead and other charges not directly related to the operations of the Company and the Subsidiaries, or that are charges in excess of amounts that would otherwise have been incurred on an arms-length basis between the Company or any Subsidiary and Buyer or any Affiliate thereof; (vii) any costs or expenses (including payments under the Company's Phantom Stock Plan) caused by or arising out of the Company's Phantom Stock Plan; and (viii) any gain, loss, income or expense associated with KCAS. During calendar year 1998, the Buyers will operate the Company and its Subsidiaries in a manner reasonably consistent with the past practice of the business as conducted prior to the Closing Date. During such period, the Buyers shall not divert existing customers of the business conducted by the Company and its Subsidiaries to other Phoenix affiliates. (b) By March 31, 1999, Buyer shall have prepared and delivered to Seller the Company's consolidated balance sheet and income statements for the year ending -6- December 31, 1998 (the "EBITDA Financial Statements") which statements shall have been prepared in accordance with GAAP (including footnotes and other disclosures required by GAAP), applied consistent with past practices of the Company, along with a statement setting forth in reasonable detail the computation of 1998 EBITDA, including identification of all excluded items and adjustments and all necessary back up calculations. Buyer shall promptly provide to Seller all information which Seller shall reasonably request in connection with preparation of the EBITDA Financial Statements. Except as otherwise provided in subparagraph (d) below, Buyer shall deliver the Earn-Out Payment to Seller no later than April 30, 1999. (c) Buyer's calculation of 1998 EBITDA shall be used in determining the Earn-Out Payment unless, within thirty (30) days following Seller's receipt of the EBITDA Financial Statements, Seller has given Buyer notice (the "EBITDA Dispute Notice") that Seller disputes Buyer's calculation, which notice shall set forth in reasonable detail the exclusions or calculations being disputed in good faith. In the event an EBITDA Dispute Notice is timely given to Buyer, Seller and Buyer shall have fifteen (15) days to resolve the dispute and if not resolved, the dispute shall be submitted to a nationally recognized "Big Six" accounting firm or its successor (other than auditors used by Seller or Buyer or any Affiliate of either within the past three (3) years, or their successors) chosen by lot (the "EBITDA Arbitrator") which shall be instructed to arbitrate such disputed item(s) and determine 1998 EBITDA within thirty (30) days. The fees and expenses of the EBITDA Arbitrator shall be borne equally by Buyer and Seller. The resolution of disputes by the EBITDA Arbitrator shall be set forth in writing and shall be conclusive and binding upon and non-appealable by the parties, and the determination of 1998 EBITDA shall become final upon the date of such resolution, and may be entered as a final judgment in any court of proper jurisdiction. (d) If an EBITDA Dispute Notice has been delivered in accordance with subparagraph (c) above and the dispute has not been resolved by the Earn-Out due date, (a) the amount not in dispute shall be paid as required hereunder, and (b) the amount, if any, required to be paid as an adjustment shall be paid by Buyer or Seller, as applicable, no later than 10 days after the dispute is resolved, which amount shall bear interest, from May 1, 1999 until paid, at the rate equal to the lower of (i) the maximum rate permitted by Applicable Law or (ii) two percent (2%) plus the Prime Rate of Bank of Canada on May 1, 1999. In addition, in the event that Buyer has not delivered an EBITDA Dispute Notice in accordance with subparagraph (c) above, the amount required to be paid by Buyer pursuant to Section 1.3 hereof shall bear interest, from May 1, 1999 until paid, at the rate described in the previous sentence. (e) All payments required to be made in respect of the Earn-Out Payment shall be made by cashier's check or wire transfer of immediately available funds to an account designated by the payee. (f) For purposes of determining the Earn-Out, in the event that, prior to January 1, 1999, Phoenix U.S. or Phoenix Canada (i) terminates any operation of the -7- Company or any Subsidiary, (ii) sells assets, except in the ordinary course of business, of the Company or any Subsidiary or (iii) sells a controlling interest in the Company or any Subsidiary or merges the Company or any Subsidiary with any other Person (other than an Affiliate) (each such transaction an "Earn-Out Restricted Transaction"), then the 1998 EBITDA shall equal (x) the annualized 1998 EBITDA for such business or assets sold (the "Divested Operations") based on the 1998 EBITDA for the period beginning on January 1, 1998 through the last day of the month prior to the closing of such Earn-Out Restricted Transaction (the "Reference Period") PLUS (y) the 1998 EBITDA contributed by the remainder of the Company and Subsidiaries. 2.5. NET DEBT ADJUSTMENT. 2.5.1. PRELIMINARY EARNED CASH CERTIFICATE. As soon as practicable and in any event not later than five (5) business days prior to the U.S. Closing, KAS will prepare and deliver to Phoenix U.S. a certificate setting forth the Earned Cash of the Company and its Subsidiaries as of December 31, 1997 (or as of the end of the month prior to the Closing Date if the Closing occurs after January 31, 1998) (the "Preliminary Earned Cash"), and shall also include a calculation of the Net Debt Amount as of December 31, 1997 (or as of the end of the month prior to the Closing Date) (the "Preliminary Earned Cash Certificate"). "Earned Cash" means at any particular date, the amount of cash that would be on hand which is not subject to a corresponding liability, determined in accordance with the Company's historical revenue recognition policies as currently applied to each of the contracts of the Company and any Subsidiary as set forth on SCHEDULE 3.6 (the "Company Policies") and equal to: (x) the amount of cash reflected on the consolidated balance sheet of the Company and its Subsidiaries minus the sum of (y) the amount of cash representing customer deposits for services not yet performed by the Company or a Subsidiary and (z) the amount of cash representing advanced payments of reimbursable costs, with respect to which revenue should not be recognized other than in accordance with the Company Policies. 2.5.2. NET DEBT ADJUSTMENT. As soon as practicable following the Closing Date, but not later than ninety (90) days thereafter, Ernst & Young LLP (the "Buyers' Accountant") shall prepare and deliver a certificate proposing the final amount of Earned Cash of the Company and its Subsidiaries as of the Closing Date utilizing the Company Policies, and a calculation of the Net Debt Amount as at such date (the "Earned Cash Certificate"). Deloitte & Touche LLP (the "Sellers' Accountant") shall review the Final Earned Cash Certificate. In the event Buyers' Accountant and Sellers' Accountant cannot agree on the final amount of Earned Cash and the final Net Debt Amount the matter shall be submitted to the EBITDA Arbitrator. The EBITDA Arbitrator shall review the proposed Final Earned Cash Certificate and shall independently verify the accuracy and completeness thereof and shall make such adjustments thereto as it, in its independent judgment, believes appropriate to make such Final Earned Cash Certificate fairly reflect the amount of Earned Cash available on the U.S. Closing Date utilizing the Company Policies. If the Earned Cash as reflected on the Earned Cash Certificate (agreed by the Sellers' Accountant and Buyers' Accountant -8- or determined by the EBITDA Arbitrator) is less than the Preliminary Earned Cash, then KAS shall pay in cash to Phoenix U.S. the amount of the difference (the "Net Debt Adjustment") which shall be treated as a reduction in the U.S. Purchase Price. If the Earned Cash or the Final Earned Cash Certificate is more than the amount of Earned Cash set forth on the Preliminary Earned Cash Certificate, then Phoenix U.S. will pay in cash to KAS the amount of the difference as additional U.S. Purchase Price. The payment, if any, to be made under this Section 2.5.2 shall be made, without interest thereon, within five (5) business days after delivery of the Final Earned Cash Certificate by the Buyers' Accountant to the Parties. The fees and expenses of the Buyers' Accountant in connection with the audit shall be paid by the Buyers, the fees and expenses of the Sellers' Accountants shall be paid by the Sellers, and the Buyers and Sellers shall each pay one half of the fees of the EBITDA Arbitrator. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF KAS AND KURAYA Except as otherwise set forth in any Disclosure Schedule (it being understood and agreed that (a) any item disclosed in a Disclosure Schedule in reference to any particular Section hereof will be deemed to be disclosed for purposes of another Section hereof, even if there is no express cross-reference, so long as such disclosure is made with such specificity that no other explanation or additional information is necessary for a reasonable person to determine that such disclosed item also represents an exception to a representation or warranty contained in such other Section; and (b) the specification of any dollar amount in the representations and warranties contained herein or the inclusion of any specific item in any Disclosure Schedule is not intended to imply that such amounts or higher or lower amounts, or the items so included or other items, are or are not material). KAS and Kuraya, jointly and severally, hereby represent and warrant to the Buyers as follows: 3.1. ORGANIZATION AND STANDING. Each of KAS, the Company, each Subsidiary, and to the Knowledge of KAS, each of KCAS and Bath (a) is duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation as set forth in SCHEDULE 3.1; (b) has all necessary corporate power and authority to carry on its business as it is now being conducted and to own, lease, license or use the properties and assets that it purports to own, lease, license or use; and (c) is duly qualified as a foreign entity in good standing in each jurisdiction where the character of its properties owned or leased or the nature of its activities make such qualification necessary, except, solely as to Bath and KCAS, where the failure to qualify could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. 3.2. AUTHORITY. Each of KAS, Kuraya, IBRD-Rostrum and the Company has all requisite corporate power and authority to execute and deliver this Agreement and each Transaction -9- Document to which it is a party and to perform its respective obligations hereunder and thereunder. This Agreement has been, and each Transaction Document to which it is a party will be prior to the Closing, duly authorized, executed and delivered by each of KAS, Kuraya, IBRD-Rostrum and the Company, and (assuming the due authorization, execution and delivery by the Buyers) this Agreement constitutes, and each Transaction Document to which it is a party when so executed and delivered will constitute, legal, valid and binding obligations of each of KAS, Kuraya, IBRD-Rostrum and the Company enforceable against each of KAS, Kuraya, IBRD-Rostrum and the Company in accordance with their terms except to the extent that enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar law affecting enforcement of creditors' rights generally, and general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). 3.3. NO VIOLATION OF LAW. The execution and delivery by each of KAS, Kuraya, IBRD-Rostrum and the Company of this Agreement and each Transaction Document to which it is a party, and the performance by each of KAS, Kuraya, IBRD-Rostrum and the Company of its respective obligations hereunder or thereunder, does not and will not: (a) violate any provision of the Certificate of Incorporation (or other similar charter instrument) or Bylaws of KAS, Kuraya, IBRD-Rostrum, the Company, any Subsidiary or, to the Knowledge of KAS, KCAS or Bath; (b) except as set forth in SCHEDULE 3.3(B), (i) violate any provision of Applicable Law relating to KAS, Kuraya, IBRD-Rostrum, the Company, any Subsidiary or, to the Knowledge of KAS, KCAS or Bath; (ii) violate any provision under any Court Order, arbitration award, judgment or decree to which KAS, Kuraya, IBRD-Rostrum, the Company or any Subsidiary or, to the Knowledge of KAS, KCAS or Bath is subject; and (iii) require a registration, filing, application, notice, consent, approval, order, qualification or waiver with, to or from any Governmental Authority; or (c) except as set forth in SCHEDULE 3.3(C), (i) require a consent, approval or waiver from, or notice to, any party to a Contract or (ii) result in a breach of or cause a default under any provision of a Contract; except, solely as to KCAS and Bath, where such violation, registration, filing, notice, consent, approval, order, qualification or waiver would not in the aggregate have a Material Adverse Effect. 3.4. CAPITALIZATION. The total authorized capital stock of the Company consists solely of Ten Thousand (10,000) shares of common stock, $.01 par value per share, one (1) of which is issued and outstanding. All issued and outstanding shares of the Company's common stock are validly issued, fully paid and nonassessable and were acquired by KAS pursuant to an exemption from the registration requirements of federal and state securities laws. Except as set forth in SCHEDULE 3.4, there are no outstanding (a) securities convertible into or exchangeable for any capital -10- stock of the Company; (b) options, warrants or other rights to purchase or subscribe to capital stock of the Company or securities convertible into or exchangeable for stock of the Company; or (c) contracts, commitments, agreements, understandings, arrangements, calls, demands or claims of any kind relating to the issuance of any capital stock of the Company, any such convertible or exchangeable securities or any such options, warrants or rights; in each instance other than those, if any, as set forth in SCHEDULE 3.4. KAS is the sole record and beneficial owner of the IBRD-U.S. Shares, free and clear of all liens, encumbrances, charges, adverse claims and restrictions (other than restrictions of general applicability imposed by federal or state securities laws). Prior to the Liquidation, IBRD-Rostrum was the sole record and beneficial owner of all of the issued and outstanding capital stock of each of IBRD-U.K., IBRD-France and IBRD-Germany, in each case, free and clear of all liens, encumbrances, charges, adverse claims and restrictions (other than restrictions of general applicability imposed by federal or state securities laws). All options, warrants or rights set forth in SCHEDULE 3.4 were issued in compliance with Applicable Law. SCHEDULE 3.4 sets forth the sole record and beneficial owners of all of such options, warrants or rights. 3.5. SUBSIDIARIES. (a) The total authorized capital stock of each Subsidiary consists of the number and type of shares of capital stock set forth under Column II of SCHEDULE A opposite the name of such Subsidiary. The number of shares of each Subsidiary that is issued and outstanding is set forth under Column III of SCHEDULE A opposite the name of such Subsidiary. All issued and outstanding shares of each Subsidiary's capital stock are validly issued, fully paid and nonassessable and were acquired by the Company or a Subsidiary pursuant to an exemption from the registration requirements of federal and state securities laws. Each of the IBRD-Europe Shares was issued by the respective IBRD-Europe Subsidiary to IBRD-Rostrum (and will have been issued to the Company upon completion of the Liquidation of IBRD-Rostrum) in compliance with Applicable Law. Except as set forth in SCHEDULE 3.5, there are no outstanding (a) securities convertible into or exchangeable for any capital stock of any Subsidiary; (b) options, warrants or other rights to purchase or subscribe to capital stock of any Subsidiary or securities convertible into or exchangeable for capital stock of any Subsidiary; or (c) contracts, commitments, agreements, understandings, arrangement, calls, demands, or claims of any kind relating to the issuance of any capital stock of any Subsidiary, any such convertible or exchangeable securities or any such options, warrants or rights; in each instance other than those, if any, created by the Buyers. Except as set forth in SCHEDULE 3.5, the Company directly or indirectly owns beneficially and of record all of the issued and outstanding capital stock of each Subsidiary, in each case free and clear of all liens, encumbrances, charges, adverse claims and restrictions (other than restrictions of general applicability imposed by federal or state securities laws). Except as set forth in SCHEDULE 3.5, the Company does not, directly or indirectly, own any stock or other equity interest in any other Person. All options, warrants or rights set forth in SCHEDULE 3.5 were issued in compliance with Applicable -11- Law. SCHEDULE 3.5 sets forth the sole record and beneficial owners of all of such options, warrants or rights. (b) Except as set forth in SCHEDULE 3.5 hereto, to the Knowledge of KAS: (i) the total authorized capital stock of KCAS consists of the number and type of shares of capital stock set forth under Column II of SCHEDULE A; (ii) the number of shares of KCAS that are issued and outstanding is set forth under Column III of SCHEDULE A; (iii) all issued and outstanding shares of each of KCAS' and Bath's capital stock held by the Company or any Subsidiary are validly issued, fully paid and nonassessable and were acquired by the Company or a Subsidiary, as applicable, pursuant to an exemption from the registration requirements of federal and state securities laws; (iv) there are no outstanding (a) securities convertible into or exchangeable for any capital stock of KCAS; (b) options, warrants or other rights to purchase or subscribe to capital stock of KCAS or securities convertible into or exchangeable for capital stock of KCAS; or (c) contracts, commitments, agreements, understandings, arrangement, calls, demands or claims of any kind relating to the issuance of any capital stock of KCAS, any such convertible or exchangeable securities or any such options, warrants or rights; in each instance other than those, if any, created by the Buyers; (v) the Company directly or indirectly owns beneficially and of record that number of issued and outstanding capital stock of, KCAS as set forth in SCHEDULE A, and of Bath, in each case free and clear of all liens, encumbrances, charges, adverse claims and restrictions (other than restrictions of general applicability imposed by federal or state securities laws); (vi) all options, warrants or rights set forth in SCHEDULE 3.5 in respect of KCAS were issued in compliance with Applicable Law; and (vii) SCHEDULE 3.5 sets forth the sole record and beneficial owners of all of such options, warrants or rights in respect of KCAS. 3.6. FINANCIAL STATEMENTS. KAS has delivered to the Buyers: (a) the Company's audited consolidated balance sheets dated December 31, 1996 (the "Company Audited Balance Sheet"), December 31, 1995 and December 31, 1994, including the notes thereto, and the related audited consolidated statements of income and retained earnings and cash flow for each of the fiscal years then ended, together with the report thereon of Deloitte Touche Tohmatsu independent certified public accountants (collectively, the "Company Year-End Financial Statements"); and (b) the Company's unaudited consolidated interim balance sheet (the "Company Interim Balance Sheet") dated September 30, 1997 (the "Company Interim Balance Sheet Date") and the related unaudited consolidated statements of income and retained earnings and cash flow for the nine-month period ended on the Company Interim Balance Sheet Date (collectively, the "Company Interim Financial Statements," and together with the Company Year-End Financial Statements, the "Company Financial Statements"). Except as set forth in SCHEDULE 3.6, the Company Financial Statements (a) are correct and complete and in accordance with the books and records of the Company; (b) have been prepared in accordance with GAAP consistently applied throughout the periods covered thereby; and (c) fairly reflect the financial position of the Company and the Subsidiaries on a consolidated basis as of the respective dates thereof and the results of operations and changes in stockholders' equity and cash flow for the periods then ended, subject in the case of the Company -12- Interim Financial Statements, to normal recurring year-end adjustments, none of which will be material, and the absence of notes. For purposes of financial presentation, the Company recognizes net revenue from its contracts as set forth in SCHEDULE 3.6. The Company backlog (calculated based on fee payments anticipated to be received under letters of intent and legally binding written agreements for the provision of contract research to third parties) ("Backlog") as of September 30, 1997 was as described in SCHEDULE 3.6, as certified by the Company's principal financial officer. 3.7. BOOKS AND RECORDS. All material books of account of the Company and each Subsidiary and other financial records prepared by or on behalf of the Company or any Subsidiary (the "Books and Records") are complete and correct in all respects and fairly reflect in reasonable detail its assets, liabilities and transactions and, where applicable, are in accordance with GAAP (except as otherwise stated therein). Except as set forth in SCHEDULE 3.7, all of the Books and Records have been prepared and maintained in accordance with good business practices and, where applicable, in conformity with GAAP (except as otherwise stated therein) and are in compliance in all respects with Applicable Law. 3.8. ACCOUNTS RECEIVABLE. Except as set forth in SCHEDULE 3.8, all of the accounts and notes receivable of the Company and each Subsidiary as set forth on the Company Audited Balance Sheet or arising since the date thereof (including all of the accounts receivable listed in SCHEDULE 3.8A) (a) are valid and genuine; (b) have arisen only in the ordinary course of business; and (c) except to the extent of any reserves with respect thereto are not subject to valid defenses, set-offs or counterclaims and have been (or will be in the ordinary course of business) billed. SCHEDULE 3.8A sets forth a true, correct and complete list of all accounts receivable as of December 18, 1997 (in respect of IBRD-U.K., IBRD-France and IBRD-Germany) and December 19, 1997 (in respect of the Company and the U.S. Subsidiary). The allowance for doubtful accounts reflected on the Company Audited Balance Sheet and Company Interim Balance Sheet has been determined in accordance with GAAP. Except as set forth in SCHEDULE 3.8 KAS does not know of any facts or circumstances (other than general economic conditions) that are likely to result in any material increase in the uncollectibility of such accounts and notes receivable in excess of any allowance therefor set forth on the Company Interim Balance Sheet. 3.9. NO UNDISCLOSED LIABILITIES. Except as set forth in SCHEDULE 3.9, neither the Company nor any Subsidiary has any liabilities, debts or obligations (whether due or to become due, absolute, accrued, contingent, matured or unmatured), other than those that (a) are disclosed or reserved against on the Company Interim Balance Sheet; (b) have been incurred in the ordinary course of business since the Company Interim Balance Sheet Date; or (c) are disclosed in a -13- Disclosure Schedule. Except as set forth in SCHEDULE 3.9, neither the Company nor any Subsidiary is obligated in respect of any Liability of KCAS or Bath. 3.10. INSURANCE. SCHEDULE 3.10 lists all policies or binders of insurance held by or on behalf of the Company and each Subsidiary, specifying with respect to each policy the insurer, the amount of the coverage (as reflected on the declarations page thereon), the type of insurance, the expiration date, the policy number and any pending claims thereunder, including all insurance policies that, to the Knowledge of Seller, have been maintained by any other Person that may provide any coverage with respect to any Environmental Losses. All such policies are in full force and effect. There is no Default with respect to any such policy or binder, nor has there been any failure to give any notice or present any claim under any such policy or binder in a timely fashion or in the manner or detail required by the policy or binder. Except as set forth in SCHEDULE 3.10, there is no notice of nonrenewal or cancellation with respect to, or disallowance of any claim under, any such policy or binder that has been received by the Company or any Subsidiary within the past twelve (12) months. 3.11. ABSENCE OF CERTAIN CHANGES. Except as set forth in SCHEDULE 3.11, since December 31, 1996 the Company and each Subsidiary has conducted its operations in the ordinary course and there has not occurred any event that, individually or in the aggregate, has had, or reasonably could be expected to have, a Material Adverse Effect, and neither the Company nor any Subsidiary has taken any action or agreed to take any action that, if taken after the date hereof would constitute a breach of Section 5.2 hereof. 3.12. COMPLIANCE WITH LAWS. Except as set forth in SCHEDULE 3.12 the Company and each Subsidiary has complied with, and is in compliance with, all Applicable Law, except for any noncompliance that would not have a Material Adverse Effect. 3.13. GOVERNMENTAL PERMITS. The Company and each Subsidiary has all Governmental Permits of federal, state or local governmental or regulatory bodies that are required to operate their respective businesses (including, without limitation, those required under any Environmental Law or FDA law) and the Company and each Subsidiary is in compliance with the terms and conditions of the Governmental Permits. SCHEDULE 3.13 sets forth a correct and complete list of all Governmental Permits along with their expiration dates, each one of which is currently valid and in full force. The Company and each Subsidiary has filed such timely and complete renewal applications as may be required with respect to its Governmental Permits. No suspension, revocation, cancellation or withdrawal of any of the Governmental Permits has been filed or, to the Knowledge of KAS, is threatened and no cause exists for such suspension, revocation, cancellation or withdrawal. Any Governmental Permits that cannot be transferred in connection with the Transactions are identified in SCHEDULE 3.13. -14- 3.14. TAXES AND TAX RETURNS. (a) The Company and each of its Subsidiaries has duly and timely filed all tax returns required by Applicable Law including all information returns, schedules, forms or other certificates (the "Tax Returns"), and each such Tax Return as amended (if amended prior to November 27, 1997) is true, accurate and complete. The Company and each of its Subsidiaries has paid in full all Taxes for the period covered by such Tax Returns. All Taxes for the period ending on the Closing Date and which are not yet due and payable will have been withheld or reserved for on the Books and Records of the Company and its Subsidiaries, in accordance with GAAP on a consistent basis, or, to the extent that they relate to periods on or prior to the date of the Company Audited Balance Sheet, are reflected as a liability thereon. (b) The Company and each of its Subsidiaries has complied with the requirements of all Applicable Law relating to the payment and withholding of Taxes (including, without limitation, withholding of Taxes pursuant to Section 1441 and 1442 of the Code, or similar provisions under any foreign Applicable Law) and have, within the time and in the manner prescribed by Applicable Law, withheld from employee wages and paid over, in a timely manner, to the proper taxing authorities all amounts required to be so withheld and paid over under Applicable Law. (c) No deficiency for any Taxes has been asserted or assessed against the Company or any of its Subsidiaries that has not been resolved and paid in full or fully reserved for and identified on the Company Audited Balance Sheet and, no deficiency for any Taxes has been proposed in writing to the Company or is otherwise known to the Company that has not been fully reserved for and identified on the Company Audited Balance Sheet. Neither the Company nor any of its Subsidiaries has received any outstanding and unresolved notices from the IRS or any other taxing authority of any proposed examination or of any proposed change in reported information relating to the Company or any such Subsidiary. Except as set forth in SCHEDULE 3.14 (which sets forth the nature of the proceeding, the type of Tax Return, the deficiencies proposed or assessed and the amount thereof, and the taxable year in question), no Action or audit or similar foreign proceedings is pending with regard to any of the Company's or any of its Subsidiaries' Taxes or Tax Returns. (d) No waiver or comparable consent given by the Company or any of its Subsidiaries regarding the application of the statute of limitations with respect to any Taxes or Tax Returns is outstanding, nor, to the Knowledge of KAS, is any request for any such waiver or consent pending. (e) There are no liens or encumbrances of any kind for Taxes upon any assets or properties of the Company or any of its Subsidiaries other than for Taxes not yet due and payable. -15- (f) Neither the Company nor any of its Subsidiaries has requested any extension of time within which to file any Tax Return, which Tax Return has not since been filed. (g) The Company and certain of its Subsidiaries are a party to an agreement dated December 15, 1992 providing for the allocation or sharing of Taxes (the "Tax Sharing Agreement") and no other arrangements, whether or not in writing exist concerning the sharing of tax cost or benefits. (h) Neither of the Company nor any of its Subsidiaries has made any election under Section 341(f) of the Code. (i) Neither the Company nor any of its Subsidiaries has agreed to make, nor is any of them required to make, any adjustment under Section 481(a) of the Code for any period ending after the Closing Date by reason of a change in accounting method or otherwise and neither the Company nor any of its Subsidiaries has any knowledge that the IRS has proposed such adjustment or change in accounting method. (j) None of the assets of the Company or any of its Subsidiaries is required to be treated as owned by any other person pursuant to the "safe harbor lease" provisions of former Section 168(f)(8) of the Code. (k) Neither the Company nor any of its Subsidiaries is a party to any venture, partnership, contract, agreement, understanding or arrangement under which it could be treated as a partner for federal income tax purposes. (l) Other than in respect of a period for which a Tax is not yet due, no state of facts exists or has existed that would constitute grounds for the assessment of any Tax liability with respect to a period that has not been audited by any Governmental Authority. (m) Except as provided in SCHEDULE 3.14, no power of attorney has been granted by the Company or any of its Subsidiaries with respect to any matter relating to Taxes that is currently in force. (n) Neither the Company nor any of its Subsidiaries is or has been a United States real property holding company (as defined in Section 897(c)(2) of the Code) during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code. (o) Neither the Company nor any of its Subsidiaries is a party to any Contract or arrangement that would, nor will the execution of and performance of this -16- Agreement, result in the payment of any "excess parachute payment" within the meaning of Section 280G of the Code. (p) All transactions that could give rise to an understatement of federal income tax (within the meaning of Section 6662 of the Code or any predecessor provision thereof) have been adequately disclosed on the Tax Returns required in accordance with Section 6662(d)(2)(B) of the Code or any predecessor provision thereto. (q) No election under Code Section 338 (or any predecessor provisions) has been made by or with respect to the Company or any of its Subsidiaries or any of their respective assets or properties. (r) No indebtedness of the Company or any of its Subsidiaries is "corporate acquisition indebtedness" within the meaning of Code Section 279(b). (s) The additional representations and warranties set forth on ATTACHMENT A apply with respect to IBRD-U.K. and its Subsidiaries. 3.15. CONTRACTS. SCHEDULE 3.15 sets forth all of the following (collectively, the "Contracts"): (a) written or unwritten contracts, agreements or understandings between the Company or any Subsidiary and any current or former officer, director or employee thereof; (b) notes, mortgages, indentures and other agreements and instruments for money borrowed in excess of $100,000 and guarantees of third-party obligations of $100,000 or more entered into by or binding on the Company or any Subsidiary; (c) joint venture or partnership agreements to which the Company or any Subsidiary is a party; (d) real property leases to which the Company or any Subsidiary is a party; (e) personal property leases to which the Company or any Subsidiary is a party involving total future payments in excess of $100,000; (f) written or unwritten contracts, agreements or understandings to which the Company or any Subsidiary is a party containing covenants of the Company or any Subsidiary not to compete in a line of business or with a Person; -17- (g) contracts granting or permitting any Encumbrances with respect to any assets, rights or capital stock of the Company or any Subsidiary; (h) contracts, licenses or distributorships that relate in whole or in part to any Intellectual Property or Software; (i) representative, sales agency, dealer or distributor contracts; (j) other written or unwritten contracts, agreements, understandings or offers (which if accepted by the other party would be binding upon the parties thereto) involving an estimated total future payment or payments or liability, individually or, with respect to a group of related written contracts with a single third party, taken as a whole, in excess of $100,000 to or by the Company or any Subsidiary; (k) employment or consulting agreements; (l) bonus, profit-sharing, compensation, stock option, severance, pension, retirement, accrued vacation pay, group insurance, welfare arrangements or other plans, agreements, trusts or arrangements for the benefit of employees; or (m) any other material contracts not made in the ordinary course of business. Except as disclosed in SCHEDULE 3.15(B), (i) each of the Contracts listed in SCHEDULE 3.15(A) is valid and enforceable in accordance with its terms, (ii) the Company or the applicable Subsidiary, and to the Knowledge of Seller, the other party(ies) to such Contract are in compliance with the provisions thereof, and are not in default in the performance, observance or fulfillment of any material obligation, covenant or condition contained therein, and no event has occurred that would constitute a Default by the Company or a Subsidiary, or to the Knowledge of Seller, the other party thereto, (iii) no Contract contains any contractual requirement within which there is a reasonable likelihood the Company or any Subsidiary or, to the Knowledge of Seller, any other party thereto will be unable to comply, (iv) no advance payments have been received by the Company or any Subsidiary by or on behalf of any party to any such Contracts for services to be rendered or products to be delivered to such party following the Closing Date, (v) no consent or approval of any party to such Contracts is required for the execution, delivery, consummation and performance of this Agreement, (vi) neither KAS nor any Affiliates of KAS other than the Company and its Subsidiaries is a party to any such Contracts or is entitled to any benefits thereof. All Contracts (i) have been entered into in the ordinary course of business consistent with past practices; (ii) have been priced in the ordinary course of business consistent with past -18- practice; and (iii) when entered into (including, without limitation, when change orders and extensions were given) provide for operating profit margins which in the aggregate are consistent with past practice. Neither the Company nor any Subsidiary has diverted, or will divert, revenue or earnings on a particular contract to Kuraya, IBRD-Japan or any Affiliate of either organized under the laws of Japan. 3.16. PERSONAL PROPERTY. The Company and the Subsidiaries have good and marketable title to all of their properties and assets, including the property and assets reflected on the Company Interim Balance Sheet (except as since sold or disposed of in the ordinary course of business), free and clear of Encumbrances, except (a) as set forth in SCHEDULE 3.16; and (b) for any Encumbrance, that would not have a Material Adverse Effect. 3.17. REAL PROPERTY. Neither the Company nor any Subsidiary owns any real property. SCHEDULE 3.17 sets forth an accurate, correct and complete list of all Leased Real Property, including the street address thereof. The Company or a Subsidiary has been in peaceable possession of the Leased Real Property since the commencement of the original term of the applicable lease thereon, and has performed all material obligations required to be performed by it to date under such lease. Neither the leases identified in SCHEDULE 3.15 nor the leasehold interest of the Company or any Subsidiary with respect to such Leased Real Property is subject to any Encumbrances granted by the Company or Subsidiary or, to the Knowledge of KAS, any third party, except as set forth in SCHEDULE 3.15. 3.18. INTELLECTUAL PROPERTY. (a) SCHEDULE 3.18 sets forth a correct and complete list and description of all Intellectual Property and all Software owned by or licensed to the Company or any Subsidiary and used directly, in whole or in part, in and material to the business of the Company or any Subsidiary, and indicates whether such Intellectual Property and Software is owned or licensed by the Company or any Subsidiary. Except as set forth in SCHEDULE 3.18, the Company or a Subsidiary owns or licenses all material Intellectual Property and Software used directly, in whole or in part, in the business of the Company or any Subsidiary. (b) Except as set forth in SCHEDULE 3.18, either the Company or a Subsidiary owns or is licensed to use or otherwise possesses legally enforceable rights to use all trademarks, service marks, trade names, patents (other than patents that have expired), patent applications and copyrights used in and material to the Company's or a Subsidiary's business as currently conducted. Except as disclosed in SCHEDULE 3.18, neither the Company nor any Subsidiary is infringing on any Person's intellectual property rights. -19- 3.19. LABOR AND EMPLOYMENT MATTERS. Neither the Company nor any Subsidiary is a party to any collective bargaining agreement or currently negotiating any collective bargaining agreement. Except as set forth in SCHEDULE 3.19 or for events that occur after the date hereof in a manner not prohibited by this Agreement, (a) there is no labor strike, slowdown, work stoppage or lockout pending or, to the Knowledge of KAS, threatened against or affecting the Company or any Subsidiary and, during the past five (5) years, there has not been any such action; (b) there are no union claims to represent the employees of the Company or any Subsidiary; and (c) neither the Company nor any Subsidiary is a party to or bound by any collective bargaining or similar agreement with any labor organization. 3.20. EMPLOYEE LICENSES. (a) Each employee of the Company or any Subsidiary who is practicing as a physician, nurse or pharmacist is identified in SCHEDULE 3.20, (b) each such employee is duly licensed and in good standing to practice as a physician, nurse or pharmacist, as the case may be, in each jurisdiction in which such employee renders services for or on behalf of the Company or any Subsidiary where such licensure and standing is required by Applicable Law in order for such person to render such services, (c) none of such employees is or has been subject to any claim in connection with his or her practice as a physician, nurse or pharmacist while employed by the Company or the Subsidiary, as the case may be, and (d) no fact or occurrence exists, which is likely to give rise to the revocation of any such license. 3.21. NON-COMPETITION. SCHEDULE 3.21 sets forth a true and complete list of each employee of the Company or any Subsidiary that has signed non-compete covenants in favor of the Company or the Subsidiary, as the case may be. 3.22. EMPLOYEE BENEFIT PLANS. (a) SCHEDULE 3.22 contains a current, correct and complete list of each Employee Benefit Plan maintained by, or under which, the Company or any Subsidiary has any Liability, whether actual or contingent, to employees of the Company or any Subsidiary or their respective beneficiaries, former employees of the Company or any Subsidiary or their respective beneficiaries, or otherwise in connection with the business of the Company or any Subsidiary. (b) Except as set forth in SCHEDULE 3.22, all Employee Benefit Plans conform (and at all times have conformed) in all material respects to, and are being administered and operated (and have at all time been administered and operated) in material compliance with, the requirements of ERISA, the Code and/or all other Applicable Law. All returns, reports and disclosure statements required to be made under ERISA and the Code with respect to all such Employee Benefit Plans have been timely filed or delivered. There have not been any "prohibited transactions," as such term is defined in Section 4975 of the Code or Section 406 of ERISA, involving any of the Employee Benefit Plans subject to ERISA, that could subject the Company or any Subsidiary to any material penalty or tax imposed under the Code or ERISA. -20- (c) Except as set forth in SCHEDULE 3.22, any Employee Benefit Plan that is intended to be qualified under Section 401(a) of the Code and exempt from tax under Section 501(a) of the Code has been determined by the Internal Revenue Service to be so qualified or an application for such determination is pending. Any such determination that has been obtained remains in effect and has not been revoked, and with respect to any application that is pending, KAS has no reason to suspect that such application for determination will be denied. Nothing has occurred since the date of any such determination that is reasonably likely to affect adversely such qualification or exemption, or result in the imposition of excise taxes or income taxes on unrelated business income under the Code or ERISA with respect to any such Employee Benefit Plan. (d) The Company and the ERISA Affiliates do not sponsor or contribute to, and have not in the past sponsored or contributed to, and have no Liability with respect to, any defined benefit plan subject to Title IV of ERISA or any multi-employer plan (as defined in Section 3(37) of ERISA). Neither the Company nor any ERISA Affiliate has any current or contingent obligation to any multi-employer plan (as defined in Section 3(37) of ERISA). The Company and the Subsidiaries do not have any Liability with respect to any employee benefit plan or arrangement other than with respect to the Employee Benefit Plans listed in SCHEDULE 3.22. (e) There are no pending or, to the Knowledge of KAS, threatened claims by or on behalf of any such Employee Benefit Plans, or by or on behalf of any individual participants or beneficiaries of any such Employee Benefit Plans, alleging any violation in respect of such Employee Benefit Plans of ERISA or any other Applicable Laws or regulations, or claiming benefit payments (other than those made in the ordinary operation of such plans), nor is there, to the Knowledge of KAS, any basis for such claim. Except as set forth in SCHEDULE 3.22, such Employee Benefit Plans are not the subject of any pending (or to the Knowledge of KAS, any threatened) investigation or audit by the Internal Revenue Service, the U.S. Department of Labor or the Pension Benefit Guaranty Corporation or any similar regulatory agency, foreign or domestic. (f) The Company and each Subsidiary has timely made all required payments and contributions under the Employee Benefit Plans including the payment of all insurance premiums. All such payments and contributions have been deducted fully to the extent permitted by Applicable Law by the Company or a Subsidiary for federal income tax purposes. Such deductions have not been challenged or disallowed by any Governmental Entity and KAS has no reason to believe that such deductions are not properly allowable. There have been no accumulated funding deficiencies (as defined in Section 412 of the Code or Section 302 of ERISA) with respect to any Employee Benefit Plan and no request for a waiver from the Internal Revenue Service with respect to any minimum funding requirement under Section 412 of the Code. The Company and each Subsidiary has not incurred any Liability for any tax, excise tax, penalty or fee with respect to any Employee Benefit Plan, and no event has occurred and no circumstance exists or has existed that could give rise to any such Liability. -21- (g) Except as set forth in SCHEDULE 3.22, the execution of and performance of the Transactions contemplated by this Agreement will not (either alone or upon the occurrence of any additional or subsequent events) result in any payment, acceleration, vesting or increase in benefits with respect to any employee or former employee of the Company or any Subsidiary. (h) Neither the Company nor any Subsidiary maintains any plan or arrangement that provides post retirement medical benefits, post retirement death benefits or other post retirement welfare benefits, other than to the extent required by Part 6 of Title I of ERISA. (i) Neither the Company nor any Subsidiary maintains or contributes to, nor has maintained or contributed to any "welfare benefit fund" (within the meaning of Section 419 of the Code). (j) Any Employee Benefit Plan that is a group health plan (within the meaning of Section 4980B(g)(2) of the Code) complies and has been administered in material respects in accordance with all of the applicable requirements of Section 4980B of the Code, Part 6 of Title I of ERISA, Title XXII of the Public Health Service Act, the Social Security Act and all other Applicable Law. (k) Any Employee Benefit Plan that is a group health plan (within the meaning of Section 4980D(f)(1) of the Code) complies and has been administered in material respects in accordance with all of the applicable requirements of Subtitle K of the Code, Part 7 of Title I of ERISA, the Public Health Service Act and all other Applicable Law, and (l) Neither the Company nor any ERISA Affiliate has contributed to a non-conforming group health plan (as that term is defined in Code section 5000(c)) or incurred any tax Liability under Code section 5000(a). 3.23. LEGAL PROCEEDINGS AND COMPLIANCE WITH LAWS; ENVIRONMENTAL MATTERS. (a) Except as set forth in SCHEDULE 3.23, there is no Action that is pending or, to the Knowledge of KAS, threatened against the Company or any Subsidiary, or relating to the Transactions, nor to the Knowledge of Seller, are there any reasonable grounds for any such Action. There has been no Default under any Applicable Law relating to the operation of the Company or any Subsidiary, including Environmental Law, and the Company and each Subsidiary has not received any notices from any governmental entity regarding any alleged Defaults under any Applicable Law. Except as set forth in SCHEDULE 3.23, the Company and each Subsidiary has not received any notice relating to the business or the Leased Real Property alleging any violation of any Environmental Law or any written request for information from any governmental agency or other -22- Person pursuant to any Environmental Law. The Company and each Subsidiary is in compliance with the terms and conditions of all Governmental Permits required under any Environmental Law or relating to any Hazardous Substance. Except as set forth in SCHEDULE 3.23, neither the Company nor any Subsidiary is a party to any Court Order, nor, to the Knowledge of Seller, is there any Court Order that might affect the Transactions. There has been no Default by the Company or any Subsidiary with respect to any Court Order applicable to the Company or any Subsidiary. (b) Without limiting the generality of Section 3.23(a), there has not been any Environmental Condition (i) at any property or premises at which the business of the Company or any Subsidiary has been conducted, (ii) at any property owned, leased or operated at any time by the Company or any Subsidiary or any predecessor of any of them, or (iii) at any property at which Hazardous Substances have been deposited or disposed by or at the behest or direction of any of the foregoing, nor has the Company or any Subsidiary received written notice of any such Environmental Condition. "Environmental Condition" means any condition or circumstance, including the presence of Hazardous Substances, whether created by the Company or any Subsidiary or any other Person, at or relating to any such property or premises that (x) requires abatement or correction under an Environmental Law, (y) gives rise to any civil or criminal liability on the part of the Company or any Subsidiary under an Environmental Law, or (z) has created a public or private nuisance. To the Knowledge of KAS, the Leased Real Property does not contain any: (A) underground storage tanks, (B) underground injection wells; (C) septic tanks in which process wastewater or any Hazardous Substances have been disposed; (D) asbestos; (E) equipment using polychlorinated biphenyls; or (F) drums buried in the ground. (c) SCHEDULE 3.23 identifies all environmental reports, studies, assessments, analyses or any other related documents in the possession or custody or under the control of KAS relating to any Environmental Condition, the Company or any Subsidiary or the Leased Real Property, true and complete copies of which have been delivered to the Buyers. 3.24. COMPENSATION ARRANGEMENTS; BANK ACCOUNTS; OFFICERS AND DIRECTORS. SCHEDULE 3.24 hereto sets forth the following information: (a) the names and current annual salary, including any bonus, if applicable, of all present officers and employees of the Company or the Subsidiaries whose current annual salary, including any promised, expected or customary bonus, equals or exceeds $80,000, together with a statement of the full amount of all remuneration paid during the twelve (12) month period preceding the date hereof and currently payable by the Company and the Subsidiaries to each such person and to any director of the Company or the Subsidiaries; (b) the name of each bank in which the Company or any Subsidiary has an account or safe deposit box, the identifying numbers or symbols thereof and the names of all persons authorized to draw thereon or the have access thereto; and -23- (c) the names and titles of all directors and officers of the Company and of each Subsidiary and of each trustee, fiduciary or plan administrator of each Employee Benefit Plan. 3.25. KAS'S BROKERS. Except as set forth in SCHEDULE 3.25, (a) no broker, finder or investment banker has acted directly or indirectly for KAS or any Affiliate thereof in connection with this Agreement or the transactions contemplated hereby; and (b) no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in respect thereof based in any way on agreements, arrangements or understandings made by or on behalf of KAS or any Affiliate thereof. 3.26. CUSTOMERS AND SUPPLIERS. Except as set forth in SCHEDULE 3.26 KAS has used its reasonable business efforts to maintain and currently maintains, good working relationships with all of its customers. SCHEDULE 3.26 contains lists of the names of each of the twenty customers that, for each of the years ended December 31, 1995 and 1996 and for the nine months ended September 30, 1997, were the largest dollar volume customers of the Company or the Subsidiaries. Except as specified in SCHEDULE 3.26, none of such customers has given the Company or any Subsidiary notice terminating, canceling or threatening to terminate or cancel any contract or relationship with the Company or any Subsidiary. To the Knowledge of Seller, no major customer intends to cease doing business with the Company or any Subsidiary or, after the Closing, with the Buyers, or to alter materially the amount of business done with the Company or any Subsidiary or the Buyers due to the consummation of the Transactions or any other reason. 3.27. CONDITION OF ASSETS. All Leased Real Property and tangible personal property of the Company and each Subsidiary are suitable for the purposes for which they are used, are in good operating condition and repair, reasonable wear and tear excepted, are usable in the ordinary course of business, are free from any known defects, except such minor defects that would not have a Material Adverse Effect, individually or in the aggregate, and conform in all material respects to all Applicable Law relating to their construction, use and operation. Any Software used by the Company and each Subsidiary, together with all know-how and processes used in connection therewith, functions as intended and is in machine-readable form. 3.28. COMPLETENESS AND ACCURACY OF INFORMATION. All information set forth in any Schedule hereto is true and correct. No representation or warranty by KAS or Kuraya in any Transaction Document, and no information contained therein or otherwise delivered by or on behalf of KAS or Kuraya to the Buyers in writing in connection with the Transactions, including the Company Financial Statements, contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements contained herein or therein not misleading. All Contracts, permits and other documents and instruments furnished or made available to the Buyers by KAS or Kuraya, when so furnished or made available are or will be true, complete and -24- accurate originals or copies of originals and include all amendments, supplements, waivers and modifications thereto. There is no fact, development or threatened development (excluding general economic factors affecting business in general) that KAS or Kuraya has not disclosed to the Buyers in writing that has or, so far as KAS or Kuraya can now foresee, may have, a Material Adverse Effect. To the Knowledge of KAS, except as set forth in SCHEDULE 3.28, there is no fact, development or threatened development (excluding general economic factors affecting business in general) that KAS or Kuraya has not disclosed to the Buyers in writing that has or, may have, a Material Adverse Effect in respect of KCAS or Bath. 3.29. IBRD JAPAN. Except as set forth in SCHEDULE 3.29, IBRD Japan, a wholly owned subsidiary of Kuraya ("IBRD Japan"), does not conduct operations in competition with, or otherwise in conflict with, the business of the Company and the Subsidiaries. IBRD Japan currently does not use any property belonging to the Company or any of the Subsidiaries. There are no obligations of IBRD Japan to the Company or any Subsidiary, and no obligations of the Company or any Subsidiary to IBRD Japan. 3.30. NO IMPLIED REPRESENTATIONS. Notwithstanding anything contained herein to the contrary, it is the explicit intent of each party hereto that neither KAS nor any Affiliate thereof is making or has made any representation or warranty whatsoever, express or implied, beyond those expressly given by KAS or Kuraya herein, including but not limited to any implied warranty or representation as to the future business, results of operations, financial condition or prospects of the Company or any Subsidiary or as to the value, condition, merchantability or suitability of any of the properties or assets of the Company or any Subsidiary. 3.31. TRANSACTIONS WITH RELATED PARTIES. Except as disclosed in SCHEDULE 3.31, no Related Party (as hereinafter defined) has: 1. borrowed money or loaned money to the Company or any Subsidiary which remains outstanding; 2. any contractual or other claim, express or implied, of any kind whatsoever against the Company or any Subsidiary (other than solely by reason of his or her employment with the Company); 3. had any interest in any property or assets used by the Company or any Subsidiary in their businesses; or 4. engaged in any other transaction with the Company, any Subsidiary (other than employment relationships), any Affiliate of the Company or any Subsidiary, or any customer, contractor or subcontractor. -25- As used herein, a "Related Party" means KAS, Kuraya, the Company or IBRD Japan, any of the officers, directors or employees of Kuraya, KAS, the Company, any Subsidiary, IBRD Japan or any Affiliate of any of the foregoing, or any Affiliate or relative of Kuraya, KAS, the Company, any Subsidiary or IBRD Japan, or any of their respective officers, directors or employees, or any business or entity in which Kuraya, KAS, the Company any Subsidiary or any Affiliate, associate or relative of any such Affiliates or associates has any direct or material indirect interest. 3.32. IBRD-EUROPE COMPANIES. The representations and warranties set forth on ATTACHMENT B hereto are incorporated herein by reference and made a part hereof. 3.33. CLINICAL TRIALS. Except as set forth in SCHEDULE 3.33, all clinical trials conducted by the Company or any Subsidiary have been conducted in compliance with good clinical practices and Applicable Law, including, but not limited to, Title 21 of the United States Code of Federal Regulations (particularly subchapters A, D and F) and the United States Food, Drug and Cosmetic Act (particularly 21 U.S.C. subchapter V), and there have been no deaths or serious injuries related to any drug or biologic being studied in any such clinical trials. Except as set forth in SCHEDULE 3.33, to the Knowledge of KAS all services provided by KCAS and Bath in clinical trials have been provided in compliance with good laboratory practices and Applicable Law. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE BUYERS The Buyers jointly and severally represent and warrant to KAS as follows: 4.1. ORGANIZATION AND STANDING. Phoenix U.S. (a) is duly incorporated, validly existing and in good standing under the laws of Delaware; (b) has all necessary corporate power and authority to carry on its business as it is now being conducted and to own or use the properties and assets that it purports to own or use; and (c) is duly qualified as a foreign entity in good standing in each jurisdiction where the character of its properties owned or leased or the nature of its activities make such qualification necessary, except where the failure to be so qualified or licensed would not have a Material Adverse Effect. Phoenix Canada is (a) is duly incorporated, validly exists and is in good standing under the Canada Business Corporations Act and (b) has all necessary corporate capacity and power to own and lease its property and assets and to carry on the business now conducted by it. 4.2. AUTHORITY. Each Buyer has all requisite corporate power and authority to execute and deliver this Agreement and each Transaction Document to which it is a party and to perform its obligations hereunder and thereunder. This Agreement has been, and each Transaction Document to which it is a party will be prior to the Closing, duly authorized, executed and delivered by each -26- Buyer, and (assuming the due authorization, execution and delivery by KAS) this Agreement constitutes, and each Transaction Document to which it is a party when so executed and delivered will constitute, the legal, valid and binding obligations of each Buyer enforceable against each Buyer in accordance with its terms except to the extent that enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws affecting enforcement of creditors' rights generally and general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). 4.3. NO VIOLATION OF LAW. The execution and delivery by each Buyer of this Agreement and each Transaction Document to which it is a party, and the performance by each Buyer of its respective obligations hereunder or thereunder, does not and will not: (a) violate any provision of the Certificate of Incorporation or Bylaws of either Buyer; (b) (i) violate any provision of Applicable Law relating to either Buyer; (ii) violate any provision of any Order, arbitration award, judgment or decree to which either Buyer is subject; or (iii) require a registration, filing, application, notice, consent, approval, order, qualification or waiver with, to or from any Governmental Authority, except under the HSR Act or as set forth in SCHEDULE 4.3(B); except in either case where such violation or the failure to comply with such requirement would not have a Material Adverse Effect; or (c) require a consent, approval or waiver from, or notice to, any party to any material contract to which either Buyer or any Affiliate thereof is a party which has not been obtained or sent, as the case may be, or result in a breach of or cause a default under any provision of any such contract, except where such breach would not have a Material Adverse Effect. 4.4. THE BUYERS' BROKERS. Except as set forth in SCHEDULE 4.4, (a) no broker, finder or investment banker has acted directly or indirectly for either Buyer or any Affiliate thereof in connection with this Agreement or the transactions contemplated hereby; and (b) no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in respect thereof based in any way on agreements, arrangements or understandings made by or on behalf of either Buyer or any Affiliate thereof. 4.5. INVESTMENT INTENTION. Each Buyer has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the Transactions. Each Buyer is acquiring its respective Shares for investment only, and not with a view toward or for sale in connection with any distribution thereof, or with any present intention of distributing or selling any of its respective Shares. Each Buyer understands that the transactions contemplated hereby have not been, and will not be, the subject of a registration statement filed under the Securities Act, or qualified under applicable states securities law, by reason of a specific exemption -27- from the registration provisions of the Securities Act and the qualification provisions of the applicable state securities laws. Each Buyer understands that none of the Shares may be resold unless such resale is registered under the Securities Act and qualified under applicable state securities laws, or an exemption from such registration and qualification is available. 4.6. SECURITIES FILINGS. The Buyers have made available to KAS a complete and accurate copy of each report, schedule, registration statement and definitive proxy statement filed by Phoenix Canada with the Ontario Securities Commission or the Quebec Securities Commission (each, a "Canadian Securities Commission") on or after January 1, 1996 (the "Phoenix Securities Reports"), which are all the forms, reports and documents required to be filed by Phoenix Canada with either Canadian Securities Commission since December 31, 1995. The Phoenix Security Reports (i) complied in all material respects with the requirements of the Ontario or Quebec securities laws, as the case may be, at and as of the times they were filed (or, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) and (ii) did not at and as of the time they were filed (or, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 4.7. FINANCIAL STATEMENTS. Each of the sets of financial statements (including, in each case, any related notes thereto) contained in Phoenix Security Reports were prepared in accordance with generally accepted accounting principles of Canada applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto) and fairly presents the consolidated financial position of Phoenix Canada and its subsidiaries as at the respective dates thereof and the consolidated results of its operations and cash flows for the periods indicated. Except for changes in the ordinary course of business, since August 31, 1997, there has not occurred any event that, individually or in the aggregate, has had, or reasonably could be expected to have, a Material Adverse Effect. ARTICLE 5 COVENANTS AND AGREEMENTS OF KAS 5.1. REQUIRED ACTIONS. Except as otherwise agreed by the Buyers in writing, between the date of this Agreement and the Closing Date and as contemplated in this Agreement, KAS and Kuraya shall, and KAS and Kuraya shall cause the Company to: (a) subject to reasonable conditions to avoid disruption of business activities, give to the Buyers and their counsel, accountants, consultants and other representatives, prior to the Closing Date, upon reasonable notice and during normal business hours, reasonable access to communicate with all employees who are project managers and project accountants (those -28- responsible for accruing revenue for each project) and to all employees and officers senior to such project managers and project accountants of the Company and each Subsidiary, provided, however that the Buyers shall use commercially reasonable efforts to minimize any potential disruptive affects of such access by, for example, limiting the number of representatives seeking such access, and give to the Buyers and their counsel, accountants, consultants and other representatives, at the Buyers' sole expense and risk, upon reasonable notice and during normal business hours, full access to such properties (including the right to investigate the Leased Real Properties and inspect and copy all relevant documents and records relating to any Environmental Losses or other environmental matters), books, accounts, contracts, records and affairs as are relevant to the Company and each Subsidiary and to TAP Holdings, Inc., and furnish or otherwise make available to the Buyers all such information concerning the Company and the Subsidiaries as either Buyer may reasonably request; provided that notwithstanding the foregoing (i) the confidentiality of any data or information so acquired shall be maintained as confidential by the Buyers and their representatives in accordance with the Confidentiality Agreement; (ii) in no event shall the Buyers or their counsel, accountants, consultants or other representatives be entitled to contact any other employees, vendor, or customer (except for TAP or any current customer of the Buyers) of the Company or a Subsidiary or enter onto any of the premises of the Company or a Subsidiary, without the prior consent of KAS (it being acknowledged by the Buyers that Seller desires to restrict Buyers' access to the Company's and the Subsidiaries' employees so as to prevent the disruption of the Company's and the Subsidiaries' respective workforces, but that Seller shall endeavor to make access to such employees available to the Buyers to the extent that doing so will not result in such disruption); and (iii) the Buyers and their counsel, accountants, consultants and other representatives shall use all reasonable efforts to refrain from imposing any undue burden upon the Company and any Affiliate thereof and from interfering with the Company's and any such Affiliate's operations while conducting its due diligence activities; (b) operate the business of the Company and each Subsidiary only in the usual, regular and ordinary manner as such business was conducted prior to the date hereof and, to the extent consistent with such operation, use its reasonable efforts until the Closing Date to (i) preserve and keep intact the business of the Company and each Subsidiary, and (ii) preserve its relationships with customers and others having business dealings with the Company and each Subsidiary; (c) maintain the assets of the Company and each Subsidiary, whether owned or leased, in good repair, order and condition, in accordance with manufacturers' instructions and the Company's and each Subsidiary's past practice (reasonable wear and tear excepted), maintain the insurance policies or binders referred to in SCHEDULE 3.10 in accordance with past practice and notify the Buyers of any material changes in the terms of the insurance policies or binders referred to in SCHEDULE 3.10; (d) maintain the Books and Records in the usual, regular and ordinary manner, on a basis consistent with past practice; -29- (e) comply in all material respects with all Applicable Law relating to the Company and each Subsidiary and to the conduct of the operations of the business and all Applicable Law in connection with the execution, delivery and performance of the Transaction Documents or affecting the Transactions; (f) promptly advise the Buyers in writing of the commencement or, where to the Knowledge of Seller it exists, the threat of any Action against or involving the Company or any Subsidiary or affecting the Transactions or of the occurrence of any development (exclusive of general economic factors affecting business in general) of a nature that has or may have a Material Adverse Effect; (g) promptly advise the Buyers in writing of any event or development that occurs that (i) had it existed or been known on the date hereof would have been required to be set forth or disclosed in or pursuant to this Agreement; (ii) would cause any of the representations and warranties of KAS contained herein to be inaccurate or otherwise misleading or would result in the breach in any material respect by KAS of any of its representations, warranties, covenants or agreements hereunder; or (iii) gives KAS any reason to believe that any of the conditions set forth herein applicable to KAS will not be satisfied; (h) perform all the material obligations and satisfy all material liabilities of KAS relating to the Company and each Subsidiary in accordance with the past practice of KAS; (i) provide to the Buyers all environmental reports, studies, assessments, analyses and any other related documents in the Company's, any Subsidiaries', KAS's or Kuraya's possession relating to any Environmental Condition, the business of the Company and each Subsidiary or the Leased Real Property, and cooperate with the Buyers in conducting an environmental assessment of any Environmental Condition, the business of the Company and each Subsidiary and the Leased Real Property, including physical inspection of the Leased Real Property and the operations of the business of the Company and each Subsidiary, review of all relevant records in the possession or custody or under the control of KAS, review of relevant governmental agency records and contact with governmental agency personnel and conduct of sampling activities and any other investigatory activities, all of a scope satisfactory to the Buyers (the "Environmental Assessment"), the costs of which shall be borne by the Buyers; (j) pay all accounts and trade payables in the ordinary course of business and consistent with past practice; collect all accounts receivable in the ordinary course of business and consistent with past practice; and continue to recognize revenues in accordance with the Company Policies; and -30- (k) use its reasonable efforts to obtain in writing as promptly as possible all waivers, approvals and consents, required to be obtained by KAS in order to effectuate the Transactions and deliver to the Buyers copies of such waivers, approvals and required consents. In respect of Section 5.1(i), the Buyers shall, jointly and severally, indemnify each Seller Indemnified Party (as defined in Section 10.4) from, against and in respect of, any Losses incurred by such Seller Indemnified Party directly caused by the performance of the Environmental Assessment by the Buyers and their representatives. In respect of Section 5.1(j), the Company shall provide to the Buyers on a weekly basis prior to the Closing Date beginning on January 15, 1998 a schedule providing aging schedules by accounts payable and accounts receivable. 5.2. PROHIBITED TRANSACTIONS. Except as otherwise contemplated herein or as set forth in SCHEDULE 5.2, from the date hereof through the Closing Date, KAS and Kuraya shall not without the prior written consent of the Buyers (which consent shall not be unreasonably withheld), cause or suffer the Company or any Subsidiary to do or agree to do any of the following: (a) incur any new obligations for borrowed money, except for working capital borrowings and other indebtedness incurred in the ordinary course of business; (b) issue or sell any equity securities or securities convertible into equity securities including, without limitation, any options, rights, puts, calls or warrants; (c) amend its Certificate of Incorporation (or similar charter document) or Bylaws in any material respect; (d) mortgage, pledge or otherwise encumber any of its properties or assets or sell, transfer or otherwise dispose of any of its properties or assets, except in each case in the ordinary course of business; (e) terminate or materially amend any Contract, except in the ordinary course of business; (f) waive any material right or forebear any material debt or release any material claim, except in each case in the ordinary course of business; (g) change in any material respect the character of the business, including, without limitation, closing any office or facility used, in whole or in part, by KAS in the conduct of the operations as of the date hereof; -31- (h) subject to lien, security interest or any other Encumbrance any of the assets or capital stock of the Company or any Subsidiary, except for (i) purchase money security interests arising in the ordinary course of business of no more than $50,000 individually or $150,000 in the aggregate, and (ii) Taxes not yet due and payable; (i) make any capital expenditure involving in any individual case more than $20,000; (j) increase or commit to increase the rate of compensation paid, or pay any bonus, except for those increases or bonuses planned, in the ordinary course of business, or establish or adopt any new pension or profit-sharing plan, deferred compensation agreement or employee benefit arrangement of any kind whatsoever; (k) declare or make any distribution or payment in respect of the Company's or any Subsidiary's capital stock by way of dividend, purchase or redemption of shares or otherwise or make any extraordinary distribution; (l) except as may be required by Applicable Law or as may be necessary to preserve an Employee Benefit Plan's qualified status under Section 401 of the Code, adopt, terminate, amend, extend, or otherwise change any Employee Benefit Plan, and KAS shall give the Buyers prior written notice of the Company's or any Subsidiary's intention to take any such action required by Applicable Law or necessary to continue the qualified status of any Employee Benefit Plan; (m) except as required by Applicable Law, publicize, advertise or announce to any third party, except as required pursuant to this Agreement to obtain a required consent, the entering into of the Transaction Documents or the terms of the Transaction Documents or the Transactions; or (n) enter into any new contract for services with a value in excess of $500,000 other than the offers listed in SCHEDULE 3.15. 5.3. EFFORTS TO CLOSE. From the date hereof through the Closing Date, KAS and Kuraya shall use its reasonable efforts to take, or cause to be taken, all actions, and shall do, or cause to be done, all things necessary, proper or advisable to consummate and make effective as promptly as practicable the Transactions (including, without limitation, using its reasonable efforts to satisfy the Buyers' conditions to Closing), and shall cooperate with the Buyers in connection with the foregoing. 5.4. EXPENSES. KAS and Kuraya shall bear all expenses incurred on behalf of KAS, Kuraya, the Company and each Subsidiary in connection with the preparation, execution and -32- performance of this Agreement and the Transactions, including, without limitation, all fees and expenses of their respective agents, representatives, brokers, counsel and accountants. 5.5. SUPPLEMENTS TO SCHEDULES; COVENANTS. If prior to the Closing Date but after the date hereof KAS shall become aware of any event or condition that causes any of its representations or warranties herein to be inaccurate or become aware that any of its representations or warranties herein was inaccurate when made, KAS shall promptly notify the Buyers in writing (the "Supplemental Notice"). KAS may thereafter (prior to but not on or following the Canada Closing Date) supplement the Disclosure Schedule to account for such inaccuracy and promptly will deliver the revised Disclosure Schedules to the Buyers. In respect of any Schedule which has been revised to disclose information relating to periods prior to the date hereof, the Buyers shall then at their sole discretion have the option to terminate the Agreement, or proceed to the Closings. If the Buyers determine to proceed to the Closings, then the indemnification obligations of KAS and Kuraya under Section 10.2(i) shall be limited and reduced to the extent of any Losses resulting from the event or condition described in the Supplemental Notice. In respect of any Schedule which has been revised to disclose information relating to the period after the date hereof, Buyers' only right shall be to terminate this Agreement if such information could reasonably be expected to result in a Material Adverse Effect. If the Buyers determine to proceed to the Closings, then the indemnification obligations of KAS and Kuraya under Section 10.2(i) as to such information shall be limited and reduced to the extent of any Losses resulting from the event or condition described in the Supplemental Notice. 5.6. FURTHER ASSURANCES. KAS and Kuraya shall execute such documents and other papers and take such further actions as may be reasonably required or desirable to carry out the provisions hereof and the transactions contemplated hereby. 5.7. HSR ACT AND ISRA. KAS and Kuraya shall promptly take all such action as may be necessary, desirable or convenient to satisfy the requirement of filing notification under (a) the HSR Act and the rules of the FTC thereunder and to comply at the earliest practicable date with any request for additional information received by them from the FTC or from Justice pursuant to the HSR Act. KAS shall promptly file an application with the New Jersey Department of Environmental Protection for a decision that ISRA is not applicable to the Company's New Jersey operations and in the event ISRA is applicable to comply with ISRA (including entering into a remediation or similar agreement). KAS shall use all reasonable efforts to assist the Buyers in complying with its obligations under Section 6.4 hereof. 5.8. NO SOLICITATION OF TRANSACTIONS. KAS shall not directly or indirectly solicit encourage, initiate or hold discussions or negotiations with, provide any non-public information to, or enter into any agreement with, any Person (other than the Buyers and their employees, representatives and agents) with respect to a merger, consolidation, sale of substantial amount of assets, sale of securities or acquisition of beneficial ownership of the Company or any Subsidiary. -33- 5.9. COOPERATION WITH FINANCING; CAPITAL CONTRIBUTION. KAS and Kuraya hereby agree, and agree to use their reasonable efforts to cause Deloitte & Touche, to cooperate with Phoenix Canada, at the request and sole expense of Phoenix Canada, its underwriters, accountants and advisors in connection with their efforts in regard to any public offering of securities of Phoenix Canada or any Affiliate after the Closing Date. Simultaneously with the Closing, Seller shall cause the capital contribution or loan received by the Company pursuant to Section 7.8 hereof to be used to pay off all amounts outstanding under the obligations identified in SCHEDULE 7.8. 5.10. LIQUIDATION. No later than five business days after the execution of this Agreement, IBRD-Rostrum shall adopt a plan of liquidation, as defined for purposes of section 332 of the Code, which will provide for the distribution of all of its assets and liabilities to IBRD-Rostrum prior to the Canadian Acquisition. Within five business days after the adoption of such plan, KAS shall prepare Internal Revenue Service Form 966, with attachments and provide it to Phoenix Canada for its review and approval, which shall not be unreasonably withheld. Unless Phoenix Canada objects, KAS shall file such form on the business day before the Canada Closing. No later than the business day before the Canadian Acquisition, IBRD-Rostrum shall, pursuant to the plan of liquidation, distribute all of its assets and liabilities to the Company, in complete liquidation of IBRD-Rostrum. 5.11. PROFESSIONAL LIABILITY INSURANCE POLICY. The Company, KAS, Kuraya and IBRD-Rostrum shall, and shall cause the Subsidiaries to, execute all certificates reasonably required by the Buyers and take all other actions reasonably necessary, to enable Buyers' to obtain the Professional Liability Insurance Policy. ARTICLE 6 COVENANTS AND AGREEMENTS OF THE BUYERS 6.1. EFFORTS TO CLOSE. From the date hereof through the Closing Date, the Buyers shall use reasonable efforts to take, or cause to be taken, all actions, and shall do, or cause to be done, all things necessary, proper or advisable to consummate and make effective as promptly as practicable the Transactions (including, without limitation, using reasonable efforts to satisfy KAS conditions to the Closings), and shall cooperate with KAS in connection with the foregoing. 6.2. EXPENSES. The Buyers shall bear all expenses incurred on behalf of the Buyers in connection with the preparation, execution and performance of this Agreement and the Transactions, including, without limitation, all fees and expenses of their respective agents, representatives, counsel, brokers and accountants. -34- 6.3. FURTHER ASSURANCES. The Buyers shall execute such documents and other papers and take such further actions as may be reasonably required or desirable to carry out the provisions hereof and the transactions contemplated hereby. 6.4. HSR ACT. The Buyers shall promptly take all such action as may be necessary, desirable or convenient to satisfy the requirement of filing notification under the HSR Act and the rules of the FTC thereunder and to comply at the earliest practicable date with any request for additional information received by it from the FTC or from Justice pursuant to the HSR Act. The Buyers shall use all reasonable efforts to assist KAS in complying with its obligations under Section 5.7 hereof. 6.5. RECORDS. For a period of six (6) years after the Closings, the Buyers shall cause the Company and each Subsidiary (i) to maintain in an orderly and businesslike fashion all books, records and data in such Person's possession on the Closing Date; (ii) to permit KAS and each of its Affiliate's employees, agents and representatives to have reasonable access at KAS expense to such books, records and data in connection with the preparation of KAS or such Affiliate's financial reports, tax returns, tax audits and the defense or prosecution of litigation (including arbitration); and (iii) to provide KAS and its Affiliates with reasonable assistance at KAS's expense (but only for the Buyers' documented, out-of-pocket expenses that have been pre-approved by KAS) by the provision of employees of the Company or a Subsidiary (as applicable) to act as witnesses and to prepare documents, reports and other information by KAS and its Affiliates in support of activities described in clause. 6.6. CONFIDENTIALITY AGREEMENT. Until the Closing Date, the letter agreement dated October 31, 1997 between Merrill Lynch, Pierce, Fenner & Smith, Inc.(whose rights thereunder have been assigned to the Company) and Phoenix Canada (the "Confidentiality Agreement") shall continue in full force and effect in accordance with its terms. 6.7. GUARANTIES. After the Closing Date, the Buyers shall use commercially reasonable efforts to cause each of the landlords set forth in SCHEDULE 6.7 hereto to release Kuraya from its guaranty of the leases set forth in SCHEDULE 6.7 by offering to substitute either or both Buyers as guarantors. After the Closing Date, the Buyers shall, jointly and severally, indemnify Kuraya from, against and in respect of, any Losses incurred by Kuraya under such guaranties for events after the Closing Date. In the event KCAS subsequent to the Closing requires Kuraya to provide a guaranty in favor of KCAS in accordance with the Purchase Option Agreement, then the Buyers shall use commercially reasonable efforts to have Kuraya released from such guaranty or the obligation to provide such guaranty, by offering to substitute either or both Buyers as guarantors, or in the alternative, the Buyers shall jointly and severally, indemnify Kuraya, from, against and in respect of, any Losses incurred by Kuraya under such guaranty. -35- ARTICLE 7 CONDITIONS TO THE OBLIGATIONS OF KAS The obligation of KAS and Kuraya to enter into and complete the Closings is subject to the fulfillment on or prior to the Closing Date of the following conditions, any one or more of which may be waived by KAS, in its sole and absolute discretion. 7.1. REPRESENTATIONS AND COVENANTS. The representations and warranties of the Buyers contained herein shall be true and correct in all material respects on and as of the Closing Date as though made at and as of that date (except for representations and warranties, if any, made as of a specified date, which shall be true and correct as of the specified date), and the Buyers shall have delivered to KAS a certificate to such effect. 7.2. COMPLIANCE WITH COVENANTS. The Buyers shall in all material respects have performed and complied with all terms, agreements, covenants and conditions of this Agreement to be performed or complied with by it on or prior to the Closing Date, and the Buyers shall have delivered a certificate to that effect. 7.3. CORPORATE ACTION. The Buyers shall have delivered to KAS (a) certified copies of the Buyers' charter documents and resolutions of the Buyers' Boards of Directors, in form reasonably satisfactory to KAS, approving the execution and delivery of this Agreement and each Transaction Document to which it is a party and the performance of the Buyers' obligations hereunder and thereunder; (b) a certificate of good standing with respect to the Buyers issued by appropriate Governmental Authority of the Buyers' jurisdiction of incorporation showing that each of the Buyers is in good standing in such jurisdiction, dated within ten (10) business days prior to the Closings; and (c) an incumbency certificate of each Buyer, certified by the Secretary or Assistant Secretary of each Buyer. 7.4. LITIGATION. On the Closing Date, there shall be no Action pending or threatened pertaining to the Transactions. 7.5. ABSENCE OF ADVERSE GOVERNMENTAL ACTION. No action shall have been taken, proposed or threatened and no statute, rule, regulation or order shall have been proposed, enacted or entered by any Governmental Authority or by any court with jurisdiction over the Transactions that threatens to prohibit or unduly delay consummation of such Transactions on the terms and provisions herein set forth. 7.6. FILINGS; CONSENTS; WAITING PERIODS. All registrations, filings, applications, notices, consents, approvals, orders, qualifications and waivers listed in SCHEDULES 3.3(B) OR 3.3(C), -36- shall have been filed, made or obtained, and all waiting periods applicable under the HSR Act shall have expired or been terminated. 7.7. APPROVAL OF DOCUMENTATION. The form and substance of all certificates, instruments, opinions and other documents delivered to KAS under this Agreement shall be satisfactory in all reasonable respects to KAS and its counsel. 7.8. DEBT. Phoenix U.S. shall have made a capital contribution, or, at the Buyers' election, a loan, to the Company in an amount equal to the difference between (i) the sum of all amounts outstanding immediately prior to the Closing Date under the obligations identified in SCHEDULE 7.8 (as reflected in the pay-off letters referred to in Section 8.12 hereof) and (ii) the amount of Earned Cash of the Company and the Subsidiaries as of December 31, 1997 (or the most recent month end prior to the Closing Date) as reflected on the Preliminary Earned Cash Certificate, (the "Net Debt Amount") so that the Company may pay and satisfy in full on the U.S. Closing Date all amounts outstanding on such date under each loan set forth in SCHEDULE 7.8. 7.9. LEGAL OPINION. KAS shall have received a legal opinion from each of Pepper, Hamilton & Scheetz LLP and McCarthy Tetrault, counsel to the Buyers in substance and form reasonably satisfactory to KAS and its counsel, substantially in the forms of EXHIBIT C-1 and EXHIBIT C-2 hereto, it being understood that such firms shall opine only with respect to federal, Pennsylvania and Delaware law, and Canadian law, respectively. 7.10. PROFESSIONAL LIABILITY INSURANCE POLICY. Buyer shall have obtained, at Buyer's expense, and delivered to Seller, an occurrence professional liability insurance policy (the "Professional Liability Insurance Policy") covering the Company and the Subsidiaries for events or occurrences of the business of the Company and the Subsidiaries for the five (5) year period prior to the Closing Date; provided, however, the Sellers shall have no right to terminate this Agreement or otherwise obtain the benefits of this Agreement, at law or in equity on account of the failure to this provision to have been satisfied unless the Sellers have delivered the certificates required under Section 5.11. The Professional Liability Insurance Policy shall name KAS and Kuraya as additional insureds. The Professional Liability Insurance Policy shall be maintained for a period of not less than three years from the Closing Date, with a deductible of not more than One Hundred Thousand Dollars ($100,000). -37- ARTICLE 8 CONDITIONS TO THE OBLIGATIONS OF THE BUYERS The obligation of the Buyers to enter into and complete the Closings is subject to the fulfillment on or prior to the Closing Date of the following conditions, any one or more of which may be waived by the Buyers, in their sole and absolute discretion. 8.1. REPRESENTATIONS AND COVENANTS. The representations and warranties of KAS and Kuraya contained herein and any amendments to the Schedules in accordance with Section 5.5 hereof shall be true and correct on and as of the Closing Date as though made at and as of that date (except for the representations and warranties, if any, made as of a specified date, which shall be true and correct as of the specified date), and KAS and Kuraya shall have delivered to the Buyers a certificate of a duly authorized officer of KAS to such effect. 8.2. COMPLIANCE WITH COVENANTS. KAS shall have performed and complied with all terms, agreements, covenants and conditions of this Agreement to be performed or complied with by it on or prior to the Closing Date, and KAS shall have delivered to the Buyers a certificate of a duly authorized officer of KAS to that effect. 8.3. CORPORATE ACTION. The Buyers shall have received (a) certified copies of KAS's, the Company's and each Subsidiary's charter documents and resolutions of KAS's Board of Directors, in form reasonably satisfactory to the Buyers, approving the execution and delivery of this Agreement and each Transaction Document to which it is a party and the obligations of KAS hereunder and thereunder; (b) a certificate of good standing with respect to KAS, the Company and each Subsidiary issued by the appropriate Governmental Authority of such Person's jurisdiction of incorporation showing that such Person is in good standing in such jurisdiction, dated within ten (10) days of the Closing Date; and (c) incumbency certificates of KAS, the Company and each Subsidiary, certified by the Secretary or Assistant Secretary of each such Person. 8.4. LITIGATION. On the Closing Date, there shall be no Action pending or threatened pertaining to the Transactions or to their consummation. 8.5. ABSENCE OF ADVERSE GOVERNMENTAL ACTION. No action shall have been taken, proposed or threatened and no statute, rule, regulation or order shall have been proposed, enacted or entered by any Governmental Authority or by any court with jurisdiction over the Transactions that threatens to prohibit or unduly delay consummation of such transactions on the terms and provisions herein set forth. 8.6. NO MATERIAL ADVERSE EFFECT OR DAMAGE. No event, occurrence, fact, condition, change, development or effect shall have occurred, exist or come to exist that, individually or in the -38- aggregate, has constituted or resulted in, or could reasonably be expected to constitute or result in, a Material Adverse Effect with respect to the Company and the Subsidiaries, taken as a whole. No material damage to or destruction or loss of (whether or not covered by insurance) any of the assets of the Company and the Subsidiaries, taken as a whole, shall have occurred. 8.7. FILINGS; CONSENTS; WAITING PERIODS. All registrations, filings, applications, notices, consents, approvals, orders, qualifications and waivers listed in SCHEDULES 3.3(B) OR 3.3(C), or required by any Governmental Authority or under Applicable Law, shall have been filed, made or obtained, all waiting periods applicable under the HSR Act shall have expired or been terminated and the Sellers shall (i) have received a determination that ISRA is not applicable, or (ii) if ISRA is applicable, shall have complied with ISRA. 8.8. APPROVAL OF DOCUMENTATION. The form and substance of all certificates, instruments, opinions and other documents delivered to the Buyers under this Agreement shall be satisfactory in all reasonable respects to the Buyers and its counsel. 8.9. RESIGNATIONS; SEMLER. The Buyers shall have received resignations from all directors and officers of the Company and the Subsidiaries. All positions and the employment of Tom Semler shall have terminated with the Company and any Subsidiary, and neither the Company, any Subsidiary or the Buyers shall have incurred or will incur any Liability (for severance or otherwise) in connection therewith. 8.10. LEGAL OPINIONS. The Buyers shall have received a legal opinion of Sheppard, Mullin, Richter & Hampton LLP, counsel for KAS, substantially in the form attached hereto as EXHIBIT B, it being understood that such firm shall opine only with respect to federal law, the General Corporation Law of Delaware, and California law. 8.11. ANCILLARY DOCUMENTS. KAS and Kuraya shall have executed and delivered all Transaction Documents to which they are intended to be parties, including the Escrow Agreement. 8.12. CONSENT AND RELEASE. KAS shall have obtained pay-off letters and lien releases from each lender set forth in SCHEDULE 7.8. All Encumbrances on the assets of, or affecting in any way, the Company or any Subsidiary on account thereof shall have been released. 8.13. ENVIRONMENTAL ASSESSMENT. The Buyers shall have received an Environmental Assessment in form and substance satisfactory to the Buyers. 8.14. TERMINATION OF TAX SHARING AGREEMENT. Prior to the Closings, KAS, the Company and the Subsidiaries shall have terminated the Tax Sharing Agreement, and such termination shall include a release of the Company and each Subsidiary from all obligations and liabilities under the Tax Sharing Agreement and neither the Company nor a Subsidiary shall have any further liabilities or obligations thereunder as of the Closing Date. At the U.S. Closing, KAS shall deliver the amended executed Tax Sharing Agreement in the form attached hereto as EXHIBIT D. -39- 8.15. PROFESSIONAL LIABILITY INSURANCE POLICY. Buyer shall have obtained, at Buyers' expense, the Professional Liability Insurance Policy covering the Company and its Subsidiaries for events or occurrences of the business of the Company and its Subsidiaries for the five (5) year period prior to the Closing Date. The Professional Liability Insurance Policy shall name the Buyers, KAS and Kuraya as additional insureds and the Buyers shall have provided Kuraya and KAS with a certificate evidencing such insurance. Notwithstanding anything to the contrary contained herein except as provided in Section 10.3(f) below, the existence of any such insurance shall not be deemed to affect any indemnification obligations or limitation of Liability provided for in this Agreement. The Company, KAS, IBRD-Rostrum and Kuraya shall have executed and delivered the certificates reasonably requested by the Buyers, and taken such other action reasonably required by the Buyers' insurance carrier. 8.16. IBRD SHARES. KAS and Kuraya shall have taken all action necessary, to the satisfaction of the Buyers and their counsel, to effect the valid transfer of the IBRD-Europe Shares from the Company to Phoenix Canada on the Canada Closing Date. 8.17. LIQUIDATION. The Liquidation shall have been consummated. ARTICLE 9 COMPETITION AND CONFIDENTIALITY BY THE SELLING PARTIES 9.1. NONCOMPETITION. In consideration of the execution and performance by the Buyers of its obligations under this Agreement, from the Closing Date through the end of the second year following the Closing Date, KAS, Kuraya and any Affiliate of KAS or Kuraya (including without limitation IBRD Japan) will not, unless acting in accordance with the written consent of the Buyers, (a) furnish for use in North America or Europe any services of the type provided by the Company or any Subsidiary within the one year period prior to the Closing Date, including, without limitation, services related to obtaining FDA regulatory approvals or its European equivalent with respect to new drugs or biotechnology products; or (b) hire any employee of the Company or any Subsidiary to become employed by KAS, Kuraya or any Affiliate of KAS or Kuraya. The restrictions contained in the preceding sentence are not intended to, nor shall they be construed to, prohibit the general use of advertising and other forms of public communications designed to obtain employees. Notwithstanding any provisions in this Section 9.1, IBRD-Japan shall be entitled to continue to provide regulatory consulting services to companies organized under the laws of Japan, or any other Asian country, and any Affiliate of such companies -40- organized under the laws of Japan, or any other Asian country, in each case, conducting their principal business activities in Asia, with respect to the regulatory approval process in North America and Europe with respect to new drugs or biotechnology products, so long as such consulting services do not consist of (a) managing actual clinical trials or (b) providing any other drug development service. For purposes of this Section 9.1, "Asia" shall consist only of, and an Asian country shall be any of the following: Japan, North and South Korea, Hong Kong, Singapore, Taiwan, China, Vietnam, Cambodia, Thailand, Malaysia, Indonesia, India, Burma, Sri Lanka and Laos. 9.2. CONFIDENTIALITY. Prior to the Closings and indefinitely thereafter, unless this Agreement is terminated, KAS or Kuraya shall not, except as may be required by Applicable Law or court order, at any time reveal, divulge, communicate or make known to any Person (other than the Buyers or their agents or Affiliates) or, after the Closings, use in any way any information that relates to this Agreement, the Transactions or the Company and the Subsidiaries (whether now possessed by the KAS or furnished by the Buyers after the Closing Date), including, without limitation, all trade secrets, customer lists or other customer information, marketing plans or proposals, financial information, personnel information or any data, written material, records or documents used by or relating to the Company or any Subsidiary that are of a confidential nature (collectively, the "Confidential Information"). 9.3. AFFILIATES. The terms of this Article 9 shall apply to KAS and any of its Affiliates to the same extent as if they were parties hereto, and KAS shall take whatever actions may be necessary to cause its Affiliates to adhere to the terms of this Article 9. 9.4. INJUNCTIVE RELIEF. Each of KAS and Kuraya acknowledges that the provisions of this Article 9 are reasonable and necessary to protect the interests of the Buyers, that any violation of this Article will result in an irreparable injury to the Buyers and that damages at law would not be reasonable or adequate compensation to the Buyers for violation of this Article. In the event of any breach or threatened breach by KAS or any Affiliate thereof of any provision of this Article 9, the Buyers shall be entitled to injunctive or other equitable relief, restraining such party from using or disclosing any Confidential Information in whole or in part, or from engaging in conduct that would constitute a breach of the obligations of such party under this Article 9. Such relief shall be in addition to and not in lieu of any other remedies that may be available, including an action for the recovery of damages. In addition to any other available remedies, the Buyers shall be entitled to have the provisions of this Article 9 specifically enforced by preliminary and permanent injunctive relief without the necessity of proving actual damages or posting a bond or other security and to an equitable accounting of all earnings, profits and other benefits arising out of any violation of this Article 9. In the event that the provisions of this Article 9 shall ever be deemed to exceed the time, geographic, product or other limitations permitted by Applicable Law, then the provisions shall be deemed reformed to the maximum extent permitted by Applicable Law. KAS acknowledges, -41- however, that this Article 9 has been negotiated by the Parties and that the time, geographic and product limitations, as well as the limitation on activities, are reasonable in light of the circumstances pertaining to the Company and the Subsidiaries. ARTICLE 10 INDEMNIFICATION 10.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Except as otherwise set forth in this Section 10.1, all representations and warranties of KAS and Kuraya shall survive for eighteen (18) months after the Closing Date; provided that there shall be no termination of any such representation or warranty as to which a claim, including an Unliquidated Claim, has been asserted prior to the termination of such survival period. All representations and warranties of KAS and Kuraya set forth in Sections 3.4, 3.5 and 3.16 shall survive indefinitely. All representations and warranties of KAS and Kuraya set forth in Sections 3.14, 3.22 and 3.23(b) and (c) and 3.33 shall survive the Closings and remain effective until 60 days after the expiration of the applicable statute of limitations for claims that might be asserted for matters related thereto; provided, however, that, for purposes of this Section 10.1 as applied in respect of Section 3.14, (i) the "statute of limitations" shall mean the later of (A) the statute of limitations for the relevant period ending on or before the Closing Date or (B) the statute of limitations for a later period in which the Loss with respect to Taxes arises, (ii) the statute of limitations for Taxes (including extensions thereto); provided that the statute of limitations with respect to any Taxes may not be extended by the Buyers without the prior written consent of KAS, which consent shall not be unreasonably withheld, and (iii) notwithstanding the immediately preceding clause (i), all statutes of limitations in respect of Taxes shall be deemed to have expired no later than the fifteenth anniversary of the U.S. Closing. Except as provided in Section 5.5 above, all representations, warranties and covenants contained herein shall not be deemed to be waived or otherwise affected by any investigation at any time made by or on behalf of any Party hereto. Except as otherwise expressly provided in this Agreement, all covenants, agreements, undertakings and indemnities set forth in this Agreement shall survive indefinitely. 10.2. INDEMNIFICATION BY KAS AND KURAYA. Subject to the provisions of Section 10.3 and to the further provisions of this Section 10, KAS and Kuraya shall, jointly and severally, indemnify each of the Buyer Indemnified Parties, and hold them harmless from, against and in respect of, any and all Sellers' General Liabilities. "Sellers' General Liabilities" shall mean all Losses resulting from, arising out of, or incurred by the Buyers, the Company, any Subsidiary or any of their respective successors or assigns and their respective directors, officers and employees (each a "Buyer Indemnified Party") after the Closing Date in connection with (i) any breach of any of the representations or warranties made by the KAS or Kuraya in this Agreement, (ii) any Default by KAS, Kuraya or IBRD-Rostrum in respect of any of the covenants or agreements made by KAS, Kuraya or IBRD-Rostrum in this Agreement, (iii) any injuries to Persons, property or business by -42- reason of defectiveness of any services provided by or on behalf of, or business operations of, the Company or any Subsidiary, whether known or unknown, currently asserted or arising hereafter, if such claims are based upon or arise out of services performed or business operations on or prior to the Closing Date, provided that in the event of a Contract Claim (as hereinafter defined) such Claim is made within the applicable statute of limitations; such Losses for purposes of this Section 10.2(iii) shall be (A) "Contract Claims" if the gravamen of the action is based on breach of contract, or (B) "Tort Claims" if such Losses are not Contract Claims, (iv) any attempt by any Person to collect any Liability for Taxes relating to a period that ends on or before the Closing Date, or a Straddle Period (for which, in accord with the terms of Section 11.1(e) KAS is obligated to pay), including, without limitation, Taxes due under Treasury Regulation Section 1.1502-6 (or any successor provision or any similar provision under state, local or foreign laws), provided such Claim is made within the applicable statute of limitations (as defined in Section 10.1 in respect of Taxes, except for (A) Taxes reserved for on the September Balance Sheet or incurred in the ordinary course of business from such date up to and including the Closing Date, (B) Taxes which the Buyers are required to pay pursuant to Sections 11.3 and 13.2 and (C) Taxes as to which disclosure is made in SCHEDULE 3.14 other than items set forth in SCHEDULE 10.2, (v) any Environmental Loss provided a Claim relating thereto is brought within the applicable statute of limitations, (vi) each item set forth in SCHEDULE 10.2 hereof or (vii) costs incurred without corresponding contractual change orders to increase above the amount due thereunder on the date hereof revenue due under (A) Contract Research Organization Agreement (8/15/96) between Astra Merck Inc. and the Company (ASMUS 9602) and (B) Master Agreement (8/13/93) between the Company and Aviron (AVIRO 9506), to the extent such increased revenue on such contracts is less then $245,000 and $122,000, respectively. Notwithstanding the restrictions set forth in Section 9.1 hereof, in the event Dainippon requests that the Company reperform any services in respect of the Zonisamide study or NDA filing, the Buyers shall promptly notify KAS of such request. KAS, subject to the consent of Dainippon and at KAS's and Kuraya's sole expense, may elect to reperform such services, or cause such services to be reperformed, which reperformance shall not constitute a breach of Section 9.1 hereof. Notwithstanding the preceding sentence, KAS and Kuraya shall pay, perform and discharge all Liabilities, and shall indemnify any Buyer Indemnified Party in respect of any Losses incurred by such Buyer Indemnified Party relating to the Dainippon matter. 10.3. LIMITATIONS ON OBLIGATION OF KAS AND KURAYA TO INDEMNIFY. (a) Except as otherwise provided in Section 10.1 with respect to surviving provisions, KAS and Kuraya shall have no obligation to indemnify any Buyer Indemnified Party pursuant to Section 10.2(i) above based solely upon any breach by KAS or Kuraya of any representation or warranty as to which KAS or Kuraya has not received a Claim Notice within eighteen months after the Closing Date. -43- (b) Nothing herein shall be deemed to limit or restrict in any manner any rights or remedies available at law, in equity or otherwise against KAS or Kuraya based on a willful misrepresentation or willful breach of warranty by KAS or Kuraya hereunder. (c) Notwithstanding anything to the contrary contained in this Agreement, except as set forth below, KAS or Kuraya shall not have any Liability for indemnification under Section 10.2(i), (ii) (except in respect of breaches of representations, warranties or covenants affecting the determination of Purchase Price or Net Debt Amount, which shall not be limited in any way) or (iii) of this Agreement unless the aggregate of all Losses relating thereto for which KAS and Kuraya would, but for this Section 10.3(c), be liable exceeds on a cumulative and aggregate basis $250,000 (the "Threshold"), and then only to the extent of such excess; provided, however, that such Threshold shall not apply to any Losses attributable to or arising out of (1) an inaccuracy in any representation or warranty set forth in (A) Section 3.14, 3.22, 3.23(b), 3.23(c), or (B) 3.13 or 3.23(a), in each case solely in connection with an inaccuracy in any representation or warranty relating to an environmental matter or (2) Section 10.2(iii) (in respect of Tort Claims), (iv), (v) and (vi) of this Agreement, and, in the case of clauses (1) or (2) above the obligation of KAS and Kuraya under Section 10.2 shall begin with the first dollar of loss; further, provided that if but for the Loss giving rise to the indemnification obligation under Section 10.2(i) or (ii), the Purchase Price or Net Debt Amount would have been less, the Liability of the Sellers under Section 10.2(i) and (ii) shall begin with the first dollar of Loss and should not be reduced or otherwise affected by the Threshold. (d) Seller and Kuraya shall not be liable hereunder for any individual Loss that is less than $5,000; provided, however, that all such Losses of or in excess of $5,000 (from the first dollar of loss) shall be considered for purposes of determining the Threshold. (e) Except for Losses indemnifiable under Section 10.2(iii) (in respect of Tort Claims and Contract Claims), (iv) or (v), the maximum aggregate amount of indemnifiable Losses that may be recovered by the Buyer Indemnified Parties from KAS and Kuraya under this Article 10 shall not exceed $10,000,000. The maximum aggregate amount of indemnifiable Losses under Section 10.2(iii) (in respect of Tort Claims and Contract Claims), (iv) or (v) that may be recovered by the Buyer Indemnified Parties from KAS and Kuraya under this Article 10 shall not exceed the Purchase Price. (f) Subject to the limitation set forth in this Article 10, the amount of any Losses for which indemnification by KAS or Kuraya is provided under Article 10 of this Agreement shall be net of the amount of any insurance proceeds actually recovered by a Buyer Indemnified Party pursuant to any insurance policy in force and owned by the Company or any Subsidiary (the "Insurance Proceeds"); provided, however, that notwithstanding this Section 10.3(f), any payment required under Article 10 shall accrue and become due and payable in full as provided herein at the time such payment obligation arises without taking into account any such Insurance -44- Proceeds. In the event that Insurance Proceeds are actually recovered by a Buyer Indemnified Party after payment by the indemnifying Party of any amount required to be paid to a Buyer Indemnified Party under this Article 10, such Buyer Indemnified Party shall repay to the indemnifying Party, promptly after such recovery, any amount that the indemnifying Party would not have had to pay pursuant to this Section 10.3(f) had such recovery been made to the Buyer Indemnified Party at the time of the payment by the indemnifying Party. (g) Seller's and Kuraya's indemnities herein are intended solely for the benefit of Buyer Indemnified Parties and are in no way intended to, nor shall they, constitute an agreement for the benefit of, or be enforceable by, any other Person. (h) Notwithstanding anything to the contrary in this Article 10, the Buyers shall not be entitled to indemnification under Section 10.2 for any Losses on account of the Company's or any Subsidiary's recognizing revenue for periods on or prior to Closing for services to be performed by the Company or its Subsidiaries after the Closing Date, except that the limitation of liability in the preceding clause shall not apply for (i) any known material deviations to the revenue recognition policy set forth in SCHEDULE 3.6, or (ii) Losses relating to (A) the Contract Clinical Research Services Agreement dated 7/15/97 between Genetics Institute and IBRD-U.K.("GI Contract") and (B) Clinical Development Agreement dated 4/29/96 between Bracco S.p.A. and IBRD-U.K. (Study B16880/015) ("Bracco Contract"). As soon as practicable after the Closing Date, but in any event, not later than sixty (60) days after the Closing Date, the Buyers shall prepare and deliver to the Sellers a certificate (the "Revenue Certificate") setting forth their proposed calculation of Losses relating to the amount of revenue which was recognized prior to the Closing Date in connection with the GI Contract and/or Bracco Contract (the "Revenue Losses"). The amount of indemnifiable Loss shall equal 76% of the Revenue Loss. The Sellers shall have thirty (30) days after receipt of the proposed Revenue Loss Certificate to provide written notice to Buyers if, and to the extent it disagrees with the proposed Revenue Losses set forth in the Revenue Loss Certificate. If Sellers do not provide written notice of a disagreement with the Revenue Loss Certificate, then the Revenue Losses set forth therein shall be considered final, binding and conclusive on the Parties. If Sellers provide a notice disputing the amount of Revenue Losses, then Sellers' Accountant and Buyers' Accountant shall attempt to resolve the amount of the Revenue Losses. If Sellers' Accountant and Buyers' Accountant are unable to reach agreement after thirty (30) days of receipt by Buyers Accountant of the written dispute notice, then the dispute shall be submitted to a nationally recognized "Big Six" accounting firm or its successor (other than auditors used by the Sellers or the Buyers or any Affiliate of either written the part three (3) years, or their successors) chosen by lot (the "Third Accounting Firm") which shall be instructed to arbitrate the disputed items and determine the final Revenue Losses within thirty (30) days. The fees and expenses of the Third Accounting Firm shall be borne equally by the Buyers and Sellers. The resolution of disputes by the Third Accounting Firm shall be set forth in writing and shall be conclusive and binding upon and non-appealable by the Parties -45- and the determination of Revenue Losses shall become final upon the date of such resolution, and may be entered as a final judgment in any court of proper jurisdiction. KAS shall pay to Phoenix U.S. the final Revenue Losses within five (5) days of the date of resolution. Amounts not paid when due shall bear interest from the date due until paid at a rate equal to the lower of (i) the Maximum Rate permitted by Applicable Law or (ii) two percent plus the prime rate of the Bank of Canada on the date payment is due. Amounts of Revenue Losses shall not be subject to the Threshold. 10.4. INDEMNIFICATION BY THE BUYERS. Subject to the provisions of Section 10.5 and to the further provisions of this Section 10, Phoenix Canada and Phoenix U.S. shall jointly and severally indemnify all Seller Indemnified Parties, and hold them harmless from, against and in respect of, any and all the Buyers' General Liabilities. "Buyers' General Liabilities" shall mean all Losses resulting from, arising out of, or incurred by KAS or any of its Affiliates, or any of their respective successors or assigns and their respective directors, officers and employees (each a "Seller Indemnified Party") after the Closing Date in connection with (i) any breach of any of the representations or warranties made by the Buyers in this Agreement, (ii) any Default by the Buyers in respect of any of the covenants or agreements made by the Buyers in this Agreement, (iii) any attempt (whether or not successful) by any Person to cause or require a Seller Indemnified Party to pay or discharge any liability of, or claim against, the Buyers of any kind in respect of the operation of the Company or any Subsidiary after the Closing Date to the extent not specifically subject to an indemnity by the KAS under the terms of this Agreement, or (iv) any liability under Section 500 of the California Corporations Code directly resulting from liquidation distribution of the IBRD-Europe Purchase Price to KAS. 10.5. LIMITATIONS ON OBLIGATION OF THE BUYERS TO INDEMNIFY. (a) The Buyers shall have no obligation to indemnify any Seller Indemnified Party based solely upon any breach by the Buyers of any representation or warranty as to which the Buyers have not received a Claim Notice within eighteen months after the Closing Date; provided, however, that the representations and warranties of the Buyers under Section 4.5 shall survive indefinitely and the representations and warranties of the Buyers under Sections 4.6 and 4.7 shall terminate at Closing. (b) Notwithstanding anything to the contrary contained in this Agreement, the Buyers shall not have any Liability for indemnification for breaches of representations and warranties under this Agreement unless the aggregate of all Losses relating thereto for which the Buyers would, but for this Section 10.5(b), be liable exceeds on a cumulative and aggregate basis $500,000 and then only to the extent of such excess, except for Sections 10.4(iv) and 11.3. (c) The maximum aggregate amount of indemnifiable Losses that may be recovered by the Seller Indemnified Parties from the Buyers for breaches of representations -46- and warranties under this Article 10 shall not exceed $10,000,000, except for Sections 10.4(iv) and 11.3. 10.6. PROCEDURES FOR INDEMNIFICATION. (a) Each Indemnified Party shall promptly give notice hereunder (the "Claim Notice") to the indemnifying Party and, to the extent applicable, in accordance with the Escrow Agreement, after becoming aware of any claim as to which recovery may be sought against the indemnifying Party because of the indemnity provided in this Article 10 or otherwise in this Agreement. The Indemnified Party shall provide the indemnifying Party with full and unrestricted access to all books and records relating to the claim, and to all employees or other persons who are knowledgeable about such claim, in order to allow the indemnifying Party to audit the status of such claim and the payments that have been or will be, made with respect thereto. After receiving such Claim Notice, the indemnifying Party shall have thirty (30) days from the delivery of the Claim Notice to notify the Indemnified Party that the indemnifying Party will assume the defense of any such claim or any litigation resulting from such claim; provided that if the period of time to respond, answer, defend or otherwise plead to any claim or other item is less than such thirty (30) day period, the Indemnified Party shall give prior notice to the indemnifying Party, who shall have the right to so respond, defend, answer or otherwise plead by giving timely notice to the Indemnified Party and if the indemnifying Party fails to give such timely notice to the Indemnified Party, the Indemnified Party, acting reasonably shall have the right to so respond, defend, answer or otherwise plead to such claim. If the indemnifying Party assumes the defense of the claim or litigation at issue, the Indemnified Party shall have the right to employ separate counsel in such claim or litigation and to participate in the defense or conduct thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying Party unless (i) the indemnifying party shall have failed, within the time limits set forth in the preceding sentence, to assume the defense of such claim or litigation, (ii) the employment of such counsel has been specifically authorized in writing by the indemnifying Party, (iii) the named parties to any such action (including any impleaded parties) include both such Indemnified Party and the indemnifying Party and such Indemnified Party and indemnifying Party shall have determined that there are material conflicting interests between the indemnifying Party and the Indemnified Party in the legal defense thereof and, in such event, each of legal counsel selected by the indemnifying Party and the Indemnified Party shall be required to cooperate fully with each other, (iv) the relief sought exceeds the indemnifying Party's maximum indemnification obligations under Article 10 hereof, or (v) equitable relief is being sought against any Indemnified Party. Notwithstanding the foregoing, the right to indemnification hereunder shall not be affected by any failure of an Indemnified Party to give such Claim Notice (or by delay by an Indemnified Party in giving such Claim Notice) unless, and then only to the extent that, the rights and remedies of the indemnifying Party shall have been prejudiced as a result of the failure to give, or delay in giving, such Claim Notice. The Claim Notice required hereunder shall specify the basis for the claim for indemnification to the extent ascertainable at the time of the Claim Notice. If the matter to which a claim relates shall not have been resolved as of the date of the Claim Notice, the Indemnified Party -47- shall include an estimate of the amount of the claim in the Claim Notice to be provided pursuant to this Section 10.6(a), accompanied by a statement therein that the claim has not yet been liquidated (an "Unliquidated Claim"). In the event that an Indemnified Party gives a Claim Notice for an Unliquidated Claim relating to or arising from the breach of a representation or warranty prior to the termination of the survival period of a representation or warranty set forth in this Section 10, such survival period shall be tolled with respect to such Unliquidated Claim until it becomes finally resolved pursuant to the provisions of this Article 10. If an Indemnified Party gives a Claim Notice for an Unliquidated Claim, the Indemnified Party shall also give a second Claim Notice within thirty (30) days after the matter giving rise to the claim becomes finally resolved, and such second Claim Notice shall specify the amount of the claim. (b) Failure by the indemnifying Party to notify the Indemnified Party of its election to defend any such claim or litigation by a third party within thirty (30) days from the delivery of the Claim Notice to the indemnifying Party shall be deemed a waiver by the indemnifying Party of its right to defend such claim or litigation. If the indemnifying Party shall not assume the defense of any such claim by a third party or litigation resulting therefrom, the Indemnified Party may defend against such claim or litigation in such manner as it may deem appropriate, acting reasonably, and may settle such claim of litigation on such terms as it may deem appropriate, acting reasonably, without prejudicing its rights against the indemnifying Party provided for herein. The parties and their respective counsel shall provide reasonable cooperation and information in connection with any claim or litigation as to which indemnification is sought. (c) The indemnifying Party shall not, in the defense of such claim or any Action resulting therefrom, consent to entry of any judgment (other than a judgment of dismissal on the merits without costs) or enter into any settlement, except with the written consent, which consent shall not be unreasonably withheld, of the Indemnified Party, which does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnified Party a release from all liability in respect of such claim or Action or which would in any way restrict or impair the business of the Buyers, the Company, any Subsidiary or any Affiliate of any of the foregoing. (d) If an indemnifying Party does not, within thirty (30) days after its receipt of the Claim Notice required by Section 10.6(a) hereof or in accordance with the Escrow Agreement or, in the case of an Unliquidated Claim, within thirty (30) days after its receipt of the second Claim Notice described in Section 10.6(a), advise the Indemnified Party that the indemnifying Party denies the right of the Indemnified Party to indemnity in respect of the claim, then the amount of such claim shall be deemed to be finally determined between the Parties hereto. If the indemnifying Party notifies the Indemnified Party that it disputes any claim made by the Indemnified Party, then the Parties hereto shall endeavor to settle and compromise such claim, and if unable to agree on any settlement or compromise, such claim for indemnification shall be settled by appropriate arbitration in accordance with the terms of this Agreement, and any Liability -48- established by reason of such settlement, compromise or litigation shall be deemed to be finally determined. Any claim that is finally determined in the manner set forth above shall be paid promptly by the indemnifying Party in cash. 10.7. PAYMENT OF INDEMNIFICATION OBLIGATIONS. Each Party shall pay promptly to any Indemnified Party the amount of all Losses to which the foregoing indemnity relates. 10.8. INTEREST ON UNPAID OBLIGATIONS. If all or part of any indemnification obligation under this Agreement is not paid when due, the indemnifying Party shall pay the Indemnified Party interest on the unpaid amount of such obligation for each day from the date the amount became due until it is paid in full, payable on demand, at the rate equal to the lower of (i) the maximum rate permitted by Applicable Law or (ii) two percent (2%) per annum plus the prime rate of Bank of Canada. 10.9. EXCLUSIVE REMEDY. Except as otherwise provided in this Agreement, the provisions for indemnification set forth in this Article 10 are the exclusive remedies of the parties hereto with respect to the matters addressed in this Article 10, except for the remedies for injunctive relief provided elsewhere herein and except for the indemnification obligations expressly provided elsewhere in this Agreement and except as set forth in Section 10.3(b). ARTICLE 11 TAXES 11.1. FINAL TAX RETURN. (a) KAS will prepare the Federal consolidated income tax return for each taxable year (including any short taxable year) ending on or before the Closing Date (individually and in the aggregate, the "Final Return") that includes the Company (including IBRD-U.K.), IBRD-Rostrum and IBRD Center for Clinical Research, Inc. (the "IBRD Group") consistent with the consolidated return regulations promulgated pursuant to the Code and in a manner that is substantially similar to all prior KAS consolidated Federal income tax returns. In preparing the Final Return, (i) the allocation of tax items as between the last period covered by the Final Returns and the period commencing immediately after the end of such last period shall be made pursuant to the general Code method in accordance with Treasury Regulations Section 1.1502-76(b)(2)(i), and (ii) KAS shall not make any elections not made in prior returns nor shall it revoke any elections previously made, without the prior written consent of Phoenix U.S., which consent shall not be unreasonably withheld. KAS will present the draft Final Return to Phoenix U.S. 45 days prior to its filing due date (with extensions) for the review and approval of Phoenix U.S., which shall not be unreasonably withheld. Should Phoenix U.S. object to a reporting of an item or items of income, gain, loss, -49- deduction or credit by sending written notice to KAS of such objection and the reasons therefor within 10 business days of receipt of the draft Final Return for review (the "Tax Notice"), the parties shall endeavor in good faith to reach an acceptable reporting position. If such agreement cannot be reached within 10 business days after receipt by KAS of the Tax Notice, the issue shall be reviewed and decided the Third Accounting Firm, taking into account the terms of this Agreement. If the decision of the Third Accounting Firm is not received by KAS by the day before the filing due date (with extensions) for the Final Return, then the Final Return shall be filed in the manner determined by KAS, and if the decision of the Third Accounting Firm requires a different action or treatment in respect of any item on the Final Return then KAS shall file an amended Final Return consistent with the decision of the Third Accounting Firm. The fees of such Third Accounting firm shall be paid by Phoenix U.S. unless such accounting firm determines that the Tax Notice is materially correct, in which case, KAS shall bear such fees. (1) Without limiting the foregoing, KAS shall not make an election pursuant to Treasury Regulation Section 1.1502-20 of Section 1502 of the Code (or any other regulation or successor thereto) to reattribute to KAS any portion of the net operating loss carryover and net capital loss carryover attributable to any member of the IBRD Group. (2) Without the prior written consent of KAS, which consent shall not be unreasonably withheld, (i) a Buyer shall make no Code Section 338(g) election with respect to any IBRD-Europe Subsidiary. (3) Buyers and KAS acknowledge that the liquidation of IBRD-Rostrum and the sale of the IBRD-Europe Shares by the Company will be includible in the Final Return. Buyers agree not to cause the Company or any Subsidiary to take any action outside the ordinary course of business on either Closing Date (or to allow any such action to occur with respect to any IBRD-Europe Subsidiary once the Canadian Closing has occurred or with respect to the Company or any Subsidiary once the U.S. Closing has occurred), unless all Tax consequences of any such action shall be (i) reported under the "next day rule" of Treasury Regulations Section 1.1502-76(b)(1)(ii)(B) or (ii) if such rule is not applicable, treated for all purposes as having occurred on the first day after the Closings have occurred. (b) Buyers shall deliver to KAS any refund of Tax received by Buyers, the Company or any Subsidiary after the Closing Date attributable to any Taxes paid for any period ending on or before the Closing Date, and KAS shall deliver to Buyers any refund of income Tax received by KAS, in its capacity as common parent and agent of the Company and Subsidiaries, as a result of any carryback of net operating loss or other similar item attributable to activities after the U.S. Closing Date. KAS and the Buyers shall not have any obligation to seek any such refunds but shall cooperate as reasonably required with the efforts of the other to do so. Nothing in this -50- Agreement shall require Buyer to incur any costs with respect to a refund that will be delivered to KAS, and a refund that is derived or available because of a payment between IBRD-U.K. and IBRD-Rostrum Global Limited with respect to Group Relief, ACT or Taxation Refund, shall be retained by such Subsidiary and shall not be deliverable to KAS. (c) All state and local Tax Returns for any member of the IBRD Group not filed prior to the date of this Agreement for periods that end before or on the U.S. Closing Date (the "Final State and Local Tax Returns") shall be prepared by KAS in a manner consistent with the principles for preparation of the Final Return set forth above and substantially similar to the same prior state and local Tax Returns. KAS shall not make any elections not made in prior returns nor shall it revoke any elections previously made, without the prior written consent of Phoenix U.S., which consent shall not be unreasonably withheld. Such Final State and Local Tax Returns shall be submitted to Phoenix U.S. for review and approval, which shall not be unreasonably withheld, in the same manner and subject to the same procedures as described in 11.1(a) above. (d) All non-U.S. tax returns for any of IBRD-Europe for periods that end before or on the Canadian Closing Date, and which are due after such date shall be completed by Phoenix Canada, or its agents. If any such returns are due prior to the Closing of the Canadian Acquisition, they shall be prepared by the relevant company. In either case, such Tax Returns shall be prepared in a manner consistent with prior returns and the principles for preparation of the Final Return set forth above, and the company shall allow Phoenix Canada or KAS, as the case may be, to review and approve such returns prior to the filing, which approval shall not be unreasonably withheld. (e) The Buyers shall, in accordance with Applicable Law, prepare or cause to be prepared each Tax Return for the Company and each Subsidiary for any period that includes but does not end upon the U.S. or Canada Closing Date as applicable (such period the "Straddle Period," such Tax Return the "Straddle Period Return"), in a manner consistent with prior such Tax Returns filed by or on behalf of the Company and Subsidiaries. Except for (A) Taxes reserved for on the September Balance Sheet or incurred in the ordinary course of business from such date up to and including the Closing Date that have been accrued or reserved for in the Books and Records of the Company or any Subsidiary, (B) Taxes which Buyers are required to pay pursuant to Sections and 11.3 and 13.2 and (C) Taxes as to which disclosure is made in SCHEDULE 3.14 other than items set forth in SCHEDULE 10.2, KAS shall pay the Taxes reported on a Straddle Period Returns that are allocable to the portion of the Straddle Period ending on the U.S. or Canada Closing Date. Such allocation of Taxes based on income shall be done on the "closing of the books" basis; all other allocations of Taxes shall be allocated based on the days in the Straddle Period. The Buyers shall present the Straddle Period Return to KAS for review and approval, which shall not be unreasonably withheld, in accord with the procedures set forth in Section 11.1(a) above. -51- 11.2. AUDITS AND TAX LITIGATION. KAS shall have control over any audit, examination, appeal, and Tax Court or other Action relating to any Tax Return required to be filed by KAS hereunder, and any Tax Return filed before Closing with respect to which KAS or Kuraya may have Liability to a Buyer or any other person under this Agreement or otherwise, and Buyers shall execute, verify, acknowledge and deliver any and all powers of attorney and other documents and instruments necessary for KAS to exercise such control; provided, however, that Buyers shall have the right to participate in any such events, at Buyers' expense, and provided further that KAS shall not enter into any settlement or closing agreement with respect to Taxes without the prior written consent of Buyers, which shall not be unreasonably withheld. Buyers shall have control over any audit, examination, appeal, and Tax Court or other Action relating to any Straddle Period Return or other Tax Return not filed by KAS that relates to any Taxes for which KAS or Kuraya may have Liability to a Buyer or any other person under this Agreement or otherwise; provided, however, that KAS shall have the right to participate in any such events, at its expense solely as it relates to an indemnifiable item, and provided further that Buyers shall not enter into any settlement or closing agreement with respect to such item without the prior written consent of KAS, which shall not be unreasonably withheld. 11.3. TAX INDEMNITY. Without regard to any limitation expressed in Article 10, (i) Buyers shall, jointly and severally, indemnify KAS, and hold KAS harmless from, against and in respect of, any and all Excess Tax Liabilities, and Buyers shall pay to KAS the Gross-Up Amount with respect to any and all Excess Tax Liabilities. "Excess Tax Liabilities"shall mean all Losses with respect to Taxes incurred by KAS for Taxes as a result of the Transactions, to the extent such Losses exceed the amount, if any, of the total liability for Taxes that KAS would have incurred if the Transactions had been structured as a sale by KAS of the IBRD-U.S. Shares for the Purchase Price instead of as (1) first a sale by the Company of the IBRD-Europe Shares for the IBRD-Europe Purchase Price and (2) then a sale by KAS of the IBRD-U.S. Shares for the balance of the Purchase Price; provided, however, that Buyers shall have no obligations under this Section 11.3 to the extent the Loss arose because the tax basis of the IBRD-Europe Shares (as determined for federal or state purposes) to the Company is, at the time of the Canadian Acquisition, less than $9,000,000 in the aggregate. "Gross-Up Amount" shall the amount required to be paid to KAS such that, after taking into account all Taxes incurred by KAS by reason of both (i) indemnification of KAS in respect of the Excess Tax Liabilities and (ii) the Gross-Up Amount, KAS shall have received a net amount after payment of such Taxes equal to the Excess Tax Liabilities. Section 10.3(h) shall apply in calculating the Losses under this paragraph, and nothing in this paragraph shall be deemed to override Section 5.4. -52- ARTICLE 12 TERMINATION OF AGREEMENT 12.1. TERMINATION. This Agreement may be terminated prior to the Closings as follows: (a) at the election of KAS, if any one or more of the conditions to its obligation to close has not been fulfilled by March 1, 1998; (b) at the election of the Buyers, if any one or more of the conditions to its obligation to close has not been fulfilled by March 1, 1998; (c) at the election of KAS, if the Buyers has materially breached any material representation, warranty, covenant or agreement contained herein; (d) at the election of the Buyers, if KAS or Kuraya has materially breached any material representation, warranty, covenant or agreement contained herein; (e) at the election of KAS on the one hand, or the Buyers, on the other hand, if any action shall have been instituted and be continuing by any Governmental Authority with proper authority to restrain, modify or prohibited carrying out of the transactions contemplated hereby; (f) at any time on or prior to the Closing Date, by mutual written consent of KAS and the Buyers; or (g) at the election of the Buyers pursuant to Section 5.5 hereof. If the Buyers or KAS, as the case may be, elects to terminate this Agreement pursuant to Section 12.1(a), (b), (c), (d), (e) or (g) hereof, the terminating party shall deliver a notice to the other party hereto declaring its election to so terminate this Agreement in accordance with the provisions of Section 12.1(a), (b), (c), (d), (e) or (g), as the case may be, and setting forth therein the basis for such termination. If this Agreement so terminates, it shall become null and void and have no further force or effect, except as provided in Section 12.2 hereof. 12.2. SURVIVAL. If this Agreement is terminated, this Agreement shall become void and of no further force and effect, except for the provisions of this Agreement relating to the obligation of the Buyers to keep confidential and not to use certain information and data obtained -53- by it from KAS or any Affiliate thereof and except for the provisions of Sections 5.4 and 6.2 hereof, Article 10, this Article 12 and Articles 13 and 14 hereof. None of the parties hereto shall have any liability in respect to a termination of this Agreement pursuant to this Article 12, except to the extent that failure to satisfy the conditions of Articles 7 or 8, as applicable, results from the intentional or willful breach or violation of the representations, warranties, covenants or agreements of such party under this Agreement. For purposes of the preceding sentence, the failure of any party to comply with its respective obligations under Article 1 promptly after all conditions to such compliance shall have been fulfilled, shall constitute an intentional or willful violation of the agreement herein contained by such failing party. 12.3. RETURN OF MATERIALS. If this Agreement is terminated for any reason whatsoever, each party shall return to the other all documents, work papers and other material (including all copies thereof) obtained in connection with the transactions contemplated hereby and will use all reasonable efforts, including instructing its employees, agents and representatives and others who have had access to such information, to keep confidential and not to use any such information, unless such information is now, or is hereafter disclosed, through no act or omission of such party, in any manner making it available to the general public. ARTICLE 13 MISCELLANEOUS 13.1. NOTICES. Any notice or other communication required or permitted hereunder or under any Transaction Document shall be in writing, shall be delivered personally, by facsimile transmission or by overnight courier, shall be deemed given upon receipt if delivered personally, or upon confirmation of receipt, if given by facsimile, or on the first business day following delivery by overnight courier, if delivered by overnight courier, and shall be as follows: (a) If to either Buyer to: Phoenix International Life Sciences (U.S.) Inc. Phoenix International Life Sciences Inc. 2350 Cohen Street Saint-Laurent (Montreal) Quebec Canada H4R 2N6 Attention: Chief Executive Officer Telecopier: (514)333-7306 -54- with a copy to: Pepper, Hamilton & Scheetz LLP 1235 Westlakes Drive, Suite 400 Berwyn, PA 19312 Attention: James D. Rosener, Esquire Telecopier: (610) 640-7835 (b) If to KAS or Kuraya to: Kuraya American Systems Inc. 3625 Del Amo Blvd., Ste. 180 Torrance, CA 90503 Attention: Mr. Gerry Shishido, Vice President Telecopier: (310) 542-4175 with a copy to: Sheppard, Mullin, Richter & Hampton LLP 333 South Hope Street 48th Floor Los Angeles, California 90071 Attention: Scott J. Lochner, Esq. Telecopier: (213) 620-1398 Any party may, by notice given in accordance with this Section 13.1 to the other parties, designate another address or person for receipt of notices hereunder. 13.2. TAXES. The Buyers shall pay all sales, use, transfer, stock transfer, and other similar taxes and fees arising out of or in connection with the transactions contemplated hereby, and the Buyers shall cooperate with KAS in filing all necessary documentation and tax returns with respect to such taxes and fees. 13.3. ENTIRE AGREEMENT. This Agreement (including the Schedules hereto), the Transaction Documents and the Confidentiality Agreement contain the entire agreement of the parties with respect to the purchase of the Shares and related transactions, and supersedes all prior agreements, representation and warranties, written or oral, with respect thereto. 13.4. WAIVERS AND AMENDMENTS. Except as provided for in Section 5.5, this Agreement and each Transaction Document may be amended, superseded, canceled, renewed or extended, and the terms hereof or thereof may be waived, only by a written instrument signed by each of the parties hereto or thereto or, in the case of a waiver, by the party waiving compliance. The failure of a party to insist, in any one or more instances, upon performance of the terms or conditions of this Agreement or any Transaction Document shall not be construed as a waiver or relinquishment -55- of any right granted hereunder or of the future performance of any such term, covenant or condition. No waiver on the part of any party of any right, power or privilege, nor any single or partial exercise of any such right, power or privilege, shall preclude any further exercise thereof or the exercise of any other such right, power or privilege. 13.5. GOVERNING LAW. This Agreement and each Transaction Document shall be governed by and construed in accordance with the substantive and procedural laws of the State of California without regard to California conflict of law rules. Each of the Parties hereby consents to the exclusive jurisdiction of any state or federal court located in Los Angeles, California. Any controversy or claim arising out of or relating to this Agreement or the breach thereof, other than a claim for specific performance or injunctive relief, shall be settled by arbitration before a single arbitrator in the State of California in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. All costs associated with such arbitration shall be borne equally by the parties to the dispute, except that each party shall bear the costs of its own attorneys and experts (except as otherwise provided in this Agreement). 13.6. REFERENCE TO U.S. DOLLARS. All references in this Agreement and in any Transaction Document to amounts of money expressed in dollars are references to United States dollars, unless otherwise indicated. 13.7. BINDING EFFECT; ASSIGNMENT. This Agreement and each Transaction Document shall be binding upon and inure to the benefit of the parties and their respective permitted successors and permitted assigns. Neither this Agreement or any Transaction Document, nor any of the rights hereunder or thereunder, may be assigned by any party, nor may any party delegate any obligations hereunder or thereunder, without the written consent of the other party hereto or thereto. Any non-permitted assignment or attempted assignment shall be void. Notwithstanding the foregoing, KAS may assign this Agreement and the Transaction Documents, and any of its rights hereunder or thereunder, and may delegate any of its obligations hereunder or thereunder, to Kuraya Corporation or any Affiliate thereof and the Buyers may assign this Agreement to any of its Affiliates. 13.8. NO THIRD PARTY BENEFICIARIES. Nothing herein is intended or shall be construed to give any person any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein, except as otherwise provided herein. 13.9. COUNTERPARTS. This Agreement and each Transaction Document may be executed by the parties in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof or thereof each signed by less than all, but together signed by all of the parties. -56- 13.10. SCHEDULES AND EXHIBITS. The schedules and exhibits attached to this Agreement or to any Transaction Document are a part hereof or thereof, as applicable, as if fully set forth herein or therein. 13.11. HEADINGS. The heading herein or in any Transaction Document are for reference only and shall not affect the interpretation of this Agreement or such Transaction Document. 13.12. PUBLICITY. All notices to third parties and all other publicity concerning the transactions contemplated hereby or by any Transaction Document shall be jointly planned and coordinated by the Buyers and KAS provided, however, that any of the Buyers, KAS or Kuraya may issue any press release or public announcement in form and content as the issuing party determines is required by Applicable Law. 13.13. SEVERABILITY. Whenever possible, each provision of this Agreement and any Transaction Document shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement or any Transaction Document is held to be prohibited or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement or such Transaction Document. 13.14. CONFIDENTIAL INFORMATION. The parties acknowledge that the transactions described herein are of a confidential nature and shall not be disclosed except to each party's respective Affiliates, consultants and advisors, or as required by law, until such time as the parties make a public announcement regarding the transactions in accordance with Section 13.12 hereof. Each party shall treat such information as confidential, preserve the confidentiality thereof and not duplicate or use such information, except to Affiliates, advisors and consultants in connection with the transactions contemplated hereby or by any Transaction Document. KAS, at a time and in a manner which reasonably determines and after prior notice to and consultation with the Buyers, may notify employees of the Company and the Subsidiaries of the fact of the subject transaction. 13.15. WAIVER OF CONFLICT. The Buyers acknowledge that KAS, the Company and each Subsidiary have been jointly represented by Sheppard, Mullin, Richter & Hampton LLP in connection with this transaction and in other matters, and each Buyer hereby agrees to waive on behalf of itself, the Company and each Subsidiary any and all conflicts of interest and privileges that may apply to any future representation by such firm of KAS or its Affiliates in connection with disputes arising from the transactions contemplated hereby or in connection with any other matters. 13.16. INJUNCTIVE RELIEF. The Buyers acknowledge that the provisions of this Agreement or the Confidentiality Agreement requiring the Buyers (or any Affiliate of the Buyers) to keep certain information confidential (the "Confidentiality Provisions") are reasonable and -57- necessary to protect the interests of KAS and Kuraya, that any violation of the Confidentiality Provisions will result in an irreparable injury to KAS and Kuraya and that damages at law would not be reasonable or adequate compensation to KAS and Kuraya for such violation. Accordingly, in the event of any breach or threatened breach by the Buyers (or any Affiliate of the Buyers) of the Confidentiality Provisions, KAS and Kuraya shall be entitled to injunctive or other equitable relief (from a Los Angeles County Court), restraining the Buyers (or any Affiliate of the Buyers), as applicable, from engaging in conduct that would constitute a breach of the Confidentiality Provisions. Such relief shall be in addition to and not in lieu of any other remedies that may be available, including an action for the recovery of damages. In addition to any other available remedies, KAS and Kuraya shall be entitled to have the Confidentiality Provisions specifically enforced by preliminary and permanent injunctive relief without the necessity of proving actual damages or posting a bond or other security and to an equitable accounting of all earnings, profits and other benefits arising out of any violation of the Confidentiality Provisions. 13.17. VENUE. The parties hereby agree that any action, suit arbitration or other proceeding arising out of or related to this Agreement or any Transaction Document or the relationship created hereby or thereby shall be conducted only in Los Angeles County, California. Each party hereby irrevocably consents and submits to the personal jurisdiction of and venue in United States District Court for the Central District of California and in the Superior Court and Municipal Court for Los Angeles County in any legal action, equitable suit or other proceeding arising out of or related to this Agreement or any Transaction Document, the negotiations thereof or the relationship between the parties created hereby or thereby. ARTICLE 14 DEFINITIONS 14.1. CERTAIN DEFINED TERMS. As used herein, the terms below shall have the following meanings. Any of such terms, unless the context otherwise requires, may be used in the singular or plural, depending upon the reference. "Action" means any action, suit, proceeding or investigation (provided that such investigation is by a Governmental Authority). "Affiliate" has the meaning set forth in Regulation 12B of the Securities Exchange Act of 1934, as amended, as applicable to "affiliate." "Applicable Law" means, with respect to any Person, any domestic or foreign, federal, state or local statute, law, ordinance, rule or regulation of any Governmental Authority applicable to such Person. -58- "Code" means the Internal Revenue Code of 1986, as it may be amended from time to time, and any successor thereto. "Court Order" means any judgment, decree, injunction, order or ruling of any federal, state, local or foreign court or governmental or regulatory body or authority that is binding on any Person or its property under Applicable Law. "Default" means (i) a breach, default or violation, (ii) the occurrence of an event that with or without the passage of time or the giving of notice, or both, would constitute a breach, default or violation or (iii) with respect to any contract, agreement or understanding, the occurrence of an event that with or without the passage of time or the giving of notice, or both, would give rise to a right of termination, renegotiation or acceleration or a right to receive damages or a payment of penalties. "Disclosure Schedule" means a schedule prepared and delivered by KAS to the Buyers pursuant to this Agreement that sets forth the exceptions to the representations and warranties of KAS and Kuraya contained herein. Unless the context clearly indicates otherwise, each reference herein to any numbered schedule is a reference to that numbered schedule which is included in the Disclosure Schedule. "Employee Benefit Plan" means a written pension, retirement profit-sharing, deferred compensation, bonus, incentive, performance, stock option, phantom stock, stock purchase, restricted stock, medical, hospitalization, vision, dental or other health, life, disability, severance, termination or other employee benefit plan, program, arrangement, agreement or policy to which the Company or any Subsidiary contributes or is obligated to contribute or is a party or is bound or under which the Company or any Subsidiary may have any liability and under which present or former employees of the Company or any Subsidiary (or their beneficiaries or dependents) are eligible to participate or to continue to accrue a benefit. "Encumbrances" means any lien, mortgage, security interest, license right, pledge, restriction on transferability, defect of title or other claim, charge or encumbrance of any nature whatsoever on any property or property interest. "Environmental Law" means any Applicable Law (including but not limited to the Clean Water Act, 33 U.S.C. Sections 1251 ET SEQ., the Toxic Substances Control Act, 15 U.S.C. Sections 2601 ET SEQ., the Clean Air Act, 42 U.S.C. Sections 7401 ET SEQ., the Safe Drinking Water Act, 42 U.S.C. Sections 300f ET SEQ., the Comprehensive Environmental -59- Response, Compensation and Liability Act, 42 U.S.C. Sections 9601 ET SEQ., the Resource Conservation and Recovery Act, 42 U.S.C. Sections 6901 ET SEQ., the River and Harbor Act, 33 U.S.C. Section 407, and the Occupational Safety and Health Act, 29 U.S.C. Sections 651 ET. SEQ., each as may be amended from time to time), Court Order (whether or not by consent), any duties imposed by applicable common law and any applicable provision or condition of any Governmental Permit relating to (i) the protection of the environment, employees or the public welfare from actual or potential exposure (or the effects of exposure) to any actual or potential release, discharge, disposal or emission (whether past or present) of any Hazardous Substance or (ii) the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of any Hazardous Substance. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" means (i) a member of any "controlled group," as defined in Section 414(b) of the Code, of which the Company is a member, (ii) a trade or business, whether or not incorporated, under common control (within the meaning of Section 414(c) of the Code) with the Company, or (iii) a member of any affiliated service groups (within the meaning of Section 414(m) of the Code) of which the Company is a member. "Escrow Agent" means a party mutually selected by the Parties to hold funds pursuant to the terms of the Escrow Agreement. "Escrow Agreement" means the Escrow Agreement among KAS, the Buyers and the Escrow Agent to be entered into effective as of the Closing Date, substantially in the form of EXHIBIT A. "FTC" means the Federal Trade Commission. "GAAP" means generally accepted accounting principles of the United States of America consistently applied. "Governmental Authority" means any foreign, domestic, federal, territorial, state or local governmental authority, quasi-governmental authority or instrumentality, or any regulatory, administrative or other agency, or any political or other subdivision, department or branch of any of the foregoing. -60- "Governmental Permits" means all governmental permits, licenses, registrations, certificates of occupancy, orders, approvals and other governmental authorizations. "Hazardous Substances" means any toxic or hazardous gaseous, liquid or solid material or waste that may or could pose a hazard to the environment or human health or safety including (i) any "hazardous substances" as defined by the federal Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Sections 9601 ET SEQ., (ii) any "extremely hazardous substance," "hazardous chemical" or "toxic chemical" as those terms are defined by the federal Emergency Planning and Community Right-to-Know Act, 42 U.S.C. Sections 11001 ET SEQ., (iii) any "hazardous waste," as defined under the federal Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act, 42 U.S.C. Sections 6901 ET SEQ., (iv) any "pollutant," as defined under the federal Water Pollution Control Act, 33 U.S.C. Sections 1251 ET SEQ., as any of such laws in clauses (i) through (iv) may be amended from time to time, and (v) any regulated substance or waste under any Laws or Court Orders that currently exist or that may be enacted, promulgated or issued in the future by any federal, state or local governmental authorities concerning protection of the environment or the public welfare. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder. "Indemnified Party" means either a Seller Indemnified Party or a Buyer Indemnified Party, as the context so requires. "Intellectual Property" means any and all copyrights, patents, trademarks, technology rights and licenses, logos, trade names, trade secrets, franchises, know-how, inventions, methods, techniques and other intellectual property used, in whole or in part, directly or indirectly, by the Company or any Subsidiary. "ISRA" means New Jersey Industrial Site Recovery Act, as amended, and the rules and regulations promulgated thereunder. "Justice" means the Antitrust Division of the Department of Justice. "Knowledge of the Buyers" means to the knowledge or understanding of Dr. John W. Hooper or Jean-Yves Caloz, including any knowledge or understanding that each of them should have gained upon reasonable inquiry with respect to the performance of their respective duties and responsibilities. -61- "Knowledge of Seller, KAS or Kuraya" means to the knowledge or understanding of Malcolm VandenBerg, Thomas B. Semler, Lynda Wight, Susan Thornton, Sally Claybourn Evans, Sharon Anderson, Gerry Shishido, C. Shishido, or K. Yamazaki including any knowledge or understanding that each of them should have gained upon reasonable inquiry with respect to the performance of their respective duties and responsibilities. As to KCAS or Bath, Knowledge of Seller shall not imply any duty to make inquiry with respect to a particular matter. "Leased Real Property" means the real property that is the subject of the leases set forth in SCHEDULE 3.15(D). "Liability" means any direct or indirect liability, indebtedness, obligation, expense, claim, loss, damage, deficiency, guaranty or endorsement of or by any Person, absolute or contingent, accrued or unaccrued, due or to become due, liquidated or unliquidated. "Losses" means all losses, costs, claims, Liabilities, demands, fines, judgments, penalties, damages and expenses of any nature whatsoever, including interest which may be imposed in connection therewith and court costs and reasonable fees and disbursements of counsel and consultants of every kind, nature and description charged to or incurred by them in connection therewith. "Material Adverse Effect" means, with respect to any Person, any significant and substantial adverse effect in the financial condition, business, results of operations, assets, liabilities or operations of such Person. "Party" means KAS, Kuraya, the Company, IBRD-Rostrum, Phoenix Canada, Phoenix U.S., individually, as the context so requires, and the term "Parties" means KAS, Kuraya, the Company, IBRD-Rostrum, Phoenix Canada and Phoenix U.S., collectively. "Person" means an individual corporation, partnership, association, trust, estate or other entity or organization, including a Governmental Authority. "Software" means any computer software of any nature whatsoever, including all systems software, all applications software, whether for general business usage (e.g., accounting, finance, word processing, graphics, spreadsheet analysis, etc.) or specific, unique-to-the-business of the Company or any Subsidiary usage and all computer operating, security or programming software, that is owned by or licensed to the Company or any Subsidiary or used, in whole or in part, directly or indirectly, or has been developed or designed for or is in the process of being developed or -62- designed for use, in whole or in part, directly or indirectly, in the conduct of the business of the Company or any Subsidiary, and any and all documentation and object and source codes related thereto. "Taxes" shall mean (i) any tax, charge, fee, levy or other assessment including, without limitation, any net income, gross income, gross receipts, sales, use, value added tax, ad valorem, transfer, franchise, profits, payroll, employment, social security, unemployment, excise, estimated, stamp, occupancy, occupation, property or other similar taxes, including any interest or penalties thereon, and additions to tax or additional amounts imposed by any federal, state, local or foreign governmental authority, domestic or foreign (a "Taxing Authority") or (ii) any liability for the payment of any taxes, interest, penalty, addition to tax or like additional amount resulting from the application of Treasury Regulation Section 1.1502-6 or comparable Requirement of Law. "Transaction Document" means, when used in reference to a particular Person, any agreement, document or instrument to be executed by such Person in connection with the transactions contemplated hereby. "Transactions" means the sale of the Shares and the other transactions contemplated by the Transaction Documents. "Unliquidated Claim" is defined in Section 10.6(a). 14.2. Other Defined Terms. The following terms are defined in the Section set forth opposite such term.
TERM SECTION ---- ------- Acquisition Recitals Agreement Recitals Backlog 3.6 Bath Recitals Books and Records 3.7 Bracco Contract 10.3 Buyer or Buyers Recitals Buyers' Accountant 2.5 Buyers' General Liabilities 10.4 Buyer Indemnified Party 10.2 Canada Acquisition Recitals
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TERM SECTION ---- ------- Canada Closing 2.1 Canadian Securities Commission 4.6 Claim Notice 10.6 Closings or Closing Date 2.1 Company Recitals Company Audited Balance Sheet 3.6 Company Financial Statements 3.6 Company Interim Balance Sheet 3.6 Company Interim Balance Sheet Date 3.6 Company Interim Financial Statements 3.6 Company Policies 2.5 Company Year-End Financial Statements 3.6 Confidential Information 9.2 Confidentiality Agreement 6.6 Confidentiality Provisions 13.16 Contracts 3.15 Divested Operations 2.4 Earned Cash 2.5 Earned Cash Certificate 2.5 Earn-Out Payment 1.3 Earn-Out Restricted Transaction 2.4 EBITDA Arbitrator 2.4 EBITDA Dispute Notice 2.4 EBITDA Financial Statements 2.4 Environmental Assessment 5.1 Environmental Condition 3.23 Escrow Amount 2.3 Excess Tax Liabilities 11.3 Final Return 11.1 Final State and Local Tax Returns 11.1 GI Contract 10.3 Gross up Amount 11.3 IBRD-Europe Recitals IBRD-Europe Purchase Price 1.2 IBRD-Europe Shares Recitals IBRD-France Recitals IBRD-Germany Recitals IBRD Group 11.1 IBRD-Japan 3.29 IBRD-Rostrum Recitals IBRD-U.K. Recitals
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TERM SECTION ---- ------- IBRD-U.S. Shares Recitals Insurance Proceeds 10.3 KAS Recitals KAS Dividend Recitals KCAS Recitals Kuraya Recitals Liquidation Recitals Net Debt Adjustment 2.5 Net Debt Amount 7.8 Phoenix Canada Recitals Phoenix Securities Reports 4.6 Phoenix U.S. Recitals Preliminary Earned Cash 2.5 Preliminary Earned Cash Certificate 2.5 Professional Liability Insurance Policy 7.10 Purchase Price 1.2 Reference Period 2.4 Related Parties 3.31 Revenue Certificate 10.3 Revenue Losses 10.3 Seller or Sellers Recitals Sellers' Accountant 2.5 Sellers' General Liabilities 10.2 Seller Indemnified Party 10.4 Shares Recitals Straddle Period 11.1 Straddle Period Return 11.1 Subsidiary Recitals Supplemental Notice 5.5 Tax Notice 11.1 Tax Returns 3.14 Tax Sharing Agreement 3.14 Third Accounting Firm 10.3 Threshold 10.3 Unliquidated Claim 10.6 U.S. Acquisition Recitals U.S. Closing 2.1 U.S. Purchase Price 1.2 1998 EBITDA 2.4 1998 EBITDA Target 2.4
-65- IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the date first above written. KURAYA AMERICAN SYSTEMS INC., a California corporation By /s/ Gerry Shishido ---------------------------------------------- Gerry Shishido, Vice President ------------------------------------------------ Printed Name and Title KURAYA CORPORATION, a corporation organized under the laws of Japan By /s/ Osamu Takumiva ---------------------------------------------- Osamu Takumiva, Executive Vice President ------------------------------------------------ Printed Name and Title IBRD-ROSTRUM GLOBAL, INC., a Delaware corporation By /s/ Gerry Shishido ---------------------------------------------- Gerry Shishido, Vice President ------------------------------------------------ Printed Name and Title IBRD-ROSTRUM EUROPE, INC., a Delaware corporation By /s/ Gerry Shishido --------------------------------------------------- Gerry Shishido, President and Chief Executive Officer ----------------------------------------------------- Printed Name and Title PHOENIX INTERNATIONAL LIFE SCIENCES (U.S.) INC., a Delaware corporation By /s/ Jean-Yves Caloz ---------------------------------------------- Jean-Yves Caloz, Treasurer ------------------------------------------------ Printed Name and Title -66- PHOENIX INTERNATIONAL LIFE SCIENCES INC., a corporation organized under the laws of Quebec, Canada By /s/ Jean-Yves Caloz ------------------------------------------------ Jean-Yves Caloz, Senior Vice President and Chief Financial Officer -------------------------------------------------- Printed Name and Title -67- ATTACHMENT A Without limiting Section 3.14, the following additional representations and warranties are made with respect to IBRD-Rostrum Group Ltd., IBRD-Rostrum Global Ltd. and Bath Clinical Trials Ltd., each a "UK Company." Statements herein with respect to Bath Clinical Trials Ltd. are made to the Knowledge of KAS. DEFINITIONS "ACCOUNTING DATE" This means the financial year end date which for both of the UK Companies is 31 December. "AUDITED ACCOUNTS" The Audited Accounts of the Company for the accounting reference period ended on the Accounting Date. "EVENT" Any event, act, transaction or omission of whatever nature and includes without limitation any change in the residence of any person and a failure to distribute. "ICTA 1988" Income and Corporation Taxes Act 1988. "IHTA 1984" Inheritance Tax Act 1984. "REVENUE" The Board of the Inland Revenue. "TAXATION" Any form of taxation, duty, levy, impost, charge, national insurance or other similar contribution, or rates, created or imposed by any governmental, state, federal, local, municipal or other body, in the United Kingdom including any payment which the Company A-1 may be or become bound to make or obliged to account for to any person in respect of taxation and also including any related penalty, interest, fine or surcharge. "TCGA 1992" The Taxation Chargeable Gains Act 1992. "VATA 1994" Value Added Tax Act 1994; and 1. RETURNS AND INFORMATION 1.1 All returns, computations, notices and information which are or have been required to be made or given by each UK Company to a UK governmental authority for each Taxation purpose 1.1.1 have been made or given within the requisite periods required by law and on a correct and proper basis proper basis in all material respects filed; and 1.1.2 none of them is or is likely to be, the subject of any material dispute with the Revenue except that in relation to the 1995 return there is an open issue regarding a covenant not to compete 1.1.3 did not improperly claim any relief, allowance, deduction or credit so as to result in the likelihood of a relief claimed being disallowed or the imposition or assessment or increased assessment (including any claim for any penalty, interest, surcharge or fine) for the periods covered. 1.2 Each UK Company has paid all Taxation which it has become liable to pay and is not, and has not in the six years ending on the date of this Agreement been, liable to pay a penalty, surcharge, fine or interest in connection with Taxation or the submission or failure to submit any returns. 1.3. Each UK Company is in possession of sufficient information or has reasonable access to such information to enable it to compute its liability to Taxation insofar as it depends on any Event occurring on or before the Closing Date and the books and records of each UK Company contain sufficient detail in appropriate form to enable the Taxation liability of such UK Company to be established in all material respects and to determine the Taxation consequences in all material respects which would arise on any disposal or realization of any asset owned at the Accounting Date or acquired since that date but before the Closing Date. A-2 1.4 No Taxation authority has, to the Knowledge of KAS, investigated or indicated in writing to a U.K. Subsidiary that it intends to investigate the Taxation affairs of any UK Company or carried out any audit in relation to the Taxation affairs of a UK Company. 1.5 All material Taxation liabilities of each UK Company including contingent and deferred liabilities as at the Accounting Date are fully and properly provided for or reserved in the Audited Accounts. 1.6 The execution or completion of this Agreement will not result in any profit or gain being deemed to accrue to any of the UK Companies for Taxation purposes whether under Section 178, or 179 TCGA 1992 or otherwise. 1.7 SCHEDULE 3.14 sets out full particulars of any special agreement or arrangement currently in place between the UK Company and the Revenue as a result of which such UK Company is permitted not to comply with its statutory obligations. 1.8 No Event has occurred as a result of which the Company has or may become liable to pay or to bear any Taxation which is primarily or directly chargeable against or attributable to any person, firm or company other than the Company. 1.9 No notice has been given to the Company or any UK Company or enquiry made nor are pursuant to Section 770 ICTA 1988, other than an enquiry concerning transfer pricing between UK Companies and the German and French IBRD Subsidiaries.. 2. TAXATION CLAIMS, LIABILITIES AND RELIEFS 2.1 SCHEDULE 3.14 sets forth all matters rating to Taxation in respect of which each UK Company (either alone or jointly with any other person) has, or at the Closings will have an outstanding entitlement in relation to any accounting period commencing prior to Closing to make. 2.1.1 any claim for relief, 2.1.2 any application to make an election, including an election for one type of relief, or one basis, system or method of Taxation, as opposed to another, 2.1.3 any appeal or further appeal against an assessment to Taxation; and 2.1.4 any application for the postponement of, or payment by instalments of, Taxation; or to disclaim or require the postponement of any allowance or relief; A-3 2.2 No relief from Taxation (whether by way of deduction, reduction, set off, exemption, postponement, rollover, holdover, repayment or allowance or otherwise) from, against or in respect of any Taxation has been given to any UK Company by Revenue which properly should be effectively withdrawn, postponed, restricted, clawed back or otherwise lost as a result of any act or omission of a UK Company. 3 CLOSE COMPANIES 3.1 No UK Company is, nor has never been since the acquisition of IBRD-Rostrum Group, Ltd by IBRD-Rostrum Europe, Inc., a close company. 4. DISTRIBUTIONS 4.1 No UK Company has failed to treat as a distribution any amount which ought to have been so treated for Taxation purposes. 4.2 No UK Company has made any distribution for Taxation purposes since the Accounting Date. 4.3 Since the acquisition of IBRD-Rostrum Group Ltd. by IBRD-Rostrum Europe, Inc., none of the UK Companies have made a repayment of share capital to which Section 210 ICTA 1988 (bonus issue following repayment of share capital) applies or issued share capital as paid up other than by the receipt of new consideration within the meaning of Part VI ICTA 1988 (company distributions, tax credits etc.). 5. COMPANY RESIDENCE Each UK Company has been resident for tax purposes in the United Kingdom and nowhere else at all times since its incorporation and will be so resident at Closing. 6. GROUP RELATIONSHIPS 6.1 No UK Company has ever been a member of any group (other than the Group comprised of the three UK Companies) for any Taxation purpose. 6.2 No UK Company is liable to make a payment for Group Relief, ACT or Taxation Refund surrendered to it, provided, however, the Audited Accounts have been prepared based on the assumption that IBRD-Rostrum Group Ltd would make such payment to IBRD-Rostrum Global Ltd. A-4 6.3 No UK Company is liable under an obligation, agreement or arrangement entered into before the Closings to surrender Group Relief, ACT or Taxation Refund which has not been surrendered. 6.4 There is no arrangement by which a UK Company may become liable to repay a sum paid to it for the surrender of the Group Relief, ACT or Taxation Refund. 7. REPLACEMENT OF BUSINESS ASSETS No disposal of a business asst has been made in respect of which gain was deferred through replacement of business assets. 8. CORPORATION TAX 8.1 If each of the assets (other than trading stock) each UK Company was disposed of for a consideration equal to the book value of that asset in, or adopted for the purpose of, the Audited Accounts, no liability to Taxation, not fully provided for in the Audited Amounts, would arise. 8.2 No UK Company is entitled to any capital loss to which section 18(3) TCGA 1992 applies. 8.3 A balancing charge of not more than (pound)90,000 UK would arise in respect of capital allowances claimed by or given to each UK Company if the assets of the UK Companies or the plant and machinery taken as a whole were to be realized for a consideration equal to the amount of their book value as shown or included in the Audited Accounts. 9. PAYE, NATIONAL INSURANCE AND OTHER WITHHOLDING TAX 9.1 All income tax under the Pay As You Earn system and payments due in respect of employees' National Insurance Contributions have been deducted from all payments made or treated as made by each UK Company and have been duly paid by each UK Company to the Revenue in the appropriate manner, and each UK Company has complied with all its reporting obligations in connection with all payments to and benefits provided for employees and directors of such UK Company. 9.2 No PAYE audit has been made in respect of each UK Company by the Revenue and no notice has been given that any such audit will or may be made; however, in a National Insurance Contributions Agency examination in August 1996 the status of two persons as self-employed was questioned but agreed to have been correctly characterized as such. A-5 9.3 Each UK Company has in all material respects, accounted to the Revenue, as required by law, for all secondary Class 1 and Class 1A National Insurance Contributions which it is required by law to make. 10. DEPRECIATORY TRANSACTIONS AND VALUE SHIFTING 10.1 No asset owned by any UK Company has at any time since its acquisition by that or any other UK Company or any UK Company which has at any time been a member of a group (as defined from time to time for any Taxation purpose) of which the Company has at any time been a member, been subjected to a reduction in value such that any allowable loss arising on its disposal is likely to be reduced or eliminated or any chargeable gain arising on its disposal is likely to be increased. 11. LOANS The UK Companies have been party to a loan relationship within the meaning of Section 81 Finance Act 1996. Group has accrued interest payable on such loan. When Group decides to pay the interest, it will need to apply for clearance to enable the interest to be paid gross I.E., without making a deduction for withholding tax. If clearance is not applied for, then Group will be obliged to deduct withholding tax on any such interest payments. party to any loan relationship within the meaning of Section 81 Finance Act 1996. 12. VALUE ADDED TAX (VAT) 12.1 For the purpose of this paragraph: "the VAT legislation" means the law relating to VAT in any jurisdiction including VATA 1994 and all regulations made or imposed thereunder (or any earlier enactment of which VATA 1994 is a consolidation) and any other statutes or other provisions relating to value added tax including all SEC legislation whether in the form of directives, regulations or otherwise; and "VAT" means UK value added tax and its equivalent under the law of any other country. 12.2 Each UK Company is registered for the purposes of VAT and has been so registered at all times that it has been required to be so registered in accordance with the VAT legislation. 12.3 Each UK Company has compiled in all material respects with the VAT legislation and has made and maintained in all material respects at the date hereof full complete correct and up-to-date records invoices and other documents appropriate or requisite for the A-6 purpose of such legislation and has at all times punctually paid and made all payments and returns required under the VAT legislation. 12.4 No UK Company is in arrears with any payment or return due under the VAT legislation and no UK Company has been liable to any abnormal or non-routine payment of VAT or to any penalty or interest for late payment of VAT or non-compliance with the VAT legislation. 12.5 No UK Company has been partially exempt for any VAT accounting period in the last six years prior to Completion and no UK Company has in that period been denied credit for any input tax. 12.6 No UK Company nor any company of which the UK Company is a relevant associate within the meaning of Paragraph 3 (7) Schedule 10 VATA 1994 has elected to waive exemption under paragraph 2 Schedule 10 VATA 1994 in relation to any land except as disclosed in Schedule 3.1. 13. STAMP DUTY 13.1 All documents in the possession or under the control of each UK Company to which it has been a party and which attract stamp duty or stamp duty reserve tax have been Property stamped, no such document is currently subject to adjudication of claims for exemption of relief, and there are no circumstances which may result in such UK Company becoming liable for any interest or penalties in respect of stamp duty or stamp reserve tax. 13.2 All documents which form part of the title of each UK Company to any asset or in the enforcement of which such UK Company is or may be interested have been duly stamped and (where appropriate) adjudicated. No UK Company has been a party to any transaction which could cause such UK Company to become liable to stamp duty reserve tax. 14. INHERITANCE TAX 14.1 The Company has made no transfer of value within section 94 or 99 IHTA 1984. 14.2 No person has or may as a result of any event occurring on or before Closing have the power under section 212 IHTA 1984 to raise any capital transfer tax or inheritance tax by the sale of or charge over any of the such UK Company's assets. A-7 14.3 There is no unsatisfied liability to capital transfer tax or inheritance tax attached or attributable to the assets of each UK Company or the shares in such UK Company, and neither the assets not the Shares are subject to any Inland Revenue charge as is mentioned in section 237 IRTA 1984. A-8 ATTACHMENT B GENERAL COMPLIANCE WITH STATUTES AND LICENSES General 1.1 Each UK Company has obtained all licenses, consents, approvals, permissions, permits, (including, without limitation Home Office permits for, inter alia, animal experimentation), test and other certificates and authorities (public or private) and details of compliance procedures and/or Accreditations relating to the Good Laboratory Practise, Good Clinical Practise and Good Manufacturing Practice Guidelines (together "Licenses") necessary for the carrying on of its business in the places and in the manner in which such business is now carried on. 1.2 All Licenses are accurately listed in SCHEDULE 3.13 and are valid and subsisting. 1.3 There are no reasons or any facts or circumstances which (with or without the giving of notice or lapse of time) would be likely to give rise to any reason why any of the Licenses should be suspended, canceled, revoked or not renewed. 2. Each UK Company and each of IBRD-France and IBRD-Germany has conducted and is conducting its business in all material respects in accordance with all applicable contracts, laws, rules, regulations, judgments, decisions, decrees, orders, Licenses or other requirements of any government, quasi government, statutory, administrative or regulatory body, court or agency (whether of the U.K., France, Germany or elsewhere), including, without limitation, with respect to: 2.1 selecting investigators; 2.2 obtaining documentation from investigators; 2.3 verifying that patient informed consent is obtained; 2.4 monitoring the validity and accuracy of data; 2.5 verifying drug countability and instructing investigators to maintain records and reports. B-1 SCHEDULE 10.2 INDEMNIFIABLE DISCLOSED ITEMS SCHEDULE 3.6 1. Bracco (study B16880/015) 2. Reckitt & Coleman and Daiichi SCHEDULE 3.8 1. Roche to the extent, when taken together with all other bad debt and doubtful accounts, is in excess of accounts receivable bad debt and doubtful accounts reserve SCHEDULE 3.9 1. Dainippon 2. Japan tobacco 3. Novartis 4. Schwabe 5. Roche 6. Tap Holdings, Inc. SCHEDULE 3.14 AND ATTACHMENT A 1. South Africa Branch Office of IBRD-Rostrum Global Limited to the extent in excess of Rand 190,500 2. VandenBurg 3. Nonfilings in Colorado, Florida, Idaho, Illinois, Maryland, Massachusetts, Minnesota, Missouri, North Carolina, Ohio, Tennessee, Texas, Wisconsin 401(k) Plan Audit 5. IBRD-Rostrum Global Limited 1995 expected corporation tax refund 6. 1995 U.K. Tax Returns - treatment of restrictive covenant cost 7. 1996 U.K. Tax Returns - treatment of restrictive covenant cost 8. Interaction between IBRD-Rostrum Global Limited and IBRD-France and IBRD-Germany 9. 1996 Federal Tax return amendment Exhibit A ESCROW AGREEMENT THIS ESCROW AGREEMENT (this "Agreement") is made as of February ___, 1998 by and among Phoenix International Life Sciences (U.S.), Inc., a Delaware corporation ("Phoenix U.S."), Phoenix International Life Sciences Inc., a corporation constituted under the laws of Canada ("Phoenix Canada" and together with Phoenix U.S., the "Phoenix Parties"), Kuraya American Systems Inc., a California corporation ("KAS"), Kuraya Corporation, a corporation organized under the laws of Japan ("Kuraya" and together with KAS, the "Kuraya Parties"), and First Trust of California, National Association (the "Escrow Agent"). BACKGROUND The Phoenix Parties and the Kuraya Parties are parties to a Stock Purchase Agreement dated as of December 24, 1997 (the "Stock Purchase Agreement") pursuant to which Phoenix Canada is purchasing all of the issued and outstanding shares of certain subsidiaries of the Company, and Phoenix U.S. is purchasing from KAS all of the issued and outstanding Common Stock of the Company This Agreement is the Escrow Agreement that is referred to in the Stock Purchase Agreement. Unless otherwise defined herein, terms are used herein as defined in the Stock Purchase Agreement. WITNESSETH NOW, THEREFORE, in consideration of the respective covenants contained herein and in the Stock Purchase Agreement and intending to be legally bound, the parties hereto agree as follows: 1. INCORPORATION OF TERMS OF STOCK PURCHASE AGREEMENT. The provisions of the Stock Purchase Agreement, a conformed copy of which has been delivered to the Escrow Agent, are hereby incorporated herein by reference but only as the context of this Agreement may require. 2. ESCROW FUNDS. 2.1 The Phoenix Parties and the Kuraya Parties hereby appoint the Escrow Agent as their agent and custodian to hold, invest and disburse the funds deposited with the Escrow Agent on the date hereof and all earnings thereon (collectively, the "Escrow Funds") in accordance with the terms of this Agreement. 2.2 On the date of this Agreement, the Phoenix Parties are depositing a portion of the Purchase Price with the Escrow Agent in the amount of Five Million Dollars ($5,000,000). The parties hereto acknowledge and agree that, subject to the terms hereof, the Escrow Funds shall be the property of KAS. 2.3 Upon receipt of the Escrow Funds, the Escrow Agent shall send a notice to the Kuraya Parties and the Phoenix Parties acknowledging receipt of the Escrow Funds and shall hold the Escrow Funds in escrow pursuant to the terms of this Agreement. The Escrow Agent shall segregate the Escrow Funds from all other property held by the Escrow Agent and shall identify the Escrow Funds as being held in connection with this Agreement. The Escrow Agent agrees that its documents and records with respect to the transactions contemplated hereby will be available for examination by authorized representatives of the Phoenix Parties and the Kuraya Parties upon reasonable notice and during normal business hours. 2.4 The Escrow Funds shall not be subject to lien or attachment by any creditor of any party hereto and shall be used solely for the purpose set forth in this Agreement. 2.5 The Escrow Funds shall be invested exclusively in (i) any money market mutual fund that invests exclusively in obligations of the United States Government, or any agencies or instrumentalities thereof or any combination of the foregoing, (ii) short-term obligations issued by the United States Treasury and (iii) such other government securities as may be approved in writing from time to time by the Phoenix Parties and the Kuraya Parties. The Chief Financial Officer of KAS shall direct, with the consent of Phoenix U.S., the investment of the Escrow Funds in accordance with this Section 2.5. Any interest income or other investment proceeds shall be credited to the account of KAS, and KAS shall be obligated to pay all income and other taxes in respect thereof. The Escrow Agent shall release to KAS by the fifth business day of each calendar quarter hereafter all interest income and other investment proceeds of the Escrow Funds earned during the previous period. 3. CLAIMS UNDER STOCK PURCHASE AGREEMENT. 3.1 If a Buyer Indemnified Party shall claim indemnification under the Stock Purchase Agreement (a "CLAIM"), the Buyer Indemnified Party shall give written notice of the Claim (a "CLAIM NOTICE") to the Escrow Agent and the Kuraya Parties. The Claim shall then be resolved -2- in accordance with the procedures set forth in the Stock Purchase Agreement. Upon resolution of a Claim, the Kuraya Parties and the Phoenix Parties shall issue a joint written direction to the Escrow Agent with respect to the Claim at issue. The Escrow Agent shall act in accordance with a written direction from the Phoenix Parties and the Kuraya Parties if and when issued. If the Phoenix Parties and the Kuraya Parties are unable to resolve the Claim, such Claim shall be settled by appropriate arbitration, and any Losses established by reason of such litigation shall be deemed to be finally determined. Upon such final determination, the Escrow Agent shall pay over to the Buyer Indemnified Party the amount set forth in a copy of a binding arbitration award evidencing a final, binding and enforceable award. 4. TERMINATION OF ESCROW. Promptly after the eighteenth complete calendar month following the date hereof, the Escrow Agent shall deliver the remainder of the Escrow Funds to KAS, except that if a Claim under the Stock Purchase Agreement is unresolved at that time, a portion of the Escrow Funds that is equal to any such outstanding Claim shall continue to be held until the resolution of the Claim in accordance with this Agreement. Upon delivery of all the Escrow Funds to the Kuraya Parties and/or to a Buyer Indemnified Party pursuant to Section 3 above, this Agreement will thereupon terminate. 5. EXPENSES. The Escrow Agent's fee schedule is attached hereto as Exhibit A and incorporated herein. All expenses and fees (including reasonable attorneys' fees) of the Escrow Agent shall be borne by the Phoenix Parties. The Phoenix Parties and the Kuraya Parties shall bear their own expenses in connection with the resolution of any Claim or other dispute with respect to this Agreement, except as otherwise provided in the Stock Purchase Agreement. 6. NOTICES. Any notice or other communication required or permitted hereunder shall be in writing, shall be delivered personally, by facsimile transmission or by overnight courier, shall be deemed given upon receipt if delivered personally, or upon confirmation of receipt, if given by facsimile, or on the first business day following delivery by overnight courier, if delivered by overnight courier, and shall be as follows: -3- (1) If to Phoenix U.S. or Phoenix Canada to: Phoenix International Life Sciences (U.S.) Inc. Phoenix International Life Sciences Inc. 2350 Cohen Street Saint-Laurent (Montreal) Quebec Canada H4R 2N6 Attention: Chief Executive Officer Telecopier: (514) 333-7306 with a copy to: Pepper Hamilton LLP 1235 Westlakes Drive, Suite 400 Berwyn, PA 19312 Attention: James D. Rosener, Esquire Telecopier: (610) 640-7835 (2) If to KAS or Kuraya to: Kuraya American Systems Inc. 3625 Del Amo Blvd., Ste. 180 Torrance, CA 90503 Attention: Mr. Gerry Shishido, Vice President Telecopier: (310) 542-4175 with a copy to: Sheppard, Mullin, Richter & Hampton LLP 333 South Hope Street 48th Floor Los Angeles, California 90071 Attention: Scott J. Lochner, Esq. Telecopier: (213) 620-1398 (3) If to the Escrow Agent to: First Trust of California, National Association 550 South Hope Street, Ste. 500 Los Angeles, California 90071 Attention: Brad Scarbrough Telecopier (213) 533-8750; Telephone: (213) 533-8741 -4- Any party may, by notice given in accordance with this Section 6 to the other parties, designate another address or person for receipt of notices hereunder. 7. SECURITY INTEREST. 7.1 As security for the payment of any Claim that a Buyer Indemnified Party may have against KAS hereunder, the Kuraya Parties hereby grant to the Phoenix Parties a security interest in the Escrow Funds to the extent of the Kuraya Parties' ownership interest, if any, and other rights that the Kuraya Parties may have hereunder (collectively, the "Collateral"). 7.2 The Kuraya Parties will execute, from time to time, such financing statements and other documents covering the Collateral as the Phoenix Parties may reasonably request in order to create, evidence, perfect, maintain or continue its security interest in the Collateral. 7.3 The Kuraya Parties acknowledge that they are granting to the Phoenix Parties a first priority security interest in the Collateral under the Uniform Commercial Code as in effect in California, and that the Kuraya Parties will not assign the Collateral or any interest therein in any manner without the prior written consent of the Phoenix Parties. In particular, the Kuraya Parties will not grant any other security interest in the Collateral without the prior written consent of the Phoenix Parties. 7.4 The security interest granted in the Collateral shall be deemed automatically released upon the Escrow Agent's release of the Escrow Funds to KAS in accordance with the terms of this Agreement. 7.5 The Escrow Agent hereby waives any right, title and interest it may have in or to the Collateral except to the extent of fees and expenses in the amounts provided on Exhibit A hereto. 8. LIABILITY OF ESCROW AGENT. 8.1 The Phoenix Parties and the Kuraya Parties, jointly and severally, shall indemnify the Escrow Agent and hold it harmless from and against any losses, liabilities, expenses (including reasonable attorneys' fees and expenses), claims or demands arising out of or in connection with the performance of its obligations in accordance with the provisions of this Agreement, except for losses, liabilities, expenses, claims or demands resulting from the gross negligence or willful misconduct of the Escrow Agent. These indemnities shall survive the resignation of the Escrow Agent and the termination of this Agreement. 8.2 The Escrow Agent shall have no duties except those specifically set forth in this Agreement and shall not be subject to, nor have any liability or responsibility under, any other -5- agreement or document the parties hereto may be responsible for, even if same is referenced herein. 8.3 The Escrow Agent shall be protected in acting upon written instructions from the Phoenix Parties and the Kuraya Parties if it, in good faith, believes such written instructions to be genuine and what it purports to be. 8.4 The Escrow Agent may confer with legal counsel, including its own in-house counsel, in the event of any dispute or questions as to the construction of any of the provisions hereof, or its duties hereunder, and it shall incur no liability and it shall be fully protected in acting in accordance with the opinions of such counsel except to the extent of any willful misconduct or gross negligence of the Escrow Agent. 8.5 If a dispute arises between or among any of the parties to this Agreement, the Escrow Agent shall be entitled, at its option, and upon written notice to the Phoenix Parties and the Kuraya Parties, to tender into the custody of any court of competent jurisdiction in California all funds and all materials that the Escrow Agent may be holding under this Agreement and to begin such legal proceedings as the Escrow Agent deems appropriate. After taking such actions, the Escrow Agent shall then be discharged from any further duties and liability under this Agreement except to the extent of any prior willful misconduct or gross negligence of the Escrow Agent. 9. RESIGNATION AND REMOVAL OF ESCROW AGENT. 9.1 The Escrow Agent may resign at any time and for any reason upon notice to the Phoenix Parties and the Kuraya Parties given at least 30 days prior to the effective date of such resignation. During such 30-day period, the Phoenix Parties and the Kuraya Parties shall endeavor to agree upon a successor Escrow Agent. If the Phoenix Parties and the Kuraya Parties fail to agree on a successor Escrow Agent within such 30-day period, the Escrow Agent shall deliver the funds and all materials that it may then be holding to a court in accordance with Section 8.2 above. If the Escrow Agent becomes unable to fulfill its duties hereunder, or if for any reason, the Phoenix Parties and the Kuraya Parties desire to remove the Escrow Agent hereunder, the Phoenix Parties and the Kuraya Parties may appoint a successor Escrow Agent for the purposes of this Agreement. Upon the appointment of any successor Escrow Agent under this Agreement, the successor Escrow Agent shall have all the rights, duties and powers that applied to the original Escrow Agent hereunder. 9.2 Any company into which the Escrow Agent may be merged or with which it may be consolidated, or any company to whom Escrow Agent may transfer a substantial amount of its global escrow business, shall be the successor to the Escrow Agent without the execution or -6- filing of any paper or any further act on the part of any of the parties hereto, anything to the contrary herein notwithstanding. 10. GENERAL. 10.1 ENTIRE AGREEMENT. This Agreement and the Stock Purchase Agreement contain the entire agreement of the parties with respect to the subject matter hereof, and supersede all prior agreements, representation and warranties, written or oral, with respect thereto. 10.2 WAIVERS AND AMENDMENTS. This Agreement may be amended, superseded, canceled, renewed or extended, and the terms hereof or thereof may be waived, only by a written instrument signed by each of the parties hereto, in the case of a waiver, by the party waiving compliance. The failure of a party to insist, in any one or more instances, upon performance of the terms or conditions of this Agreement shall not be construed as a waiver or relinquishment of any right granted hereunder or of the future performance of any such term, covenant or condition. No waiver on the part of any party of any right, power or privilege, nor any single or partial exercise of any such right, power or privilege, shall preclude any further exercise thereof or the exercise of any other such right, power or privilege. 10.3 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the substantive and procedural laws of the State of California applicable to agreements made and to be performed entirely within such State. Each of the parties hereby consents to the jurisdiction of any state or federal court located in the State of California. Notwithstanding any provision herein to the contrary, any controversy or claim arising out of or relating to this Agreement or the breach thereof, other than a claim for specific performance or injunctive relief, shall be settled by arbitration before a single arbitrator in the State of California in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. All costs associated with such arbitration shall be borne equally by the parties to the dispute, except that each party shall bear the costs of its own attorneys and experts (except as otherwise provided in this Agreement). 10.4 REFERENCE TO U.S. DOLLARS. All references in this Agreement to amounts of money expressed in dollars are references to United States dollars, unless otherwise indicated. 10.5 BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the parties and their respective permitted successors and permitted assigns. Neither this Agreement nor any of the rights hereunder, may be assigned by any party, nor may any party delegate any obligations hereunder, without the written consent of the other party hereto or thereto. Any non-permitted assignment or attempted assignment shall be void. Notwithstanding the foregoing, any party hereto (other than the Escrow Agent) may assign this Agreement, and -7- any of its rights hereunder, and may delegate any of its obligations hereunder, to any of its Affiliates. 10.6 NO THIRD PARTY BENEFICIARIES. Nothing herein is intended or shall be construed to give any person any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein, except as otherwise provided herein. 10.7 COUNTERPARTS. This Agreement may be executed by the parties in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof or thereof each signed by less than all, but together signed by all of the parties. 10.8 HEADINGS. The heading herein are for reference only and shall not affect the interpretation of this Agreement. 10.9 SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. [SIGNATURE PAGE FOLLOWS.] -8- IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first written above. KURAYA AMERICAN SYSTEMS INC., a California corporation By /s/ Gerry Shishido -------------------------------- Gerry Shishido, Vice President ----------------------------------- Printed Name and Title KURAYA CORPORATION By /s/ /s/ Osamu Takumiya -------------------------------- Osamu Takumiya, Executive Vice President ----------------------------------- Printed Name and Title PHOENIX INTERNATIONAL LIFE SCIENCES, INC., a Canadian corporation By /s/ Jean-Yves Caloz -------------------------------- Jean-Yves Caloz, Chief Financial Officer ----------------------------------- Printed Name and Title PHOENIX INTERNATIONAL LIFE SCIENCES (U.S.) INC., a Delaware corporation By /s/ Jean-Yves Caloz -------------------------------- Jean-Yves Caloz, Treasurer ----------------------------------- Printed Name and Title FIRST TRUST OF CALIFORNIA, NATIONAL ASSOCIATION, as Escrow Agent By /s/ Brad E. Scarbrough -------------------------------- Brad E. Scarbrough, Assistant Vice President ----------------------------------- Printed Name and Title -9- EX-2.3 4 EXHIBIT 2.3 Exhibit 2.3 SHARE PURCHASE AGREEMENT AMONG PHOENIX INTERNATIONAL LIFE SCIENCES INC. AND DR. JOHANN JAKOB VOLLENWEIDER AND ALBERS & CO. AND DR. ERNST FISCHER AND INNOVENT CAPITAL LTD. AND WERNER HASSLER AND DR. PETER JOLLER AND DR. DAVID KARABELNIK AND DR. ANDREAS WICKI AND ANAWA HOLDING AG -------------------------- DATED AS OF APRIL 30, 1998 -------------------------- SHARE PURCHASE AGREEMENT dated as of April 30, 1998 AMONG: PHOENIX INTERNATIONAL LIFE SCIENCES INC., a corporation incorporated under the Canada Business Corporations Act, having its head office at 2350, Cohen Street, Saint-Laurent, Quebec, Canada, H4R 2N6, herein acting and represented by Suzanne Peeters, its duly authorized representative; (hereinafter "Phoenix") AND: DR. JOHANN JAKOB VOLLENWEIDER, residing at Unterdorfstrasse 23, 8602 Wangen, Switzerland; (hereinafter "Vollenweider") AND: ALBERS & CO., a Swiss partnership having its head office at Schanzengasse 14, 8000 Zurich, Switzerland, herein acting and represented by Dr. Johann Jakob Vollenweider, its duly authorized representative; (hereinafter "Albers") AND: DR. ERNST FISCHER, residing at Heugatterstrasse 24, 8600 Dubendorf, Switzerland; (hereinafter "Fischer") AND: INNOVENT CAPITAL LTD., a company incorporated under the laws of the Cayman Islands, with a corporate seat at Midland Bank Trust Building, P.O. Box 1109, Fort Street, Grand Cayman, B.W.I., herein acting and represented by Dr. Johann Jakob Vollenweider, its duly authorized representative; (hereinafter "Innovent") AND: WERNER HASSLER, residing at Buchserstrasse 43, 8157, Dielsdorf, Switzerland; (hereinafter "Hassler") - 2 - AND: DR. PETER JOLLER, residing at Spitzackerstrasse 8, 8057 Zurich, Switzerland; (hereinafter "Joller") AND: DR. DAVID KARABELNIK, residing at Untere Allmend 12, 8702 Zollikon, Switzerland; (hereinafter "Karabelnik") AND: DR. ANDREAS WICKI, residing at Hohestrasse 39, 8702 Zollikon, Switzerland; (hereinafter "Wicki") (Vollenweider, Albers, Fischer, Innovent, Hassler, Joller, Karabelnik and Wicki are hereinafter collectively referred to as the "Vendors") AND: ANAWA HOLDING AG, a Swiss corporation with capital of SFr3,000,000, registered in the Commercial Register of the Canton of Zug under number CH-170.3.016.195-4 and having its head office at Industriestrasse 13c, 6300 Zug, Switzerland, herein acting and represented by Dr. Johann Jakob Vollenweider, its duly authorized representative; (hereinafter "Anawa") WHEREAS, the Vendors hold, directly or indirectly, as more fully set out in Schedule A, all of the outstanding shares and voting rights of Anawa; WHEREAS, ANAWA Laboratorien AG ("Laboratories"), a Swiss corporation, with capital of SFr1,110,000, registered in the Commercial Register of the Canton of Zurich under number CH- 020.3.901.417-4 and having its head office at Unterdorfstrasse 23, 8602 Wangen-Bruttisellen, Switzerland, is a subsidiary of Anawa, held as to 100% by Anawa. The capital structure of Laboratories is set forth in Schedule B; WHEREAS, ANAWA Trading AG ("Trading"), a Swiss corporation, with capital of SFr100,000, registered in the Commercial Register of the Canton of Zurich under number CH-020.3.901.440-9 and having its head office at Unterdorfstrasse 23, 8602 Wangen-Bruttisellen, Switzerland, is a subsidiary of Anawa, held as to 100% by Anawa. The capital structure of Trading is set forth in Schedule C; WHEREAS the Vendors have agreed to sell all of the outstanding shares of Anawa to Phoenix in consideration for the issuance to the Vendors of common shares of Phoenix; - 3 - NOW, THEREFORE, the parties hereto agree as follows: 1. INTERPRETATION AND DEFINITIONS Except as the context otherwise explicitly requires, (a) the capitalized term "Section" refers to sections of this Agreement; (b) the capitalized terms "Schedules" and "Exhibit" refer to schedules and exhibits to this Agreement; (c) references to a particular Section include all subsections thereof; (d) the word "including" shall be construed as "including without limitation"; (e) accounting terms not otherwise defined herein have the meaning provided under GAAP (as defined below); (f) references to a particular law, statute or regulation include all rules and regulations thereunder and any successor, law, statute, regulation or rules, in each case as from time to time in effect; (g) references to a particular Person include such Person's successors and assigns to the extent not prohibited by this Agreement; (h) references to dollars or $ in this Agreement are to Canadian dollars. In this Agreement, unless the context otherwise requires, the following terms shall have the respective meanings assigned to them: 1.1 "AFFILIATE" means, with respect to any Person, any Person which, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with such Person. For the purposes of this Agreement, "Affiliate" also means an affiliate as such term is defined by the SEC. 1.2 "ANAWA AFFILIATE" means any of Vollenweider, Albers, Fischer, Innovent, Karabelnik and Wicki. 1.3 "ARTICLES" means the original or restated articles of incorporation, articles of amendment, articles of amalgamation, articles of continuance, articles of reorganization and articles of arrangement, including amendments thereto, as in effect from time to time, of Anawa. 1.4 "COMPENSATION" as applied to any Person means the aggregate of all salaries, compensation, remuneration or bonuses of any character, retirement or pension benefits of any kind, or other payments of any kind whatsoever (other than health and medical benefits made available to employees generally and advances and reimbursements of business expenses) made directly or indirectly by Anawa, any of the Subsidiaries or other specified Persons to such Person and affiliates of such Person. 1.5 "COMPLETION DATE" means the date of this Agreement, i.e. April 30, 1998. 1.6 "CONSOLIDATED", when used with reference to any term, means that term as applied to the accounts of Anawa or other indicated Person and each of its respective Subsidiaries, consolidated or combined in accordance with GAAP after eliminating all inter-company operations and with appropriate deductions for minority interests in Subsidiaries. 1.7 "CONTRACTUAL OBLIGATION" means, with respect to any Person, any contracts, agreements, deeds, hypothecs, mortgages, indentures, leases, licenses, other instruments, commitments, undertakings, arrangements or understandings, written or oral, or other documents or instruments, including any provisions of its articles of incorporation or other constituting documents or by-laws and any document or instrument evidencing Indebtedness, to which any such Person is a - 4 - party or otherwise subject to or bound by or to which any property or asset of any such Person is subject. 1.8 "DISTRIBUTION" means (a) the declaration or payment of any dividend on or in respect of the shares of any class or series of shares of Anawa, any of the Subsidiaries or other specified Person, other than dividends payable solely in common shares of the share capital of the payor; (b) the purchase, redemption or other retirement of any shares of any class of Anawa, any of the Subsidiaries or other specified Person directly, or indirectly through a Subsidiary or otherwise; or (c) any other distribution on or in respect of any shares of any class or series of shares of Anawa, any of the Subsidiaries or other specified Person. 1.9 "ESCROW AGENT" means Montreal Trust Company. 1.10 "ESCROW AGREEMENT" means the escrow agreement entered between the parties hereto and the Escrow Agent a copy of which is attached hereto as Schedule 1.10. 1.11 "ESCROWED SECURITIES" means the Phoenix Shares escrowed pursuant to Section 2.4 together with all Proceeds (as defined in the Escrow Agreement). 1.12 "ESCROWED SHARE PRICE" means the amount obtained by adding the opening and closing prices of the common shares of Phoenix on each of the Montreal Exchange and The Toronto Stock Exchange for the ten trading days preceding the date of execution of the present Agreement, divided by 40. 1.13 "ENVIRONMENTAL LAWS" means all Legal Requirements (including consent decrees, administrative orders and contractual obligations) relating to public health and safety, workers health and safety and pollution or protection of the environment. 1.14 "GAAP" means generally accepted accounting principles, as in effect from time to time, consistently applied. 1.15 "GUARANTEE" means (a) any guarantee of the payment or performance of, or any contingent obligation in respect of, any indebtedness or other obligation of any other Person, (b) any other arrangement whereby credit or financial assistance is extended to one obligor on the basis of any promise or undertaking of another Person (i) to pay the Indebtedness of such obligor, (ii) to purchase any obligation owed by such obligor, or (iii) to maintain the capital, working capital, solvency or general financial condition of such obligor, whether or not such arrangement is disclosed in the balance sheet of such other Person or is referred to in a footnote thereto or appears in a "keep well" agreement, "comfort letter" or "take or pay" agreement, and (c) any liability of Anawa or any of the Subsidiaries as general partner of a partnership or as a venturer in a joint venture in respect of Indebtedness or other obligations of such partnership or venture; provided, however, that in no event shall Guarantees include product warranties given or the endorsement of negotiable instruments for deposit or collection in the ordinary course of business. 1.16 "INDEBTEDNESS" means (a) all indebtedness, obligations and liabilities for borrowed money and similar monetary obligations evidenced by bonds, notes debentures, evidences of indebtedness, - 5 - capitalized lease obligations, deferred purchase price of property (other than ordinary trade payables) or otherwise, whether direct or indirect; and (b) all indebtedness, obligations and liabilities secured by any Liens existing on property owned or acquired, whether or not the liability secured thereby shall have been assumed. 1.17 "LEGAL REQUIREMENT" means any national, provincial, regional, municipal, local or foreign law, statute, standard, ordinance, code, order, rule, regulation, resolution, promulgation, by-law, policy, guideline, directive, standard and any other provision having the force or effect of law or any final order, judgment or decree of any court, arbitrator, tribunal or governmental authority, or any license, franchise, permit, certificate, authorization, registration or similar right granted under any of the foregoing. 1.18 "LIEN" means (a) any hypothec, priority, mortgage, pledge, lien, charge, security interest or other similar encumbrance upon any property or assets of any character, or upon the income or profits therefrom, whether arising by agreement or under law, or otherwise (b) any conditional sale or other title retention agreement or arrangement (including a capitalized lease); (c) any sale, assignment, pledge or other transfer for security of any accounts, general intangibles, or chattel paper, with or without recourse, or (d) any transaction (regardless of form) which is intended to create any charge or encumbrance on property to secure the payment or performance of an obligation. 1.19 "MANAGEMENT" means each of Wicki, Vollenweider, Hassler, Karabelnik and Joller. . 1.20 "MATERIAL ADVERSE EFFECT" means any (a) material adverse effect whatsoever upon the validity, performance or enforceability of this Agreement, (b) material adverse effect upon the business, assets, financial condition, income or prospects of Anawa and the Subsidiaries on a Consolidated basis, or (c) material adverse effect upon the ability of the Vendors to perform their obligations under this Agreement. 1.21 "PERMITTED LIEN" means those Liens indicated on Schedule 1.21. 1.22 "PERSON" means an individual, partnership, corporation, company, association, trust, joint venture, unincorporated organization, business trust, limited liability company and any governmental or administrative department or agency or political subdivision. 1.23 "PHOENIX AFFILIATES" means John Hooper, Heather Baker, Judy Zilber, Jean-Yves Caloz, Sue Campbell, Dr. Richard Lalonde, Diane Bouchard, Diane Matheou, Millicent Broderick, Blake Glover, Carmen Discenza, Richard L. Lalonde, Tom Pillsworth, Pamela Burnett, Ebi Kimanani, John Burrows, John Capicchioni, Chris Kemper, Martine Ortega, Lucien Steru, Dominique Steru, Claude E. Forget, Bertran Spilker, Robert Raich, David Goldman and Suzanne Peeters. 1.24 "SEC" means the United States Securities and Exchange Commission. 1.25 "SECURITIES ACT" means the United States Securities Act of 1933, as amended, and all rules and regulations promulgated thereunder. - 6 - 1.26 "SHARES" means 9,016 bearer shares with a nominal value of SFr200 each and 11,968 registered shares with a nominal value of SFr100 each of Anawa being all of the issued and outstanding shares of Anawa. 1.27 "SUBSIDIARIES" means Laboratories and Trading and "SUBSIDIARY" means any of the Subsidiaries on an individual basis. 2. SALE AND PURCHASE OF SHARES 2.1 AGREEMENT TO PURCHASE AND SELL SHARES Upon the terms and subject to the conditions hereof and in reliance on the representations and warranties of Phoenix set forth in Section 4, Vollenweider, Albers, Fischer, Innovent, Hassler, Joller, Karabelnik and Wicki hereby sell to Phoenix and, upon the terms and subject to the conditions hereof and in reliance on the representations and warranties of the Vendors set forth in Section 3, Phoenix hereby purchases from Vollenweider, Albers, Fischer, Innovent, Hassler, Joller, Karabelnik and Wicki, the Shares, as set forth below:
VENDOR NUMBER OF ANAWA REGISTERED AND BEARER SHARES ------ -------------------------------------------- REGISTERED BEARER -------------- ---------- Vollenweider 3,430 797 Albers 0 2,350 Fischer 1,973 275 Innovent 0 2,600 Hassler 200 75 Joller 1,480 0 Karabelnik 3,429 797 Wicki 1,456 2,122 ----- ----- TOTAL 11,968 9,016
2.2 PRICE OF SHARES The purchase price of the bearer shares is payable by the issuance by Phoenix to Vollenweider, Albers, Fischer, Innovent, Hassler, Karabelnik and Wicki of an aggregate of 315,954 common shares of Phoenix. The aggregate purchase price for the bearer shares is to be allocated among Vollenweider, Albers, Fischer, Innovent, Hassler, Karabelnik and Wicki as follows: - 7 -
VENDOR NUMBER OF PHOENIX SHARES ------ ------------------------ Vollenweider 27,930 Albers 82,352 Fischer 9,637 Innovent 91,114 Hassler 2,627 Karabelnik 27,931 Wicki 74,363 -------- TOTAL 315,954
The purchase price of the registered shares is payable by the issuance by Phoenix to Vollenweider, Fischer, Hassler, Joller, Karabelnik and Wicki of an aggregate of 209,697 common shares of Phoenix. The aggregate purchase price for the registered shares is to be allocated among Vollenweider, Fischer, Hassler, Joller, Karabelnik and Wicki as follows:
VENDOR NUMBER OF PHOENIX SHARES ------ ------------------------ Vollenweider 60,099 Fischer 34,570 Hassler 3,505 Joller 25,932 Karabelnik 60,080 Wicki 25,511 -------- TOTAL 209,697
(The common shares of Phoenix issued to the Vendors pursuant to this Section 2.2 are hereinafter collectively referred to as the "Phoenix Shares".) 2.3 DELIVERY OF SHARES AND PAYMENT OF PURCHASE PRICE 2.3.1 Phoenix hereby acknowledges receipt from each of Vollenweider, Albers, Fischer, Innovent, Hassler, Joller, Karabelnik and Wicki of certificates representing the Shares duly endorsed in blank for transfer by Vollenweider, Albers, Fischer, Innovent, Hassler, Joller, Karabelnik and Wicki. 2.3.2 Vollenweider, Albers, Fischer, Innovent, Hassler, Joller, Karabelnik and Wicki hereby acknowledge receipt from Phoenix of certificates registered in the names of Vollenweider, Albers, Fischer, Innovent, Hassler, Joller, Karabelnik and Wicki representing 66.4% of the purchase price for the Shares. - 8 - 2.4 ISSUANCE INTO ESCROW Notwithstanding any provision of this Agreement, upon delivery of the Phoenix Shares pursuant to Section 2.3, 10% of the aggregate number of the Phoenix Shares and Phoenix Shares representing the total amount of the specific contingencies referred to in Section 8 hereof calculated using an amount of SFr220,000 in respect of the specific contingency referred to in Section 8.2 hereof shall be delivered immediately to the Escrow Agent, on a pro rata basis among the Vendors, to be held and released by the Escrow Agent pursuant to the terms of this Agreement and the Escrow Agreement. All such Phoenix Shares shall be issued in the name of the Escrow Agent, as escrow agent under the Escrow Agreement. The Vendors hereby acknowledge receipt of such 33.6% of the purchase price of the Shares on their behalf by the Escrow Agent. 3. REPRESENTATIONS AND WARRANTIES OF VENDORS In order to induce Phoenix to enter into this Agreement and to purchase the Shares hereunder, the Vendors hereby make the following representations and warranties to Phoenix. The Vendors' liability for the following representations and warranties shall be joint, and not solidary i.e. pro rata to the number of Phoenix Shares received by each Vendor according to Section 2.2, except in the event of fraud with respect thereto. 3.1 SHARES The Vendors own the Shares free and clear of all Liens and there are no rights or other obstacles of any nature whatsoever to the sale of the Shares to Phoenix. 3.2 ORGANIZATION 3.2.1 DUE INCORPORATION, ETC. Each of Anawa and the Subsidiaries is duly incorporated or organized and validly exists under the laws of its jurisdiction of incorporation, and is in good standing under the laws applicable to it and has all necessary corporate capacity and power to own and lease its property and assets and to carry on the businesses now conducted or presently proposed to be conducted by it. 3.2.2 SUBSIDIARIES. Anawa does not own or control, directly or indirectly, or have an interest in, any other corporation, partnership, association or business entity other than the Subsidiaries. 3.2.3 MANAGEMENT. The Management of Anawa and the Subsidiaries is exclusively comprised of the Persons referred to in Section 1.19. 3.2.4 AUTHORIZATIONS AND APPROVALS. All authorizations, approvals, licences, permits, certificates, registrations, consents, exemptions or declarations required in order for each of Anawa and the Subsidiaries to own or lease their property and assets and to carry on their business in all jurisdictions in which such property and assets are located or such business is carried on have been duly obtained or effected and are in full force and effect except for authorizations, approvals, licences, permits, certificates, registrations, consents, exemptions or declarations, the absence of which, individually or in the aggregate, does not and shall not result in a Material Adverse Effect. - 9 - In particular: (a) except for permits, certificates, licences, registrations and other authorizations, the absence of which, individually or in the aggregate, does not and shall not result in a Material Adverse Effect, each of Anawa and the Subsidiaries hold all permits, certificates, licenses, registrations and other authorizations required under applicable Environmental Laws for their operations (the "Environmental Permits"); each such Environmental Permit is valid and in force and the operations of Anawa and the Subsidiaries are in compliance with the conditions set out in such Environmental Permits and their is no ground for revocation, expiry or annulment of any such Environmental Permits; (b) except for permits, certificates, licences, registrations and other authorizations, the absence of which, individually or in the aggregate, does not and shall not result in a Material Adverse Effect, each of Anawa and the Subsidiaries hold all permits, certificates, licenses, registrations and other authorizations required under applicable Legal Requirement for clinical research for the pharmaceutical industry and pharmaceutical research (the "Research Permits"); each such Research Permit is valid and in force, the operations of Anawa and the Subsidiaries are in compliance with the conditions set out in such Research Permits and there is no ground for revocation, expiry or annulment of any such Research Permits; 3.2.5 CORPORATE RECORDS. The Corporate records of Anawa and each of the Subsidiaries are complete and up to date. 3.2.6 OFFICERS AND DIRECTORS. The officers and directors of Anawa and each of the Subsidiaries have been properly elected or appointed in accordance with applicable laws and the relevant articles of incorporation or other constituting documents. 3.2.7 CORPORATE ACTION. All necessary corporate action has been taken by Anawa, to authorize the execution of this Agreement and the consummation of the transactions contemplated hereby. The Board of directors of Anawa has agreed to register Phoenix in the share ledger of Anawa as the owner of 11,968 registered shares. 3.3 CAPITALIZATION 3.3.1 SHARE CAPITAL OF ANAWA. The outstanding share capital of Anawa is exhaustively set forth in Schedule A, all of which has been validly issued and is fully paid and non-assessable and, subject to no Lien, adverse claim or restriction on transfer, except restrictions on transfer under this Agreement. 3.3.2 OPTIONS, ETC. Other than as set forth in Schedule A and Schedule 3.3.5, Anawa does not have outstanding (a) any rights (either preemptive or otherwise) or options to subscribe for or purchase, or any warrants or other agreements providing for or requiring the issuance of, any shares or any securities convertible into or exchangeable for its shares, (b) any obligation to redeem, purchase or otherwise acquire or retire any of its shares, - 10 - any securities convertible into or exchangeable for its shares or any rights, options or warrants with respect thereto, (c) any rights to require Anawa to qualify for distribution for securities laws purposes, or (d) any restrictions on voting. 3.3.3 CAPITAL STOCK OF THE SUBSIDIARIES. The issued and outstanding shares of each Subsidiary are as set forth in Schedules B and C. The issued and outstanding shares of each Subsidiary are validly issued, and paid and non-assessable and subject to no Lien, adverse claim or restriction on transfer, other than as set forth in Schedule 3.3.3. 3.3.4 SUBSIDIARY OPTIONS, ETC. Other than as set forth in Schedule 3.3.4, none of the Subsidiaries has outstanding (a) any rights (either preemptive or otherwise) or options to subscribe for or purchase, or any warrants or other agreements providing for or requiring the issuance of, any shares or any securities convertible into or exchangeable for its shares, (b) any obligation to redeem, purchase or otherwise acquire or retire any of its shares, any securities convertible into or exchangeable for its shares or any rights, options or warrants with respect thereto, (c) any rights to require the Subsidiary to qualify for distribution for securities laws purposes, or (d) any restrictions on voting. 3.3.5 NO COMMITMENTS AFFECTING SHARES, ETC. Other than as set forth in Schedule 3.3.5, neither Anawa nor any of the Subsidiaries is a party to or bound by any agreement, commitment or understanding, whether verbal or written, affecting its shares or the participating or voting rights attached thereto. 3.4 REPORTS, FINANCIAL STATEMENTS AND OTHER DOCUMENTS Phoenix has been provided with complete and correct copies of audited financial statements of Anawa and its Subsidiaries for the years ended December 31, 1994, 1995, 1996 and 1997, copies of which are attached hereto as Schedule 3.4A. The financial statements of Anawa and the Subsidiaries referred to above have been prepared in accordance with Swiss GAAP and all such financial statements fairly present the financial condition of Anawa and the Subsidiaries at the dates thereof and the results of their operations for the periods covered thereby. Other than as set forth in Schedule 3.5, neither Anawa nor any of the Subsidiaries has material liabilities, contingent or otherwise, which are not referred to in the financial statements. The financial statements for the year ended December 31, 1994, 1995, 1996 and 1997, copies of which are attached hereto as Schedule 3.4A have been properly approved by the annual general meetings of shareholders of the relevant entities in due form without reservation. For purposes of financial presentation, Anawa recognizes net revenue from its contracts on a percentage of completion basis as work is performed. The percentage of completion, and consequently the revenue to be recorded, of each individual contract is determined through detailed analysis and discussion between all appropriate operational and financial department management. Although Anawa does not require collateral for unpaid balances, credit losses have consistently been within Management's expectations. Certain contracts contain provisions for price adjustment for cost overruns. Such adjusted amounts are included in service revenue when realization is assured and the amounts can be reasonably - 11 - determined. In the period in which it is determined that a loss will result from the performance of a contract, the entire amount of the estimated ultimate loss is charged against income. Since January 1, 1998, the business of Anawa and the Subsidiaries has been operated in the customary fashion and no revenues that would have been earned by Anawa or the Subsidiaries have been earned by any Person who is an Affiliate of any of the Vendors. Notwithstanding anything else in this Agreement, including, without limitation, the provisions of this Section 3.4, the Vendors make no representation or warranty of any kind whatsoever with respect to future business, financial performance or future profitability of Anawa. 3.5 OFF BALANCE SHEET OBLIGATIONS Schedule 3.5 contains a complete list of the off-balance sheet obligations of Anawa and the Subsidiaries, including all guarantees and obligations to the benefit of the Vendors, members of their families or third parties. 3.6 CHANGES IN CONDITION Since January 1, 1998: 3.6.1 MATERIAL ADVERSE EFFECT. No event having a Material Adverse Effect has occurred. 3.6.2 EXTRAORDINARY TRANSACTIONS, ETC. Other than as set forth in Schedule 3.4A, neither Anawa nor any of the Subsidiaries has (a) made any Distribution, (b) other than as set forth in Schedule 3.6.2, made any payment (other than Compensation of its directors, officers and employees in amounts in effect prior to January 1, 1998 or for bonuses accrued in accordance with normal practice prior to January 1, 1998) to any of the Vendors, (c) other than as set forth in Schedule 3.6.2, increased the Compensation, including bonuses, payable or to be payable to any of its directors, officers or employees by more than 5%, or (d) entered into any Contractual Obligation, or entered into or performed any other transaction, not in the ordinary and usual course of business and consistent with past practice. 3.6.3 INVENTORY AND WORK-IN-PROGRESS. The value of inventory and work-in-progress reflected in the financial statements of Anawa and the Subsidiaries has been established in accordance with Swiss GAAP and there has been no material change in the period subsequent to December 31, 1997, other than in the ordinary and usual courses of business. 3.6.4 REVENUES. The business of Anawa and the Subsidiaries has been operated in the customary fashion and no revenues that would have been earned by Anawa or the Subsidiaries have been earned by any Person which is an Affiliate of any of the Vendors. - 12 - 3.7 SOLVENCY Each of Anawa and the Subsidiaries shall be able to pay its liabilities existing at the time of the signing of this Agreement and based on the financial condition of Anawa and the Subsidiaries at the time of signing this Agreement as they become due. 3.8 CONTRACTUAL OBLIGATIONS, ETC. 3.8.1 CERTAIN CONTRACTS. Schedule 3.8.1 contains, together with a reference to the subparagraph pursuant to which each item is being disclosed, a correct and complete list of all Contractual Obligations of Anawa and the Subsidiaries of the types described below: (a) All collective bargaining agreements; all employment agreements, all profit sharing, profit participation, deferred compensation, bonus, stock option, stock purchase, pension, retainer, consulting, retirement, welfare or incentive plans or agreements; and all plans, agreements or practices which constitute Compensation or "fringe benefits" to any of the employees of Anawa or the Subsidiaries, including vacation programs, sick leave programs, group medical insurance, group life insurance, disability insurance and related benefits. (b) All Contractual Obligations under which Anawa or the Subsidiaries are restricted from carrying on any business, venture or other activities anywhere in the world. (c) All Contractual Obligations (including options) to sell, lease (as lessor), exchange or otherwise dispose of or transfer any of the properties or assets of Anawa or the Subsidiaries except in the ordinary course of business. (d) All Contractual Obligations pursuant to which Anawa or the Subsidiaries guarantees or otherwise assumes any liability of or gives financial assistance to any Person, or pursuant to which any Person guarantees or otherwise assumes any liability of Anawa or the Subsidiaries. (e) All Contractual Obligations constituting license agreements, service agreements, consulting agreements or other similar arrangements, the termination of which, individually or in the aggregate, would result in a Material Adverse Effect. (f) All Contractual Obligations under which Anawa or any of the Subsidiaries leases immovable property or is obligated to lease or purchase immovable property or incur capital expenditures in excess of SFr100,000 annually. (g) All Contractual Obligations of Anawa or the Subsidiaries relating to the borrowing of money or to the creation of a Lien, other than a Permitted Lien, on any property or asset of Anawa, or the Subsidiaries. - 13 - (h) All Contractual Obligations of Anawa or any of the Subsidiaries requiring a notice exceeding 6 (six) months for termination. 3.8.2 NATURE OF CONTRACTS. All of the Contractual Obligations of Anawa and the Subsidiaries at the Completion Date are enforceable against Anawa and the Subsidiaries, the other parties thereto, in accordance with their terms; except for Contractual Obligations the failure of which to be so enforceable does not and shall not, individually or in the aggregate, result in a Material Adverse Effect. Except for breaches, defaults and liabilities which do not and shall not individually or in the aggregate result in a Material Adverse Effect, neither Anawa nor any of the Subsidiaries is now in default, and no event has occurred which with notice or lapse of time or both would constitute a default under, nor are there any liabilities arising from any breach or default by any of them or event which with notice or lapse of time or both would constitute a default by any of them prior to the Completion Date of, any provision of any such Contractual Obligation. 3.8.3 ARTICLES. Neither Anawa nor any of the Subsidiaries is in violation of, or in default under, any provision of its articles or constituting documents and Phoenix has been provided with complete and correct copies of such articles or constituting documents. 3.8.4 INSURANCE. Each of Anawa and the Subsidiaries carries insurance policies with independent third party insurers which, with respect to their amounts and types of coverage, are adequate to insure against risks to which each of Anawa and the Subsidiaries and their respective property and assets are normally exposed in the operation of their respective businesses, including without limitation professional liability. All policies, the absence of which, individually or in the aggregate, would result in a Material Adverse Effect, are in full force and effect. There are no outstanding unpaid premiums except in the ordinary course of business, and neither Anawa nor any Subsidiary has received any notice of cancellation or non-renewal of any such policy. Neither Anawa nor any Subsidiary is aware of any risks, situations, occurrences or other matters which have been disclosed, or should have been disclosed, to insurance carriers or brokers in connection with any application for such insurance as a result of which an insurance carrier would have a right to cancel the corresponding insurance policy or deny coverage with respect to any rights under any such policies. There exists no event of default or event, occurrence, condition or act (including the transactions contemplated by this Agreement) which, with the giving of notice, the lapse of time or the happening of any further event or condition, would become a default or occasion a material premium increase under any such policy or give rise to, and neither Anawa nor any Subsidiary has any anticipation of, any termination or cancellation thereof or material premium increase therefor. 3.8.5 DISPUTE. Neither Anawa nor any of the Subsidiaries has received any notice from any supplier, vendor, contractor, customer or client with which Anawa or such Subsidiary has conducted business during the one-year period ending on the date of this Agreement confirming such Person's intention to reduce the volume under, terminate or otherwise alter any Contractual Obligation with Anawa or any Subsidiary, the effect of which, individually or in the aggregate, would result in a Material Adverse Effect. - 14 - 3.9 OPERATIONS IN CONFORMITY WITH LAW, ETC. The operations of Anawa and the Subsidiaries as now conducted, and their properties, assets, equipments, buildings, immoveables and leased or occupied properties, are not, and have not been, in violation of, nor is Anawa or any of the Subsidiaries in default and no event has occurred which with notice or lapse of time or both would constitute a default under, any applicable Legal Requirements including, in particular, any applicable Environmental Laws or Legal Requirements regarding clinical research and experimentation on animals, except for such violations and defaults as do not and shall not, in the aggregate, have a Material Adverse Effect. Neither Anawa nor any of the Subsidiaries has received notice of any such violation or default and there are no basis on which the operations of Anawa or any of the Subsidiaries, when conducted as currently proposed to be conducted after the Completion Date, would be held so as to violate or to give rise to any such violation or default. Anawa and the Subsidiaries have all franchises, licenses, permits, certificates, authorizations, registrations or other authority presently necessary for the conduct of their business as now conducted, except for franchises, licences, permits, certificates, authorizations, registrations or other authority, the absence of which, individually or in the aggregate, does not and shall not result in a Material Adverse Effect. Based on the facts presently known to the Vendors and Management, all future expenditures on the part of Anawa and the Subsidiaries required to meet the provisions of any presently existing applicable Legal Requirements (including Legal Requirements relating to employment practices or to occupational or health standards or to environmental considerations) shall not, in the aggregate, have a Material Adverse Effect. Anawa and the Subsidiaries have complied and are in compliance with applicable competition regulations and have never infringed fair competition in the markets where they operate, either with or towards third companies or between themselves. Anawa and the Subsidiaries do not hold separately or together a dominant position on the markets involved and their market share and net aggregate turnover do not meet the European and Swiss thresholds which authorizes European or domestic competition authorities to control the operation and impede the completion of the transaction contemplated hereby. 3.10 INTELLECTUAL PROPERTY Schedule 3.10 contains a list of all the trade-marks, trade names and patents used by any of Anawa or the Subsidiaries (collectively "Used Intellectual Property"). The entity indicated in said Schedule as owner of Used Intellectual Property is the registered and beneficial owner of such Used Intellectual Property or the registration thereof, if applicable, (except as set forth in Schedule 3.10), with good and marketable title, unencumbered (except for Permitted Liens), and with full right to sell, assign or otherwise transfer or license to others and subject to no pending challenge, refutation, expiry or termination other than as set forth in Schedule 3.10. To the best of Vendors' knowledge, other than as set forth in Schedule 3.10, none of Anawa or the Subsidiaries uses any intellectual property not owned by it, other than software purchased "off the shelf", all of which each entity using said property has the right to use (collectively "Licenced Intellectual Property"). (Used Intellectual Property and Licensed Intellectual Property are sometimes hereinafter referred to collectively as "Intellectual Property"). None of Anawa or the Subsidiaries is required to pay royalties, fees or other consideration to any other person with respect to the use of any of the Intellectual Property or in connection with the conduct of its business or otherwise. To the best of Vendors' knowledge, none of Anawa or the Subsidiaries has infringed the intellectual or industrial property rights of any other person, nor has any of them used any intellectual or industrial property (including, without limitation, trade-marks, trade names, patents, models, designs and copyrights) which it does not own or have the right to use other than as set forth in Schedule 3.10. There are no outstanding claims asserted against any of Anawa or the Subsidiaries alleging the infringement or - 15 - the misappropriation by any of them of any intellectual or industrial property. None of Anawa or the Subsidiaries has granted any licences or sub-licences to third parties with respect to any of the Intellectual Property other than as set forth in Schedule 3.10 and neither the Vendors nor Management has any knowledge of any infringement or misappropriation by any other Person of any of the Intellectual Property. Neither the execution nor delivery of this Agreement will constitute a breach of or a default under any agreement relating to the Intellectual Property. 3.11 ENVIRONMENTAL MATTERS 3.11.1 Anawa and the Subsidiaries, their employees, agents, shareholders, directors and officers (acting in their capacity of employees, agents, shareholders, directors or officers of Anawa or of one of the Subsidiaries) have never been declared guilty of committing an offence for a violation of Environmental Laws and have never been fined for such an offence or have otherwise settled such a prosecution in connection with the activities of Anawa and the Subsidiaries; 3.11.2 There are no contaminants, waste or pollutants of any kind whatsoever in, on or under the equipment, buildings, immoveables or properties owned, leased or occupied by Anawa or any of the Subsidiaries and caused by Anawa, the Subsidiaries or their employees, agents, shareholders, directors or officers (acting in their capacity of employees, agents, shareholders, directors or officers of Anawa or one of the Subsidiaries), the presence of which constitutes a violation of applicable Environmental Laws and the presence of which, individually or in the aggregate, constitutes a Material Adverse Effect; 3.11.3 Neither Anawa nor any of the Subsidiaries has received any written notice or request for information in the context of any national, supra-national, provincial, regional, local or municipal environmental investigation or inspection; 3.11.4 There are no PCBs, asbestos or urea formaldehyde insolation in, on or under the equipment, buildings, immoveables or properties owned, leased or occupied by Anawa or the Subsidiaries; 3.11.5 There is no action, suit or proceeding pending in relation to environmental matters against Anawa or the Subsidiaries, its employees, agents, shareholders, directors and officers (acting in their capacity of employees, agents, shareholders, directors or officers of Anawa or of one of the Subsidiaries), or involving Anawa or the Subsidiaries or its assets, before any judicial body, tribunal, commission, agency or other governmental entity, and to the Vendors' knowledge and to the knowledge of Management, there is no threat of, or event or fact based on which, such action, suit or proceeding may be instituted; 3.11.6 To the knowledge of Management and the Vendors, Anawa and the Subsidiaries are in compliance with all applicable Environmental Laws. - 16 - 3.12 LABOUR AND EMPLOYMENT MATTERS 3.12.1 Without limiting the generality of Section 3.9, each of Anawa and the Subsidiaries has complied with all applicable laws relating to the employment of labour, including provisions thereof relating to wages, hours and collective bargaining rights. 3.12.2 There is no collective agreement by which Anawa or any of the Subsidiaries is bound which relates to the employees of Anawa or the Subsidiaries. To the best knowledge of the Vendors and to the knowledge of Management, there are no threatened or pending attempts to organize or establish any labour union or employee association in connection with the business of Anawa or any of the Subsidiaries. To the best knowledge of the Vendors and to the best knowledge of Management, there is no pending or threatened labour dispute, grievance, strike, or work stoppage materially affecting the business of any of Anawa or any of the Subsidiaries. Neither Anawa nor any of the Subsidiaries is a party to any other written employment agreement, contract, arrangement, management contract or service contract affecting employees other than as set forth in Schedule 3.8.1, nor are any such contracts, agreements, arrangements, management contracts or service contracts being currently negotiated or proposed other than in the ordinary course of business. 3.12.3 There exist no retirement plans, profit sharing, option or incentive plans, or other employee benefit plans for employees of Anawa or any of the Subsidiaries other than as set forth in Schedule 3.8.1 for which adequate arrangements have been made since January 1, 1998 to set aside the requisite amounts in the prescribed fashion, and neither Anawa nor any of the Subsidiaries has promised or intends to implement other such plans. 3.12.4 Neither Anawa nor any of the Subsidiaries has any employee who cannot be dismissed without further liability upon such notice period not exceeding what it is required by the applicable Legal Requirement. 3.12.5 None of Anawa's or any of the Subsidiary's employees has signed non-compete covenants in favour of Anawa or the Subsidiary. 3.13 TAXES Other than as set forth in Schedule 3.13, all tax returns required to be filed by Anawa and the Subsidiaries in any jurisdiction have been filed and all taxes, assessments, levies and other governmental charges upon Anawa and the Subsidiaries or upon any of their properties or income, including any tax in respect of value added, have been paid if and when due unless such payment is being contested in good faith and by appropriate proceedings and adequate reserves with respect thereto determined in accordance with applicable policies have been established by Anawa and the Subsidiaries. There is no tax revision threatened in writing against Anawa and any of the Subsidiaries and there is no basis for such assessment. - 17 - 3.14 WITHHOLDINGS Each of Anawa and the Subsidiaries has withheld from each payment made to any of its shareholders, officers, directors, non-resident creditors and employees the amount of all taxes and other deductions required to be withheld and has remitted all such amounts to the appropriate authorities within the prescribed times, and has otherwise fulfilled all requirements of all Legal Requirements governing such deductions and withholdings. Each of Anawa and the Subsidiaries has remitted to the proper authorities all employer contributions due and payable under all social security, occupational health and safety and pension plans. 3.15 GOOD TITLE Other than as set forth in Schedule 3.15 each of Anawa and the Subsidiaries has good and marketable title to all assets in the balance sheets as per December 31, 1997 free and clear of Liens and other adverse claims. 3.16 LITIGATION Other than as set forth in Schedule 3.16, no litigation or proceeding before, or investigation by, any foreign, national, supra-national or municipal, judicial, tax or customs tribunal or board or other governmental or administrative agency or any arbitrator, is pending or threatened (or does any basis exist therefor), against Anawa or the Subsidiaries or, to the Vendors' best knowledge or to the best knowledge of Management, any director or officer of Anawa or any of the Subsidiaries, which individually or in the aggregate could result in a Material Adverse Effect, or which seeks rescission of, seeks to enjoin the consummation of, or which questions the validity of, this Agreement or any of the transactions contemplated hereby. Neither Anawa nor the Subsidiaries has been charged, nor to the Vendors' knowledge or to the knowledge of Management, is it threatened to be charged, with infringement of any trademark, trade name, service mark, copyright, patent, patent right or other proprietary right of any Person. 3.17 PRESS COVERAGE Neither Anawa nor any of the Subsidiaries has been the object of any demonstrations, press campaigns or other attacks due to the nature of its activities. 3.18 VIOLATION OF OTHER INSTRUMENTS Neither the execution and delivery of this Agreement by the Vendors, the consummation of any of the transactions contemplated hereby or in Schedule 3.18, shall (a) constitute a breach of or a default or an event which with notice or lapse of time or both would constitute a default under any Contractual Obligation of Anawa or any of the Subsidiaries, (b) result in acceleration in the time for performance of any obligation of Anawa or the Subsidiaries under any such Contractual Obligation, (c) result in the creation of any Lien upon any property or asset of Anawa or the Subsidiaries, (d) require any consent, waiver or amendment to any such Contractual Obligation that has not been obtained and remains in full force and effect, (e) give rise to any severance payment, right of termination, securities purchase or redemption right or other right under any such Contractual Obligation, or (f) violate or give rise to a default or an event which with notice or lapse of time or both could constitute a default under any Legal - 18 - Requirements, except for events or conditions described in clauses (a) through (f) above which shall not, individually or in the aggregate, have any Material Adverse Effect or (g) result in any state of facts which could have a Material Adverse Effect. 3.19 APPROVALS, CONSENTS, ETC. Other than as set forth in Schedule 3.19, no approval, consent, authorization or other order of, and no declaration, filing, registration, qualification or recording with, any governmental authority or any other Person is required to be made by or on behalf of the Vendors, Anawa or any of the Subsidiaries in connection with the execution, delivery or performance of this Agreement or any of the transactions contemplated hereby. 3.20 INVESTMENT OR DIVESTITURE Schedule 3.20 contains a complete list of all investments and divestitures in process which are not mentioned in the financial statements of Anawa and the Subsidiaries (balance sheet, statement of earnings and schedules) for the period ended December 31, 1997. 3.21 FULL DISCLOSURE Disclosure made by the Vendors in respect of one of the representations contained in this Section 3 is considered being made in respect of all other representations. There is no fact that the Vendors, to the best of their knowledge, have not disclosed to Phoenix which could have a Material Adverse Effect on the properties, business, prospects or condition (financial or otherwise) of Anawa or any of the Subsidiaries. Neither the reports, financial statements and other documents referred to in Section 3.4, nor any certificate, statement or document delivered by the Vendors to Phoenix in connection with this Agreement contains any untrue statement of a fact or omits to state any fact necessary to keep the statements contained herein or therein from being misleading in a manner that would constitute a Material Adverse Effect. 4. REPRESENTATIONS AND WARRANTIES OF PHOENIX Phoenix represents and warrants to the Vendors that: 4.1 DUE INCORPORATION, ETC. Phoenix is duly incorporated, validly exists and is in good standing under the Canada Business Corporations Act and has all necessary corporate capacity and power to own and lease its property and assets and to carry on the business now conducted by it. 4.2 SHARE CAPITAL OF PHOENIX The authorized share capital of Phoenix is composed of an unlimited number of common shares and an unlimited number of preferred shares issuable in series of which, as at April 17, 1998, there were 24,291,208 common shares issued and outstanding. - 19 - 4.3 OPTIONS Other than the options to acquire common shares of Phoenix granted pursuant to Phoenix's Key Employee Share Option Plan and shares to be issued to Dorn Cook under an earn-out formula which has been disclosed to the Vendors, Phoenix does not have any rights or options to subscribe for, or any warrants or other agreements providing for or requiring the issuance of common shares or preferred shares. 4.4 DUE AUTHORIZATION All necessary corporate action has been taken by Phoenix to authorize the execution of this Agreement and the consummation of the transactions contemplated hereby, including the issuance of the Phoenix Shares as fully paid and non-assessable in consideration for the purchase of the Shares. 4.5 CONFORMITY WITH APPLICABLE SECURITIES LAWS All documents have been filed, all requisite proceedings have been taken and all approvals, exemptions, consents, orders and authorizations required under applicable securities laws have been obtained in order to validly and lawfully issue and deliver the Phoenix Shares issued hereunder. The execution of this Agreement and the issuance of the Phoenix Shares by Phoenix to the Vendors will be exempt from the prospectus and registration requirements of the applicable Canadian securities legislation. 4.6 STOCK EXCHANGE APPROVALS The listing of the Phoenix Shares on The Montreal Exchange and the Toronto Stock Exchange has been approved by such exchanges, subject to Phoenix fulfilling all of the standard requirements of such exchanges before April 30, 1998. 4.7 REPORTING ISSUER Phoenix is a reporting issuer under the laws of the provinces of Ontario and Quebec and is not in default of any requirements of the securities legislation of such provinces. 4.8 PHOENIX SHARES The Phoenix Shares will at the time of issuance be duly authorized, validly issued, fully paid and non-assessable. 4.9 HOLD PERIOD The Phoenix Shares shall not be subject to any hold period (whether prescribed by applicable securities legislation or the policies of The Toronto Stock Exchange or Montreal Exchange) during which the Phoenix Shares may not be sold without a prospectus or reliance on a statutory exemption from the prospectus requirements of applicable securities legislation. - 20 - 4.10 PUBLIC INFORMATION No material change (as defined in the Securities Act (Quebec)) has occurred in the affairs of Phoenix which had not been generally disclosed to the public, nor has Phoenix any knowledge of any other material adverse information in regard to the current and prospective operations of Phoenix which have not been generally disclosed to the public. 5. POOLING OF INTERESTS 5.1 ACCOUNTING TREATMENT Phoenix, Anawa and the Vendors intend and desire for the transactions contemplated by this Agreement to qualify for "pooling of interests" treatment for US GAAP purposes in accordance with Accounting Principles Board Opinion No. 16. 5.2 SUCCESSFUL APPLICATION OF "POOLING OF INTERESTS" The Vendors acknowledge that the successful application of "pooling of interests" accounting is one of the principal considerations in Phoenix purchasing the Shares. The Vendors represent that they have not taken any action listed in the letter attached hereto as Schedule 5.3 that would preclude the application of "pooling of interests" accounting nor will they agree or participate to any such action in the future. 5.3 POOLING LETTER On or prior to the Completion Date, Anawa shall cause to be executed and delivered to Phoenix a letter substantially in the form attached hereto as Schedule 5.3 dated the Completion Date from Anawa's management related to the compliance by Anawa with applicable "pooling of interests" criteria in form and substance reasonably satisfactory to Phoenix and its auditors. 5.4 PLACEMENT AND STOCK TRANSFER RESTRICTIONS AND RELATED MATTERS Each party to this Agreement agrees that from and after the date of this Agreement, such party shall not knowingly take any action, or knowingly fail to take any action, which action or failure is reasonably likely to disqualify the transactions contemplated by this Agreement from pooling of interests accounting treatment by Phoenix, and that such party shall take all reasonable actions necessary to cause the transactions contemplated by this Agreement to qualify as a pooling of interest, if such characterization shall be jeopardized by action taken by such party. Without limiting the foregoing, each Vendor who is a Pooling Affiliate of Anawa agrees that such Vendor shall not sell, transfer, pledge, or otherwise dispose of such Vendor's interests in or reduce such Vendor's risk relative to any of the Phoenix Shares until Phoenix shall have published financial results (including combined sales and net income) covering at least thirty (30) days of combined operations of Phoenix and Anawa after the Completion Date. No later than July 30, 1998, Phoenix shall prepare and publish such financial results for the first full month of operations following the Completion Date. Each of the Vendors and Anawa acknowledge and agree with Phoenix that none of the Vendors or Anawa is a party to any agreement or arrangement among themselves or with third parties regarding the transactions contemplated by this Agreement or the subject matter hereof. - 21 - Prior to the Completion Date, Phoenix shall deliver to Anawa a list of names and addresses of those persons who are or may be, in Phoenix's reasonable judgement, Affiliates of Phoenix within the meaning of Rule 145 of the rules and regulations promulgated under the Securities Act or applicable SEC accounting releases with respect to pooling of interests accounting treatment (each such persons, a "Pooling Affiliate"). Phoenix also shall provide Anawa with such information and documents as Anawa shall reasonably request for purposes of reviewing such list. Prior to the Completion Date, Phoenix shall deliver to Anawa an affiliate letter, in form and substance reasonably satisfactory to Anawa, executed by each of the Pooling Affiliates identified in the foregoing list. Prior to the Completion Date, Anawa shall deliver to Phoenix a list of names and addresses of those persons who are or may be, in Anawa's reasonable judgment, Pooling Affiliates of Anawa. Anawa also shall provide Phoenix with such information and documents as Phoenix shall reasonably request for purposes of reviewing such list. Prior to the Completion Date, Anawa shall deliver to Phoenix an affiliate letter, in form and substance reasonably satisfactory to Phoenix, executed by each of the Pooling Affiliate of Anawa identified in the foregoing list. 6. EMPLOYMENT AGREEMENT 6.1 EMPLOYMENT AGREEMENT WITH WICKI Wicki and Phoenix shall execute an employment agreement. 7. SURVIVAL OF REPRESENTATIONS; INDEMNITY 7.1 SURVIVAL OF REPRESENTATIONS The respective representations and warranties of the Vendors contained in this Agreement or in any schedule attached hereto shall survive the consummation of the transactions contemplated hereby and shall remain in full force and effect notwithstanding any investigation or examination of, or knowledge with respect to, the subject matter thereof by or on behalf of Phoenix until the earlier of November 30, 1998 or the date of completion of the audit of the combined financial statements of Phoenix and Anawa (the period ending on such date being referred to herein as the "Representations Period"), except that such representations and warranties shall survive indefinitely in the event of fraud with respect thereto. No claim for indemnification pursuant to Section 7.2.1 below may be brought after the expiration of the Representations Period, except for claims made in good faith in writing prior to such expiration and setting forth in reasonable detail the claim, regardless of whether any action or demand has been commenced against Phoenix (it being understood without limitation, that any and all Losses (as defined below) arising after the expiration of the Representations Period shall be recoverable upon notice properly given prior to the expiration of the Representations Period in accordance with this Section 7.1). The representations and warranties of Phoenix contained in this Agreement or in any schedule attached hereto shall terminate upon and not survive the Completion Date, except in the event of fraud by Phoenix with respect thereto, in which case they shall survive indefinitely. - 22 - 7.2 INDEMNIFICATION 7.2.1 From and after the Completion Date, Phoenix and its Affiliates (including Anawa and the Subsidiaries) and all of their respective officers, directors, employees, agents and shareholders (each, an "Indemnitee") shall be defended, indemnified and held harmless by the Vendors pursuant to this Agreement and the Escrow Agreement to the full extent permitted by law, from and against any and all losses, claims, actions, damages, liabilities, costs and expenses (including attorneys' fees and expenses) (collectively, "Losses") relating to or arising from or in connection with (i) any misrepresentation or any non-fulfilment of any representation, warranty, covenant, obligation or agreement by any Vendor contained in or made pursuant to this Agreement or any other document, agreement, officer's certificate or other certificate delivered to Phoenix in connection with this Agreement, and (ii) the enforcement by Phoenix of its rights pursuant to this Section 7.2, or any litigation, proceeding or investigation relating to any of the foregoing. The indemnification obligations of the Vendors pursuant hereto shall be joint and not solidary, i.e. prorata to the number of Phoenix Shares received by each Vendor in accordance with Section 2.2. 7.2.2 Notwithstanding the foregoing provisions of this Section 7.2, but except with respect to any Losses resulting from or arising out of fraud or other intentional or knowing misconduct or misrepresentation, (i) the maximum aggregate recourse by the Indemnitees pursuant to Section 7.2.1 above shall not exceed the aggregate value (calculated by adding together the opening and closing prices of the common shares of Phoenix on each of the Toronto Stock Exchange and The Montreal Exchange for each of the ten trading days preceding the Completion Date, and dividing this sum by 40) of the Escrowed Securities (the "Indemnity Cap"), and (ii) the sole recourse of any Indemnitee in respect of Losses (but not in respect of fraud or other intentional or knowing misconduct or misrepresentation) shall be from, out of, and to the extent of the Escrowed Securities. Any indemnification shall be payable by the return of Escrowed Securities to Phoenix in accordance with the provisions of the Escrow Agreement. In particular, the number of Escrowed Shares to be remitted to Phoenix in payment of any indemnification obligation shall be calculated on the basis of the average price of the Escrowed Shares obtained by adding together the opening and closing prices of the common shares of Phoenix on each of the Toronto Stock Exchange and The Montreal Exchange for each of the ten trading days preceding the Completion Date, and dividing this sum by 40. All dividends or other distributions received by a Vendor in respect of common shares of Phoenix which are remitted to Phoenix in satisfaction of an indemnification obligation under this Section 7, shall also be repaid to Phoenix at the time of payment of indemnification. 7.2.3 Notwithstanding any other provision of this Agreement, as of and after the Completion Date, Anawa shall not have any liability under this Agreement, and no Vendor shall threaten or bring any claim or action whatsoever against Anawa for contribution to any amounts payable under this Section 7.2 by such Vendor. - 23 - 8. SPECIFIC CONTINGENCIES The Vendors hereby undertake to indemnify Phoenix in respect of the occurrence, in whole or in part, of any of the specific contingencies described below, each of which exists at the Completion Date and will only be finally resolved or determined at some time in the future. The provision for these contingencies is not made as an attempt to anticipate future events, but merely to provide for a reasonable period of time within which such contingencies may be resolved. Any indemnification pursuant to this Section shall be payable by all of the Vendors, pro rata to the number of common shares of Phoenix issuable to each of them pursuant to this Agreement. In the event of the realization of any of the specific contingencies contemplated in this Section 8, the Vendors shall indemnify Phoenix by remitting to Phoenix for cancellation such number of Phoenix Shares as corresponds to the amount of indemnification owed (calculated on the basis of the Escrowed Share Price). Any obligation to remit common shares of Phoenix upon the occurrence of a specific contingency shall be satisfied by return of Escrowed Shares in accordance with the Escrow Agreement. In the event that there does not remain a sufficient number of Escrowed Shares or Proceeds (as defined in the Escrow Agreement) to satisfy an obligation under this Section, such shortfall always to be calculated on the basis of the Escrowed Share Price, the balance of such indemnification obligation shall be paid in cash. All dividends or other distributions received by a Vendor in respect of Phoenix Shares which are remitted to Phoenix in satisfaction of an indemnification obligation under this Section 8, shall also be repaid to Phoenix at the time of payment of indemnification. 8.1 Any liability related to the cessation of employment of Fischer. The maximum amount payable in respect of this contingency is SFr220,000 plus any interest due to the plaintiff(s) from the date of this Agreement to the final settlement of this specific contingency. Notwithstanding any other provision of this Agreement, the Vendors' indemnification obligation with respect to this contingency shall survive until any possible claims have been prescribed under applicable law. 8.2 Any liability related to the alleged termination of a strategic alliance (or similar matters) with Dr. Rondez AG. The maximum amount payable in respect of this contingency is SFr1,100,000 plus any interest due to the plaintiff(s) from the date of this Agreement to the final settlement of this specific contingency. Notwithstanding any other provision of this Agreement, the Vendors' indemnification obligation with respect to this contingency shall survive until any possible claims have been prescribed under applicable law. 8.3 Any liability related to the VAT treatment for the analysis of samples sent to foreign customers. The maximum amount payable in respect of this contingency is SFr100,000 plus any interest due to the relevant taxation authorities from the date of this Agreement to the final settlement of this specific contingency. Notwithstanding any other provision of this Agreement, the Vendors' indemnification obligation with respect to this contingency shall survive until any possible claims have been prescribed under applicable law. 8.4 Any liability related to the payment guarantee issued by Schweizerische Volksbank on behalf of Anawa for the benefit of Wybert GmbH, Lorrach, Germany. The maximum amount payable in respect of this contingency is SFr200,000 plus any commission due to the Scheweizerische Volksbank. Notwithstanding any other provision of this Agreement, the Vendors indemnification obligation with respect to this contingency shall survive until any possible claims have prescribed under applicable law. - 24 - 8.5 Any impairment in value of the account receivable in the amount of SFr1,000,000 as set out in the financial statements of Anawa as at December 31, 1997. The maximum amount payable in respect of this contingency is SFr1,000,000. Notwithstanding any other provision of this Agreement, the Vendors' indemnification obligation with respect to this contingency shall survive until payment. 9. NOTICES Any demand, notice or other communication to be given in connection with this Agreement shall be given in writing and shall be given by personal delivery, by registered mail or by electronic means of communication addressed to the recipient as follows: 9.1 To Phoenix: Phoenix International Life Sciences Inc. 2350, Cohen Street Saint-Laurent, Quebec H4R 2N6 Canada Telecopier No.: (514) 333-7306 ATTENTION: JEAN-YVES CALOZ 9.2 To Vollenweider: Dr. Johann Jakob Vollenweider Unterdorfstrasse 23 8602 Wangen, Switzerland 9.3 To Albers: Albers & Co. Schanzengasse 14 8000 Zurich, Switzerland Postal address: Schanzengasse 14 Postfach 4276 8022 Zurich, Switzerland Telecopier No.: (411) 265-2902 - 25 - 9.4 To Fischer: Dr. Ernst Fischer Heugatterstrasse 24 8600 Dubendorf, Switzerland 9.5 To Innovent: Innovent Capital Ltd. Midland Bank Trust Building P.O. Box 1109, Fort Street Grand Cayman, B.W.I. Telecopier No.: (411) 211-4230 9.6 To Hassler: Werner Hassler Buchserstrasse 43 8157 Dielsdorf, Switzerland 9.7 To Joller: Dr. Peter Joller Spitzackerstrasse 8 8057 Zurich, Switzerland 9.8 To Karabelnik: Dr. David Karabelnik Untere Allmend 12 8702 Zollikon, Switzerland 9.9 To Wicki: Dr. Andreas Wicki Hohestrasse 39 8702 Zollikon, Switzerland 9.10 To Anawa: ANAWA Holding AG Industriestrasse 13c 6300 Zug, Switzerland Telecopier No.: (411) 833-0575 - 26 - 10. MODIFICATION All modifications or amendments of any provision of this Agreement shall be effective only if the same shall be in writing and then shall be effective only in the specific instance and for the purpose for which given. 11. WAIVER No failure to exercise, and no delay in exercising, on the part of a party hereto, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right. No waiver of any provision of this Agreement shall be effective unless in writing. No notice or demand given in any case shall constitute a waiver of the right to take other action in the same, similar or other instances without such notice or demand. 12. CONFIDENTIALITY The parties agree to treat this Agreement as confidential and not to disclose its contents to third parties other than their advisers, except to the extent necessary to enforce performance of obligations hereunder, or as is required to comply with applicable laws or regulations, including regulations of any stock exchange on which the securities of Phoenix are listed following consultations with Vollenweider. 13. FURTHER ASSURANCES The parties shall, with all reasonable diligence, do all such things and provide all such reasonable assurances as may be required to consummate the transactions contemplated hereby, and each party shall provide such further documents or instruments required by another party as may be reasonably necessary or desirable to give effect to the purpose of this Agreement and to carry out its provisions. 14. GOVERNING LAWS This Agreement shall be governed by the laws of the Province of Quebec and the laws of Canada applicable therein. 15. ARBITRATION All disputes arising out of or in connection with the present Agreement shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules. The place of arbitration shall be Zurich. The language of the arbitration shall be English. 16. GENERAL The invalidity or unenforceability of any term or provision hereof shall not affect the validity or enforceability of any other term or provision hereof. The headings in this Agreement are for convenience of reference only and shall not alter or otherwise affect the meaning hereof. This Agreement and the other documents - 27 - and instruments referred to herein constitute the entire understanding of the parties hereto with respect to the subject matter hereof and thereof and supersede all present and prior agreements, whether written or oral. No investigation made by or on behalf of a party hereto shall mitigate, diminish or affect the representations and warranties made herein by the Vendors. This Agreement may be executed in any number of counterparts which together shall constitute one instrument and shall be governed by and construed in accordance with the laws of the Province of Quebec and the laws of Canada applicable therein, and shall bind and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, personal representatives, successors and assigns. The parties hereto have expressly required that this Agreement and all documents and notices related hereto be drafted in English. LES PARTIES AUX PRESENTES ONT EXPRESSEMENT EXIGE QUE LE PRESENT CONTRAT ET TOUS LES DOCUMENTS ET AVIS Y AFFERENTS SOIENT REDIGES EN ANGLAIS. IN WITNESS WHEREOF, the parties hereto caused this Agreement to be duly executed as of the Completion Date. PHOENIX INTERNATIONAL LIFE SCIENCES INC. By: /s/ Suzanne Peeters -------------------------------------- Suzanne Peeters Title: Senior Vice-President Analytical Services /s/ Johann Jakob Vollenweider -------------------------------------- DR. JOHANN JAKOB VOLLENWEIDER ALBERS & CO. By: /s/ Johann Jakob Vollenweider -------------------------------------- Dr. Johann Jakob Vollenweider /s/ Ernst Fischer -------------------------------------- DR. ERNST FISCHER INNOVENT CAPITAL LTD. By: /s/ Johann Jakob Vollenweider -------------------------------------- Dr. Johann Jakob Vollenweider /s/ Werner Hassler -------------------------------------- WERNER HASSLER - 28 - /s/ Peter Joller -------------------------------------- DR. PETER JOLLER /s/ David Karabelnik -------------------------------------- DR. DAVID KARABELNIK /s/ Andreas Wicki -------------------------------------- DR. ANDREAS WICKI ANAWA HOLDING AG By: /s/ Johann Jakob Vollenweider -------------------------------------- Dr. Johann Jakob Vollenweider LIST OF SCHEDULES Schedule A Outstanding shares and voting rights of Anawa Schedule B The capital structure of Laboratories Schedule C The capital structure of Trading Schedule 1.10 Escrow Agreement Schedule 1.21 Permitted Lien Schedule 3.3.3 Capital Stock of the Subsidiaries Schedule 3.3.4 Subsidiary Options Schedule 3.3.5 Commitments affecting shares or voting rights of Anawa or the Subsidiaries Schedule 3.4A Financial Statements Schedule 3.5 Material liabilities, contingent or otherwise of Anawa or any of the Subsidiaries and off-balance sheet obligations of Anawa and the Subsidiaries Schedule 3.6.2 Extraordinary Transactions after January 1, 1998 Schedule 3.8.1 Contractual Obligations Schedule 3.10 Intellectual Property Schedule 3.13 Taxes Schedule 3.15 Title to assets Schedule 3.16 Litigation Schedule 3.18 Violation of Other Instruments Schedule 3.19 Approvals, Consents, etc. Schedule 3.20 Investment or Divestiture Schedule 5.3 Pooling Letter
Schedule 1.10 ESCROW AGREEMENT dated as of April 30, 1998. AMONG: PHOENIX INTERNATIONAL LIFE SCIENCES INC., a corporation incorporated under the Canada Business Corporations Act, having its head office at 2350, Cohen Street, Saint-Laurent, Quebec, Canada, H4R 2N6, herein acting and represented by Suzanne Peeters, its duly authorized representative; (hereinafter "Phoenix") AND: DR. JOHANN JAKOB VOLLENWEIDER, residing at Unterdorfstrasse 23, 8602 Wangen, Switzerland; (hereinafter "Vollenweider") AND: ALBERS & CO., a Swiss partnership having its head office at Schanzengasse 14, 8000 Zurich, Switzerland, herein acting and represented by Dr. Johann Jakob Vollenweider, its duly authorized representative; (hereinafter "Albers") AND: DR. ERNST FISCHER, residing at Heugatterstrasse 24, 8600 Dubendorf, Switzerland; (hereinafter "Fischer") AND: INNOVENT CAPITAL LTD., a company incorporated under the laws of the Cayman Islands, with corporate seat at Midland Bank Trust Building, P.O. Box 1109, Fort Street, Grand Cayman, B.W.I., herein acting and represented by Dr. Johann Jakob Vollenweider, its duly authorized representative; (hereinafter "Innovent") AND: WERNER HASSLER, residing at Buchserstrasse 43, 8157, Dielsdorf, Switzerland; (hereinafter "Hassler") AND: DR. PETER JOLLER, residing at Spitzackerstrasse 8, 8057 Zurich, Switzerland; -2- (hereinafter "Joller") AND: DR. DAVID KARABELNIK, residing at Untere Allmend 12, 8702 Zollikon, Switzerland; (hereinafter "Karabelnik") AND: DR. ANDREAS WICKI, residing at Hohestrasse 39, 8702 Zollikon, Switzerland; (hereinafter "Wicki") AND: MONTREAL TRUST COMPANY, 1800 McGill College Avenue, Montreal, Quebec, H3A 3K9, as escrow agent, herein represented by its duly authorized representatives Antonietta DeLuca and Francine Beausejour; (hereinafter the "Escrow Agent") WHEREAS Phoenix and the Vendors are parties to a share purchase agreement dated April 30, 1998 (the "Purchase Agreement"); WHEREAS the Purchase Agreement provides that certain shares of Phoenix issued to the Vendors pursuant thereto are to be held in escrow for the purposes described therein; NOW THEREFORE the parties hereby agree as follows: 1. INTERPRETATION AND DEFINITIONS 1.1 Whenever used in this Agreement: 1.1.1 "AFFILIATE" means any of Vollenweider, Albers, Fischer, Innovent, Karabelnik, and Wicki and "Affiliates" means more than one of them; 1.1.2 "CLAIM" means any claim by Phoenix against and the Vendors under Section 7.2 or a claim for a Specific Contingency under Section 8 of the Purchase Agreement; 1.1.3 "DISTRIBUTIONS" has the meaning ascribed thereto in Section 2.3 hereof; 1.1.4 "ESCROWED SHARES" has the meaning ascribed thereto in Section 2.1 hereof; 1.1.5 "ESCROWED SHARE PRICE" means the amount obtained by adding the opening and closing prices of the common shares of Phoenix on each of the Montreal -3- Exchange and The Toronto Stock Exchange for the ten trading days preceding the date of execution of the Purchase Agreement, divided by 40; 1.1.6 "NOTICE OF CLAIM" means a written notice of any Claim given by Phoenix setting forth the details of each Claim referred to therein including the amount thereof, if known to Phoenix, or Phoenix's reasonable estimate thereof, as well as the provisions of the Purchase Agreement upon which such Claim is based; 1.1.7 "NON-AFFILIATE" means Hassler and Joller, and "Non-Affiliates" means more than one of them; 1.1.8 "OBJECTION" means, in respect of any Claim, any objection raised in the Response by any of the Vendors to such Claim; 1.1.9 "PROCEEDS" has the meaning ascribed thereto in Section 3.2 hereof; 1.1.10 "PURCHASE AGREEMENT" has the meaning ascribed thereto in the preamble to this Agreement; 1.1.11 "RELEASED SHARES" has the meaning ascribed thereto in Section 3.5.1.1 hereof; 1.1.12 "RESPONSE" means, in respect of any Claim, the joint written response of the representatives of the Vendors duly appointed in the manner set forth in Section 3.1 hereof indicating whether they accept or dispute such Claim; 1.1.13 "SPECIFIC CONTINGENCY" means any of the specific contingencies referred to in Section 8 of the Purchase Agreement; and 1.1.14 "VENDORS" means Vollenweider, Albers, Fischer, Innovent, Hassler, Joller, Karabelnik and Wicki. 1.2 Each capitalized term used in this Agreement but not defined herein as the meaning ascribed thereto in the Purchase Agreement. 1.3 In the event of (i) any subdivision, consolidation or reclassification of the class of shares comprising the Escrowed Shares or (ii) any reorganization of the share capital of Phoenix affecting the Escrowed Shares or (iii) the amalgamation of Phoenix with any other company, the number of Escrowed Shares and Escrowed Share Price shall be adjusted, if required, so that none of the parties hereto shall be in a position less favorable to it than as provided in this Agreement as a result of any of the foregoing actions. 1.4 For all purposes of this Agreement, the amount of any Claim in a currency other than Canadian dollars shall be converted to Canadian dollars at the exchange rate between Canadian and such currency shall be the "Spot Rate" of the alternate currency on the business day preceding the day as of which the conversion from one currency to the other is to be effected, as reported in the Financial Post of Canada on that day. 1.5 In any calculation hereunder of the applicable number of Escrowed Shares results in fractional shares, the result shall be rounded up or down, as the case may be, to the nearest -4- whole number and, if such result represents exactly one-half of a whole number, then such fraction shall be rounded up to the next whole number. 2. ESTABLISHMENT OF ESCROW 2.1 Phoenix hereby delivers in escrow to the Escrow Agent certificates representing an aggregate of 176,507 common shares of Phoenix registered in the name of the Escrow Agent, as escrow agent (the "Escrowed Shares"). The Vendors' interests in the Escrowed Shares are as set forth below:
VENDOR ESCROWED SHARES ------ --------------- Vollenweider 29,559 Albers 27,653 Fischer 14,844 Innovent 30,595 Hassler 2,059 Joller 8,708 Karabelnik 29,553 Wicki 33,536
2.2 The Escrow Agent hereby accepts delivery and acknowledges receipt of the Escrowed Shares and agrees to act as escrow agent and to hold, safeguard and release the Escrowed Shares in accordance with the provisions of this Agreement. The Escrowed Shares shall not be assigned, hypothecated, alienated, released from escrow, transferred within escrow or dealt with in any manner whatsoever except as provided in this Agreement. 2.3 Notwithstanding the registration of the Escrowed Shares in the name of the Escrow Agent, the Vendors shall, subject to the provisions hereof, remain the owners thereof in the proportion contemplated by Section 2.1 hereof and be entitled to the exercise of all voting rights related thereto and to receive all dividends, income and other distributions in respect thereof (collectively, "Distributions"). In the event that any Escrowed Shares are remitted to Phoenix for cancellation pursuant to the provisions of Section 3 hereof, the Vendors shall repay to Phoenix any Distributions received in respect of such Escrowed Shares. 3. INSTRUCTIONS TO ESCROW AGENT 3.1 All communications made by the Vendors, including instructions to the Escrow Agent or Responses hereunder, shall be made by Wicki and Vollenweider jointly on behalf of the Vendors. All of the Vendors hereby authorize Wicki and Vollenweider jointly to duly represent them in accordance with all communications under this Agreement. Should the Vendors wish to withdraw this authorization and to designate new representatives they have -5- to do so jointly and by notifying Phoenix and the Escrow Agent in accordance with Section 7 hereof. 3.2 At any time while the Escrowed Shares are held by the Escrow Agent, a Non-Affiliate may instruct the Escrow Agent in writing to sell all or part of such Non-Affiliate's portion of the Escrowed Shares. Upon receipt of such written instruction, the Escrow Agent shall sell such Escrowed Shares on the open market and shall retain the proceeds of sale, less any expenses incurred in realizing such sale (the "Proceeds") as escrowed property for such Non-Affiliate. The Escrow Agent shall invest such Proceeds according to the written instructions of such Non-Affiliate for the duration of the escrow. The Escrow Agent shall keep complete records of any such sales of Escrowed Shares. 3.3 At any time after receipt by the Escrow Agent of written notice by Phoenix of the release, in the format prescribed by the SEC, of at least 30 days of post-combination financial results of Phoenix and ANAWA Holding AG, and provided that the Escrowed Shares are not then subject to any restrictions on transfer imposed by any Regulatory Authority, an Affiliate may also instruct the Escrow Agent to sell all or part of their portion of the Escrowed Shares in the manner set forth in Section 3.2. In such event, the Escrow Agent shall proceed as set forth in Section 3.2. 3.4 Whenever Phoenix has a Claim it shall promptly give a Notice of Claim in respect thereof to the Vendors and the Escrow Agent. Upon receipt of a Notice of Claim, the Escrow Agent shall immediately reserve for distribution in accordance with the provisions of Section 3.5 hereof (but shall not release from escrow except in accordance with the provisions hereof) that number of the Escrowed Shares which is equal in value to the amount provided for in the Notice of Claim, calculated on the basis of the Escrowed Share Price for such Claim. 3.5 Within 15 days of receipt of a Notice of Claim, the Vendors (or any of them) shall give to Phoenix and the Escrow Agent a Response with respect to each Claim set forth therein. If: 3.5.1 the Response indicates that the Vendors accept a Claim set forth in the Notice of Claim, or if the Escrow Agent does not receive a Response with respect to a Claim within said 15 day period, the Vendors shall be deemed to have irrevocably consented to each Claim so accepted or in respect of which no Response is so received, as made, and the Escrow Agent shall forthwith give written notice thereof to Phoenix: 3.5.1.1 setting forth the total amount of all Claims which have been consented to and the number of shares from the Escrowed Shares to be released from escrow for the benefit of Phoenix (the "Released Shares"), being that number of the Escrowed Shares which is equal in value to the amount of the admitted Claims set forth in such Notice of Claim, calculated on the basis of the Escrowed Share Price for such Claim; and 3.5.1.2 surrender for cancellation to Phoenix the share certificate(s) in its possession representing the Released Shares, duly endorsed for transfer, and the Escrow Agent shall retain in its possession the other share certificate(s) representing the balance of the Escrowed Shares, if any, to be held by it in escrow and dealt with in accordance with the terms hereof; or -6- 3.5.2 the Response indicates that the Vendors (or any of them) dispute a Claim set forth in the Notice of Claim (whether or nor arbitration proceedings have been instituted), the Escrow Agent shall retain in its possession and continue to hold in escrow that number of the Escrowed Shares which is equal in value to the amount provided for in the disputed Claims, calculated on the basis of the Escrowed Share Price for such Claim: 3.5.2.1 until the Escrow Agent receives a joint written notice from Phoenix and the Vendors directing the Escrow Agent as to the manner in which such Escrowed Shares and the share certificate(s) representing same are to be dealt with, in which case the Escrow Agent shall deal with same in accordance with such joint written instructions; or 3.5.2.2 in the absence of such a joint written notice within 10 business days of the Escrow Agent's receipt of the Response, the Escrow Agent shall deal with such Escrowed Shares and the share certificate(s) representing same in accordance with a final arbitration order in respect of such disputed Claim(s) pursuant to the arbitration contemplated by Section 12 hereof. Any arbitration order shall be accompanied by a legal opinion by counsel for the presenting party satisfactory to the Escrow Agent to the effect that the said order is final and non-appealable. 3.6 If, at the time of receipt by the Escrow Agent of any Notice of Claim as provided for in Section 3.4 hereof, the Escrowed Shares remaining in escrow for the account of any Vendor calculated on the basis of the Escrowed Share Price is insufficient to meet such Vendor's pro rata portion of the number of Released Shares to be remitted to Phoenix, the balance of such Vendor's pro rata portion of the admitted Claims shall be satisfied by payment in cash from the Proceeds of those Escrowed Shares sold by the Escrow Agent at the direction of such Vendor pursuant to Section 3.2 or 3.3 hereof. 3.7 On the earlier of (i) November 30, 1998, or (ii) the date at which the Escrow Agent receives a notice from Phoenix confirming that the audit of the combined financial statements of Phoenix and ANAWA Holding AG has been completed, the Escrow Agent will deliver the Escrowed Shares and all Distributions and Proceeds to the Vendors, pro rata to their respective interests in the Escrowed Shares, Distributions and Proceeds, if any, with the exception of such number of Escrowed Shares calculated on the basis of the Escrowed Share Price as may be necessary to satisfy any obligation to indemnify for a Specific Contingency which has not yet occurred. The notice from Phoenix referred to above shall indicate the maximum amount of Specific Contingencies which have not been prescribed or definitively settled and the number of Escrowed Shares, calculated on the basis of the Escrowed Share Price, which may not be released from the escrow for such Specific Contingencies. In calculating the maximum amount of Specific Contingencies which have not been prescribed or definitively settled and the number of Escrowed Shares which may be released, Phoenix and the Vendors acknowledge that the number of Escrowed Shares relating to the Specific Contingency referred to in Section 8.2 of the Purchase Agreement is calculated using the Escrowed Share Price provided in Section 1.1.5 hereof and an amount of SFr220,000 as opposed to Sfr1,100,000. The number of Escrowed Shares relating to any other Specific Contingency is calculated using the amounts mentioned in -7- Section 8 of the Purchase Agreement and the Escrowed Share Price provided in Section 1.1.5 hereof. 3.8 Upon receipt by the Escrow Agent from Phoenix of a written notice instructing it to release, pro rata to the Vendors, such further number of Escrowed Shares as is no longer necessary to satisfy remaining indemnification obligations in respect of the maximum amount of remaining Specific Contingencies which have been prescribed or definitively settled, the Escrow Agent shall so release such number of Escrowed Shares to the Vendors, pro rata to their respective interests in the Escrowed Shares, Distributions and Proceeds, if any. It is agreed between Phoenix and the Vendors that the Specific Contingency referred to in Section 8.2 of the Purchase Agreement will be considered prescribed or definitively settled for the purposes hereof if on the third anniversary hereof no legal proceedings have been instituted against ANAWA Holding AG by Dr. Rondez AG. Phoenix hereby undertakes to notify the Escrow Agent promptly when a Specific Contingency becomes prescribed or definitively settled. 4. VOTING RIGHTS 4.1 The Escrow Agent shall provide to each of the Vendors a proxy entitling such Vendor to vote those of the Escrowed Shares which are owned by it, forthwith upon the Escrow Agent's receipt thereof in its capacity as registered shareholder of Phoenix, in order to allow each Vendor to vote its Escrowed Shares in the same manner as if it were the registered owner thereof. 5. RIGHTS AND OBLIGATIONS OF THE ESCROW AGENT 5.1 The Escrow Agent is not a party to, and is not bound by, any provisions which may be evidenced by, or arise out of, any agreement other than as therein set forth under the express provisions of this Agreement. 5.2 The Escrow Agent acts hereunder as a depositary only and is not responsible or liable in any manner whatever for the sufficiency, correctness, genuineness or validity of any instrument deposited with it, or for the form of execution of such instrument or for the identity or authority or right of any person or party executing or depositing it. 5.3 The Escrow Agent shall not be under any duty to give the Escrowed Shares, Distributions and Proceeds, if any, held by it hereunder any greater degree of care than it gives its own similar property and shall not be required to invest any funds held hereunder except as directed in this Agreement. Uninvested funds held hereunder shall not earn or accrue interest. 5.4 The Escrow Agent shall not be liable, except for its own gross negligence or willful misconduct and, except with respect to claims based upon such gross negligence or willful misconduct that are successfully asserted against the Escrow Agent, the other parties hereto shall solidarily indemnify and hold harmless the Escrow Agent (and any successor Escrow Agent) from and against any and all losses, liabilities, claims, actions, damages and expenses, including reasonable attorney's fees and disbursements, arising out of and in connection with this Agreement. Without limiting the foregoing, the Escrow Agent shall in no event be liable in connection with its investment or reinvestment of any cash held by it hereunder in good faith, in accordance with the terms hereof. -8- 5.5 The Escrow Agent shall be entitled to rely upon any order, judgment, certification, demand, notice, instrument or other writing delivered to it hereunder without being required to determine the authenticity or the correctness of any fact stated therein or the propriety or validity of the service thereof. The Escrow Agent may act in reliance upon any instrument or signature believed by it to be genuine and may assume that the person purporting to give receipt or advice or make any statement or execute any document in connection with the provisions hereof has been duly authorized to do so. The Escrow Agent may conclusively presume that the undersigned representative of any party hereto which is an entity other than a natural person has full power and authority to instruct the Escrow Agent on behalf of that party unless written notice to the contrary is delivered to the Escrow Agent. 5.6 The Escrow Agent may act pursuant to the advice of counsel with respect to any matter relating to this Agreement and shall not be liable for any action taken or omitted by it in good faith in accordance with such advice. 5.7 The Escrow Agent makes no representation as to the validity, value, genuineness or the collectability of any security or other document or instrument held by or delivered to it. 5.8 The Escrow Agent shall not be called upon to advise any party as to the wisdom in selling or retaining or taking or refraining from any action with respect to any securities or other property deposited hereunder. 5.9 The Escrow Agent (and any successor Escrow Agent) may at any time resign as such by delivering the Escrowed Shares, Distributions and Proceeds, if any, to any successor Escrow Agent jointly designated by the other parties hereto in writing, or to any court of competent jurisdiction, whereupon Escrow Agent shall be discharged of and from any and all further obligations arising in connection with this Agreement. The resignation of Escrow Agent will take effect on the earlier of (a) the appointment of a successor (including a court of competent jurisdiction) or (b) the day which is 30 days after the date of delivery of its written notice of resignation to the other parties hereto. If at that time Escrow Agent has not received a designation of a successor Escrow Agent, Escrow Agent's sole responsibility after that time shall be to retain and safeguard the Escrowed Shares and Proceeds, if any, until receipt of a designation of successor Escrow Agent or a joint written disposition instruction by the other parties hereto or a final non-appealable order of a court of competent jurisdiction. 5.10 Phoenix and the Vendors shall pay Escrow Agent compensation (as payment in full) for the services to be rendered by Escrow Agent hereunder in the amount of $1,500 at the time of execution of this Agreement and agree to reimburse Escrow Agent for all reasonable expenses, disbursements and advances incurred or made by Escrow Agent in performance of its duties hereunder (including reasonable fees, expenses and disbursements of its counsel). -9- 6. LIMITED RESPONSIBILITY This Agreement expressly sets forth all the duties of Escrow Agent with respect to any and all matters pertinent hereto. No implied duties or obligations shall be read into this Agreement against the Escrow Agent. The Escrow Agent shall not be bound by the provisions of any agreement among the other parties hereto except this Agreement. No trust is created by this Agreement and the Escrow Agent does not act in any capacity as a trustee. In the event of any disagreement between any of the parties to this Agreement, or between them or either of them and any other person, resulting in demands or adverse claims being made in connection with or for any asset involved herein or affected hereby, the Escrow Agent shall be entitled, at its discretion, to refuse to comply with any demands or claims on it, as long as such disagreement shall continue, and in so refusing the Escrow Agent may make no delivery or other disposition of any asset involved herein or affected hereby, and in so doing the Escrow Agent shall not be or become liable in any way or to any person or party for its failure or refusal to comply with such conflicting demands or adverse claims, and it shall be entitled to continue so to refrain from acting and so to refuse to act until the right of person or party shall have been finally settled as provided in Section 12 hereof, or all differences shall have been adjusted by agreement and the Escrow Agent shall have been notified thereof in writing signed by all persons and parties interested. 7. NOTICES All notices, consents, waivers and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by telecopier (with written confirmation of receipt) provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case the appropriate addresses and telecopier numbers set forth below (or to such other addresses and telecopier numbers as a party may designate by notice to the other parties): 7.1 To Phoenix: Phoenix International Life Sciences Inc. 2350, Cohen Street Saint-Laurent, Quebec H4R 2N6 Canada Telecopier No.: (514) 333-7306 ATTENTION: JEAN-YVES CALOZ To the Vendors: 7.2 To Vollenweider: Dr. Johann Jakob Vollenweider Unterdorfstrasse 23 8602 Wangen, Switzerland -10- 7.3 To Albers: Albers & Co. Schanzengasse 14 8000 Zurich, Switzerland Postal address: Schanzengasse 14 Postfach 4276 8022 Zurich, Switzerland Telecopier No.: (411) 265-2902 7.4 To Fischer: Dr. Ernst Fischer Heugatterstrasse 24 8600 Dubendorf, Switzerland 7.5 To Innovent: Innovent Capital Ltd. Midland Bank Trust Building P.O. Box 1109, Fort Street Grand Cayman, B.W.I. Telecopier No.: (411) 211-4230 7.6 To Hassler: Werner Hassler Buchserstrasse 43 8157 Dielsdorf, Switzerland 7.7 To Joller: Dr. Peter Joller Spitzackerstrasse 8 8057 Zurich, Switzerland 7.8 To Karabelnik: Dr. David Karabelnik Untere Allmend 12 8702 Zollikon, Switzerland -11- 7.9 To Wicki: Dr. Andreas Wicki Hohestrasse 39 8702 Zollikon, Switzerland 7.10 To the Escrow Agent: Montreal Trust Company 1800 McGill College Avenue Montreal (Quebec) H3A 3K9 Telecopier No.: (514) 982-7677 8. GOVERNING LAW This Agreement shall be governed by the laws of the Province of Quebec and the laws of Canada applicable therein. 9. COUNTERPARTS This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original and all of which, when taken together, will be deemed to constitute one and the same. 10. SECTION HEADINGS The headings of sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. 11. WAIVER The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither the failure nor any delay by any party in exercising any right, power, or privilege under this Agreement or the documents referred to in this Agreement will operate as a waiver of such right, power or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other parties; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement. -12- 12. ARBITRATION All disputes arising out of or in connection with the present Agreement shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules. The place of arbitration shall be Montreal. The language of the arbitration shall be English. 13. CONFIDENTIALITY The parties agree to treat this Agreement as confidential and not to disclose its contents to third parties other than their advisers, except to the extent necessary to enforce performance of obligations hereunder, or as is required to comply with applicable laws or regulations, including regulations of any stock exchange on which the securities of Phoenix are listed. 14. FURTHER ASSURANCES The parties shall, with all reasonable diligence, do all such things and provide all such reasonable assurances as may be required to consummate the transactions contemplated hereby, and each party shall provide such further documents or instruments required by another party as may be reasonably necessary or desirable to give effect to the purpose of this Agreement and to carry out its provisions. 15. GENERAL The invalidity or unenforceability of any term or provision hereof shall not affect the validity or enforceability of any other term or provision hereof. This Agreement and the other documents and instruments referred to herein constitute the entire understanding of the parties hereto with respect to the subject matter hereof and thereof and supersede all present and prior agreements, whether written or oral. This Agreement shall bind and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, personal representatives, successors and assigns. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first written above. PHOENIX INTERNATIONAL LIFE SCIENCES INC. By: /s/ Suzanne Peeters ------------------------------------- Suzanne Peeters Title: Senior Vice-President Analytical Services /s/ Johann Jakob Vollenweider ------------------------------------- DR. JOHANN JAKOB VOLLENWEIDER -13- ALBERS & CO. By: /s/ Johann Jakob Vollenweider ------------------------------------- Dr. Johann Jakob Vollenweider /s/ Ernst Fischer ------------------------------------- DR. ERNST FISCHER INNOVENT CAPITAL LTD. By: /s/ Johann Jakob Vollenweider ------------------------------------- Dr. Johann Jakob Vollenweider /s/ Werner Hassler ------------------------------------- WERNER HASSLER /s/ Peter Joller ------------------------------------- DR. PETER JOLLER /s/ David Karabelnik ------------------------------------- DR. DAVID KARABELNIK /s/ Andreas Wicki ------------------------------------- DR. ANDREAS WICKI MONTREAL TRUST COMPANY By: /s/ Antonietta Deluca ------------------------------------- ANTONIETTA DELUCA Title: Senior Trust Officer By: /s/ Francine Beausejour ------------------------------------- FRANCINE BEAUSEJOUR Title: Account Manager EX-2.4 5 EXHIBIT 2.4 AGREEMENT AND PLAN OF MERGER between APPLIED ANALYTICAL INDUSTRIES, INC. KCAS ACQUISITION, INC. and KANSAS CITY ANALYTICAL SERVICES, INC. Dated as of September 2, 1998 TABLE OF CONTENTS ARTICLE I. DEFINED TERMS.....................................................................1 1.1. Definitions............................................................1 ARTICLE II. THE MERGER........................................................................6 2.1. The Merger.............................................................6 2.2. Articles of Incorporation..............................................6 2.3. Bylaws.................................................................6 2.4. Directors and Officers.................................................7 ARTICLE III. CONVERSION AND EXCHANGE OF SHARES.................................................7 3.1. Shares.................................................................7 3.2. Exchange and Conversion of Shares......................................8 ARTICLE IV. THE CLOSING.......................................................................9 4.1. Effective Time and Closing.............................................9 4.2. Deliveries by KCAS.....................................................9 4.3. Deliveries by Merger Sub and AAI.......................................9 ARTICLE V. REPRESENTATIONS AND WARRANTIES OF KCAS...........................................10 5.1. Organization and Good Standing; Power and Authority; Qualifications...10 5.2. Authorization of the Merger Documents.................................10 5.3. Capitalization........................................................10 5.4. Financial Statements..................................................11 5.5. Absence of Undisclosed Liabilities....................................11 5.6. Absence of Material Changes...........................................11 5.7. No Conflicts..........................................................12 5.8. Agreements............................................................13 5.9. Intellectual Property Rights..........................................13 5.10. Equity Investments; Subsidiaries......................................15 5.11. Corporate Minute Books................................................15 5.12. Suitability...........................................................15 5.13. Assets................................................................15 5.14. Employee Benefit Plans................................................16 5.15. Labor Relations; Employees............................................17
-i- 5.16. Litigation; Orders....................................................18 5.17. Compliance with Laws; Permits.........................................18 5.18. Related Transactions..................................................18 5.19. Disclosure............................................................18 5.20. Taxes.................................................................19 5.21. Environmental Protection..............................................19 5.22. Consents..............................................................20 5.23. Insurance; Workers' Compensation......................................20 5.24. Brokers...............................................................21 5.25. Suppliers and Customers...............................................21 5.26. Previous Issuances Exempt.............................................21 5.27. Real Property.........................................................21 5.28. Accounts Receivable...................................................22 5.29. Food and Drug Administration Matters..................................22 5.30. Other Representations and Warranties..................................23 ARTICLE VI. REPRESENTATIONS AND WARRANTIES OFAAI AND MERGER SUB.............................................................23 6.1. Organization and Good Standing; Power and Authority; Qualifications...23 6.2. Authorization of the Merger Documents.................................23 6.3. Authorization and Issuance of Shares..................................24 6.4. Public Documents......................................................24 6.5. No Conflicts..........................................................24 6.6. Disclosure............................................................25 6.7. Brokers...............................................................25 ARTICLE VII. COVENANTS OF KCAS................................................................25 7.1. Ordinary Conduct......................................................25 7.2. No Solicitation.......................................................27 7.3. Access to Information.................................................28 7.4. Schedules to Agreement................................................28 7.5. Maintenance of Corporate Existence....................................28 7.6. Contributions to and Termination of 401(k) Plan.......................28 ARTICLE VIII. MUTUAL COVENANT OF KCAS, MERGER SUB AND AAI......................................29 8.1. Confidentiality.......................................................29 8.2. Consummation of Agreement.............................................29 8.3. Publicity.............................................................30
-ii- ARTICLE IX. CONDITIONS TO CLOSING............................................................30 9.1. Conditions to Each Party's Obligations to Effect the Transactions Contemplated Hereby......................................30 9.2. Conditions to the Obligations of KCAS to Effect the Transactions Contemplated Hereby......................................30 9.3. Conditions to the Obligations of AAI and Merger Sub to Effect the Transactions Contemplated Hereby...........................31 ARTICLE X. TERMINATION......................................................................33 10.1. Termination...........................................................33 10.2. Procedure and Effect of Termination or Failure to Close...............33 ARTICLE XI. MISCELLANEOUS PROVISIONS.........................................................34 11.1. Survival of Representations; Indemnification..........................34 11.2. Expenses..............................................................34 11.3. Waiver of Compliance; Consents........................................35 11.4. Amendment and Modification............................................35 11.5. Notices...............................................................35 11.6. Assignment............................................................36 11.7. Governing Law; Jurisdiction...........................................36 11.8. Jurisdiction and Venue................................................36 11.9. Counterparts..........................................................37 11.10. Nouns and Pronouns....................................................37 11.11. Interpretation........................................................37 11.12. Parties in Interest...................................................37 11.13. Employee Length of Service............................................37 11.14. Entire Agreement......................................................37 11.15. Release of Phoenix (IBRD).............................................37
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EXHIBITS Exhibit A Form of Certificate of Merger Exhibit B Form of Indemnification Agreement Exhibit C Form Employee Nondisclosure Agreement Exhibit D Form of Dr. Mason Employment Agreement Exhibit E Form of Dr. Fu Employment Agreement Exhibit F Form of Election of Merger Consideration Exhibit G Form of Transmittal Letter Exhibit H Form of Opinion of AAI's Counsel Exhibit I Form of Opinion of KCAS's Counsel
-iv- AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of September 2, 1998, is by and between APPLIED ANALYTICAL INDUSTRIES, INC., a Delaware corporation ("AAI"), KCAS ACQUISITION, INC., a Kansas corporation and a wholly owned subsidiary of AAI ("Merger Sub"), and KANSAS CITY ANALYTICAL SERVICES, INC., a Kansas corporation ("KCAS"). BACKGROUND STATEMENT The parties hereto desire to effect a merger of Merger Sub and KCAS pursuant to which KCAS will be the surviving corporation, and the stockholders of KCAS as of the Effective Time will receive as consideration for the Merger at their election (i) cash in the amount of $6,060.61 per outstanding share of common stock, $1.00 par value, of KCAS ("Common Stock") or (ii) shares of common stock, $.001 par value, of AAI ("AAI Common Stock") based on a formula set forth herein or (iii) a combination of cash and shares of AAI Common Stock as set forth herein. Such merger shall be consummated pursuant to the terms and conditions of this Agreement. STATEMENT OF AGREEMENT In consideration of the premises and the mutual covenants contained herein, the parties hereto agree as follows: ARTICLE I. DEFINED TERMS 1.1. DEFINITIONS. As used in this Agreement, the following terms have the following meanings: "AAI Common Stock" shall mean the common stock, $.001 par value, of AAI. "Acquisition Transaction" has the meaning given to it in Section 7.2. "Action" has the meaning given to it in Section 11.2. "Board of Directors" means the board of directors of a corporation or any committee thereof legally authorized to act on its behalf. "Benefit Plan" has the meaning given to it in Section 5.14. "Certificate of Merger" means the Certificate of Merger substantially in the form attached hereto as Exhibit A. "Closing" means the closing of the transactions contemplated herein, as identified more specifically in Article IV. "Closing Date" means September 16, 1998, or such other date agreed to by the parties hereto. "Code" means the Internal Revenue Code of 1986, as amended, and any successor statute of similar import, together with the regulations thereunder, in each case as in effect from time to time. References to sections of the Code shall be construed also to refer to any successor sections. "Common Stock" shall mean the common stock, $1.00 par value, of KCAS. "Contract" means any indenture, mortgage, guaranty, lease, license or other contract, agreement or understanding, written or oral. "Dissenting Shares" shall mean shares of Common Stock as to which a Stockholder has properly asserted rights of dissent and appraisal pursuant to Section 17-6712 of the Kansas Law. "Effective Time" has the meaning given to it in Section 4.1. "Employee" has the meaning given to it in Section 5.15(a). "Employee Nondisclosure Agreements" means those certain Employee Nondisclosure Agreements substantially in the form of Exhibit C. "Employment Agreements" shall mean the Employment Agreement between AAI and Dr. William D. Mason of the form attached hereto as Exhibit D and the Employment Agreement between AAI and Dr. Chauhwei J. Fu of the form attached hereto as Exhibit E. "Encumbrances" means any mortgages, claims, liens, security interests, pledges, escrows, charges or other encumbrances of any kind or character whatsoever. "Environmental Costs" means, without limitation, any actual or potential cleanup costs, remediation, removal, or other response costs (which, without limitation, shall include costs to cause KCAS to come into compliance with Environmental Laws), investigation costs (including, without limitation, fees of consultants, counsel, and other experts in connection with any environmental investigation, testing, audits or studies), losses, liabilities or obligations (including, without limitation, liabilities or obligations under any lease or other contract), payments, damages (including, without limitation, any actual, punitive or consequential damages under any statutory laws, common law cause of action or contractual obligations or otherwise, including, without limitation, damages of third parties for personal injury or property damage or -2- damages to natural resources), civil or criminal fines or penalties, judgments, and amounts paid in settlement arising out of or relating to or resulting from any Environmental Matter. "Environmental Laws" means, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. ss.ss. 9601,ET SEQ.; the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. ss.ss. 11001, ET SEQ.; the Resource Conservation and Recovery Act, 42 U.S.C. ss.ss. 6901, ET SEQ.; the Toxic Substances Control Act, 15 U.S.C. ss.ss. 26019 ET SEQ.; the Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. ss.ss. 136, ET SEQ.; the Clean Air Act, 42 U.S.C. ss.sS. 7401 ET SEQ.; the Clean Water Act (Federal Water Pollution Control Act), 33 U.S.C. ss.ss. 1251 ET SEQ.; the Safe Drinking Water Act, 42 U.S.C. ss.ss. 300F, ET SEQ.; the Occupational Safety and Health Act, 29 U.S.C. ss.sS. 641, ET SEQ.; the Hazardous Materials Transportation Act, 49 U.S.C. ss.ss. 1801, ET SEQ.; as any of the above statutes have been amended from time to time, all rules and regulations promulgated pursuant to any of the above statutes, and any other foreign, federal, state or local law, statute, ordinance, rule or regulation governing Environmental Matters, as the same have been amended from time to time, including any common law cause of action providing any right of remedy relating to Environmental Matters, all indemnity agreements and other contractual obligations (including leases, asset purchase and merger agreements) relating to Environmental Matters, and all applicable judicial and administrative decisions, orders, and decrees relating to Environmental Matters. "Environmental Matter" means any matter arising out of, relating to, or resulting from pollution, contamination, protection of the environment, human health or safety, health or safety of employees, sanitation, and any matters relating to emissions, discharges, disseminations, releases or threatened releases, of Hazardous Substances into the air (indoor and outdoor), surface water, groundwater, soil, land surface or subsurface, buildings, facilities, real or personal property or fixtures or otherwise arising out of, relating to, or resulting from the manufacture, processing, distribution, use, treatment, storage, disposal, transport, handling, release or threatened release of Hazardous Substances. "Environmental Permits" has the meaning given to it in Section 5.21. "ERISA" means the Employment Retirement Income Security Act of 1974, as amended, and any successor statute of similar import in each case as in effect from time to time. References to sections of ERISA shall be construed also to refer to any successor sections. "Financial Statements" means, with respect to KCAS and its Subsidiaries, (a) the audited balance sheet at October 31, 1996 and 1997, (b) the unaudited statements of income, stockholders' equity and cash flows for the fiscal years ended October 31, 1996 and 1997, (c) the unaudited statements of income, stockholders' equity and cash flows and the unaudited balance sheet for and at the fiscal year ended October 31, 1995 and (d) the unaudited balance sheet at March 31, 1998. -3- "Generally Accepted Accounting Principles" means generally accepted accounting principles as recognized by the American Institute of Certified Public Accountants, as in effect from time to time, consistently applied and maintained on a consistent basis for a Person on a consolidated basis throughout the period indicated and consistent with such Person's prior Financial practice. "Hazardous Substance" means any substance or material meeting any one or more of the following criteria: (i) it is or contains a substance designated as a hazardous waste, hazardous substance, hazardous material, pollutant, contaminant or toxic substance under any Environmental Law; (ii) its presence at some quantity requires investigation, notification or remediation under any Environmental Law; or (iii) it contains, without limiting the foregoing, asbestos, polychlorinated biphenyls, petroleum hydrocarbons, petroleum derived substances or waste, crude oil or any fraction thereof, nuclear fuel, natural gas or synthetic gas. "IRB Debt" means the debt of KCAS underlying or securing the Industrial Revenue Bonds, Series 1985 (Mason Lanman Associates Project) in the initial principal amount of $830,000 issued pursuant to that certain Trust Indenture dated September 1, 1985, by and between the City of Shawnee, Kansas and United Missouri Bank of Kansas City, N.A., as trustee. "Indemnification Agreement" means that certain Indemnification Agreement substantially in the form attached hereto as Exhibit B. "Information" has the meaning given to it in Section 8.1. "Intellectual Property" means (a) all world wide inventions and discoveries (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications and patent disclosures, together with all reissuances, continuations, continuations-in-part, revisions, extensions and reexaminations thereof, (b) all trademarks, service marks, trade dress, logos, trade names and corporate names, together with all translations, adaptations, derivations and combinations thereof and including all goodwill associated therewith, and all applications, registrations and renewals in connection therewith, (c) all copyrightable works, all copyrights and all applications, registrations and renewals in connection therewith, (d) all mask works and all applications, registrations and renewals in connection therewith, (e) all know-how, trade secrets and confidential business information, whether patentable or unpatentable and whether or not reduced to practice (including ideas, research and development, know-how, formulas, compositions, manufacturing and production process and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information and business and marketing plans and proposals), (f) all computer software (including data and related documentation), (g) all other proprietary rights, (h) all copies and tangible embodiments thereof (in whatever form or medium) and (i) all licenses and agreements in connection therewith. -4- "Kansas Law" means the General Corporation Code of Kansas as amended and any successor statute of similar import, in each case as in effect from time to time. References to sections of Kansas Law shall be construed also to refer to any successor sections. "Knowledge of KCAS" means the actual knowledge of any of the following: William D. Mason, Ph.D., Marilyn L. Mason, Chauhwei J. Fu, Ph.D. and Robert Schroder. "Leased Real Properties" has the meaning given to it in Section 5.27. "Material Adverse Effect" means a material adverse effect on the condition (financial or otherwise), results of operations, business, prospects or assets or liabilities of a Person. "Merger" means the merger of KCAS with and into Merger Sub pursuant to the terms and conditions of this Agreement. "Merger Consideration" has the meaning given to it in Section 3.1(a). "Merger Documents" means collectively this Agreement and the other agreements and documents contemplated hereby, including any certificates or filings required hereunder or thereunder. "Permitted Encumbrances" means any of the following Encumbrances: (i) Encumbrances in favor of carriers, warehousemen, mechanics, landlords and materialmen and other similar persons incurred in the ordinary course of business for sums not yet due and payable, and (ii) Encumbrances for current taxes, assessments or other governmental charges incurred in the ordinary course of business and that are not delinquent or remain payable without any penalty. "Person" means a corporation, a company, an association, a joint venture, a partnership, an organization, a business, an individual, a trust or a government or political subdivision thereof or any government agency or any other legal entity. "Real Properties" has the meaning given to it in Section 5.27. "Securities Act" means the Securities Act of 1933, as amended, and any successor statute of similar import, in each case as in effect from time to time. "Stockholder" or "Stockholders" means one or more of the holders of capital stock of KCAS immediately prior to the Effective Time, as the case may be. "Subsidiary" of a Person means a corporation or other Person of which more than fifty percent (50%) of the outstanding securities having ordinary voting power to elect a majority -5- of the board of directors, in the case of a corporation, or of the ownership or beneficial interests having ordinary voting power, in the case of a Person not a corporation, is, directly or indirectly, provided or controlled by such Person or any of its subsidiaries or a combination thereof (irrespective of whether, at the time, securities of any other class or classes of-any such corporation or other Person shall have or might have voting power by reason of the happening of any contingency). "Surviving Corporation" has the meaning given to it in Section 2.1. "Taxes" means any taxes, assessments, duties, fees, levies, imposts, deductions, withholdings, including, without limitation, income, gross receipts, ad valorem, value added, excise, real or personal property, asset, sales, use, license, payroll, transaction, capital, net worth and franchise taxes, estimated taxes, withholding, employment, social security, workers compensation, utility, severance, production, unemployment compensation, occupation, premium, windfall profits, transfer and gains taxes, or other governmental charges of any nature whatsoever imposed by any government or taxing authority of any country or political subdivision of any country and any liabilities with respect thereto, including any penalties, additions to tax, fines or interest thereon, and includes any liability of KCAS and its Subsidiaries arising under any tax sharing agreement to which any of them is or has been a party. "Tax Return" means any report, return or other information required to be supplied to a taxing authority in connection with Taxes. "Transmittal Letter" has the meaning given to it in Section 3.2(a). ARTICLE II. THE MERGER 2.1. THE MERGER. On the terms and subject to the conditions of this Agreement and Kansas Law, at the Effective Time, Merger Sub will merge with and into KCAS, the separate existence of Merger Sub will cease and KCAS will be the surviving corporation (the "Surviving Corporation"). 2.2. ARTICLES OF INCORPORATION. The articles of incorporation of KCAS in effect at the Effective Time shall be the articles of incorporation of the Surviving Corporation which shall be amended and restated to be substantially identical to the Articles of Incorporation of Merger Sub except that Article I shall be amended to read as follows: "The name of the corporation is Kansas City Analytical Services, Inc." 2.3. BYLAWS. The bylaws of Merger Sub in effect at the Effective Time shall be the bylaws of the Surviving Corporation until amended in accordance with applicable law. -6- 2.4. DIRECTORS AND OFFICERS. From and after the Effective Time, until successors are duly elected or appointed in accordance with applicable law, the directors of Merger Sub at the Effective Time shall be the directors of the Surviving Corporation and the officers of Merger Sub at the Effective Time shall be the officers of the Surviving Corporation. ARTICLE III. CONVERSION AND EXCHANGE OF SHARES 3.1. SHARES. At the Effective Time, by virtue of the Merger and without any action on the part of any Person: (a) Each issued and outstanding share of Common Stock, other than Dissenting Shares shall be converted into the right to receive, at the option of each Stockholder, (i) an amount in cash, without interest, equal to $6,060.61 (the "Cash Merger Consideration") or (ii) $6,888.89 worth of AAI Common Stock at the AAI Valuation Price (as defined below) (the "Stock Merger Consideration"; the Stock Merger Consideration and Cash Merger Consideration are generally referred to as the "Merger Consideration"). As used herein, the "AAI Valuation Price" shall mean (i) the average of the average of the high and low trading prices per share for AAI Common Stock as reported on the Nasdaq National Stock Market (as published in The Wall Street Journal, eastern edition) for each trading day during the ten consecutive trading days during which shares are traded on the Nasdaq National Stock Market ending on the fifth trading day prior to the Effective Time (the "Average Trading Price"). No fractional shares of AAI Common Stock shall be issued. In lieu thereof, each Stockholder who would otherwise be entitled to a fraction of a share of AAI Common Stock shall be entitled to receive an amount of cash (rounded to the nearest whole cent) equal to the product of such fraction of a share of AAI Common Stock multiplied by the Average Trading Price. No interest will accrue or be paid on the cash payable in lieu of fractional shares. A Stockholder may elect to receive Cash Merger Consideration for a portion of such Stockholder's shares of Common Stock and Stock Merger Consideration for such Stockholder's remaining shares of Common Stock. Elections to receive Cash Merger Consideration, Stock Merger Consideration or a combination of both must be made by written notice of the form attached hereto as Exhibit F by each Stockholder delivered to AAI contemporaneously with the execution by KCAS of this Agreement. If a Stockholder does not timely make the election required by the immediately preceding sentence, then the Stockholder shall be deemed to have elected to receive Cash Merger Consideration for each share of Common Stock held by such Stockholder. At the Effective Time, all shares of Common Stock shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate representing any such shares of Common Stock shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration, without interest or, with respect to holders of Dissenting Shares, rights provided under Section 17-6712 of the Kansas Law. In the event that at any time any holder of Dissenting Shares shall cease to have the right to demand payment for the value of such Dissenting Shares pursuant to Section -7- 17-6712 of the Kansas Law, each Dissenting Share shall be converted into the right to receive the Cash Merger Consideration. (b) Each issued and outstanding share of capital stock of Merger Sub shall be converted into one fully paid and nonassessable share of common stock, par value $0.01, of the Surviving Corporation. 3.2. EXCHANGE AND CONVERSION OF SHARES. (a) At the Closing Date, each holder of shares of Common Stock shall deliver to the Surviving Corporation a properly executed letter of transmittal and instructions (together, a "Transmittal Letter"), the form of which is attached hereto as Exhibit G, along with the certificate evidencing such shares of Common Stock. Subject to any required backup withholding obligations under the Code, at the Effective Time and upon surrender to the Surviving Corporation of certificates representing shares of Common Stock, together with a Transmittal Letter, the Stockholder of such certificates shall receive in exchange therefor, and AAI shall issue and deliver to such Stockholder, the Merger Consideration entitled to be received by such Stockholder. (b) From and after the Effective Time, there shall be no transfers on the stock transfer books of KCAS in respect of stockholders of record at the Effective Time. If after the Effective Time, certificates representing shares of Common Stock are presented to the Surviving Corporation, the Surviving Corporation shall cancel or exchange such certificates, and any underlying shares of Common Stock represented thereby, as provided by this Article HI. AAI shall be obligated to issue Merger Consideration only to the record holders of Common Stock. (c) The Surviving Corporation shall not be liable to a holder of shares of Common Stock for any property delivered to a public official pursuant to applicable abandoned property laws, or for any interest thereon. If certificates representing shares of Common Stock are not surrendered prior to the date on which the consideration payable in respect of the underlying shares would otherwise escheat to or become the property of any governmental unit or agency, any consideration payable in respect of such certificates, shall, to the extent permitted by applicable law, become the property of the Surviving Corporation, free and clear of all claims of interest of any person previously entitled thereto. -8- ARTICLE IV. THE CLOSING 4.1. EFFECTIVE TIME AND CLOSING. On the Closing Date, assuming satisfaction or, to the extent permitted hereunder, waiver, of all conditions to the Merger set forth in Article IX, KCAS shall cause the Certificate of Merger to be filed with the Secretary of State of the State of Kansas. Additionally, KCAS and Merger Sub shall cause all other filings or recordings to be made as required by applicable law in connection with the Merger. The Merger shall be consummated and the Merger shall become effective upon the filing of the Certificate of Merger with the Secretary of State of the State of Kansas (such time, the "Effective Time"). The closing of the Merger shall take place at the offices of Robinson, Bradshaw & Hinson, P.A. in Charlotte, North Carolina commencing at 10:00 a.m. local time on the Closing Date. 4.2. DELIVERIES BY KCAS. At or by the Closing, KCAS shall have caused the following documents to be executed as contemplated thereby and delivered to Merger Sub or AAI, or both, as the case may be: (a) The Employee Nondisclosure Agreements executed by each of the employees of KCAS listed on Annex 2; (b) The Indemnification Agreement executed by each Stockholder; and (c) All other documents, certificates, instruments and writings required hereunder to be delivered by KCAS, or as reasonably may be requested by Merger Sub or AAI to consummate the transactions contemplated by this Agreement or any of the other Merger Documents. 4.3. DELIVERIES BY MERGER SUB AND AAI. At or by the Closing, Merger Sub and AAI shall have caused to be executed and delivered to the Stockholders: (a) the Indemnification Agreement; (b) the Employment Agreements; (c) all other documents, certificates, instruments and writings required hereunder to be delivered by Merger Sub or AAI, or as reasonably may be requested by KCAS to consummate the transactions contemplated by this Agreement or any other of the Merger Documents; and (d) the Merger Consideration. -9- ARTICLE V. REPRESENTATIONS AND WARRANTIES OF KCAS KCAS represents and warrants to Merger Sub and AAI as follows: 5.1. ORGANIZATION AND GOOD STANDING; POWER AND AUTHORITY; QUALIFICATIONS. KCAS, (i) is a corporation duly incorporated, validly existing and in good standing under the laws of Kansas, (ii) has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as presently conducted and as proposed to be conducted and (iii) is qualified to transact business as a foreign corporation in, and is in good standing under the laws of, those jurisdictions listed on Schedule 5.1, which jurisdictions constitute all of the jurisdictions wherein the character of the property owned or leased or the nature of the activities conducted by it makes such qualification necessary, except where the failure to be so qualified and in good standing would not have a Material Adverse Effect on KCAS. KCAS has all requisite corporate power and authority to enter into and perform its obligations under the Merger Documents. 5.2. AUTHORIZATION OF THE MERGER DOCUMENTS. The execution, delivery and performance by KCAS of each of the Merger Documents to which it is party have been duly authorized by all requisite corporate action on the part of KCAS, and each of the Merger Documents constitutes a legal, valid and binding obligation of KCAS enforceable against it in accordance with its terms except to the extent (a)that enforceability may be limited by bankruptcy, insolvency or other similar laws affecting creditors' rights generally and (b) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to certain equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. 5.3. CAPITALIZATION. (a) The authorized equity capitalization of KCAS as of the date of this Agreement consists entirely of 900 shares of Common Stock, $1.00 par value per share, all of which shares are issued and outstanding. All of such shares have been validly issued and are fully paid and nonassessable. There are, and immediately after the Closing there will be, no outstanding warrants, options, agreements, convertible securities or other commitments or securities convertible into, or exchangeable or exercisable for, shares of capital stock of KCAS pursuant to which KCAS is or may become obligated to issue any shares of the capital stock or other securities of KCAS. There are, and immediately after the Closing there will be, no rights, including preemptive or similar rights, to purchase or otherwise acquire shares or sell or otherwise transfer shares of the capital stock of KCAS pursuant to any provision of law, KCAS's articles of incorporation or its bylaws, any agreement to which KCAS is a party or otherwise. -10- (b) Schedule 5.3(b) hereto contains a list of (i) all holders of record of capital stock of KCAS, including the number of shares of capital stock held by each such holder. Except as set forth on Schedule 5.3(b), there are no beneficial owners of shares of KCAS's capital stock or other securities who are not otherwise holders of record. Except as set forth on Schedule 5.3(b), KCAS is not a party to, and there is, and immediately after the Closing there will be, no agreement, restriction or encumbrance (such as a right of first refusal, right of first offer, proxy, voting agreement, voting trust, registration rights agreement, stockholders' agreement, or any other similar agreement, whether or not KCAS is a party thereto) with respect to the purchase, sale or voting of any shares of capital stock of KCAS (whether outstanding or issuable upon conversion, exchange or exercise of outstanding securities). Except as set forth in Schedule 5.3(b) immediately prior to Closing, no Person has the right to nominate or elect one or more directors of KCAS other than through the right to vote its shares of Common Stock in an election of directors. 5.4. FINANCIAL STATEMENTS. KCAS has furnished to Merger Sub its Financial Statements. Except as set forth in Schedule 5.4 all such Financial Statements (i) which have been audited have been prepared in accordance with Generally Accepted Accounting Principles (except that the unaudited financial statements do not contain all of the footnotes required under Generally Accepted Accounting Principles and the Financial Statements for any period other than for a fiscal year or at a fiscal year end are subject to normal year-end adjustments, none of which reasonably could be expected to result in a Material Adverse Effect on KCAS) and (ii) fairly present the financial position of KCAS as of the date thereof, and the results of their operations for the periods indicated therein. 5.5. ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed on Schedule 5.5, KCAS does not have any liabilities or obligations (whether accrued, absolute, contingent, unliquidated or otherwise, whether due or to become due) other than (i) liabilities or obligations reserved against or otherwise disclosed in KCAS's Financial Statements or the footnotes thereto, (ii) intercompany liabilities among KCAS and its Subsidiaries, (iii) liabilities or obligations under Contracts listed on the Schedules to this Agreement or under Contracts that are not required to be disclosed thereon (but not liabilities for breaches thereof), (iv) trade accounts payable for goods and services and wages and salaries, in each case, incurred after October 3 1, 1997, in the ordinary course of business consistent (in amount and kind) with past practice, (v) other liabilities or obligations that were incurred after October 31, 1997, in the ordinary course of business consistent (in amount and kind) with past practice -and that do not exceed $50,000 in the aggregate and (vi) other liabilities disclosed or referred to elsewhere in this Agreement. 5.6. ABSENCE OF MATERIAL CHANGES. Except as set forth on Schedule 5.6 and except as otherwise expressly contemplated by this Agreement, since October 31, 1997, KCAS has conducted its business in the ordinary course, consistent with past practice and there has not been (a) any event or condition having a Material Adverse Effect on KCAS or any event or condition (other than publicly reported events or conditions affecting KCAS's industry generally) that reasonably could be expected to have a Material Adverse Effect, (b) any waiver or -11- cancellation of any right of KCAS to the extent such waiver or cancellation has had or reasonably could be expected to have a Material Adverse Effect on KCAS, or the cancellation of any material debt or claim held by KCAS, (c) any payment, discharge or satisfaction of any claim, liability or obligation of KCAS, other than trade payables paid in the ordinary course of business, (d) any Encumbrance upon the assets of KCAS other than any Permitted Encumbrance or Encumbrance disclosed on Schedule 5.13(a), (e) any payment of dividends on, or other distribution with respect to, or any direct or indirect redemption or acquisition by KCAS of, any securities of KCAS, (f) any issuance of stock, bonds or other securities of KCAS or any options or warrants or other rights to acquire any such securities or the exercise of outstanding options or warrants, (g) any sale, assignment or transfer of any tangible or intangible assets of KCAS except in the ordinary course of business, (h) any loan by KCAS to any officer, director, employee, consultant or shareholder thereof of an amount in excess of $25,000 (other than advances to such persons in the ordinary course of business in connection with travel and travel related expenses), (i) any damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting the assets, property, financial condition or results of operations of KCAS, (j) any increase, direct or indirect, in the compensation paid or payable to any officer or director of KCAS or, other than in the ordinary course of business, to any other employee, consultant or agent of KCAS, (k) any change in the accounting methods, practices or policies of KCAS, (1) any indebtedness incurred, except in the ordinary course of business, for borrowed money by KCAS, (m) any amendment to or termination of any material agreement to which KCAS is a party other than the expiration of any such agreement in accordance with its terms, (n) any change to the knowledge of KCAS with respect to the regulation of KCAS or their respective activities by any administrative agency or governmental body to the extent such change has had or reasonably could be expected to have a Material Adverse Effect on KCAS, (o) any material change in the manner of business or operations of KCAS or (p) any agreement or commitment (contingent or otherwise) by KCAS to do any of the foregoing. 5.7. NO CONFLICTS. Except as set forth on Schedule 5.7, KCAS's execution and delivery of, and performance of its obligations under, the Merger Documents and the consummation by KCAS of the transactions contemplated thereby will not (a) violate any provision of law, statute, rule or regulation, or any ruling, writ, injunction order, judgment or decree of any court, administrative agency or other governmental body applicable to it, or any of its properties or assets, (b) conflict with or result in any material breach of any of the terms, conditions or provisions of, or constitute (with due notice or lapse of time, or both) a default (or give rise to any right of termination, cancellation or acceleration) under, or result in the creation of any Encumbrance upon any of its properties or assets under, any Contract to which it is a party or (c) violate its articles of incorporation or bylaws. -12- 5.8. AGREEMENTS. (a) Except as set forth on Schedule 5.8(a), KCAS is not a party to any Contract other than any Contract that (i) pursuant to its terms, has expired, been terminated or fully performed by the parties, and in each case, under which KCAS does not have any liability, contingent or otherwise, (ii) is cancelable by either KCAS on thirty (30) days' or less notice without any penalty or other financial obligation and that involves payments to or from KCAS of less than $2,000 in such 30-day period or (iii) involves annual aggregate payments to or from KCAS of $25,000 or less, and in each case, is not material to the business or financial condition of KCAS, individually or in the aggregate. (b) Complete copies (or, if oral, full written descriptions) of all Contracts required to be listed hereby on Schedule 5.8(a), including all amendments thereto, have been delivered to AAI. To KCAS's knowledge, each of such Contracts is legal, valid, binding, enforceable, and in full force and-effect against KCAS and against the other parties thereto. There is no material breach, violation or default by KCAS, and no event that, with notice or lapse of time or both, (A) would constitute a breach, violation or default by such party under any such Contract or (B) would give rise to any lien or fight of termination, modification, cancellation, prepayment, suspension, limitation, revocation or acceleration against such party under any such Contract. Except as set forth on Schedule 5.8(b), no other party to any of such Contracts is in arrears in respect of the performance or satisfaction of the terms and conditions on its part to be performed or satisfied under any of such Contracts, no waiver or indulgence has been granted by any of the parties thereto and no party to any of such Contracts has repudiated any provision thereof. 5.9. INTELLECTUAL PROPERTY RIGHTS. (a) KCAS owns or has the fight to use pursuant to license, sublicense, agreement or permission all Intellectual Property, individually or in the aggregate, material to the operation of its business as currently conducted; provided, however, KCAS's right to use such Intellectual Property owned by third parties may be limited by nondisclosure obligations or other restrictions. Each item of Intellectual Property owned or used by KCAS immediately prior to the Closing will be owned or available for use by the Surviving Corporation on identical terms and conditions immediately subsequent to the Closing. (b) Except as set forth on Schedule 5.9(b), (i) to best knowledge of KCAS (A) KCAS has not interfered with, infringed upon or misappropriated any Intellectual Property rights of third parties, and (B) the business conducted by KCAS (which, in the case of the development, marketing and licensing of proprietary products, shall be limited to the products set forth on Schedule 5.9(b)) will not interfere with, infringe upon or misappropriate any Intellectual Property rights of third parties, and (ii) KCAS has not received any charge, complaint, claim, demand or notice alleging any such interference, infringement or misappropriation (including any claim that it must license or refrain from using any Intellectual -13- Property rights of any third party). To KCAS's knowledge, no third party has interfered with, infringed upon or misappropriated any Intellectual Property rights of KCAS. (c) Schedule 5.9(c) identifies each patent and each pending patent application that KCAS has filed worldwide. With respect to each such patent, to the best of KCAS's knowledge, there is no substantial suggestion or assertion that any claim therein is invalid or unenforceable. The patent applications identified on Schedule 5.9(c) hereto have been properly prepared and filed, and such applications are presently being diligently pursued by the Person making such application. (d) Schedule 5.9(d) identifies (i) all registered or unregistered trademarks of each KCAS and (ii) each license, agreement and other permission that KCAS have granted to any third party with respect to any of their respective Intellectual Property. (e) KCAS has delivered to AAI correct and complete copies of all registrations, patent applications, licenses, agreements and permissions (as amended), identified in Schedules 5.9(c) and 5.9(d) hereto and has delivered to AAI correct and complete copies of all other material written documentation evidencing ownership and prosecution (including all papers filed with or received from the United States Patent and Trademark Office of each such item. With respect to each item of Intellectual Property required to be identified in Schedule 5.9(c) and 5.9(d) and except as set forth in Schedule 5.9(e): (i) KCAS possesses all right, title and interest in and to the item, free and clear of any encumbrance, license or other restriction; (ii) the item is not subject to any outstanding injunction, judgment, order, decree, ruling or charge; and (iii) KCAS has not agreed to indemnify any Person for or against any interference, infringement, misappropriation or other conflict with respect to the item. (f) Schedule 5.9(f) identifies each item of Intellectual Property that any third party owns and that KCAS uses pursuant to license, sublicense, agreement or permission except those products that are readily available at retail market for $1,000 or less. KCAS has not granted any sublicense or similar right with respect to any such agreements or Intellectual Property. Each such item of Intellectual Property is not subject to any outstanding injunction, judgment, order, decree, ruling or change, and no action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand is pending or is threatened that challenges the legality, validity, or enforceability of any such item of Intellectual Property. (g) KCAS has not disclosed any of its proprietary information other than (i) in the regular and ordinary course of business, (ii) to representatives, agents, consultants, -14- accountants, attorneys, financial advisers of such Person, (iii) in connection with entering into this Agreement, (iv) to governmental authorities as from time to time requested or (v) to other persons subject to agreements regarding the confidential treatment thereof. (h) KCAS has delivered to AAI copies of (i) all written opinions of legal counsel issued to KCAS relating to Intellectual Property and (ii) all correspondence KCAS has received from, or sent to, any third party concerning or relating to any interference with, infringement upon or misappropriation of their respective or any third party's Intellectual Property. 5.10. EQUITY INVESTMENTS; SUBSIDIARIES. Except as disclosed on Schedule 5.10, KCAS has never had, nor does it presently have, any Subsidiaries, nor has it owned, nor does it presently own, whether directly or indirectly owned, any capital stock or other proprietary interest, directly or indirectly, in any corporation, company, association, trust, partnership, joint venture or other entity. 5.11. CORPORATE MINUTE BOOKS. Except as disclosed on Schedule 5.11, the corporate records of each of KCAS are correct and complete in all material respects. True and correct copies of all minutes of meetings or other actions by the directors, stockholders or incorporators of each such Person since their respective inceptions have previously been provided to AAI. 5.12. SUITABILITY. To KCAS's knowledge, none of the events described in Item 401(f) of Regulation S-K under the Securities Act, has occurred during the last five years with respect to any director or officer of KCAS (other than directors serving at the designation of Phoenix International Life Sciences (IBRD) Inc. or its predecessor). 5.13 ASSETS. (a) KCAS has good and marketable title to all of its assets and properties, free and clear of any Encumbrances except (i) as disclosed in Schedule 5.13(a), or (ii) Permitted Encumbrances. (b) Except as set forth on Schedule 5.13(b), the buildings, facilities, machinery, equipment, furniture, leasehold and other improvements, fixtures, vehicles, structures, any related capitalized items and other tangible property owned by, or leased to KCAS and material to their respective operations, as of the date hereof, (i) are in all material respects in good operating condition and repair (normal wear and tear excepted), (ii) are in all material respects subject to continued repair and replacement in accordance with past practice and all applicable regulations, and (iii) are suitable for their current use in all material respects. -15- (c) Except as set forth on Schedule 5.13(c), KCAS has not received notice of, or has knowledge of, any pending, threatened or contemplated condemnation proceeding or similar taking affecting their respective assets (including the Real Properties). (d) KCAS has repaid in full the principal and accrued interest of the IRB Debt and has taken or will promptly take all action required by it to acquire the approximately 1.2 acres of real property located at 12700 Johnson Drive, Shawnee, Kansas upon payment by it of $100.00 pursuant to the terms of the Lease Agreement, dated as of September 1, 1985, by and between the City of Shawnee, Kansas, and Mason Lanman Associates, a Kansas general partnership, as assigned to KCAS pursuant to that certain Assignment of Lease Agreement, dated December 31, 1992 (the "Lease Agreement"). Upon its acquisition of such real property pursuant to the Lease Agreement, KCAS shall have good and marketable title to such real property, free and clear of any Encumbrances except as disclosed on Schedule 5.13(d) or Permitted Encumbrances. 5.14 EMPLOYEE BENEFIT PLANS. (a) Schedule 5.14 hereto contains a true and complete list of (i) each plan, program, policy, contract, agreement or other arrangement providing for compensation, severance, termination pay, performance awards, stock or stock-related awards, vacation, fringe benefits or other employee benefits of any kind, whether funded or unfunded, written or oral, which is now sponsored, maintained, contributed to or required to be contributed to by KCAS or pursuant to which KCAS has any liability, contingent or otherwise, including, but not limited to, any "`employee benefit plan" within the meaning of Section 3(3) of ERISA (each, a "Benefit Plan") and (ii) each management, employment, bonus, option, equity (or equity related), severance, consulting, noncompete, confidentiality or similar agreement or contract, pursuant to which KCAS has any liability, contingent or otherwise, between, on the one hand, KCAS, and on the other, any current, former or retired employee, officer, consultant, independent contractor, agent or director of such Person (an "Employee") (each, an "Employee Agreement"). Except as identified on Schedule 5.14, KCAS does not currently sponsor, maintain, contribute to, and is not required to contribute to, nor has KCAS ever sponsored, maintained, contributed to or been required to contribute to, or incurred any liability to, (i) any "defined benefit plan" (as defined in ERISA Section 3(35)), (ii) any "multiemployer plan" (as defined in ERISA Section 3(37)) or (iii) any Benefit Plan that provides, or has any liability to provide, life insurance, medical, severance or other employee welfare benefits to any Employee upon his or her retirement or termination of employment, except as required by Section 4980B of the Code. (b) KCAS is not (i) a member of a "controlled group of corporations," under ("common control" or an "affiliated service group" within the meaning of Sections 414(b), (c) or (m) of the Code, (ii) required to be aggregated under Section 414(o) of the Code, or (iii) under "common control," within the meaning of Section 4001(a)(14) of ERISA, or any regulations promulgated or proposed under any of the foregoing Sections, in each case with any other entity. -16- (c) KCAS has delivered to AAI current, accurate and complete copies of all documents embodying or relating to each Benefit Plan and each Employee Agreement, including all amendments thereto, trust or funding agreements relating thereto (if any), the two most recent annual reports (Series 5500 and related schedules) required under ERISA (if any), the most recent determination letter (if any) received from the Internal Revenue Service, the most recent summary plan description (with all material modifications) (if any), and all material communications to any Employee or Employees relating to any Benefit Plan or Employee Agreement. (d) Each Benefit Plan has been established and maintained in accordance with its terms and in material compliance with all applicable, laws, statutes, orders, rules and regulations, including but not limited to ERISA and the Code; and each Benefit Plan intended to qualify under Section 401 of the Code is, and since its inception has been, so qualified. (e) The execution of, and performance of the transactions contemplated in, this Agreement will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any Benefit Plan or Employee Agreement that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligations to fund benefits with respect to any Employee. 5.15. LABOR RELATIONS; EMPLOYEES. (a) Schedule 5.15 hereto lists all employees (each, an "Employee") of KCAS as of the date hereof and their current annual salaries or hourly wage rate. Except as set forth on Schedule 5.15 hereto, (i) KCAS is not delinquent in payments to any of its employees, for any wages, salaries, commissions, bonuses or other direct compensation for any services performed by the date hereof or amounts required to be reimbursed by them to the date hereof, (ii) KCAS is in material compliance with all applicable federal, state and local laws, rules and regulations respecting employment, employment practices, labor, terms and conditions of employment and wages and hours, (iii) KCAS is not bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, commitment or arrangement with any labor union, and no labor union has requested or, to the best of their knowledge has sought to represent any of the employees, representatives or agents of KCAS, (iv) there is no labor strike, dispute, slowdown or stoppage actually pending, or, to the best of KCAS's knowledge, threatened against or involving KCAS, (v) to the best of KCAS's knowledge, no salaried key Employee has any plans to terminate his or her employment with KCAS. (b) Each Employee listed on Schedule 5.15(b) has executed an Employee Nondisclosure Agreement. -17- 5.16. LITIGATION; ORDERS. Except as set forth on Schedule 5.16, there is no civil, criminal or administrative action, suit, claim, notice, hearing, inquiry, proceeding or investigation at law or in equity by or before any court, arbitrator or similar panel, governmental instrumentality or other agency now pending or, to the Knowledge of KCAS, threatened against KCAS or its assets or business. Except as set forth on Schedule 5.16, KCAS is not subject to any order, writ, injunction or decree of any court of any federal, state, municipal or other domestic or foreign governmental department, commission, board, bureau, agency or instrumentality. 5.17. COMPLIANCE WITH LAWS; PERMITS. Except as provided in Schedule 5.17 and subject to the limitations of more specific representations made in this Agreement, in particular those set forth in Sections 5.21 and 5.29 hereof, KCAS (a) has complied in all material respects with all federal, state, local and foreign laws, rules, ordinances, codes, consents, authorizations, registrations, regulations, decrees, directives, judgments and orders materially applicable to it and its respective business and (b) has all federal, state, local and foreign governmental licenses, permits and qualifications required to conduct its business as currently conducted, such licenses, permits and qualifications are in full force and effect, and no violations (other than violations notice of which has not been received by KCAS) have been recorded in respect of any such licenses, permits and qualifications, and no proceeding is pending or, to the Knowledge of KCAS, threatened to revoke or limit any such license, permit or qualification. Schedule 5.17 sets forth a list of all such licenses, permits and qualifications, and the expiration dates thereof. 5.18. RELATED TRANSACTIONS. Except as set forth on Schedule 5.18(a), no current stockholder, director, officer or employee of KCAS, or any "affiliate" or "associate" (as such terms are defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) of any of the foregoing persons, or KCAS, is presently, or during the past five years has been, directly or indirectly, a party to any agreement, transaction or series of similar transactions with KCAS other than in connection with any such Person's duties as a director, officer or employee of KCAS. 5.19. DISCLOSURE. (a) This Agreement and all certificates, instruments and written materials furnished or made to AAI by or on behalf of KCAS in connection with this Agreement do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained herein and therein not misleading. (b) There is no fact peculiar to KCAS, or its respective business, of which KCAS is aware that KCAS has not disclosed to AAI that could reasonably be expected (i) to have a Material Adverse Effect on KCAS or (ii) to materially adversely affect the ability of KCAS to perform its obligations under the Merger Documents. -18- 5.20. TAXES. (a) Except as set forth on Schedule 5.20(a), KCAS has filed all. Tax Returns required by law to have been filed by it, and has paid all Taxes required to be paid by it, prior to the date hereof, including, without limitation, any Tax levied upon any of its properties, assets, income or franchises. All Tax Returns filed by KCAS were complete and correct in all material respects and, except as set forth in Schedule 5.20(a), each such Tax Return was timely filed. All amounts required to be collected or withheld by KCAS have been collected or withheld and any such amounts that are required to be remitted to any taxing authority prior to the date hereof have been duly remitted. The accruals and reserves for Taxes in each of such balance sheets that are part of the Financial Statements are adequate in all material respects to cover any liability of KCAS for Taxes for periods through the dates of such balance sheets. The accruals and reserves for deferred tax liability in each of such balance sheets were adequate as of the date thereof. If KCAS files its Tax Returns for its current taxable year, in conformity with its past practices and tax reporting, there will be no basis for any material adverse audit adjustments with respect to KCAS under any of the provisions of the Code, or any provisions of state, local or foreign tax law, with respect to operations and activities of KCAS during the period beginning on November 1, 1997 and ending on the date hereof. (b) No taxing authority in a jurisdiction where KCAS does not file Tax Returns has made a claim, assertion or, to the Knowledge of KCAS, threat that such non-filing entity is or may be subject to taxation by such jurisdiction. Schedule 5.20(c) contains a list of states, territories and jurisdictions (whether foreign or domestic) in which KCAS has filed any income, franchise, sales and use tax return for taxable periods ending on or after October 3 1, 1994. All taxable years of KCAS for federal, state and foreign local income tax purposes for periods ended on or before October 31, 1994 have been closed by expiration of the applicable statute of limitations (taking into account waivers and extensions). 5.21. ENVIRONMENTAL PROTECTION. Except as set forth on Schedule 5.21(a), KCAS has, at all times and in all material respects, operated, and in all material respects is, in compliance with all Environmental Laws. Except as set forth in Schedule 5.21(b), KCAS has obtained, and is in material compliance with, all material permits, licenses, authorizations, registrations and other governmental consents required by applicable Environmental Laws ("Environmental Permits"), including, without limitation, those regulating emissions, discharges, or releases of Hazardous Substances, or the use, storage, treatment, transportation, release, emission and disposal of raw materials, byproducts, wastes and other substances used or produced by or otherwise relating to its business. Except as set forth in Schedule 5.21(c), there are no claims, notices, civil, criminal or administrative actions, suits, hearings, investigations, inquiries or proceedings pending or, to the Knowledge of KCAS, threatened against KCAS that are based on or related to any Environmental Matters or the failure to have any required Environmental Permits. Except as set forth in Schedule 5.21(d), there are no past or present conditions, events or circumstances (i) that may interfere with or prevent continued compliance by KCAS with Environmental Laws and the requirements of Environmental Permits, (ii) that -19- may give rise to any liability or other obligation under any Environmental Laws that may require KCAS to incur any actual or potential Environmental Costs, or (iii) that may form the basis of any claim, action, suit, proceeding, hearing, investigation or inquiry against or involving any KCAS based on or related to any Environmental Matter or that could require KCAS to incur any Environmental Costs. Except as set forth in Schedule 5.21(e), there are no underground or aboveground storage tanks, incinerators or surface impoundments at, on, or about under or within any real property or tangible assets owned, operated or controlled in whole or in part by KCAS. Schedule 5.21(e) also lists all underground or aboveground storage tanks, incinerators or surface impoundments that were removed from any such properties. Except as set forth in Schedule 5.21(f), KCAS has not received any written notice or other communication that it is or may be a potentially responsible person or otherwise liable in connection with any waste disposal site allegedly containing any Hazardous Substances, or other location used for the disposal of any Hazardous Substances, or notice of any failure on its behalf to comply in any respect with any Environmental Law or the requirements of any Environmental Permit. Except as set forth on Schedule 5.21(g), KCAS has not used any waste disposal site, or otherwise disposed of, transported, or arranged for the transportation of, any Hazardous Substances to any place or location, or in violation of any Environmental Laws. Except as set forth in Schedule 5.21(h), no lien exists, and, to KCAS's knowledge, no condition exists which could result in the filing of a lien, against any property of KCAS under any Environmental Law or relating to any Environmental Matte-r. Except as set forth in Schedule 5.21(i), there has been no release or other dissemination at any time of any Hazardous Substances at, on, or about, under or within any real property currently or formerly owned or leased by KCAS or any predecessor thereof or any real properties operated or controlled by KCAS (other than pursuant to and in accordance with permits held by KCAS or its predecessor). Except as set forth in Schedule 5.21(j), KCAS has not been requested or required by any governmental authority to perform any investigatory or remedial activity or other action in connection with any Environmental Matter. 5.22. CONSENTS. Except as set forth on Schedule 5.22, no permit, authorization, consent or approval of or by, or any notification of or filing with, any person (governmental or private) is required in connection with the execution, delivery and performance by KCAS of the Merger Documents or the consummation by KCAS of the transactions contemplated thereby (other than such notifications or filings required under applicable federal or state securities laws, if any, which shall be made on a timely basis and the filing of the Certificate of Merger with the Secretary of State of the State of Kansas). 5.23. INSURANCE; WORKERS' COMPENSATION. (a) Schedule 5.23(a) lists each currently effective insurance policy issued in favor of KCAS, setting forth the identity of the respective insurance carriers and a description of the policy. All premiums due and payable in respect of such policies have been paid, such policies are in full force and effect and free from any right granted by KCAS of termination on the part of the insurance carriers, except as provided in the respective policies. Schedule 5.23(b) sets forth a description, indicating dates and nature of claims, of the workers' -20- compensation experience through the date hereof of KCAS since November 1, 1996, which description is true, complete and accurate in all material respects. (b) Except as set forth on Schedule 5.23(b), KCAS has not received any notice of cancellation with respect to any of its insurance policies within the three years preceding the date hereof, and, within the three years preceding the date hereof, KCAS has not been refused any insurance coverage sought or applied for, in each case where such cancellation or refusal, individually or in the aggregate, would have a Material Adverse Effect on KCAS. 5.24. BROKERS. Neither KCAS nor any of its officers, directors, employees or stockholders has employed any broker or finder in connection with the transactions contemplated by this Agreement. 5.25. SUPPLIERS AND CUSTOMERS. No supplier of materials or services to KCAS in an amount in excess of $50,000 per year has during the last twelve (12) months on such supplier's initiative decreased materially or, to the Knowledge of KCAS, threatened to decrease or limit materially its provision of services or supplies to KCAS, nor expressed to KCAS material dissatisfaction with the business relationship between such Person and the supplier. KCAS has provided to AAI a list of all customers which accounted for 5% or more of KCAS's revenues for the fiscal year ended October 31, 1997, indicating the revenues from each such customer. KCAS has no knowledge of any termination, cancellation or threatened termination or cancellation or limitation of, or any material modification or change in, or expressed material dissatisfaction with the business relationship between KCAS, on one hand, and any supplier or customer thereof, on the other hand, of materials or services in an amount in excess of $50,000 per year received by KCAS since October 31, 1996. 5.26. PREVIOUS ISSUANCES EXEMPT. All shares of capital stock and other securities issued by KCAS prior to Closing have been issued in transactions exempt from registration under the Securities Act and all applicable state securities or "blue sky" laws. KCAS has not violated the Securities Act or any applicable state securities or "blue sky" laws in connection with the issuance of any shares of capital stock or other securities prior to the Closing. KCAS has not offered any of its capital stock, or any other securities, for sale to, or solicited any offers to buy any of the foregoing from KCAS, or otherwise approached or negotiated with any other person in respect thereof, in such a manner as to require registration under the Securities Act. 5.27. REAL PROPERTY. Schedule 5.27(a) lists all real property owned by KCAS (the "Real Properties") and Schedule 5.27(b) lists all real property leased by KCAS, each of which has leasehold title to its respectively leased real properties (collectively, the "Leased Real Properties"), in each case, free and clear of all imperfections of title and all Encumbrances, except for (i) Permitted Encumbrances, and (ii) Encumbrances listed on Schedule 5.27(b). To KCAS's knowledge, other than as described on Schedule 5.27(b), there are no intended public improvements that will result in any charge being levied against, or in the creation of any -21- Encumbrances upon, the Real Properties or Leased Real Properties or any portion thereof To KCAS's knowledge, except as disclosed on Schedule 5.27(b), there are no options, rights of first refusal, rights of first offer or other similar rights with respect to the Real Properties or Leased Real Properties. 5.28. ACCOUNTS RECEIVABLE. The accounts receivable reflected on the Financial Statements and those accounts receivable of KCAS acquired or created after October 31, 1997 through the date hereof (a) were and are, except to the extent collected, bona fide accounts receivable created in the ordinary and usual course of business in connection with bona fide transactions and consistent with past practice and (b) are recorded net of discounts, if any, provided to customers. , To the Knowledge of KCAS, there are no matters that would cause KCAS to believe that any outstanding account receivable is not collectible in the ordinary course. 5.29. FOOD AND DRUG ADMINISTRATION MATTERS. (a) Except as set forth on Schedule 5.29, KCAS has not received any communication (including, any warning letter) or is otherwise aware of any action or proceeding pending or, to the best of their knowledge, threatened, including, without limitation, warning letter, prosecution, injunction, seizure, civil fine or recall, alleging that such Person is not in compliance with any and all applicable laws, regulations or orders implemented by the Food and Drug Administration, or implemented by the relevant state, local or international agency responsible for regulating the pharmaceutical industry, including but not limited to, allegations related to (i) drug development establishments operated by KCAS or (ii) drug or product license applications submitted directly by such Person or by a customer of such Person that includes data generated by KCAS other than non-material correspondence received from the Food and Drug Administration in connection with the filing and review of applications. To KCAS's knowledge, no employee of KCAS is or has been the subject of any similar pending or threatened action or proceeding. (b) To the best knowledge of KCAS after appropriate inquiry, all consultants utilized by KCAS to generate information to be submitted to the Food and Drug Administration, or any equivalent state, local or international agency, including, but not limited to, contract research organizations, pre-clinical testing laboratories, clinical investigators and institutional review boards, are in compliance with all applicable Food and Drug Administration requirements, as well as the applicable requirements of relevant state, local and international agencies with regard to the development of data to be utilized by KCAS as part of the relevant drug or product approval process. (c) Neither KCAS, nor any employee of KCAS, has received any correspondence from the Food and Drug Administration or is aware of any action or proceeding, pending or, to the best of KCAS's knowledge, threatened, against KCAS or any such employee regarding any debarment action or investigation undertaken pursuant to the Generic Drug -22- Enforcement Act of 1992, 21 U.S.C. ss. 335, or any other similar regulation of the Food and Drug Administration. (d) Neither KCAS, nor any employee of KCAS, has been the subject, officially or otherwise, of any investigation by the Food and Drug Administration pursuant to its Fraud, Untrue, Statements of Material Facts, Bribery, and Illegal Gratuities Final Policy. (e) To KCAS's knowledge, no data generated by KCAS that has been provided to clients of such Person is the subject, either pending or threatened, of any regulatory or other action by the Food and Drug Administration or by any state, local or international regulatory entity relating to the truthfulness or scientific adequacy of such data. (f) All drug and product license applications and related filings to the Food and Drug Administration by KCAS, and all statements furnished by KCAS to Merger Sub or AAI applicable to the status of all drug and product license applications, pending and anticipated, are current and do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein not misleading. With regard to all drug and product license applications pending before the Food and Drug Administration, except as set forth on Schedule 5.29(f), there is no correspondence or other communications from the Food and Drug Administration questioning the approvability of such applications. 5.30. OTHER REPRESENTATIONS AND WARRANTIES. The representations and warranties of KCAS set forth in any of the other Merger Documents other than this Agreement are true and correct. ARTICLE VI. REPRESENTATIONS AND WARRANTIES OF AAI AND MERGER SUB AAI and Merger Sub represent and warrant to KCAS as follows: 6.1. ORGANIZATION AND GOOD STANDING; POWER AND AUTHORITY; QUALIFICATIONS. Each of AAI and Merger Sub (i) is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and (ii) has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as presently conducted and as proposed to be conducted. Each of Merger Sub and AAI has all requisite corporate power and authority to enter into and perform its obligations under the Merger Documents. 6.2. AUTHORIZATION OF THE MERGER DOCUMENTS. The execution, delivery and performance by Merger Sub and AAI of each of the Merger Documents to which it is party have -23- been duly authorized by all requisite corporate action on the parts of Merger Sub and AAI, and each of the Merger Documents constitutes a legal, valid and binding obligation of Merger Sub and AAI, as appropriate, enforceable against it in accordance with its terms, except to the extent (a) that enforceability may be limited by bankruptcy, insolvency or other similar laws affecting creditors' rights generally and (b) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to certain equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. 6.3. AUTHORIZATION AND ISSUANCE OF SHARES. The authorization, reservation, issuance, sale and delivery of the Stock Merger Consideration have been duly authorized by all requisite corporate action on the part of AAI, and when issued, sold and delivered in accordance with this Agreement, such Stock Merger Consideration will be validly issued and outstanding, fully paid and nonassessable with no personal liability attaching to the ownership thereof, free of all Encumbrances. Moreover, AAI has reserved a sufficient number of shares of AAI Common Stock for issuance under this Agreement. 6.4. PUBLIC DOCUMENTS. AAI's Annual Report on Form 10-K for the, fiscal year ended December 31, 1997, as amended, and Quarterly Report on Form 10-Q for the period ended March 31, 1998, when filed with the Securities and Exchange Commission did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. 6.5. NO CONFLICTS. Merger Sub's and AAI's execution and delivery of, and performance of their respective obligations under, the Merger Documents and the consummation by each of them of the transactions contemplated thereby (including, without limitation, the issuance, sale and delivery by AAI of AAI Common Stock hereunder) will not (a) violate any provision of law, statute, rule or regulation, or any ruling, writ, injunction, order, judgment or decree of any court, administrative agency or other governmental body applicable to AAI or any of its Subsidiaries, or any of such Person's properties or assets, (b) conflict with or result in any breach of any of the terms, conditions or provisions of, or constitute (with due notice or lapse of time, or both) a default (or give rise to any right of termination, cancellation or acceleration) under, or result in the creation of any Encumbrance upon any of the properties or assets of AAI or any of its Subsidiaries under, any Contract to which any of them is a party or (c) violate the certificate of incorporation or bylaws of any such Persons. -24- 6.6. DISCLOSURE. (a) This Agreement and all certificates, instruments and written materials furnished or made to KCAS by or on behalf of AAI or any of its Subsidiaries in connection with this Agreement, taken as a whole, and including any corrective materials furnished or made available to KCAS prior to the date hereof, do not contain any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. (b) There is no fact peculiar to AAI or any of its Subsidiaries, or their respective businesses, of which Merger Sub or AAI is aware, that Merger Sub or AAI has not disclosed to KCAS that could reasonably be expected (i) to have a Material Adverse Effect on AAI and its Subsidiaries taken as a whole or (ii) to materially adversely affect the ability of Merger Sub or AAI to perform its obligations under the Merger Documents. 6.7. BROKERS. Neither AAI nor any of its Subsidiaries, nor any officer, director, employee or stockholder of any such Persons, has employed any broker or finder in connection with the transactions contemplated by this Agreement. ARTICLE VII. COVENANTS OF KCAS KCAS covenants and agrees as follows: 7.1. ORDINARY CONDUCT. Except as contemplated by this Agreement, during the period from the date of this Agreement to the Effective Time, KCAS will cause its business to be conducted in the ordinary course in substantially the same manner as presently conducted and will make all reasonable commercial efforts consistent with past practices to preserve its relationships with its customers, suppliers and others with whom KCAS deals and to keep available the services of its officers and employees. Additionally, except as otherwise contemplated by this Agreement or as set forth on Schedule 7.1, KCAS will not do any of the following without the prior written consent of Merger Sub or AAI: (a) Amend the articles of incorporation or bylaws of KCAS; (b) Authorize for issuance, issue, sell, deliver or agree or commit to issue, sell or deliver (whether through the issuance or granting of options, warrants, commitments, subscriptions, fights to purchase or otherwise) any stock of any class or any other securities or equity equivalents (including, without limitation, any stock appreciation rights) of KCAS, or amend any of the terms of any such securities or agreements outstanding as of the date hereof, except as specifically contemplated by this Agreement; -25- (c) (i) Split, combine or reclassify any shares of capital stock of KCAS; (ii) declare, set aside or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of capital stock of KCAS or (iii) redeem or otherwise acquire any securities of KCAS; (d) (i) Incur or assume any long-term debt or issue any debt securities or, except under existing lines of credit and in amounts not material to KCAS, incur or assume any short-term debt other than in the ordinary course of business, (ii) assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for the obligations of any other Person except in the ordinary course of business consistent with past practice and in amounts not material to KCAS, (iii) make any loans, advances or capital contributions to, or investments in, any other Person (other than to entities listed on Schedule 7.1(d) pursuant to existing agreements or customary loans or advances to employees in the ordinary course of business consistent with past practice and in amounts not material to the maker of such loan or advance), (iv) pledge or otherwise encumber shares of capital stock of KCAS, or (v) except in the ordinary course of business consistent with past practice, mortgage or pledge, any of its material assets, tangible or intangible, or create or suffer to exist any material lien thereupon, except (A) as may be required under existing agreements to which KCAS is a party, (B) Permitted Encumbrances and (C) Encumbrances disclosed on Schedule 5.13(a); (e) Except as may be required by law or as contemplated or permitted by the Merger Documents, (i) enter into, adopt or amend or terminate any bonus, profit sharing, compensation, severance, termination, stock option, stock appreciation right, restricted stock, performance unit, stock equivalent, stock purchase agreement, pension, retirement, deferred compensation, employment or other employee benefit agreement, trust, plan, fund or other arrangement for the benefit or welfare of any director, officer or employee of KCAS in any manner, (ii) except for (A) normal increases in the ordinary course of business consistent with past practice that, in the aggregate, do not result in a material increase in benefits or compensation expense to KCAS and (B) as required under existing agreements or in the ordinary course of business generally consistent with past practice, increase in any manner the compensation or fringe benefits of any director, officer or employee of KCAS, or pay any benefit to any such Persons not required by any plan and arrangement as in effect as of the date hereof (including, without limitation, the granting of stock appreciation rights or performance units), or (iii) make any contributions to the Kansas City Analytical Services, Inc. Profit Sharing 401(k) Plan, except for so-called employee 401(k) contributions through withholding; (f) (i) Acquire, sell, lease or dispose of any assets outside the ordinary course of business or any other assets that in the aggregate are material to KCAS, or (ii) enter into any commitment or transaction outside the ordinary course of business consistent with past practice; -26- (g) Except as may be required as result of a change in law or in Generally Accepted Accounting Principles, change or modify any of the accounting principles or practices used by KCAS; (h) Except as may be required by applicable law or Generally Accepted Accounting Principles, revalue in any material respect any of its assets, including, without limitation, writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business; (i) (i) Acquire (by merger, consolidation, or acquisition of stock or assets) any corporation, company, partnership or other business organization or division thereof or any equity interest therein; (ii) enter into any contract or agreement other than in the ordinary course of business consistent with past practice; (iii) enter into any contract or agreement involving an amount in excess of $20,000; (iv) authorize any new capital expenditure or expenditures that, individually or in the aggregate, are in excess of $20,000; or (v) enter into or amend any contract, agreement, commitment or arrangement with respect to any of the foregoing; (j) Pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business of liabilities reflected or reserved against in, or contemplated by, the Financial Statements of KCAS or on Schedule 5.5 or incurred in the ordinary course of business consistent with past practice, including the payment of approximately $360,000 for purchase of two mass spectrometers previously delivered to KCAS; (k) Settle or compromise any pending or threatened suit, action or claim relating to the transactions contemplated hereby; (l) Take, or agree in writing or otherwise to take, any action that would make any of the representations or warranties of KCAS contained in this Agreement untrue or incorrect or would result in any of the conditions set forth in this Agreement not being satisfied; or (m) Agree, whether in writing or otherwise, to do any of the foregoing. 7.2. NO SOLICITATION. KCAS agrees that, prior to the earlier of the Effective Time and September 30, 1998, it shall not, and it shall use its best efforts to cause its directors, officers, employees, agents or representatives, not to, directly or indirectly, solicit, initiate or encourage (including by way of furnishing non-public information) inquiries or proposals concerning any merger, consolidation or acquisition or purchase with or by any third party (other than the Merger Sub or AAI) of all or any substantial portion of the assets or capital stock of KCAS (an "Acquisition Transaction") or negotiate with any such third party with respect to any Acquisition Transaction; provided that the foregoing shall not prevent KCAS or its board of -27- directors from taking or permitting any action in connection with any such proposal on a third party if, based on the written opinion of its outside counsel, the failure to do so would violate its fiduciary duties to KCAS's stockholders under applicable law. KCAS shall immediately advise Merger Sub of any inquiries or proposals that it receives or attempts to negotiate relating to an Acquisition Transaction, and any such notice shall include a description of the terms and conditions of any such proposal, or the nature of any inquiry or attempts to negotiate. 7.3. ACCESS TO INFORMATION. Between the date of this Agreement and the Effective Time, KCAS will (a) give AAI and Merger Sub (and their authorized representatives) reasonable access, during normal business hours and upon reasonable notice, to the books, records, offices and other facilities and properties of KCAS (including, without limitation, for the purpose of conducting such inspections, tests and sampling work as Merger Sub or AAI deems advisable), and (b) cause its officers, agents or other appropriate officials to furnish Merger Sub or AAI with such financial and operating data (including accountants' work papers) and other information with respect to the business operations of KCAS including, but not limited to, information relating to taxes as Merger Sub or AAI may from time to time reasonably request; PROVIDED, HOWEVER, that any such investigation by Merger Sub or AAI shall be conducted in such a manner as not to interfere unreasonably with the normal operations of KCAS. 7.4. SCHEDULES TO AGREEMENT. KCAS shall promptly notify Merger Sub of any event, fact or other circumstance arising after the date hereof that would have caused the disclosure schedules delivered under this Agreement to be untrue or misleading had such event, fact or circumstance arisen prior to the delivery of such schedules. 7.5. MAINTENANCE OF CORPORATE EXISTENCE. KCAS shall maintain in full force and effect its corporate existence. 7.6. CONTRIBUTIONS TO AND TERMINATION OF 401(K) PLAN. Notwithstanding Section 7.1, at least 14 days prior to the Closing Date, KCAS shall take such action as may be necessary to irrevocably terminate the Kansas City Analytical Services, Inc. Profit Sharing 401(k) Plan ("Profit-Sharing Plan") effective at least 14 days prior to the Closing Date and shall provide AAI with evidence that the Profit Sharing Plan has been so terminated. Notwithstanding Section 7.1, at or prior to the time KCAS takes action to terminate the Profit Sharing Plan, KCAS may take action to authorize profit sharing contributions and matching contributions to the Profit Sharing Plan for the current plan year in the aggregate not exceeding the lesser of (i) $175,000 or (ii) one-third of KCAS's income before taxes for the eight-month period ending June 30, 1998. In connection with the termination of the Profit Sharing Plan, KCAS may amend the Profit Sharing Plan as reasonably necessary to provide for the allocation of profit sharing and matching contributions for the period ending immediately prior to the termination date, and shall amend the Profit Sharing Plan to provide that distributions in liquidation of the terminated Profit Sharing Plan shall be made only in single sum distributions. -28- ARTICLE VIII. MUTUAL COVENANTS OF KCAS, MERGER SUB AND AAI KCAS, Merger Sub and AAI covenant and agree as follows: 8.1. CONFIDENTIALITY. Each of the parties to this Agreement (a) will hold, and will use its best efforts to cause each of its officers, directors, employees, lenders, accountants, representatives, agents, consultants and advisors to hold, in strict confidence all information (other than such information as may be publicly available) furnished to it in connection with the transactions contemplated by this Agreement, together with all information concerning any of the parties hereto contained in any analyses, compilations, studies or other documents prepared by or on behalf of any of the parties hereto (collectively, the "Information") and (b) will not, without the prior written consent of the party to whom any certain Information relates, except as required by law, release or disclose that Information to any other person, except to the officers, directors, employees, lenders, accountants, representatives, agents, consultants and advisors of the parties hereto (i) who need to know the Information in connection with the consummation of the transactions contemplated by this Agreement, (ii) who have been informed by either KCAS, on one hand, or AAI, on the other hand, of the confidential nature of the Information and (iii) who are instructed to comply with the terms and conditions of this Section 8.1. The parties hereto understand that all Information is proprietary and that dissemination of any part thereof or the use thereof for purposes other than the evaluation and consummation of the transactions contemplated by this Agreement will cause irreparable harm to the party hereto to whom the Information relates. In the event a party hereto or a Person to whom such party transmits the Information in accordance with this Agreement becomes legally compelled to disclose any of the Information, such party will provide the party to whom the information relates with prompt notice so that it may seek a protective order or other appropriate remedy or waive compliance with the provisions of this Section 8.1. In the event that such protective order or other remedy is not obtained, or that the party to whom the Information relates waives compliance with the provisions of this Section 8.1, such party will furnish only that portion of the Information that it believes, after receiving advice from counsel reasonably experienced in such matters, may be legally required. If the transactions contemplated by this Agreement are not consummated, the Information, including all analyses, compilations, studies or other documents prepared by or on behalf of any of the parties hereto based on the Information, will be returned to the party to whom it relates. 8.2. CONSUMMATION OF AGREEMENT. Each of the parties hereto will use its reasonable efforts to perform or fulfill all conditions and obligations to be performed or fulfilled by it under this Agreement so that the transactions contemplated hereby shall be consummated. If any event should occur, either within or outside the control of the parties hereto that would materially delay or prevent fulfillment of the conditions of the parties hereto to consummate the -29- transactions contemplated by this Agreement, each party will notify the other of any such event, and the parties hereto will use their respective reasonable, diligent and good faith efforts to cure or minimize the same as expeditiously as possible. 8.3. PUBLICITY. Any press release or other public announcement of the transactions contemplated hereby must be jointly approved by AAI and KCAS, except as may otherwise be required under applicable laws. In the event AAI is required by law to make a disclosure, it agrees to use its best efforts to notify KCAS of such impending disclosure and the content thereof Any information contained in a required disclosure that is not mandated by law to be included in such disclosure shall be included only with the consent of KCAS. Phoenix International Life Sciences (IBRD), Inc. ("Phoenix (IBRD)"), or its parent corporation, shall submit any press release or other publication to AAI prior to releasing such document to the media, which release to the media shall not be done prior to the Effective Time. ARTICLE IX. CONDITIONS TO CLOSING 9.1. CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE TRANSACTIONS CONTEMPLATED HEREBY. The respective obligations of each party hereto to effect the transactions contemplated hereby shall be subject to the following condition, which may be waived upon mutual agreement of KCAS, AAI and Merger Sub: Neither KCAS, AAI nor Merger Sub shall be subject on the Closing Date to any order, decree or injunction of a court of competent jurisdiction that enjoins or prohibits the consummation of this Agreement, nor shall there be pending a suit or proceeding by any governmental authority that seeks injunctive or other relief in connection with the transactions contemplated hereby. 9.2. CONDITIONS TO THE OBLIGATIONS OF KCAS TO EFFECT THE TRANSACTIONS CONTEMPLATED HEREBY. The obligations of KCAS to effect the transactions contemplated hereby shall be further subject to the fulfillment of the following conditions, any one or more of which may be waived by KCAS: (a) Payment of the Merger Consideration at the Closing; (b) All representations and warranties of Merger Sub and AAI contained in this Agreement shall be true and correct as of the Closing Date as though made as of such date (except as otherwise expressly contemplated by this Agreement). Merger Sub and AAI shall have performed and complied with all covenants and agreements contained in this Agreement required to be performed and complied with by Closing. KCAS shall have received a certificate to the matters set forth in this Section 9.2(a) in form reasonably satisfactory to it signed and attested on behalf of Merger Sub and AAI by their authorized officers. -30- (c) KCAS shall have received all of the documents, appropriately executed as may be necessary, referenced in Section 4.3; (d) KCAS shall have received an opinion rendered by Robinson, Bradshaw & Hinson, P.A., counsel for Merger Sub and AAI, dated as of the Closing Date substantially in the form attached hereto as Exhibit H hereto; (e) KCAS shall have received a certificate executed by the Secretary or Assistant Secretary of each of Merger Sub and AAI and attested by the President or an Executive Vice President of each of Merger Sub and AAI attaching and certifying the accuracy, truthfulness and completeness of the following documents: (i) A long-form certificate of good standing of each of Merger Sub and AAI issued as of a recent date by the Secretary of State, or similar official, of their respective states of incorporation; (ii) A copy of the certificate or articles of incorporation of each of Merger Sub and AAI certified as of a recent date by the Secretary of State, or similar official, of each of their respective states of incorporation; (iii) A copy of the bylaws of each of Merger Sub and AAI; and (iv) A copy of the resolutions of each of Merger Sub's and AAI's Board of Directors authorizing the execution of each of the Merger Documents to which it is a party and authorizing the consummation of the transactions contemplated thereby; and (f) All other documents, appropriately executed as may be necessary, required by the Merger Documents or reasonably required by KCAS to have been delivered to it at or prior to Closing in order to consummate the transactions contemplated hereby. 9.3. CONDITIONS TO THE OBLIGATIONS OF AAI AND MERGER SUB TO EFFECT THE TRANSACTIONS CONTEMPLATED HEREBY. The obligations of AAI and Merger Sub to effect the transactions contemplated hereby shall be further subject to the fulfillment of the following conditions, any one or more of which may be waived by AAI: (a) All representations and warranties of KCAS contained in this Agreement and all Schedules attached hereto shall be true and correct in all material respects as of the Closing Date as though made as of such date. KCAS shall have performed and complied with all covenants and agreements contained in this Agreement required to be performed and complied with by it at or prior to Closing. AAI shall have received a certificate certifying the matters set forth in this Section 9.3(a) signed and attested on behalf of KCAS by its authorized officers; -31- (b) AAI shall have received all of the documents, appropriately executed as may be necessary, referenced in Section 4.2; (c) AAI shall have received an opinion rendered by Seigfreid, Bingham, Levy, Selzer & Gee, P.C., counsel to KCAS, dated the Closing Date substantially in the form attached hereto as Exhibit 1; (d) AAI shall have received a certificate executed by the Secretary or Assistant Secretary of KCAS and attested by the President or Chief Executive Officer of KCAS attaching and certifying the accuracy, truthfulness and completeness of the following documents: (i) A long-form certificate of good standing of KCAS and each of its Subsidiaries issued as of a recent date by the Secretary of State, or similar official, of their respective states of incorporation; (ii) A copy of the certificate or articles of incorporation of KCAS and each of its Subsidiaries certified as of a recent date by the Secretary of State, or similar official, of their respective states of incorporation; (iii) A copy of the bylaws of KCAS and each of its Subsidiaries; and (iv) A copy of the resolutions of KCAS's Board of Directors authorizing the execution of each of the Merger Documents to which it is a party and authorizing the consummation of the transactions contemplated thereby; (e) AAI shall have received all other documents, appropriately executed as may be necessary, required by the Merger Documents or reasonably required by Merger Sub or AAI to have been delivered to either of them at or prior to Closing in order to consummate the transactions contemplated hereby; (f) AAI shall have received all consents referred to in this Agreement; and (g) KCAS shall not have received any notice from any holder of Common Stock (who has not voted in favor of the Merger or consented thereto in writing) of such holder's intent to demand appraisal for such shares if the Merger is effective, in accordance with Kansas law. -32- ARTICLE X. TERMINATION 10.1. TERMINATION. The obligations of the parties hereunder may be terminated and the transactions contemplated hereby abandoned at any time prior to the Closing Date: (a) by mutual written consent of Merger Sub and KCAS; (b) by any party hereto, if there shall be any law or regulation that makes consummation of the Merger illegal or otherwise prohibited or if any judgment, injunction, order or decree permanently enjoining any of the parties hereto from consummating the Merger is entered and such judgment, injunction, order or decree shall become final and non-appealable; and (c) by any of the parties hereto if any condition to such party's obligation contained in any of the Merger Documents (including all such conditions set forth in Article IX hereof) to effect the Merger shall not have been fulfilled or waived by September 30, 1998 (or shall have become incapable of fulfillment) and if such party seeking termination is in material compliance with all of its obligations under this Agreement. 10.2. PROCEDURE AND EFFECT OF TERMINATION OR FAILURE TO CLOSE. (a) In the event of a termination by any party pursuant to Section 10.1, such terminating party shall give prompt written notice thereof to the other party, and the transactions contemplated hereby shall be abandoned, without further action by either of the parties hereto. In such event: (a) Merger Sub and AAI shall return to KCAS all Information regarding KCAS and its Subsidiaries received by Merger Sub or AAI, whether obtained before or after the execution hereof, and KCAS shall return or cause to be returned to Merger Sub and AAI all Information regarding Merger Sub or AAI received by KCAS, whether obtained before or after the execution hereof; (b) All filings, applications and other submissions relating to the Merger shall, to the extent practicable, be withdrawn from the agency or other Person to which made; and (c) None of the parties hereto nor any of their partners, directors, officers, shareholders, employees, agents, or affiliates shall have any liability or further obligation to the other party or any of its partners, directors, officers, shareholders, employees, agents, or affiliates pursuant to this Agreement, except (i) as stated in Section 8.1 (relating to confidentiality) and Section 11.2 (relating to expenses) hereof and (ii) any of the parties hereto nevertheless shall be entitled to seek any remedy to which it may be entitled at law or in equity -33- for the violation or breach by any other party hereto of any agreement, covenant, representation or warranty contained in this Agreement. ARTICLE XI. MISCELLANEOUS PROVISIONS 11.1. SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION. (a) Survival. All representations, warranties and agreements made by the parties to this Agreement to one another pursuant to any of the Merger Documents shall survive for twenty-four months following the Closing Date. No representation or warranty shall be deemed to be waived or otherwise diminished as a result of any due diligence investigation by the party to whom such representation or warranty was made or as a result of any actual or constructive knowledge by such party with respect to any facts, circumstances or claims or by the actual or constructive knowledge of such Person that any representation or warranty was false or misleading at Closing. All claims (except for claims of actual intentional fraud) made by virtue of such representations, warranties and agreements shall be made under, and subject to the limitations set forth in, this Section 11.1. (b) Indemnification Agreement. Pursuant to that certain Indemnification Agreement, as more specifically set forth therein, (i) the Stockholders have agreed to indemnify, defend and hold harmless AAI and its Subsidiaries (including Merger Sub), and (ii) AAI has agreed to indemnify, defend and hold harmless each Stockholder, from and against all demands, claims, actions, loses, damages, liabilities, costs and expenses (including, without limitation, settlement costs, arbitration costs and any reasonable legal and other expenses for investigating or defending any action or threatened action) asserted against or incurred thereby arising out of or in connection with or resulting from a breach of any covenant, agreement, representation or warranty of KCAS, on one hand, and Merger Sub and AAI, on the other, respectively, in the Merger Agreement. 11.2. EXPENSES. Whether or not the transactions contemplated hereby are consummated, except as otherwise provided herein or in the Indemnification Agreement, Merger Sub or AAI, on one hand, or KCAS, on the other, will pay all of its own costs and expenses incurred by it in connection with this Agreement and the transactions contemplated hereby; PROVIDED, however' that, in the event of any litigation, dispute, suit, action or other proceeding between the parties relating in any way to this Agreement and the transactions contemplated hereby (an "Action"), the "prevailing party" shall be entitled to recover from the other party, upon demand, all of its reasonable out-of-pocket costs and expenses (including, without limitation, attorneys' fees and expenses) incurred in connection with such Action. For purposes of the foregoing, the parties agree that the judge or other trier of law assigned to any Action shall determine which party is the "prevailing party" in such Action, and that there shall be only one "prevailing party" in any Action. -34- 11.3. WAIVER OF COMPLIANCE; CONSENTS. Except as otherwise provided in this Agreement, any failure of any of the parties to comply with any obligation, representation, warranty, covenant, agreement or condition herein may be waived by the party entitled to the benefits thereof only by a written instrument signed by the party granting such waiver, but such waiver or failure to insist upon strict compliance with such obligation, representation, warranty, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. Whenever this Agreement requires or permits consent by or on behalf of any party hereto, such consent shall be given in writing in a manner consistent with the requirements for a waiver of compliance as set forth in this Section. 11.4. AMENDMENT AND MODIFICATION. This Agreement may be amended, modified or supplemented only by written agreement of KCAS, AAI and Merger Sub at any time prior to the Closing with respect to any of the terms contained herein. 11.5. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given when delivered by hand or by facsimile transmission or mailed by registered or certified mail (return receipt requested), postage prepaid, to the parties at the following addresses (or at such other address for a party as shall be specified by like notice; provided that notices of a change of address shall be effective only upon receipt thereof): (a) If to KCAS, to: Kansas City Analytical Services, Inc. 12700 Johnson Drive Shawnee, Kansas 66216 Attn: Dr. William D. Mason Telecopy: (913) 268-1497 Copies to: Seigfreid, Bingham, Levy, Selzer & Gee 2800 Commerce Tower 911 Main Street Kansas City, Missouri 64105 Attn: Mr. James C. Tilden Telecopy: (816) 474-3447 And -35- Phoenix International Life Sciences (IBRD), Inc. 2350 Cohen Street H4R2N6 Montreal, Quebec Canada Attention: John W. Hooper, Ph. D., Chairman and CEO Telecopy: (514) 333-8861 (b) If to AAI or to Merger Sub, to: Applied Analytical Industries, Inc. 1206 North 23rd Street Wilmington, North Carolina 28405 Attn: Mr. R. Forrest Waldon Telecopy: (910) 392-6557 Copies to: Robinson, Bradshaw & Hinson, P.A. 1900 Independence Center 101 North Tryon Street Charlotte North Carolina 28246 Attn: Mr. Stephen M. Lynch Telecopy: (704) 373-3955 11.6. ASSIGNMENT. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any party hereto without the prior written consent of the other party, nor is this Agreement intended to confer upon any other person except the parties hereto any rights or remedies hereunder. 11.7. GOVERNING LAW; JURISDICTION. The execution, interpretation and performance of this Agreement shall be governed by the internal laws and judicial decisions of the State of North Carolina except with respect to the Merger which shall be governed by the internal laws and judicial decisions of the State of Kansas. 11.8. JURISDICTION AND VENUE. In the event that KCAS commences a lawsuit or other proceeding against either AAI or Merger Sub relating to or arising from this Agreement, AAI and Merger Sub consent to and agree to submit to the jurisdiction of the United States Court for the District of Kansas and the District Court of Johnson County, Kansas and agree to accept service of process to vest personal jurisdiction over them in any of these courts. In the event that AAI or Merger Sub commences a lawsuit or other proceeding against KCAS relating to or arising -36- from this Agreement, the parties to this Agreement agree that the United States District Court for the District of Kansas shall have the sole and exclusive jurisdiction over any such proceeding. If such court lacks federal subject matter jurisdiction, the parties agree that the District Court of Johnson County, Kansas shall have sole and exclusive jurisdiction. Any of these courts shall be proper venue for any such lawsuit or judicial proceeding and the parties hereto waive any objection to such venue. KCAS, consents to and agrees to submit to the jurisdiction of any of the courts specified in the foregoing two sentences and agrees to accept service of process to vest personal jurisdiction over it in any of these courts. 11.9. 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. 11.10. NOUNS AND PRONOUNS. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice versa. 11.11. INTERPRETATION. The article and section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Agreement. 11.12. PARTIES IN INTEREST. Nothing in this Agreement, express or implied, other than the right to receive the Merger Consideration pursuant to Article III hereof, is intended to or shall confer upon any Person other than the parties hereto any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement. 11.13. EMPLOYEE LENGTH OF SERVICE. AAI agrees that for the purposes of determining an Employee's length of service for eligibility to participate and resting under all AAI employee benefit plans, including vacation policy, after the Merger, an Employee's prior service with KCAS shall be deemed to constitute service with AAI. 11.14. ENTIRE AGREEMENT. This Agreement, including the Annexes, Exhibits, Schedules and the other documents delivered pursuant hereto, embody the entire agreement and understanding of the parties hereto in respect of the subject matter hereof The Exhibits and Schedules hereto are an integral part of this Agreement and are incorporated by reference herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to the transactions contemplated by this Agreement, except with respect to the Confidential Disclosure Agreement dated January 27, 1998 between AAI and KCAS, the terms of which shall continue in effect to the extent not directly in conflict with the terms of this Agreement. 11.15. RELEASE OF PHOENIX (IBRD). At the Effective Time, Phoenix (IBRD) shall be released of all obligations it has to KCAS, Merger Sub, AAI and all other persons to provide -37- or guaranty any funding of capital improvements for KCAS, or its successors, including the obligations set forth in Amendment No. 1, dated March 10, 1995, by and among William D. Mason, Robert C. Lanman, Chauhwei J. Fu, Institute for Biological Research and Development, Inc. and KCAS, and the Purchase Option Agreement, dated March 10, 1995, by and among William D. Mason, Robert C. Lanman, Chauhwei J. Fu, Institute for Biological Research and Development, Inc. and KCAS. -38- IN WITNESS WHEREOF, KCAS, AAI and Merger Sub have caused this Agreement to be signed and attested by their respective duly authorized officers as of the date first above written.
Attest: APPLIED ANALYTICAL INDUSTRIES, INC. /S/ R. FORREST WALDON By: /S/ EUGENE T. HALEY - ------------------------------------- --------------------------------------- R. Forrest Waldon, Secretary Eugene T. Haley, Vice President Attest: KCAS ACQUISITION, INC. /S/ R. FORREST WALDON By: /S/ EUGENE T. HALEY - ------------------------------------- -------------------------------------- R. Forrest Waldon, Secretary Eugene T. Haley, President Attest: KANSAS CITY ANALYTICAL SERVICES, INC. /S/ MARILYN L. MASON By: /S/ WILLIAM D. MASON - ------------------------------------- ------------------------------------- Marilyn L. Mason, Secretary William D. Mason, Ph.D., President
-39- EXHIBIT B INDEMNIFICATION AGREEMENT THIS INDEMNIFICATION AGREEMENT (this "Agreement"), dated as of September 14, 1998, is among APPLIED ANALYTICAL INDUSTRIES, INC., a Delaware corporation ("AAI"), and the stockholders (the "Stockholders") of KANSAS CITY ANALYTICAL SERVICES, INC., a Kansas corporation ("KCAS"). BACKGROUND STATEMENT Pursuant to an Agreement and Plan of Merger between AAI, KCAS and KCAS Acquisition, Inc., dated as of September 2, 1998 (the "Merger Agreement"), AAI is acquiring by merger all of the outstanding common stock of KCAS. At the effective time of the merger, all of the Stockholders will receive either cash, shares of common stock of AAI or a combination of both. To induce AAI to complete the acquisition of KCAS, the Stockholders have agreed to indemnify AAI for breaches of KCAS's representations and warranties in the Merger Agreement and to reimburse AAI for certain expenses of KCAS in the event the acquisition is completed. This Agreement sets forth the agreement of the parties with respect to the foregoing. STATEMENT OF AGREEMENT In consideration of the premises and the mutual covenants contained herein, the parties hereto agree as follows: ARTICLE I. DEFINED TERMS 1.1. DEFINITIONS. As used in this Agreement, the following terms have the following meanings (terms not otherwise defined herein shall have the meanings given to them in the Merger Agreement): "Buyer's Damages" has the meaning given to it in Section 2.2(a). "Indemnified Buyer Parties" has the meaning given to it in Section 2.2(a). "Indemnified-Stockholder Parties" has the meaning given to it in Section 2.1(a). "Required Stockholders" means Stockholders holding at least a majority of the shares of Common Stock outstanding immediately prior to the Effective Time. "Stockholders' Damages" has the meaning given to it in Section 2.3(a). -1- ARTICLE II. INDEMNIFICATION 2.1. SURVIVAL OF REPRESENTATIONS. All representations, warranties and agreements made in the Merger Agreement shall survive the Closing for twenty-four months following the Closing Date. No such representation or warranty shall be deemed to be waived or otherwise diminished as a result of any due diligence investigation by the party to whom the representation or warranty was made or as a result of any actual or constructive knowledge by such party with respect to any facts, circumstances or claims or by the actual or constructive knowledge of such person that any representation or warranty is false at the time of Closing. All claims made by virtue of such representations, warranties, covenants and agreements shall be made under, and subject to the limitations set forth in, this Agreement. 2.2. THE STOCKHOLDERS' AGREEMENT INDEMNITY. (a) Subject to the limitations set forth in this Section 2.2, each Stockholder hereby agrees to indemnify, defend and hold harmless AAI and its subsidiaries (including KCAS after the Closing) and their directors, officers, employees and agents (together, the "Indemnified Buyer Parties") from and against all demands, claims, actions, losses, damages, liabilities, penalties, taxes, costs and expenses (including, without limitation, attorneys' fees, settlement costs, arbitration costs and any reasonable legal and other expenses for investigating or defending any action or threatened action) asserted against or incurred by any of the Indemnified Buyer Parties arising out of or in connection with or resulting from (i) a misrepresentation, breach, or nonfulfillment of any covenant, agreement, representation or warranty of KCAS contained in the Merger Agreement or in any agreement or instrument executed and delivered by KCAS on or prior to Closing pursuant to the Merger Agreement, (ii) state sales or use taxes that may be owed by KCAS for transactions occurring prior to November 1, 1997, (iii) the employment discrimination claim identified in Schedules 5.5 and 5.16(a) to the Merger Agreement, (iv) the potential environmental remediation identified in Schedule 5.21(d) to the Merger Agreement and (v) the threatened litigation identified in Schedule 5.16 to the Merger Agreement (collectively, "Buyer's Damages"). For all purposes hereunder, the amount of Buyer's Damages shall be computed net of the present value of any income tax benefit actually resulting therefrom to AAI and the present value of any proceeds actually paid to KCAS or AAI under any insurance coverage with respect thereto obtained by KCAS prior to the date hereof that reduces Buyer's Damages that would otherwise be sustained. (b) Each Stockholder shall be obligated to indemnify the Indemnified Buyer Parties only for those Buyer's Damages as to which such Stockholder has received notice within twenty-four months after the Closing Date. (c) The Indemnified Buyer Parties shall be entitled to recover under this Section 2.2 for Buyer's Damages to the extent the cumulative amount of all Buyer's -2- Damages exceeds the sum (such sum being referred to as the "Basket") of (i) fifty thousand dollars ($ 50,000) plus (ii) the difference between the maximum aggregate amount of profit sharing and matching contributions permitted to be made after the date of the Merger Agreement by the Company to the Profit Sharing Plan pursuant to Section 7.6 of the Merger Agreement minus the greater of (x) $117,000 or (y) the actual aggregate amount of profit sharing and matching contributions made by the Company to the Profit Sharing Plan after the date of the Merger Agreement. (d) In the event any Indemnified Buyer Party has a claim for Buyer's Damages, resulting from the assertion of liability by a third party, such Indemnified Buyer Party shall, within thirty days after receiving notice thereof, give the Stockholders notice of any such third party claim and, unless AAI reasonably determines that the sum of the amount of such claim plus the amount of any other outstanding claims exceeds the remaining aggregate amount of the Stockholders' liability under this Section 2.2, the Stockholders may undertake the defense thereof by counsel of their own choosing if the Required Stockholders provide written notice to the Indemnified Buyer Party and AAI that the Stockholders intend to undertake such defense; provided that no Stockholder shall settle any such third-party claim without the consent of the Indemnified Buyer Party, which will not be unreasonably withheld. In such case, the Indemnified Buyer Party may, by counsel, participate in such proceedings, negotiations or defense, at its expense, and AAI shall advance to, or on behalf of, the Stockholders payments of the expense of the Stockholders' undertaking such defense to the extent that the sum of such advances plus all Buyer's Damages and prior advances pursuant to this clause do not exceed the Basket. In the event that (i) within ten days after notice of any such third-party claim, the Stockholders have not notified the Indemnified Buyer Party of their intention to defend the third party claim or (ii) AAI reasonably determines that the sum of the amount of such claim plus the amount of any other outstanding claims exceeds the remaining aggregate amount of the Stockholders' liability under this Section 2.2, the Indemnified Buyer Party will (upon further notice to the Stockholders) have the right to undertake the defense, compromise or settlement of such claim; provided that the Indemnified Buyer Party shall not settle any such third-party claim without the consent of the Required Stockholders, which will not be unreasonably withheld. In such case, the Stockholders may elect to participate in such proceedings, negotiations or defense at any time at its own expense. (e) The liability of each Stockholder shall be several, and not joint, for its pro rata share of the recoverable portion of Buyer's Damages, based upon the percentage of all outstanding shares held by such Stockholder as of the date hereof No Stockholder shall have liability hereunder for any amount in excess of the amount set forth opposite such Stockholder's name below: -3-
STOCKHOLDER MAXIMUM LIABILITY AMOUNT ------------- ------------------------ William D. Mason, Ph.D. $1,020,000.00 Chauhwei.J. Fu, Ph.D. 100,000.00 Phoenix International Life Sciences (IBRD) Inc. 880,000.00
2.3. AAI'S AGREEMENT TO INDEMNIFY. (a) Subject to the limitations set forth in this Section 2.3, AAI hereby agrees to indemnify, defend and hold harmless the Stockholders, their directors, officers, employees and agents (together, the "Indemnified Stockholder Parties") from and against all demands, claims, actions, losses, damages, liabilities, penalties, taxes, costs and expenses (including, without limitation, attorneys' fees, settlement costs, arbitration costs and any reasonable legal and other expenses for investigating or defending any action or threatened action) asserted against or incurred by the Indemnified Stockholder Parties arising out of or in connection with or resulting from a misrepresentation, breach or nonfulfillment of any covenant, agreement, representation or warranty of AAI contained in the Merger Agreement or in any agreement or instrument executed and delivered on or prior to Closing pursuant to the Merger Agreement (collectively, "Stockholders' Damages"). For all purposes hereunder, the amount of Stockholders' Damages shall be computed net of the present value of any income tax benefit to such Stockholder actually resulting therefrom. (b) AAI shall be obligated to indemnify the Indemnified Stockholder Parties only for those Stockholders' Damages as to which the Indemnified Stockholder Parties have given AAI notice within twenty-four months after the Closing Date. (c) In the event the Indemnified Stockholder Parties have a claim for Stockholders' Damages resulting from the assertion of liability by a third party, the Indemnified Stockholder Parties will, within thirty days after receiving notice thereof, give AAI notice of any such thirdparty claim, and AAI may undertake the defense thereof by counsel of its own choosing if AAI provides written notice to the Indemnified Stockholder Parties that AAI intends to undertake such defense; provided that AAI shall not settle any such third-party claim without the consent of the Required Stockholders, which will not be unreasonably withheld. The Indemnified Stockholder Parties may, by counsel, participate in such proceedings, negotiations or defense, at their expense. In the event that within ten days after notice of any such third-party claim, AAI has not notified the Indemnified Stockholder Parties of its intention to defend the third-party claim, the Indemnified Stockholder Parties will (upon further notice to AAI) have the right to undertake the defense, compromise or settlement of such claim; provided that the Indemnified Stockholder Parties shall not settle any such third-party claim without the consent of AAI, which will not be unreasonably withheld. AAI may elect to participate in such proceedings, negotiations or defense at any time at its own expense. -4- 2.4. ADJUSTMENT TO MERGER CONSIDERATION. All amounts paid by any Stockholder or AAI pursuant to Sections 2.2 and 2.3, respectively, shall be deemed an adjustment in the Merger Consideration received or paid pursuant to the Merger Agreement. 2.5. CONTRIBUTION AMONG STOCKHOLDERS. The Stockholders agree among themselves that each Stockholder shall (a) contribute his or its pro rata share of (i) all costs and expenses incurred by any other Stockholder in defense of any claim for which the Stockholders have the obligation to indemnify the Indemnified Buyer Parties under the terms of this Agreement and (ii) all amounts owed to AAI hereunder and (b) indemnify each other Stockholder for all amounts paid or incurred by each other Stockholder in excess of his or its pro rata share thereof. Each Stockholder's pro rata shall be determined among them based on the Maximum Liability Amount set forth in Section 2.2(e) for such Stockholder compared to the total of the Maximum Liability Amounts for all Stockholders. ARTICLE III. REIMBURSEMENT FOR KCAS EXPENSES 3.1. REIMBURSEMENT OF EXPENSES. In the event that the Merger is completed and KCAS's legal, accounting and other expenses incurred in connection with the negotiation and execution of the Merger Agreement and other Merger Documents, due diligence, the completion of the Merger and other related matters exceeds the sum of (i) $36,000.00 plus (ii) the amount by which the fees and expenses of Ernst & Young LLP for auditing KCAS's financial statements at and for the year ended October 31, 1997 exceed $10,000, each Stockholder shall pay to AAI such Stockholder's pro rata share of the amount by which such legal, accounting and other expenses of KCAS exceed such sum (based upon the percentage of all outstanding shares held by such Stockholder as of the date hereof) promptly upon delivery of written notice thereof from AAI accompanied by reasonable documentation substantiating such expenses. ARTICLE IV. REPRESENTATIONS, WARRANTIES AND COVENANTS OF STOCKHOLDERS 4.1. REPRESENTATIONS AND WARRANTIES. Each Stockholder, severally and not jointly, represents and warrants to AAI the following: (a) Such Stockholder has the legal right, power and authority to execute and deliver this Agreement and to perform such Stockholder's obligations hereunder and to consummate the transactions contemplated hereby. (b) This Agreement constitutes the legal, valid and binding obligation of such Stockholder and is enforceable in accordance with its terms (except as such -5- enforceability may e limited by applicable bankruptcy, insolvency or other laws of general applicability affecting creditors' rights and by general principles of equity that may limit the specific performance of articular provisions). ARTICLE V. REPRESENTATIONS AND WARRANTIES OF AAI 5.1. REPRESENTATIONS AND WARRANTIES. AAI represents and warrants to each Stockholder as follows: (a) AAI is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and all requisite corporate power and authority to enter into and perform its obligations under this Agreement. (b) The execution, delivery and performance by AAI of the Agreement has been duly authorized by all requisite corporate action on the part of AAI, and this Agreement constitutes a legal, valid and binding obligation AAI, enforceable against it in accordance with its terms (except as such enforceability may be limited by applicable bankruptcy, insolvency or other laws of general applicability affecting creditors' rights and by general principles of equity that may limit the specific performance of particular provisions). ARTICLE VI. MISCELLANEOUS PROVISIONS 6.1. AMENDMENT AND MODIFICATION. This Agreement may be amended, modified or supplemented only by written agreement of the parties hereto. 6.2. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given when delivered by hand, sent by an overnight delivery service or mailed by registered or certified mail (return receipt requested), postage prepaid, to the parties at the following addresses (or at such other address for a party as shall be specified by like notice; provided that notices of a change of address shall be effective only upon receipt thereof): (a) If to AAI, to: Applied Analytical Industries, Inc. 5051 New Centre Drive Wilmington, North Carolina 28403 Attn: Mr. R. Forrest Waldon Telecopy: (910) 392-6557 -6- Copies to: Robinson, Bradshaw & Hinson, P.A. 1900 Independence Center 101 North Tryon Street Charlotte, North Carolina 28246 Attn: Mr. Stephen M. Lynch Telecopy: (704) 373-3955 (b) If to any of the Stockholders, to the address appearing under the Stockholder's name on the signature pages hereto. 6.3. ASSIGNMENT. This Agreement and all, of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any party hereto without the prior written consent of the other party, nor is this Agreement intended to confer upon any other Person, except the parties hereto, any rights or remedies hereunder. 6.4. GOVERNING LAW; JURISDICTION. The execution, interpretation and performance of this Agreement shall be governed by the internal laws and judicial decisions of the State of North Carolina. 6.5. JURISDICTION AND VENUE. In the event that any Stockholder commences a lawsuit or other proceeding against AAI relating to or arising from this Agreement, AAI consents to and agrees to submit to the jurisdiction of the United States District Court for the District of Kansas and the District Court of Johnson County, Kansas and agrees to accept service of process to vest personal jurisdiction over it in any of these courts. In the event that AAI commences a lawsuit or other proceeding against any Stockholder relating to or arising from this Agreement, the parties to this Agreement agree that the United States District Court for the District of Kansas shall have the sole and exclusive jurisdiction over any such proceeding. If such court lacks federal subject matter jurisdiction, the parties agree that the District Court of Johnson County, Kansas shall have sole and exclusive jurisdiction. Any of these courts shall be proper venue for any such lawsuit or judicial proceeding and the parties hereto waive any objection to such venue. Each of the Stockholders consents to and agrees to submit to the jurisdiction of any of the courts specified in the foregoing two sentences and agrees to accept service of process to vest personal jurisdiction over it or him in any of these courts. 6.6. 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. -7- 6.7. NOUNS AND PRONOUNS. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice versa. 6.8. INTERPRETATION. The article and section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Agreement. 6.9. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and understanding of the parties hereto in respect of the subject matter hereof. 6.10. RECOVERY OF COSTS AND ATTORNEY'S FEES. In the event of any litigation, dispute, suit, action or other proceeding between the parties pursuant to or relating in any way to this Agreement (an "Action"), the "prevailing party" shall be entitled to recover from the other party, upon demand, all of its reasonable out-of-pocket costs and expenses (including, without limitation, attorneys' fees and expenses) incurred in connection with such Action. For purposes of the foregoing, the parties agree that the judge or other trier of law assigned to any Action shall determine which party is the "prevailing party" in such Action, and that there shall be only one "prevailing party" in any Action. -8- IN WITNESS WHEREOF, AAI and the Stockholders have caused this Agreement to be signed under seal as of the date first above written. APPLIED ANALYTICAL INDUSTRIES, INC. By: /S/ R. FORREST WALDON -------------------------------- R. Forrest Waldon, Secretary STOCKHOLDERS /S/ WILLIAM D. MASON ------------------------------------- Dr. William D. Mason Adddress: 106 Terrace Trail South Lake Quivira, Kansas 66106 /S/ CHAUHWEI J. FU ------------------------------------- Dr. Chauhwei J. Fu Address: 10714 West 130th Terrace Overland Park, Kansas 66213 PHOENIX INTERNATIONAL LIFE SCIENCES (IRBD), INC. By: /S/ JEAN-YVES CALOZ -------------------------------- Title: /S/ SECRETARY ------------------------------ Address: c/o Chief Executive Officer Phoenix International Life Sciences Inc. 2350 Cohen Street H4R 2N6 Montreal, Quebec Canada -9- EX-2.5 6 EXHIBIT 2.5 Exhibit 2.5 SHARE PURCHASE AGREEMENT AMONG PHOENIX INTERNATIONAL LIFE SCIENCES INC. AND DR. ANDRE VON FROREICH AND DR. ANDREAS WICKI AND CLINSERVE A.G. ------------------------- DATED AS OF NOVEMBER 5, 1998 ------------------------- SHARE PURCHASE AGREEMENT dated as of November 5, 1998 AMONG: PHOENIX INTERNATIONAL LIFE SCIENCES INC., a corporation incorporated under the Canada Business Corporations Act, having its head office at 2350, Cohen Street, Saint-Laurent, Quebec, Canada, H4R 2N6, herein acting and represented by John Hooper, its duly authorized representative; (hereinafter "Phoenix") AND: DR. ANDRE VON FROREICH, residing at Forsthohe 33, 21149 Hamburg, Germany; (hereinafter "Froreich") AND: DR. ANDREAS WICKI, residing at Hohestrasse 39, 8702 Zollikon, Switzerland; (hereinafter "Wicki") (Froreich and Wicki are hereinafter collectively referred to as the "Vendors") AND: CLINSERVE A.G., a Swiss corporation with capital of SFr600,000, registered in the Commercial Register of the Canton of Fribourg under number EHRA-Id. 341 555 and having its head office at rue St. Pierre 18, 1700 Fribourg, Switzerland, herein acting and represented by Dr. Andreas Wicki, its duly authorized representative; (hereinafter "Clinserve") WHEREAS, the Vendors hold, directly or indirectly, as more fully set out in Schedule A, all of the outstanding shares and voting rights of Clinserve; WHEREAS, Clinserve Clinical Trials Services GmbH ("Clinserve GmbH"), a German corporation, with capital of DM50,000, registered in the Commercial Register of Amtsgericht Hamburg under number 61 348 and having its head office at Grossmooreogen 25, 21079 Hamburg, Germany, is a subsidiary of Clinserve, held as to 100% by Clinserve. The capital structure of Clinserve GmbH is set forth in Schedule B; WHEREAS the Vendors have agreed to sell all of the outstanding shares of Clinserve to Phoenix in consideration for the issuance to the Vendors of common shares of Phoenix; NOW, THEREFORE, the parties hereto agree as follows: - 2 - 1. INTERPRETATION AND DEFINITIONS Except as the context otherwise explicitly requires, (a) the capitalized term "Section" refers to sections of this Agreement; (b) the capitalized terms "Schedules" and "Exhibit" refer to schedules and exhibits to this Agreement; (c) references to a particular Section include all subsections thereof; (d) the word "including" shall be construed as "including without limitation"; (e) accounting terms not otherwise defined herein have the meaning provided under GAAP (as defined below); (f) references to a particular law, statute or regulation include all rules and regulations thereunder and any successor, law, statute, regulation or rules, in each case as from time to time in effect; (g) references to a particular Person include such Person's successors and assigns to the extent not prohibited by this Agreement; (h) references to dollars or $ in this Agreement are to Canadian dollars. In this Agreement, unless the context otherwise requires, the following terms shall have the respective meanings assigned to them: 1.1 "AFFILIATE" means, with respect to any Person, any Person which, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with such Person. For the purposes of this Agreement, "Affiliate" also means an affiliate as such term is defined by the SEC. 1.2 "ARTICLES" means the original or restated articles of incorporation, articles of amendment, articles of amalgamation, articles of continuance, articles of reorganization and articles of arrangement, including amendments thereto, as in effect from time to time, of Clinserve. 1.3 "CLINSERVE AFFILIATE" means any of Froreich and Wicki. 1.4 "COMPENSATION" as applied to any Person means the aggregate of all salaries, compensation, remuneration or bonuses of any character, retirement or pension benefits of any kind, or other payments of any kind whatsoever (other than health and medical benefits made available to employees generally and advances and reimbursements of business expenses) made directly or indirectly by Clinserve, the Subsidiary or other specified Persons to such Person and affiliates of such Person. 1.5 "COMPLETION DATE" means the date of this Agreement, i.e. November 5, 1998. 1.6 "Consolidated", when used with reference to any term, means that term as applied to the accounts of Clinserve or other indicated Person and each of its respective subsidiaries, consolidated or combined in accordance with GAAP after eliminating all inter-company operations and with appropriate deductions for minority interests in subsidiaries. 1.7 "CONTRACTUAL OBLIGATION" means, with respect to any Person, any contracts, agreements, deeds, hypothecs, mortgages, indentures, leases, licenses, other instruments, commitments, undertakings, arrangements or understandings, written or oral, or other documents or instruments, including any provisions of its articles of incorporation or other constituting documents or by-laws and any document or instrument evidencing Indebtedness, to which any such Person is a party or otherwise subject to or bound by or to which any property or asset of any such Person is subject. 1.8 "DISTRIBUTION" means (a) the declaration or payment of any dividend on or in respect of the shares of any class or series of shares of Clinserve, the Subsidiary or other specified Person, other than dividends payable solely in common shares of the share capital of the payor; (b) the purchase, redemption or other retirement of any shares of any class of Clinserve, the Subsidiary - 3 - or other specified Person directly, or indirectly through a Subsidiary or otherwise; or (c) any other distribution on or in respect of any shares of any class or series of shares of Clinserve, the Subsidiary or other specified Person. 1.9 "ESCROW AGENT" means Montreal Trust Company. 1.10 "ESCROW AGREEMENT" means the escrow agreement entered between the parties hereto and the Escrow Agent a copy of which is attached hereto as Schedule 1.10. 1.11 "ESCROWED SECURITIES" means the Phoenix Shares escrowed pursuant to Section 2.4 together with all Proceeds (as defined in the Escrow Agreement). 1.12 "ESCROWED SHARE PRICE" means the amount obtained by adding the opening and closing prices of the common shares of Phoenix on each of the Montreal Exchange and The Toronto Stock Exchange for the ten trading days preceding the date of execution of the present Agreement, divided by 40. 1.13 "ENVIRONMENTAL LAWS" means all Legal Requirements (including consent decrees, administrative orders and contractual obligations) relating to public health and safety, workers health and safety and pollution or protection of the environment. 1.14 "GAAP" means generally accepted accounting principles, as in effect from time to time, consistently applied. 1.15 "GUARANTEE" means (a) any guarantee of the payment or performance of, or any contingent obligation in respect of, any indebtedness or other obligation of any other Person, (b) any other arrangement whereby credit or financial assistance is extended to one obligor on the basis of any promise or undertaking of another Person (i) to pay the Indebtedness of such obligor, (ii) to purchase any obligation owed by such obligor, or (iii) to maintain the capital, working capital, solvency or general financial condition of such obligor, whether or not such arrangement is disclosed in the balance sheet of such other Person or is referred to in a footnote thereto or appears in a "keep well" agreement, "comfort letter" or "take or pay" agreement, and (c) any liability of Clinserve or the Subsidiary as general partner of a partnership or as a venturer in a joint venture in respect of Indebtedness or other obligations of such partnership or venture; provided, however, that in no event shall Guarantees include product warranties given or the endorsement of negotiable instruments for deposit or collection in the ordinary course of business. 1.16 "INDEBTEDNESS" means (a) all indebtedness, obligations and liabilities for borrowed money and similar monetary obligations evidenced by bonds, notes debentures, evidences of indebtedness, capitalized lease obligations, deferred purchase price of property (other than ordinary trade payables) or otherwise, whether direct or indirect; and (b) all indebtedness, obligations and liabilities secured by any Liens existing on property owned or acquired, whether or not the liability secured thereby shall have been assumed. 1.17 "LEGAL REQUIREMENT" means any national, provincial, regional, municipal, local or foreign law, statute, standard, ordinance, code, order, rule, regulation, resolution, promulgation, by-law, policy, guideline, directive, standard and any other provision having the force or effect of law or any final order, judgment or decree of any court, arbitrator, tribunal or governmental authority, - 4 - or any license, franchise, permit, certificate, authorization, registration or similar right granted under any of the foregoing. 1.18 "LIEN" means (a) any hypothec, priority, mortgage, pledge, lien, charge, security interest or other similar encumbrance upon any property or assets of any character, or upon the income or profits therefrom, whether arising by agreement or under law, or otherwise (b) any conditional sale or other title retention agreement or arrangement (including a capitalized lease); (c) any sale, assignment, pledge or other transfer for security of any accounts, general intangibles, or chattel paper, with or without recourse, or (d) any transaction (regardless of form) which is intended to create any charge or encumbrance on property to secure the payment or performance of an obligation. 1.19 "MANAGEMENT" means each of Froreich and Wicki. 1.20 "MATERIAL ADVERSE EFFECT" means any (a) material adverse effect whatsoever upon the validity, performance or enforceability of this Agreement, (b) material adverse effect upon the business, assets, financial condition, income or prospects of Clinserve and the Subsidiary on a Consolidated basis, or (c) material adverse effect upon the ability of the Vendors to perform their obligations under this Agreement. 1.21 "PERMITTED LIEN" means those Liens indicated on Schedule 1.21. 1.22 "PERSON" means an individual, partnership, corporation, company, association, trust, joint venture, unincorporated organization, business trust, limited liability company and any governmental or administrative department or agency or political subdivision. 1.23 "PHOENIX AFFILIATES" means John Hooper, Stephane Huguet, Heather Baker, Judy Zilber, Jean-Yves Caloz, Diane Bouchard, Carmen Discenza, Lucien Steru, Dominique Steru, Susan Thornton, Greg Holmes, Claude E. Forget, Bertran Spilker, Robert Raich, David Goldman, Suzanne Peeters, George Engelberg, Wicki and Cornelius P. McCarthy III. 1.24 "SEC" means the United States Securities and Exchange Commission. 1.25 "SECURITIES ACT" means the United States Securities Act of 1933, as amended, and all rules and regulations promulgated thereunder. 1.26 "SHARES" means the 6,000 bearer shares with a nominal value of SFr100 each of Clinserve being all of the issued and outstanding shares of Clinserve. 1.27 "SUBSIDIARY" means Clinserve Clinical Trial Services GmbH. 2. SALE AND PURCHASE OF SHARES 2.1 AGREEMENT TO PURCHASE AND SELL SHARES Upon the terms and subject to the conditions hereof and in reliance on the representations and warranties of Phoenix set forth in Section 4, Froreich and Wicki hereby sell to Phoenix and, upon the terms and subject to the conditions hereof and in reliance on the representations and warranties of the - 5 - Vendors set forth in Section 3, Phoenix hereby purchases from Froreich and Wicki, the Shares, as set forth below:
VENDOR NUMBER OF SHARES ------ ---------------- Froreich 4,800 Wicki 1,200 TOTAL 6,000
2.2 PRICE OF SHARES The purchase price of the Shares is payable by the issuance by Phoenix to Froreich and Wicki of an aggregate of 316,805 common shares of Phoenix. The aggregate purchase price for the Shares is to be allocated among Froreich and Wicki as follows:
VENDOR NUMBER OF COMMON SHARES OF PHOENIX ------ ---------------------------------- Froreich 253,444 Wicki 63,361 TOTAL 316,805
(The common shares of Phoenix issued to the Vendors pursuant to this Section 2.2 are hereinafter collectively referred to as the "Phoenix Shares".) 2.3 DELIVERY OF SHARES AND PAYMENT OF PURCHASE PRICE 2.3.1 Phoenix hereby acknowledges receipt from each of Froreich and Wicki of certificates representing the Shares duly endorsed in blank for transfer by Froreich and Wicki. 2.3.2 Froreich and Wicki hereby acknowledge receipt from Phoenix of certificates registered in the names of Froreich and Wicki representing 90% of the purchase price for the Shares. 2.4 ISSUANCE INTO ESCROW Notwithstanding any provision of this Agreement, upon delivery of the Phoenix Shares pursuant to Section 2.3, 10% of the aggregate number of the Phoenix Shares shall be delivered immediately to the Escrow Agent, on a pro rata basis among the Vendors, to be held and released by the Escrow Agent pursuant to the terms of this Agreement and the Escrow Agreement. All such Phoenix Shares shall be issued in the name of the Escrow Agent, as escrow agent under the Escrow Agreement. The Vendors hereby acknowledge receipt of such 10% of the purchase price of the Shares on their behalf by the Escrow Agent. 3. REPRESENTATIONS AND WARRANTIES OF VENDORS In order to induce Phoenix to enter into this Agreement and to purchase the Shares hereunder, the Vendors hereby make the following representations and warranties to Phoenix. The Vendors' liability for the following representations and warranties shall be joint, and not solidary i.e. pro rata to the number of Phoenix Shares received by each Vendor according to Section 2.2, except in the event of fraud with respect thereto. - 6 - 3.1 SHARES The Vendors own the Shares free and clear of all Liens and there are no rights or other obstacles of any nature whatsoever to the sale of the Shares to Phoenix. 3.2 ORGANIZATION 3.2.1 DUE INCORPORATION, ETC. Each of Clinserve and the Subsidiary is duly incorporated or organized and validly exists under the laws of its jurisdiction of incorporation, and is in good standing under the laws applicable to it and has all necessary corporate capacity and power to own and lease its property and assets and to carry on the businesses now conducted or presently proposed to be conducted by it. 3.2.2 SUBSIDIARIES. Clinserve does not own or control, directly or indirectly, or have an interest in, any other corporation, partnership, association or business entity other than the Subsidiary. 3.2.3 MANAGEMENT. The Management of Clinserve and the Subsidiary is exclusively comprised of the Persons referred to in Section 1.19. 3.2.4 AUTHORIZATIONS AND APPROVALS. All authorizations, approvals, licences, permits, certificates, registrations, consents, exemptions or declarations required in order for each of Clinserve and the Subsidiary to own or lease their property and assets and to carry on their business in all jurisdictions in which such property and assets are located or such business is carried on have been duly obtained or effected and are in full force and effect except for authorizations, approvals, licences, permits, certificates, registrations, consents, exemptions or declarations, the absence of which, individually or in the aggregate, does not and shall not result in a Material Adverse Effect. In particular: (a) except for permits, certificates, licences, registrations and other authorizations, the absence of which, individually or in the aggregate, does not and shall not result in a Material Adverse Effect, each of Clinserve and the Subsidiary hold all permits, certificates, licenses, registrations and other authorizations required under applicable Environmental Laws for their operations (the "Environmental Permits"); each such Environmental Permit is valid and in force and the operations of Clinserve and the Subsidiary are in compliance with the conditions set out in such Environmental Permits and their is no ground for revocation, expiry or annulment of any such Environmental Permits; (b) except for permits, certificates, licences, registrations and other authorizations, the absence of which, individually or in the aggregate, does not and shall not result in a Material Adverse Effect, each of Clinserve and the Subsidiary hold all permits, certificates, licenses, registrations and other authorizations required under applicable Legal Requirement for clinical research for the pharmaceutical industry and pharmaceutical research (the "Research Permits"); each such Research Permit is valid and in force, the operations of Clinserve and the Subsidiary are in compliance with the conditions set out in such Research - 7 - Permits and there is no ground for revocation, expiry or annulment of any such Research Permits. 3.2.5 CORPORATE RECORDS. The Corporate records of Clinserve and the Subsidiary are complete and up to date. 3.2.6 OFFICERS AND DIRECTORS. The officers and directors of Clinserve and the Subsidiary have been properly elected or appointed in accordance with applicable laws and the relevant articles of incorporation or other constituting documents. 3.2.7 CORPORATE ACTION. All necessary corporate action has been taken by Clinserve, to authorize the execution of this Agreement and the consummation of the transactions contemplated hereby. The Board of directors of Clinserve has agreed to register Phoenix in the share ledger of Clinserve as the owner of the Shares. The Vendors and Clinserve have fulfilled any and all of their obligations under the preemptive rights relating to the sale of the Shares. 3.3 CAPITALIZATION 3.3.1 SHARE CAPITAL OF CLINSERVE. The outstanding share capital of Clinserve is exhaustively set forth in Schedule A, all of which has been validly issued and is fully paid and non-assessable and, subject to no Lien, adverse claim or restriction on transfer, except restrictions on transfer under this Agreement. 3.3.2 OPTIONS, ETC. Other than as set forth in Schedule A and Schedule 3.3.5, Clinserve does not have outstanding (a) any rights (either preemptive or otherwise) or options to subscribe for or purchase, or any warrants or other agreements providing for or requiring the issuance of, any shares or any securities convertible into or exchangeable for its shares, (b) any obligation to redeem, purchase or otherwise acquire or retire any of its shares, any securities convertible into or exchangeable for its shares or any rights, options or warrants with respect thereto, (c) any rights to require Clinserve to qualify for distribution for securities laws purposes, or (d) any restrictions on voting. 3.3.3 CAPITAL STOCK OF THE SUBSIDIARY. The issued and outstanding shares of the Subsidiary are as set forth in Schedules B. The issued and outstanding shares of the Subsidiary are validly issued, and paid and non-assessable and subject to no Lien, adverse claim or restriction on transfer, other than as set forth in Schedule 3.3.3 and the shares of the Subsidiary were purchased by Clinserve from Wicki and Froreich on May 26, 1998 at their fair market value. 3.3.4 SUBSIDIARY OPTIONS, ETC. Other than as set forth in Schedule 3.3.4, the Subsidiary does not have outstanding (a) any rights (either preemptive or otherwise) or options to subscribe for or purchase, or any warrants or other agreements providing for or requiring the issuance of, any shares or any securities convertible into or exchangeable for its shares, (b) any obligation to redeem, purchase or otherwise acquire or retire any of its shares, any securities convertible into or exchangeable for its shares or any rights, options or warrants with respect thereto, (c) any rights to require the Subsidiary to qualify for distribution for securities laws purposes, or (d) any restrictions on voting. - 8 - 3.3.5 NO COMMITMENTS AFFECTING SHARES, ETC. Other than as set forth in Schedule 3.3.5, neither Clinserve nor the Subsidiary is a party to or bound by any agreement, commitment or understanding, whether verbal or written, affecting its shares or the participating or voting rights attached thereto. 3.4 REPORTS, FINANCIAL STATEMENTS AND OTHER DOCUMENTS Phoenix has been provided with complete and correct copies of audited financial statements of Clinserve for the years ended August 31, 1995, 1996 and 1997 and unaudited financial statements for the year ended August 31, 1998 and consolidated financial statements of Clinserve for the year ended August 31, 1998, and with complete and correct copies of financial statements of the Subsidiary sealed by a German auditor according to the German law on limited liability companies for the years ended December 31, 1996 and 1997, copies of which are attached hereto as Schedule 3.4A. The financial statements of Clinserve and the Subsidiary referred to above have been prepared in accordance with Swiss GAAP and German GAAP, as applicable, and all such financial statements fairly present the financial condition of Clinserve and the Subsidiary at the dates thereof and the results of their operations for the periods covered thereby. Other than as set forth in Schedule 3.5, neither Clinserve nor the Subsidiary has material liabilities, contingent or otherwise, which are not referred to in the financial statements. The audited financial statements for the years ended August 31, 1995, 1996 and 1997, copies of which are attached hereto as Schedule 3.4A have been properly approved by the annual general meetings of shareholders of the relevant entities in due form without reservation. For purposes of financial presentation, Clinserve and the Subsidiary recognize net revenue from their contracts on a percentage of completion basis as work is performed. The percentage of completion, and consequently the revenue to be recorded, of each individual contract is determined through detailed analysis and discussion between all appropriate operational and financial department management. Although Clinserve and the Subsidiary do not require collateral for unpaid balances, credit losses have consistently been within Management's expectations. Certain contracts contain provisions for price adjustment for cost overruns. Such adjusted amounts are included in service revenue when realization is assured and the amounts can be reasonably determined. In the period in which it is determined that a loss will result from the performance of a contract, the entire amount of the estimated ultimate loss is charged against income. Since September 1, 1998, the business of Clinserve and the Subsidiary has been operated in the customary fashion and no revenues that would have been earned by Clinserve or the Subsidiary have been earned by any Person who is an Affiliate of any of the Vendors. Notwithstanding anything else in this Agreement, including, without limitation, the provisions of this Section 3.4, the Vendors make no representation or warranty of any kind whatsoever with respect to future business, financial performance or future profitability of Clinserve. 3.5 OFF BALANCE SHEET OBLIGATIONS Schedule 3.5 contains a complete list of the off-balance sheet obligations of Clinserve and the Subsidiary, including all guarantees and obligations to the benefit of the Vendors, members of their families or third parties. -9- 3.6 CHANGES IN CONDITION Since September 1, 1998: 3.6.1 MATERIAL ADVERSE EFFECT. No event having a Material Adverse Effect has occurred. 3.6.2 EXTRAORDINARY TRANSACTIONS, ETC. Other than as set forth in Schedule 3.4A, neither Clinserve nor the Subsidiary has (a) made any Distribution, (b) other than as set forth in Schedule 3.6.2, made any payment (other than Compensation of its directors, officers and employees in amounts in effect prior to September 1, 1998 or for bonuses accrued in accordance with normal practice prior to September 1, 1998) to any of the Vendors, (c) other than as set forth in Schedule 3.6.2, increased the Compensation, including bonuses, payable or to be payable to any of its directors, officers or employees by more than 5%, or (d) entered into any Contractual Obligation, or entered into or performed any other transaction, not in the ordinary and usual course of business and consistent with past practice. 3.6.3 INVENTORY AND WORK-IN-PROGRESS. The value of inventory and work-in-progress reflected in the financial statements of Clinserve and the Subsidiary has been established in accordance with Swiss and German GAAP, respectively, and there has been no material change in the period subsequent to August 31, 1998, other than in the ordinary and usual courses of business. 3.6.4 REVENUES. The business of Clinserve and the Subsidiary has been operated in the customary fashion and no revenues that would have been earned by Clinserve or the Subsidiary have been earned by any Person which is an Affiliate of any of the Vendors. 3.7 CONTRACTUAL OBLIGATIONS, ETC. 3.7.1 CERTAIN CONTRACTS. Schedule 3.7.1 contains, together with a reference to the subparagraph pursuant to which each item is being disclosed, a correct and complete list of all Contractual Obligations of Clinserve and the Subsidiary of the types described below: (a) All collective bargaining agreements; all employment agreements, all profit sharing, profit participation, deferred compensation, bonus, stock option, stock purchase, pension, retainer, consulting, retirement, welfare or incentive plans or agreements; and all plans, agreements or practices which constitute Compensation or "fringe benefits" to any of the employees of Clinserve or the Subsidiary, including vacation programs, sick leave programs, group medical insurance, group life insurance, disability insurance and related benefits. (b) All Contractual Obligations under which Clinserve or the Subsidiary are restricted from carrying on any business, venture or other activities anywhere in the world. (c) All Contractual Obligations (including options) to sell, lease (as lessor), exchange or otherwise dispose of or transfer any of the properties or assets of Clinserve or the Subsidiary except in the ordinary course of business. -10- (d) All Contractual Obligations pursuant to which Clinserve or the Subsidiary guarantees or otherwise assumes any liability of or gives financial assistance to any Person, or pursuant to which any Person guarantees or otherwise assumes any liability of Clinserve or the Subsidiary. (e) All Contractual Obligations constituting license agreements, service agreements, consulting agreements or other similar arrangements, the termination of which, individually or in the aggregate, would result in a Material Adverse Effect. (f) All Contractual Obligations under which Clinserve or the Subsidiary leases immovable property or is obligated to lease or purchase immovable property or incur capital expenditures in excess of SFr50,000 annually. (g) All Contractual Obligations of Clinserve or the Subsidiary relating to the borrowing of money or to the creation of a Lien, other than a Permitted Lien, on any property or asset of Clinserve, or the Subsidiary. (h) All Contractual Obligations of Clinserve or the Subsidiary requiring a notice exceeding 6 (six) months for termination. 3.7.2 NATURE OF CONTRACTS. All of the Contractual Obligations of Clinserve and the Subsidiary at the Completion Date are enforceable against Clinserve and the Subsidiary, the other parties thereto, in accordance with their terms; except for Contractual Obligations the failure of which to be so enforceable does not and shall not, individually or in the aggregate, result in a Material Adverse Effect. Except for breaches, defaults and liabilities which do not and shall not individually or in the aggregate result in a Material Adverse Effect, neither Clinserve nor the Subsidiary is now in default, and no event has occurred which with notice or lapse of time or both would constitute a default under, nor are there any liabilities arising from any breach or default by any of them or event which with notice or lapse of time or both would constitute a default by any of them prior to the Completion Date of, any provision of any such Contractual Obligation. 3.7.3 ARTICLES. Neither Clinserve nor the Subsidiary is in violation of, or in default under, any provision of its articles or constituting documents and Phoenix has been provided with complete and correct copies of such articles or constituting documents. 3.7.4 INSURANCE. Each of Clinserve and the Subsidiary carries insurance policies with independent third party insurers which, with respect to their amounts and types of coverage, are adequate to insure against risks to which each of Clinserve and the Subsidiary and their respective property and assets are normally exposed in the operation of their respective businesses, including without limitation professional liability. All policies, the absence of which, individually or in the aggregate, would result in a Material Adverse Effect, are in full force and effect and free from any right of termination on the part of the applicable insurance carriers. There are no outstanding unpaid premiums except in the ordinary course of business, and neither Clinserve nor any Subsidiary has received any notice of cancellation or non-renewal of any such policy. Neither Clinserve nor any Subsidiary is aware of any risks, situations, occurrences or other matters which have been disclosed, or should have been disclosed, to insurance carriers or brokers in connection with any application for such insurance as a result of which an insurance carrier would have a right to cancel the corresponding -11- insurance policy or deny coverage with respect to any rights under any such policies. There exists no event of default or event, occurrence, condition or act (including the transactions contemplated by this Agreement) which, with the giving of notice, the lapse of time or the happening of any further event or condition, would become a default or occasion a material premium increase under any such policy or give rise to, and neither Clinserve nor any Subsidiary has any anticipation of, any termination or cancellation thereof or material premium increase therefor. 3.7.5 INSURANCE CLAIM. Each of the Vendors declares that after thorough internal investigation, there is no known fact, situation or circumstance involving Clinserve or the Subsidiary or their directors or officers, which would reasonably be expected to result in any future claim being made against the Company or the Subsidiary. 3.7.6 DISPUTE. Neither Clinserve nor the Subsidiary has received any notice from any supplier, vendor, contractor, customer or client with which Clinserve or such Subsidiary has conducted business during the one-year period ending on the date of this Agreement confirming such Person's intention to reduce the volume under, terminate or otherwise alter any Contractual Obligation with Clinserve or any Subsidiary, the effect of which, individually or in the aggregate, would result in a Material Adverse Effect. 3.8 OPERATIONS IN CONFORMITY WITH LAW, ETC. The operations of Clinserve and the Subsidiary as now conducted, and their properties, assets, equipments, buildings, immoveables and leased or occupied properties, are not, and have not been, in violation of, nor is Clinserve or the Subsidiary in default and no event has occurred which with notice or lapse of time or both would constitute a default under, any applicable Legal Requirements including, in particular, any applicable Environmental Laws or Legal Requirements regarding clinical research and experimentation on animals [or humans], except for such violations and defaults as do not and shall not, in the aggregate, have a Material Adverse Effect. Neither Clinserve nor the Subsidiary has received notice of any such violation or default and neither the Vendors nor the Management have knowledge of any basis on which the operations of Clinserve or the Subsidiary, when conducted as currently proposed to be conducted after the Completion Date, would be held so as to violate or to give rise to any such violation or default. Clinserve and the Subsidiary have all franchises, licenses, permits, certificates, authorizations, registrations or other authority presently necessary for the conduct of their business as now conducted, except for franchises, licences, permits, certificates, authorizations, registrations or other authority, the absence of which, individually or in the aggregate, does not and shall not result in a Material Adverse Effect. Based on the facts presently known to the Vendors and Management, all future expenditures on the part of Clinserve and the Subsidiary required to meet the provisions of any presently existing applicable Legal Requirements (including Legal Requirements relating to employment practices or to occupational or health standards or to environmental considerations) shall not, in the aggregate, have a Material Adverse Effect. Clinserve and the Subsidiary have complied and are in compliance with applicable competition regulations and have never infringed fair competition in the markets where they operate, either with or towards third companies or between themselves. Clinserve and the Subsidiary do not hold separately or together a dominant position on the markets involved and their market share and net aggregate turnover do not meet the European, Swiss or German thresholds which authorizes European or domestic competition authorities to control the operation and impede the completion of the transaction contemplated hereby. 3.9 INTELLECTUAL PROPERTY -12- Schedule 3.9 contains a list of all the trade-marks, trade names and patents used by any of Clinserve or the Subsidiary (collectively "Used Intellectual Property"). The entity indicated in said Schedule as owner of Used Intellectual Property is the registered and beneficial owner of such Used Intellectual Property or the registration thereof, if applicable, (except as set forth in Schedule 3.9), with good and marketable title, unencumbered (except for Permitted Liens), and with full right to sell, assign or otherwise transfer or license to others and subject to no pending challenge, refutation, expiry or termination other than as set forth in Schedule 3.9. To the Vendors' and Management's knowledge, other than as set forth in Schedule 3.9, none of Clinserve or the Subsidiary uses any intellectual property not owned by it, other than software purchased "off the shelf", all of which each entity using said property has the right to use (collectively "Licenced Intellectual Property"). (Used Intellectual Property and Licensed Intellectual Property are sometimes hereinafter referred to collectively as "Intellectual Property"). None of Clinserve or the Subsidiary is required to pay royalties, fees or other consideration to any other person with respect to the use of any of the Intellectual Property or in connection with the conduct of its business or otherwise. To the Vendors' and Management's knowledge, none of Clinserve or the Subsidiary has infringed the intellectual or industrial property rights of any other person, nor has any of them used any intellectual or industrial property (including, without limitation, trade-marks, trade names, patents, models, designs and copyrights) which it does not own or have the right to use other than as set forth in Schedule 3.9. There are no outstanding claims asserted against any of Clinserve or the Subsidiary alleging the infringement or the misappropriation by any of them of any intellectual or industrial property. None of Clinserve or the Subsidiary has granted any licences or sub-licences to third parties with respect to any of the Intellectual Property other than as set forth in Schedule 3.9 and neither the Vendors nor Management has any knowledge of any infringement or misappropriation by any other Person of any of the Intellectual Property. Neither the execution nor delivery of this Agreement will constitute a breach of or a default under any agreement relating to the Intellectual Property. 3.10 ENVIRONMENTAL MATTERS 3.10.1 Clinserve and the Subsidiary, their employees, agents, shareholders, directors and officers (acting in their capacity of employees, agents, shareholders, directors or officers of Clinserve or of the Subsidiary) have never been declared guilty of committing an offence for a violation of Environmental Laws and have never been fined for such an offence or have otherwise settled such a prosecution in connection with the activities of Clinserve and the Subsidiary; 3.10.2 There are no contaminants, waste or pollutants of any kind whatsoever in, on or under the equipment, buildings, immoveables or properties owned, leased or occupied by Clinserve or the Subsidiary and caused by Clinserve, the Subsidiary or their employees, agents, shareholders, directors or officers (acting in their capacity of employees, agents, shareholders, directors or officers of Clinserve or the Subsidiary), the presence of which constitutes a violation of applicable Environmental Laws and the presence of which, individually or in the aggregate, constitutes a Material Adverse Effect; 3.10.3 Neither Clinserve nor the Subsidiary has received any written notice or request for information in the context of any national, supra-national, provincial, regional, local or municipal environmental investigation or inspection; 3.10.4 There are no PCBs, asbestos or urea formaldehyde insolation in, on or under the equipment, buildings, immoveables or properties owned, leased or occupied by Clinserve or the Subsidiary; -13- 3.10.5 There is no action, suit or proceeding pending in relation to environmental matters against Clinserve or the Subsidiary, its employees, agents, shareholders, directors and officers (acting in their capacity of employees, agents, shareholders, directors or officers of Clinserve or of the Subsidiary), or involving Clinserve or the Subsidiary or its assets, before any judicial body, tribunal, commission, agency or other governmental entity, and to the Vendors' knowledge and to the knowledge of Management, there is no threat of, or event or fact based on which, such action, suit or proceeding may be instituted; 3.10.6 To the knowledge of Management and the Vendors, Clinserve and the Subsidiary are in compliance with all applicable Environmental Laws. 3.11 LABOUR AND EMPLOYMENT MATTERS 3.11.1 Without limiting the generality of Section 3.8, each of Clinserve and the Subsidiary has complied with all applicable laws relating to the employment of labour, including provisions thereof relating to wages, hours and collective bargaining rights. 3.11.2 There is no collective agreement by which Clinserve or the Subsidiary is bound which relates to the employees of Clinserve or the Subsidiary. To the knowledge of the Vendors and to the knowledge of Management, there are no threatened or pending attempts to organize or establish any labour union or employee association in connection with the business of Clinserve or the Subsidiary. To the knowledge of the Vendors and to the knowledge of Management, there is no pending or threatened labour dispute, grievance, strike, or work stoppage materially affecting the business of any of Clinserve or the Subsidiary. Neither Clinserve nor the Subsidiary is a party to any other written employment agreement, contract, arrangement, management contract or service contract affecting employees other than as set forth in Schedule 3.7.1, nor are any such contracts, agreements, arrangements, management contracts or service contracts being currently negotiated or proposed other than in the ordinary course of business. 3.11.3 There exist no retirement plans, profit sharing, option or incentive plans, or other employee benefit plans for employees of Clinserve or the Subsidiary other than as set forth in Schedule 3.7.1 for which adequate arrangements have been made since September 1, 1998 to set aside the requisite amounts in the prescribed fashion, and neither Clinserve nor the Subsidiary has promised or intends to implement other such plans. 3.11.4 Neither Clinserve nor the Subsidiary has any employee who cannot be dismissed without further liability upon such notice period not exceeding what it is required by the applicable Legal Requirement. 3.11.5 Each of Clinserve's or any of the Subsidiary's employees who is practising as a physician, nurse or pharmacist is identified in Schedule 3.11.5, and each such employee is duly licensed and in good standing to practice as a physician, nurse or pharmacist, as the case may be, in each jurisdiction in which such employee renders services for or on behalf of Clinserve or any Subsidiary. None of the employees listed on Schedule 3.11.5 is or has been subject to any claim in connection with his or her practice as physician, nurse or pharmacist while employed by Clinserve or the Subsidiary, as the case may be, and no fact or occurrence is known to the Management to exist which is likely to give rise to the revocation of any such licence. -14- 3.11.6 None of Clinserve's or any of the Subsidiary's employees has signed non-compete covenants in favour of Clinserve or the Subsidiary. 3.12 TAXES Other than as set forth in Schedule 3.12, all tax returns required to be filed by Clinserve and the Subsidiary in any jurisdiction have been filed and all taxes, assessments, levies and other governmental charges upon Clinserve and the Subsidiary or upon any of their properties or income, including any tax in respect of value added, have been paid if and when due unless such payment is being contested in good faith and by appropriate proceedings and adequate reserves with respect thereto determined in accordance with applicable policies have been established by Clinserve and the Subsidiary. There is no tax revision threatened in writing against Clinserve and the Subsidiary and there is no basis for such assessment. 3.13 WITHHOLDINGS Each of Clinserve and the Subsidiary has withheld from each payment made to any of its shareholders, officers, directors, non-resident creditors and employees the amount of all taxes and other deductions required to be withheld and has remitted all such amounts to the appropriate authorities within the prescribed times, and has otherwise fulfilled all requirements of all Legal Requirements governing such deductions and withholdings. Each of Clinserve and the Subsidiary has remitted to the proper authorities all employer contributions due and payable under all social security, occupational health and safety and pension plans. 3.14 GOOD TITLE Other than as set forth in Schedule 3.14 each of Clinserve and the Subsidiary has good and marketable title to all assets in the balance sheets as per August 31, 1998 free and clear of Liens and other adverse claims. 3.15 LITIGATION Other than as set forth in Schedule 3.15, no litigation or proceeding before, or investigation by, any foreign, national, supra-national or municipal, judicial, tax or customs tribunal or board or other governmental or administrative agency or any arbitrator, is pending or threatened (or does any basis exist therefor), against Clinserve or the Subsidiary or, to the Vendors' knowledge or to the knowledge of Management, any director or officer of Clinserve or the Subsidiary, which individually or in the aggregate could result in a Material Adverse Effect, or which seeks rescission of, seeks to enjoin the consummation of, or which questions the validity of, this Agreement or any of the transactions contemplated hereby. Neither Clinserve nor the Subsidiary has been charged, nor to the Vendors' knowledge or to the knowledge of Management, is it threatened to be charged, with infringement of any trademark, trade name, service mark, copyright, patent, patent right or other proprietary right of any Person. 3.16 PRESS COVERAGE Neither Clinserve nor the Subsidiary has been the object of any demonstrations, press campaigns or other attacks due to the nature of its activities. -15- 3.17 VIOLATION OF OTHER INSTRUMENTS Neither the execution and delivery of this Agreement by the Vendors, the consummation of any of the transactions contemplated hereby or in Schedule 3.17, shall (a) constitute a breach of or a default or an event which with notice or lapse of time or both would constitute a default under any Contractual Obligation of Clinserve or the Subsidiary, (b) result in acceleration in the time for performance of any obligation of Clinserve or the Subsidiary under any such Contractual Obligation, (c) result in the creation of any Lien upon any property or asset of Clinserve or the Subsidiary, (d) require any consent, waiver or amendment to any such Contractual Obligation that has not been obtained and remains in full force and effect, (e) give rise to any severance payment, right of termination, securities purchase or redemption right or other right under any such Contractual Obligation, or (f) violate or give rise to a default or an event which with notice or lapse of time or both could constitute a default under any Legal Requirements, except for events or conditions described in clauses (a) through (f) above which shall not, individually or in the aggregate, have any Material Adverse Effect or (g) result in any state of facts which could have a Material Adverse Effect. 3.18 APPROVALS, CONSENTS, ETC. Other than as set forth in Schedule 3.18, no approval, consent, authorization or other order of, and no declaration, filing, registration, qualification or recording with, any governmental authority or any other Person is required to be made by or on behalf of the Vendors, Clinserve or the Subsidiary in connection with the execution, delivery or performance of this Agreement or any of the transactions contemplated hereby. 3.19 INVESTMENT OR DIVESTITURE Schedule 3.19 contains a complete list of all investments and divestitures in process which are not mentioned in the financial statements of Clinserve and the Subsidiary (balance sheet, statement of earnings and schedules) for the period ended August 31, 1998. 3.20 FULL DISCLOSURE Disclosure made by the Vendors in respect of one of the representations contained in this Section 3 is considered being made in respect of all other representations. There is no fact that the Vendors, to the best of their knowledge, have not disclosed to Phoenix which could have a Material Adverse Effect on the properties, business, prospects or condition (financial or otherwise) of Clinserve or the Subsidiary. Neither the reports, financial statements and other documents referred to in Section 3.4, nor any certificate, statement or document delivered by the Vendors to Phoenix in connection with this Agreement contains any untrue statement of a fact or omits to state any fact necessary to keep the statements contained herein or therein from being misleading in a manner that would constitute a Material Adverse Effect. 4. REPRESENTATIONS AND WARRANTIES OF PHOENIX Phoenix represents and warrants to the Vendors that: 4.1 DUE INCORPORATION, ETC. -16- Phoenix is duly incorporated, validly exists and is in good standing under the Canada Business Corporations Act and has all necessary corporate capacity and power to own and lease its property and assets and to carry on the business now conducted by it. 4.2 SHARE CAPITAL OF PHOENIX The authorized share capital of Phoenix is composed of an unlimited number of common shares and an unlimited number of preferred shares issuable in series of which, as at November 4, 1998, there were 24,857,059 common shares issued and outstanding. 4.3 OPTIONS Other than the options to acquire common shares of Phoenix granted pursuant to Phoenix's Key Employee Share Option Plan, shares to be issued to Dorn Cook under an earn-out formula which has been disclosed to the Vendors, an approximate number of 2,405,000 common shares of Phoenix to be issued in payment of the purchase prices for certain proposed acquisitions, Phoenix does not have any rights or options to subscribe for, or any warrants or other agreements providing for or requiring the issuance of common shares or preferred shares. 4.4 DUE AUTHORIZATION All necessary corporate action has been taken by Phoenix to authorize the execution of this Agreement and the consummation of the transactions contemplated hereby, including the issuance of the Phoenix Shares as fully paid and non-assessable in consideration for the purchase of the Shares. 4.5 CONFORMITY WITH APPLICABLE SECURITIES LAWS All documents have been filed, all requisite proceedings have been taken and all approvals, exemptions, consents, orders and authorizations required under applicable securities laws have been obtained in order to validly and lawfully issue and deliver the Phoenix Shares issued hereunder. The execution of this Agreement and the issuance of the Phoenix Shares by Phoenix to the Vendors will be exempt from the prospectus and registration requirements of the applicable Canadian securities legislation. 4.6 STOCK EXCHANGE APPROVALS The listing of the Phoenix Shares on The Montreal Exchange and the Toronto Stock Exchange has been approved by such exchanges, subject to Phoenix fulfilling all of the standard requirements of such exchanges. 4.7 REPORTING ISSUER Phoenix is a reporting issuer under the laws of the provinces of Ontario and Quebec and is not in default of any requirements of the securities legislation of such provinces. 4.8 PHOENIX SHARES The Phoenix Shares will at the time of issuance be duly authorized, validly issued, fully paid and non-assessable. -17- 4.9 HOLD PERIOD The Phoenix Shares are not subject to any statutory hold period or any resale restrictions under the SECURITIES ACT (Quebec). 4.10 PUBLIC INFORMATION No material change (as defined in the Securities Act (Quebec)) has occurred in the affairs of Phoenix which had not been generally disclosed to the public, nor has Phoenix any knowledge of any other material adverse information in regard to the current and prospective operations of Phoenix which have not been generally disclosed to the public. 4.11 UNDERTAKING Phoenix undertakes to refer to Clinserve all clinical laboratory tests derived from Phoenix's European Phase II-IV studies, to the extent allowed by Phoenix's clients. 5. POOLING OF INTERESTS 5.1 ACCOUNTING TREATMENT Phoenix, Clinserve and the Vendors intend and desire for the transactions contemplated by this Agreement to qualify for "pooling of interests" treatment for US GAAP purposes in accordance with Accounting Principles Board Opinion No. 16. 5.2 POOLING LETTERS On or prior to the Completion Date, Clinserve shall cause to be executed and delivered to Ernst & Young, auditors to Phoenix, and to Phoenix a letter or letters, dated the Completion Date, from Clinserve's shareholders in form and substance reasonably satisfactory to Phoenix and its auditors relating to "pooling of interests" accounting (the "Clinserve Pooling Letter"). On or prior to the Completion Date, Phoenix shall deliver to Ernst & Young, auditors to Phoenix, a letter or letters, dated the Completion Date, from Phoenix's management in form and substance reasonably satisfactory to its auditors relating to "pooling of interests" accounting. 5.3 PLACEMENT AND STOCK TRANSFER RESTRICTIONS AND RELATED MATTERS Each party to this Agreement agrees that from and after the date of this Agreement, such party shall not knowingly take any action, or knowingly fail to take any action, which action or failure is reasonably likely to disqualify the transactions contemplated by this Agreement from pooling of interests accounting treatment by Phoenix, and that such party shall take all reasonable actions necessary to cause the transactions contemplated by this Agreement to qualify as a pooling of interest, if such characterization shall be jeopardized by action taken by such party. Without limiting the foregoing, each Vendor who is a Pooling Affiliate of Clinserve agrees that such Vendor shall not sell, transfer, pledge, or otherwise dispose of such Vendor's interests in or reduce such Vendor's risk relative to any of the Phoenix Shares until Phoenix shall have published financial results (including combined sales and net income) covering at least thirty (30) days of combined operations of Phoenix and Clinserve after the Completion Date. No later than April 30, 1999, Phoenix shall prepare and publish such financial results for the first full month of operations following the Completion Date. Each of the Vendors and Clinserve acknowledge and agree with Phoenix that none of the Vendors or Clinserve -18- is a party to any agreement or arrangement among themselves or with third parties regarding the transactions contemplated by this Agreement or the subject matter hereof. Prior to the Completion Date, Phoenix shall deliver to Clinserve a list of names and addresses of those persons who are or may be, in Phoenix's reasonable judgement, Affiliates of Phoenix within the meaning of Rule 145 of the rules and regulations promulgated under the Securities Act or applicable SEC accounting releases with respect to pooling of interests accounting treatment (each such persons, a "Pooling Affiliate"). Phoenix also shall provide Clinserve with such information and documents as Clinserve shall reasonably request for purposes of reviewing such list. Prior to the Completion Date, Phoenix shall deliver to Clinserve an affiliate letter, in form and substance reasonably satisfactory to Clinserve, executed by each of the Pooling Affiliates identified in the foregoing list. Prior to the Completion Date, Clinserve shall deliver to Phoenix an affiliate letter, in form and substance reasonably satisfactory to Phoenix, executed by each of the Pooling Affiliate of Clinserve. Clinserve represents to Phoenix that Froreich and Wicki are the only Pooling Affiliates of Clinserve. 6. EMPLOYMENT AGREEMENT AND COOPERATION AGREEMENT 6.1 EMPLOYMENT AGREEMENT WITH CEMAL KUYAS Cemal Kuyas and Clinserve GmbH shall execute an employment agreement satisfactory in form and content to Phoenix and Clinserve. 7. SURVIVAL OF REPRESENTATIONS; INDEMNITY 7.1 SURVIVAL OF REPRESENTATIONS The respective representations and warranties of the Vendors contained in this Agreement or in any schedule attached hereto shall survive the consummation of the transactions contemplated hereby and shall remain in full force and effect notwithstanding any investigation or examination of, or knowledge with respect to, the subject matter thereof by or on behalf of Phoenix until the earlier of November 5, 1999 or the date of completion of the audit of the combined financial statements of Phoenix and Clinserve (the period ending on such date being referred to herein as the "Representations Period"), except that such representations and warranties shall survive indefinitely in the event of fraud with respect thereto. No claim for indemnification pursuant to Section 7.2.1 below may be brought after the expiration of the Representations Period, except for claims made in good faith in writing prior to such expiration and setting forth in reasonable detail the claim, regardless of whether any action or demand has been commenced against Phoenix (it being understood without limitation, that any and all Losses (as defined below) arising after the expiration of the Representations Period shall be recoverable upon notice properly given prior to the expiration of the Representations Period in accordance with this Section 7.1). The representations and warranties of Phoenix contained in this Agreement or in any schedule attached hereto shall terminate upon and not survive the Completion Date, except in the event of fraud by Phoenix with respect thereto, in which case they shall survive indefinitely. -19- 7.2 INDEMNIFICATION 7.2.1 From and after the Completion Date, Phoenix and its Affiliates (including Clinserve and the Subsidiary) and all of their respective officers, directors, employees, agents and shareholders (each, an "Indemnitee") shall be defended, indemnified and held harmless by the Vendors pursuant to this Agreement and the Escrow Agreement to the full extent permitted by law, from and against any and all losses, claims, actions, damages, liabilities, costs and expenses (including attorneys' fees and expenses) (collectively, "Losses") relating to or arising from or in connection with (i) any misrepresentation or any non-fulfilment of any representation, warranty, covenant, obligation or agreement by any Vendor contained in or made pursuant to this Agreement or any other document, agreement, officer's certificate or other certificate delivered to Phoenix in connection with this Agreement, and (ii) the enforcement by Phoenix of its rights pursuant to this Section 7.2, or any litigation, proceeding or investigation relating to any of the foregoing. The indemnification obligations of the Vendors pursuant hereto shall be joint and not solidary, i.e. prorata to the number of Phoenix Shares received by each Vendor in accordance with Section 2.2. 7.2.2 Notwithstanding the foregoing provisions of this Section 7.2, but except with respect to any Losses resulting from or arising out of fraud or other intentional or knowing misconduct or misrepresentation, (i) the maximum aggregate recourse by the Indemnitees pursuant to Section 7.2.1 above shall not exceed the aggregate value (calculated by adding together the opening and closing prices of the common shares of Phoenix on each of the Toronto Stock Exchange and The Montreal Exchange for each of the ten trading days preceding the Completion Date, and dividing this sum by 40) of the Escrowed Securities (the "Indemnity Cap"), and (ii) the sole recourse of any Indemnitee in respect of Losses (but not in respect of fraud or other intentional or knowing misconduct or misrepresentation) shall be from, out of, and to the extent of the Escrowed Securities. Any indemnification shall be payable by the return of Escrowed Securities to Phoenix in accordance with the provisions of the Escrow Agreement. In particular, the number of Escrowed Shares to be remitted to Phoenix in payment of any indemnification obligation shall be calculated on the basis of the average price of the Escrowed Shares obtained by adding together the opening and closing prices of the common shares of Phoenix on each of the Toronto Stock Exchange and The Montreal Exchange for each of the ten trading days preceding the Completion Date, and dividing this sum by 40. All dividends or other distributions received by a Vendor in respect of common shares of Phoenix which are remitted to Phoenix in satisfaction of an indemnification obligation under this Section 7, shall also be repaid to Phoenix at the time of payment of indemnification. 7.2.3 Notwithstanding any other provision of this Agreement, as of and after the Completion Date, Clinserve shall not have any liability under this Agreement, and no Vendor shall threaten or bring any claim or action whatsoever against Clinserve for contribution to any amounts payable under this Section 7.2 by such Vendor. -20- 8. NOTICES Any demand, notice or other communication to be given in connection with this Agreement shall be given in writing and shall be given by personal delivery, by registered mail or by electronic means of communication addressed to the recipient as follows: 8.1 To Phoenix: Phoenix International Life Sciences Inc. 2350, Cohen Street Saint-Laurent, Quebec H4R 2N6 Canada Telecopier No.: (514) 333-7306 ATTENTION: JEAN-YVES CALOZ 8.2 To Froreich: Dr. Andre von Froreich Forsthohe 33 21149 Hamburg, Germany 8.3 To Wicki: Dr. Andreas Wicki Hohestrasse 39 8702 Zollikon, Switzerland 8.4 To Clinserve: Clinserve A.G. Rue St. Pierre 18 1700 Fribourg, Switzerland ATTENTION: DR. VON FROREICH 9. MODIFICATION All modifications or amendments of any provision of this Agreement shall be effective only if the same shall be in writing and then shall be effective only in the specific instance and for the purpose for which given. 10. WAIVER No failure to exercise, and no delay in exercising, on the part of a party hereto, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right. No waiver of any provision of this Agreement shall beeffective unless in writing. No notice or demand given in any case shall constitute a waiver of the right to take other action in the same, similar or other instances without such notice or demand. -21- 11. CONFIDENTIALITY The parties agree to treat this Agreement as confidential and not to disclose its contents to third parties other than their advisers, except to the extent necessary to enforce performance of obligations hereunder, or as is required to comply with applicable laws or regulations, including regulations of any stock exchange on which the securities of Phoenix are listed following consultations with Froreich and Wicki. 12. FURTHER ASSURANCES The parties shall, with all reasonable diligence, do all such things and provide all such reasonable assurances as may be required to consummate the transactions contemplated hereby, and each party shall provide such further documents or instruments required by another party as may be reasonably necessary or desirable to give effect to the purpose of this Agreement and to carry out its provisions. 13. GOVERNING LAWS This Agreement shall be governed by the laws of the Province of Quebec and the laws of Canada applicable therein. 14. ARBITRATION All disputes arising out of or in connection with the present Agreement shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules. The place of arbitration shall be Montreal. The language of the arbitration shall be English. 15. GENERAL The invalidity or unenforceability of any term or provision hereof shall not affect the validity or enforceability of any other term or provision hereof. The headings in this Agreement are for convenience of reference only and shall not alter or otherwise affect the meaning hereof. This Agreement and the other documents and instruments referred to herein constitute the entire understanding of the parties hereto with respect to the subject matter hereof and thereof and supersede all present and prior agreements, whether written or oral. No investigation made by or on behalf of a party hereto shall mitigate, diminish or affect the representations and warranties made herein by the Vendors. This Agreement may be executed in any number of counterparts which together shall constitute one instrument and shall be governed by and construed in accordance with the laws of the Province of Quebec and the laws of Canada applicable therein, and shall bind and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, personal representatives, successors and assigns. The parties hereto have expressly required that this Agreement and all documents and notices related hereto be drafted in English. LES PARTIES AUX PRESENTES ONT EXPRESSEMENT EXIGE QUE LE PRESENT CONTRAT ET TOUS LES DOCUMENTS ET AVIS Y AFFERENTS SOIENT REDIGES EN ANGLAIS. IN WITNESS WHEREOF, the parties hereto caused this Agreement to be duly executed as of the Completion Date. -22- PHOENIX INTERNATIONAL LIFE SCIENCES INC. By: /s/ John W. Hooper ------------------------------------- John Hooper, Ph.D. Title: Chairman and Chief Executive Officer /s/ Andre Von Froreich ------------------------------------- DR. ANDRE VON FROREICH /s/ Andreas Wicki ------------------------------------- DR. ANDREAS WICKI CLINSERVE A.G. By: /s/ Andreas Wicki ------------------------------------- Andreas Wicki Title: Chairman of the board of directors LIST OF SCHEDULES Schedule A Outstanding shares and voting rights of Clinserve Schedule B The capital structure of Clinserve Schedule C The capital structure of Clinserve GmbH Schedule 1.10 Escrow Agreement Schedule 1.21 Permitted Lien Schedule 3.3.3 Capital Stock of the Subsidiary Schedule 3.3.4 Subsidiary Options Schedule 3.3.5 Commitments affecting shares or voting rights of Clinserve or the Subsidiary Schedule 3.4A Financial Statements Schedule 3.5 Material liabilities, contingent or otherwise of Clinserve or the Subsidiary Schedule 3.6.2 Extraordinary Transactions after August 31, 1998 Schedule 3.7.1 Contractual Obligations Schedule 3.9 Intellectual Property Schedule 3.11.5 Physicians, nurses or pharmacists employed by Clinserve and the Subsidiary Schedule 3.12 Taxes Schedule 3.14 Title to assets Schedule 3.15 Litigation Schedule 3.17 Violation of Other Instruments Schedule 3.18 Approvals, Consents, etc. Schedule 3.19 Investment or Divestiture Schedule 1.10 ESCROW AGREEMENT dated as of November 5, 1998. AMONG: PHOENIX INTERNATIONAL LIFE SCIENCES INC., a corporation incorporated under the Canada Business Corporations Act, having its head office at 2350, Cohen Street, Saint-Laurent, Quebec, Canada, H4R 2N6, herein acting and represented by John Hooper, Ph.D., its duly authorized representative; (hereinafter "Phoenix") AND: DR. ANDRE VON FROREICH, residing at Forsthohe 33, 21149 Hamburg, Germany; (hereinafter "Froreich") AND: DR. ANDREAS WICKI, residing at Hohestrasse 39, 8702 Zollikon, Switzerland; (hereinafter "Wicki") AND: MONTREAL TRUST COMPANY, 1800 McGill College Avenue, Montreal, Quebec, H3A 3K9, as escrow agent, herein represented by its duly authorized representatives Rose Marie Labbe and Guy L'Esperance; (hereinafter the "Escrow Agent") WHEREAS Phoenix and the Vendors are parties to a share purchase agreement dated November 5, 1998 (the "Purchase Agreement"); WHEREAS the Purchase Agreement provides that certain shares of Phoenix issued to the Vendors pursuant thereto are to be held in escrow for the purposes described therein; NOW THEREFORE the parties hereby agree as follows: 1. INTERPRETATION AND DEFINITIONS 1.1 Whenever used in this Agreement: 1.1.1 "AFFILIATE" means any of Froreich and Wicki and "Affiliates" means more than one of them; -2- 1.1.2 "CLAIM" means any claim by Phoenix against and the Vendors under Section 7.2 of the Purchase Agreement; 1.1.3 "DISTRIBUTIONS" has the meaning ascribed thereto in Section 2.3 hereof; 1.1.4 "ESCROWED SHARES" has the meaning ascribed thereto in Section 2.1 hereof; 1.1.5 "ESCROWED SHARE PRICE" means the amount obtained by adding the opening and closing prices of the common shares of Phoenix on each of the Montreal Exchange and The Toronto Stock Exchange for the ten trading days preceding the date of execution of the Purchase Agreement, divided by 40; 1.1.6 "NOTICE OF CLAIM" means a written notice of any Claim given by Phoenix setting forth the details of each Claim referred to therein including the amount thereof, if known to Phoenix, or Phoenix's reasonable estimate thereof, as well as the provisions of the Purchase Agreement upon which such Claim is based; 1.1.7 "OBJECTION" means, in respect of any Claim, any objection raised in the Response by any of the Vendors to such Claim; 1.1.8 "PROCEEDS" has the meaning ascribed thereto in Section 3.1 hereof; 1.1.9 "PURCHASE AGREEMENT" has the meaning ascribed thereto in the preamble to this Agreement; 1.1.10 "RELEASED SHARES" has the meaning ascribed thereto in Section 3.3.1.1 hereof; 1.1.11 "RESPONSE" means, in respect of any Claim, the joint written response of the representatives of the Vendors duly appointed in the manner set forth in Section 3.3 hereof indicating whether they accept or dispute such Claim; 1.1.12 "VENDORS" means Froreich and Wicki. 1.2 Each capitalized term used in this Agreement but not defined herein as the meaning ascribed thereto in the Purchase Agreement. 1.3 In the event of (i) any subdivision, consolidation or reclassification of the class of shares comprising the Escrowed Shares or (ii) any reorganization of the share capital of Phoenix affecting the Escrowed Shares or (iii) the amalgamation of Phoenix with any other company, the number of Escrowed Shares and Escrowed Share Price shall be adjusted, if required, so that none of the parties hereto shall be in a position less favorable to it than as provided in this Agreement as a result of any of the foregoing actions. 1.4 For all purposes of this Agreement, the amount of any Claim in a currency other than Canadian dollars shall be converted to Canadian dollars at the exchange rate between Canadian and such currency shall be the "Spot Rate" of the alternate currency on the business day preceding the day as of which the conversion from one currency to the other is to be effected, as reported in the Financial Post of Canada on that day. -3- 1.5 In any calculation hereunder of the applicable number of Escrowed Shares results in fractional shares, the result shall be rounded up or down, as the case may be, to the nearest whole number and, if such result represents exactly one-half of a whole number, then such fraction shall be rounded up to the next whole number. 2. ESTABLISHMENT OF ESCROW 2.1 Phoenix hereby delivers in escrow to the Escrow Agent certificates representing an aggregate of 31,680 common shares of Phoenix registered in the name of the Escrow Agent, as escrow agent (the "Escrowed Shares"). The Vendors' interests in the Escrowed Shares are as set forth below:
VENDOR ESCROWED SHARES ------ --------------- Froreich 6,336 Wicki 25,344
2.2 The Escrow Agent hereby accepts delivery and acknowledges receipt of the Escrowed Shares and agrees to act as escrow agent and to hold, safeguard and release the Escrowed Shares in accordance with the provisions of this Agreement. The Escrowed Shares shall not be assigned, hypothecated, alienated, released from escrow, transferred within escrow or dealt with in any manner whatsoever except as provided in this Agreement. 2.3 Notwithstanding the registration of the Escrowed Shares in the name of the Escrow Agent, the Vendors shall, subject to the provisions hereof, remain the owners thereof in the proportion contemplated by Section 2.1 hereof and be entitled to the exercise of all voting rights related thereto and to receive all dividends, income and other distributions in respect thereof (collectively, "Distributions"). In the event that any Escrowed Shares are remitted to Phoenix for cancellation pursuant to the provisions of Section 3 hereof, the Vendors shall repay to Phoenix any Distributions received in respect of such Escrowed Shares. 3. INSTRUCTIONS TO ESCROW AGENT 3.1 At any time after receipt by the Escrow Agent of written notice by Phoenix of the release, in the format prescribed by the SEC, of at least 30 days of post-combination financial results of Phoenix and Clinserve AG, and provided that the Escrowed Shares are not then subject to any restrictions on transfer imposed by any Regulatory Authority, an Affiliate may instruct the Escrow Agent to sell all or part of their portion of the Escrowed Shares. Upon receipt of such written instruction, the Escrow Agent shall sell such Escrowed Shares on the open market and shall retain the proceeds of sale, less any expenses incurred in realizing such sale (the "Proceeds") as escrowed property for such Affiliate. The Escrow Agent shall invest such Proceeds according to the written instructions of such Affiliate for the duration of the escrow. The Escrow Agent shall keep complete records of any such sales of Escrowed Shares. -4- 3.2 Whenever Phoenix has a Claim it shall promptly give a Notice of Claim in respect thereof to the Vendors and the Escrow Agent. Upon receipt of a Notice of Claim, the Escrow Agent shall immediately reserve for distribution in accordance with the provisions of Section 3.3 hereof (but shall not release from escrow except in accordance with the provisions hereof) that number of the Escrowed Shares which is equal in value to the amount provided for in the Notice of Claim, calculated on the basis of the Escrowed Share Price for such Claim. 3.3 Within 15 days of receipt of a Notice of Claim, the Vendors (or any of them) shall give to Phoenix and the Escrow Agent a response (the "Response") with respect to each Claim set forth therein. If: 3.3.1 the Response indicates that the Vendors accept a Claim set forth in the Notice of Claim, or if the Escrow Agent does not receive a Response with respect to a Claim within said 15 day period, the Vendors shall be deemed to have irrevocably consented to each Claim so accepted or in respect of which no Response is so received, as made, and the Escrow Agent shall forthwith give written notice thereof to Phoenix: 3.3.1.1 setting forth the total amount of all Claims which have been consented to and the number of shares from the Escrowed Shares to be released from escrow for the benefit of Phoenix (the "Released Shares"), being that number of the Escrowed Shares which is equal in value to the amount of the admitted Claims set forth in such Notice of Claim, calculated on the basis of the Escrowed Share Price for such Claim; and 3.3.1.2 surrender for cancellation to Phoenix the share certificate(s) in its possession representing the Released Shares, duly endorsed for transfer, and the Escrow Agent shall retain in its possession the other share certificate(s) representing the balance of the Escrowed Shares, if any, to be held by it in escrow and dealt with in accordance with the terms hereof; or 3.3.2 the Response indicates that the Vendors (or any of them) dispute a Claim set forth in the Notice of Claim (whether or nor arbitration proceedings have been instituted), the Escrow Agent shall retain in its possession and continue to hold in escrow that number of the Escrowed Shares which is equal in value to the amount provided for in the disputed Claims, calculated on the basis of the Escrowed Share Price for such Claim: 3.3.2.1 until the Escrow Agent receives a joint written notice from Phoenix and the Vendors directing the Escrow Agent as to the manner in which such Escrowed Shares and the share certificate(s) representing same are to be dealt with, in which case the Escrow Agent shall deal with same in accordance with such joint written instructions; or 3.3.2.2 in the absence of such a joint written notice within 10 business days of the Escrow Agent's receipt of the Response, the Escrow Agent shall deal with such Escrowed Shares and the share certificate(s) representing same in accordance with a final arbitration order in respect of such -5- disputed Claim(s) pursuant to the arbitration contemplated by Section 12 hereof. Any arbitration order shall be accompanied by a legal opinion by counsel for the presenting party satisfactory to the Escrow Agent to the effect that the said order is final and non-appealable. 3.4 If, at the time of receipt by the Escrow Agent of any Notice of Claim as provided for in Section 3.2 hereof, the Escrowed Shares remaining in escrow for the account of any Vendor calculated on the basis of the Escrowed Share Price is insufficient to meet such Vendor's pro rata portion of the number of Released Shares to be remitted to Phoenix, the balance of such Vendor's pro rata portion of the admitted Claims shall be satisfied by payment in cash from the Proceeds of those Escrowed Shares sold by the Escrow Agent at the direction of such Vendor pursuant to Section 3.1 hereof. 3.5 On the earlier of (i) November 5, 1999, or (ii) the date at which the Escrow Agent receives a notice from Phoenix confirming that the audit of the combined financial statements of Phoenix and Clinserve AG has been completed, the Escrow Agent will deliver the Escrowed Shares and all Distributions and Proceeds to the Vendors, pro rata to their respective interests in the Escrowed Shares, Distributions and Proceeds, if any. 4. VOTING RIGHTS 4.1 The Escrow Agent shall provide to each of the Vendors a proxy entitling such Vendor to vote those of the Escrowed Shares which are owned by it, forthwith upon the Escrow Agent's receipt thereof in its capacity as registered shareholder of Phoenix, in order to allow each Vendor to vote its Escrowed Shares in the same manner as if it were the registered owner thereof. 5. RIGHTS AND OBLIGATIONS OF THE ESCROW AGENT 5.1 The Escrow Agent is not a party to, and is not bound by, any provisions which may be evidenced by, or arise out of, any agreement other than as therein set forth under the express provisions of this Agreement. 5.2 The Escrow Agent acts hereunder as a depositary only and is not responsible or liable in any manner whatever for the sufficiency, correctness, genuineness or validity of any instrument deposited with it, or for the form of execution of such instrument or for the identity or authority or right of any person or party executing or depositing it. 5.3 The Escrow Agent shall not be under any duty to give the Escrowed Shares, Distributions and Proceeds, if any, held by it hereunder any greater degree of care than it gives its own similar property and shall not be required to invest any funds held hereunder except as directed in this Agreement. Uninvested funds held hereunder shall not earn or accrue interest. 5.4 The Escrow Agent shall not be liable, except for its own gross negligence or willful misconduct and, except with respect to claims based upon such gross negligence or willful misconduct that are successfully asserted against the Escrow Agent, the other parties hereto shall solidarily indemnify and hold harmless the Escrow Agent (and any successor Escrow Agent) from and against any and all losses, liabilities, claims, actions, damages and -6- expenses, including reasonable attorney's fees and disbursements, arising out of and in connection with this Agreement. Without limiting the foregoing, the Escrow Agent shall in no event be liable in connection with its investment or reinvestment of any cash held by it hereunder in good faith, in accordance with the terms hereof. 5.5 The Escrow Agent shall be entitled to rely upon any order, judgment, certification, demand, notice, instrument or other writing delivered to it hereunder without being required to determine the authenticity or the correctness of any fact stated therein or the propriety or validity of the service thereof. The Escrow Agent may act in reliance upon any instrument or signature believed by it to be genuine and may assume that the person purporting to give receipt or advice or make any statement or execute any document in connection with the provisions hereof has been duly authorized to do so. The Escrow Agent may conclusively presume that the undersigned representative of any party hereto which is an entity other than a natural person has full power and authority to instruct the Escrow Agent on behalf of that party unless written notice to the contrary is delivered to the Escrow Agent. 5.6 The Escrow Agent may act pursuant to the advice of counsel with respect to any matter relating to this Agreement and shall not be liable for any action taken or omitted by it in good faith in accordance with such advice. 5.7 The Escrow Agent makes no representation as to the validity, value, genuineness or the collectability of any security or other document or instrument held by or delivered to it. 5.8 The Escrow Agent shall not be called upon to advise any party as to the wisdom in selling or retaining or taking or refraining from any action with respect to any securities or other property deposited hereunder. 5.9 The Escrow Agent (and any successor Escrow Agent) may at any time resign as such by delivering the Escrowed Shares, Distributions and Proceeds, if any, to any successor Escrow Agent jointly designated by the other parties hereto in writing, or to any court of competent jurisdiction, whereupon Escrow Agent shall be discharged of and from any and all further obligations arising in connection with this Agreement. The resignation of Escrow Agent will take effect on the earlier of (a) the appointment of a successor (including a court of competent jurisdiction) or (b) the day which is 30 days after the date of delivery of its written notice of resignation to the other parties hereto. If at that time Escrow Agent has not received a designation of a successor Escrow Agent, Escrow Agent's sole responsibility after that time shall be to retain and safeguard the Escrowed Shares and Proceeds, if any, until receipt of a designation of successor Escrow Agent or a joint written disposition instruction by the other parties hereto or a final non-appealable order of a court of competent jurisdiction. 5.10 Phoenix and the Vendors shall pay Escrow Agent compensation (as payment in full) for the services to be rendered by Escrow Agent hereunder in the amount of $1,500 at the time of execution of this Agreement and agree to reimburse Escrow Agent for all reasonable expenses, disbursements and advances incurred or made by Escrow Agent in performance of its duties hereunder (including reasonable fees, expenses and disbursements of its counsel). -7- 6. LIMITED RESPONSIBILITY This Agreement expressly sets forth all the duties of Escrow Agent with respect to any and all matters pertinent hereto. No implied duties or obligations shall be read into this Agreement against the Escrow Agent. The Escrow Agent shall not be bound by the provisions of any agreement among the other parties hereto except this Agreement. No trust is created by this Agreement and the Escrow Agent does not act in any capacity as a trustee. In the event of any disagreement between any of the parties to this Agreement, or between them or either of them and any other person, resulting in demands or adverse claims being made in connection with or for any asset involved herein or affected hereby, the Escrow Agent shall be entitled, at its discretion, to refuse to comply with any demands or claims on it, as long as such disagreement shall continue, and in so refusing the Escrow Agent may make no delivery or other disposition of any asset involved herein or affected hereby, and in so doing the Escrow Agent shall not be or become liable in any way or to any person or party for its failure or refusal to comply with such conflicting demands or adverse claims, and it shall be entitled to continue so to refrain from acting and so to refuse to act until the right of person or party shall have been finally settled as provided in Section 12 hereof, or all differences shall have been adjusted by agreement and the Escrow Agent shall have been notified thereof in writing signed by all persons and parties interested. 7. NOTICES All notices, consents, waivers and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by telecopier (with written confirmation of receipt) provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case the appropriate addresses and telecopier numbers set forth below (or to such other addresses and telecopier numbers as a party may designate by notice to the other parties): 7.1 To Phoenix: Phoenix International Life Sciences Inc. 2350, Cohen Street Saint-Laurent, Quebec H4R 2N6 Canada Telecopier No.: (514) 333-7306 ATTENTION: JEAN-YVES CALOZ 7.2 To the Vendors: TO FROREICH: Dr. Andre von Froreich Forsthohe 33 21149 Hamburg, Germany -8- TO WICKI: Dr. Andreas Wicki Hohestrasse 39 8702 Zollikon, Switzerland 7.3 To the Escrow Agent: Montreal Trust Company 1800 McGill College Avenue Montreal (Quebec) H3A 3K9 Telecopier No.: (514) 982-7677 8. GOVERNING LAW This Agreement shall be governed by the laws of the Province of Quebec and the laws of Canada applicable therein. 9. COUNTERPARTS This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original and all of which, when taken together, will be deemed to constitute one and the same. 10. SECTION HEADINGS The headings of sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. 11. WAIVER The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither the failure nor any delay by any party in exercising any right, power, or privilege under this Agreement or the documents referred to in this Agreement will operate as a waiver of such right, power or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other parties; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement. -9- 12. ARBITRATION All disputes arising out of or in connection with the present Agreement shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules. The place of arbitration shall be Montreal. The language of the arbitration shall be English. 13. CONFIDENTIALITY The parties agree to treat this Agreement as confidential and not to disclose its contents to third parties other than their advisers, except to the extent necessary to enforce performance of obligations hereunder, or as is required to comply with applicable laws or regulations, including regulations of any stock exchange on which the securities of Phoenix are listed. 14. FURTHER ASSURANCES The parties shall, with all reasonable diligence, do all such things and provide all such reasonable assurances as may be required to consummate the transactions contemplated hereby, and each party shall provide such further documents or instruments required by another party as may be reasonably necessary or desirable to give effect to the purpose of this Agreement and to carry out its provisions. 15. GENERAL The invalidity or unenforceability of any term or provision hereof shall not affect the validity or enforceability of any other term or provision hereof. This Agreement and the other documents and instruments referred to herein constitute the entire understanding of the parties hereto with respect to the subject matter hereof and thereof and supersede all present and prior agreements, whether written or oral. This Agreement shall bind and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, personal representatives, successors and assigns. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first written above. PHOENIX INTERNATIONAL LIFE SCIENCES INC. By: /s/ John W. Hooper ------------------------------------- John Hooper, Ph.D. Title: Chairman and Chief Executive Officer /s/ Andre Von Froreich ------------------------------------- DR. ANDRE VON FROREICH -10- /s/ Andreas Wicki ------------------------------------- DR. ANDREAS WICKI MONTREAL TRUST COMPANY By: /s/ Rose Marie Labbe ------------------------------- ROSE MARIE LABBE Title: Trust Officer By: /s/ Guy L'Esperance ------------------------------- GUY L'ESPERANCE Title: Manager, Client Servicing EX-2.6 7 EXHIBIT 2.6 Exhibit 2.6 SHARE PURCHASE AGREEMENT AMONG PHOENIX INTERNATIONAL LIFE SCIENCES INC. AND PROF. DR. KLAUS-GEORG BUHRENS AND MARTIN GEIST AND DR. BERND BLOHM AND CHRISTIAN HILGENSTOCK AND CLAUS HEMKER AND DR. IVAN KOZAK AND DR. BERNHARD VENS-CAPPELL AND WOLFGANG TETZLOFF AND DR. JURGEN HENKE AND DR. LOTTE HENKE AND TREND FINANZANALYSEN GMBH AND MCKNIGHT LABORATORIES GMBH ---------------------- DATED AS OF NOVEMBER 6, 1998 ---------------------- SHARE PURCHASE AGREEMENT dated as of November 6, 1998 AMONG: PHOENIX INTERNATIONAL LIFE SCIENCES INC., a corporation incorporated under the Canada Business Corporations Act, having its head office at 2350, Cohen Street, Saint-Laurent, Quebec, Canada, H4R 2N6, herein acting and represented by John Hooper, its duly authorized representative; (hereinafter "Phoenix") AND: PROF. DR. KLAUS-GEORG BUHRENS, residing at Buchtallee 4a, 21465 Reinbek, Germany; (hereinafter "Buhrens") AND: MARTIN GEIST, residing at Georgiweg 43, 22453 Hamburg, Germany; (hereinafter "Geist") AND: DR. BERND BLOHM, residing at Buchtallee 23, 21465 Reinbek, Germany; (hereinafter "Blohm") AND: CHRISTIAN HILGENSTOCK, residing at Gronenweg 73, 22549 Hamburg, Germany; (hereinafter "Hilgenstock") AND: CLAUS HEMKER, residing at Feldblick 2, 22397 Hamburg, Germany; (hereinafter "Hemker") AND: DR. IVAN KOZAK, residing at Kopeniker Str. 15, 22045 Hamburg, Germany; (hereinafter "Kozak") AND: DR. BERNHARD VENS-CAPPELL, residing at Wurtkamp 12, 22527 Hamburg, Germany; (hereinafter "Vens-Cappell") - 2 - AND: WOLFGANG TETZLOFF, residing at Friedenstrasse 56, 82194 Grobenzell, Germany; (hereinafter "Tetzloff") AND: DR. JURGEN HENKE, residing at Hohenzollernring 57, 50672 Koln, Germany, herein acting and represented by Ulrike Schafer, his duly authorized representative; (hereinafter "J. Henke") AND: DR. LOTTE HENKE, residing at Hohenzollernring 57, 50672 Koln, Germany, herein acting and represented by Ulrike Schafer, her duly authorized representative; (hereinafter "L. Henke") AND: TREND FINANZANALYSEN GMBH, a German corporation with capital of DM150,000, registered in the Commercial Register of the Amtsgericht Dusseldorf under number HRB 18161 and having its head office at Berliner Allee 21, 40212 Dusseldorf, Germany, herein acting and represented by Ulrike Schafer, its duly authorized representative; (hereinafter "TREND") (Buhrens, Geist, Blohm, Hilgenstock, Hemker, Kozak, Vens-Cappell, Tetzloff, J. Henke, L. Henke and TREND are hereinafter collectively referred to as the "Vendors") AND: MCKNIGHT LABORATORIES GMBH, a German corporation with capital of DM1,100,000, registered in the Commercial Register of the Amtsgericht Hamburg under number HRB 28004 and having its head office at Osterstrasse 86, 20259 Hamburg, Germany, herein acting and represented by Prof. Dr. Klaus - Georg Buhrens, its duly authorized representative; (hereinafter "MKL") WHEREAS, the Vendors hold, directly or indirectly, as more fully set out in Schedule A, all of the outstanding shares and voting rights of MKL; WHEREAS, IPHAR Institut fur Klinische Pharmakologie GmbH ("IPHAR"), a German corporation, with capital of DM500,000, registered in the Commercial Register of the Amtsgericht Munchen under number HRB 8768 and having its head office at Arnikastrasse 4, 85631 Hohenkirchen -Siergertsbrunn, Germany, is a subsidiary of MKL, held as to 100% by MKL. The capital structure of IPHAR is set forth in Schedule B; - 3 - WHEREAS, McKnight Laboratories (U.S.A.) inc. ("MKL-USA"), a corporation and having its head office at 122 Main Street, Flemington, New Jersey, United States, is a subsidiary of MKL, held as to 100% by MKL. The capital structure of MKL-USA is set forth in Schedule C; WHEREAS the Vendors have agreed to sell all of the outstanding shares of MKL to Phoenix in consideration for the issuance to the Vendors of common shares of Phoenix; NOW, THEREFORE, the parties hereto agree as follows: 1. INTERPRETATION AND DEFINITIONS Except as the context otherwise explicitly requires, (a) the capitalized term "Section" refers to sections of this Agreement; (b) the capitalized terms "Schedules" and "Exhibit" refer to schedules and exhibits to this Agreement; (c) references to a particular Section include all subsections thereof; (d) the word "including" shall be construed as "including without limitation"; (e) accounting terms not otherwise defined herein have the meaning provided under GAAP (as defined below); (f) references to a particular law, statute or regulation include all rules and regulations thereunder and any successor, law, statute, regulation or rules, in each case as from time to time in effect; (g) references to a particular Person include such Person's successors and assigns to the extent not prohibited by this Agreement; (h) references to dollars or $ in this Agreement are to Canadian dollars. In this Agreement, unless the context otherwise requires, the following terms shall have the respective meanings assigned to them: 1.1 "AFFILIATE" means, with respect to any Person, any Person which, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with such Person. For the purposes of this Agreement, "Affiliate" also means an affiliate as such term is defined by the SEC. 1.2 "ARTICLES" means the original or restated articles of incorporation, articles of amendment, articles of amalgamation, articles of continuance, articles of reorganization and articles of arrangement, including amendments thereto, as in effect from time to time, of MKL. 1.3 "COMPENSATION" as applied to any Person means the aggregate of all salaries, compensation, remuneration or bonuses of any character, retirement or pension benefits of any kind, or other payments of any kind whatsoever (other than health and medical benefits made available to employees generally and advances and reimbursements of business expenses) made directly or indirectly by MKL, any of the Subsidiaries or other specified Persons to such Person and affiliates of such Person. 1.4 "COMPLETION DATE" means the date of this Agreement, i.e. November 6, 1998. 1.5 "CONSOLIDATED", when used with reference to any term, means that term as applied to the accounts of MKL or other indicated Person and each of its respective Subsidiaries, consolidated or combined in accordance with GAAP after eliminating all inter-company operations and with appropriate deductions for minority interests in Subsidiaries. 1.6 "CONTRACTUAL OBLIGATION" means, with respect to any Person, any contracts, agreements, deeds, hypothecs, mortgages, indentures, leases, licenses, other instruments, commitments, undertakings, arrangements or understandings, written or oral, or other documents or instruments, including any provisions of its articles of incorporation or other constituting documents or by-laws and any document or instrument evidencing Indebtedness, to which any - 4 - such Person is a party or otherwise subject to or bound by or to which any property or asset of any such Person is subject. 1.7 "DISTRIBUTION" means (a) the declaration or payment of any dividend on or in respect of the shares of any class or series of shares of MKL, any of the Subsidiaries or other specified Person, other than dividends payable solely in common shares of the share capital of the payor; (b) the purchase, redemption or other retirement of any shares of any class of MKL, any of the Subsidiaries or other specified Person directly, or indirectly through a Subsidiary or otherwise; or (c) any other distribution on or in respect of any shares of any class or series of shares of MKL, any of the Subsidiaries or other specified Person. 1.8 "ESCROW AGENT" means Montreal Trust Company. 1.9 "ESCROW AGREEMENT" means the escrow agreement entered between the parties hereto and the Escrow Agent a copy of which is attached hereto as Schedule 1.9. 1.10 "ESCROWED SECURITIES" means the Phoenix Shares escrowed pursuant to Section 2.4 together with all Proceeds (as defined in the Escrow Agreement). 1.11 "ESCROWED SHARE PRICE" means the amount obtained by adding the opening and closing prices of the common shares of Phoenix on each of the Montreal Exchange and The Toronto Stock Exchange for the ten trading days preceding the date of execution of the present Agreement, divided by 40. 1.12 "ENVIRONMENTAL LAWS" means all Legal Requirements (including consent decrees, administrative orders and contractual obligations) relating to public health and safety, workers health and safety and pollution or protection of the environment. 1.13 "GAAP" means generally accepted accounting principles, as in effect from time to time, consistently applied. 1.14 "GUARANTEE" means (a) any guarantee of the payment or performance of, or any contingent obligation in respect of, any indebtedness or other obligation of any other Person, (b) any other arrangement whereby credit or financial assistance is extended to one obligor on the basis of any promise or undertaking of another Person (i) to pay the Indebtedness of such obligor, (ii) to purchase any obligation owed by such obligor, or (iii) to maintain the capital, working capital, solvency or general financial condition of such obligor, whether or not such arrangement is disclosed in the balance sheet of such other Person or is referred to in a footnote thereto or appears in a "keep well" agreement, "comfort letter" or "take or pay" agreement, and (c) any liability of MKL or any of the Subsidiaries as general partner of a partnership or as a venturer in a joint venture in respect of Indebtedness or other obligations of such partnership or venture; provided, however, that in no event shall Guarantees include product warranties given or the endorsement of negotiable instruments for deposit or collection in the ordinary course of business. 1.15 "INDEBTEDNESS" means (a) all indebtedness, obligations and liabilities for borrowed money and similar monetary obligations evidenced by bonds, notes debentures, evidences of indebtedness, capitalized lease obligations, deferred purchase price of property (other than ordinary trade payables) or otherwise, whether direct or indirect; and (b) all indebtedness, - 5 - obligations and liabilities secured by any Liens existing on property owned or acquired, whether or not the liability secured thereby shall have been assumed. 1.16 "LEGAL REQUIREMENT" means any national, provincial, regional, municipal, local or foreign law, statute, standard, ordinance, code, order, rule, regulation, resolution, promulgation, by-law, policy, guideline, directive, standard and any other provision having the force or effect of law or any final order, judgment or decree of any court, arbitrator, tribunal or governmental authority, or any license, franchise, permit, certificate, authorization, registration or similar right granted under any of the foregoing. 1.17 "LIEN" means (a) any hypothec, priority, mortgage, pledge, lien, charge, security interest or other similar encumbrance upon any property or assets of any character, or upon the income or profits therefrom, whether arising by agreement or under law, or otherwise (b) any conditional sale or other title retention agreement or arrangement (including a capitalized lease); (c) any sale, assignment, pledge or other transfer for security of any accounts, general intangibles, or chattel paper, with or without recourse, or (d) any transaction (regardless of form) which is intended to create any charge or encumbrance on property to secure the payment or performance of an obligation. 1.18 "MANAGEMENT" means each of Barkworth, Buhrens, Geist, Hemker, Hilgenstock, Kozak, Dr. Mazur, Vens-Cappel, Schmieder and Tetzloff. 1.19 "MATERIAL ADVERSE EFFECT" means any (a) material adverse effect whatsoever upon the validity, performance or enforceability of this Agreement, (b) material adverse effect upon the business, assets, financial condition, income or prospects of MKL and the Subsidiaries on a Consolidated basis, or (c) material adverse effect upon the ability of the Vendors to perform their obligations under this Agreement. For the purposes of this Agreement and the Schedules hereto, the expression "Material Adverse Effect" when used in reference to obligations, debts, effects, liabilities or claims, shall mean an obligation, debt, effect, liability or claim, as the case may be which involves an amount in excess of DM60,000. 1.20 "MKL AFFILIATE" means any of Buhrens and TREND. 1.21 "PERMITTED LIEN" means those Liens indicated on Schedule 1.21. 1.22 "PERSON" means an individual, partnership, corporation, company, association, trust, joint venture, unincorporated organization, business trust, limited liability company and any governmental or administrative department or agency or political subdivision. 1.23 "PHOENIX AFFILIATES" means John Hooper, Stephane Huguet, Heather Baker, Judy Zilber, Jean-Yves Caloz, Diane Bouchard, Carmen Discenza, Lucien Steru, Dominique Steru, Susan Thornton, Greg Holmes, Claude E. Forget, Bertran Spilker, Robert Raich, David Goldman, Suzanne Peeters, George Engelberg, Dr. Andreas Wicki and Cornelius P. McCarthy III. 1.24 "SEC" means the United States Securities and Exchange Commission. 1.25 "SECURITIES ACT" means the United States Securities Act of 1933, as amended, and all rules and regulations promulgated thereunder. - 6 - 1.26 "SHARES" means shares in the nominal value of DM1,100,000 of MKL being all of the issued and outstanding shares of MKL. 1.27 "SUBSIDIARIES" means IPHAR and MKL-USA and "SUBSIDIARY" means any of the Subsidiaries on an individual basis. 2. SALE AND PURCHASE OF SHARES 2.1 AGREEMENT TO PURCHASE AND SELL SHARES Upon the terms and subject to the conditions hereof and in reliance on the representations and warranties of Phoenix set forth in Section 4, the Vendors hereby sell to Phoenix and, upon the terms and subject to the conditions hereof and in reliance on the representations and warranties of the Vendors set forth in Section 3, Phoenix hereby purchases from the Vendors, the Shares, as set forth below:
VENDOR NUMBER OF SHARES ------ ---------------- Buhrens DM550,500 Geist DM21,000 Blohm DM21,000 Hilgenstock DM55,500 Hemker DM55,500 Kozak DM55,500 Vens-Cappell DM55,500 Tetzloff DM55,500 J. Henke DM45,000 L. Henke DM45,000 TREND DM140,000 TOTAL DM1,100,000
2.2 PRICE OF SHARES The purchase price of the Shares is payable by the issuance by Phoenix to the Vendors of an aggregate of 873,325 common shares of Phoenix. The aggregate purchase price for the Shares is to be allocated among the Vendors as follows:
VENDOR NUMBER OF COMMON SHARES OF PHOENIX ------ ---------------------------------- Buhrens 437,059 Geist 16,673 Blohm 16,673 Hilgenstock 44,063 Hemker 44,063 Kozak 44,063 Vens-Cappell 44,063 Tetzloff 44,063 J. Henke 35,727
- 7 -
VENDOR NUMBER OF COMMON SHARES OF PHOENIX ------ ---------------------------------- L. Henke 35,727 TREND 111,151 TOTAL 873,325
(The common shares of Phoenix issued to the Vendors pursuant to this Section 2.2 are hereinafter collectively referred to as the "Phoenix Shares".) 2.3 TRANSFER OF SHARES AND PAYMENT OF PURCHASE PRICE 2.3.1 Phoenix hereby acknowledges receipt from each of Buhrens, Geist, Blohm, Hilgenstock, Hemker, Kozak, Vens-Cappell, Tetzloff, J. Henke, L. Henke and TREND of the Shares by notarial deed dated November 6, 1998 of the Notary Dr. Werner Vogel duly signed, personally or by his/her attorney with valid power of attorney, by Buhrens, Geist, Blohm, Hilgenstock, Hemker, Kozak, Vens-Cappell, Tetzloff, J. Henke, L. Henke and TREND. 2.3.2 Buhrens, Geist, Blohm, Hilgenstock, Hemker, Kozak, Vens-Cappell, Tetzloff, J. Henke, L. Henke and TREND hereby acknowledge receipt from Phoenix of certificates registered in the names of Buhrens, Geist, Blohm, Hilgenstock, Hemker, Kozak, Vens-Cappell, Tetzloff, J. Henke, L. Henke and TREND representing 90% of the purchase price for the Shares. 2.4 ISSUANCE INTO ESCROW Notwithstanding any provision of this Agreement, upon delivery of the Phoenix Shares pursuant to Section 2.3, 10% of the aggregate number of the Phoenix Shares shall be delivered immediately to the Escrow Agent, on a pro rata basis among the Vendors, to be held and released by the Escrow Agent pursuant to the terms of this Agreement and the Escrow Agreement. All such Phoenix Shares shall be issued in the name of the Escrow Agent, as escrow agent under the Escrow Agreement. The Vendors hereby acknowledge receipt of such 10% of the purchase price of the Shares on their behalf by the Escrow Agent. 3. REPRESENTATIONS AND WARRANTIES OF VENDORS In order to induce Phoenix to enter into this Agreement and to purchase the Shares hereunder, the Vendors hereby make the following representations and warranties to Phoenix. The Vendors' liability for the following representations and warranties shall be joint, and not solidary i.e. pro rata to the number of Phoenix Shares received by each Vendor according to Section 2.2, except in the event of fraud with respect thereto. 3.1 SHARES Each of the Vendors declares that he owns the Shares free and clear of all Liens and there are no rights or other obstacles of any nature whatsoever to the sale of the Shares to Phoenix. 3.2 ORGANIZATION 3.2.1 DUE INCORPORATION, ETC. Each of MKL and the Subsidiaries is duly incorporated or organized and validly exists under the laws of its jurisdiction of incorporation, and - 8 - is in good standing under the laws applicable to it and has all necessary corporate capacity and power to own and lease its property and assets and to carry on the businesses now conducted or presently proposed to be conducted by it. 3.2.2 SUBSIDIARIES. MKL does not own or control, directly or indirectly, or have an interest in, any other corporation, partnership, association or business entity other than the Subsidiaries. 3.2.3 MANAGEMENT. The Management of MKL and the Subsidiaries is exclusively comprised of the Persons referred to in Section 1.18. 3.2.4 AUTHORIZATIONS AND APPROVALS. All authorizations, approvals, licences, permits, certificates, registrations, consents, exemptions or declarations required in order for each of MKL and the Subsidiaries to own or lease their property and assets and to carry on their business in all jurisdictions in which such property and assets are located or such business is carried on have been duly obtained or effected and are in full force and effect except for authorizations, approvals, licences, permits, certificates, registrations, consents, exemptions or declarations, the absence of which, individually or in the aggregate, does not and shall not result in a Material Adverse Effect. In particular: (a) except for permits, certificates, licences, registrations and other authorizations, the absence of which, individually or in the aggregate, does not and shall not result in a Material Adverse Effect, each of MKL and the Subsidiaries hold all permits, certificates, licenses, registrations and other authorizations required under applicable Environmental Laws for their operations (the "Environmental Permits"); each such Environmental Permit is valid and in force and the operations of MKL and the Subsidiaries are in compliance with the conditions set out in such Environmental Permits and their is no ground for revocation, expiry or annulment of any such Environmental Permits; (b) except for permits, certificates, licences, registrations and other authorizations, the absence of which, individually or in the aggregate, does not and shall not result in a Material Adverse Effect, each of MKL and the Subsidiaries hold all permits, certificates, licenses, registrations and other authorizations required under applicable Legal Requirement for clinical research for the pharmaceutical industry and pharmaceutical research (the "Research Permits"); each such Research Permit is valid and in force, the operations of MKL and the Subsidiaries are in compliance with the conditions set out in such Research Permits and there is no ground for revocation, expiry or annulment of any such Research Permits. 3.2.5 CORPORATE RECORDS. The Corporate records of MKL and each of the Subsidiaries are complete and up to date. - 9 - 3.2.6 OFFICERS AND DIRECTORS. The officers and directors of MKL and each of the Subsidiaries have been properly elected or appointed in accordance with applicable laws and the relevant articles of incorporation or other constituting documents. 3.2.7 CORPORATE ACTION. All necessary action has been taken by MKL, to authorize the execution of this Agreement and the consummation of the transactions contemplated hereby. 3.3 CAPITALIZATION 3.3.1 SHARE CAPITAL OF MKL. The outstanding share capital of MKL is exhaustively set forth in Schedule A, all of which has been validly issued and is fully paid and non-assessable. Each of the Vendors declares that his Shares are subject to no Lien, adverse claim or restriction on transfer, except restrictions on transfer under this Agreement. 3.3.2 OPTIONS, ETC. Other than as set forth in Schedule A and Schedule 3.3.2, MKL does not have outstanding (a) any rights (either preemptive or otherwise) or options to subscribe for or purchase, or any warrants or other agreements providing for or requiring the issuance of, any shares or any securities convertible into or exchangeable for its shares, (b) any obligation to redeem, purchase or otherwise acquire or retire any of its shares, any securities convertible into or exchangeable for its shares or any rights, options or warrants with respect thereto, (c) any rights to require MKL to qualify for distribution for securities laws purposes, or (d) any restrictions on voting. 3.3.3 CAPITAL STOCK OF THE SUBSIDIARIES. The issued and outstanding shares of each Subsidiary are as set forth in Schedules B and C. The issued and outstanding shares of each Subsidiary are validly issued, and paid and non-assessable and subject to no Lien, adverse claim or restriction on transfer, other than as set forth in Schedule 3.3.3. 3.3.4 SUBSIDIARY OPTIONS, ETC. Other than as set forth in Schedule 3.3.4, none of the Subsidiaries has outstanding (a) any rights (either preemptive or otherwise) or options to subscribe for or purchase, or any warrants or other agreements providing for or requiring the issuance of, any shares or any securities convertible into or exchangeable for its shares, (b) any obligation to redeem, purchase or otherwise acquire or retire any of its shares, any securities convertible into or exchangeable for its shares or any rights, options or warrants with respect thereto, (c) any rights to require the Subsidiary to qualify for distribution for securities laws purposes, or (d) any restrictions on voting. 3.3.5 NO COMMITMENTS AFFECTING SHARES, ETC. Other than as set forth in Schedule 3.3.5, neither MKL nor any of the Subsidiaries is a party to or bound by any agreement, commitment or understanding, whether verbal or written, affecting its shares or the participating or voting rights attached thereto. - 10 - 3.4 REPORTS, FINANCIAL STATEMENTS AND OTHER DOCUMENTS Phoenix has been provided with complete and correct copies of audited financial statements of MKL and IPHAR for the years ended December 31, 1995, 1996 and 1997 and for the eight-month period ended August 31, 1998, copies of which are attached hereto as Schedule 3.4A. The financial statements of MKL and the Subsidiaries referred to above have been prepared in accordance with German GAAP and all such financial statements fairly present the financial condition of MKL and the Subsidiaries at the dates thereof and the results of their operations for the periods covered thereby. Other than as set forth in Schedule 3.5, neither MKL nor any of the Subsidiaries has material liabilities, contingent or otherwise, which are not referred to in the financial statements. The financial statements for the year ended December 31, 1995, 1996 and 1997, copies of which are attached hereto as Schedule 3.4A have been properly approved by the annual general meetings of shareholders of the relevant entities in due form without reservation. The last general meeting of the shareholders of each of MKL and IPHAR were held on May 13, 1998 and May 13, 1998, respectively and there has been no meeting of shareholders of MKL and IPHAR since then. For purposes of financial presentation, MKL and the subsidiaries recognize net revenue from their contracts on a percentage of completion basis as work is performed. The percentage of completion, and consequently the revenue to be recorded, of each individual contract is determined through detailed analysis and discussion between all appropriate operational and financial department management. Although MKL and the subsidiaries do not require collateral for unpaid balances, credit losses have consistently been within Management's expectations. Certain contracts contain provisions for price adjustment for cost overruns. Such adjusted amounts are included in service revenue when realization is assured and the amounts can be reasonably determined. In the period in which it is determined that a loss will result from the performance of a contract, the entire amount of the estimated ultimate loss is charged against income. Since January 1, 1998, the business of MKL and the Subsidiaries has been operated in the customary fashion and no revenues that would have been earned by MKL or the Subsidiaries have been earned by any Person who is an Affiliate of any of the Vendors. Notwithstanding anything else in this Agreement, including, without limitation, the provisions of this Section 3.4, the Vendors make no representation or warranty of any kind whatsoever with respect to future business, financial performance or future profitability of MKL. 3.5 OFF BALANCE SHEET OBLIGATIONS Schedule 3.5 contains a complete list of the off-balance sheet obligations of MKL and the Subsidiaries, including all guarantees and obligations to the benefit of the Vendors, members of their families or third parties. 3.6 CHANGES IN CONDITION Since January 1, 1998: 3.6.1 MATERIAL ADVERSE EFFECT. No event having a Material Adverse Effect has occurred. - 11 - 3.6.2 EXTRAORDINARY TRANSACTIONS, ETC. Other than as set forth in Schedule 3.4A, neither MKL nor any of the Subsidiaries has (a) made any Distribution, (b) other than as set forth in Schedule 3.6.2, made any payment (other than Compensation of its directors, officers and employees in amounts in effect prior to January 1, 1998 or for bonuses accrued in accordance with normal practice prior to January 1, 1998) to any of the Vendors, (c) other than as set forth in Schedule 3.6.2, increased the Compensation, including bonuses, payable or to be payable to any of its directors, officers or employees by more than 5%, or (d) entered into any Contractual Obligation, or entered into or performed any other transaction, not in the ordinary and usual course of business and consistent with past practice. 3.6.3 INVENTORY AND WORK-IN-PROGRESS. The value of inventory and work-in-progress reflected in the financial statements of MKL and the Subsidiaries has been established in accordance with German GAAP and there has been no material change in the period subsequent to December 31, 1997, other than in the ordinary and usual courses of business. 3.6.4 REVENUES. The business of MKL and the Subsidiaries has been operated in the customary fashion and no revenues that would have been earned by MKL or the Subsidiaries have been earned by any Person which is an Affiliate of any of the Vendors. 3.7 SOLVENCY Each of MKL and the Subsidiaries shall be able to pay its liabilities existing at the time of the signing of this Agreement as they become due. 3.8 CONTRACTUAL OBLIGATIONS, ETC. 3.8.1 CERTAIN CONTRACTS. Schedule 3.8.1 contains, together with a reference to the subparagraph pursuant to which each item is being disclosed, a correct and complete list of all Contractual Obligations of MKL and the Subsidiaries of the types described below: (a) All collective bargaining agreements; all agreements with any member of the Management, a list of all employees, all profit sharing, profit participation, deferred compensation, bonus, stock option, stock purchase, pension, retainer, consulting, retirement, welfare or incentive plans or agreements; and all plans, agreements or practices which constitute Compensation or "fringe benefits" to any of the employees of MKL or the Subsidiaries, including vacation programs, sick leave programs, group medical insurance, group life insurance, disability insurance and related benefits. (b) All Contractual Obligations under which MKL or the Subsidiaries are restricted from carrying on any business, venture or other activities anywhere in the world. (c) All Contractual Obligations (including options) to sell, lease (as lessor), exchange or otherwise dispose of or transfer any of the properties or assets of MKL or the Subsidiaries except in the ordinary course of business. - 12 - (d) All Contractual Obligations pursuant to which MKL or the Subsidiaries guarantees or otherwise assumes any liability of or gives financial assistance to any Person, or pursuant to which any Person guarantees or otherwise assumes any liability of MKL or the Subsidiaries. (e) All Contractual Obligations constituting license agreements, service agreements, consulting agreements or other similar arrangements, the termination of which, individually or in the aggregate, would result in a Material Adverse Effect. (f) All Contractual Obligations under which MKL or any of the Subsidiaries leases immovable property or is obligated to lease or purchase immovable property or incur capital expenditures in excess of DM60,000 annually. (g) All Contractual Obligations of MKL or the Subsidiaries relating to the borrowing of money or to the creation of a Lien, other than a Permitted Lien, on any property or asset of MKL, or the Subsidiaries. (h) All Contractual Obligations of MKL or any of the Subsidiaries requiring a notice exceeding six months for termination and involving expenditures in excess of DM60,000. 3.8.2 NATURE OF CONTRACTS. All of the Contractual Obligations of MKL and the Subsidiaries at the Completion Date are enforceable against MKL and the Subsidiaries, the other parties thereto, in accordance with their terms, except as such enforcement may be limited by bankruptcy, insolvency or other laws of general application affecting the rights of creditors and except that specific performance is an equitable remedy which may only be awarded in the discretion of the court; and except for Contractual Obligations the failure of which to be so enforceable does not and shall not, individually or in the aggregate, result in a Material Adverse Effect. Except for breaches, defaults and liabilities which do not and shall not individually or in the aggregate result in a Material Adverse Effect, neither MKL nor any of the Subsidiaries is now in default, and no event has occurred which with notice or lapse of time or both would constitute a default under, nor are there any liabilities arising from any breach or default by any of them or event which with notice or lapse of time or both would constitute a default by any of them prior to the Completion Date of, any provision of any such Contractual Obligation. 3.8.3 ARTICLES. Neither MKL nor any of the Subsidiaries is in violation of, or in default under, any provision of its articles or constituting documents and Phoenix has been provided with complete and correct copies of such articles or constituting documents. 3.8.4 INSURANCE. Each of MKL and IPHAR carries insurance policies with independent third party insurers according to Schedule 3.8.4. All such policies are in full force and effect and free from any present right of termination on the part of the applicable insurance carriers. There are no outstanding unpaid premiums except in the ordinary course of business, and neither MKL nor any Subsidiary has received any notice of cancellation or non-renewal of any such policy. Neither MKL nor any Subsidiary is aware of any risks, situations, occurrences or other matters which have been disclosed, or should have been disclosed, to insurance carriers or brokers in - 13 - connection with any application for such insurance as a result of which an insurance carrier would have a right to cancel the corresponding insurance policy or deny coverage with respect to any rights under any such policies. There exists no event of default or event, occurrence, condition or act (including the transactions contemplated by this Agreement) which, with the giving of notice, the lapse of time or the happening of any further event or condition, would become a default or occasion a material premium increase under any such policy or give rise to, and neither MKL nor any Subsidiary has any anticipation of, any termination or cancellation thereof or material premium increase therefor. 3.8.5 INSURANCE CLAIM. Each of the Vendors declares that after thorough internal investigation, there is no known fact, situation or circumstance involving the Company or one of the Subsidiaries or their directors or officers, which would reasonably be expected to result in any future claim being made against the Company or any Subsidiaries. 3.8.6 DISPUTE. Neither MKL nor any of the Subsidiaries has received any notice from any supplier, vendor, contractor, customer or client with which MKL or such Subsidiary has conducted business during the one-year period ending on the date of this Agreement confirming such Person's intention to reduce the volume under, terminate or otherwise alter any Contractual Obligation with MKL or any Subsidiary, the effect of which, individually or in the aggregate, would result in a Material Adverse Effect. 3.9 OPERATIONS IN CONFORMITY WITH LAW, ETC. The operations of MKL and the Subsidiaries as now conducted, and their properties, assets, equipments, buildings, immoveables and leased or occupied properties, are not, and have not been, in violation of, nor is MKL or any of the Subsidiaries in default and no event has occurred which with notice or lapse of time or both would constitute a default under, any applicable Legal Requirements including, in particular, any applicable Environmental Laws or applicable Legal Requirements regarding clinical research and experimentation on humans, except for such violations and defaults as do not and shall not, in the aggregate, have a Material Adverse Effect. Neither MKL nor any of the Subsidiaries has received notice of any such violation or default and neither the Vendors nor the Management have knowledge of any basis on which the operations of MKL or any of the Subsidiaries, when conducted as currently proposed to be conducted after the Completion Date, would be held so as to violate or to give rise to any such violation or default. MKL and the Subsidiaries have all franchises, licenses, permits, certificates, authorizations, registrations or other authority presently necessary for the conduct of their business as now conducted, except for franchises, licences, permits, certificates, authorizations, registrations or other authority, the absence of which, individually or in the aggregate, does not and shall not result in a Material Adverse Effect. Based on the facts presently known to the Vendors and Management, all future expenditures on the part of MKL and the Subsidiaries required to meet the provisions of any presently existing applicable Legal Requirements (including Legal Requirements relating to employment practices or to occupational or health standards or to environmental considerations) shall not, in the aggregate, have a Material Adverse Effect. MKL and the Subsidiaries have complied and are in compliance with applicable competition regulations and have, to the best of Vendors' and Management's knowledge, never infringed fair competition in the markets where they operate, either with or towards third companies or between themselves. MKL and the Subsidiaries do not hold separately or together a dominant position on the markets involved and their market share and net aggregate turnover do not meet the European or German thresholds which - 14 - authorizes European or domestic competition authorities to control the operation and impede the completion of the transaction contemplated hereby. 3.10 INTELLECTUAL PROPERTY Schedule 3.10 contains a list of all the trade-marks, trade names and patents used by any of MKL or the Subsidiaries (collectively "Used Intellectual Property"). The entity indicated in said Schedule as owner of Used Intellectual Property is the registered and beneficial owner of such Used Intellectual Property or the registration thereof, if applicable, (except as set forth in Schedule 3.10), with good and marketable title, unencumbered (except for Permitted Liens), and with full right to sell, assign or otherwise transfer or license to others and subject to no pending challenge, refutation, expiry or termination other than as set forth in Schedule 3.10. To the Vendors' and Management's knowledge, other than as set forth in Schedule 3.10, none of MKL or the Subsidiaries uses any intellectual property not owned by it, other than software purchased "off the shelf", all of which each entity using said property has the right to use (collectively "Licenced Intellectual Property"). (Used Intellectual Property and Licensed Intellectual Property are sometimes hereinafter referred to collectively as "Intellectual Property"). None of MKL or the Subsidiaries is required to pay royalties, fees or other consideration to any other person with respect to the use of any of the Intellectual Property or in connection with the conduct of its business or otherwise. To the Vendors' and Management's knowledge, none of MKL or the Subsidiaries has infringed the intellectual or industrial property rights of any other person, nor has any of them used any intellectual or industrial property (including, without limitation, trademarks, trade names, patents, models, designs and copyrights) which it does not own or have the right to use other than as set forth in Schedule 3.10. There are no outstanding claims asserted against any of MKL or the Subsidiaries alleging the infringement or the misappropriation by any of them of any intellectual or industrial property. None of MKL or the Subsidiaries has granted any licences or sub-licences to third parties with respect to any of the Intellectual Property other than as set forth in Schedule 3.10 and neither the Vendors nor Management has any knowledge of any infringement or misappropriation by any other Person of any of the Intellectual Property. Neither the execution nor delivery of this Agreement will constitute a breach of or a default under any agreement relating to the Intellectual Property. 3.11 ENVIRONMENTAL MATTERS 3.11.1 MKL and the Subsidiaries, their employees, agents, shareholders, directors and officers (acting in their capacity of employees, agents, shareholders, directors or officers of MKL or of one of the Subsidiaries) have never been declared guilty of committing an offence for a violation of Environmental Laws and have never been fined for such an offence or have otherwise settled such a prosecution in connection with the activities of MKL and the Subsidiaries; 3.11.2 There are no contaminants, waste or pollutants of any kind whatsoever in, on or under the equipment, buildings, immoveables or properties owned, leased or occupied by MKL or any of the Subsidiaries and caused by MKL, the Subsidiaries or their employees, agents, shareholders, directors or officers (acting in their capacity of employees, agents, shareholders, directors or officers of MKL or one of the Subsidiaries), the presence of which constitutes a violation of applicable Environmental Laws and the presence of which, individually or in the aggregate, constitutes a Material Adverse Effect; - 15 - 3.11.3 Neither MKL nor any of the Subsidiaries has received any written notice or request for information in the context of any national, supra-national, provincial, regional, local or municipal environmental investigation or inspection; 3.11.4 There are no PCBs, asbestos or urea formaldehyde insolation in, on or under the equipment, buildings, immoveables or properties owned, leased or occupied by MKL or the Subsidiaries; 3.11.5 There is no action, suit or proceeding pending in relation to environmental matters against MKL or the Subsidiaries, its employees, agents, shareholders, directors and officers (acting in their capacity of employees, agents, shareholders, directors or officers of MKL or of one of the Subsidiaries), or involving MKL or the Subsidiaries or its assets, before any judicial body, tribunal, commission, agency or other governmental entity, and to the Vendors' knowledge and to the knowledge of Management, there is no threat of, or event or fact based on which, such action, suit or proceeding may be instituted; 3.11.6 To the knowledge of Management and the Vendors, MKL and the Subsidiaries are in compliance with all applicable Environmental Laws. 3.12 LABOUR AND EMPLOYMENT MATTERS 3.12.1 Without limiting the generality of Section 3.9, each of MKL and the Subsidiaries has complied with all applicable laws relating to the employment of labour, including provisions thereof relating to wages, hours and collective bargaining rights. 3.12.2 Other than as disclosed under Section 3.8, there is no collective agreement by which MKL or any of the Subsidiaries is bound which relates to the employees of MKL or the Subsidiaries. To the knowledge of the Vendors and to the knowledge of Management, there are no threatened or pending attempts to organize or establish any labour union or employee association in connection with the business of MKL or any of the Subsidiaries. To the knowledge of the Vendors and to the knowledge of Management, there is no pending or threatened labour dispute, grievance, strike, or work stoppage materially affecting the business of any of MKL or any of the Subsidiaries. Neither MKL nor any of the Subsidiaries is a party to any other written employment agreement, contract, arrangement, management contract or service contract affecting employees other than as set forth in Schedule 3.8.1, nor are any such contracts, agreements, arrangements, management contracts or service contracts being currently negotiated or proposed other than in the ordinary course of business. 3.12.3 There exist no retirement plans, profit sharing, option or incentive plans, or other employee benefit plans for employees of MKL or any of the Subsidiaries other than as set forth in Schedule 3.8.1 for which adequate arrangements have been made since January 1, 1998 to set aside the requisite amounts in the prescribed fashion, and neither MKL nor any of the Subsidiaries has promised or intends to implement other such plans. 3.12.4 Other than as set forth in Schedule 3.12.4, neither MKL nor any of the Subsidiaries has any employee who cannot be dismissed without further liability upon such notice period not exceeding what it is required by the applicable Legal Requirement. - 16 - 3.12.5 Each of MKL's or any of the Subsidiary's employees who is practising as a physician, nurse or pharmacist is identified in Schedule 3.12.5, and each such employee is duly licensed and in good standing to practice as a physician, nurse or pharmacist, as the case may be, in each jurisdiction in which such employee renders services for or on behalf of MKL or any Subsidiary. None of the employees listed on Schedule 3.12.5 is or has been subject to any claim in connection with his or her practice as physician, nurse or pharmacist while employed by MKL or the Subsidiary, as the case may be, and no fact or occurrence is known to the Management to exist which is likely to give rise to the revocation of any such licence. 3.12.6 None of MKL's or any of the Subsidiary's employees has signed non-compete covenants in favour of MKL or the Subsidiary. 3.13 TAXES Other than as set forth in Schedule 3.13, all tax returns required to be filed by MKL and the Subsidiaries in any jurisdiction have been filed and all taxes, assessments, levies and other governmental charges upon MKL and the Subsidiaries or upon any of their properties or income, including any tax in respect of value added, have been paid if and when due unless such payment is being contested in good faith and by appropriate proceedings and adequate reserves with respect thereto determined in accordance with applicable policies have been established by MKL and the Subsidiaries. There is no tax revision threatened in writing against MKL and any of the Subsidiaries and there is no basis for such assessment. 3.14 WITHHOLDINGS Each of MKL and the Subsidiaries has withheld from each payment made to any of its shareholders, officers, directors, non-resident creditors and employees the amount of all taxes and other deductions required to be withheld and has remitted all such amounts to the appropriate authorities within the prescribed times, and has otherwise fulfilled all requirements of all Legal Requirements governing such deductions and withholdings. Each of MKL and the Subsidiaries has remitted to the proper authorities all employer contributions due and payable under all social security, occupational health and safety and pension plans. 3.15 GOOD TITLE Other than as set forth in Schedule 3.15 and Schedule 1.21, each of MKL and the Subsidiaries has good and marketable title to all assets in the balance sheets as per December 31, 1998 and August 31, 1998 free and clear of Liens and other adverse claims. 3.16 LITIGATION Other than as set forth in Schedule 3.16, no litigation or proceeding before, or investigation by, any foreign, national, supra-national or municipal, judicial, tax or customs tribunal or board or other governmental or administrative agency or any arbitrator, is pending or threatened (or, according to Management's knowledge, does any basis exist therefor), against MKL or the Subsidiaries or, to the Vendors' knowledge or to the knowledge of Management, any director or officer of MKL or any of the Subsidiaries, which individually or in the aggregate could result in a Material Adverse Effect, or which seeks rescission of, seeks to enjoin the consummation of, or which questions the validity of, this Agreement or any of the transactions contemplated hereby. Neither MKL nor the Subsidiaries has - 17 - been charged, nor to the Vendors' knowledge or to the knowledge of Management, is it threatened to be charged, with infringement of any trademark, trade name, service mark, copyright, patent, patent right or other proprietary right of any Person. 3.17 PRESS COVERAGE Neither MKL nor any of the Subsidiaries has been the object of any demonstrations, press campaigns or other attacks due to the nature of its activities. 3.18 VIOLATION OF OTHER INSTRUMENTS Neither the execution and delivery of this Agreement by the Vendors, the consummation of any of the transactions contemplated hereby or in Schedule 3.18, shall (a) constitute a breach of or a default or an event which with notice or lapse of time or both would constitute a default under any Contractual Obligation of MKL or any of the Subsidiaries, (b) result in acceleration in the time for performance of any obligation of MKL or the Subsidiaries under any such Contractual Obligation, (c) result in the creation of any Lien upon any property or asset of MKL or the Subsidiaries, (d) require any consent, waiver or amendment to any such Contractual Obligation that has not been obtained and remains in full force and effect, (e) give rise to any severance payment, right of termination, securities purchase or redemption right or other right under any such Contractual Obligation, or (f) violate or give rise to a default or an event which with notice or lapse of time or both could constitute a default under any Legal Requirements, except for events or conditions described in clauses (a) through (f) above which shall not, individually or in the aggregate, have any Material Adverse Effect or (g) result in any state of facts which could have a Material Adverse Effect, and except for events or conditions described in Schedule 3.18. 3.19 APPROVALS, CONSENTS, ETC. Other than as set forth in Schedule 3.19, no approval, consent, authorization or other order of, and no declaration, filing, registration, qualification or recording with, any governmental authority or any other Person is required to be made by or on behalf of the Vendors, MKL or any of the Subsidiaries in connection with the execution, delivery or performance of this Agreement or any of the transactions contemplated hereby. 3.20 INVESTMENT OR DIVESTITURE Schedule 3.20 contains a complete list of all investments and divestitures in process which are not mentioned in the financial statements of MKL and the Subsidiaries (balance sheet, statement of earnings and schedules) for the period ended August 31, 1998 and which are not in the ordinary course of business. 3.21 FULL DISCLOSURE Disclosure made by the Vendors in respect of one of the representations contained in this Section 3 is considered being made in respect of all other representations. There is no fact that the Vendors, to the best of their knowledge, have not disclosed to Phoenix which could have a Material Adverse Effect on the properties, business, prospects or condition (financial or otherwise) of MKL or any of the Subsidiaries. Neither the reports, financial statements and other documents referred to in Section 3.4, nor any certificate, statement or document forming part of this Agreement contains any - 18 - untrue statement of a fact or omits to state any fact necessary to keep the statements contained herein or therein from being misleading in a manner that would constitute a Material Adverse Effect. 4. REPRESENTATIONS AND WARRANTIES OF PHOENIX Phoenix represents and warrants to the Vendors that: 4.1 DUE INCORPORATION, ETC. Phoenix is duly incorporated, validly exists and is in good standing under the Canada Business Corporations Act and has all necessary corporate capacity and power to own and lease its property and assets and to carry on the business now conducted by it. 4.2 SHARE CAPITAL OF PHOENIX The authorized share capital of Phoenix is composed of an unlimited number of common shares and an unlimited number of preferred shares issuable in series of which, as at November 4, 1998, there were 24,857,059 common shares issued and outstanding. 4.3 OPTIONS Other than the options to acquire common shares of Phoenix granted pursuant to Phoenix's Key Employee Share Option Plan, shares to be issued to Dorn Cook under an earn-out formula which has been disclosed to the Vendors and an approximate number of 1,800,000 common shares of Phoenix to be issued in connection with proposed acquisitions, Phoenix does not have any rights or options to subscribe for, or any warrants or other agreements providing for or requiring the issuance of common shares or preferred shares. 4.4 DUE AUTHORIZATION All necessary corporate action has been taken by Phoenix to authorize the execution of this Agreement and the consummation of the transactions contemplated hereby, including the issuance of the Phoenix Shares as fully paid and non-assessable in consideration for the purchase of the Shares. 4.5 STOCK EXCHANGE APPROVALS The listing of the Phoenix Shares on The Montreal Exchange and the Toronto Stock Exchange has been approved by such exchanges, subject to Phoenix fulfilling all of the standard requirements of such exchanges before November 27, 1998 and the Phoenix Shares are not subject to any statutory hold period or resale restrictions under the SECURITIES ACT (Quebec) or any other contractual resale restrictions other than as mentioned in this Agreement. However, the sale of the Shares in the province of Quebec will constitute a distribution requiring the establishment of a prospectus or an exemption therefrom except if such sale is effected on a stock exchange or on the over-the-counter-market. Phoenix is a reporting issuer in good standing under the SECURITIES ACT (Quebec). - 19 - 4.6 PHOENIX SHARES The Phoenix Shares will at the time of issuance be duly authorized, validly issued, fully paid and non-assessable common shares in the share capital of Phoenix and registered in the names of the Vendors or the Escrow Agent, as the case may be, on the share registers of Phoenix. 4.7 UNDERTAKING Phoenix undertakes, on a best effort basis, to obtain a release of the guarantee provided by Buhrens to Hamburger Sparkasse in favour of MKL. 5. POOLING OF INTERESTS 5.1 ACCOUNTING TREATMENT Phoenix, MKL and the Vendors intend and desire for the transactions contemplated by this Agreement to qualify for "pooling of interests" treatment for US GAAP purposes in accordance with Accounting Principles Board Opinion No. 16. 5.2 POOLING LETTERS On or prior to the Completion Date, MKL shall cause to be executed and delivered to Ernst & Young, auditors to Phoenix, and to Phoenix a letter or letters, dated the Completion Date, from MKL's shareholders in form and substance reasonably satisfactory to Phoenix and its auditors relating to "pooling of interests" accounting (the "MKL Pooling Letter"). On or prior to the Completion Date, Phoenix shall deliver to Ernst & Young, auditors to Phoenix, a letter or letters, dated the Completion Date, from Phoenix's management in form and substance reasonably satisfactory to its auditors relating to "pooling of interests" accounting. 5.3 OPINIONS OF ACCOUNTANTS AND AUDITORS OF PHOENIX On or prior to the Completion Date, Phoenix shall have received a letter, dated the Completion Date, from Ernst & Young, accountants and auditors to Phoenix, in form and substance satisfactory to Phoenix, regarding the appropriateness of pooling of interests treatment for the transactions contemplated herein. 5.4 OPINIONS OF ACCOUNTANTS AND AUDITORS OF MKL On or prior to the Completion Date, MKL and Phoenix shall have received a letter, dated the Completion Date, from Bernd Rohrberg, accountant and auditor of MKL, attesting to the validity of the MKL Pooling Letter referred to in Section 5.2, in form and substance satisfactory to MKL and Phoenix. 5.5 PLACEMENT AND STOCK TRANSFER RESTRICTIONS AND RELATED MATTERS Each party to this Agreement agrees that from and after the date of this Agreement, such party shall not knowingly take any action, or knowingly fail to take any action, which action or failure is reasonably likely to disqualify the transactions contemplated by this Agreement from pooling of interests accounting treatment by Phoenix, and that such party shall take all reasonable actions necessary to cause the transactions contemplated by this Agreement to qualify as a pooling of interest, - 20 - if such characterization shall be jeopardized by action taken by such party. Without limiting the foregoing, each Vendor who is a Pooling Affiliate of MKL agrees that such Vendor shall not sell, transfer, pledge, or otherwise dispose of such Vendor's interests in or reduce such Vendor's risk relative to any of the Phoenix Shares until Phoenix shall have published financial results (including combined sales and net income) covering at least thirty (30) days of combined operations of Phoenix and MKL after the Completion Date. No later than April 30, 1999, Phoenix shall prepare and publish such financial results for the first full month of operations following the Completion Date. Each of the Vendors and MKL acknowledge and agree with Phoenix that none of the Vendors or MKL is a party to any agreement or arrangement among themselves or with third parties regarding the transactions contemplated by this Agreement or the subject matter hereof. Prior to the Completion Date, Phoenix shall deliver to MKL a list of names and addresses of those persons who are or may be, in Phoenix's reasonable judgement, Affiliates of Phoenix within the meaning of Rule 145 of the rules and regulations promulgated under the Securities Act or applicable SEC accounting releases with respect to pooling of interests accounting treatment (each such persons, a "Pooling Affiliate"). Phoenix also shall provide MKL with such information and documents as MKL shall reasonably request for purposes of reviewing such list. Prior to the Completion Date, Phoenix shall deliver to MKL an affiliate letter, in form and substance reasonably satisfactory to MKL, executed by each of the Pooling Affiliates identified in the foregoing list. Prior to the Completion Date, MKL shall deliver to Phoenix a list of names and addresses of those persons who are or may be, in MKL's reasonable judgment, Pooling Affiliates of MKL. MKL also shall provide Phoenix with such information and documents as Phoenix shall reasonably request for purposes of reviewing such list. Prior to the Completion Date, MKL shall deliver to Phoenix an affiliate letter, in form and substance reasonably satisfactory to Phoenix, executed by each of the Pooling Affiliate of MKL identified in the foregoing list. 6. EMPLOYMENT AGREEMENT 6.1 EMPLOYMENT AGREEMENTS WITH BUhrens and Tetzloff Buhrens and MKL shall execute an employment agreement satisfactory in form and content to Phoenix and MKL. Tetzloff and MKL shall execute an employment agreement satisfactory in form and content to Phoenix and IPHAR. 7. SURVIVAL OF REPRESENTATIONS; INDEMNITY 7.1 SURVIVAL OF REPRESENTATIONS The respective representations and warranties of the Vendors contained in this Agreement or in any schedule attached hereto shall survive the consummation of the transactions contemplated hereby and shall remain in full force and effect notwithstanding any investigation or examination of, or knowledge with respect to, the subject matter thereof by or on behalf of Phoenix until the earlier of November 6, 1999 or the date of completion of the audit of the combined financial statements of Phoenix and MKL (the period ending on such date being referred to herein as the "Representations Period"), except that such representations and warranties shall survive indefinitely in the event of fraud with respect thereto. No claim for indemnification pursuant to Section 7.2.1 below may be brought after the expiration of the Representations Period, except for claims made in good faith in - 21 - writing prior to such expiration and setting forth in reasonable detail the claim, regardless of whether any action or demand has been commenced against Phoenix (it being understood without limitation, that any and all Losses (as defined below) arising after the expiration of the Representations Period shall be recoverable upon notice properly given prior to the expiration of the Representations Period in accordance with this Section 7.1). The representations and warranties of Phoenix contained in this Agreement or in any schedule attached hereto shall terminate upon and not survive the Completion Date, except in the event of fraud by Phoenix with respect thereto, in which case they shall survive indefinitely. 7.2 INDEMNIFICATION 7.2.1 From and after the Completion Date, Phoenix and its Affiliates (including MKL and the Subsidiaries) and all of their respective officers, directors, employees, agents and shareholders (each, an "Indemnitee") shall be defended, indemnified and held harmless by the Vendors pursuant to this Agreement and the Escrow Agreement to the full extent permitted by law, from and against any and all losses, evictions, claims, actions, damages, liabilities, costs and expenses (including attorneys' fees and expenses) (collectively, "Losses") relating to or arising from or in connection with (i) any misrepresentation or any non-fulfilment of any representation, warranty, covenant, obligation or agreement by any Vendor contained in or made pursuant to this Agreement or any other document, agreement, officer's certificate or other certificate delivered to Phoenix in connection with this Agreement, and (ii) the enforcement by Phoenix of its rights pursuant to this Section 7.2, or any litigation, proceeding or investigation relating to any of the foregoing. The indemnification obligations of the Vendors pursuant hereto shall be joint and not solidary, i.e. prorata to the number of Phoenix Shares received by each Vendor in accordance with Section 2.2. 7.2.2 Notwithstanding the foregoing provisions of this Section 7.2, but except with respect to any Losses resulting from or arising out of fraud or other intentional or willful misconduct or misrepresentation, (i) the maximum aggregate recourse by the Indemnitees pursuant to Section 7.2.1 above shall not exceed the aggregate value (calculated by adding together the opening and closing prices of the common shares of Phoenix on each of the Toronto Stock Exchange and The Montreal Exchange for each of the ten trading days preceding the Completion Date, and dividing this sum by 40) of the Escrowed Securities (the "Indemnity Cap"), and (ii) the sole recourse of any Indemnitee in respect of Losses (but not in respect of fraud or other intentional or willful misconduct or misrepresentation) shall be from, out of, and to the extent of the Escrowed Securities. It being understood that the Indemnitees shall in no circumstances be entitled to recover the property of the Phoenix Shares transferred under this Agreement. Any indemnification shall be payable by the return of Escrowed Securities to Phoenix in accordance with the provisions of the Escrow Agreement. In particular, the number of Escrowed Shares to be remitted to Phoenix in payment of any indemnification obligation shall be calculated on the basis of the average price of the Escrowed Shares obtained by adding together the opening and closing prices of the common shares of Phoenix on each of the Toronto Stock Exchange and The Montreal Exchange for each of the ten trading days preceding the Completion Date, and dividing this sum by 40. All dividends or other distributions received by a Vendor in respect of common shares of Phoenix which are remitted to - 22 - Phoenix in satisfaction of an indemnification obligation under this Section 7, shall also be repaid to Phoenix at the time of payment of indemnification. 7.2.3 Notwithstanding any other provision of this Agreement, as of and after the Completion Date, MKL shall not have any liability under this Agreement, and no Vendor shall threaten or bring any claim or action whatsoever against MKL for contribution to any amounts payable under this Section 7.2 by such Vendor. 8. NOTICES Any demand, notice or other communication to be given in connection with this Agreement shall be given in writing and shall be given by personal delivery, by registered mail or by electronic means of communication addressed to the recipient as follows: 8.1 To Phoenix: Phoenix International Life Sciences Inc. 2350, Cohen Street Saint-Laurent, Quebec H4R 2N6 Canada Telecopier No.: (514) 333-7306 ATTENTION: JEAN-YVES CALOZ 8.2 To Buhrens Prof. Dr. Klaus-Georg Buhrens Buchtallee 4a 21465 Reinbek, Germany 8.3 To Geist: Dr. Martin Geist Georgiweg 43 22453 Hamburg, Germany 8.4 To Blohm: Dr. Bernk Blohm Buchtallee 23 21465 Reinbek, Germany 8.5 To Hilgenstock: Dr. Christian Hilgenstock Gronenweg 73 22549 Hamburg, Germany - 23 - 8.6 To Hemker: Dr. Claus Hemker Feldblick 2 22397 Hamburg, Germany 8.7 To Kozak: Dr. Ivan Kozak Kopeniker Str. 15 22045 Hamburg, Germany 8.8 To Vens-Cappell: Dr. Bernhard Vens-Cappell Wurtkamp 12 22527 Hamburg, Germany 8.9 To Tetzloff: Dr. Wolfgang Tetzloff Friedenstrasse 56 82194 Grobenzell, Germany 8.10 To J. Henke: Dr. Jurgen Henke Hohenzollernring 57 50672 Koln, Germany 8.11 To L. Henke: Dr. Lotte Henke Hohenzollernring 57 50672 Koln, Germany 8.12 To TREND: TREND Finanzanalysen GmbH Berliner Allee 21 40212 Dusseldorf, Germany - 24 - 8.13 To MKL: McKnight Laboratories GmbH Osterstrasse 86 20259 Hamburg, Germany Telecopier No.: 011-49-40-490-5055 ATTENTION: PROF. DR. KLAUS-GEORG BUHRENS 9. MODIFICATION All modifications or amendments of any provision of this Agreement shall be effective only if the same shall be in writing and then shall be effective only in the specific instance and for the purpose for which given. 10. WAIVER No failure to exercise, and no delay in exercising, on the part of a party hereto, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right. No waiver of any provision of this Agreement shall be effective unless in writing. No notice or demand given in any case shall constitute a waiver of the right to take other action in the same, similar or other instances without such notice or demand. 11. CONFIDENTIALITY The parties agree to treat this Agreement as confidential and not to disclose its contents to third parties other than their advisers, except to the extent necessary to enforce performance of obligations hereunder, or as is required to comply with applicable laws or regulations, including regulations of any stock exchange on which the securities of Phoenix are listed following consultations with the Vendors. 12. FURTHER ASSURANCES The parties shall, with all reasonable diligence, do all such things and provide all such reasonable assurances as may be required to consummate the transactions contemplated hereby, and each party shall provide such further documents or instruments required by another party as may be reasonably necessary or desirable to give effect to the purpose of this Agreement and to carry out its provisions. 13. GOVERNING LAWS This Agreement shall be governed by the laws of the Province of Quebec and the laws of Canada applicable therein. 14. ARBITRATION All disputes arising out of or in connection with the present Agreement shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules. The place of arbitration shall be Montreal. - 25 - The language of the arbitration shall be English. 15. GENERAL The invalidity or unenforceability of any term or provision hereof shall not affect the validity or enforceability of any other term or provision hereof. The headings in this Agreement are for convenience of reference only and shall not alter or otherwise affect the meaning hereof. This Agreement and the other documents and instruments referred to herein constitute the entire understanding of the parties hereto with respect to the subject matter hereof and thereof and supersede all present and prior agreements, whether written or oral. No investigation made by or on behalf of a party hereto shall mitigate, diminish or affect the representations and warranties made herein by the Vendors. This Agreement may be executed in any number of counterparts which together shall constitute one instrument and shall be governed by and construed in accordance with the laws of the Province of Quebec and the laws of Canada applicable therein, and shall bind and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, personal representatives, successors and assigns. The parties hereto have expressly required that this Agreement and all documents and notices related hereto be drafted in English. LES PARTIES AUX PRESENTES ONT EXPRESSEMENT EXIGE QUE LE PRESENT CONTRAT ET TOUS LES DOCUMENTS ET AVIS Y AFFERENTS SOIENT REDIGES EN ANGLAIS. IN WITNESS WHEREOF, the parties hereto caused this Agreement to be duly executed as of the Completion Date. PHOENIX INTERNATIONAL LIFE SCIENCES INC. By: /s/ John Hooper /s/ Klaus-Georg Buhrens ------------------------------------- ------------------------------- John Hooper, Ph.D. PROF. DR. KLAUS-GEORG BUHRENS Title: Chairman and Chief Executive Officer /s/ Martin Geist /s/ Bernd Blohm - ----------------------------------- ----------------------------------- DR. MARTIN GEIST DR. BERND BLOHM /s/ Christian Hilgenstock /s/ Claus Hemker - ----------------------------------- ----------------------------------- DR. CHRISTIAN HILGENSTOCK DR. CLAUS HEMKER /s/ Ivan Kozak /s/ Bernard Vens-Cappell - ----------------------------------- ----------------------------------- DR. IVAN KOZAK DR. BERNHARD VENS-CAPPELL /s/ Wolfgang Tetzloff /s/ Ulrike Schafer - ----------------------------------- ----------------------------------- DR. WOLFGANG TETZLOFF DR. JURGEN HENKE, by Ulrike Schafer - 26 - /s/ Ulrike Schafer - ----------------------------------- TREND FINANZANALYSEN GMBH DR. LOTTE HENKE, by Ulrike Schafer By: /s/ Ulrike Schafer ----------------------------------- Ulrike Schafer MCKNIGHT LABORATORIES GMBH By: /s/ Klaus-Georg Buhrens ------------------------------- Prof. Dr. Klaus-Georg Buhrens LIST OF SCHEDULES Schedule A Outstanding shares and voting rights of MKL Schedule B The capital structure of IPHAR Schedule C The capital structure of MKL/USA Schedule 1.9 Escrow Agreement Schedule 1.21 Permitted Lien Schedule 3.3.2 Options Schedule 3.3.3 Capital Stock of the Subsidiaries Schedule 3.3.4 Subsidiary Options Schedule 3.3.5 Commitments affecting shares or voting rights of MKL or the Subsidiaries Schedule 3.4A Financial Statements Schedule 3.5 Material liabilities, contingent or otherwise of MKL or any of the Subsidiaries and off-balance sheet obligations of MKL and the Subsidiaries Schedule 3.6.2 Extraordinary Transactions after January 1, 1998 Schedule 3.8.1 Contractual Obligations Schedule 3.8.4 Insurance Schedule 3.10 Intellectual Property Schedule 3.12.4 Liability for employee dismissal Schedule 3.12.5 Physicians, nurses or pharmacists employed by MKL and the Subsidiaries Schedule 3.13 Taxes Schedule 3.15 Title to assets Schedule 3.16 Litigation Schedule 3.18 Violation of Other Instruments Schedule 3.19 Approvals, Consents, etc. Schedule 3.20 Investment or Divestiture
Schedule 1.09 ESCROW AGREEMENT dated as of November 6, 1998. AMONG: PHOENIX INTERNATIONAL LIFE SCIENCES INC., a corporation incorporated under the Canada Business Corporations Act, having its head office at 2350, Cohen Street, Saint-Laurent, Quebec, Canada, H4R 2N6, herein acting and represented by John Hooper, its duly authorized representative; (hereinafter "Phoenix") AND: PROF. DR. KLAUS-GEORG BUHRENS, residing at Buchtallee 4a, 21465 Reinbek, Germany; (hereinafter "Buhrens") AND: MARTIN GEIST, residing at Georgiweg 43, 22453 Hamburg, Germany; (hereinafter "Geist") AND: DR. BERND BLOHM, residing at Buchtallee 23, 21465 Reinbek, Germany; (hereinafter "Blohm") AND: CHRISTIAN HILGENSTOCK, residing at Gronenweg 73, 22549 Hamburg, Germany; (hereinafter "Hilgenstock") AND: CLAUS HEMKER, residing at Feldblick 2, 22397 Hamburg, Germany; (hereinafter "Hemker") AND: DR. IVAN KOZAK, residing at Kopeniker Str. 15, 22045 Hamburg, Germany; (hereinafter "Kozak") - 2 - AND: DR. BERNHARD VENS-CAPPELL, residing at Wurtkamp 12, 22527 Hamburg, Germany; (hereinafter "Vens-Cappell") AND: WOLFGANG TETZLOFF, residing at Friedenstrasse 56, 82194 Grobenzell, Germany; (hereinafter "Tetzloff") AND: DR. JURGEN HENKE, residing at Hohenzollernring 57, 50672 Koln, Germany; (hereinafter "J. Henke") AND: DR. LOTTE HENKE, residing at Hohenzollernring 57, 50672 Koln, Germany; (hereinafter "L. Henke") AND: TREND FINANZANALYSEN GMBH, a German corporation with capital of DM150,000, registered in the Commercial Register of the Amtsgericht Dusseldorf under number HRB 18161 and having its head office at Berliner Allee 21, 40212 Dusseldorf, Germany, herein acting and represented by Peter Martin, its duly authorized representative; (hereinafter "TREND") AND: MONTREAL TRUST COMPANY, 1800 McGill College Avenue, Montreal, Quebec, H3A 3K9, as escrow agent, herein represented by its duly authorized representatives Rose Marie Labbe and Guy L'Esperance; (hereinafter the "Escrow Agent") WHEREAS Phoenix and the Vendors are parties to a share purchase agreement dated November 6, 1998 (the "Purchase Agreement"); WHEREAS the Purchase Agreement provides that certain shares of Phoenix issued to the Vendors pursuant thereto are to be held in escrow for the purposes described therein; NOW THEREFORE the parties hereby agree as follows: - 3 - 1. INTERPRETATION AND DEFINITIONS 1.1 Whenever used in this Agreement: 1.1.1 "AFFILIATE" means any of Buhrens and TREND and "Affiliates" means more than one of them; 1.1.2 "CLAIM" means any claim by Phoenix against and the Vendors under Section 7.2 of the Purchase Agreement; 1.1.3 "DISTRIBUTIONS" has the meaning ascribed thereto in Section 2.3 hereof; 1.1.4 "ESCROWED SHARES" has the meaning ascribed thereto in Section 2.1 hereof; 1.1.5 "ESCROWED SHARE PRICE" means the amount obtained by adding the opening and closing prices of the common shares of Phoenix on each of the Montreal Exchange and The Toronto Stock Exchange for the ten trading days preceding the date of execution of the Purchase Agreement, divided by 40; 1.1.6 "NON-AFFILIATE" means Geist, Blohm, Hilgenstock, Hemker, Kozak, Vens- Cappell, Tetzloff, J. Henke and L. Henke; 1.1.7 "NOTICE OF CLAIM" means a written notice of any Claim given by Phoenix setting forth the details of each Claim referred to therein including the amount thereof, if known to Phoenix, or Phoenix's reasonable estimate thereof, as well as the provisions of the Purchase Agreement upon which such Claim is based; 1.1.8 "OBJECTION" means, in respect of any Claim, any objection raised in the Response by any of the Vendors to such Claim; 1.1.9 "PROCEEDS" has the meaning ascribed thereto in Section 3.2 hereof; 1.1.10 "PURCHASE AGREEMENT" has the meaning ascribed thereto in the preamble to this Agreement; 1.1.11 "RELEASED SHARES" has the meaning ascribed thereto in Section 3.5.1.1 hereof; 1.1.12 "RESPONSE" means, in respect of any Claim, the joint written response of the representatives of the Vendors duly appointed in the manner set forth in Section 3.1 hereof indicating whether they accept or dispute such Claim; and 1.1.13 "VENDORS" means Buhrens, Geist, Blohm, Hilgenstock, Hemker, Kozak, Vens-Cappell, Tetzloff, J. Henke, L. Henke and TREND. 1.2 Each capitalized term used in this Agreement but not defined herein as the meaning ascribed thereto in the Purchase Agreement. - 4 - 1.3 In the event of (i) any subdivision, consolidation or reclassification of the class of shares comprising the Escrowed Shares or (ii) any reorganization of the share capital of Phoenix affecting the Escrowed Shares or (iii) the amalgamation of Phoenix with any other company, the number of Escrowed Shares and Escrowed Share Price shall be adjusted, if required, so that none of the parties hereto shall be in a position less favorable to it than as provided in this Agreement as a result of any of the foregoing actions. 1.4 For all purposes of this Agreement, the amount of any Claim in a currency other than Canadian dollars shall be converted to Canadian dollars at the exchange rate between Canadian and such currency shall be the "Spot Rate" of the alternate currency on the business day preceding the day as of which the conversion from one currency to the other is to be effected, as reported in the Financial Post of Canada on that day. 1.5 In any calculation hereunder of the applicable number of Escrowed Shares results in fractional shares, the result shall be rounded up or down, as the case may be, to the nearest whole number and, if such result represents exactly one-half of a whole number, then such fraction shall be rounded up to the next whole number. 2. ESTABLISHMENT OF ESCROW 2.1 Phoenix hereby delivers in escrow to the Escrow Agent certificates representing an aggregate of 87,332 common shares of Phoenix registered in the name of the Escrow Agent, as escrow agent (the "Escrowed Shares"). The Vendors' interests in the Escrowed Shares are as set forth below:
VENDOR ESCROWED SHARES ------ --------------- Buhrens 47,707 Geist 1,667 Blohm 1,667 Hilgenstock 4,406 Hemker 4,406 Kozak 4,406 Vens-Cappell 4,406 Tetzloff 4,406 J. Henke 3,573 L. Henke 3,573 TREND 11,115
- 5 - 2.2 The Escrow Agent hereby accepts delivery and acknowledges receipt of the Escrowed Shares and agrees to act as escrow agent and to hold, safeguard and release the Escrowed Shares in accordance with the provisions of this Agreement. The Escrowed Shares shall not be assigned, hypothecated, alienated, released from escrow, transferred within escrow or dealt with in any manner whatsoever except as provided in this Agreement. 2.3 Notwithstanding the registration of the Escrowed Shares in the name of the Escrow Agent, the Vendors shall, subject to the provisions hereof, remain the owners thereof in the proportion contemplated by Section 2.1 hereof and be entitled to the exercise of all voting rights related thereto and to receive all dividends, income and other distributions in respect thereof (collectively, "Distributions"). In the event that any Escrowed Shares are remitted to Phoenix for cancellation pursuant to the provisions of Section 3 hereof, the Vendors shall repay to Phoenix any Distributions received in respect of such Escrowed Shares. 3. INSTRUCTIONS TO ESCROW AGENT 3.1 All communications made by the Vendors, including instructions to the Escrow Agent or Responses hereunder, shall be made by Buhrens and Dr. Ulrike Schafer jointly on behalf of the Vendors. All of the Vendors hereby authorize Buhrens and Dr. Ulrike Schafer to duly represent them in accordance with all communications under this Agreement. Should the Vendors wish to withdraw this authorization and to designate new representatives, they have to do so jointly by notifying Phoenix and the Escrow Agent in accordance with Section 7 hereof. 3.2 At any time while the Escrowed Shares are held by the Escrow Agent, a Non-Affiliate may instruct the Escrow Agent in writing to sell all or part of such Non-Affiliate's portion of the Escrowed Shares. Upon receipt of such written instruction, the Escrow Agent shall sell such Escrowed Shares on the open market and shall retain the proceeds of sale, less any expenses incurred in realizing such sale (the "Proceeds") as escrowed property for such Non-Affiliate. The Escrow Agent shall invest such Proceeds according to the written instructions of such Non-Affiliate for the duration of the escrow. The Escrow Agent shall keep complete records of any such sales of Escrowed Shares. 3.3 At any time after receipt by the Escrow Agent of written notice by Phoenix of the release, in the format prescribed by the SEC, of at least 30 days of post-combination financial results of Phoenix and McKnight Laboratories GmbH, and provided that the Escrowed Shares are not then subject to any restrictions on transfer imposed by any Regulatory Authority, an Affiliate may also instruct the Escrow Agent to sell all or part of their portion of the Escrowed Shares in the manner set forth in Section 3.2. In such event, the Escrow Agent shall proceed as set forth in Section 3.2. 3.4 Whenever Phoenix has a Claim it shall promptly give a Notice of Claim in respect thereof to the Vendors and the Escrow Agent. Upon receipt of a Notice of Claim, the Escrow Agent shall immediately reserve for distribution in accordance with the provisions of Section 3.5 hereof (but shall not release from escrow except in accordance with the provisions hereof) - 6 - that number of the Escrowed Shares which is equal in value to the amount provided for in the Notice of Claim, calculated on the basis of the Escrowed Share Price for such Claim. 3.5 Within 15 days of receipt of a Notice of Claim, the Vendors (or any of them) shall give to Phoenix and the Escrow Agent a Response with respect to each Claim set forth therein. If: 3.5.1 the Response indicates that the Vendors accept a Claim set forth in the Notice of Claim, or if the Escrow Agent does not receive a Response with respect to a Claim within said 15 day period, the Vendors shall be deemed to have irrevocably consented to each Claim so accepted or in respect of which no Response is so received, as made, and the Escrow Agent shall forthwith give written notice thereof to Phoenix: 3.5.1.1 setting forth the total amount of all Claims which have been consented to and the number of shares from the Escrowed Shares to be released from escrow for the benefit of Phoenix (the "Released Shares"), being that number of the Escrowed Shares which is equal in value to the amount of the admitted Claims set forth in such Notice of Claim, calculated on the basis of the Escrowed Share Price for such Claim; and 3.5.1.2 surrender for cancellation to Phoenix the share certificate(s) in its possession representing the Released Shares, duly endorsed for transfer, and the Escrow Agent shall retain in its possession the other share certificate(s) representing the balance of the Escrowed Shares, if any, to be held by it in escrow and dealt with in accordance with the terms hereof; or 3.5.2 the Response indicates that the Vendors (or any of them) dispute a Claim set forth in the Notice of Claim (whether or nor arbitration proceedings have been instituted), the Escrow Agent shall retain in its possession and continue to hold in escrow that number of the Escrowed Shares which is equal in value to the amount provided for in the disputed Claims, calculated on the basis of the Escrowed Share Price for such Claim: 3.5.2.1 until the Escrow Agent receives a joint written notice from Phoenix and the Vendors directing the Escrow Agent as to the manner in which such Escrowed Shares and the share certificate(s) representing same are to be dealt with, in which case the Escrow Agent shall deal with same in accordance with such joint written instructions; or 3.5.2.2 in the absence of such a joint written notice within 10 business days of the Escrow Agent's receipt of the Response, the Escrow Agent shall deal with such Escrowed Shares and the share certificate(s) representing same in accordance with a final arbitration order in respect of such disputed Claim(s) pursuant to the arbitration contemplated by Section 12 hereof. Any arbitration order shall be accompanied by a legal opinion by counsel for the presenting party satisfactory to the Escrow Agent to the effect that the said order is final and non-appealable. - 7 - 3.6 If, at the time of receipt by the Escrow Agent of any Notice of Claim as provided for in Section 3.4 hereof, the Escrowed Shares remaining in escrow for the account of any Vendor calculated on the basis of the Escrowed Share Price is insufficient to meet such Vendor's pro rata portion of the number of Released Shares to be remitted to Phoenix, the balance of such Vendor's pro rata portion of the admitted Claims shall be satisfied by payment in cash from the Proceeds of those Escrowed Shares sold by the Escrow Agent at the direction of such Vendor pursuant to Section 3.2 or 3.3 hereof. 3.7 On the earlier of (i) November 6, 1999, or (ii) the date at which the Escrow Agent receives a notice from Phoenix confirming that the audit of the combined financial statements of Phoenix and McKnight Laboratories GmbH has been completed, the Escrow Agent will deliver the Escrowed Shares and all Distributions and Proceeds to the Vendors, pro rata to their respective interests in the Escrowed Shares, Distributions and Proceeds if any. 4. VOTING RIGHTS 4.1 The Escrow Agent shall provide to each of the Vendors a proxy entitling such Vendor to vote those of the Escrowed Shares which are owned by it, forthwith upon the Escrow Agent's receipt thereof in its capacity as registered shareholder of Phoenix, in order to allow each Vendor to vote its Escrowed Shares in the same manner as if it were the registered owner thereof. 5. RIGHTS AND OBLIGATIONS OF THE ESCROW AGENT 5.1 The Escrow Agent is not a party to, and is not bound by, any provisions which may be evidenced by, or arise out of, any agreement other than as therein set forth under the express provisions of this Agreement. 5.2 The Escrow Agent acts hereunder as a depositary only and is not responsible or liable in any manner whatever for the sufficiency, correctness, genuineness or validity of any instrument deposited with it, or for the form of execution of such instrument or for the identity or authority or right of any person or party executing or depositing it. 5.3 The Escrow Agent shall not be under any duty to give the Escrowed Shares, Distributions and Proceeds, if any, held by it hereunder any greater degree of care than it gives its own similar property and shall not be required to invest any funds held hereunder except as directed in this Agreement. Uninvested funds held hereunder shall not earn or accrue interest. 5.4 The Escrow Agent shall not be liable, except for its own gross negligence or willful misconduct and, except with respect to claims based upon such gross negligence or willful misconduct that are successfully asserted against the Escrow Agent, the other parties hereto shall solidarily indemnify and hold harmless the Escrow Agent (and any successor Escrow Agent) from and against any and all losses, liabilities, claims, actions, damages and expenses, including reasonable attorney's fees and disbursements, arising out of and in connection with this Agreement. Without limiting the foregoing, the Escrow Agent shall - 8 - in no event be liable in connection with its investment or reinvestment of any cash held by it hereunder in good faith, in accordance with the terms hereof. 5.5 The Escrow Agent shall be entitled to rely upon any order, judgment, certification, demand, notice, instrument or other writing delivered to it hereunder without being required to determine the authenticity or the correctness of any fact stated therein or the propriety or validity of the service thereof. The Escrow Agent may act in reliance upon any instrument or signature believed by it to be genuine and may assume that the person purporting to give receipt or advice or make any statement or execute any document in connection with the provisions hereof has been duly authorized to do so. The Escrow Agent may conclusively presume that the undersigned representative of any party hereto which is an entity other than a natural person has full power and authority to instruct the Escrow Agent on behalf of that party unless written notice to the contrary is delivered to the Escrow Agent. 5.6 The Escrow Agent may act pursuant to the advice of counsel with respect to any matter relating to this Agreement and shall not be liable for any action taken or omitted by it in good faith in accordance with such advice. 5.7 The Escrow Agent makes no representation as to the validity, value, genuineness or the collectability of any security or other document or instrument held by or delivered to it. 5.8 The Escrow Agent shall not be called upon to advise any party as to the wisdom in selling or retaining or taking or refraining from any action with respect to any securities or other property deposited hereunder. 5.9 The Escrow Agent (and any successor Escrow Agent) may at any time resign as such by delivering the Escrowed Shares, Distributions and Proceeds, if any, to any successor Escrow Agent jointly designated by the other parties hereto in writing, or to any court of competent jurisdiction, whereupon Escrow Agent shall be discharged of and from any and all further obligations arising in connection with this Agreement. The resignation of Escrow Agent will take effect on the earlier of (a) the appointment of a successor (including a court of competent jurisdiction) or (b) the day which is 30 days after the date of delivery of its written notice of resignation to the other parties hereto. If at that time Escrow Agent has not received a designation of a successor Escrow Agent, Escrow Agent's sole responsibility after that time shall be to retain and safeguard the Escrowed Shares and Proceeds, if any, until receipt of a designation of successor Escrow Agent or a joint written disposition instruction by the other parties hereto or a final non-appealable order of a court of competent jurisdiction. 5.10 Phoenix and the Vendors shall pay Escrow Agent compensation (as payment in full) for the services to be rendered by Escrow Agent hereunder in the amount of $1,500 at the time of execution of this Agreement and agree to reimburse Escrow Agent for all reasonable expenses, disbursements and advances incurred or made by Escrow Agent in performance of its duties hereunder (including reasonable fees, expenses and disbursements of its counsel). - 9 - 6. LIMITED RESPONSIBILITY This Agreement expressly sets forth all the duties of Escrow Agent with respect to any and all matters pertinent hereto. No implied duties or obligations shall be read into this Agreement against the Escrow Agent. The Escrow Agent shall not be bound by the provisions of any agreement among the other parties hereto except this Agreement. No trust is created by this Agreement and the Escrow Agent does not act in any capacity as a trustee. In the event of any disagreement between any of the parties to this Agreement, or between them or either of them and any other person, resulting in demands or adverse claims being made in connection with or for any asset involved herein or affected hereby, the Escrow Agent shall be entitled, at its discretion, to refuse to comply with any demands or claims on it, as long as such disagreement shall continue, and in so refusing the Escrow Agent may make no delivery or other disposition of any asset involved herein or affected hereby, and in so doing the Escrow Agent shall not be or become liable in any way or to any person or party for its failure or refusal to comply with such conflicting demands or adverse claims, and it shall be entitled to continue so to refrain from acting and so to refuse to act until the right of person or party shall have been finally settled as provided in Section 12 hereof, or all differences shall have been adjusted by agreement and the Escrow Agent shall have been notified thereof in writing signed by all persons and parties interested. 7. NOTICES All notices, consents, waivers and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by telecopier (with written confirmation of receipt) provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case the appropriate addresses and telecopier numbers set forth below (or to such other addresses and telecopier numbers as a party may designate by notice to the other parties): 7.1 To Phoenix: Phoenix International Life Sciences Inc. 2350, Cohen Street Saint-Laurent, Quebec H4R 2N6 Canada Telecopier No.: (514) 333-7306 ATTENTION: JEAN-YVES CALOZ 7.2 To the Vendors: TO BUHRENS Prof. Dr. Klaus-Georg Buhrens Buchtallee 4a 21465 Reinbek, Germany - 10 - TO GEIST: Dr. Martin Geist Georgiweg 43 22453 Hamburg, Germany TO BLOHM: Dr. Bernk Blohm Buchtallee 23 21465 Reinbek, Germany TO HILGENSTOCK: Dr. Christian Hilgenstock Gronenweg 73 22549 Hamburg, Germany TO HEMKER: Dr. Claus Hemker Feldblick 2 22397 Hamburg, Germany TO KOZAK: Dr. Ivan Kozak Kopeniker Str. 15 22045 Hamburg, Germany TO VENS-CAPPELL: Dr. Bernhard Vens-Cappell Wurtkamp 12 22527 Hamburg, Germany TO TETZLOFF: Dr. Wolfgang Tetzloff Friedenstrasse 56 82194 Grobenzell, Germany TO J. HENKE: Dr. Jurgen J. Henke Hohenzollernring 57 50672 Koln, Germany - 11 - TO L. HENKE: Dr. L. Henke J. Henke Hohenzollernring 57 50672 Koln, Germany TO TREND: TREND Finanzanalysen GmbH Berliner Allee 21 40212 Dusseldorf, Germany ATTENTION: PETER MARTIN 7.3 To the Escrow Agent: Montreal Trust Company 1800 McGill College Avenue Montreal (Quebec) H3A 3K9 Telecopier No.: (514) 982-7677 7.4 To Dr. Ulrike Schafer: Schafer Pott Berlinerallee 26 40212 Dusseldorf, Germany 8. GOVERNING LAW This Agreement shall be governed by the laws of the Province of Quebec and the laws of Canada applicable therein. 9. COUNTERPARTS This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original and all of which, when taken together, will be deemed to constitute one and the same. 10. SECTION HEADINGS The headings of sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. 11. WAIVER - 12 - The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither the failure nor any delay by any party in exercising any right, power, or privilege under this Agreement or the documents referred to in this Agreement will operate as a waiver of such right, power or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other parties; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement. 12. ARBITRATION All disputes arising out of or in connection with the present Agreement shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules. The place of arbitration shall be Montreal. The language of the arbitration shall be English. 13. CONFIDENTIALITY The parties agree to treat this Agreement as confidential and not to disclose its contents to third parties other than their advisers, except to the extent necessary to enforce performance of obligations hereunder, or as is required to comply with applicable laws or regulations, including regulations of any stock exchange on which the securities of Phoenix are listed. 14. FURTHER ASSURANCES The parties shall, with all reasonable diligence, do all such things and provide all such reasonable assurances as may be required to consummate the transactions contemplated hereby, and each party shall provide such further documents or instruments required by another party as may be reasonably necessary or desirable to give effect to the purpose of this Agreement and to carry out its provisions. 15. GENERAL The invalidity or unenforceability of any term or provision hereof shall not affect the validity or enforceability of any other term or provision hereof. This Agreement and the other documents and instruments referred to herein constitute the entire understanding of the parties hereto with respect to the subject matter hereof and thereof and supersede all present and prior agreements, whether written or oral. This Agreement shall bind and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, personal representatives, successors and assigns. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first written above. - 13 - PHOENIX INTERNATIONAL LIFE SCIENCES INC. By: /s/ John Hooper /s/ Klaus-Georg Buhrens --------------------------------------------- ----------------------------- John Hooper, Ph.D. PROF. DR. KLAUS-GEORG BUHRENS Title: Chairman and Chief Executive Officer /s/ Martin Geist /s/ Bernd Blohm - ------------------------------------ --------------------------------------- DR. MARTIN GEIST DR. BERND BLOHM /s/ Christian Hilgenstock /s/ Claus Hemker - ------------------------------------ --------------------------------------- DR. CHRISTIAN HILGENSTOCK DR. CLAUS HEMKER /s/ Ivan Kozak /s/ Bernhard Vens-Cappell - ------------------------------------ --------------------------------------- DR. IVAN KOZAK DR. BERNHARD VENS-CAPPELL /s/ Wolfgang Tetzloff /s/ Ulrike Schafer - ------------------------------------ --------------------------------------- DR. WOLFGANG TETZLOFF DR. JURGEN HENKE, by Ulrike Schafer TREND FINANZANALYSEN GMBH /s/ Ulrike Schafer By: /s/ Ulrike Schafer - ------------------------------------ ----------------------------------- DR. L. HENKE, by Ulrike Schafer Ulrike Schafer MONTREAL TRUST COMPANY By: /s/ Rose Marie Labbe ----------------------------------- Rose Marie Labbe Title: Trust Officer By: /s/ Guy L'Esperance ----------------------------------- Guy L'Esperance Title: Manager, Client Servicing EX-2.7 8 EXHIBIT 2.7 AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER, dated as of March 24, 1999, among Phoenix International Life Sciences Inc., a corporation constituted under the laws of Canada ("Buyer"), Chrysalis International Corporation, a Delaware corporation (the "Company"), and Phoenix Merger Sub Corp., a Delaware corporation and a wholly-owned subsidiary of Buyer ("Merger Sub"). WHEREAS, the parties have entered into an Agreement and Plan of Merger, dated as of November 18, 1998 (the "Merger Agreement"); and WHEREAS, neither the stockholders of the Company nor the shareholders of Buyer have adopted the Merger Agreement; and WHEREAS, the parties wish to amend certain provisions of the Merger Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged: 1. AMENDMENT TO MERGER AGREEMENT. Pursuant to Section 10.03 of the Merger Agreement, the parties hereby amend the Merger Agreement to replace each reference to "March 31, 1999" with "April 30, 1999" in each of the following sections of the Merger Agreement: Section 9.01(f) Section 9.01(g) Section 9.03(b) 2. COUNTERPARTS; EFFECTIVENESS. This Amendment No. 1 may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Amendment No. 1 shall become effective when each party hereto shall have received counterparts hereof signed by all of the other parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be duly executed by their respective authorized officers as of the day and year first above written. PHOENIX INTERNATIONAL LIFE SCIENCES INC. By: /s/ Jean-Yves Caloz -------------------- Name: Jean-Yves Caloz Title: Senior Vice President International Finance and Acquisitions CHRYSALIS INTERNATIONAL CORPORATION By: /s/ Paul J. Schmitt ------------------- Name: Paul J. Schmitt Title: President PHOENIX MERGER SUB CORP. By: /s/ Jean-Yves Caloz -------------------- Name: Jean-Yves Caloz Title: Treasurer and Secretary - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER dated as of November 18, 1998 among PHOENIX INTERNATIONAL LIFE SCIENCES INC. CHRYSALIS INTERNATIONAL CORPORATION and PHOENIX MERGER SUB CORP. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS -----------
PAGE ---- ARTICLE 1 THE MERGER...............................................................................................1 Section 1.01 MERGER.................................................................................1 Section 1.02 SURRENDER AND PAYMENT..................................................................2 Section 1.03 THE MERGER DATE........................................................................4 Section 1.04 STOCK OPTIONS AND WARRANTS OF THE COMPANY..............................................4 Section 1.05 ADJUSTMENTS............................................................................6 Section 1.06 FRACTIONAL SHARES......................................................................6 Section 1.07 FAILURE TO OBTAIN APPROVAL FOR LISTING; CASH MERGER CONSIDERATION......................7 Section 1.08 DISSENTING SHARES......................................................................8 Section 1.09 PURCHASE PRICE; EXCHANGE RATIO; VALUATION OF BUYER COMMON STOCK........................8 ARTICLE 2 THE SURVIVING CORPORATION................................................................................9 Section 2.01 CERTIFICATE OF INCORPORATION; BYLAWS...................................................9 Section 2.02 DIRECTORS AND OFFICERS.................................................................9 Section 2.03 SUBSCRIPTION..........................................................................10 ARTICLE 3........................................................................................................10 REPRESENTATIONS AND WARRANTIES OF THE COMPANY...........................................................10 Section 3.01 CORPORATE EXISTENCE AND POWER.........................................................10 Section 3.02 CORPORATE AUTHORIZATION...............................................................10 Section 3.03 GOVERNMENTAL AUTHORIZATION............................................................11 Section 3.04 NON-CONTRAVENTION.....................................................................12 Section 3.05 CAPITALIZATION........................................................................12 Section 3.06 SUBSIDIARIES..........................................................................13 Section 3.07 SEC FILINGS...........................................................................14 Section 3.08 FINANCIAL STATEMENTS..................................................................14 Section 3.09 DISCLOSURE DOCUMENTS..................................................................15 Section 3.10 INFORMATION SUPPLIED..................................................................15 Section 3.11 ABSENCE OF CERTAIN CHANGES............................................................16 Section 3.12 NO UNDISCLOSED MATERIAL LIABILITIES...................................................17 Section 3.13 LITIGATION; INVESTIGATIONS; ORDERS AND DECREES........................................17 Section 3.14 TAXES.................................................................................18 Section 3.15 ERISA AND LABOR MATTERS...............................................................19 Section 3.16 COMPLIANCE WITH LAWS..................................................................21
i Section 3.17 INTELLECTUAL PROPERTY RIGHTS..........................................................22 Section 3.18 ENVIRONMENTAL MATTERS.................................................................24 Section 3.19 OPINION OF FINANCIAL ADVISOR..........................................................26 Section 3.20 ANTITAKEOVER STATUTES AND CERTIFICATE OF INCORPORATION PROVISIONS.....................26 Section 3.21 RIGHTS AGREEMENT......................................................................26 Section 3.22 FINDERS FEES..........................................................................26 Section 3.23 TITLE TO AND CONDITION OF PROPERTIES..................................................27 Section 3.24 CONTRACTS.............................................................................27 Section 3.25 ACCOUNTS RECEIVABLE...................................................................28 Section 3.26 RELATIONSHIPS.........................................................................28 Section 3.27 PRODUCT WARRANTIES AND LIABILITIES....................................................28 Section 3.28 AFFILIATE TRANSACTIONS. ..............................................................28 Section 3.29 INSURANCE.............................................................................29 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER.................................................................29 Section 4.01 CORPORATE EXISTENCE AND POWER. .......................................................29 Section 4.02 CORPORATE AUTHORIZATION...............................................................30 Section 4.03 GOVERNMENTAL AUTHORIZATION............................................................30 Section 4.04 NON-CONTRAVENTION.....................................................................30 Section 4.05 CAPITALIZATION........................................................................30 Section 4.06 PUBLIC FILINGS........................................................................31 Section 4.07 FINANCIAL STATEMENTS..................................................................31 Section 4.08 DISCLOSURE DOCUMENTS..................................................................31 Section 4.09 INFORMATION SUPPLIED..................................................................32 Section 4.10 ABSENCE OF CERTAIN CHANGES............................................................32 Section 4.11 NO UNDISCLOSED MATERIAL LIABILITIES...................................................33 Section 4.12 OWNERSHIP OF COMPANY STOCK............................................................33 Section 4.13 FINDERS FEES..........................................................................33 Section 4.14 SUFFICIENT CASH TO REPAY CERTAIN DEBT.................................................34 ARTICLE 5 COVENANTS OF THE COMPANY................................................................................34 Section 5.01 CONDUCT OF THE COMPANY................................................................34 Section 5.02 STOCKHOLDER MEETING; PROXY MATERIALS..................................................38 Section 5.03 OTHER OFFERS..........................................................................38 Section 5.04 SHUT-DOWNS............................................................................39 Section 5.05 INTELLECTUAL PROPERTY MATTERS.........................................................40 Section 5.06 NOTICE OF PREPAYMENT..................................................................40 Section 5.07 SHARED SERVICES.......................................................................40 Section 5.08 HACKEL AFFILIATE LETTER AND SUPPORT/VOTING AGREEMENT..................................40
ii ARTICLE 6 COVENANTS OF BUYER......................................................................................40 Section 6.01 CONDUCT OF BUYER......................................................................40 Section 6.02 LISTING OF STOCK......................................................................41 Section 6.03 REPAYMENT OF CERTAIN DEBT.............................................................41 Section 6.04 FINANCING.............................................................................41 ARTICLE 7 COVENANTS OF BUYER AND THE COMPANY......................................................................41 Section 7.01 COMMERCIALLY REASONABLE EFFORTS.......................................................41 Section 7.02 COOPERATION...........................................................................41 Section 7.03 PUBLIC ANNOUNCEMENTS..................................................................42 Section 7.04 ACCESS TO INFORMATION.................................................................42 Section 7.05 FURTHER ASSURANCES....................................................................43 Section 7.06 NOTICES OF CERTAIN EVENTS.............................................................43 Section 7.07 DIRECTOR AND OFFICER LIABILITY........................................................44 Section 7.08 REGISTRATION STATEMENT................................................................45 Section 7.09 GOVERNMENTAL AUTHORIZATION............................................................45 Section 7.10 CERTAIN CORPORATE MATTERS.............................................................45 Section 7.11 EMPLOYMENT............................................................................45 ARTICLE 8 CONDITIONS TO THE MERGER................................................................................45 Section 8.01 CONDITIONS TO THE OBLIGATIONS OF EACH PARTY...........................................45 Section 8.02 CONDITIONS TO THE OBLIGATIONS OF BUYER................................................46 Section 8.03 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY..........................................47 ARTICLE 9 TERMINATION.............................................................................................48 Section 9.01 TERMINATION...........................................................................48 Section 9.02 EFFECT OF TERMINATION.................................................................49 Section 9.03 TERMINATION UPON BANKRUPTCY...........................................................49 ARTICLE 10 MISCELLANEOUS...........................................................................................50 Section 10.01 NOTICES...............................................................................50
iii Section 10.02 ENTIRE AGREEMENT; NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES; NO THIRD PARTY BENEFICIARIES.............................................................52 Section 10.03 AMENDMENTS; NO WAIVERS................................................................52 Section 10.04 EXPENSES..............................................................................52 Section 10.05 DOLLAR AMOUNTS........................................................................53 Section 10.06 SUCCESSORS AND ASSIGNS................................................................53 Section 10.07 GOVERNING LAW.........................................................................53 Section 10.08 JURISDICTION..........................................................................53 Section 10.09 COUNTERPARTS; EFFECTIVENESS...........................................................53 Section 10.10 RELIEF FROM AUTOMATIC STAY. .........................................................54 EXHIBITS EXHIBIT A - Form of Support/Voting Agreement EXHIBIT B - Form of Affiliate Letter EXHIBIT C - Form of Representation Related to D&O Insurance
iv AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of November 18, 1998, among Phoenix International Life Sciences Inc., a corporation constituted under the laws of Canada ("BUYER"), Chrysalis International Corporation, a Delaware corporation (the "COMPANY"), and Phoenix Merger Sub Corp., a Delaware corporation and a wholly-owned subsidiary of Buyer ("MERGER SUB"). The parties intend that the Merger (as defined herein) be the adoption of a plan of reorganization qualifying under Section 368(a) of the Code (as defined herein). The parties hereto agree as follows: ARTICLE 1 THE MERGER SECTION 1.01. MERGER. (a) Upon the terms and subject to the conditions set forth herein, on the Merger Date, Merger Sub shall merge into the Company (the "MERGER") and the separate existence of Merger Sub shall cease. The Company shall be the surviving corporation in the Merger (hereinafter sometimes referred to as the "SURVIVING CORPORATION") and its separate corporate existence, with all its purposes, objects, rights, privileges, powers and franchises, shall continue unaffected and unimpaired by the Merger. (b) Pursuant to the Merger: (i) Each share of common stock, $.01 par value, of the Company (the "COMPANY STOCK") held by the Company or any Subsidiary of the Company as treasury stock or by Buyer, in each case immediately prior to the Merger Date, shall be canceled and no payment shall be made with respect thereto; (ii) Subject to Section 1.07, each share of Company Stock outstanding immediately prior to the Merger Date shall, except as otherwise provided in Section 1.01(b)(i), be converted into the right to receive a number of common shares of Buyer ("BUYER COMMON STOCK") equal to the Exchange Ratio (the "MERGER CONSIDERATION") (determined in accordance with Section 1.09(b)); and (iii) At the Merger Date, each share of common stock, par value $0.01 per share, of Merger Sub ("MERGER SUB COMMON STOCK") outstanding immediately prior to the Merger Date shall be converted into an equal number of shares of common stock, par value $.01 per share, of the Surviving Corporation ("SURVIVING CORPORATION COMMON STOCK"). From and after the Merger Date, all shares of Company Stock converted in accordance with Section 1.01(b)(ii) shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of such shares shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration, the right to exercise appraisal rights in accordance with and subject to the provisions of the Delaware Law if Section 1.08 is applicable and the other rights specified in this Agreement. From and after the Merger Date, all certificates representing Merger Sub Common Stock shall be deemed for all purposes to represent the number of shares of Surviving Corporation Common Stock into which they were converted in accordance with Section 1.01(b)(iii). For purposes of this Agreement, "SUBSIDIARY", when used with respect to any Person, means any other Person, whether incorporated or unincorporated, of which securities or other ownership interests having ordinary power to elect a majority of the board of directors or other persons performing similar functions are directly or indirectly owned or controlled by such Person or by any one or more of its Subsidiaries. For purposes of this Agreement, "PERSON" means an individual, a corporation, a limited liability company, a partnership (general or limited), an association, a trust or any other entity or organization, including, without limitation, a government or political subdivision or any agency or instrumentality thereof. For purposes of this Agreement, an "AFFILIATE", when used with respect to any Person, means any other Person who is, or is deemed to be, an affiliate of such Person within the meaning of the 1933 Act. SECTION 1.02. SURRENDER AND PAYMENT. (a) Prior to the Merger Date, Buyer shall appoint an agent reasonably satisfactory to the Company (the "EXCHANGE AGENT") for the purpose of exchanging certificates representing shares of Company Stock for the Merger Consideration. Buyer will make available to the Exchange Agent, as needed, certificates representing the Buyer Common Stock (or, if a Listing Failure occurs, United States Dollars) in respect of the Merger Consideration to be paid in respect of shares of Company Stock, in accordance with the terms of Section 1.01(b), together with any Excess Shares (as defined below). The Exchange Agent shall invest any cash amounts delivered by Buyer to the Exchange Agent as directed by Buyer. Any interest and other income resulting from such investments shall be paid to Buyer pursuant to Section 1.02(e). Promptly after the Merger Date, Buyer shall send, or shall cause the Exchange Agent to send, to each holder of shares of Company Stock whose shares were converted into a right to receive the Merger Consideration in accordance with Section 1.01(b)(ii) at the Merger Date a letter of transmittal for use in such exchange (which shall specify that delivery of the Merger Consideration shall be effected, and risk of loss and title shall pass, only upon proper delivery of the certificates representing shares of Company Stock, to the Exchange Agent). (b) Each holder of shares of Company Stock that have been converted into a right to receive the Merger Consideration, upon surrender to the Exchange Agent of a certificate or certificates representing such shares of Company Stock, together with a properly completed letter of transmittal covering such shares of Company Stock, will be entitled to receive (i) the Merger Consideration payable in respect of such shares of Company Stock, (ii) subject to Section 1.07, cash in lieu of any fractional shares pursuant to Section 1.06 and (iii) subject to Section 1.07, certain dividends or other distributions in accordance with Section 1.02(g). Until so surrendered, each such certificate shall, after the Merger Date, represent for all purposes only the right to receive (i) the Merger Consideration, (ii) subject to Section 1.07, cash in lieu of any fractional 2 shares pursuant to Section 1.06 and (iii) subject to Section 1.07, certain dividends or other distributions in accordance with Section 1.02(g). All Buyer Common Stock issued and/or cash paid pursuant to this Article 1 upon surrender of certificates representing shares of Company Stock shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Company Stock represented thereby. (c) If any portion of the Merger Consideration is to be paid to a Person other than the registered holder of the shares of Company Stock represented by the certificate or certificates surrendered in exchange therefor, it shall be a condition to such payment that the certificate or certificates so surrendered shall be properly endorsed or otherwise be in proper form for transfer and that the Person requesting such payment shall pay to the Exchange Agent any transfer or other taxes required as a result of such payment to a Person other than the registered holder of such shares of Company Stock or establish to the satisfaction of the Exchange Agent that such tax has been paid or is not payable. (d) After the Merger Date, there shall be no further registration of transfers of shares of Company Stock. If, after the Merger Date, certificates representing shares of Company Stock are presented to the Surviving Corporation, they shall be canceled and exchanged for the consideration provided for, and in accordance with the procedures set forth, in this Article 1. (e) Any portion of the Merger Consideration made available to the Exchange Agent pursuant to Section 1.02(a) that remains unclaimed by the holders of shares of Company Stock twelve months after the Merger Date shall be returned to Buyer, upon demand, and any such holder who has not exchanged his shares of Company Stock for the Merger Consideration in accordance with this Section 1.02 prior to that time shall thereafter look only to Buyer for his claim for (i) Merger Consideration, (ii) subject to Section 1.07, any cash in lieu of any fractional shares pursuant to Section 1.06 and (iii) subject to Section 1.07, certain dividends or other distributions in accordance with Section 1.02(g). Notwithstanding the foregoing, Buyer shall not be liable to any holder of shares of Company Stock for any amount paid to a public official pursuant to applicable escheat or abandoned property laws. Any amounts remaining unclaimed by holders of shares of Company Stock two years after the Merger Date (or such earlier date immediately prior to such time as such amounts would otherwise escheat to or become property of any governmental entity) shall, to the extent permitted by applicable law, become the property of Buyer free and clear of any claim or interest of any Person previously entitled thereto. (f) If a Listing Failure occurs, any portion of the Merger Consideration made available to the Exchange Agent pursuant to Section 1.02(a) to pay for shares of Company Stock in respect of which appraisal rights have been perfected shall be returned to Buyer, upon demand. (g) No dividends or other distributions with respect to the Buyer Common Stock constituting all or a portion of the Merger Consideration shall be paid to the holder of any unsurrendered certificate representing Company Stock until such certificates are surrendered as provided in this Section 1.02. Subject to the effect of applicable laws and Section 1.07, following 3 such surrender, there shall be paid, without interest, to the record holder of the certificates representing the Buyer Common Stock (i) at the time of such surrender, the amount of dividends or other distributions with a record date after the Merger Date payable prior to or on the date of such surrender with respect to such whole shares of Buyer Common Stock, and not paid, and the amount of cash payable in lieu of any fractional shares pursuant to Section 1.06, less the amount of any withholding taxes which may be required thereon under any provision of federal, state, local or foreign tax law, and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Merger Date but prior to the date of surrender and a payment date subsequent to the date of surrender payable with respect to such whole shares of Buyer Common Stock, less the amount of any withholding taxes which may be required thereon under any provision of federal, state, local or foreign tax law. Buyer shall make available to the Exchange Agent cash for these purposes. (h) If any certificate representing Company Stock that was converted into a right to receive the Merger Consideration in accordance with Section 1.01(b)(ii) shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such certificate to be lost, stolen or destroyed and, if required by Buyer, the posting by such Person of a bond in such reasonable amount as Buyer may direct as indemnity against any claim that may be made against it with respect to such certificate, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed certificate (i) the Merger Consideration, (ii) subject to Section 1.07, cash in lieu of any fractional shares pursuant to Section 1.06, and (iii) subject to Section 1.07 and if applicable, any unpaid dividends and distributions on shares of Buyer Common Stock deliverable in respect thereof in accordance with Section 1.02(g). SECTION 1.03. THE MERGER DATE. As soon as practicable (but in no event more than two business days) after the satisfaction or, to the extent permitted hereunder or under applicable law, waiver of all conditions to the Merger, (a) Merger Sub and the Company shall file a copy of this Agreement (or, to the extent permitted by the Delaware General Corporation Law ("DELAWARE LAW"), a Certificate of Merger) (the "CERTIFICATE OF MERGER") with the Delaware Secretary of State and make all other filings or recordings required by the Delaware Law in connection with the Merger, and (b) the Merger shall become effective at such time as the Certificate of Merger is duly filed with the Secretary of State, or at such later date or time as Buyer and the Company shall agree and shall be specified in the Certificate of Merger (such time and date are referred to as the "MERGER DATE"). SECTION 1.04. STOCK OPTIONS AND WARRANTS OF THE COMPANY. (a) As soon as practicable following the date of this Agreement, the Board of Directors of the Company (or, if appropriate, any committee of the Board of Directors administering the Company Stock Plans, as defined below) shall adopt such resolutions or take such other actions as may be required to effect the following: (i) adjust the terms of all outstanding options to purchase shares of Company Stock (the "COMPANY STOCK OPTIONS") granted under any plan or arrangement providing 4 for the grant of options to purchase shares of Company Stock to current or former officers, directors, employees or consultants of the Company (the "COMPANY STOCK PLANS"), whether vested or unvested, and all outstanding warrants to purchase shares of Company Stock (the "COMPANY WARRANTS"), whether vested or unvested, as necessary to provide that, at the Merger Date, each Company Stock Option and Company Warrants outstanding immediately prior to the Merger Date shall be amended and converted into an option or warrant, as the case may be, to acquire, on the same terms and conditions as were applicable under the Company Stock Option or Company Warrant, as the case may be, the number of shares of Buyer Common Stock (rounded down to the nearest whole share) determined by multiplying the number of shares of Company Stock subject to such Company Stock Option or Company Warrant by the Exchange Ratio, at a price per share of Buyer Common Stock equal to (A) the aggregate exercise price for the shares of Company Stock otherwise purchasable pursuant to such Company Stock Option or Company Warrant divided by (B) the aggregate number of shares of Buyer Common Stock deemed purchasable pursuant to such Company Stock Option (each, as so adjusted, an "ADJUSTED OPTION") or Company Warrant (each as so adjusted, an "ADJUSTED WARRANT"); PROVIDED that such exercise price shall be rounded up to the nearest whole cent; and (ii) make such other changes to the Company Stock Plans, Company Stock Options and Company Warrants as Buyer and the Company may agree are appropriate solely to give effect to the Merger. (b) Notwithstanding Section 1.04(a), the adjustments provided in Section 1.04(a) with respect to any Company Stock Options that are "incentive stock options" as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "CODE") shall be and are intended to be effected in a manner which is consistent, to the extent permitted by applicable law, with Section 424(a) of the Code. (c) Prior to the Merger Date, Buyer shall amend its option plan to provide, or shall adopt an option plan which shall provide (in each case, the "BUYER OPTION PLAN"), for the issuance of the Adjusted Options at the Merger Date and by virtue of the Merger and without the need of any further corporate action, Buyer shall assume all obligations of the Company under the Company Stock Plans, including with respect to the Company Stock Options outstanding at the Merger Date. (d) Within two (2) business days after the Merger Date, Buyer shall prepare and file with the SEC a registration statement on Form S-8 (or another appropriate form) registering a number of shares of Buyer Common Stock equal to the number of shares subject to the Adjusted Options. Such registration statement shall be kept effective (and the current status of the initial offering prospectus or prospectuses required thereby shall be maintained) at least for so long as any Adjusted Options may remain outstanding. 5 (e) As soon as practicable after the Merger Date, Buyer shall deliver to the holders of Company Stock Options appropriate notices setting forth such holders' rights pursuant to the respective Company Stock Plans and the agreements evidencing the grants of such Company Stock Options and that such Company Stock Options and agreements shall be assumed by Buyer and shall continue in effect on the same terms and conditions (subject to the adjustments required by this Section 1.04 after giving effect to the Merger). (f) A holder of an Adjusted Option may exercise such Adjusted Option in accordance with its terms. (g) Buyer shall issue the Adjusted Warrants, if any, at the Merger Date and by virtue of the Merger and without the need for any further corporate action, Buyer shall assume all obligations of the Company under any Company Warrant outstanding at the Merger Date. (h) As soon as practicable after the Merger Date, Buyer shall deliver to any holders of Company Warrants, upon due surrender of the Company Warrants, warrants evidencing the Assumed Warrants. (i) Except to the extent required under the respective terms of the Company Stock Options or Company Warrants or other applicable agreements, all restrictions or limitations on transfer and vesting with respect to Company Stock Options awarded under the Company Stock Plans or any other plan, program or arrangement of the Company, and with respect to Company Warrants, to the extent that such restrictions or limitations shall not have already lapsed, shall remain in full force and effect with respect to such options or warrants after giving effect to the Merger and the assumption by Buyer as set forth above. SECTION 1.05. ADJUSTMENTS. If at any time during the period between the date of this Agreement and the Merger Date, any change in the outstanding shares of Buyer Common Stock shall occur by reason of any reclassification, recapitalization, stock split or combination, exchange or readjustment of shares, or any stock dividend thereon with a record date during such period or any similar transaction or event, the Merger Consideration shall be appropriately adjusted to provide to the holders of Company Stock the same economic effect as contemplated prior to such change or dividend. If at any time during the period between the date of this Agreement and the Merger Date, any change in the outstanding shares of Company Stock shall occur by reason of any reclassification, recapitalization, stock split or combination, exchange or readjustment of shares, or any stock dividend thereon with a record date during such period or any similar transaction or event, the Merger Consideration shall be appropriately adjusted to provide to the Buyer the same economic effect as contemplated prior to such change or dividend. SECTION 1.06. FRACTIONAL SHARES. No fractional shares of Buyer Common Stock shall be issued in the Merger, but in lieu thereof each holder of Company Stock otherwise entitled to a fractional share of Buyer Common Stock will be entitled, subject to Section 1.07, to receive, from the Exchange Agent in accordance with the provisions of this Section 1.06, a cash payment 6 in lieu of such fractional shares of Buyer Common Stock representing such holder's proportionate interest, if any, in the net proceeds from the sale by the Exchange Agent in one or more transactions (which sale transactions shall be made at such times, in such manner and on such terms as the Exchange Agent shall determine in its reasonable discretion) on behalf of all such holders of the aggregate of the fractional shares of Buyer Common Stock which would otherwise have been issued (the "EXCESS SHARES"). The sale of the Excess Shares by the Exchange Agent shall be executed on The Nasdaq Stock Market ("NASDAQ") through one or more member firms of the National Association of Securities Dealers, Inc. and shall be executed in round lots to the extent practicable. Until the net proceeds of such sale or sales have been distributed to the appropriate holders of shares of Company Stock, the Exchange Agent will hold such proceeds in trust for the appropriate holders of Company Stock. Buyer shall pay all commissions, transfer taxes and other out-of-pocket transaction costs, including, without limitation, the expenses and compensation of the Exchange Agent, incurred in connection with such sale of the Excess Shares. As soon as practicable after the determination of the amount of cash, if any, to be paid to holders of Company Stock in lieu of any fractional shares of Buyer Common Stock the Exchange Agent shall make available such amounts to such holders of shares of Company Stock without interest. SECTION 1.07 FAILURE TO OBTAIN APPROVAL FOR LISTING; CASH MERGER CONSIDERATION. If Buyer is unable to obtain, within sixty (60) days after the filing of the applications and forms referred to in Section 6.02 ("LISTING PERIOD"), a letter from Nasdaq ("NASDAQ LETTER") indicating that the Buyer Common Stock has been approved for listing on the Nasdaq NMS subject to customary conditions to be contained in such approval letter for a transaction of this type (a "LISTING FAILURE"), then: (a) Section 1.01(b)(ii) shall be deemed to be amended and restated in its entirety as follows without any action by the parties hereto: "(ii) Each share of Company Stock outstanding immediately prior to the Merger Date shall, except as otherwise provided in Section 1.01(b)(i) or in Section 1.08 with respect to shares of Company Stock as to which appraisal rights have been exercised (which shares shall be treated in accordance with Section 262 of the Delaware Law), be converted into the right to receive an amount of cash (in United States dollars and rounded to the nearest cent) equal to (A) the Purchase Price (as determined in accordance with Section 1.09) divided by (B) (x) the number of shares of Company Stock outstanding on the date immediately prior to the Merger Date PLUS (y) the number of shares of Company Stock subject to Company Options and Company Warrants that have an exercise or conversion price less than $.71 MINUS (z) the number of shares of Company Stock owned by Buyer. As of the date of this Agreement, (B) in the immediately preceding sentence would be 11,695,549 (the "MERGER CONSIDERATION"). 7 (b) Section 1.02(g) shall be deemed to be deleted in its entirety without any action by the parties hereto; (c) Section 1.06 shall be deemed to be deleted in its entirety without any action by the parties hereto; and (d) (i) The (A) representations and warranties of the Company contained in Section 3.10(i), (B) representations and warranties of Buyer contained in Sections 4.05 through 4.08 and Sections 4.10 through 4.11, (C) covenants contained in Sections 6.01, 6.02, the last sentence of Section 7.02 and Section 7.08 and (D) the closing conditions set forth in Sections 8.01(e) and 8.01(f) shall cease to be applicable, and (ii) the accuracy of any such representation and warranty or failure to comply with any such covenant will not be a condition to the closing of the Merger and the breach of any such representation and warranty or failure to perform any such covenant shall not serve as the basis for any termination right set forth in Section 9.01. SECTION 1.08 DISSENTING SHARES. Notwithstanding Section 1.01, in the event of a Listing Failure, shares of Company Stock outstanding immediately prior to the Merger Date and held by a holder who has not voted in favor of the Merger and who has exercised appraisal rights in respect of such shares of Company Stock in accordance with the Delaware Law shall not be converted into a right to receive the Merger Consideration unless such holder fails to perfect or withdraws or otherwise loses his appraisal or objecting stockholders' rights. Shares of Company Stock in respect of which appraisal rights have been exercised shall be treated in accordance with Section 262 of the Delaware Law. If after the Merger Date such holder fails to perfect or withdraws or otherwise loses his right to demand the payment of fair value for shares of Company Stock under Delaware Law, such shares of Company Stock shall be treated as if they had been converted as of the Merger Date into a right to receive the Merger Consideration. The Company shall give Buyer prompt notice of any demands received by the Company for the exercise of appraisal rights with respect to shares of Company Stock and Buyer shall have the right to participate in all negotiations and proceedings with respect to such demands. The Company shall not, except with the prior written consent of Buyer, make any payment with respect to, or settle or offer to settle, any such demands. In the event any amounts shall become due and payable in respect of any such demands, such amounts shall be paid by the Surviving Corporation. SECTION 1.09 PURCHASE PRICE; EXCHANGE RATIO; VALUATION OF BUYER COMMON STOCK. (a) For purposes of this Agreement, the term "PURCHASE PRICE" shall mean Eight Million Two Hundred Ninety Thousand United States Dollars (U.S.$8,290,000). On or before the date immediately prior to the Merger Date, Buyer and the Company shall agree on the appropriate calculation of the Merger Consideration (pursuant to Section 1.01(b)(ii)) and the Exchange Ratio (pursuant to Sections 1.09(b) and (c)) and will cause the Merger Consideration (as so calculated) to be reflected correctly in the Certificate of Merger to be effective on the Merger Date. 8 (b) For purposes of this Agreement, the term "EXCHANGE RATIO" shall mean a fraction of which (i) the numerator shall be (x) the Purchase Price divided by (y) (A) the number of shares of Company Stock outstanding on the date immediately prior to the Merger Date PLUS (B) the number of shares of Company Stock subject to Company Options and Company Warrants that have an exercise or conversion price less than $.71 MINUS (C) the number of shares of Company Stock owned beneficially by Buyer other than beneficial ownership arising from the execution of the Support/Voting Agreements, and (ii) the denominator shall be the value of Buyer Common Stock (determined in accordance with Section 1.09(c)). As of the date of this Agreement, (y) in the immediately preceding sentence is 11,695,549. (c) For purposes of Section 1.09(b), the value of Buyer Common Stock shall be determined by dividing by two the following sum: (I) the average of the closing prices for the Buyer Common Stock on the Toronto Stock Exchange for each business day commencing on the 30th day prior to the public announcement of the transactions contemplated by this Agreement and (II) the average of the closing prices for the Buyer Common Stock on the Toronto Stock Exchange for each business day commencing on the day immediately following such announcement and ending on the 30th day following such public announcement. Such value shall then be converted from Canadian dollars into U.S. dollars based upon the average applicable exchange rate for such calculation period as published in THE WALL STREET JOURNAL (Exchange Rate table in Currency Trading section). ARTICLE 2 THE SURVIVING CORPORATION SECTION 2.01. CERTIFICATE OF INCORPORATION; BYLAWS. The certificate of incorporation and bylaws of the Merger Sub in effect at the Merger Date shall be the certificate of incorporation and bylaws, respectively, of the Surviving Corporation until amended in accordance with applicable law, except for Article I thereof which shall include the name of the Surviving Corporation designated by Buyer. The Surviving Corporation shall succeed to all of the rights, privileges, powers and franchises, of a public as well as of a private nature, of the Company and Merger Sub, all of the properties and assets and all of the debts of the Company and Merger Sub, choses in action and other interests due or belonging to the Company and Merger Sub and shall be subject to, and responsible for, all of the debts, liabilities and duties of the Company and Merger Sub with the effect set forth in the Delaware Law. SECTION 2.02. DIRECTORS AND OFFICERS. From and after the Merger Date, until successors are duly elected or appointed and qualified in accordance with applicable law, (a) the directors of Merger Sub immediately prior to the Merger Date shall be the directors of the Surviving Corporation, and (b) the officers of Merger Sub immediately prior to the Merger Date shall be the officers of the Surviving Corporation. On or prior to the Merger Date, the Company shall deliver to Buyer evidence satisfactory to Buyer of the resignations (to be effective as of the Merger Date) of each of the directors of the Company and/or its Subsidiaries, and, without 9 affecting their employment status or any rights they may have under any severance agreement, employment agreement or similar arrangement disclosed in the Company Disclosure Schedule, each of the officers of the Company and/or its Subsidiaries. SECTION 2.03. SUBSCRIPTION. As part of the overall transactions described in this Agreement, in consideration of Buyer agreeing to issue and deliver Buyer Common Stock in accordance with Section 1.02 of this Agreement, Buyer will be entitled to subscribe and agrees to subscribe, at the Merger Date, for a number of shares of common stock ( par value $.01 per share), of the Surviving Corporation equivalent to the number of shares of Company Stock outstanding immediately prior to the Merger Date (the "SUBSCRIPTION STOCK"). The acquisition of the Subscription Stock shall occur simultaneously with the conversions provided for under Sections 1.01(b)(ii) and 1.01(b)(iii) of this Agreement. The Subscription Stock will, at the Merger Date, have been duly authorized and, when issued to Buyer pursuant to this Agreement, will be validly issued and outstanding, fully paid and non-assessable. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as set forth in the disclosure schedule (each section of which qualifies the correspondingly numbered representation and warranty only, except where the information in any such section is disclosed in such a way to make its relevance to any other representation or warranty readily apparent, in which case, such section shall be deemed to also qualify such other representation and warranty) of the Company attached hereto (the "COMPANY DISCLOSURE SCHEDULE") (and except as to any matter set forth in or contemplated by Section 2.03 hereof as to which the representations and warranties in this Article 3 do not apply) or as otherwise provided herein, the Company represents and warrants to Buyer that: SECTION 3.01. CORPORATE EXISTENCE AND POWER. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, and has all corporate powers required to carry on its business as now conducted and is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, except for those jurisdictions where the failure to be so qualified or in good standing is not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect on the Company. For purposes of this Agreement, a "MATERIAL ADVERSE EFFECT" means, with respect to any Person, a material adverse effect on the financial condition, business, operations, assets or results of operations of such Person and its Subsidiaries taken as a whole or on the ability of such Person to perform its obligations under this Agreement in all material respects. Section 3.01(a) of the Company Disclosure Schedule includes true and complete copies of the Company's certificate of incorporation and bylaws as currently in effect. Section 3.01(b) of the Company Disclosure Schedule includes a list of all jurisdictions in which the Company or any Subsidiary of the Company is duly qualified to conduct business. 10 SECTION 3.02. CORPORATE AUTHORIZATION. (a) The execution, delivery and performance by the Company of each of (I) this Agreement, (ii) the letter agreement dated October 29, 1998 between the Company and Dr. Jack Barbut (the "BARBUT AGREEMENT"), (iii) the Agreement dated November 16, 1998 among the Company, Panlabs International, Inc. and MDS, Inc. (the "MDS AMENDMENT") and (iv) the Forbearance Agreement dated the date hereof among the Company, its Subsidiaries named therein and First Union National Bank (the "FORBEARANCE AGREEMENT") and the consummation by the Company of the transactions contemplated by this Agreement, the Barbut Agreement, the MDS Amendment and the Forbearance Agreement are within the Company's corporate powers and, except for the required approval of the stockholders of the Company in connection with the consummation of the Merger, have been duly authorized by all necessary corporate action. The affirmative vote of a majority of the shares of Company Stock outstanding as of the record date for the Company Stockholder Meeting (the "REQUIRED STOCKHOLDER VOTE") is the only vote of any class or series of the Company's capital stock necessary to approve and adopt this Agreement and the transactions contemplated by this Agreement. This Agreement has been duly executed and delivered by the Company and constitutes a valid and binding agreement of the Company enforceable against the Company in accordance with its terms. (b) The Board of Directors of the Company, at a meeting duly called and held, has (i) determined that this Agreement and the transactions contemplated by this Agreement (including the Merger) are fair to and in the best interests of the stockholders of the Company, (ii) approved this Agreement and the transactions contemplated by this Agreement (including the Merger), and (iii) resolved to recommend adoption of this Agreement and the transactions contemplated hereby by the stockholders of the Company, subject to the terms hereof. (c) Each of the persons identified in Section 3.02(c) of the Company Disclosure Schedule has (i) entered into a Support/Voting Agreement in the form attached hereto as Exhibit A (each a "SUPPORT/VOTING AGREEMENT"), whereby each such individual has agreed, among other things, to vote all shares of Company Stock beneficially owned by them in favor of adoption of this Agreement and (ii) a written undertaking in the form attached hereto as Exhibit B (each an "AFFILIATE LETTER"), whereby each such individual has agreed, among other things, to comply with the requirements of Rule 145 under the 1933 Act with respect to public sales of Buyer Common Stock received by them in the Merger. The persons identified in Section 3.02(c) are the only persons which the Company believes may be Affiliates of the Company. SECTION 3.03. GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the transactions contemplated by this Agreement require no action, by or in respect of, or filing with, any federal, state, local or foreign governmental body, agency, official or authority ("GOVERNMENTAL AUTHORITY") other than (a) the filing of the Certificate of Merger in accordance with the Delaware Law; (b) compliance with any applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR ACT"); (c) compliance with any applicable requirements of the Securities and Exchange Act of 1934, as amended, and the rules 11 and regulations promulgated thereunder (the "1934 ACT"); (d) compliance with any applicable requirements of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the "1933 ACT"); (e) compliance with any applicable foreign or state securities or Blue Sky laws; and (f) immaterial actions or filings relating to ordinary operational matters. SECTION 3.04. NON-CONTRAVENTION. The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the transactions contemplated by this Agreement do not and will not, assuming receipt of the Required Stockholder Vote, (a) contravene or conflict with the certificate of incorporation or bylaws of the Company or any Subsidiary of the Company, (b) assuming compliance with the matters referred to in Section 3.03 and Section 3.03 of the Company Disclosure Schedule, contravene or conflict with or constitute a violation of any provision of any law, regulation, judgment, injunction, order or decree binding upon or applicable to the Company or any Subsidiary of the Company, (c) constitute a default (or an event which with notice, the lapse of time or both would become a default) under or give rise to a right of termination, cancellation or acceleration of any right or obligation of the Company or any Subsidiary of the Company or to a loss of any benefit to which the Company or any Subsidiary of the Company is entitled under any provision of any agreement, contract or other instrument binding upon the Company or any Subsidiary of the Company or any license, franchise, permit or other similar authorization held by the Company or any Subsidiary of the Company, (d) require any action or consent or approval of any Person other than a Governmental Authority or (e) result in the creation or imposition of any Lien on any asset of the Company or any Subsidiary of the Company, other than, (i) in the case of the events specified in clauses (b), (c), and (e) (other than indebtedness of the Company or any Subsidiary of the Company) and (ii) in the case of the events specified in clause (d) (other than indebtedness of the Company and licenses and sublicenses related to the 191 patent to which the Company or any Subsidiary is a party on the date hereof), any such event which, individually or in the aggregate, has not had, and is not reasonably likely to have, a Material Adverse Effect on the Company. For purposes of this Agreement, "LIEN" means, with respect to any asset, any mortgage, claim, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. SECTION 3.05. CAPITALIZATION. The authorized capital stock of the Company consists of 20,000,000 shares of Company Stock and 5,000,000 shares of serial preferred stock. As of September 30, 1998, there were (i)11,523,257 shares of Company Stock (together with associated Rights as described in Section 3.21) outstanding and (ii) no shares of serial preferred stock outstanding. As of September 30, 1998, there were (i) employee and director stock options to purchase an aggregate of 1,962,851 shares of Company Stock outstanding (none of which options were exercisable, other than options in respect of 1,367,241 shares of Company Stock) and (ii) warrants to purchase 2,110,000 shares of Company Stock outstanding (all of which were exercisable). All outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable and, as to shares issued and sold by the Company within the three years prior to the date of this Agreement, to the Company's knowledge, have been issued in compliance with all federal and state securities laws. Except (i) 12 as set forth in this Section 3.05, (ii) for changes since September 30, 1998 resulting from the expiration, vesting, termination or exercise in accordance with their respective terms of stock options or warrants outstanding on such date, (iii) modifications of the Rights as described in Section 3.21, (iv) acceleration of vesting of stock options resulting from the execution of this Agreement as set forth in Section 3.04 of the Company Disclosure Schedule, and (v) issuances after September 30, 1998 in the ordinary course of business consistent with past practice of shares of Company Stock to the Company's 401(k) plan, there are outstanding (a) no shares of capital stock or other voting securities of the Company, (b) no securities of the Company convertible into or exchangeable for shares of capital stock or voting securities of the Company, and (c) no options, warrants, calls, subscriptions or other rights to acquire from the Company, and no obligation of the Company to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of the Company (the items in clauses (a), (b) and (c) being referred to collectively as the "COMPANY SECURITIES"). There are no outstanding obligations of the Company or any Subsidiary of the Company to repurchase, redeem or otherwise acquire any Company Securities. Section 3.05 of the Company Disclosure Schedule sets forth, with respect to each stock option and warrant for Company Stock outstanding at September 30, 1998, the name of the optionee or warrant holder, as the case may be, the number of shares of Company Stock subject thereto, the per share exercise price thereof and the initial vesting date thereof. Section 3.05 of the Company Disclosure Schedule sets forth (i) every agreement pursuant to which the Company has granted to any Person registration rights related to shares of Company Stock and (ii) every agreement of which the Company has knowledge relating to the voting of any shares of Company Stock. SECTION 3.06. SUBSIDIARIES. (a) Each Subsidiary of the Company is duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, has all corporate powers to carry on its business as now conducted and is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, except for those jurisdictions where failure to be so qualified or licensed is not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect on the Company. (b) The Company does not own, directly or indirectly, any equity or other ownership interest in any corporation, partnership, joint venture or other entity or enterprise, except for the Subsidiaries of the Company set forth in Section 3.06 of the Company Disclosure Schedule. Except as set forth in Section 3.06 of the Company Disclosure Schedule, the Company is not subject to any obligation or requirement to provide funds to or make any investment (in the form of a loan, capital contribution or otherwise) in any such entity. The ownership interests having by their terms ordinary voting power to elect a majority of directors (or others performing similar functions with respect to such Subsidiary) of each of the Company's Subsidiaries is held of record by the Company or one of its other Subsidiaries, free and clear of any Liens. Each of the outstanding shares of capital stock of each of the Company's Subsidiaries is duly authorized, validly issued, fully paid and nonassessable. The following information for each Subsidiary of the Company is set forth in Section 3.06 of the Company Disclosure Schedule, as applicable: (i) 13 its name and jurisdiction of incorporation or organization; (ii) its authorized capital stock or share capital; and (iii) the number of issued and outstanding shares of capital stock or share capital and the record owner(s) thereof. There are no outstanding subscriptions, options, warrants, puts, calls, agreements, understandings, claims or other commitments or rights of any type relating to the issuance, sale or transfer of any securities of any Subsidiary of the Company (collectively, the "COMPANY SUBSIDIARY SECURITIES"), nor are there outstanding any securities which are convertible into or exchangeable for any Company Subsidiary Securities; and no Subsidiary of the Company has any obligation of any kind to issue any additional Company Subsidiary Securities or to pay for any Company Subsidiary Securities. SECTION 3.07. SEC FILINGS. The Company has delivered to Buyer (i) the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "COMPANY 10-K"), (ii) its Quarterly Reports on Form 10-Q for its fiscal quarters ended after December 31, 1997 and filed with the Securities and Exchange Commission (the "SEC") prior to the date of this Agreement (the "COMPANY 10-QS"), and (iii) its proxy or information statements relating to meetings of, or actions taken without a meeting by, the stockholders of the Company held since December 31, 1997, and (iv) all of its other reports, statements, schedules and registration statements filed with the SEC since January 1, 1998 and through the date of this Agreement. The Company has timely filed all required reports, schedules, forms, statements and other documents with the SEC since January 1, 1998 (collectively, the "COMPANY SEC DOCUMENTS"). As of their respective dates, or if amended, as of the date of the last such amendment, the Company SEC Documents complied, and all documents required to be filed by the Company with the SEC after the date hereof and prior to the Merger Date (the "SUBSEQUENT COMPANY SEC DOCUMENTS") will comply, in all material respects with the requirements of the 1933 Act or the 1934 Act, as the case may be, and the applicable rules and regulations promulgated thereunder, and none of the Company SEC Documents contained, and the Subsequent Company SEC Documents when filed will not contain, any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. SECTION 3.08. FINANCIAL STATEMENTS. The audited consolidated financial statements and unaudited consolidated interim financial statements of the Company included in the Company SEC Documents at the time such Company SEC Documents were filed with the SEC complied as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, were prepared in accordance with generally accepted accounting principles applied in the United States ("U.S. GAAP") applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto or, in the case of the unaudited statements, as permitted by Form 10-Q of the SEC), and fairly present (subject in the case of unaudited statements to normal, recurring audit adjustments) the consolidated financial position of the Company as at the dates thereof and the consolidated results of its operations and cash flows for the periods then ended. For purposes of this Agreement, "COMPANY BALANCE SHEET" means the consolidated balance sheet of the Company 14 as of December 31, 1997 set forth in the Company 10-K and "COMPANY BALANCE SHEET DATE" means December 31, 1997. For purposes of financial presentation, the Company and its Subsidiaries recognize net revenue from their contracts on a percentage of completion basis as work is performed. The percentage of completion, and consequently the revenue to be recorded, of each individual contract is determined through detailed analysis and discussion between all appropriate operational and financial department management. Although the Company and its Subsidiaries do not require collateral for unpaid balances, credit losses have consistently been within management's expectations. Certain contracts contain provisions for price adjustment for cost overruns. Such adjusted amounts are included in service revenue when realization is assured and the amounts can be reasonably determined. In the period in which it is determined that a loss will result from the performance of a contract, the entire amount of the estimated ultimate loss is charged against income. SECTION 3.09. DISCLOSURE DOCUMENTS. (a) Each document required to be filed by the Company with the SEC in connection with the transactions contemplated by this Agreement (the "COMPANY DISCLOSURE DOCUMENTS"), including, without limitation, the proxy or information statement of the Company (the "COMPANY PROXY STATEMENT") to be filed with the SEC in connection with the adoption of this Agreement by the holders of Company Stock, and any amendments or supplements thereto, will, when filed, comply as to form in all material respects with the applicable requirements of the 1934 Act. (b) At the time the Company Proxy Statement or any amendment or supplement thereto is first mailed to stockholders of the Company, and at the time such stockholders vote on the adoption of this Agreement, the Company Proxy Statement, as supplemented or amended, if applicable, will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. At the time of the filing of any Company Disclosure Document other than the Company Proxy Statement and at the time of any distribution thereof, such Company Disclosure Document will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties contained in this Section 3.09(b) will not apply to statements included in or omissions from the Company Disclosure Documents based upon information furnished to the Company by Buyer specifically for use therein. SECTION 3.10. INFORMATION SUPPLIED. The information supplied or to be supplied by the Company for inclusion or incorporation by reference in (i) the Buyer's Form F-4 or any amendment or supplement thereto will not, at the time the Form F-4 or any amendment or supplement thereto becomes effective under the 1933 Act and on the Merger Date, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (ii) any Buyer Disclosure 15 Documents (other than the Form F-4 and any amendments or supplements to either) will not, at the time of effectiveness of such Buyer Disclosure Document and at the time of any distribution thereof, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. SECTION 3.11. ABSENCE OF CERTAIN CHANGES. From the Company Balance Sheet Date, except (i) as set forth in the Company SEC Documents, (ii) as contemplated by this Agreement (including, without limitation, Sections 1.04 and 3.21 hereof) or (iii) related to the Shut-Downs, the Company and its Subsidiaries have conducted their business in the ordinary course consistent with past practice and there has not been: (a) any event, occurrence or development of a state of circumstances or facts which has had or is reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on the Company other than any of the foregoing (i) relating to the economy or securities markets in general, (ii) relating to the Company's industry in general or (iii) arising from the announcement or thereafter the pendency of this Agreement or the transactions contemplated by this Agreement; (b) any declaration, setting aside or payment of any dividend or other distribution with respect to any shares of capital stock of the Company, or any repurchase, redemption or other acquisition by the Company or any Subsidiary of the Company of any amount of outstanding shares of capital stock or other securities of, or other ownership interests in, the Company or any of its Subsidiaries; (c) any amendment of any material term of any outstanding security of the Company or any Subsidiary of the Company; (d) any incurrence, assumption or guarantee by the Company or any Subsidiary of the Company of any indebtedness from any third party for borrowed money; (e) any creation or assumption by the Company or any Subsidiary of the Company of any Lien on any material asset other than Liens arising solely by operation of applicable law; (f) any making of any loan, advance or capital contribution to or investment in any Person other than (i) loans and advances to any employees of the Company in an amount not in excess of $5,000 per employee and (ii) loans, advances or capital contributions to or investments in wholly-owned Subsidiaries of the Company; (g) any damage, destruction or other casualty loss (whether or not covered by insurance) affecting the business or assets of the Company or any Subsidiary of the Company which, individually or in the aggregate, has had or is reasonably likely to have a Material Adverse Effect on the Company; 16 (h) any transaction or commitment made, or any contract or agreement entered into, by the Company or any Subsidiary of the Company relating to its assets or business (including, without limitation, the acquisition or disposition of any assets) (other than transactions and commitments contemplated by this Agreement) inconsistent with the Company's budget and/or spending plans disclosed to Buyer prior to the date of this Agreement or any relinquishment by the Company or any Subsidiary of the Company of any material contract, license or right; (i) any change in any method of accounting or accounting principle or practice by the Company or any Subsidiary of the Company, except for any such change required by U.S. GAAP or SEC Regulation S-X promulgated under the 1934 Act and, as to changes occurring prior to the date of this Agreement, as set forth in Section 3.11 of the Company Disclosure Schedule ("REGULATION S-X"); (j) any (i) grant by the Company or any of its Subsidiaries of any severance or termination pay to, or entry into any employment, termination or severance arrangement with, any director, officer or employee of the Company or any Subsidiary of the Company; (ii) entering into of any employment, deferred compensation or other similar agreement (or any amendment to any such existing agreement) with any director, officer or employee of the Company or any Subsidiary, (iii) increase in benefits payable under any existing severance or termination pay policies or employment agreements or (iv) increase in compensation, bonus or other benefits payable to directors, officers or employees of the Company or any Subsidiary of the Company, other than in the ordinary course of business and consistent with past practice. SECTION 3.12. NO UNDISCLOSED MATERIAL LIABILITIES. There are no liabilities, commitments or obligations (whether pursuant to contracts or otherwise) of the Company or any Subsidiary of the Company of any kind whatsoever which, individually or in the aggregate, have had or are reasonably likely to have a Material Adverse Effect on the Company, whether accrued, contingent, absolute, determined, determinable or otherwise, and there is no existing condition, situation or set of circumstances which is reasonably likely to result in such a liability, commitment or obligation, including, without limitation, any fines, disciplinary actions or other adverse actions that may be taken or reported concerning the conduct of the Company or any of its Subsidiaries, other than: (a) liabilities, commitments or obligations disclosed or provided for in the Company Balance Sheet (including the notes thereto) or disclosed in the Company SEC Documents; (b) liabilities, commitments or obligations incurred in the ordinary course of business consistent with past practice since the Company Balance Sheet Date; (c) liabilities, commitments or obligations arising from the Shut-Downs and disclosed to Buyer; and (d) liabilities, commitments or obligations under this Agreement. 17 SECTION 3.13. LITIGATION; INVESTIGATIONS; ORDERS AND DECREES. There is no action, claim, suit, investigation, proceeding or examination ("ACTION") pending against or affecting, or to the knowledge of the Company, threatened or reasonably likely to be brought against or affecting, the Company or any Subsidiary of the Company or any of their respective properties before any arbitrator or any Governmental Authority which, individually or in the aggregate, has had or is reasonably likely to have a Material Adverse Effect on the Company or on Chrysalis DNX Transgenic Sciences Corporation ("CHRYSALIS DNX"). The foregoing representation and warranty does not include or relate to any Action, pending or threatened, challenging or seeking to prevent, enjoin, alter or delay the Merger or any of the transactions contemplated by this Agreement. Neither the Company nor any Subsidiary is subject to any outstanding order, writ, injunction or decree which, individually or in the aggregate, would have a Material Adverse Effect on the Company or Chrysalis DNX. Since December 31, 1993, (i) there has not been any Action asserted or, to the knowledge of the Company, threatened before any Governmental Authority against the Company or any Subsidiary of the Company relating to the Company or any of its Subsidiary's method of doing business or its relationship with past, existing or future users or purchasers of any goods or services of the Company or any Subsidiary of the Company which has had, individually or in the aggregate, a Material Adverse Effect on the Company and (ii) neither the Company nor any Subsidiary of the Company has been subject to any outstanding order, writ, injunction or decree relating to the Company's or any of its Subsidiary's method of doing business or its relationship with past, existing or future lessees, users, purchasers, licensees or sublicensees of any Intellectual Property, goods or services of the Company or any Subsidiary of the Company which has had, individually or in the aggregate, a Material Adverse Effect on the Company. SECTION 3.14. TAXES. (a) Except as set forth in the Company Balance Sheet (including the notes thereto), (i) all Tax Returns for the Company or any Subsidiary of the Company required to be filed with any taxing authority by, or with respect to, the Company and its Subsidiaries have been filed in accordance with all applicable laws and are true, correct and complete in all material respects; (ii) the Company and its Subsidiaries have timely paid all Taxes shown as due and payable on the Tax Returns for the Company or any Subsidiary of the Company that have been so filed; (iii) the Company and its Subsidiaries have made provision for all Taxes payable by the Company and its Subsidiaries for which no Tax Return for the Company or any Subsidiary of the Company has yet been filed; (iv) there is no action, suit, proceeding, audit or claim now proposed or pending against or with respect to the Company or any of its Subsidiaries in respect of any Tax where there is a reasonable possibility of an adverse determination; (v) neither the Company nor any of its Subsidiaries has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code; (vi) neither the Company nor any of its Subsidiaries has been a member of an affiliated, consolidated, combined or unitary group other than one of which the Company was the common parent and no members of that group have left the group; (vii) all Tax Returns filed with respect to tax years of the Company and its Subsidiaries through the tax year ended December 31, 1994, have been examined and closed or are returns with respect to which the applicable period for assessment under applicable 18 law, after giving effect to extensions or waivers, has expired; (viii) neither the Company nor any Subsidiary (or any member of any affiliated, consolidated, combined or unitary group of the Company or any Subsidiary of the Company is or has been a member) has been granted any extension or waiver of the statute of limitations period applicable to any Tax Return, which period (after giving effect to such extension or waiver) has not yet expired; and (ix) neither the Company nor any Subsidiary of the Company is a party to a tax sharing agreement, including, without limitation, any agreement with respect to the shifting of losses or income among parties or has been a party to a tax sharing agreement that imposes obligations of the Company or any Subsidiary of the Company as of the date of this Agreement. For purposes of the representations contained in this Section 3.14, none of these representations shall be deemed to have been breached unless such breach would have, individually or in the aggregate, a Material Adverse Effect on the Company. (b) For purposes of this Agreement, "TAXES" means all United States Federal, state, local and foreign taxes, levies and other assessments, including, without limitation, all income, sales, use, goods and services, value added, capital, capital gains, net worth, transfer, profits, withholding, payroll, PAYE, employer health, unemployment insurance payments, excise, real property and personal property taxes, and any other taxes, assessments or similar charges in the nature of a tax, including, without limitation, interest, additions to tax, fines and penalties, imposed by a governmental or public body, agency, official or authority (the "TAXING AUTHORITIES"). "TAX RETURN" means any return, report, information return or other document (including any related or supporting information) required to be filed with any Taxing Authority in connection with the determination, assessment, collection, administration or imposition of any Taxes. SECTION 3.15. ERISA AND LABOR MATTERS. (a) Section 3.15(a) of the Company Disclosure Schedule contains a list identifying each "EMPLOYEE BENEFIT PLAN", as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), which is subject to any provision of ERISA and is maintained, administered or contributed to by the Company or any ERISA Affiliate of the Company and covers any employee or former employee of the Company or any Subsidiary of the Company or in connection with which the Company or any Subsidiary of the Company has any liability. Copies of such plans (and, if applicable, related trust agreements) and all amendments thereto and written interpretations thereof, if any, have been furnished to Buyer together with the three most recent annual reports (Form 5500 including, if applicable, Schedule B thereto) prepared in connection with, and any favorable determination letter issued in connection with, any such plan. Such plans are referred to collectively herein as the "EMPLOYEE PLANS". For purposes of this Section, "ERISA AFFILIATE" of the Company means any other Person which, together with the Company, would be treated as a single employer under Section 414 of the Code. The only Employee Plans which individually or collectively would constitute an "EMPLOYEE PENSION BENEFIT PLAN" as defined in Section 3(2) of ERISA (the "PENSION PLANS") are identified as such in the list referred to above. 19 (b) Neither the Company nor any ERISA Affiliate has ever maintained or been obligated to contribute to or had any liability in connection with any "MULTIEMPLOYER PLAN", as defined in Section 3(37) of ERISA, or any "DEFINED BENEFIT PLAN", as defined in Section 3(35) of ERISA. Nothing done or omitted to be done and no transaction or holding of any asset under or in connection with any Employee Plan has or will make the Company or any Subsidiary of the Company, any officer or director of the Company or any Subsidiary of the Company subject to any liability under Title I of ERISA or liable for any tax pursuant to Section 4975 of the Code that is reasonably likely to have a Material Adverse Effect on the Company. (c) Each Employee Plan which is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the IRS that it is so qualified. The Company has furnished to Buyer copies of the most recent IRS determination letters with respect to each such Employee Plan. Each Employee Plan has been maintained in compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations, including but not limited to ERISA and the Code, which are applicable to the Employee Plan, excluding any instances of non-compliance that would not individually or in the aggregate be reasonably likely to have a Material Adverse Effect on the Company. (d) Section 3.15(d) of the Company Disclosure Schedule contains a list of each employment, severance (including the duration of severance periods or, in the case of stay bonuses, the amount) or other similar contract, arrangement or policy and each plan or arrangement (written or oral) providing for insurance coverage (including any self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits or for deferred compensation, profit-sharing, bonuses, stock options, stock appreciation or other forms of incentive compensation or post-retirement insurance, compensation or benefits which is not an Employee Plan, is entered into, maintained or contributed to, as the case may be, by the Company or any Subsidiary of the Company and covers any employee or former employee of the Company or any of its Subsidiaries or in connection with which the Company or any Subsidiary of the Company could have liability. Such contracts, plans and arrangements as are described above, copies or descriptions of all of which have been furnished previously to Buyer, are referred to collectively herein as the "BENEFIT ARRANGEMENTS". Each Benefit Arrangement has been maintained in substantial compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations that are applicable to such Benefit Arrangement, excluding any instances of non-compliance that would not individually or in the aggregate be reasonably likely to have a Material Adverse Effect on the Company. (e) Except as would not be reasonably likely to have a Material Adverse Effect on the Company, no Employee Plan, Benefit Arrangement or related document contains any provision that would prevent the Company or any Subsidiary of the Company from amending or terminating any post-retirement health, medical or life insurance benefits and no agent or representative of the Company or of any Subsidiary of the Company has made any statements 20 that would limit the ability of the Company or any of its Subsidiaries to amend or terminate any such benefits. (f) There has been no amendment to, written interpretation or announcement (whether or not written) by the Company or any Subsidiary of the Company relating to, or change in employee participation or coverage under, any Employee Plan or Benefit Arrangement which would increase materially the expense of maintaining such Employee Plan or Benefit Arrangement above the level of the expense incurred in respect thereof for the fiscal year ended on the Company Balance Sheet Date. (g) The execution of, and performance of the transactions contemplated in, this Agreement will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any Employee Plan, Benefit Arrangement, trust or loan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any employee or former employee of the Company or any of its Subsidiaries, or result in the triggering or imposition of any restrictions or limitations on the right of Buyer, the Company or any Subsidiary of the Company to amend or terminate any Employee Plan and receive the full amount of any excess assets remaining or resulting from such amendment or termination, subject to applicable taxes. Except as otherwise identified in Section 3.15(d) of the Company Disclosure Schedule, there is no contract, agreement, plan or arrangement covering any employee or former employee of the Company or any Subsidiary that, individually or collectively, could give rise to the payment of any amount that would not be deductible pursuant to the terms of Sections 162(a)(1), 162(a)(2) or 280G of the Code. (h) Neither the Company nor any of its Subsidiaries is a party to any collective bargaining agreement. There are no labor unions voluntarily recognized or certified to represent any bargaining unit of employees at the Company or any of its Subsidiaries. No work stoppage, labor strike or slowdown against the Company or any of its Subsidiaries is pending or threatened nor has any of the foregoing occurred since December 18, 1996. Neither the Company nor any of its Subsidiaries is involved in or threatened with any labor dispute or grievance which individually or in the aggregate has had or is reasonably likely to have a Material Adverse Effect on the Company. To the knowledge of the Company, there is no organizing effort or representation question at issue with respect to any employee of the Company or any of its Subsidiaries. No collective bargaining agreement to which the Company or any of its Subsidiaries is or may be a party is currently under negotiation or renegotiation and no existing collective bargaining agreement is due for expiration, renewal or renegotiation within the one year period after the date hereof. SECTION 3.16. COMPLIANCE WITH LAWS. (a) Each of the Company and its Subsidiaries has all permits, licenses, authorizations, consents, approvals and franchises necessary to own, lease and operate its respective properties and to carry on its respective business as it is now being conducted except for any of the foregoing, the absence of which would not, individually or in the 21 aggregate, have a Material Adverse Effect on the Company or Chrysalis DNX. The Company and each Subsidiary is in compliance in all material respects with the terms and conditions of all such permits, licenses, authorizations, consents, approvals and franchises. Section 3.16 of the Company Disclosure Schedule sets forth, as of the date of this Agreement, a list of all material permits, licenses, authorizations, consents, approvals and franchises of the Company and each Subsidiary of the Company along with their expiration dates, each one of which is currently valid and in full force. The Company and each Subsidiary has filed such timely and complete renewal applications as may be required with respect to its material permits, licenses, authorizations, consents, approvals and franchises. No suspension, revocation, cancellation or withdrawal of, or any Action related to, any material permits, licenses, authorizations, consents, approvals or franchises of the Company and any Subsidiary of the Company has been filed or, to the knowledge of the Company or its Subsidiaries, has been commenced or is threatened. The Company and each Subsidiary is currently in compliance with, and at all times since December 31, 1993, has been in compliance with, all applicable federal, state, local or foreign laws, statutes, orders, judgments, decisions, rules, regulations, policies or guidelines (collectively "APPLICABLE LAWS"), including those promulgated or entered by the United States Food and Drug Administration ("FDA"), United States Department of Agriculture ("USDA"), United States Drug Enforcement Agency ("DEA"), European Medicines Evaluation Agency ("EMEA"), relating to the Company, any Subsidiary of the Company or its respective businesses or properties, except for any non-compliance which has not had, and is not reasonably likely to have, a Material Adverse Effect on the Company. (b) As to each product or service (including preclinical and clinical trials) subject to the jurisdiction of any Governmental Authority that is manufactured, tested, distributed, held, performed, offered and/or marketed by the Company or its Subsidiaries, such product or service is being, and since December 31, 1993 has been, manufactured, tested, distributed, held, performed, offered and/or marketed in compliance, to the extent required, with all Applicable Laws including, but not limited to, those provisions of the Federal Food, Drug and Cosmetic Act ("FDCA") relating to investigational use, informed consent, premarket clearance, good manufacturing practices, good laboratory practices, good clinical practices, labeling, advertising, record keeping, filing of report and security, except for any non-compliance which has not had, and is not reasonably likely to have, a Material Adverse Effect on the Company, and during the past five years there have been no deaths or serious adverse events, as defined in Title 21 of CFR, related or alleged to have been related to any drug, device or biologic product being studied in any such clinical trials or to the negligence of the Company or any of its Subsidiaries or agents. (c) Section 3.16(c) of the Company Disclosure Schedule lists (i) all notices of violation issued by the FDA, USDA, DEA or EMEA during the five years prior to the date of this Agreement to the Company or any of its Subsidiaries; (ii) all audit reports performed during the five years prior to the date of this Agreement by the Company, any Subsidiary, or any outside consultant retained by the Company or one of its Subsidiaries with respect to matters over which the FDA, USDA, DEA or EMEA has jurisdiction; and (iii) any document concerning any oral or 22 written communication received from the FDA, the USDA, the DEA or the Department of Justice during the five years prior to the date of this Agreement. SECTION 3.17. INTELLECTUAL PROPERTY RIGHTS. (a) Set forth in Section 3.17 of the Company Disclosure Schedule is a true and complete list, as of the date of this Agreement, of (i) all of the Company's and each of its Subsidiary's foreign and domestic material patents, patent applications, invention disclosures, trademarks, service marks, trade names (and any registrations or applications for registration for any of the foregoing) and all material design right and copyright applications and registrations, including all patents, trademarks, copyrights and applications under which the Company or any Subsidiary has obtained rights from others, and (ii) all material agreements to which the Company or any Subsidiary of the Company is a party which may concern any of the Intellectual Property. "INTELLECTUAL PROPERTY" shall mean all intellectual property or other proprietary rights of every kind, including, without limitation, all domestic or foreign patents, patent applications, inventions (whether or not patentable) processes, products, technologies, discoveries, copyrightable and copyrighted works, apparatus, trade secrets, trademarks and trademark applications and registrations, service marks and service mark applications and registrations, trade names, trade dress, copyright regulations, design rights, customer list, marketing and customer information, mask works rights, know-how, licenses, technical information (whether confidential or otherwise), software, and all documentation thereof). Other than the Intellectual Property set forth in Section 3.17 of the Company Disclosure Schedule, no name, patent invention, trade secret, proprietary right, computer software, trademark, trade name, service mark, logo, copyright, franchise, license, sublicense, or other such right is necessary for the operation of the business of the Company or any Subsidiary in substantially the same manner as such business is presently or proposed to be conducted. Except as set forth in Section 3.17 of the Company Disclosure Schedule, (i) the Company or its Subsidiaries, as applicable, owns, free and clear of any Liens the Intellectual Property set forth in Section 3.17 of the Disclosure Schedule and has the exclusive right to bring actions for the infringement thereof; (ii) no person or entity has asserted to the Company or any Subsidiary of the Company (and the Company or any Subsidiary is not otherwise aware) that, with respect to the Intellectual Property and the research, development and commercial activities of the Company or any Subsidiary, the Company or any Subsidiary of the Company is infringing or has infringed any domestic or foreign patent, trademark, service mark, trade name, or copyright or design right or misappropriated or improperly used or disclosed any trade secret, or know-how, (iii) all working requirements and all maintenance fees, annuities, and other payments which are due from or controlled by the Company or any Subsidiary of the Company on or before the date of this Agreement for any of the Intellectual Property, including, without limitation, all material foreign or domestic patents, patent applications, trademarks registrations service mark registrations, copyright registrations and any applications for any of the preceding, have been met or paid; (iv) the Company is not aware of any part of the Intellectual Property having been obtained through inequitable conduct or fraud in the United States Patent and Trademark Office or any foreign Governmental Authority; (v) neither the Company nor any Subsidiary of the Company is aware of any conduct or use by the Company or any Subsidiary of the Company that would, to the Company's knowledge, void or invalidate or constitute misuse of, any of the 23 Intellectual Property (vi) the execution, delivery and performance of this Agreement by the Company, and the consummation of the transactions contemplated by this Agreement will not materially impair the right of Buyer or the Surviving Corporation, after the Merger Date, to use, sell, license or dispose of, or to bring any action for the infringement of, any Intellectual Property; (vii) the Company or any Subsidiary of the Company is not aware of any prior art that has been identified to the Company or any Subsidiary of the Company as invalidating or potentially invalidating prior art with respect to U.S. Patent No. 4,873,191 (the "191 PATENT"); (viii) the Company or any Subsidiary of the Company is not aware of any Person who has made or asserted a claim of ownership, inventorship, license or material interest in the 191 patent; and (ix) there are no material royalties, honoraria, fees or other payments payable to any Person by reason of the ownership, use, license, sublicense, sale or disposition of the Intellectual Property. SECTION 3.18. ENVIRONMENTAL MATTERS. (a) (i) No notice, notification, demand, request for information, citation, summons or order has been received by the Company, no complaint has been filed, no penalty has been assessed, no Action or review is pending before any Governmental Authority or, to the knowledge of the Company or any Subsidiary of the Company, threatened by any Governmental Authority or other Person with respect to any matters relating to the Company or any Subsidiary of the Company and arising out of any Environmental Law or Environmental Permit which, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect on the Company; and (ii) the Company and each Subsidiary of the Company are in compliance with all Environmental Laws and have, and are in compliance with, all Environmental Permits, except where any noncompliance or failure to obtain or comply with Environmental Permits is not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect on the Company; and (iii) there are no liabilities of, or relating to, the Company or any Subsidiary of the Company of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, arising under or relating to any Environmental Law or Environmental Permit which, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect on the Company. (b) There are no liabilities disclosed in any environmental assessment, investigation, study, audit, test, review or other analysis conducted at the request of the Company or any Subsidiary of the Company in relation to the current or prior business of the Company or any Subsidiary of the Company or any property or facility now or previously owned, leased or operated by the Company or any Subsidiary of the Company and of which the Company has knowledge which individually or in the aggregate are reasonably likely to exceed $25,000 which have not been disclosed to Buyer in writing as of the date hereof. (c) Neither the Company nor any Subsidiary of the Company has knowledge in relation to the current or prior business of the Company or any Subsidiary of the Company 24 owning or operating or having owned or operated any underground storage tank which has been closed or abandoned in place, other than in compliance with Environmental Laws and Environmental Permits, as in effect on the date of such closure or abandonment, and each underground storage tank presently owned, leased or operated by the Company or any Subsidiary of the Company is in compliance with Environmental Laws and Environmental Permits and, as of the date hereof, meets applicable local, state, federal and foreign standards, including new system performance standards and upgrading requirements contained in Subtitle I of the Resource Conservation and Recovery Act, 42 U.S. C. 6991, ET SEQ., as amended, and any rules or regulations promulgated thereunder, including 40 C.F.R. Section 280.20, ET SEQ., except to the extent that any non-compliance, assessment or remediation costs arising from or relating to underground storage tanks would not, individually or in the aggregate, be reasonably likely to result in liabilities in excess of $10,000. (d) Neither the Company nor any Subsidiary of the Company has knowledge of any releases of Hazardous Substances at, to or from a facility or property while owned or operated by the Company or any Subsidiary that either (i) required reporting to a Governmental Authority under Environmental Laws or Environmental Permits, or (ii) are reasonably likely, individually or in the aggregate, to have a Material Adverse Effect on the Company. (e) To the knowledge of the Company or any Subsidiary of the Company, no Hazardous Substances (exclusive of inventory and finished products) have been transferred from any facility or property while owned or operated by the Company or any Subsidiary of the Company to any off-site location for treatment, storage, disposal, recycling or other waste management activity. (f) For purposes of this Section 3.18, the following terms shall have the meanings set forth below: (i) "ENVIRONMENTAL LAWS" means any federal, state, local and foreign law (including, without limitation, common law), treaty, judicial decision, regulation, rule, judgment, order, decree, injunction, agreement or contract with any Governmental Authority relating to protection of human health and safety, the environment or to the regulation or remediation of pollutants, contaminants, wastes or chemicals or toxic, radioactive, ignitable, corrosive, reactive or otherwise hazardous substances, wastes or materials; (ii) "ENVIRONMENTAL PERMITS" means all permits, licenses, franchises, certificates, approvals and other similar authorizations of Governmental Authorities relating to or required by Environmental Laws for operation of the business of the Company or any Subsidiary of the Company as currently conducted; (iii) "HAZARDOUS SUBSTANCE" means any material, substance, chemical, raw material, product, byproduct or waste whose release to the environment, including 25 remediation of such releases, is regulated under any Environmental law or Environmental Permit; and (iv) "COMPANY" AND "SUBSIDIARY OF THE COMPANY" shall include any entity which is, in whole or in part, a predecessor of the Company or any Subsidiary of the Company. SECTION 3.19. OPINION OF FINANCIAL ADVISOR. The Board of Directors of the Company has received the opinion of Vector Securities International, Inc., financial advisor to the Company, to the effect that, as of the date of this Agreement, the Merger Consideration (whether in the form of Buyer Common Stock or United States dollars) is fair to the stockholders of the Company from a financial point of view, and such opinion has not been withdrawn. SECTION 3.20. ANTITAKEOVER STATUTES AND CERTIFICATE OF INCORPORATION PROVISIONS. The Board of Directors of the Company have taken all appropriate and necessary actions such that, assuming the truth and accuracy of the representations and warranties contained in Section 4.12, Section 203 of the Delaware Law and Article Eighth of the Company's Third Amended and Restated Certificate of Incorporation will not have any effect (including, without limitation, a required vote of the stockholders of the Company owning more than a majority of the outstanding shares of Company Stock as of the record date for the Company Stockholder Meeting) on the Merger or the other transactions contemplated by this Agreement. No other "fair price," "moratorium," "control share acquisition," or other similar antitakeover statute or regulation of the Delaware Law or, to the knowledge of the Company, any other jurisdiction is applicable to the Merger or the other transactions contemplated by this Agreement. SECTION 3.21. RIGHTS AGREEMENT. (a) The Company has adopted an amendment to the Rights Agreement, dated July 1, 1998, between the Company and American Stock Transfer & Trust Company (the "RIGHTS AGREEMENT") with the effect that as a result of entering into this Agreement or consummating the Merger and/or the other transactions contemplated by this Agreement in accordance with the terms of this Agreement (i) neither Buyer nor Merger Sub shall be deemed to be an Acquiring Person (as defined in the Rights Agreement), (ii) neither the Distribution Date (as defined in the Rights Agreement) nor a Flip-In Event or Flip-Over Event (each as defined in the Rights Agreement) shall be deemed to occur, (iii) the Rights (as defined in the Rights Agreement) will not separate from the Company Stock, and (iv) the Rights will expire immediately prior to the Merger Date. (b) The Company has taken or will take all necessary action with respect to all of the outstanding Rights (as defined in the Rights Agreement) so that, as of immediately prior to the Merger Date, as a result of entering into this Agreement and/or consummating in accordance with the terms of this Agreement the Merger and/or the other transactions contemplated by this Agreement, (i) neither the Company nor Buyer will have any obligations under the Rights or the Rights Agreement as a result of the Merger and (ii) the holders of the Rights will have no rights under the Rights or the Rights Agreement as a result of the Merger. 26 SECTION 3.22. FINDERS FEES. Except for Vector Securities International, Inc., a copy of whose engagement agreement has been provided to Buyer, there is no investment banker, broker, finder or other intermediary which has been retained by or is authorized to act on behalf of the Company or any of its Subsidiaries who might be entitled to any fee or commission in connection with the transactions contemplated by this Agreement. SECTION 3.23. TITLE TO AND CONDITION OF PROPERTIES. The Company and each Subsidiary owns or holds under valid leases all real property, plants, machinery and equipment necessary for the conduct of the business of the Company and such Subsidiary as presently conducted, except where the failure to own or hold such property, plants, machinery and equipment would not have a Material Adverse Effect on the Company. Section 3.23 of the Company Disclosure Schedule lists, and the Company has furnished to Buyer copies of, all appraisals and valuations prepared by or on behalf of the Company during the two years preceding the date of this Agreement with respect to the real property owned, leased or used by the Company or any Subsidiary. There are no Liens on any assets, rights or properties of the Company or any Subsidiary other than Liens arising solely by operation of law. SECTION 3.24. CONTRACTS. Schedule 3.24 lists all written or oral contracts, agreements, guarantees, leases and executory commitments (each a "CONTRACT") to which the Company or any Subsidiary is a party as of the date of this Agreement and which fall within any of the following categories: (a) contracts not entered into in the ordinary course of the Company's or any of its Subsidiary's business; (b) joint venture, partnership and like agreements; (c) Contracts which are service contracts (excluding contracts for delivery services entered into in the ordinary course of business) or equipment leases involving payments by the Company or any Subsidiary of more than $250,000 per year, (d) Contracts containing covenants purporting to limit the freedom of the Company or any Subsidiary of the Company to compete in any line of business in any geographic area or to hire any individual or group of individuals, (e) Contracts which contain minimum purchase conditions or requirements or other terms that restrict or limit the purchasing relationships of the Company or any Subsidiary of the Company, (f) Contracts relating to any outstanding commitment for capital expenditures of the Company or any Subsidiary of the Company in excess of $50,000, (g) indentures, mortgages, promissory notes, loan agreements, guarantees, in each case involving amounts in excess of $50,000, letters of credit or other agreements or instruments of the Company or any Subsidiary of the Company or commitments for the borrowing or the lending of amounts, in each case in excess of $50,000, by the Company or any Subsidiary of the Company or providing for the creation of any charge, security interest, encumbrance or lien upon any of the assets of the Company or any Subsidiary of the Company, (h) Contracts relating to the lease or sublease of or sale or purchase of real or personal property involving any annual expense or price in excess of $50,000 and not cancelable by the Company or any Subsidiary (without premium or penalty) within one month, (i) Contracts involving annual revenues or expenditures to the business of the Company or any Subsidiary of the Company in excess of 1.0% of the Company's consolidated annual revenues, and (j) Contracts providing for "earn-outs" or other contingent payments involving more than $20,000 over the term of the Contract. All such Contracts are valid and binding obligations of the Company and 27 its Subsidiaries, as applicable, and, to the knowledge of the Company, the valid and binding obligation of each other party thereto except such Contracts which if not so valid and binding would not, individually or in the aggregate, have a Material Adverse Effect on the Company. None of the Company, any Subsidiary of the Company nor, to the knowledge of the Company, any other party thereto is in violation of or in default in respect of, nor has there occurred any event or condition which with the passage of time or giving of notice (or both) would constitute a default under, any such Contract except such violations or defaults under such Contracts which, individually or in the aggregate, would not have a Material Adverse Effect on the Company. SECTION 3.25 ACCOUNTS RECEIVABLE. All accounts receivable and accrued interest receivable of the Company and its Subsidiaries have arisen out of the ordinary course of business and the accounts receivable reserves reflected on the consolidated balance sheet of the Company as of September 30, 1998 are as of such date established in accordance with U.S. GAAP and to the knowledge of the Company will be collectible in the aggregate, in an amount not less than the amounts carried on the balance sheet of the Company as of such date, net of any reserves included therein, except for any uncollectible amounts which, individually or in the aggregate, would not have a Material Adverse Effect on the Company. SECTION 3.26 RELATIONSHIPS. As of the date of this Agreement, (i) to the Company's knowledge, the relationship of the Company and its Subsidiaries with its respective customers and suppliers are satisfactory and, (ii) to the Company's knowledge, the execution of this Agreement and consummation of the transactions contemplated by this Agreement to be undertaken by the Company will not have a Material Adverse Effect on the relationships of the Company or any Subsidiary with such customers or suppliers, the effect of which, individually or in the aggregate, would have a Material Adverse Effect on the Company or Chrysalis DNX. SECTION 3.27 PRODUCT WARRANTIES AND LIABILITIES. Neither the Company nor any Subsidiary of the Company has any forms of warranties or guarantees of its products and services that are in effect or proposed to be used by it. There are no pending or, to the knowledge of the Company, threatened Actions under any warranty or guaranty against the Company or any Subsidiary of the Company. Neither the Company nor any Subsidiary of the Company has incurred, nor does the Company know or have any reason to believe that there is any basis for alleging, any material liability, damage, loss, cost or expense as a result of any material defect or other deficiency (whether of design, materials, workmanship, labeling instructions or otherwise) ("PRODUCT LIABILITY") with respect to any product sold or services rendered by or on behalf of the Company or any Subsidiary of the Company whether such Product Liability is incurred by reason of any express or implied warranty (including, without limitation, any warranty of merchantability or fitness), any doctrine of common law (tort, contract or other), any statutory provision or otherwise and irrespective of whether such Product Liability is covered by insurance, except for any Product Liability which would not have a Material Adverse Effect on the Company. 28 SECTION 3.28 AFFILIATE TRANSACTIONS. Except as contemplated by the transactions contemplated by this Agreement, there are no Contracts or other transactions between the Company or any Subsidiary of the Company, on the one hand, and any (i) officer or director of the Company or any Subsidiary of the Company, (ii) record or beneficial owner of five percent (5%) or more of the voting securities of the Company or (iii) affiliate (as such term is defined in Regulation 12b-2 promulgated under the Exchange Act) of any such officer, director or beneficial owner, on the other hand. SECTION 3.29 INSURANCE. The Company and its Subsidiaries are presently insured, and during each of the past five calendar years have been insured against such risks as companies engaged in a similar business would, in accordance with good business practice, customarily be insured. The policies of fire, theft, errors and omission, liability and other insurance maintained with respect to the assets or businesses of the Company and its Subsidiaries provide adequate coverage against loss and may be continued by the Company or any Subsidiary of the Company without modification or premium increase after the Merger Date and for the duration of their current terms. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER Except as set forth in the disclosure schedule (each section of which qualifies the correspondingly numbered representation and warrant only, except where the information in any such section is disclosed in such a way to make its relevance to any other representation or warranty readily apparent, in which case, such section shall be deemed to also qualify such other representation and warranty) of Buyer attached hereto (the "BUYER DISCLOSURE SCHEDULE"), Buyer represents and warrants to the Company that: SECTION 4.01. CORPORATE EXISTENCE AND POWER. (a) Buyer is a corporation duly incorporated, validly existing and in good standing under the Canada Business Corporations Act, and has all corporate powers and has or has applied for all permits, licenses, authorizations, consents, approvals and franchises necessary to own, lease and operate its properties and to carry on its business as it is now being conducted and is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, except (i) where the failure to have such permits, licenses, authorizations, consents, approvals and franchises and (ii) for those jurisdictions where the failure to be so qualified or in good standing is not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect on Buyer. Buyer has heretofore delivered to the Company true and complete copies of Buyer's Articles of Amalgamation and Certificate of Amalgamation ("ORGANIZATIONAL DOCUMENTS") as currently in effect. 29 (b) Merger Sub is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all permits, licenses, authorizations, consents, approvals and franchises required to carry on its business as it is now being conducted except where the failure to have such permits, licenses, authorizations, consents, approvals and franchises is not individually, or in the aggregate, reasonably likely to have a Material Adverse Effect on Merger Sub. Since its date of incorporation, Merger Sub has not engaged in any activities other than in connection with the transactions contemplated by this Agreement. SECTION 4.02. CORPORATE AUTHORIZATION. The execution, delivery and performance by each of Buyer and Merger Sub (each, a "BUYER PARTY") of this Agreement and the consummation by each Buyer Party of the transactions contemplated by this Agreement are within the corporate powers of such Buyer Party and have been duly authorized by all necessary corporate action. This Agreement has been duly executed and delivered by each Buyer Party and constitutes a valid and binding agreement of such Buyer Party enforceable against such Buyer Party in accordance with its terms. SECTION 4.03. GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance by each Buyer Party of this Agreement and the consummation by such Buyer Party of the transactions contemplated by this Agreement require no action, by or in respect of, or filing with, any Governmental Authority other than (a) the filing of the Certificate of Merger in accordance with the Delaware Law; (b) compliance with any applicable requirements of the HSR Act; (c) compliance with any applicable requirements of the 1934 Act; (d) compliance with any applicable requirements of the 1933 Act; (e) compliance with any applicable foreign or state securities or Blue Sky laws; (f) filings and notices not required to be made or given until on or after the Merger Date; and (g) immaterial actions or filings relating to ordinary operational matters. SECTION 4.04. NON-CONTRAVENTION. The execution, delivery and performance by each Buyer Party of this Agreement and the consummation by such Buyer Party of the transactions contemplated by this Agreement do not and will not (a) contravene or conflict with the Organizational Documents or certificate of incorporation or bylaws, as the case may be, of such Buyer Party, (b) assuming compliance with the matters referred to in Section 4.03 and Section 4.03 of the Buyer Disclosure Schedule, contravene or conflict with or constitute a violation of any provision of any law, regulation, judgment, injunction, order or decree binding upon or applicable to Buyer or any Subsidiary of Buyer, (c) constitute a default (or an event which with notice, the lapse of time or both would become a default) under or give rise to a right of termination, cancellation or acceleration of any right or obligation of Buyer or any Subsidiary of Buyer or to a loss of any benefit to which Buyer or any Subsidiary of Buyer is entitled under any provision of any agreement, contract or other instrument binding upon Buyer or any Subsidiary of Buyer or any license, franchise, permit or other similar authorization held by Buyer or any Subsidiary of Buyer, (d) require any action or consent or approval of any Person other than a Governmental Authority, or (e) result in the creation or imposition of any Lien on any asset of 30 Buyer or any Subsidiary of Buyer, other than, in the case of the events specified in clauses (b), (c), (d) and (e) (other than indebtedness of Buyer or any subsidiary of Buyer), any such event which, individually or in the aggregate, has not had, and is not reasonably likely to have, a Material Adverse Effect on Buyer. SECTION 4.05. CAPITALIZATION. The authorized capital stock of (a) Buyer consisted of (i) an unlimited number of shares of Buyer Common Stock and (ii) an unlimited number of preferred shares issuable in series ("BUYER PREFERRED STOCK"), and (b) on the date hereof, Merger Sub consisted of 3,000 shares of Merger Sub Common Stock. As of August 31, 1998, there were 24,857,059 shares of Buyer Common Stock outstanding and no shares of Buyer Preferred Stock outstanding. As of August 31, 1998, an aggregate of 2,428,920 shares of Buyer Common Stock were reserved for issuance or issuable under employee benefit or other compensation plans or programs of Buyer. All outstanding shares of capital stock of each Buyer Party have been duly authorized and validly issued and are fully paid and nonassessable. All shares of Buyer Common Stock, when issued in the Merger, will be duly authorized and validly issued and will be fully paid and non-assessable. SECTION 4.06. PUBLIC FILINGS. Buyer has delivered to the Company all documents, reports, schedules, registration statements and proxy statements filed by Buyer with the Ontario Securities Commission or the Quebec Securities Commission (each, a "CANADIAN SECURITIES COMMISSION") on or after August 1, 1997. Buyer has filed all required documents, reports, schedules, forms and statements with either Canadian Securities Commission since August 1, 1997 (collectively, the "BUYER PUBLIC DOCUMENTS"). As of their respective dates, or if amended, as of the date of the last such amendment, the Buyer Public Documents complied, and all documents required to be filed by Buyer with the either Canadian Securities Commission after the date hereof and prior to the Merger Date (the "SUBSEQUENT BUYER PUBLIC DOCUMENTS") will comply, in all material respects with the requirements of the Ontario or Quebec securities laws, as the case may be, and none of the Buyer Public Documents contained, and the Subsequent Buyer Public Documents will not contain, any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. SECTION 4.07. FINANCIAL STATEMENTS. The audited consolidated financial statements and unaudited consolidated interim financial statements of Buyer included in the Buyer Public Documents at the time filed (and, in the case of registration statements and proxy statements, on the date of effectiveness and the date of mailing, respectively) complied as to form in all material respects with applicable accounting requirements of the Ontario or Quebec securities laws, as the case may be, were prepared in accordance with generally accepted accounting principles applied in Canada ("CANADIAN GAAP") applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly present (subject in the case of unaudited statements to normal, recurring audit adjustments) the consolidated financial position of Buyer as at the dates thereof and the consolidated results of its operations and cash flows for the periods then ended. For purposes of this Agreement, "BUYER BALANCE SHEET" means the 31 consolidated balance sheet of Buyer as of August 31, 1998 set forth in the Buyer Annual Report filed with the Canadian Securities Commissions and "BUYER BALANCE SHEET DATE" means August 31, 1998. SECTION 4.08. DISCLOSURE DOCUMENTS. (a) Each document required to be filed by Buyer with the SEC in connection with the transactions contemplated by this Agreement (the "BUYER SEC DISCLOSURE DOCUMENTS"), including, without limitation, the registration statement of Buyer to be filed with the SEC on Form F-4 (or other appropriate form) in connection with the issuance of Buyer Common Stock pursuant to this Agreement (the "FORM F-4") and any amendments or supplements thereto, will, when filed, comply as to form in all material respects with the applicable requirements of the 1933 Act. Buyer is eligible to use Form F-4 for the registration of the Buyer Common Stock to be issued pursuant to the Merger. Each document required to be filed by Buyer under the Ontario or Quebec Securities laws in connection with the transactions contemplated by this Agreement (together with the Buyer SEC Disclosure Documents, the "BUYER DISCLOSURE DOCUMENTS"), will, when filed, comply as to form in all material respects with the applicable requirements of the Ontario or Quebec securities laws, as applicable. (b) At the time the prospectus which forms a part of the Form F-4 (the "BUYER PROSPECTUS") or any amendment or supplement thereto is first mailed to stockholders of the Company, and at the time such stockholders vote on the Merger, and at the Merger Date the Buyer Prospectus, as supplemented or amended, if applicable, will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. At the time of the filing of any Buyer Disclosure Document and at the time of any distribution thereof, such Buyer Disclosure Document will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties contained in this Section 4.08 will not apply to statements included in or omissions from the Buyer Disclosure Documents based upon information furnished to Buyer by the Company specifically for use therein. SECTION 4.09. INFORMATION SUPPLIED. The information supplied or to be supplied by Buyer for inclusion or incorporation by reference in (i) the Company Proxy Statement or any amendment or supplement thereto will not, at the time the Company Proxy Statement is first mailed to stockholders of the Company and at the time such stockholders vote on the adoption of this Agreement, contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading, and (ii) any Company Disclosure Document (other than the Company Proxy Statement, and any amendments or supplements thereto) will not, at the time of effectiveness of such Company Disclosure Document and at the time of any distribution by the Company thereof, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. 32 SECTION 4.10. ABSENCE OF CERTAIN CHANGES. Since the Buyer Balance Sheet Date and except as set forth in the Buyer Public Documents, Buyer and its Subsidiaries have conducted their business in the ordinary course consistent with past practice and there has not been: (a) any event, occurrence or development of a state of circumstances or facts which has had or is reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on Buyer other than any of the foregoing (i) relating to the economy or securities markets in general, (ii) relating to Buyer's industry in general or (iii) arising from the announcement or thereafter the pendency of this Agreement or the transactions contemplated by the Transaction Document; (b) any declaration, setting aside or payment of any dividend or other distribution with respect to any shares of capital stock of Buyer, or any repurchase, redemption or other acquisition by Buyer or any Subsidiary of Buyer of any amount of outstanding shares of capital stock or other securities of, or other ownership interests in, Buyer or any of its Subsidiaries; (c) any amendment of any material term of any outstanding security of Buyer or any Subsidiary of Buyer; or (d) any damage, destruction or other casualty loss (whether or not covered by insurance) affecting the business or assets of Buyer or any Subsidiary of Buyer which, individually or in the aggregate, has had or is reasonably likely to have a Material Adverse Effect on Buyer. SECTION 4.11. NO UNDISCLOSED MATERIAL LIABILITIES. There are no liabilities, commitments or obligations (whether pursuant to contracts or otherwise) of Buyer or any Subsidiary of Buyer of any kind whatsoever which, individually or in the aggregate, have had or are reasonably likely to have a Material Adverse Effect on Buyer, whether accrued, contingent, absolute, determined, determinable or otherwise, and there is no existing condition, situation or set of circumstances which is reasonably likely to result in such a liability, commitment or obligation, including, without limitation, any fines, disciplinary actions or other adverse actions that may be taken or reported concerning the conduct of Buyer or any of its Subsidiaries, other than: (a) liabilities, commitments or obligations disclosed or provided for in the Buyer Balance Sheet (including the notes thereto) or in the Buyer Public Documents; (b) liabilities, commitments or obligations incurred in the ordinary course of business consistent with past practice since the Buyer Balance Sheet Date; and (c) liabilities, commitments or obligations under this Agreement. 33 SECTION 4.12. OWNERSHIP OF COMPANY STOCK. None of Buyer nor its associates or affiliates (as such terms are defined in Section 203(c) of the Delaware Law) owns, or has owned (within the meaning of Section 203(c)(9) of the Delaware Law) at any time during the three years immediately prior to the date of this Agreement, any shares of Company Common Stock. SECTION 4.13. FINDERS FEES. Except for Pennsylvania Merchant Group, a copy of whose engagement agreement has been provided to the Company, there is no investment banker, broker, finder or other intermediary which has been retained by or is authorized to act on behalf of the Buyer or any of its Subsidiaries who might be entitled to any fee or commission in connection with the transactions contemplated by this Agreement. SECTION 4.14. SUFFICIENT CASH TO REPAY CERTAIN DEBT. Buyer will have sufficient cash on hand (or amounts available for borrowing under loan facilities which would permit the borrowings to be used for such purpose) to pay immediately after the Merger Date the amounts referred to in Section 6.03. ARTICLE 5 COVENANTS OF THE COMPANY The Company agrees that: SECTION 5.01. CONDUCT OF THE COMPANY. From the date hereof until the Merger Date, except (i) as provided in the Company Disclosure Schedule, (ii) actions related to the Shut-Downs contemplated by Section 5.04, or (iii) as otherwise consented to by Buyer (which consent shall not be unreasonably withheld or delayed), the Company shall, and shall cause its Subsidiaries to, conduct their business in the ordinary course consistent with past practice and use their commercially reasonable efforts to preserve intact their business organizations and relationships with third parties and to keep available the services of their present officers and employees. Without limiting the generality of the foregoing, except as expressly permitted in this Agreement (including, without limitation, the preceding sentence), from the date hereof until the Merger Date without prior consent of Buyer (which consent shall not be unreasonably withheld or delayed): (a) Neither the Company, nor any Subsidiary of the Company, will adopt or propose any change in its respective certificate of incorporation or bylaws; (b) The Company will not, and will not permit any Subsidiary of the Company to, merge or consolidate with any other Person or, other than as provided in the Company's capital expenditure budget (included as Section 5.01(b) of the Company Disclosure Schedule) in the ordinary course of business, acquire a material amount of assets of any other Person; 34 (c) The Company will not, and will not permit any Subsidiary of the Company to, sell, lease, license or otherwise dispose of any material assets or property except pursuant to (i) existing contracts or commitments and (ii) any sale of operating procedures, computerized project tracking systems and training manuals to BML Japan (provided, however, that any such sale to BML Japan shall not obligate the Company to provide any services or training beyond January 31, 1999); PROVIDED, however, that the Company and its Subsidiaries may continue to grant non-exclusive sublicenses related to the 191 patent in the ordinary course of business consistent with past practice. (d) The Company will not, and will not permit any Subsidiary of the Company to, declare, set aside or pay any dividend or make any other distribution with respect to any shares of the capital stock of the Company or any Subsidiary of the Company or in respect of any securities convertible or exchangeable for, or any rights, options or warrants to acquire, any capital stock of the Company or any Subsidiary of the Company; (e) The Company will not, and will not permit any Subsidiary of the Company to, create or assume any Lien on any material asset other than Liens arising solely by operation of law; (f) The Company will not, and will not permit any Subsidiary of the Company to, issue, grant, deliver or sell, or authorize or propose the issuance, grant, delivery or sale of, any Company Securities, any Company Subsidiary Securities or any securities convertible into or exchangeable for, or any rights, warrants or options to acquire, any Company Securities or Company Subsidiary Securities other than (i) pursuant to the exercise of a stock option or warrant to purchase shares of Company Stock outstanding on the date of this Agreement, or (ii) the issuance in the ordinary course of business consistent with past practice of shares of Company Stock to the Company's 401(k) plan. (g) The Company (i) will not adjust, split, combine or reclassify, or take any other similar action with respect to, any capital stock of the Company, and (ii) the Company will not, and will not permit any Subsidiary of the Company to, directly or indirectly, repurchase, redeem or otherwise acquire an amount of shares of capital stock of, or in respect of any securities convertible or exchangeable for, or any rights, options or warrants to acquire, any capital stock of, or other ownership interests in, the Company or any Subsidiary of the Company, or (iii) enter into any agreement, understanding or arrangement with respect to the sale or voting of any capital stock of the Company or any Subsidiary; (h) The Company will not, and will not permit any Subsidiary of the Company to, incur or assume any indebtedness from any Person (other than, in the case of a Subsidiary of the Company, the Company or any other subsidiary of the Company) for borrowed money or guarantee any such indebtedness; 35 (i) Except for (i) loans, advances or capital contributions to or investments in Subsidiaries of the Company, (ii) loans or advances to employees in the ordinary course of business consistent with past practice and in amounts not exceeding $5,000 per employee or (iii) investments in securities in the ordinary course of business consistent with past practices, the Company will not, and will not permit any Subsidiary of the Company to, make any material loans, advances or capital contributions to, or investments in, any other Person; (j) The Company will not, and will not permit any of its Subsidiaries to, (i) grant any severance or termination pay to, or enter into any employment, termination or severance arrangement with, any director, officer, consultant or employee of the Company or any Subsidiary of the Company, (ii) enter into any employment, deferred compensation or other similar agreement (or any amendment to any such existing agreement) with any director, officer or employee of the Company or any Subsidiary, (iii) increase or decrease benefits payable under any existing severance or termination pay policies or employment agreements, (iv) increase compensation, bonus or other benefits payable to directors, officers, consultant or employees of the Company or any Subsidiary of the Company, other than in the ordinary course of business consistent with past practice; (v) adopt any new Employee Plan or Benefit Arrangement; or (vi) otherwise amend or modify, any existing Employee Plan or Benefit Arrangement except to the extent required by applicable law; (k) The Company will not, and will not permit any of its Subsidiaries to, authorize, recommend, propose or announce an intention to adopt a plan of complete or partial liquidation or dissolution of the Company or any Subsidiary of the Company, or any plan of division or share exchange involving the Company or any of its Subsidiaries; (l) The Company will not, and will not permit any Subsidiary of the Company to, change any method of accounting or any accounting principle or practice used by the Company or any Subsidiary of the Company, except for any such change required by reason of a change in U.S. GAAP or Regulation S-X; (m) Neither the Company nor any Subsidiary shall, to the extent it may affect or relate to the Company or any Subsidiary, make or change any tax election, change any annual tax accounting period, adopt or change any method of tax accounting, file any amended Tax Return, enter into any closing agreement, settle any Tax claim or assessment, surrender any right to claim a Tax refund, consent to any extension or waiver of the limitations period applicable to any Tax claim or assessment or take or omit to take any other action, if any such action or omission would have the effect of, in the aggregate, increasing the Tax liability, or in the aggregate, reducing any Tax asset of the Company or any Subsidiary of the Company except to the extent such increase or reduction is adequately provided for, under U.S. GAAP, on the Company Balance Sheet; (n) All Tax Returns not required to be filed on or before the date hereof (i) shall be filed when due in accordance with all applicable laws and (ii) as of the time of filing, shall correctly reflect in all material respects the facts regarding the income, business, assets, 36 operations, activities and status of the Company, its Subsidiaries and any other information required to be shown therein; (o) Neither the Company nor any Subsidiary of the Company shall reserve any amount for or make any payment of Taxes to any Person or any Taxing Authority, except for such Taxes as are due or payable or have been properly estimated in accordance with applicable law as applied in a manner consistent with past practice of the Company or any such Subsidiary, as the case may be; (p) Neither the Company nor any of its Subsidiaries will: (i) settle any Actions, whether now pending or hereafter made or brought, for an amount in excess of $25,000; (ii) modify, amend or terminate, or waive, release or assign any material rights or claims with respect to, any Contract set forth in Section 3.24 of the Company Disclosure Schedule, or, except to the extent required by Applicable Law and advised by outside counsel, any confidentiality agreement to which the Company or any Subsidiary of the Company is a party; (iii) incur or commit to any capital expenditures, obligations or liabilities in respect thereof which exceed or would exceed $10,000, individually, or $50,000 in the aggregate, other than capital expenditures related to the Company's on-going construction of facilities which do not exceed amounts previously disclosed by the Company to Buyer; (iv) make any material changes or modifications to any pricing policy or investment policy; (v) take any action that would result in the representations and warranties set forth in Article III being false or incorrect in any material respect, other than inadvertent actions that do not result in the representations and warranties being unable to be true and correct in all material respects by the Merger Date; (vi) enter into any customer contract or agreement, or any other contract, lease, agreement or commitment not otherwise specified in this Section 5.01, for an amount in excess of $100,000 individually; (vii) enter into, amend or terminate any real property lease or any commitment in respect thereof; (viii) terminate the employment or engagement of any employee or consultant or agent of the Company or any Subsidiary; or 37 (ix) pay or approve any other expense or disbursement in excess of $25,000 individually (except for payroll and related tax withholding and other expenses (including insurance and 401(k) contributions), Tax liabilities, utilities, lease payments, principal and interest payments on outstanding indebtedness of the Company and/or any of its Subsidiaries, payments to suppliers, Shut-Down expenses, legal fees and expenses and, upon closing of the Merger, investment banking fees and expenses). (q) The Company will not, and will not permit any Subsidiary of the Company to, agree to do any of the foregoing. The Company and its Subsidiaries will consult regularly with the Buyer in respect of the operation of its business prior to the Merger Date; provided, however, that the provisions of this sentence will not be deemed to have been breached unless and until Buyer has notified the Company in writing of such breach and the Company and its Subsidiaries have failed to comply with the specific terms of such notice. SECTION 5.02. STOCKHOLDER MEETING; PROXY MATERIALS. (a) Subject to Section 5.03, the Company shall cause a meeting of its stockholders (the "COMPANY STOCKHOLDER MEETING") to be duly called and held as soon as reasonably practicable for the purpose of voting on the adoption of this Agreement and, to the extent submitted to the Company's stockholders for approval, the, transactions contemplated by this Agreement, and the Board of Directors of the Company shall recommend adoption of this Agreement by the Company's stockholders; PROVIDED that such mailing shall not in any event be mailed during the Listing Period unless Buyer has received the Nasdaq Letter; PROVIDED further that such meeting need not be called and held and, prior to the Company Stockholder Meeting, such recommendation may be withdrawn, modified or amended to the extent that, as a result of the commencement or receipt of an Acquisition Proposal with respect to the Company, the Board of Directors of the Company determines in good faith, in accordance with Section 5.03, that such Acquisition Proposal constitutes a Superior Proposal. (b) Subject to Section 5.03, in connection with the Company Stockholder Meeting, the Company will (i) promptly prepare and file with the SEC, will use commercially reasonable efforts to have cleared by the SEC and will thereafter mail to its stockholders as promptly as practicable after the time period referred to in Section 1.07 for determination of whether a Listing Failure has occurred the Company Proxy Statement and all other proxy materials for such meeting, (ii) use commercially reasonable efforts to obtain the necessary adoption by its stockholders of this Agreement and the approval of the transactions contemplated by this Agreement, and (iii) otherwise comply with all legal requirements applicable to such meeting. SECTION 5.03. OTHER OFFERS. From the date hereof until the termination of this Agreement, the Company will not, and will cause its Subsidiaries and the directors, officers, employees, financial advisors and other agents or representatives of the Company or any of its Subsidiaries not to, directly or indirectly, take any action to solicit, initiate or encourage any 38 Acquisition Proposal with respect to the Company or engage in negotiations with, or disclose any non-public information relating to the Company or any Subsidiary of the Company or afford access to the properties, books or records of the Company or any Subsidiary of the Company to, any Person that has informed the Company that it is considering making, or has made, an Acquisition Proposal with respect to the Company, or any Person that the Company after reasonable inquiry believes is a potential purchaser of the Company, PROVIDED, however, that the Company may, in response to an unsolicited bona fide written proposal regarding an Acquisition Proposal by any Person, disclose such non-public information to or engage in negotiations with such Person, if the Board of Directors of the Company determines in good faith that such Acquisition Proposal is reasonably likely to be a Superior Proposal, and, PROVIDED further, that prior to furnishing non-public information to, or entering into discussions or negotiations with, such Person, the Company receives from such Person an executed confidentiality agreement with terms no less favorable to the Company than those contained in the Letter Agreement dated as of July 21, 1998 between Buyer and the Company ("CONFIDENTIALITY AGREEMENT"). The Company will promptly (and in no event later than 24 hours after receipt of the relevant Acquisition Proposal with respect to the Company), notify (which notice shall be provided orally and in writing and shall identify the Person making the relevant Acquisition Proposal with respect to the Company) Buyer after receipt of any Acquisition Proposal or any indication from any Person that such Person is considering making an Acquisition Proposal with respect to the Company or any request for non-public information relating to the Company or any Subsidiary of the Company or for access to any properties, books or records of the Company or any Subsidiary of the Company by any Person that may be considering making, or has made, an Acquisition Proposal with respect to the Company and will keep Buyer fully informed of the status of any such Acquisition Proposal with respect to the Company. The Company shall give Buyer at least one business day's advance notice of any information to be supplied to, and at least two days' advance notice of any agreement to be entered into with, any Person making such Acquisition Proposal with respect to the Company. Except as provided herein, the Company shall, and shall cause its Subsidiaries and the directors, officers, employees, financial advisors and other agents or representatives of the Company or any of its Subsidiaries to, cease immediately and cause to be terminated all activities, discussions or negotiations, if any, with any Persons conducted heretofore with respect to any Acquisition Proposal with respect to the Company. For purposes of this Agreement, "ACQUISITION PROPOSAL" means any offer or proposal for, or any indication of interest in, (i) a merger or other business combination in any manner of an equity interest in an amount equal to or greater than 20% of the class of such equity security then outstanding or a substantial portion of the assets of, the Company or any Subsidiary of the Company, in each case other than the transactions contemplated by this Agreement. For purposes of this Agreement, "SUPERIOR PROPOSAL" means an Acquisition Proposal with respect to the Company which the Board of Directors of the Company determines in good faith (based on the written advice of an investment banking firm of national reputation taking into account all of the terms and conditions of the Acquisition Proposal, including any conditions to consummation) to be more favorable and provide greater value to the Company's stockholders than the Merger. 39 SECTION 5.04. SHUT-DOWNS. After execution of this Agreement, the Company shall commence the process of shutting down its facilities located in Austin, Texas, Cham, Switzerland and Dusseldorf, Germany, and reducing expenses in respect of its operations in Mannheim, Germany, and Israel (collectively, the "SHUT-DOWNS") with the goal of completing each of the Shut-Downs as soon as practicable (consistent with maintaining good client relationships). The Company shall accrue, in accordance with U.S. GAAP, all costs and expenses related to the ShutDowns. Notwithstanding the foregoing, Buyer acknowledges that the Shut-Downs in the time and in the manner agreed to by Buyer and the Company may not be completed prior to the Merger Date and that a significant portion of the activities, costs and expenses related to the Shut-Downs will occur after the Merger Date. The Company agrees to update Buyer on a regular basis (no less than every two (2) weeks and within one (1) business day of request by Buyer) prior to the Merger Date regarding the status, activities and costs and expenses (and related accounting therefor) of the Shut-Downs. Schedule 5.04 sets forth a good faith estimate of all costs and expenses (including reserves and accruals) the Company and its Subsidiaries expect to incur after the date hereof until the Merger Date in connection with the Shut-Downs, on a location-by- location and item-by-item basis. SECTION 5.05. INTELLECTUAL PROPERTY MATTERS. The Company and its Subsidiaries shall use its respective commercially reasonable efforts to preserve its ownership rights to the Intellectual Property free and clear of any Liens and shall use its commercially reasonable efforts to assert, contest and prosecute any infringement of any issued foreign or domestic patent, trademark, service mark, or copyright that forms a part of the Intellectual Property or any misappropriation or disclosure of any trade secret, confidential information or know-how that forms the Intellectual Property; provided, however, that the Company and its Subsidiaries need not preserve or prosecute any foreign trademark if the failure to preserve or prosecute such trademark would not have a Material Adverse Effect on the Company. SECTION 5.06. NOTICE OF PREPAYMENT. The Company will provide written notice of its intent to prepay immediately after the Merger Date all amounts outstanding under the Term Loan and Security Agreement dated as of August 29, 1997, as amended, among the Company, its Subsidiaries listed therein and First Union National Bank, as successor to CoreStates Bank, N.A. ("FIRST UNION"), and the ancillary documents, as amended, related thereto (the "FIRST UNION AGREEMENTS"). SECTION 5.07. SHARED SERVICES. The Company shall use commercially reasonably efforts to obtain written confirmation from Iffa Credo SA ("IFFA") reasonably satisfactory to Buyer that Iffa will continue to provide after the Merger Date to Buyer, the Surviving Corporation and/or its Subsidiaries services of the same nature, type, quantity and on the same terms as have been provided by Iffa to the Company and/or its Subsidiaries prior to the date of this Agreement and consistent with past practice. 40 SECTION 5.08. HACKEL AFFILIATE LETTER AND SUPPORT/VOTING AGREEMENT. The Company shall use commercially reasonable efforts to cause Alec Hackel to execute an Affiliate Letter and Support/Voting Agreement prior to the mailing of the Company Proxy Statement. ARTICLE 6 COVENANTS OF BUYER Buyer agrees that: SECTION 6.01. CONDUCT OF BUYER. From the date hereof until the Merger Date, Buyer shall, and shall cause its Subsidiaries to, conduct their business in all material respects in the ordinary course consistent with past practice and use their commercially reasonable efforts to preserve intact their business organizations and relationships with third parties and to keep available the services of their present officers and employees. Without limiting the generality of the foregoing, except as expressly permitted in this Agreement, from the date hereof until the Merger Date: (a) Buyer will not adopt or propose any change in its Organizational Documents that would materially and adversely affect the rights of holders of Company Stock as anticipated holders of Buyer Common Stock; (b) Buyer will not declare, set aside or pay any dividend or make any other distribution with respect to any shares of Buyer's capital stock. SECTION 6.02. LISTING OF STOCK. Within five (5) business days of the date of this Agreement, Buyer shall make application to Nasdaq and to all applicable regulatory authorities, including, without limitation, the filing of a Form 40-F with the SEC, for the listing on Nasdaq's National Market System ("NMS") of the Buyer Common Stock and to use its commercially reasonable efforts to cause such Buyer Common Stock to be approved for listing on Nasdaq's NMS effective on or prior to the Merger Date. SECTION 6.03. REPAYMENT OF CERTAIN DEBT. Immediately after the Merger Date, Buyer shall (or shall cause Merger Sub to) repay or refinance all amounts outstanding under (i) the First Union Agreements and (ii) the 6% Subordinated Note due March 16, 2001 issued by the Company to Panlabs International, Inc., as amended (the "MDS NOTE"). SECTION 6.04. FINANCING. If a Listing Failure occurs, Buyer shall use its best efforts to secure any financing required to permit it to pay on the Merger Date the Merger Consideration. 41 ARTICLE 7 COVENANTS OF BUYER AND THE COMPANY SECTION 7.01. COMMERCIALLY REASONABLE EFFORTS. (a) Subject to the terms and conditions of this Agreement, each party will use its commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate the Merger and the other transactions contemplated by this Agreement. (b) Neither Buyer nor the Company shall take any action, or omit to take any action, that would cause its representations and warranties contained herein to be inaccurate such that the conditions in Article 8 would not be satisfied. SECTION 7.02. COOPERATION. Without limiting the generality of Section 7.01(a), Buyer and the Company shall together, or pursuant to an allocation of responsibility to be agreed between them, coordinate and cooperate (i) in connection with the preparation of the Company Disclosure Documents and the Buyer Disclosure Documents, (ii) in determining whether any action by or in respect of, or filing with, any Governmental Authority is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any material contracts, in connection with the consummation of the Merger or the other transactions contemplated by this Agreement, and (iii) in seeking any such actions, consents, approvals or waivers or making any such filings, furnishing information required in connection therewith or with the Company Disclosure Documents and the Buyer Disclosure Documents, and timely seeking to obtain any such actions, consents, approvals or waivers. Subject to the terms and conditions of this Agreement, Buyer and the Company will each use its reasonable best efforts to have the Form F-4 declared effective by the SEC under the 1933 Act as promptly as practicable after the Form F-4 is filed with the SEC. SECTION 7.03. PUBLIC ANNOUNCEMENTS. Upon execution of this Agreement, Buyer and the Company will each issue a press release, each in form satisfactory to the other party, announcing the transactions contemplated by this Agreement. Buyer and the Company will consult with each other before issuing any other press release or making any public statement with respect to this Agreement and the transactions contemplated by this Agreement and, except, as may be required by applicable law or any listing or similar agreement with any securities exchange on which the Buyer Common Stock is listed or Nasdaq, will not issue any such press release or make any such public statement prior to such consultation. SECTION 7.04. ACCESS TO INFORMATION. From the date hereof until the Merger Date, the Company and Buyer (each, in such capacity, a "PROVIDING PARTY") will give (or cause to be given) to the other party (the "RECEIVING PARTY"), its counsel, financial advisors, auditors and other authorized representatives full access, during regular business hours, to the offices, 42 properties, employees and consultants, books and records of the Providing Party, will furnish (or cause to be furnished) to the Receiving Party, its counsel, financial advisors, auditors and other authorized representatives such financial and operating data and other information as such Receiving Party may reasonably request and will instruct the employees, counsel and financial advisors of the Providing Party and its Subsidiaries to cooperate with the Receiving Party in its investigation of the business of the Providing Party and its Subsidiaries; PROVIDED that no investigation pursuant to this Section shall affect any representation or warranty given by the Providing Party to the Receiving Party hereunder. Unless otherwise required by applicable law, each party hereto agrees that it shall, and it shall cause its Subsidiaries and its and their respective officers, directors, employees, auditors and agents to, hold, in confidence all non-public information so acquired and to use such information solely for purposes of effecting the transactions contemplated by this Agreement. From the date hereof until the Merger Date, each Providing Party will cooperate with the efforts of the Receiving Party, its counsel, financial advisors, auditors and other authorized representatives to have reasonable access to the Providing Party's customers and suppliers. The information obtained pursuant to this Section shall be subject to any confidentiality agreements or other confidentiality obligations currently binding upon the Providing Party or any of its Subsidiaries; PROVIDED that the Providing Party shall use commercially reasonable efforts to obtain any waivers under such agreements or obligations to permit the Providing Party to comply with its obligations hereunder. SECTION 7.05. FURTHER ASSURANCES. At and after the Merger Date, the directors and officers of the Surviving Corporation will be authorized to execute and deliver, in the name and on behalf of (x) the Company or Merger Sub, and (y) Buyer, any deeds, bills of sale, assignments or assurances and to take and do, in the name and on behalf of (x) the Company or Merger Sub, and (y) Buyer, any other actions and things to vest, perfect or confirm of record or otherwise in the Surviving Corporation any and all right, title and interest in, to and under any of the rights, properties or assets of the Company acquired or to be acquired by the Surviving Corporation as a result of the Merger or otherwise carry out the provisions of the Agreement, and the Company and its officers and directors shall be deemed to have granted to the Surviving Corporation an irrevocable power of attorney in respect of the foregoing. SECTION 7.06. NOTICES OF CERTAIN EVENTS. Each of the Company and Buyer shall promptly notify the other party of: (a) any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement; (b) any notice or other communication from any Governmental Authority in connection with the transactions contemplated by this Agreement; 43 (c) any notice or any communication from any customer or supplier indicating that such customer or supplier intends to terminate or restrict its existing relationship as a result of the public announcement or the pendency of the transactions contemplated by this Agreement; (d) any Actions commenced or, to its knowledge threatened against, relating to or involving or otherwise affecting such party that, if pending on the date of this Agreement, would have been required to have been disclosed pursuant to Section 3.13 only or that relate to the consummation of the transactions contemplated by this Agreement; and (e)(i) the occurrence or nonoccurrence of any event the occurrence or nonoccurrence of which would cause any representation or warranty of such party contained in this Agreement to be untrue or inaccurate at or prior to the Merger Date, and (ii) any material failure of such party to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by its hereunder; provided, however, that the delivery of any notice pursuant to this Section 7.06(e) shall not limit or otherwise affect the remedies available hereunder to either Buyer or the Company, as applicable. SECTION 7.07. DIRECTOR AND OFFICER LIABILITY. (a) From and after the Merger Date, Buyer shall cause the Surviving Corporation to indemnify, defend and hold harmless any Person who is on the date hereof, or has been at any time prior to the date hereof, or who becomes prior to the Merger Date, an officer, director, or employee or agent (the "INDEMNIFIED PARTY") of the Company or any of its Subsidiaries against all losses, claims, damages, liabilities, costs and expenses (including attorney's fees and expenses), judgments, fines, losses, and amounts paid in settlement in connection with any actual or threatened action, suit, claim, proceeding or investigation (each a "CLAIM") to the extent that any such Claim is based on, or arises out of, (i) the fact that such Person is or was a director, officer, employee or agent of the Company or any of its Subsidiaries at any time prior to the Merger Date or is or was serving at the request of the Company or any of its Subsidiaries as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise at any time prior to the Merger Date, or (ii) this Agreement or any of the transactions contemplated hereby or thereby in each case to the extent that any such Claim pertains to any matter or fact arising, existing, or occurring prior to or at the Merger Date, regardless of whether such Claim is asserted or claimed prior to, at or after the Merger Date (the matters described in clauses (i) and (ii) the "PRE-MERGER MATTERS") to the fullest extent indemnified under the Company's certificate of incorporation, bylaws in effect as of the date hereof or indemnification agreements in effect at the date hereof, including provisions relating to advancement of expenses incurred in the defense of any action or suit; PROVIDED that such indemnification shall be subject to any limitation imposed from time to time under applicable laws. Buyer and the Surviving Corporation shall also honor the indemnification agreements between the Company or any of its Subsidiaries, as the case may be, and any current or former officer or director of the Company or any such Subsidiary, as the case may be, existing on the date of this Agreement and which are listed in the Company Disclosure Schedule (and a form of which has been provided to Buyer). 44 (b) Buyer and the Surviving Corporation agree that all rights to indemnification and all limitations or exculpation of liabilities existing in favor of the Indemnified Party as provided in the Company's certificate of incorporation and bylaws as in effect as of the date hereof shall continue in full force and effect with respect to Pre-Merger Matters, without any amendment thereto, for a period of six years from the Merger Date to the extent such rights are consistent with Delaware Law; PROVIDED THAT, in the event any Claim or Claims with respect to any such Pre-Merger Matters are asserted or made within such six year period, all rights to indemnification in respect of any such Claim or Claims shall continue until disposition of any and all such Claims; PROVIDED HOWEVER, that any determination required to be made with respect to whether an Indemnified Party's conduct complies with the standards set forth under Delaware Law, the Company's certificate of incorporation or bylaws or such agreements, as the case may be, shall be made by independent legal counsel selected by the Indemnified Party and reasonably acceptable to Buyer, retained at Buyer's expense; and PROVIDED FURTHER, that nothing in this Section 7.07 shall impair any rights or obligations of any present or former directors or officers of the Company. (c) Buyer or the Surviving Corporation shall provide directors and officers of the Company officers' and directors' liability insurance coverage as of the Merger Date ("D&O INSURANCE") with respect to Pre-Merger Matters for a period of not less than six years after the Merger Date which coverage will be substantially similar to the Company's existing D&O Insurance including, without limitation, (i) an overall coverage amount not less than the overall coverage amount under the Company's existing D&O Insurance and (ii) coverage for liability under the 1933 and 1934 Acts in an amount not less than the coverage amounts for such liabilities under the Company's existing D&O Insurance. Buyer's obligations hereunder shall be expressly conditioned on all directors and officers of the Company or any Subsidiary having executed representation letter agreements at Buyer's request in respect of such insurance in the form attached hereto as Exhibit C. SECTION 7.08. REGISTRATION STATEMENT. Buyer shall (i) promptly prepare and file with the SEC the Form F-4 with respect to the Buyer Common Stock issuable in connection with the Merger and shall use its reasonable best efforts to cause the Form F-4 to be declared effective by the SEC as soon as practicable and (ii) take any action required to be taken under applicable Blue Sky law in connection with such issuance of Buyer Common Stock or pursuant to any Adjusted Option or Adjusted Warrant. SECTION 7.09. GOVERNMENTAL AUTHORIZATION. Each of Buyer and the Company shall take all actions by or in respect of, or filing with, any Governmental Authority required for the execution, delivery and performance by Buyer and the Company of this Agreement and the consummation by Buyer and the Company of the transactions contemplated by this Agreement, including compliance with any requirements referred to in Section 3.03 or Section 3.03 of the Company Disclosure Schedule or Section 4.03 or Section 4.03 of the Buyer Disclosure Schedule 45 SECTION 7.10. CERTAIN CORPORATE MATTERS. Buyer shall take all necessary corporate action for the amendment to or establishment of the Buyer Stock Option Plan contemplated by Section 1.04 hereof. SECTION 7.11. EMPLOYMENT. As of the Merger Date, Buyer shall assume the obligation of the Company to perform any and all employment and severance agreements identified in the Company Disclosure Schedules. ARTICLE 8 CONDITIONS TO THE MERGER SECTION 8.01. CONDITIONS TO THE OBLIGATIONS OF EACH PARTY. The obligations of Buyer and the Company to consummate the Merger are subject to the satisfaction of the following conditions: (a) this Agreement and the transactions contemplated by this Agreement shall have been adopted by the stockholders of the Company in accordance with the Delaware Law; (b) any applicable waiting period under the HSR Act and any applicable pre-merger notification or similar statutes and rules listed in Section 3.03 of the Company Disclosure Schedule or Section 4.03 of the Buyer Disclosure Schedule shall have expired; (c) no provision of any applicable law or regulation and no judgment, injunction, order or decree of a court of competent jurisdiction shall prohibit the consummation of the Merger; (d) no Action shall be instituted by any Governmental Authority which seeks to prevent consummation of the Merger or seeking material damages in connection with the transactions contemplated hereby which continues to be outstanding. (e) the Form F-4 shall have been declared effective under the 1933 Act and no stop order suspending the effectiveness of the Form F-4 shall be in effect and no proceedings for such purpose shall be pending before or threatened by the SEC; (f) (i) the Buyer Common Stock shall have been approved for listing, effective on or before the Merger Date, on Nasdaq's NMS, (ii) Buyer shall have received the approval of all applicable regulatory authorities related to such listing; and (iii) Buyer's Common Stock shall have been registered with the SEC under the Exchange Act; and (g) all actions by or in respect of or filings with any Governmental Authority required to permit the consummation of the Merger shall have been made or obtained other than any such 46 actions or filings, the failure of which to make or obtain shall not be reasonably likely to have a Material Adverse Effect on Buyer or the Company. SECTION 8.02. CONDITIONS TO THE OBLIGATIONS OF BUYER. The obligations of Buyer to consummate the Merger are subject to the satisfaction of the following further conditions: (a) (i) The Company shall have performed in all material respects all of its obligations hereunder required to be performed by it at or prior to the Merger Date, (ii) the representations and warranties of the Company contained in this Agreement shall be true and correct at and as of the Merger Date, as if made at and as of the Merger Date (except to the extent expressly made as of an earlier date, in which case as of such date), except where the failure of such representations and warranties to be so true and correct (without giving effect to any limitation as to "materiality" or "Material Adverse Effect" set forth therein) is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on the Company (or to the extent expressly set forth in any specific representation or warranty, Chrysalis DNX) and (iii) Buyer shall have received a certificate signed by an executive officer of the Company to the foregoing effect. (b) There shall not have been a breach of any obligation by any stockholder which has entered into a Support/Voting Agreement other than any breach which (i) does not result in the failure of the Company to obtain the Required Stockholder Vote in favor of adoption of this Agreement and (ii) does not result in the exercise of appraisal rights by any such stockholder. (c) In the event of a Listing Failure, holders of no more than 10% in the aggregate of outstanding shares of Company Stock shall be eligible to exercise their appraisal rights. (d) The Liens on (i) 7,989 shares of Chrysalis International in favor of Institut Merieux and (ii) 11,995 shares of Chrysalis International in favor of International Laboratories Holdings shall have been released. (e) All consents and approvals of third parties (including, but not limited to PIDA) to the transactions contemplated by this Agreement shall have been obtained, and all notices with respect to the transactions contemplated by this Agreement and required to be delivered prior to the Merger Date shall have been delivered. (f) The Barbut Agreement shall be in full force and effect and shall not have been revoked by Dr. Barbut. All loans (other than the loan to the Company from Dr. Jules Barbut) by the Company or any Subsidiary to any shareholder or affiliate shall have been repaid in full and there shall be no outstanding debts (other than the debt of Dr. Jack Barbut which reduces amounts payable under the loan to the Company from Dr. Jules Barbut) due from any directors, shareholders or affiliates to the Company or any Subsidiary of the Company. All directors, shareholders and affiliates of the Subsidiaries shall have assigned their ownership interests 47 (including but not limited to director qualifying shares) in any Subsidiary of the Company to Buyer or a Person designated by Buyer. (g) The losses of the Company and its Subsidiaries for the fiscal quarter ending December 31, 1998 shall not exceed $2,000,000 (excluding for purposes of this calculation any losses attributable to non-cash expenses required by U.S. GAAP or Regulation S-X to be expensed). (h) Buyer shall have received written confirmation from Iffa in respect of the matters set forth in Section 5.07 in form and substance reasonably satisfactory to Buyer. (i) Hackel shall have executed an Affiliate Letter. (j) The Company shall have satisfied all of its obligations to BML Japan. SECTION 8.03. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The obligations of the Company to consummate the Merger are subject to the satisfaction of the following further conditions: (a) (i) Buyer shall have performed in all material respects all of its obligations hereunder required to be performed by it at or prior to the Merger Date, (ii) the representations and warranties of Buyer and Merger Sub contained in this Agreement shall be true and correct at and as of the Merger Date, as if made at and as of the Merger Date (except to the extent expressly made as of an earlier date, in which case as of such date), except where the failure of such representations and warranties to be so true and correct (without giving effect to any limitation as to "materiality" or "Material Adverse Effect" set forth therein) is not reasonably like to have, individually or in the aggregate, a Material Adverse Effect on Buyer or Merger Sub and (iii) the Company shall have received a certificate signed by an executive officer of Buyer to the foregoing effect. (b) If a Listing Failure occurs, Buyer shall have secured any financing required to permit it to pay on the Merger Date the aggregate Merger Consideration. ARTICLE 9 TERMINATION SECTION 9.01. TERMINATION. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Merger Date (notwithstanding any approval or adoption of this Agreement by the stockholders of the Company or the shareholders of Buyer): (a) by mutual written consent of the Company and Buyer; 48 (b) by either the Company or Buyer, if there shall be any law or regulation that makes consummation of the Merger illegal or otherwise prohibited or if any judgment, injunction, order or decree enjoining Buyer or the Company from consummating the Merger is entered and such judgment, injunction, order or decree shall have become final and non-appealable; (PROVIDED that any judgment, injunction, order or decree other than a temporary restraining order shall be deemed to have become final and non-appealable thirty days following the entry thereof); (c) (i) by Buyer or, in connection with a Superior Proposal and upon satisfaction of its obligations under Section 10.04(c), by the Company, if the Board of Directors of the Company determines not to call or hold the Company Stockholders' Meeting as provided in Section 5.02 or (ii) by either the Company or Buyer if the adoption by the stockholders of the Company contemplated by this Agreement shall not have been obtained by reason of the failure to obtain the Required Stockholder Vote at a duly held meeting of stockholders of the Company or any adjournment thereof; (d) by the Company, if a Listing Failure occurs and, within two (2) business days of the satisfaction of all closing conditions other than the conditions set forth in Section 8.03, the condition set forth in Section 8.03(b) has not been satisfied; (e) by Buyer or, in connection with a Superior Proposal and upon satisfaction of its obligations under Section 10.04(c), by the Company, if prior to the Company Stockholder Meeting, the Board of Directors of the Company shall have withdrawn, modified or changed in a manner adverse to Buyer their approval or recommendation of this Agreement; (f) by Buyer, upon a breach of any representation, warranty, covenant or agreement of the Company, or if any representation or warranty of the Company shall become untrue, the effect of which is a Material Adverse Effect on the Company, in either case such that any of the conditions set forth in Section 8.02(a) would be incapable of being satisfied by March 31, 1999; and (g) by the Company, upon a breach of any representation, warranty, covenant or agreement of Buyer, or if any representation or warranty of Buyer shall become untrue, the effect of which is a Material Adverse Effect on Buyer, in either case such that any of the conditions set forth in Section 8.03(a) would be incapable of being satisfied by March 31, 1999. The party desiring to terminate this Agreement pursuant to this Section 9.01 shall give written notice of such termination to the other party in accordance with Section 10.01. SECTION 9.02. EFFECT OF TERMINATION. If this Agreement is terminated pursuant to Section 9.01, this Agreement shall become void and of no effect with no liability on the part of any party hereto, except that the agreements contained in the second sentence of Section 7.04, this Section 9.02 and Article 10 shall survive the termination hereof. Notwithstanding the 49 foregoing, nothing in this Section 9.02 shall relieve any party to this Agreement of liability for a willful breach of any provision of this Agreement and provided further that if it shall be judicially determined that the termination of this Agreement was caused by a willful breach of this Agreement, then, in addition to other remedies at law or equity for breach of this Agreement, the party found to have willfully breached this Agreement shall be responsible for payment or reimbursement of the other parties' costs, fees and expenses related to the negotiation, preparation and execution of this Agreement and related consents and related to the calling, holding and preparing, printing and distributing of any documents related to a meeting of the other parties' stockholders ("COSTS"). SECTION 9.03. TERMINATION UPON BANKRUPTCY. (a) The affirmative vote upon, consent to or adoption of a resolution or similar act by the Board of Directors of the Company or any Subsidiary authorizing the filing or commencement by the Company or any Subsidiary of the Company of a voluntary petition for relief under title 11 of the United States Code or any other law providing for relief to or liquidation of debtors, and to which Buyer shall not have consented, shall cause this Agreement to be terminated immediately and without notice. (b) Upon the occurrence of a Material Insolvency Event, Buyer may immediately seek relief from any court, if required, to effectuate termination of this Agreement, provided, however, that termination of this Agreement due to a Material Insolvency Event shall not be effective until the earlier of (i) sixty (60) days after the occurrence of a Material Insolvency Event or (ii) March 31, 1999. A "MATERIAL INSOLVENCY EVENT" shall mean any of the following: (i) the Company or any Subsidiary shall (A) apply for or consent to the appointment of a receiver, trustee, liquidator or custodian or the like of itself or its property, (B) admit in writing its inability to pay its debts generally as they become due, (C) make a general assignment for the benefit of creditors, or (D) if, without the application, approval or consent of the Company or any Subsidiary, a proceeding shall be instituted by any Person other than Buyer or any of its Affiliates in any court seeking in respect of the Company or any Subsidiary an order for relief under Title 11 of the United States Code, or an adjudication in bankruptcy, reorganization, dissolution, winding up, liquidation, a composition or arrangement with creditors, the appointment of a trustee, receiver, liquidator, custodian, fiscal agent or the like of the Company or any Subsidiary or all or any material part of the Company's or any Subsidiary's assets, and, if such proceeding is being contested by the Company, in good faith, the same shall (i) result in the entry of an order for relief or any such adjudication or appointment, or (ii) continue undismissed or pending for any period of sixty (60) consecutive days. 50 ARTICLE 10 MISCELLANEOUS SECTION 10.01. NOTICES. All notices, requests and other communications to any party hereunder shall be in writing (including telecopy or similar writing) and shall be given, if to either Buyer Party, to: Phoenix International Life Sciences Inc. 2350 Cohen Street Saint-Laurent, Montreal, Quebec Canada H4R 2N6 Fax: (514) 333-8861 Attention: Jean-Yves Caloz Senior Vice President, Chief Financial Officer and Secretary with a copy to: Pepper Hamilton LLP Suite 400 1235 Westlakes Drive Berwyn, PA 19312-2401 Fax: (610) 640-7835 Attention: Michael P. Gallagher, Esq. and McCarthy Tetrault 1170 Peel Street Montreal, Quebec Canada H38 4S8 Fax: (514) 397-4170 Attention: Hubert T. Lacroix if to the Company, to: Chrysalis International Corporation 575 Route 28 Raritan, New Jersey 08869 Fax: (908) 722-6677 51 Attention: President with a copy to: Jones, Day, Reavis & Pogue North Point 901 Lakeside Avenue Cleveland, Ohio 44114 Fax: (216) 579-0212 Attention: Thomas C. Daniels or to such other address or telecopy number as such party may hereafter specify for the purpose by notice to the other parties hereto. Each such notice, request or other communication shall be effective (a) if given by telecopy, when such telecopy is transmitted to the telecopy number specified in this Section and the appropriate telecopy confirmation is received (b) if by overnight delivery service, with proof of delivery, the next business day or (c) if given by any other means, when delivered at the address specified in this Section. SECTION 10.02. ENTIRE AGREEMENT; NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES; NO THIRD PARTY BENEFICIARIES. (a) This Agreement and the Confidentiality Agreement constitute the entire agreement among the parties with respect to the subject matter hereof and thereof and supersede all prior agreements, understandings and negotiations, both written and oral, between the parties with respect to such subject matter. None of this Agreement or any other agreement contemplated hereby or thereby (or any provision hereof or thereof) is intended to confer on or give any Person other than the parties hereto or thereto any rights or remedies (except that Sections 7.07 and 7.11 are intended to confer rights and remedies on the respective Persons specified therein). (b) The representations and warranties contained herein shall not survive the Merger Date. SECTION 10.03. AMENDMENTS; NO WAIVERS. (a) Any provision of this Agreement may be amended or waived prior to the Merger Date if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by the Company and Buyer or, in the case of a waiver, by the party against whom the waiver is to be effective; PROVIDED that after the adoption of this Agreement by (i) the stockholders of the Company, no such amendment or waiver shall, without the further approval of such stockholders, alter or change (A) the amount or kind of consideration to be received in exchange for any shares of capital stock of the Company, or (B) any of the terms or conditions of this Agreement if such alteration or change would adversely affect the holders of any shares of capital stock of the Company and (ii) the shareholders of Buyer, no such amendment or waiver shall, without the further approval of such shareholders, 52 alter or change any of the terms or conditions of this Agreement if such alteration or change would adversely affect the holders of any shares of capital stock of Buyer. Notwithstanding the foregoing, the provisions of Section 8.01(b) may not be amended or waived. (b) No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 10.04. EXPENSES. (a) Except as otherwise provided in this Section, all costs and expenses incurred in connection with this Agreement shall be paid by the party incurring such cost or expense. (b) Buyer agrees to pay to the Company, within three (3) business days of the date of any termination of this Agreement by the Company pursuant to Section 9.01(d) or 9.01(g), U.S. $1,500,000 (inclusive of the Company's Costs). (c) The Company agrees to pay to Buyer, within three (3) business days of the date of any termination of this Agreement by Buyer or the Company pursuant to Sections 9.01(c) or 9.01(e), or a termination of this Agreement pursuant to Section 9.03, U.S. $1,500,000 (inclusive of Buyer's Costs). (d) Buyer's right to receive any amounts contemplated by this Section 10.04, and its ability to enforce the provisions of Section 10.04 shall not be subject to approval by the stockholders of the Company. (e) Each of Buyer and the Company shall bear and pay one-half of the costs and expenses incurred in connection with the filing, printing and mailing of the Form F-4 and the Company Proxy Statement (including SEC filing fees but excluding legal and accounting fees related thereto). SECTION 10.05. DOLLAR AMOUNTS. All dollar amounts in this Agreement refer to United States Dollars. SECTION 10.06. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; PROVIDED that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other parties hereto; PROVIDED FURTHER that Buyer may assign its rights, but not its obligations, under this Agreement to a wholly-owned subsidiary of Buyer. 53 SECTION 10.07. GOVERNING LAW. This Agreement shall be construed in accordance with and governed by the law of the State of Delaware (without regard to principles of conflict of laws). SECTION 10.08. JURISDICTION. Any Action seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated by this Agreement may be brought against any of the parties in the United States District Court for the District of Delaware or any state court sitting in the City of Wilmington, Delaware and each of the parties hereto hereby consents to the exclusive jurisdiction of such courts (and of the appropriate appellate courts) in any such Action or waives any objection to venue laid therein. Process in any such Action proceeding may be served on any party anywhere in the world, whether within or without the State of Delaware. Without limiting the generality of the foregoing, each party hereto agrees that service of process upon such party at the address referred to in Section 10.01, together with written notice of such service to such party, shall be deemed effective service of process upon such party. SECTION 10.09. COUNTERPARTS; EFFECTIVENESS. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received counterparts hereof signed by all of the other parties hereto. SECTION 10.10. RELIEF FROM AUTOMATIC STAY. In the event the Company or any Subsidiary is the subject of an involuntary petition in bankruptcy, insolvency, receivership or similar law, and the transactions contemplated by this Agreement are subject to bankruptcy court approval, the Company or such Subsidiary shall seek to obtain bankruptcy court approval of the transactions contemplated by this Agreement, as soon as reasonably practicable, in accordance with and subject to its terms. [SIGNATURE PAGE FOLLOWS] 54 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. PHOENIX INTERNATIONAL LIFE SCIENCES INC. By:/S/ JEAN-YVES CALOZ -------------------------------------- Name: Jean-Yves Caloz Title: Senior Vice President and Secretary CHRYSALIS INTERNATIONAL CORPORATION By:/S/ PAUL J. SCHMITT -------------------------------------- Name: Paul J. Schmitt Title: Chairman, President and Chief Executive Officer PHOENIX MERGER SUB CORP. By:/S/ JEAN-YVES CALOZ -------------------------------------- Name: Jean-Yves Caloz Title: Treasurer and Secretary 55 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF DEFINITIONS
TERM SECTION - ---- ------- 191 Patent.............................................................................................3.17 1933 Act...............................................................................................3.03 1934 Act...............................................................................................3.03 Acquisition Proposal...................................................................................5.03 Action.................................................................................................3.13 Adjusted Option........................................................................................1.04(a)(i) Adjusted Warrant.......................................................................................1.04(a)(i) Affiliate..............................................................................................1.01(b) Affiliate Letter.......................................................................................3.02(c) Applicable Laws........................................................................................3.16(a) Barbut Agreement.......................................................................................3.02(a) Benefit Arrangements...................................................................................3.15(d) Buyer...............................................................................................Preamble Buyer Balance Sheet....................................................................................4.07 Buyer Balance Sheet Date...............................................................................4.07 Buyer Common Stock ....................................................................................1.01(b)(ii) Buyer Disclosure Documents.............................................................................4.08(a) Buyer Disclosure Schedule...........................................................................Article 4 Buyer Option Plan......................................................................................1.04(c) Buyer Party............................................................................................4.02 Buyer Preferred Stock..................................................................................4.05 Buyer Prospectus.......................................................................................4.08(b) Buyer Public Documents.................................................................................4.06 Buyer SEC Disclosure Documents.........................................................................4.08(a) Buyer Common Stock.....................................................................................1.01(b)(ii) Canadian GAAP......................................................................................... 4.07 Canadian Securities Commission.........................................................................4.06 Certificate of Merger..................................................................................1.03 Chrysalis DNX..........................................................................................3.13 Claim..................................................................................................7.07(a) Code...................................................................................................1.04(b) Company.............................................................................................Preamble Company 10-K...........................................................................................3.07 Company 10-Qs..........................................................................................3.07 Company Balance Sheet..................................................................................3.08 Company Balance Sheet Date.............................................................................3.08 Company Disclosure Documents...........................................................................3.09(a)
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TERM SECTION - ---- ------- Company Disclosure Schedule...........................................................................Article 3 Company Proxy Statement................................................................................3.09(a) Company SEC Documents..................................................................................3.07 Company Securities.....................................................................................3.05 Company Stockholder Meeting............................................................................5.02(a) Company Stock..........................................................................................1.01(b)(i) Company Stock Options..................................................................................1.04(a)(i) Company Stock Plans....................................................................................1.04(a)(i) Company Subsidiary Securities..........................................................................3.06(b) Company Warrants.......................................................................................1.04(a)(i) Confidentiality Agreement............................................................................. 5.03 Contract...............................................................................................3.24 Costs..................................................................................................9.02 DEA....................................................................................................3.16(a) D&O Insurance..........................................................................................7.08(c) Delaware Law...........................................................................................1.03 EMEA...................................................................................................3.16(a) Employee Plans.........................................................................................3.15(a) Environmental Laws.....................................................................................3.18(f)(i) Environmental Permits..................................................................................3.18(f)(ii) ERISA..................................................................................................3.15(a) ERISA Affiliate........................................................................................3.15(a) Excess Shares..........................................................................................1.06 Exchange Agent.........................................................................................1.02(a) Exchange Ratio.........................................................................................1.09(b) FDA....................................................................................................3.16(a) FDCA...................................................................................................3.16(b) First Union............................................................................................5.06 First Union Agreements.................................................................................5.06 Forbearance Agreement..................................................................................3.02(a) Form F-4...............................................................................................4.08(a) Governmental Authority.................................................................................3.03 Hazardous Substance....................................................................................3.18(f)(iii) HSR Act................................................................................................3.03 Iffa...................................................................................................5.07 Indemnified Party......................................................................................7.07(a) Intellectual Property..................................................................................3.17(a) Lien...................................................................................................3.04 Listing Failure........................................................................................1.07
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TERM SECTION - ---- ------- Listing Period.........................................................................................1.07 MDS Amendment..........................................................................................3.02(a) MDS Note...............................................................................................6.03 Material Adverse Effect................................................................................3.01 Material Insolvency Event..............................................................................9.03(b) Merger.................................................................................................1.01(a) Merger Consideration...................................................................................1.01(b)(ii) or 1.07(a) Merger Date............................................................................................1.03 Merger Sub...........................................................................................Preamble Merger Sub Common Stock................................................................................1.02(b)(iii) NMS....................................................................................................6.02 Nasdaq.................................................................................................1.06 Nasdaq Letter..........................................................................................1.07 Organizational Documents...............................................................................4.01 Pension Plans..........................................................................................3.15(a) Person.................................................................................................1.01(b) Pre-Merger Matters.....................................................................................7.08(a) Product Liability......................................................................................3.27 Providing Party........................................................................................7.04 Purchase Price.........................................................................................1.09(a) Receiving Party........................................................................................7.04 Regulation S-X.........................................................................................3.11(i) Required Stockholder Vote..............................................................................3.02(a) Rights Agreement.......................................................................................3.21(a) SEC....................................................................................................3.07 Shut-Downs............................................................................................ 5.04 Subscription Stock.....................................................................................2.03 Subsequent Buyer Public Documents......................................................................4.06 Subsequent Company SEC Documents.......................................................................3.07 Subsidiary.............................................................................................1.01(b) Superior Proposal......................................................................................5.03 Support/Voting Agreement...............................................................................3.02(c) Surviving Corporation..................................................................................1.01(a) Surviving Corporation Common Stock.....................................................................1.01(b)(iii) Tax Return.............................................................................................3.14(b) Taxes..................................................................................................3.14(b) Taxing Authorities.....................................................................................3.14(b) USDA...................................................................................................3.16(a)
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TERM SECTION - ---- ------- US GAAP..............................................................................................3.08
iv EX-2.8 9 EXHIBIT 2.8 PURCHASE OF BUSINESS ASSETS between Dr. Klaus Schaffler (hereinafter also "Seller") and Institute for Pharmcodynamic Research Phoenix International GmbH i.G. (hereinafter also "Buyer") relating to a clinical research business ----- PRELIMINARY REMARKS (1) The Seller is the owner of a business activity and the related assets for clinical research and testing of medicines, hereinafter "Assets.@ (2) The Seller intends to sell these Assets to the Buyer, a limited liability company in foundation with its seat in Munich, represented by its managing director with sole power of representation. A copy of the notarial deed of the foundation of the company is attached to this Agreement as ANNEX TO PARA. (2) OF THE PRELIMINARY REMARKS. The Buyer intends to purchase the Assets. (3) With this in mind, the Seller and the Buyer enter into the following AGREEMENT FOR THE SALE OF BUSINESS ASSETS Section OBJECTIVE OF THE AGREEMENT, CURRENT AGREEMENTS, LABOR RELATIONS (1) The Seller sells to the Buyer the Assets used for the business activity under the name INSTITU FIR PHARMAKADYNAMISCHE FORSCHUNG - DR. KLAUS SCHAFFLER in Munich. The Seller sells the Assets as listed in ANNEX TO SECTION 1 PARA. (1) whether or not reflected in the balance sheet of the business activity. This includes in particular but is not limited to rights to further benefits, guarantees, intellectual property rights, licenses, permits, designs, processes, formulas, drawings, draftings, samples, books and business documents as well as written or in any other way collected and stored information of any kind. (2) The Buyer shall become a party to the following agreements on the Takeover Date: 1) insurance agreements 2) agreements for the supply of utilities and disposal services (water, gas, electricity, heating, waste disposal, sewage, etc.). 3) rental agreement regarding the premises in Munich (including the deposit) 4) project contracts, especially the BERLIN CHEMIE Project, the OLD MADAUS Project and the NEW MADAUS Project Cost and proceeds of these three projects are allocated with the parties as stipulated in ANNEX TO SECTION I PARA. (2)(d). (3) The Buyer shall not enter into any other contractual agreements or assume any liability (including tax liability, whether or not relevant to the sold Assets) from the Seller. (4) The Buyer shall continue to employ Mr. Haase. The Buyer enters into the service agreement with Mr. Haase with all rights and obligations arising there from. The service agreement is attached as ANNEX TO SECTION L PARA. (4). Section 2 PURCHASE PRICE (5) The purchase price for the Assets shall be DM 420.000,--. (6) The Buyer disbursed the amount of DM 400.000,-- to the Seller on the basis of a loan agreement dated January 9, 1998. The purchase price shall be set off against this amount, consequently, the Buyer owes a payments of DM 20.000,-- (7) Payment is due on the date of Handover of Possession. Section 3 TAKEOVER DATE, INCOME Takeover Date is April 01, 1998, 0:00. From this day on the business activity sold shall be run on account of the Buyer. Section 4 CONTINUANCE OF BUSINESS, MANAGEMENT (8) The Buyer and, should occasion wise, his legal successor are entitled, but not required, to continue to use the business name of the Seller with or without the use of supplementary names or to partially use the business name, regardless of the business form. Seller and Buyer are required to cooperate in the renaming of the Buyer. (9) The Seller will act as the managing director for the Buyer for at least 3 years upon execution of this Agreement, based on the managing director employment agreement contained in ANNEX TO SECTION 4 PARA. (2). If the managing director resigns without the Buyer having given good cause (WICHUGER GRUND), or if the managing director is terminated because of the presence of good cause, then the purchase price shall be reduced by DM 100.000,--. Section 5 REPRESENTATIONS AND WARRANTIES (10) The Seller makes on the Takeover Date and at the moment of the handover of possession (Section 10) in so far as not otherwise provided for in this Agreement the following representations and warranties in the form of an independent warranty agreement 1) Financial Position 1. The Seller's annual financial statements given to the Buyer for the fiscal years 1996 end 1997 comply with statutory provisions and proper accounting principles, and accurately state the capital, financial and earnings situation of the business activity. 2. The Buyer has been completely and comprehensively informed - verbally or in writing- to the best of the Sellers knowledge of all facts known to the Seller, which are not insignificant for the evaluation of the current and future capital, financial and profit situation of the business activity. The information and documents provided are correct in so far as they contain most recent personal declarations of the Seller. 3. The sold Assets, are the property of the Seller and are not subject to any third party rights. They encompass all economic assets, which shall be used in or are necessary for the business activity. 4. The receivables stated in the balance sheet exist, are not subject to defenses and no greater losses have occurred than the amount of allowances in the balance sheet. 5. The sale of the Assets shall not make the Buyer liable for third party liabilities, in particular on the basis of negotiable instruments, guarantees, and letters of comfort. 6. The fixed assets (ANLAGEVERMOGEN) are in a proper condition and all necessary repairs and the procurement of replacements have been undertaken. 7. The quality and quantity of the inventory is reasonably in accord with business principles. The inventory is in good condition and is salable in the ordinary course of business. 8. ANNEX TO SECTION 5 PARA (1) a) 8. contains a complete list of the most recent completed field tax audit (as of 1994) concerning the business activities for every type of tax rating the time of the issuance of the respective notice of tax assessment or pending proceeding 1) Employment and Service Relationships 1. ANNEX TO SECTION 5 PARA (1) b) 1. contains a Complete list of all commercial agents and consultants of the sold business activity on the Takeover Date, including name, field of activity, date of first employment, termination notice periods, annual remuneration in the calendar year 1997, including all fringe payments. 2. Since 1996 there have been no increases or promises of increase of payments (salary, pension, profit-sharing bonus, bonuses, commission, other payments) to employees, consultants, commercial agents or other persons rendering services. No modifications of such agreements (duration, notice periods, etc.) occurred since. 3. If Mr. Haase objects to the takeover by the Buyer or employment was terminated on the Takeover Date, the Seller shall bear all claims to current compensation and settlements. 1) Period between the Takeover Date and the Handover of Possession (Section 10) (Transition Period) 1. The business activity has been conducted in accordance with the principles of reasonable and conscientious business management during the Transition Period. In particular, the prices agreed upon for deliveries and services have been calculated so as not to incur losses and so as to receive equal and valuable consideration for all obligations incurred. 2. During the Transition Period none of the fixed assets of the sold business activity have been sold or otherwise disposed of, except for those listed in the ANNEX TO SECTION 5 PARA. (1) c) 2. 3. During the Transition Period no extraordinary transactions have been conducted nor extraordinary measures taken. 1) Miscellaneous 1. There have never been, nor are there currently pending, any product or medical liability claims against the Seller in connection with the business activity. 1. 2. All know-how and intellectual property rights included in the sale are permanently at the disposal of the Buyer with full legal title, and no payments or performances in respect of those rights are due to third parties. 3. The Seller is not in substantial violation of any statutory provisions, and in particular, the Seller has fulfilled all of his tax- and social security-law obligations. The Seller is not infringing on the contractual rights of third parties and has not assumed any contractual liabilities through his business operations, and especially, the Seller has not defaulted on his delivery, performance or payment obligations. 4. The business activity complies with current and, to the best of the Seller's knowledge, future public administrative law (OFFENTLICHRECHTLICH) statutory provisions as well as with labor law provisions. 5. The fundamental operational bases of the sold business activity (e.g., concessions, operational permits, waste disposal agreements, rental and leasing (Pacht- und Leasing-), license, cooperation, credit, supply agreements) are not terminated, limited or impeded by the conclusion of this Agreement. 6. The sold business activity has sufficient insurance coverage. The ANNEX TO SECTION 5 PARA (1) d) 6. contains a complete list of all insurance Policies, stating the insured risks, the remaining term, and the yearly premium. 7. ANNEX TO SECTION 1 PARA. (1) contains a complete list of all assumed agreements. The agreements we effective, have been performed by the parties in accord with the agreement until now and shall remain effective prospectively as long as the parties continue to perform in accord with the agreement. They are the only agreements necessary to carry out the business activity in the ordinary course. The parties to the agreement shall consent to the entry of the Buyer in the assumed agreements with, the previous conditions with the exception of those specially identified agreements in ANNEX TO SECTION 5 PARA. (1) d) 7. 8. Except for those legal proceedings listed in ANNEX TO SECTION 5 PARA. (1) a) 8., there neither exist nor are threatened any lawsuits, legal remedies or other proceedings. 9. The acquisition of the Assets by the Buyer does not constitute an acquisition of assets within the meaning of Section 419 German Civil Code (BGD) or a transaction within the meaning of Section 1365 BGD. 10. The sold Assets are technically without fault and will not give raise to any claims, in particular as regards technical issues in connection with the turn of the century. 1) The statutory warranty against defects of quality and title with regard to the Assets shall apply in addition. 2) If the representations and warranties of the Seller are dependent on the knowledge and awareness of certain facts or circumstances, such knowledge awareness shall be attributed to the Seller also in case of facts and circumstances of which the Seller would have been aware had the Seller exercised due care. Section 6 CONSEQUENCES OF BREACH OF REPRESENTATIONS AND/OR WARRANTIES 1) Any noncompliance with a representation and/or warranty under '5 shall commit the Seller to the payment of compensatory damages only. The measure of said damages shall be that amount which would have to be paid in order to place the Buyer in the same position as if the representation and/or warranty had been fulfilled. 2) Claims to compensation for damages shall bear interest of 3% over the discount rate of the BUNDESBANK (Contractual Interest Rate) calculated from the time of loss, or at the earliest, from the Takeover Date. 3) If damage has not yet been incurred, the Buyer may demand that the Seller indemnify the Buyer. 4) All claims to compensation for damages shall lapse if they are not raised in writing within two years of the Takeover Date stating the bases for the claims against the Seller. Timely made claims are barred after three years from the Takeover Date. 5) If the Seller has Fraudulently concealed material defects of the Assets or, if the liability of the Seller is based on such material deviations from the above representations and/or warranties that the Buyer can no longer be reasonably expected to comply with this Agreement, then the Buyer is entitled, notwithstanding para. (1), to rescission of this Agreement in addition to the enforcement of claims to compensation for damages. Rescission shall be precluded if not exercised within six months of the execution of this agreement. Section 7 TAXES AND COSTS 1) Taxes payable by the Seller on any profit incurred incident to this Agreement shall be borne by the Seller. 2) The costs of this Agreement and its execution shall be borne by the Buyer. The Buyer and Seller shall each bear the costs of their own consultants. Section 8 NON-COMPETITION CLAUSE 1) The Seller shall in no way undertake the operation of or participate in or serve as an employee or independent contractor in any manner with an enterprise which competes with the business activity for a period of five years from the Takeover Date. This non-competition clause shall not be valid if the competition does not take effect in Germany. This non-competition clause shall not be effective in respect of the acquisition of ownership interests listed on a stock exchange in up to 5% of the stated capital (GRUNDKAPITAL). 2) For every breach by the Seller of the non-competition clause, liquidated contractual damages (VERTRAGSSTRAFE) in the amount of DM 50,000,-- shall be paid to the Buyer. In the case of a continuous violation, a separate violation shall be deemed to have occurred at the beginning of each calendar month. The Buyer shall not be barred from asserting higher damages. However, the amount of any liquidated contractual damages paid shall be subtracted from any actual damages. Section 9 PERFORMANCE PROVISIONS 1) The transfer of fixed assets and any other matter concerning the performance of this Agreement shall be governed by the following: 1) The parties to the Agreement are in agreement concerning the transfer of ownership in movables at the time of the execution of this Agreement. If any sold movables, are not in the possession of the Seller, transfer shall be effected by the assignment of claims to possession against the immediate holder of the movables by the Seller to the Buyer. 2) The sold claims are hereby assigned to the Buyer. The Buyer is entitled to notify the debtors of the transfer directly and, so far as necessary, to obtain their consents to the assignments. 3) The sold rights, licenses and permits are hereby assigned to the Buyer. If the assignment requires any further measures (entry into a register, notification of public authorities, etc.) to be legally binding or effective, the Seller will undertake all necessary steps to bring about the transfer. 4) In as far as non-transferable objects are included in the sale, the Seller is obligated to put the Buyer into a position as if the objects had been effectively transferred. 5) The Seller shall obtain the consent of third parties to the entry of the Buyer into running contracts in so far as the Buyer receives the economic benefit of the contracts. 6) Insofar as a change in the inventory in the Assets occurs between the Takeover Date and the transfer, the changed inventory is controlling for the transfer. A current inventory, including the significant items of property hereby being transferred, is attached as ANNEX TO SECTION 9 PARA. (2). Section 10 HANDOVER OF POSSESSION The handover of possession of the Assets shall take place on the date of closing. Section 11 FINAL PROVISIONS 1) This Agreement shall be governed by the laws of Germany under the exclusion of its principles of conflict of laws. 2) There are no collateral agreements to this Agreement. 3) Modifications and supplementations not requiring notarial authentication require the written form (SCHRIFTFORM) in order to be effective. 4) The place of performance of the Agreement and the jurisdictional venue shall be the seat of the Buyer, to the extent legally permitted. 5) The Seller and Buyer shall agree upon the time, manner and content of external and internal publication of the sale of the Assets. 6) This Agreement replaces all previous agreements and statements of the Seller and Buyer with regard to its subject matter. 7) The Parties to this Agreement shall take all actions necessary for the seamless implementation of this sale of the Assets. 8) If individual provisions of this Agreement should be or become invalid, the validity of the other provisions shall not be affected thereby. The invalid provision shall be replaced by a valid provision which comes as close as possible to the original economic intention of the invalid provision. Munich, this 1st day of April 1998, /s/ Klaus Schaffler - ------------------- Dr. Klaus Schaffler Institute for Pharmacodynamic Research Phoenix International GmbH i. G. /s/ Klaus Schaffler - ------------------- Dr. Klaus Schaffler I.T.E.M. S.A. being the founder and sole shareholder of Institute for Pharmacodynamic Research Phoenix International GmbH i. G. herewith authorizes Dr. Klaus Schaffler, as the managing director of said GmbH i.G. to execute the above agreement. Munich, this 1st day of April 1998, /s/ Lucien Steru - ------------------- Lucien Steru EX-3.1 10 EXHIBIT 3.1 Exhibit 3.1 Consumer and Corporate Affairs Canada Canada Business Corporations Act Certificate of Incorporation 162518 CANADA INC. Name of Corporation 234202-2 Number I hereby certify that the above-mentioned Corporation, the Articles of Incorporation of which are attached, was incorporated under the Canada Business Corporations Act. /s/ Director ------------------------------ Director June 7, 1988 ------------------------------ Date of Incorporation Consumer and Corporate Affairs Canada Canada Business Corporations Act Form 1 Articles of Incorporation (Section 6) 1. Name of Corporation: 162518 CANADA INC. 2. The place in Canada where the registered office is to be situated: THE MONTREAL URBAN COMMUNITY, PROVINCE OF QUEBEC 3. The classes and any maximum number of shares that the corporation is authorized to issue: THE ANNEXED SCHEDULE 1 IS INCORPORATED IN THIS FORM. 4. Restrictions if any on share transfers: THE ANNEXED SCHEDULE 2 IS INCORPORATED IN THIS FORM. 5. Number (or minimum and maximum number) of directors: A MINIMUM OF ONE (1) AND A MAXIMUM OF FIFTEEN (15) DIRECTORS. 6. Restrictions if any on business the corporation may carry on: N/A. 7. Other provisions if any: THE ANNEXED SCHEDULE 3 IS INCORPORATED IN THIS FORM. 8. Incorporators: Names: ANNA MASCOLO Signature: /s/ ANNA MASCOLO ---------------- Address: 5 PLACE VILLE MARIE, SUITE 1203, MONTREAL, QUEBEC H3B 2G2 Filed: June 7, 1988 -2- SCHEDULE 1 ARTICLES OF INCORPORATION THE CLASSES OF SHARES THAT THE CORPORATION IS AUTHORIZED TO ISSUE The corporation is authorized to issue Class "A" shares, Class "B" shares, Class "C" shares, Class "D" shares, Class "E" shares and Class "F" shares. The rights, privileges, restrictions and conditions attaching to the said Class "A" shares, Class "B" shares, Class "C" shares, Class "D" shares; Class "E" shares and Class "F" shares are as follows: 1. The holders of the Class "A" shares shall be entitled to one (1) vote for each share held by them at all meetings of shareholders except meetings at which only holders of a specified class of shares, other than the Class "A" shares, are entitled to vote, and they shall be entitled to notice of all meetings of shareholders of the corporation. 2. Except as otherwise specifically provided in the Canada Business Corporations Act, the Class "B" shares shall not carry any right to vote nor shall the holders thereof be entitled to notice of or to attend shareholders' meetings. 3. The Class "A" shares and the Class "B" shares shall rank PARI PASSU in every other respect, and the holders of such Class "A" shares and Class "B" shares, shall, subject to the rights of the holders of the Class "C" shares, Class "D" shares, Class "E" shares and Class "F" shares, be entitled to receive the remaining property of the corporation upon a dissolution. 4. The Class "C" shares, Class "D" shares, Class "E" shares and Class "F" shares shall carry the right, in the discretion of the directors, to a fixed monthly non-cumulative preferential dividend in an amount equal to 1% of the amount of the consideration for which such shares have been issued or in the event such shares have been issued in consideration of property or past services, in an amount equal to 1% of the amount of the fair equivalent of money that the Corporation would have received if the shares had been issued for money. 5. Each Class "C" share, Class "D" share, Class "E" share and Class "F" share shall carry the right, in the event of the liquidation or winding-up of the corporation, to repayment of the consideration for which such share has been issued, and in the event that such share has been issued in consideration of property or past services, the repayment shall be the fair equivalent of the money that the corporation would have received if the share had been issued for money. -3- 6. In the event that only part of the amount of the consideration received by the Corporation for any share issued by the Corporation is added to the stated capital account for the class or series of shares of which such share forms part, such share shall be deemed to have been issued for the full amount of the consideration received therefor for all purposes other than stated capital, including dividend, redemption, purchase, cancellation, liquidation and dissolution. 7. The Class "C" shares, Class "D" shares, Class "E" shares and Class "F" shares shall not carry the right to any further participation in profits or assets. S. The holders of the Class "C" shares and Class "E" shares shall be entitled to one (1) vote for each share held by them at all meetings of shareholders except meetings at which only holders of a specified class of shares, other than the Class "C" shares and Class "E" shares are entitled to vote, and they shall be entitled to notice of all meetings of shareholders of the corporation. 9. Except as otherwise specifically provided in the Canada Business Corporations Act, the Class "D" shares and the Class "F" shares shall not carry any right to vote nor shall the holders thereof be entitled to notice of or to attend shareholders' meetings. 10. Each Class "C" and Class "D" share shall be redeemable at a price equal to the consideration for which such share has been issued and in the event that such share has been issued in consideration of property or past services, at a price equal to the fair equivalent of the money that the corporation would have received if the share had been issued for money. The corporation may redeem all or any part of the Class "C" or Class "D" shares, at any time at the option of the directors of the corporation upon a notice of seven (7) days without the consent of the holders thereof, and if less than the whole amount of the outstanding Class "C" or Class "D" shares shall be so redeemed, the shares to be redeemed shall be selected pro rata or by lot in such manner as the directors may determine. 11. Each Class "E" and Class "F" share shall be redeemable at the option of the holder of such share at a price equal to the consideration for which such share has been issued and in the event that such share has been issued in consideration of property or past services, at a price equal to the fair equivalent of the money that the corporation would have received if the share had been issued for money. The corporation may also redeem all or any part of the Class "E" or Class "F" shares at any time at the option of the directors of the corporation upon a notice of seven (7) days, without the consent of the holders thereof, and if less than the whole amount of the outstanding Class "E" or Class "F" shares shall be so redeemed, the shares to be redeemed shall be selected pro rata or by lot in such manner as the directors may determine. -4- 12. The Class "C" shares, the Class "D" shares, the Class "E" shares and the Class "F" shares shall rank PARI PASSU in every other respect. -5- SCHEDULE 2 ARTICLES OF INCORPORATION RESTRICTIONS ON SHARE TRANSFERS No shareholder shall be entitled to sell, transfer or otherwise dispose of any share or shares in the capital stock of the corporation, or any securities thereof, without either: (a) The previous express sanction of the holders of a majority of the Class "A", Class "C" and Class "E" shares in the capital stock of the corporation for the time being outstanding expressed by a resolution passed at a meeting of the Class "A", Class "C" and Class "E" shareholders or by an instrument or instruments in writing signed by the holders of a majority of the Class "A", Class "C" and Class "E" shares in the capital stock of the corporation for the time being outstanding; or (b) The previous express lawful sanction of the board of directors of the corporation at a duly constituted meeting of the board or in lieu thereof the previous express sanction of the directors of the corporation as evidenced by the lawful adoption of a resolution to that effect. -6- SCHEDULE 3 ARTICLES OF INCORPORATION OTHER PROVISIONS 1. The number of shareholders of the corporation is limited to fifty (50), not including persons who are in the employment of the corporation and persons, who, having been formerly in the employment of the corporation were, while in that employment and have continued after the termination of that employment to be shareholders of the corporation, two or more persons holding one or more shares jointly being counted as a single shareholder. 2. Any invitation to the public to subscribe for any shares, debentures or any other securities of the corporation is prohibited. 3. The directors of the corporation may, without authorization of the shareholders: (a) borrow money upon the credit of the corporation; (b) issue, reissue sell or pledge debt obligations of the corporation; and (c) mortgage, hypothecate, pledge or otherwise create a security interest in all or any property of the corporation, owned or subsequently acquired, to secure any debt obligation of the corporation. Nothing herein limits or restricts the borrowing of money by the corporation on bills of exchange or promissory notes made, drawn, accepted or endorsed by or on behalf of the corporation. 4. Subject to the provisions of the Canada Business Corporations Act, the corporation may purchase or otherwise acquire any shares issued by it. 5. The corporation shall have a lien on the shares registered in the name of a shareholder or his legal representative for any indebtedness owed by him to the corporation, and such lien shall be enforceable in accordance with the by-laws of the Corporation or otherwise. 6. Subject to Schedule 1 of the Articles of Incorporation and the Canada Business Corporations Act, the holder of a fractional share shall be entitled to that number of votes equal to one multiplied by the fraction represented by such share and to notice of all meetings of shareholders of the Corporation. -7- Consumer and Corporate Affairs Canada Canada Business Corporations Act Certificate of Incorporation 163641 CANADA INC. Name of Corporation 237200-2 Number I hereby certify that the above-mentioned Corporation, the Articles of Incorporation of which are attached, was incorporated under the Canada Business Corporations Act. /s/ Director ----------------------------- Director August 30, 1988 ----------------------------- Date of Incorporation -8- Consumer and Corporate Affairs Canada Canada Business Corporations Act Form 1 Articles of Incorporation (Section 6) 1. Name of Corporation: 163641 CANADA INC. 2. The place in Canada where the registered office is to be situated: THE METROPOLITAN REGION OF MONTREAL, PROVINCE OF QUEBEC 3. The classes and any maximum number of shares that the corporation is authorized to issue: THE ANNEXED SCHEDULE 1 IS INCORPORATED IN THIS FORM. 4. Restrictions if any on share transfers: THE ANNEXED SCHEDULE 2 IS INCORPORATED IN THIS FORM. 5. Number (or minimum and maximum number) of directors: A MINIMUM OF ONE (1) AND A MAXIMUM OF FIFTEEN (15) DIRECTORS. 6. Restrictions if any on business the corporation may carry on: N/A. 7. Other provisions if any: THE ANNEXED SCHEDULE 3 IS INCORPORATED IN THIS FORM. 8. Incorporators: Names: ANNA MASCOLO Signature: /s/ ANNA MASCOLO ---------------- Address: 5 PLACE VILLE MARIE, SUITE 1203, MONTREAL, QUEBEC H3B 2G2 Filed: August 30, 1988 -9- SCHEDULE 1 ARTICLES OF INCORPORATION THE CLASSES OF SHARES THAT THE CORPORATION IS AUTHORIZED TO ISSUE The corporation is authorized to issue Class "A" shares, Class "B" shares, Class "C" shares, Class "D" shares, Class "E" shares and Class "F" shares. The rights, privileges, restrictions and conditions attaching to the said Class "A" shares, Class "B" shares, Class "C" shares, Class "D" shares, Class "E" shares and Class "F" shares are as follows: 1. The holders of the Class "A" shares shall be entitled to one (1) vote for each share held by them at all meetings of shareholders except meetings at which only holders of a specified class of shares, other than the Class "A" shares, are entitled to vote, and they shall be entitled to notice of all meetings of shareholders of the corporation. 2. Except as otherwise specifically provided in the Canada Business Corporations Act, the Class "B" shares shall not carry any right to vote nor shall the holders thereof be entitled to notice of or to attend shareholders' meetings. 3. The Class "A" shares and the Class "B" shares shall rank PARI PASSU in every other respect, and the holders of such Class "A" shares and Class "B" shares, shall, subject to the rights of the holders of the Class "C" shares, Class "D" shares, Class "E" shares and Class "F" shares, be entitled to receive the remaining property of the corporation upon a dissolution. 4. The Class "C" shares, Class "D" shares, Class "E" shares and Class "F" shares shall carry the right, in the discretion of the directors, to a fixed monthly non-cumulative preferential dividend in an amount equal to 1% of the amount of the consideration for which such shares have been issued or in the event such shares have been issued in consideration of property or past services, in an amount equal to 1% of the amount of the fair equivalent of money that the Corporation would have received if the shares had been issued for money. 5. Each Class "C" share, Class "D" share, Class "E" share and Class "F" share shall carry the right, in the event of the liquidation or winding-up of the corporation, to repayment of the consideration for which such share has been issued, and in the event that such share has been issued in consideration of property or past services, the repayment shall be the fair equivalent of the money that the corporation would have received if the share had been issued for money. -10- 6. In the event that only part of the amount of the consideration received by the Corporation for any share issued by the Corporation is added to the stated capital account for the class or series of shares of which such share forms part, such share shall be deemed to have been issued for the full amount of the consideration received therefor for all purposes other than stated capital, including dividend, redemption, purchase, cancellation, liquidation and dissolution. 7. The Class "C" shares, Class "D" shares, Class "E" shares and Class "F" shares shall not carry the right to any further participation in profits or assets. 8. The holders of the Class "C" shares and Class "E" shares shall be entitled to one (1) vote for each share held by them at all meetings of shareholders except meetings at which only holders of a specified class of shares, other than the Class "C" shares and Class "E" shares are entitled to vote, and they shall be entitled to notice of all meetings of shareholders of the corporation. 9. Except as otherwise specifically provided in the Canada Business Corporations Act, the Class "D" shares and the Class "F" shares shall not carry any right to vote nor shall the holders thereof be entitled to notice of or to attend shareholders' meetings. 10. Each Class "C" and Class "D" share shall be redeemable at a price equal to the consideration for which such share has been issued and in the event that such share has been issued in consideration of property or past services, at a price equal to the fair equivalent of the money that the corporation would have received if the share had been issued for money. The corporation may redeem all or any part of the Class "C" or Class "D" shares, at any time at the option of the directors of the corporation upon a notice of seven (7) days without the consent of the holders thereof, and if less than the whole amount of the outstanding Class "C" or class "D" shares shall be so redeemed, the shares to be redeemed shall be selected pro rata or by lot in such manner as the directors may determine. 11. Each Class "E" and Class "F" share shall be redeemable at the option of the holder of such share at a price equal to the consideration for which such share has been issued and in the event that such share has been issued in consideration of property or past services, at a price equal to the fair equivalent of the money that the corporation would have received if the share had been issued for money. The corporation may also redeem all or any part of the Class "E" or Class "F" shares at any time at the option of the directors of the corporation upon a notice of seven (7) days, without the consent of the holders thereof, and if less than the whole amount of the outstanding Class "E" or Class "F" shares shall be so redeemed, the shares to be redeemed shall be selected pro rata or by lot in such manner as the directors may determine. -11- 12. The Class "C" shares, the Class "D" shares, the Class "E" shares and the Class "F" shares shall rank PARI PASSU in every other respect. -12- SCHEDULE 2 ARTICLES OF INCORPORATION RESTRICTIONS ON SHARE TRANSFERS No shareholder shall be entitled to sell, transfer or otherwise dispose of any share or shares in the capital stock of the corporation, or any securities thereof, without either: (a) The previous express sanction of the holders of a majority of the Class "A", Class "C" and Class "E" shares in the capital stock of the corporation for the time being outstanding expressed by a resolution passed at a meeting of the Class "A", Class "C" and Class "E" shareholders or by an instrument or instruments in writing signed by the holders of a majority of the Class "A", Class "C" and Class "E" shares in the capital stock of the corporation for the time being outstanding; or (b) The previous express lawful sanction of the board of directors of the corporation at a duly constituted meeting of the board or in lieu thereof the previous express sanction of the directors of the corporation as evidenced by the lawful adoption of a resolution to that effect. -13- SCHEDULE 3 ARTICLES OF INCORPORATION OTHER PROVISIONS 1. The number of shareholders of the corporation is limited to fifty (50), not including persons who are in the employment of the corporation and persons, who, having been formerly in the employment of the corporation were, while in that employment and have continued after the termination of that employment to be shareholders of the corporation, two or more persons holding one or more shares jointly being counted as a single shareholder. 2. Any invitation to the public to subscribe for any shares, debentures or any other securities of the corporation is prohibited. 3. The directors of the corporation may, without authorization of the shareholders: (a) borrow money upon the credit of the corporation; (b) issue, reissue sell or pledge debt obligations of the corporation; and (c) mortgage, hypothecate, pledge or otherwise create a security interest in all or any property of the corporation, owned or subsequently acquired, to secure any debt obligation of the corporation. Nothing herein limits or restricts the borrowing of money by the corporation on bills of exchange or promissory notes made, drawn, accepted or endorsed by or on behalf of the corporation. 4. Subject to the provisions of the Canada Business Corporations Act, the corporation may purchase or otherwise acquire any shares issued by it. 5. The corporation shall have a lien on the shares registered in the name of a shareholder or his legal representative for any indebtedness owed by him to the corporation, and such lien shall be enforceable in accordance with the by-laws of the Corporation or otherwise. 6. Subject to Schedule 1 of the Articles of Incorporation and the Canada Business Corporations Act, the holder of a fractional share shall be entitled to that number of votes equal to one multiplied by the fraction represented by such share and to notice of all meetings of shareholders of the Corporation. -14- Consumer and Corporate Affairs Canada Canada Business Corporations Act Certificate of Amendment PHOENIX INTERNATIONAL LIFE SCIENCES INC. Name of Corporation 234202-2 Number I hereby certify that the Articles of the above-mentioned Corporation were amended (a) under Section 13 of the Canada Business Corporations Act in accordance with the attached notice; |_| (b) under Section 27 of the Canada Business Corporations Act as set out in the attached Articles of Amendment designating a series of shares; |_| (c) under Section 171 of the Canada Business Corporations Act as set in the attached Articles of Amendment; |X| (d) under Section 185 of the Canada Business Corporations Act as set out in the attached Articles of Reorganization; |_| (e) under Section 185.1 of the Canada Business Corporations Act as set out in the attached Articles of Arrangement. |_| /s/ Director ---------------------------- Director January 27, 1989 ---------------------------- Date of Amendment -15- Consumer and Corporate Affairs Canada Canada Business Corporations Act Form 4 Articles of Amendment (Section 27 or 171) 1. Name of Corporation: 162518 CANADA INC. 2. Corporation No.: 234202-2 3. The articles of the above-named corporation are amended as follows: SECTION 1 OF THE ARTICLES OF INCORPORATION BE AND IT IS HEREBY DELETED AND SUBSTITUTED BY THE FOLLOWING: 1. NAME OF CORPORATION PHOENIX INTERNATIONAL LIFE SCIENCES, INC. Signature: /s/ John Hooper -------------------------------- Description of Office: Director Date: January 25, 1989 -16- Consumer and Corporate Affairs Canada Canada Business Corporations Act Certificate of Amendment PHOENIX INTERNATIONAL LIFE SCIENCES INC. Name of Corporation 234202-2 Number I hereby certify that the Articles of the above-mentioned Corporation were amended (a) under Section 13 of the Canada Business Corporations Act in accordance with the attached notice; |_| (b) under Section 27 of the Canada Business Corporations Act as set out in the attached Articles of Amendment designating a series of shares; |_| (c) under Section 177 of the Canada Business Corporations Act as set in the attached Articles of Amendment; |X| (d) under Section 191 of the Canada Business Corporations Act as set out in the attached Articles of Reorganization; |_| (e) under Section 192 of the Canada Business Corporations Act as set out in the attached Articles of Arrangement. |_| /s/ Director ---------------------------- Director August 29, 1989 ---------------------------- Date of Amendment -17- Consumer and Corporate Affairs Canada Canada Business Corporations Act Form 4 Articles of Amendment (Section 27 or 171) 1. Name of Corporation: PHOENIX INTERNATIONAL LIFE SCIENCES INC. 2. Corporation No.: 234202-2 3. The articles of the above-named corporation are amended as follows: THAT THE ONE HUNDRED (100) ISSUED AND OUTSTANDING CLASS "A" SHARES OF THE CORPORATION BE SPLIT, ON A ONE (1) FOR ONE THOUSAND (1,000) BASIS, SO THAT THERE WILL BE A TOTAL OF ONE HUNDRED THOUSAND (100,000) CLASS "A" SHARES ISSUED AND OUTSTANDING. THE AGGREGATE STATED CAPITAL OF THE ISSUED AND OUTSTANDING CLASS "A" SHARES SHALL REMAIN THE SAME PRIOR TO AND AFTER THE SAID STOCK SPLIT. Signature: /s/ John Hooper -------------------------------- Description of Office: Director Date: August 23, 1989. -18- Consumer and Corporate Affairs Canada Canada Business Corporations Act Certificate of Amendment PHOENIX INTERNATIONAL LIFE SCIENCES INC. Name of Corporation 234202-2 Number I hereby certify that the Articles of the above-mentioned Corporation were amended (a) under Section 13 of the Canada Business Corporations Act in accordance with the attached notice; |_| (b) under Section 27 of the Canada Business Corporations Act as set out in the attached Articles of Amendment designating a series of shares; |_| (c) under Section 177 of the Canada Business Corporations Act as set in the attached Articles of Amendment; |X| (d) under Section 191 of the Canada Business Corporations Act as set out in the attached Articles of Reorganization; |_| (e) under Section 192 of the Canada Business Corporations Act as set out in the attached Articles of Arrangement. |_| /s/ Elaine M. Collins --------------------------- Director May 8, 1992 --------------------------- Date of Amendment -19- Consumer and Corporate Affairs Canada Canada Business Corporations Act Form 4 Articles of Amendment (Section 27 or 171) 1. Name of Corporation: PHOENIX INTERNATIONAL LIFE SCIENCES INC. 2. Corporation No.: 234202-2 3. The articles of the above-named corporation are amended as follows: THE ARTICLES OF INCORPORATION OF THE CORPORATION ARE HEREBY FURTHER AMENDED BY ADDING THE FOLLOWING: 3. THE CLASSES AND ANY MAXIMUM NUMBER OF SHARES THAT THE CORPORATION IS AUTHORIZED TO ISSUE: THE ANNEXED SCHEDULE 1 IS INCORPORATED IN THIS FORM. Signature: /s/ Heather Savage -------------------------------- Description of Office: Director Date: May 5, 1992 -20- SCHEDULE 1 ARTICLES OF AMENDMENT Section 3 of the Articles of Incorporation dated June 7, 1988 (as amended on January 27, 1989 and August 29, 1989) is hereby amended by adding thereto the following provisions: 1. In addition to the Class "A" shares, Class "B" shares, Class "C" shares, Class "D" shares, Class "E" shares and Class "F" shares, the Corporation is authorized to issue an unlimited number of Class "G" shares (without par value) and Class "H" shares (without par value) provided, however, that all outstanding Class "A" shares be split as described below. 2. The rights, privileges, restrictions and conditions attaching to the Class "G" shares and the Class "H" shares are as follows: (a) The holders of the Class "G" shares shall be entitled to one (1) vote for each share held by them at all meetings of shareholders except meetings at which only holders of a specified class of shares, other than the Class "G" shares, are entitled to vote, and they shall be entitled to notice of all meetings of shareholders of the Corporation. (b) Each Class "G" share, shall, in priority to all other classes of shares, carry the right, in the discretion of the directors, to a preferential dividend, in favour only of the first holder thereof, declarable at any time or from time to time, in an amount not to exceed the amount of the consideration for which each such Class "G" share had been issued. (c) Each Class "G" share shall, in priority to all other classes of shares, carry the right, in favour only of the first holder thereof, in the event of the liquidation or winding-up of the Corporation, to repayment of an amount equal to the difference between the consideration for which such share was issued and the amount of any dividends paid thereon prior to the date of liquidation or winding-up. (d) The holders of the Class "H" shares shall be entitled to one (1) vote for each share held by them at all meetings of shareholders except meetings at which only holders of a specified class of shares, other than the Class "H" shares, are entitled to vote, and they shall be entitled to notice of all meetings of shareholders of the Corporation. (e) Each Class "H" share, shall, in priority to all other classes of shares, carry the right, in the discretion of the directors, to a preferential dividend, in favour only of the first holder thereof, declarable at any time or from time to time, in an amount not to exceed that percentage of the consideration for which each such share had been issued, as shall be determined by resolution of the directors of the Corporation (the "Class "H" Percentage"). -21- (f) Each Class "H" share shall, in priority to all other classes of shares, carry the right, in favour only of the first holder thereof, in the event of the liquidation or winding-up of the Corporation, to repayment of an amount equal to the difference between the result obtained when the Class "H" Percentage is multiplied by the consideration for which such share was issued, and the amount of any dividends paid thereon prior to the date of liquidation or winding-up. (g) The Class "G" shares and the Class "H" shares shall rank PARI PASSU in all of the foregoing respects. (h) The Class "A" shares, Class "B", Class "G" shares and the Class "H" shares shall rank PARI PASSU in all other respects. 3. The 100,000 Class "A" shares held prior to the coming into force of these Articles of Amendment are hereby split, on a basis of 264 Class "A" shares following the coming into force of these Articles of Amendment for each Class "A" share issued and outstanding prior to the coming into force of these Articles of Amendment, so that there shall be a total of 26,400,000 Class "A" shares issued and outstanding following the coming into force of these Articles of Amendment. 4. The aggregate stated capital of the Class "A" shares so split shall be an amount equal to the aggregate stated capital of the Class "A" shares prior to the coming into force of these Articles of Amendment. -22- Consumer and Corporate Affairs Canada Canada Business Corporations Act Certificate of Amendment PHOENIX INTERNATIONAL LIFE SCIENCES INC. Name of Corporation 234202-2 Number I hereby certify that the Articles of the above-mentioned Corporation were amended (a) under Section 13 of the Canada Business Corporations Act in accordance with the attached notice; |_| (b) under Section 27 of the Canada Business Corporations Act as set out in the attached Articles of Amendment designating a series of shares; |_| (c) under Section 177 of the Canada Business Corporations Act as set in the attached Articles of Amendment; |X| (d) under Section 191 of the Canada Business Corporations Act as set out in the attached Articles of Reorganization; |_| (e) under Section 192 of the Canada Business Corporations Act as set out in the attached Articles of Arrangement. |_| /s/ Elaine M. Collins ---------------------------------- Director May 8, 1992 ---------------------------------- Date of Amendment -23- Consumer and Corporate Affairs Canada Canada Business Corporations Act Form 4 Articles of Amendment (Section 27 or 171) 1. Name of Corporation: PHOENIX INTERNATIONAL LIFE SCIENCES INC. 2. Corporation No.: 234202-2 3. The articles of the above-named corporation are amended as follows: THE ARTICLES OF INCORPORATION OF THE CORPORATION ARE HEREBY FURTHER AMENDED BY ADDING THE FOLLOWING: 3. THE CLASSES AND ANY MAXIMUM NUMBER OF SHARES THAT THE CORPORATION IS AUTHORIZED TO ISSUE: THE ANNEXED SCHEDULE 1 IS INCORPORATED IN THIS FORM. Signature: /s/ Heather Savage ------------------------------- Description of Office: Director Date: May 5, 1992 -24- SCHEDULE 1 ARTICLES OF AMENDMENT Section 3 of the Articles of Incorporation dated June 7, 1988 (as amended on January 27, 1989 and August 29, 1989) is hereby amended by adding thereto the following provisions: 1. In addition to the Class "A" shares, Class "B" shares, Class "C" shares, Class "D" shares, Class "E" shares and Class "F" shares, the Corporation is authorized to issue an unlimited number of Class "G" shares (without par value) and Class "H" shares (without par value) provided, however, that all outstanding Class "A" shares be split as described below. 2. The rights, privileges, restrictions and conditions attaching to the Class "G" shares and the Class "H" shares are as follows: (a) The holders of the Class "G" shares shall be entitled to one (1) vote for each share held by them at all meetings of shareholders except meetings at which only holders of a specified class of shares, other than the Class "G" shares, are entitled to vote, and they shall be entitled to notice of all meetings of shareholders of the Corporation. (b) Each Class "G" share, shall, in priority to all other classes of shares, carry the right, in the discretion of the directors, to a preferential dividend, in favour only of the first holder thereof, declarable at any time or from time to time, in an amount not to exceed the amount of the consideration for which each such Class "G" share had been issued. (c) Each Class "G" share shall, in priority to all other classes of shares, carry the right, in favour only of the first holder thereof, in the event of the liquidation or winding-up of the Corporation, to repayment of an amount equal to the difference between the consideration for which such share was issued and the amount of any dividends paid thereon prior to the date of liquidation or winding-up. (d) The holders of the Class "H" shares shall be entitled to one (1) vote for each share held by them at all meetings of shareholders except meetings at which only holders of a specified class of shares, other than the Class "H" shares, are entitled to vote, and they shall be entitled to notice of all meetings of shareholders of the Corporation. (e) Each Class "H" share, shall, in priority to all other classes of shares, carry the right, in the discretion of the directors, to a preferential dividend, in favour only of the first holder thereof, declarable at any time or from time to time, in an amount not to exceed that percentage of the consideration for which each such share had been issued, as shall be determined by resolution of the directors of the Corporation (the "Class "H" Percentage"). -25- (f) Each Class "H" share shall, in priority to all other classes of shares, carry the right, in favour only of the first holder thereof, in the event of the liquidation or winding-up of the Corporation, to repayment of an amount equal to the difference between the result obtained when the Class "H" Percentage is multiplied by the consideration for which such share was issued, and the amount of any dividends paid thereon prior to the date of liquidation or winding-up. (g) The Class "G" shares and the Class "H" shares shall rank PARI PASSU in all of the foregoing respects. (h) The Class "A" shares, Class "B", Class "G" shares and the Class "H" shares shall rank PARI PASSU in all other respects. 3. The 100,000 Class "A" shares held prior to the coming into force of these Articles of Amendment are hereby split, on a basis of 264 Class "A" shares following the coming into force of these Articles of Amendment for each Class "A" share issued and outstanding prior to the coming into force of these Articles of Amendment, so that there shall be a total of 26,400,000 Class "A" shares issued and outstanding following the coming into force of these Articles of Amendment. 4. The aggregate stated capital of the Class "A" shares so split shall be an amount equal to the aggregate stated capital of the Class "A" shares prior to the coming into force of these Articles of Amendment. -26- Consumer and Corporate Affairs Canada Canada Business Corporations Act Certificate of Amendment PHOENIX INTERNATIONAL LIFE SCIENCES INC. Name of Corporation 234202-2 Number I hereby certify that the Articles of the above-mentioned Corporation were amended (a) under Section 13 of the Canada Business Corporations Act in accordance with the attached notice; |_| (b) under Section 27 of the Canada Business Corporations Act as set out in the attached Articles of Amendment designating a series of shares; |_| (c) under Section 177 of the Canada Business Corporations Act as set in the attached Articles of Amendment; |X| (d) under Section 191 of the Canada Business Corporations Act as set out in the attached Articles of Reorganization; |_| (e) under Section 192 of the Canada Business Corporations Act as set out in the attached Articles of Arrangement. |_| /s/ Director -------------------------- Director May 26, 1993 -------------------------- Date of Amendment -27- Consumer and Corporate Affairs Canada Canada Business Corporations Act Form 4 Articles of Amendment (Section 27 or 171) 1. Name of Corporation: PHOENIX INTERNATIONAL LIFE SCIENCES INC. 2. Corporation No.: 234202-2 3. The articles of the above-named corporation are amended as follows: THE ARTICLES OF INCORPORATION, AS AMENDED FROM TIME TO TIME, BE AND ARE HEREBY FURTHER AMENDED AS FOLLOWS: 3. THE CLASSES AND ANY MAXIMUM NUMBER OF SHARES THAT THE CORPORATION IS AUTHORIZED TO ISSUE: THE ANNEXED SCHEDULE 1 IS INCORPORATED IN THIS FORM. Signature: /s/ John Hooper -------------------------------- Description of Office: Director Date: May 19, 1993 -28- SCHEDULE 1 ARTICLES OF AMENDMENT PHOENIX INTERNATIONAL LIFE SCIENCES INC./ PHOENIX INTERNATIONALE SCIENCES DE LA VIE INC. Section 3 of the Articles of the corporation (as amended on January 27, 1989, August 29, 1989 and May 8, 1992) is hereby further amended by adding thereto the following provisions: 1. In addition to the Class "A" shares, Class "B" shares, Class "C" shares, Class "D" shares, Class "E" shares, Class "F" shares, Class "G" shares and Class "H" shares, the corporation shall also be authorized to issue an unlimited number of Class "I" shares (without par value) and Class "J" shares (without par value). 2. The rights, privileges, restrictions and conditions attaching to the Class "I" shares and Class "J" shares shall be as follows: (a) The holders of the Class "G" shares shall be entitled to one (1) vote for each share held by them at all meetings of shareholders except meetings at which only holders of a specified class of shares, other than the Class "G" shares, are entitled to vote, and they shall be entitled to notice of all meetings of shareholders of the corporation. (b) Each Class "G" share, shall, in priority to all other classes of shares including the Class "G" shares and Class "H" shares, carry the right, in the discretion of the directors, to a preferential dividend, in favour only of the first holder thereof, declarable at any time or from time to time, in an amount not to exceed the amount of the consideration for which each such Class "I" share had been issued. (c) Each Class "I" share shall, in priority to all other classes of shares including the Class "G" shares and Class "H" shares, carry the right, in favour only of the first holder thereof, in the event of the liquidation or winding-up of the corporation, to repayment of an amount equal to the difference between the consideration for which such share was issued and the amount of any dividends paid thereon prior to the date of the liquidation or winding-up. (d) The Class "I" shares may only be issued by the corporation during 1993. (e) The holders of the Class "J" shares shall be entitled to one (1) vote for each share held by them at all meetings of shareholders except meetings at which only holders of a specified class of shares, other than the Class "J" shares, are entitled to vote, and they shall be entitled to notice of all meetings of shareholders of the corporation. -29- (f) Each Class "J" share, shall, in priority to all other classes of shares including the Class "G" shares and Class "H" shares, carry the right, in the discretion of the directors, to a preferential dividend, in favour only of the first holder thereof, declarable at any time or from time to time, in an amount not to exceed that percentage of the consideration for which each such share had been issued, as shall be determined by resolution of the directors of the corporation (the "Class "J" Percentage"). (g) Each Class "G" share shall, in priority to all other classes of shares including the Class "G" shares and Class "H" shares, carry the right, in favour only of the first holder thereof, in the event of the liquidation or winding-up of the corporation, to repayment of an amount equal to the difference between the result obtained when the Class "J" Percentage is multiplied by the consideration for which such share was issued, and the amount of any dividends paid thereon prior to the date of liquidation or winding-up. (h) The Class "J" shares may not be issued by the corporation prior to December 1, 1993. (i) The Class "I" shares and the Class "J" shares shall rank PARI PASSU in all of the foregoing respects. (j) The Class "A" shares, Class "B" shares, Class "G" shares, Class "H" shares, Class "I" shares and the Class "J" shares shall rank PARI PASSU in all other respects. -30- Consumer and Corporate Affairs Canada Canada Business Corporations Act Certificate of Amendment PHOENIX INTERNATIONAL LIFE SCIENCES INC. Name of Corporation 234202-2 Number I hereby certify that the Articles of the above-mentioned Corporation were amended (a) under Section 13 of the Canada Business Corporations Act in accordance with the attached notice; |_| (b) under Section 27 of the Canada Business Corporations Act as set out in the attached articles of amendment designating a series of shares; |_| (c) under Section 179 of the Canada Business Corporations Act as set out in the attached articles of amendment; |X| (d) under Section 191 of the Canada Business Corporations Act as set out in the attached articles of reorganization; |_| (e) under Section 192 of the Canada Business Corporations Act as set out in the attached articles of arrangement. |_| /s/ Director ----------------------- Director August 19, 1993 ----------------------- Date of Amendment -31- Consumer and Corporate Affairs Canada Canada Business Corporations Act Form 4 Articles of Amendment (Section 27 or 171) 1. Name of Corporation: PHOENIX INTERNATIONAL LIFE SCIENCES INC. 2. Corporation No.: 234202-2 3. The articles of the above-named corporation are amended as follows: THE ARTICLES OF INCORPORATION, AS AMENDED FROM TIME TO TIME, BE AND ARE HEREBY FURTHER AMENDED AS FOLLOWS: A) EACH CLASS "A" SHARE IN THE CAPITAL STOCK OF THE CORPORATION ISSUED AND OUTSTANDING IMMEDIATELY PRIOR TO THE ISSUANCE OF THE CERTIFICATE OF AMENDMENT (THE "CERTIFICATE OF AMENDMENT") IN RESPECT OF THESE ARTICLES OF AMENDMENT (SUCH TIME HEREINAFTER CALLED THE "VALUATION TIME"), SHALL, UPON THE ISSUANCE TO THE CORPORATION OF THE CERTIFICATE OF AMENDMENT, BE DIVIDED INTO THAT NUMBER OF CLASS "A" SHARES AS IS EQUAL TO THE QUOTIENT OBTAINED WHEN THE AGGREGATE FAIR MARKET VALUE OF ALL SUCH CLASS "A" SHARES AT THE VALUATION TIME, AS SHALL BE DETERMINED BY THE BOARD OF DIRECTORS, IS DIVIDED BY THE NUMBER OF SUCH CLASS "A" SHARES ISSUED AND OUTSTANDING AT THE VALUATION TIME. Signature: /s/ John Hooper --------------------------- Title: Director Date: August 11, 1993 -32- Consumer and Corporate Affairs Canada Canada Business Corporations Act Certificate of Amendment PHOENIX INTERNATIONAL LIFE SCIENCES INC. Name of Corporation 234202-2 Number I hereby certify that the Articles of the above-mentioned Corporation were amended (a) under Section 13 of the Canada Business Corporations Act in accordance with the attached notice; |_| (b) under Section 27 of the Canada Business Corporations Act as set out in the attached articles of amendment designating a series of shares; |_| (c) under Section 179 of the Canada Business Corporations Act as set out in the attached articles of amendment; |X| (d) under Section 191 of the Canada Business Corporations Act as set out in the attached articles of reorganization; |_| (e) under Section 192 of the Canada Business Corporations Act as set out in the attached articles of arrangement. |_| /s/ Director ----------------------- Director August 19, 1993 ----------------------- Date of Amendment -33- Consumer and Corporate Affairs Canada Canada Business Corporations Act Form 4 Articles of Amendment (Section 27 or 171) 1. Name of Corporation: PHOENIX INTERNATIONAL LIFE SCIENCES INC. 2. Corporation No.: 234202-2 3. The articles of the above-named corporation are amended as follows: THE ARTICLES OF INCORPORATION, AS AMENDED FROM TIME TO TIME, BE AND ARE HEREBY FURTHER AMENDED AS FOLLOWS: A) EACH CLASS "A" SHARE IN THE CAPITAL STOCK OF THE CORPORATION ISSUED AND OUTSTANDING IMMEDIATELY PRIOR TO THE ISSUANCE OF THE CERTIFICATE OF AMENDMENT (THE "CERTIFICATE OF AMENDMENT") IN RESPECT OF THESE ARTICLES OF AMENDMENT (SUCH TIME HEREINAFTER CALLED THE "VALUATION TIME"), SHALL, UPON THE ISSUANCE TO THE CORPORATION OF THE CERTIFICATE OF AMENDMENT, BE DIVIDED INTO THAT NUMBER OF CLASS "A" SHARES AS IS EQUAL TO THE QUOTIENT OBTAINED WHEN THE AGGREGATE FAIR MARKET VALUE OF ALL SUCH CLASS "A" SHARES AT THE VALUATION TIME, AS SHALL BE DETERMINED BY THE BOARD OF DIRECTORS, IS DIVIDED BY THE NUMBER OF SUCH CLASS "A" SHARES ISSUED AND OUTSTANDING AT THE VALUATION TIME. Signature: /s/ John Hooper ------------------------- Title: Director Date: August 11, 1993 -34- Consumer and Corporate Affairs Canada Canada Business Corporations Act Certificate of Amendment PHOENIX INTERNATIONAL LIFE SCIENCES INC. Name of Corporation 234202-2 Number I hereby certify that the Articles of the above-mentioned Corporation were amended (a) under Section 13 of the Canada Business Corporations Act in accordance with the attached notice; |_| (b) under Section 27 of the Canada Business Corporations Act as set out in the attached articles of amendment designating a series of shares; |_| (c) under Section 179 of the Canada Business Corporations Act as set out in the attached articles of amendment; |X| (d) under Section 191 of the Canada Business Corporations Act as set out in the attached articles of reorganization; |_| (e) under Section 192 of the Canada Business Corporations Act as set out in the attached articles of arrangement. |_| /s/ Director ------------------------- Director June 27, 1994 ------------------------- Date of Amendment -35- Consumer and Corporate Affairs Canada Canada Business Corporations Act Form 4 Articles of Amendment (Section 27 or 171) 1. Name of Corporation: PHOENIX INTERNATIONAL LIFE SCIENCES INC. 2. Corporation No.: 234202-2 3. The articles of the above-named corporation are amended as follows: THE ARTICLES OF INCORPORATION, AS AMENDED FROM TIME TO TIME, BE AND ARE HEREBY FURTHER AMENDED AS FOLLOWS: 4. RESTRICTIONS IF ANY ON SHARE TRANSFERS SCHEDULE 2 TO THE ARTICLES OF THE CORPORATION IS HEREBY DELETED 5. NUMBER (OR MINIMUM AND MAXIMUM NUMBER) OF DIRECTORS MINIMUM: 3 MAXIMUM: 15 7. OTHER PROVISIONS IF ANY THE FOLLOWING PARAGRAPHS ARE HEREBY DELETED FROM SCHEDULE 3 TO THE ARTICLES OF THE CORPORATION: 1. THE NUMBER OF SHAREHOLDERS OF THE CORPORATION IS LIMITED TO FIFTY (50), NOT INCLUDING PERSONS WHO ARE IN THE EMPLOYMENT OF THE CORPORATION AND PERSONS, WHO, HAVING BEEN FORMERLY IN THE EMPLOYMENT OF THE CORPORATION WERE, WHILE IN THAT EMPLOYMENT AND HAVE CONTINUED AFTER THE TERMINATION OF THAT EMPLOYMENT TO BE SHAREHOLDERS OF THE CORPORATION, TWO OR MORE PERSONS HOLDING ONE OR MORE SHARES JOINTLY BEING COUNTED AS A SINGLE SHAREHOLDER. -36- 2. ANY INVITATION TO THE PUBLIC TO SUBSCRIBE FOR ANY SHARES, DEBENTURES OR ANY OTHER SECURITIES OF THE CORPORATION IS PROHIBITED. Signature: /s/ Jean-yves Caloz ----------------------------- Title: Director Date: June 22, 1994 -37- -38- AMALGAMATION AGREEMENT MEMORANDUM OF AGREEMENT ENTERED INTO IN THE CITY OF MONTREAL, PROVINCE OF QUEBEC, ON THE 4TH DAY OF OCTOBER, 1994 BETWEEN: PHOENIX INTERNATIONAL LIFE SCIENCES INC./PHOENIX INTERNATIONALE SCIENCES DE LA VIE INC., a body politic and corporate, duly incorporated according to the laws of Canada, having its registered office in the City of St. Laurent, (hereinafter referred to as "PHOENIX") and herein represented by Jean-Yves Caloz, its duly authorized representative as he so declares; PARTY OF THE FIRST PART AND: PILS INVESTMENTS INC./GESTION PILS INC., a body politic and corporate, duly incorporated according to the laws of Canada, having its registered office in the City of St. Laurent, (hereinafter referred to as "PILS") and herein represented by Dr. John W. Hooper, its duly authorized representative as he so declares; PARTY OF THE SECOND PART (PHOENIX and PILS may hereinafter collectively be referred to as the "COMPANIES" as the context dictates.) WHEREAS PHOENIX is incorporated under the Canada Business Corporations Act (hereinafter referred to an the "Act"); WHEREAS, PILS is incorporated under the Act; WHEREAS, upon the amalgamation, the shareholders' agreement entered into by the shareholders of PHOENIX on October 28th, 1988, as amended February 24th, 1989, May 26th, 1989, August 15th, 1989, July 6th, 1992, May 23rd, 1993, July 22nd, 1994 and September 7th, 1994 and the shareholders agreement entered into by the shareholders of PILS on May 16th, 1990, as amended on August 11th, 1993 shall be terminated; WHEREAS the authorized capital of PHOENIX presently consists of an unlimited number of Class "A" shares, Class "B" shares, Class "C" shares, Class "D" shares, Class "E" shares, Class "F" shares, Class "G" shares, Class "H" shares, Class "I" shares and Class "J" shares of which only 45,000,000 Class "A" shares are presently issued and outstanding as fully paid; -39- WHEREAS the authorized capital of PILS presently consists of an unlimited number of Class "A" shares, Class "B" shares, Class "C" shares, Class "D" shares, Class "E" shares, Class "F" shares and a maximum number of 100 shares of each of Class 1993 through Class 2005 shares, of which only 4,590.2222 Class "A" shares, 4,355.9997 Class "B" shares, 15,000 Class "C" shares, 24 Class 1993 shares and 56 Class 1994 are presently issued and outstanding as fully paid; WHEREAS the shareholdings of all shareholders of the COMPANIES and the stated capital of the said shares are set out in Schedule "A" annexed hereto and form an integral part hereof; WHEREAS the COMPANIES acting under the authority of the Act wish to amalgamate and continue as one corporation upon the terms and conditions hereinafter set forth; WHEREAS PILS in not an operating company and its assets, liabilities and revenues as an individual corporate entity have no material impact on the financial position, results of operations or activities of PHOENIX; WHEREAS each one of the COMPANIES has made full disclosure to the other of all of its assets and liabilities; NOW, THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS: 1. THAT the preamble shall form an integral part hereof. 2. THAT the COMPANIES hereby agree to amalgamate under Sections 181, 182 and 183 of the Act and to continue as one corporation (hereinafter referred to as the "AMALGAMATED CORPORATION") under the terms and conditions hereinafter set forth. 3. THAT the name of the AMALGAMATED CORPORATION shall be: "PHOENIX INTERNATIONAL LIFE SCIENCES INC./PHOENIX INTERNATIONALE SCIENCES DE LA VIE INC." 4. THAT the purposes and objects of the AMALGAMATED CORPORATION shall be unlimited. 5. THAT the authorized capital of the AMALGAMATED CORPORATION shall consist of an unlimited number of common shares without nominal or par value and of an unlimited number of preferred shares, issuable in series, without nominal or par value. 6. THAT the issued and outstanding shares in the share capital of PHOENIX and PILS prior to amalgamation shall be exchanged for issued, outstanding and fully paid shares of the AMALGAMATED CORPORATION, upon the issuance of the Certificate of Amalgamation, in the following manner: -40- (a) the 4,598.2222 Class "A" shares of PILS shall be exchanged for 2,952,770 common shares of the AMALGAMATED CORPORATION on the basis of approximately 642.155 common shares of the AMALGAMATED CORPORATION for every one (1) Class "A" share held in PILS; (b) the 4,355.9997 Class "B" shares of PILS shall be exchanged for 2,797,230 common shares of the AMALGAMATED CORPORATION on the basis of approximately 642.155 common shares of the AMALGAMATED CORPORATION for every one (1) Class "B" share held in PILS; (c) the 15,000 Class "C" shares of PILS and registered in the name of PHOENIX shall be cancelled upon the amalgamation without any repayment of capital in respect thereof; (d) the 24 Class 1993 shares of PILS shall be exchanged for 150,000 common shares of the AMALGAMATED CORPORATION on the basis of approximately 6,250 common shares of the AMALGAMATED CORPORATION for every one (1) Class 1993 share held in PILS; (e) the 56 Class 1994 shares of PILS shall be exchanged for 350,000 common shares of the AMALGAMATED CORPORATION on the basis of approximately 6,250 common shares of the AMALGAMATED CORPORATION for every one (1) Class 1994 share held in PILS; (f) the 22,500,000 Class "A" shares of PHOENIX registered in the name of Associes de Recherche Medicale Canadienne (ARMC) Inc. shall be exchanged for 6,250,000 common shares of the AMALGAMATED CORPORATION on the basis of 1 common share of the AMALGAMATED CORPORATION for 3.6 Class "A" shares held in PHOENIX; (g) the 22,500,000 Class "A" shares of PHOENIX registered in the name of PILS shall be cancelled upon amalgamation without any repayment of capital in respect thereof; (h) the Class "A" shares, Class "B" shares, Class "C" shares, Class "D" shares, Class "E" shares, Class "F" shares, Class "G" shares, Class "H" shares, Class "I" shares and Class "J" shares presently authorized in the articles of PHOENIX shall be cancelled immediately prior to the amalgamation; and (i) the Class "A" shares, Class "B" shares, Class "C" shares, Class "D" shares, Class "E" shares, Class "F" shares and the Class 1993 through Class 2005 shares presently authorized in the articles of PILS shall be cancelled immediately prior to the amalgamation. 7. THAT amounts equal to the stated capital accounts maintained in respect of the issued shares of the COMPANIES immediately prior to the issuance of the Certificate of -41- Amalgamation, shall be deducted from such stated capital accounts respectively and such amounts shall be added to the stated capital account maintained for the common shares which shall be issued by the AMALGAMATED CORPORATION, in accordance with Section 6, in the following manner: (a) an amount equal to the stated capital of the Class "A" shares of PILS (being $119.66) shall be added to the stated capital account maintained for the common shares of the AMALGAMATED CORPORATION; (b) an amount equal to the stated capital of the Class "B" shares of PILS (being $1,088.94) shall be added to the stated capital account maintained for the common shares of the AMALGAMATED CORPORATION; (c) an amount equal to the stated capital of the Class 1993 shares of PILS (being $24.00) shall be added to the stated capital account maintained for the common shares of the AMALGAMATED CORPORATION; (d) an amount equal to the stated capital of the Class 1994 shares of PILS (being $56.00) shall be added to the stated capital account maintained for the common shares of the AMALGAMATED CORPORATION; and (e) an amount equal to the stated capital of the Class "A" shares of PHOENIX (being $1,000.00) shall be added to the stated capital account maintained for the common shares of the AMALGAMATED CORPORATION. 8. THAT subsequent to the issuance of the Certificate of Amalgamation, the shareholders of the COMPANIES when so requested by the AMALGAMATED CORPORATION, shall surrender the share certificates representing shares held by them in the COMPANIES and in return shall be entitled to receive certificates representing shares in the share capital of the AMALGAMATED CORPORATION in accordance with Section 6 of this Agreement. Any share certificate not surrendered in accordance herewith shall be deemed void. 9. THAT the rights, privileges, restrictions and conditions attaching to the common shares and preferred shares (as a class) of the AMALGAMATED CORPORATION shall be as follows: (a) The holders of the common shares shall be entitled to vote at all meetings of shareholders, except meetings at which only holders of a specified class or series of shares are entitled to vote. (b) The holders of the common shares shall, subject to the rights, privileges, restrictions and conditions attaching to any other class or series of shares of the corporation, be entitled to receive any dividends declared and payable by the corporation on the common shares. -42- (c) The holders of the common shares shall, subject to the rights, privileges, restrictions and conditions attaching to any other class or series of shares of the corporation, be entitled to receive the remaining property of the corporation upon liquidation, dissolution or winding-up of the corporation, whether voluntary or involuntary, or any other return of capital or distribution of the assets of the corporation among its shareholders for the purpose of winding-up its affairs. (d) The preferred shares may from time to time be issued in one or more series and. subject to: (i) the following provisions. (ii) the filing of articles of amendment in prescribed form, and (iii) the issuance of a certificate of amendment in respect thereof, the directors may fix by resolution, from time to time before such issue, the number of shares which is to comprise each series and the designation, rights, privileges, restrictions and conditions attaching to each series of preferred shares including, without limiting the generality of the foregoing. the rate or amount of dividends or the method of calculating dividends, the date of payment thereof, the redemption, the retraction, purchase and/or conversion prices and term and conditions of redemption, retraction, purchase and/or conversion, and any sinking fund or other provisions. (e) The preferred shares of each series shall, with respect to the payment of dividends and the distribution of assets or return of capital in the event of liquidation, dissolution or winding-up of the corporation, whether voluntary or involuntary, or any other return of capital or distribution of the assets of the corporation among its shareholders for the purpose of winding-up its affairs, rank an a parity with the preferred shares of every other series and be entitled to preference over the common shares and over any other shares of the corporation ranking junior to the preferred shares. (f) If any cumulative dividends or amounts payable on the return of capital in respect of a series of preferred shares are not paid in full, all series of preferred shares shall participate ratably in respect of accumulated dividends and return of capital. (g) After payment to the holders of preferred shares of the amounts provided in the articles of the corporation to be payable to them, they shall not be entitled to share in any further distribution of the assets of the corporation. (h) The holders of preferred shares of any series shall not, as such, be entitled to receive notice of, or to attend, any meeting of shareholders of the corporation, nor shall they have any voting rights for the election of directors or for any other purpose, except when the -43- holders of preferred shares or of any series of preferred shares are entitled to vote separately as a class or series as provided in the Act and any statute that may be substituted therefor, as from time to time amended. (i) The provisions attaching to preferred shares as a class may be repealed. altered, modified or amended from time to time with such approval as may then he required by the Act to be given by the holders of preferred shares as a class. (j) The formalities to be observed with respect to the calling and conduct of any meeting of holders of preferred, shares as a class, or any joint meeting of holders of two (2) or more series of preferred shares, including, without limiting the generality of the foregoing, the giving of notice and the record dates therefor, the quorum therefor, the procedure and voting thereof, shall mutatis mutandis be those from time to time proscribed by the by-laws of the corporation with respect to a meeting of shareholders. 10. THAT the registered office of the AMALGAMATED CORPORATION shall be located in the Montreal Urban Community, Province of Quebec bearing civic number 4625 Dobrin Street, Saint-Laurent (Qc) H4R 2P7. 11. THAT the board of directors of the AMALGAMATED CORPORATION shall consist of not less than three (3) and not more than fifteen (15) directors and the names. professions and place of residence of the initial directors of the AMALGAMATED CORPORATION shall be as follows:
NAMES OCCUPATION RESIDENCE - ----- ---------- --------- DR. JOHN W. HOOPER EXECUTIVE 64A BIRCH HILL, HUDSON (QC) J0P 1J0 HEATHER SAVAGE EXECUTIVE 7 CEDAR AVE., PTE- CLAIRE (QC) H9S 4X9 JEAN-YVES CALOZ EXECUTIVE 47 CALAIS CIRCLE, KIRKLAND (QC) H9H 3R7 JUDY ZILBER EXECUTIVE 98 AUTUMN RIDGE RD., BEDMINSTER, NJ USA 07921 CLAUDE FORGET EXECUTIVE 1227 SHERBROOKE ST. W. #82, MONTREAL (QC) H3G 1G1
-44- RAYMOND H. FARMEN EXECUTIVE 386 LAKESHORE RD., BEACONSFIELD, (QC) H9W 4B9 SERGE CARRIERE EXECUTIVE 40, DU CHENE VAUDEUIL (QC) J7V 8P3 JEAN S. DOUVILLE EXECUTIVE 186, CHEMIN STRATHCONA VILLE MONT-ROYAL (QC) H3R 1E6 JEAN-RENE HALDE EXECUTIVE 1160, MISTRAL MONTREAL (QC) H2P 2X1 CORNELIUS P. McCARTHY III EXECUTIVE 33 REEF STREET, VENICE, CA U.S.A. 90292
The said directors shall be the directors of the AMALGAMATED CORPORATION until replaced by others duly elected or appointed in their stead. The subsequent directors of the AMALGAMATED CORPORATION shall be elected each year at the annual meeting of the AMALGAMATED CORPORATION by a majority vote of the common shares represented at such meeting. Any vacancy occurring in the board of directors of the AMALGAMATED CORPORATION may be filled for the remainder of the term by the remaining directors, if any, provided they constitute a quorum. 12. THAT the COMPANIES shall contribute to the AMALGAMATED CORPORATION all their assets subject to all their liabilities as of the earliest moment on October 21st, 1994 which time shall be the effective date for the Amalgamation contemplated by this Agreement. In the event that the registration on title with respect to any property of the COMPANIES is not effected on the effective date of the Amalgamation of the COMPANIES into the AMALGAMATED CORPORATION, such property shall nonetheless be the property of the AMALGAMATED CORPORATION as of the effective date of the Amalgamation contemplated in this Agreement. 13. THAT the by-laws of PHOENIX (namely By-Law No. 94-1 and By-Law No. 94-2) shall, MUTATIS MUTANDIS, and unless they are contrary to law or the Act, be the by-laws of the AMALGAMATED CORPORATION unless and until added to, repealed or amended. 14. THAT any provisions of the Articles of Amalgamation and Schedule annexed thereto which have not been incorporated into this Agreement shall be deemed to be contained herein, as if set out word by word in this Agreement (a copy of said Articles of Amalgamation and Schedule are annexed to this Agreement and form an integral part hereof, the parties hereto -45- taking full cognizance of the provisions of said Articles of Amalgamation and Schedule). In the event that any provision of this Agreement is inconsistent with the Articles of Amalgamation and Schedule thereto, then the provisions contained in the Articles of Amalgamation and Schedule thereto shall prevail. 15. THAT any director of each of the COMPANIES is authorized to sign the Articles of Amalgamation on behalf of each of the COMPANIES which is a party to this Agreement. 16. THAT upon the adoption of this Agreement by not less than two-thirds (2/3) of the votes cast by the shareholders entitled to vote at a special general meeting of shareholders of each of the COMPANIES voting thereon separately as a class, duly held, or the adoption of special resolutions to that affect by all the shareholders of each of the COMPANIES voting thereon separately as a class, the fact shall be certified by the respective secretary of each of the COMPANIES upon a signed copy of this Agreement under their respective corporate seals and the parties hereto shall thereupon file the Articles of Amalgamation with the Schedule annexed thereto with the Director, Corporations Directorate, Industry Canada pursuant to Section 185 of the Act. 17. THAT this Agreement say be terminated without cause or reason by the board of directors of any one of the COMPANIES, notwithstanding the approval of this Agreement by the shareholders of the COMPANIES, at any time prior to the issuance of the Certificate of Amalgamation. 18. THAT the parties hereto have requested and are satisfied that this Agreement be drafted in English. Les parties aux presentes ont exige quo cette entente soit redigee on anglais et s'en declarent satisfaites. -46- DATED at Montreal, this 4th day of October, 1994. PHOENIX INTERNATIONAL LIFE SCIENCES INC./PHOENIX INTERNATIONALE SCIENCES DE LA VIE, INC. Per: /s/ JEAN-YVES CALOZ ---------------------------------------------------- JEAN-YVES CALOZ PILS INVESTMENTS INC./GESTION PILS INC. Per: /s/ JOHN W. HOOPER ---------------------------------------------------- JOHN W. HOOPER "THE FOREGOING AGREEMENT IS HEREBY CERTIFIED AS HAVING BEEN ADOPTED BY SPECIAL RESOLUTION OF ALL HOLDERS OF THE CLASS "A" SHARES OF PHOENIX INTERNATIONAL LIFE SCIENCES INC., VOTING SEPARATELY AS A CLASS, ON THE 4TH DAY OF OCTOBER, 1994 /s/ JEAN-YVES CALOZ - --------------------------------------------------------- JEAN-YVES CALOZ Secretary of PHOENIX INTERNATIONAL LIFE SCIENCES INC. "THE FOREGOING AGREEMENT IS HEREBY CERTIFIED AS HAVING BEEN ADOPTED BY SPECIAL RESOLUTION OF ALL HOLDERS OF THE CLASS "A" SHARES OF PILS INVESTMENTS INC., VOTING SEPARATELY AS A CLASS, ON THE 4TH DAY OF OCTOBER, 1994 /s/ JEAN-YVES CALOZ - --------------------------------------------------------- JEAN-YVES CALOZ Secretary of PILS INVESTMENTS INC. "THE FOREGOING AGREEMENT IS HEREBY CERTIFIED AS HAVING BEEN ADOPTED BY SPECIAL RESOLUTION OF ALL HOLDERS OF THE CLASS "B" SHARES OF PILS INVESTMENTS INC., VOTING SEPARATELY AS A CLASS, ON THE 4TH DAY OF OCTOBER, 1994 /s/ JEAN-YVES CALOZ - --------------------------------------------------------- JEAN-YVES CALOZ Secretary of PILS INVESTMENTS INC. "THE FOREGOING AGREEMENT IS HEREBY CERTIFIED AS HAVING BEEN ADOPTED BY SPECIAL RESOLUTION OF ALL HOLDERS OF THE CLASS "C" SHARES OF PILS -47- INVESTMENTS INC., VOTING SEPARATELY AS A CLASS, ON THE 4TH DAY OF OCTOBER, 1994 /s/ JEAN-YVES CALOZ - --------------------------------------------------------- JEAN-YVES CALOZ Secretary of PILS INVESTMENTS INC. "THE FOREGOING AGREEMENT IS HEREBY CERTIFIED AS HAVING BEEN ADOPTED BY SPECIAL RESOLUTION OF ALL HOLDERS OF THE CLASS 1993 SHARES OF PILS INVESTMENTS INC., VOTING SEPARATELY AS A CLASS, ON THE 4TH DAY OF OCTOBER, 1994 /s/ JEAN-YVES CALOZ - --------------------------------------------------------- JEAN-YVES CALOZ Secretary of PILS INVESTMENTS INC. "THE FOREGOING AGREEMENT IS HEREBY CERTIFIED AS HAVING BEEN ADOPTED BY SPECIAL RESOLUTION OF ALL HOLDERS OF THE CLASS 1994 SHARES OF PILS INVESTMENTS INC., VOTING SEPARATELY AS A CLASS, ON THE 4TH DAY OF OCTOBER, 1994 /s/ JEAN-YVES CALOZ - --------------------------------------------------------- JEAN-YVES CALOZ Secretary of PILS INVESTMENTS INC. -48- Consumer and Corporate Affairs Canada Canada Business Corporations Act Certificate of Amalgamation PHOENIX INTERNATIONAL LIFE SCIENCES INC. Name of Corporation 307972-4 Number I hereby certify that the above-named corporation resulted from an amalgamation, under section 185 of the Canada Business Corporations Act, of the corporations set out in the attached articles of amalgamation. /s/ Director ------------------------------ Director October 21, 1994 ------------------------------ Date of Amalgamation -49- Consumer and Corporate Affairs Canada Canada Business Corporations Act Form 9 Articles of Amalgamation (Section 185) 1. Name of Amalgamated Corporation: PHOENIX INTERNATIONAL LIFE SCIENCES INC. 2. The place in Canada where the registered office is to be situated: THE MONTREAL URBAN COMMUNITY, PROVINCE OF QUEBEC 3. The classes and any maximum number of shares that the corporation is authorized to issue: THE ANNEXED SCHEDULE 1 IS INCORPORATED IN THIS FORM. 4. Restrictions, if any, on share transfers: N/A 5. Number (or minimum and maximum number) of directors: MINIMUM: 3 MAXIMUM: 15 6. Restrictions, if any, on business the corporation may carry on: N/A. 7. Other provisions, if any: N/A. 8. The amalgamation has been approved pursuant to that section or subsection of the Act which is indicated as follows: |X| 183 |_| 184(1) |_| 184(2)
9. Name of amalgamating corporation: Corporation No. PHOENIX INTERNATIONAL LIFE SCIENCES INC. 234202-2 PILS INVESTMENTS INC. 237200-2
Signature Date Title /s/Heather Savage October 4, 1994 Director /s/Heather Savage October 4, 1994 Director
Filed: October 24, 1994 -50- SCHEDULE 1 ARTICLES OF AMALGAMATION PHOENIX INTERNATIONAL LIFE SCIENCES INC./ PHOENIX INTERNATIONALE SCIENCES DE LA VIE INC. THE CLASSES OF SHARES THAT THE CORPORATION IS AUTHORIZED TO ISSUE The corporation is authorized to issue an unlimited number of common shares without nominal or par value and an unlimited number of preferred shares, issuable in series, without nominal or par value. The rights, privileges, restrictions and conditions attaching to the said common shares and the rights, privileges, restrictions and conditions attaching to the said preferred shares (as a class) are as follows: 1. The holders of the common shares shall be entitled to vote at all meetings of shareholders, except meetings at which only holders of a specified class or series of shares are entitled to vote. 2. The holders of the common shares shall, subject to the rights, privileges, restrictions and conditions attaching to any other class or series of shares of the corporation, be entitled to receive any dividends declared and payable by the corporation on the common shares. 3. The holders of the common shares shall, subject to the rights, privileges, restrictions and conditions attaching to any other class or series of shares of the corporation, be entitled to receive the remaining property of the corporation upon liquidation, dissolution or winding-up of the corporation, whether voluntary or involuntary, or any other return of capital or distribution of the assets of the corporation among its shareholders for the purpose of winding-up its affairs. 4. The preferred shares may from time to time be issued in one or more series and, subject to: (i) the following provisions, (ii) the filing of articles of amendment in prescribed form, and (iii) the issuance of a certificate of amendment in respect thereof, the directors may fix by resolution, from time to time before such issue, the number of shares which is to comprise each series and the designation, rights, privileges, restrictions and conditions attaching to each series of preferred shares including, without limiting the generality of -51- the foregoing, the rate or amount of dividends or the method of calculating dividends, the date of payment thereof, the redemption, the retraction, purchase and/or conversion prices and terms and conditions of redemption, retraction, purchase and/or conversion, and any sinking fund or other provisions. 5. The preferred shares of each series shall, with respect to the payment of dividends and the distribution of assets or return of capital in the event of liquidation, dissolution or winding-up of the corporation, whether voluntary or involuntary, or any other return of capital or distribution of the assets of the corporation among its shareholders for the purpose of winding-up its affairs, rank on a parity with the preferred shares of every other series and be entitled to preference over the common shares and over any other shares of the corporation ranking junior to the preferred shares. 6. If any cumulative dividends or amounts payable on the return of capital in respect of a series of preferred shares are not paid in full, all series of preferred shares shall participate ratably in respect of accumulated dividends and return of capital. 7. After payment to the holders of preferred shares of the amounts provided in the articles of the corporation to be payable to them, they shall not be entitled to share in any further distribution of the assets of the corporation. 8. The holders of preferred shares of any series shall not, as such, be entitled to receive notice of, or to attend, any meeting of shareholders of the corporation, nor shall they have any voting rights for the election of directors or for any other purpose, except when the holders of preferred shares or of any series of preferred shares are entitled to vote separately as a class or series as provided in the Canada Business Corporations Act and any statute that may be substituted therefor, as from time to time amended (herein the "Act"). 9. The provisions attaching to preferred shares as a class may be repealed, altered, modified or amended from time to time with such approval as may then be required by the Act to be given by the holders of preferred shares as a class. 10. The formalities to be observed with respect to the calling and conduct of any meeting of holders of preferred shares as a class, or any joint meeting of holders of two (2) or more series of preferred shares, including, without limiting the generality of the foregoing, the giving of notice and the record dates therefor, the quorum therefor, the procedure and voting thereat, shall mutatis mutandis be those from time to time prescribed by the by-laws of the corporation with respect to a meeting of shareholders. -52- Consumer and Corporate Affairs Canada Canada Business Corporations Act Form 3 Notice of Registered Office or Notice of Change of Registered Office (Section 19) 1. Name of Corporation: PHOENIX INTERNATIONAL LIFE SCIENCES INC. 2. Corporation Name: N/A 3. The place in Canada where the registered office is to be situated: THE MONTREAL URBAN COMMUNITY, PROVINCE OF QUEBEC 4. Address of registered office: 4625 DOBRIN STREET, VILLE ST. LAURENT (QC) H4R 2P7. 5. Effective date of change: ON AMALGAMATION 6. Previous address of registered office: N/A Signature: /s/ Heather Savage ---------------------------- Title: Director Date: October 4, 1994 -53- Consumer and Corporate Affairs Canada Canada Business Corporations Act Form 4 Articles of Amendment (Section 27 or 177) 1. Name of Corporation: PILS INVESTMENTS INC. 2. Corporation No.: 237200-2 3. The articles of the above-named corporation are amended as follows: THE ARTICLES OF THE CORPORATION, AS AMENDED FROM TIME TO TIME, BE AND ARE HEREBY FURTHER AMENDED AS FOLLOWS: 7. OTHER PROVISIONS IF ANY THE FOLLOWING PARAGRAPH 7 IS HEREBY ADDED TO SCHEDULE 3 OF THE ARTICLES OF THE CORPORATION TO FORM AN INTEGRAL PART THEREOF: 7. THE CORPORATION SHALL BE ENTITLED TO PAY DIVIDENDS ON FRACTIONAL SHARES OF ANY CLASS. Signature: /s/ Jean-yves Caloz ------------------------------ Title: Director Date: July 5, 1994 -54- Consumer and Corporate Affairs Canada Canada Business Corporations Act Form 6 Notice of Change of Directors or Notice of Change of Directors (Sections 106 and 113) 1. Name of Corporation: PHOENIX INTERNATIONAL LIFE SCIENCES INC. 2. Corporation No.: N/A 3. The following persons became directors of this corporation: SEE ATTACHED SCHEDULE "A" 4. The following persons ceased to be directors of the corporation: N/A 5. The directors of this corporation now are:
Resident Name Residential address Occupation Canada John W. Hooper 64A Birch Hill, Hudson (QC) J0P 1J0 Executive Yes Heather Savage 7 Cedar Ave., Pointe Claire (QC) H9S 4X9 Executive Yes Jean-Yves Caloz 47 Calais Circle, Kirkland (QC) H9H 3R7 Executive Yes Judy Zilber 98 Autumn Ridge Rd., Bedminister, NJ USA 07921 Executive No Serge Carriere 40 Du Chene, Vaudreuil (QC) J7V 8P3 Executive Yes Jean E. Douville 186 Ch. Strathcona, Mont-Royal (QC) H3R 1E6 Executive Yes Claude Forget 1227 Sherbrooke W., #82, Montreal (QC) H3G 1G1 Executive Yes Jean-Rene Halde 1160 Mistral, Montreal (QC) H2P 2Z1 Executive Yes Cornelius P. McCarthy, III 33 Reef Street, Venice, CA , U.S.A. 90292 Executive No Raymond H. Farmen 386 Lakeshore Rd., Beaconsfield (QC) H9W 4H9 Executive Yes
Signature: /s/ Heather Savage ---------------------------- Title: Director -55- Date: October 4, 1994 -56- SCHEDULE "A" Form 6 Notice of Directors (Sections 106 and 113)
Resident Name Effective Date Residential address Occupation Canada John W. Hooper On Amal. 64A Birch Hill, Hudson (QC) J0P 1J0 Executive Yes Heather Savage On Amal. 7 Cedar Ave., Pointe Claire (QC) H9S 4X9 Executive Yes Jean-Yves Caloz On Amal. 47 Calais Circle, Kirkland (QC) H9H 3R7 Executive Yes Judy Zilber On Amal. 98 Autumn Ridge Rd., Bedminister, NJ USA 07921 Executive No Serge Carriere On Amal. 40 Du Chene, Vaudreuil (QC) J7V 8P3 Executive Yes Claude Forget On Amal. 1227 Sherbrooke W., #82, Montreal (QC) H3G 1G1 Executive Yes Jean E. Douville On Amal. 186 Ch. Strathcona, Mont-Royal (QC) H3R 1E6 Executive Yes Jean-Rene Halde On Amal. 1160 Mistral, Montreal (QC) H2P 2Z1 Executive Yes Raymond H. Farmen On Amal. 386 Lakeshore Rd., Beaconsfield (QC) H9W 4H9 Executive Yes Cornelius P. McCarthy, III On Amal. 33 Reef Street, Venice, CA , U.S.A. 90292 Executive No
-57- C A N A D A PROVINCE OF QUEBEC DISTRICT OF MONTREAL IN THE MATTER of the Canada Business Corporations Act and the Articles of Amalgamation of PHOENIX INTERNATIONAL LIFE SCIENCES INC. and PILS INVESTMENTS INC. I, HEATHER SAVAGE, of the City of Pointe Claire, Province of Quebec, do solemnly declare that: 1. I am a Director of PHOENIX INTERNATIONAL LIFE SCIENCES INC., one of the amalgamating corporations (hereinafter called the "Corporation") and an such have personal knowledge of the matters herein declared. 2. I have conducted such examinations of the books and records of the Corporation and have made such inquiries and investigations as are necessary to enable me to make this declaration. 3. I have satisfied myself that: (a) The Corporation is and the amalgamated corporation will be able to pay its liabilities as they become due, (b) The realizable value of the assets of the amalgamated corporation will not be less than the aggregate of its liabilities and stated capital of all classes of its shares, and (c) No creditor will be prejudiced by the amalgamation. And I make this solemn declaration consciously believing the same to be true and knowing that it is of the same force and effect as if made under oath and by virtue of the Canada Evidence Act. /s/ HEATHER SAVAGE - ----------------------------------------------------- HEATHER SAVAGE SOLEMNLY DECLARED BEFORE ME at Montreal, this 4th day of October, 1994 /s/ ANNA MARIA MASCOLO (SEAL) - ----------------------------------------------------- Commissioner of Oaths for the City and District of Montreal -58- C A N A D A PROVINCE OF QUEBEC DISTRICT OF MONTREAL IN THE MATTER of the Canada Business Corporations Act and the Articles of Amalgamation of PHOENIX INTERNATIONAL LIFE SCIENCES INC. and PILS INVESTMENTS INC. I, HEATHER SAVAGE, of the City of Pointe Claire, Province of Quebec, do solemnly declare that: 1. I am a Director of PILS INVESTMENTS INC., one of the amalgamating corporations (hereinafter called the "Corporation") and an such have personal knowledge of the matters herein declared. 2. I have conducted such examinations of the books and records of the Corporation and have made such inquiries and investigations as are necessary to enable me to make this declaration. 3. I have satisfied myself that: (a) The Corporation is and the amalgamated corporation will be able to pay its liabilities as they become due, (b) The realizable value of the assets of the amalgamated corporation will not be less than the aggregate of its liabilities and stated capital of all classes of its shares, and (c) No creditor will be prejudiced by the amalgamation. And I make this solemn declaration consciously believing the same to be true and knowing that it is of the same force and effect as if made under oath and by virtue of the Canada Evidence Act. /s/ HEATHER SAVAGE - ----------------------------------------------------- HEATHER SAVAGE SOLEMNLY DECLARED BEFORE ME at Montreal, this 4th day of October, 1994 /s/ ANNA MARIA MASCOLO (SEAL) - ----------------------------------------------------- Commissioner of Oaths for the City and District of Montreal -59- Consumer and Corporate Affairs Canada Canada Business Corporations Act Certificate of Amendment PILS INVESTMENT INC. Name of Corporation 237200-2 Number I hereby certify that the Articles of the above-mentioned Corporation were amended (a) under Section 13 of the Canada Business Corporations Act in accordance with the attached notice; |_| (b) under Section 27 of the Canada Business Corporations Act as set out in the attached articles of amendment designating a series of shares; |_| (c) under Section 179 of the Canada Business Corporations Act as set in the attached articles of amendment; |X| (d) under Section 191 of the Canada Business Corporations Act as set out in the attached articles of reorganization; |_| (e) under Section 192 of the Canada Business Corporations Act as set out in the attached articles of arrangement. |_| /s/ Director ------------------------------ Director July 12, 1994 ------------------------------ Date of Amendment -60- Consumer and Corporate Affairs Canada Canada Business Corporations Act Certificate of Amendment PILS INVESTMENT INC. Name of Corporation 237200-2 Number I hereby certify that the Articles of the above-mentioned Corporation were amended (a) under Section 13 of the Canada Business Corporations Act in accordance with the attached notice; |_| (b) under Section 27 of the Canada Business Corporations Act as set out in the attached Articles of Amendment designating a series of shares; |_| (c) under Section 171 of the Canada Business Corporations Act as set in the attached Articles of Amendment; |X| (d) under Section 185 of the Canada Business Corporations Act as set out in the attached Articles of Reorganization; |_| (e) under Section 185.1 of the Canada Business Corporations Act as set out in the attached Articles of Arrangement. |_| /s/ Director - ----------------------------- Director February 14, 1989 - ----------------------------- Date of Amendment -61- Consumer and Corporate Affairs Canada Canada Business Corporations Act Form 4 Articles of Amendment (Section 27 or 177) 1. Name of Corporation: 163641 CANADA INC. 2. Corporation No.: 237200-2 3. The articles of the above-named corporation are amended as follows: SECTION 1 OF THE ARTICLES OF INCORPORATION BE AND IT IS HEREBY DELETED AND ARE SUBSTITUTED BY THE FOLLOWING: 1. NAME OF CORPORATION PILS INVESTMENTS INC. Signature: /s/ John W. Hooper ------------------------------- Description of Office: Director Date: January 25, 1989 -62- -63- Consumer and Corporate Affairs Canada Canada Business Corporations Act Certificate of Amendment PILS INVESTMENT INC. Name of Corporation 237200-2 Number I hereby certify that the Articles of the above-mentioned Corporation were amended (a) under Section 13 of the Canada Business Corporations Act in accordance with the attached notice; |_| (b) under Section 27 of the Canada Business Corporations Act as set out in the attached Articles of Amendment designating a series of shares; |_| (c) under Section 171 of the Canada Business Corporations Act as set in the attached Articles of Amendment; |X| (d) under Section 191 of the Canada Business Corporations Act as set out in the attached Articles of Reorganization; |_| (e) under Section 192 of the Canada Business Corporations Act as set out in the attached Articles of Arrangement. |_| /s/ Director ---------------------------- Director May 3, 1993 ---------------------------- Date of Amendment -64- Consumer and Corporate Affairs Canada Canada Business Corporations Act Form 4 Articles of Amendment (Section 27 or 171) 1. Name of Corporation: PILS INVESTMENTS INC. 2. Corporation No.: 237200-2 3. The articles of the above-named corporation are amended as follows: THE ARTICLES OF INCORPORATION ARE HEREBY AMENDED AS FOLLOWS: 3. THE CLASSES AND ANY MAXIMUM NUMBER OF SHARES THAT THE CORPORATION IS AUTHORIZED TO ISSUE: THE ANNEXED SCHEDULE I IS INCORPORATED IN THIS FORM. Signature: /s/ John W. Hooper ------------------------------------ Description of Office: Director Date: April 30, 1993 -65- SCHEDULE I ARTICLES OF AMENDMENT PILS INVESTMENTS INC. THE CLASSES OF SHARES THAT THE CORPORATION IS AUTHORIZED TO ISSUE In addition to the Class "A" shares, Class "B" shares, Class "C" shares, Class "D" shares, Class "E" shares and Class "F" shares the Corporation shall be entitled to issue Class 1993 through Class 2005 shares inclusive and the shares of each such class shall be without par value. A maximum number of one hundred (100) shares for each of the Class 1993 through Class 2005 shares may be issued by the Corporation. The rights, privileges, restrictions and conditions attaching to the said Class 1993 through Class 2005 shares inclusive are as follows: 1. Except as otherwise specifically provided in the Canada Business Corporations Act, the Class 1993 through Class 2005 shares inclusive shall not carry any right to vote. 2. The Class 1993 shares shall only be issued by the Corporation in the Corporation's 1993 fiscal year (the "Reference Year"). 3. Each Class 1993 share will be entitled to participate in one-quarter of a percent (.25%) of the increase, if any, in the cumulative net profits of Phoenix International Life Sciences Inc. ("Phoenix") from the first day of the Reference Year to the last day of the fiscal year terminating immediately prior to the fiscal year in which the Event (as hereinafter defined) occurs, determined as if Phoenix had not paid any dividends during such period, the whole as established by the Corporation's auditors. (This increase in cumulative net profits on a per share basis shall be referred to as the "Agreed Value"). 4. For each Class 1993 share the Redemption Value to be received on a redemption, a liquidation or winding-up (hereinafter the "Event"), will be an amount equal to the lesser of (i) the amount determined in accordance with the Unanimous Shareholders' Agreement executed by all of the shareholders of the Corporation as at May 16, 1990, as from time to time amended or replaced, and (ii) the amount determined in accordance with the following schedule: -66-
AMOUNT TO BE RECEIVED --------------------- If the Event takes place in the Reference Year the consideration for which such share was issued If the Event takes place in the first fiscal year 20% of Agreed Value of Phoenix following the Reference Year If the Event takes place in the second fiscal 40% of Agreed Value year of Phoenix following the Reference Year If the Event takes place in the third fiscal year 60% of Agreed Value of Phoenix following the Reference Year If the Event takes place in the fourth fiscal 80% of Agreed Value year of Phoenix following the Reference Year If the Event takes place in or after the fifth 100% of Agreed Value fiscal year of Phoenix following the Reference Year
5. The Corporation may redeem all or any part of the Class 1993 shares for an amount equal to the Redemption Value at any time at the option of the directors of the Corporation upon a notice of seven (7) days, without the consent of the holders thereof, and if less than the whole amount of the outstanding Class 1993 shares shall be so redeemed, the shares to be redeemed shall be selected pro rata or by lot in such manner as the directors may determine. 6. Each Class 1993 share shall carry the right, in the event of the liquidation or winding up of the Corporation to repayment of an amount equal to the Redemption Value. 7. The Class 1993 shares shall not carry the right to any further participation in profits or assets of the Corporation. 8 The Class 1994 shares shall carry the same rights and conditions as the Class 1993 shares as provided for in paragraphs 1 to 6 above, except that the Reference Year shall be advanced one (1) year to the 1994 fiscal year of Phoenix. Likewise the rights and conditions attaching to the Class 1995 to Class 2005 shares inclusive shall be identical to the Class 1993 and Class 1994 shares except that the Reference Year shall be advanced, MUTATIS MUTANDIS. 9. The Class 1993 through Class 2005 shares shall rank PARI PASSU in every other respect. -67- Consumer and Corporate Affairs Canada Canada Business Corporations Act Certificate of Amendment PHOENIX INTERNATIONAL LIFE SCIENCES INC. Name of Corporation 307972-4 Number I hereby certify that the Articles of the above-mentioned Corporation were amended (a) under Section 13 of the Canada Business Corporations Act in accordance with the attached notice; |_| (b) under Section 27 of the Canada Business Corporations Act as set out in the attached articles of amendment designating a series of shares; |_| (c) under Section 179 of the Canada Business Corporations Act as set in the attached articles of amendment; |X| (d) under Section 191 of the Canada Business Corporations Act as set out in the attached articles of reorganization. |_| /s/ Director --------------------------- Director January 12, 1996 --------------------------- Date of Amendment -68- Consumer and Corporate Affairs Canada Canada Business Corporations Act Form 4 Articles of Amendment (Section 27 or 171) 1. Name of Corporation: PHOENIX INTERNATIONAL LIFE SCIENCES INC. 2. Corporation No.: 3079724 3. The articles of the above-named corporation are amended as follows: PARAGRAPH 7 OF THE ARTICLES OF AMALGAMATION OF THE CORPORATION IS HEREBY AMENDED BY ADDING THE FOLLOWING: THE DIRECTORS MAY APPOINT ONE OR MORE DIRECTORS, WHO SHALL HOLD OFFICE FOR A TERM EXPIRING NOT LATER THAN THE CLOSE OF THE NEXT ANNUAL MEETING OF SHAREHOLDERS, PROVIDED THAT: (i) THE TOTAL NUMBER OF DIRECTORS OF THE CORPORATION IMMEDIATELY AFTER SUCH APPOINTMENT SHALL NOT EXCEED THE MAXIMUM NUMBER SET FORTH IN THE ARTICLES OF INCORPORATION, AND THAT (ii) THE TOTAL NUMBER OF DIRECTORS SO APPOINTED BY THE DIRECTORS SHALL NOT EXCEED ONE THIRD OF THE NUMBER OF DIRECTORS ELECTED AT THE PREVIOUS ANNUAL MEETING OF SHAREHOLDERS. Signature: /s/ Jean-yves Caloz -------------------------- Title: Secretary Date: September 1, 1996 -69- Consumer and Corporate Affairs Canada Canada Business Corporations Act Form 4 Articles of Amendment (Section 27 or 171) 1. Name of Corporation: PHOENIX INTERNATIONAL LIFE SCIENCES INC. 2. Corporation No.: 307972-4 3. The articles of the above-named corporation are amended as follows: PARAGRAPH 1 THEREOF IS REPLACED WITH THE FOLLOWING PARAGRAPH: PHOENIX INTERNATIONAL LIFE SCIENCES INC. Signature: /s/ Jean-yves Caloz ------------------------------------------ Title: Senior Vice-President, Finance and Corporate Development and Secretary Date: July 1, 1998 -70- Consumer and Corporate Affairs Canada Canada Business Corporations Act Form 4 Articles of Amendment (Section 27 or 171) 1. Name of Corporation: PHOENIX INTERNATIONAL LIFE SCIENCES, INC. 2. Corporation No.: 307972-4 3. The articles of the above-named corporation are amended as follows: PARAGRAPH 1 THEREOF IS REPLACED WITH THE FOLLOWING PARAGRAPH: PHOENIX INTERNATIONAL LIFE SCIENCES INC. Signature: /s/ Jean-yves Caloz ------------------------------------------ Title: Senior Vice-President, Finance and Corporate Development and Secretary Date: July 1, 1998 -71- Consumer and Corporate Affairs Canada Canada Business Corporations Act Certificate of Amendment PHOENIX INTERNATIONAL LIFE SCIENCES INC. Name of Corporation 307972-4 Number I hereby certify that the Articles of the above-mentioned Corporation were amended (a) under Section 13 of the Canada Business Corporations Act in accordance with the attached notice; |_| (b) under Section 27 of the Canada Business Corporations Act as set out in the attached articles of amendment designating a series of shares; |_| (c) under Section 179 of the Canada Business Corporations Act as set in the attached articles of amendment; |X| (d) under Section 191 of the Canada Business Corporations Act as set out in the attached articles of reorganization. |_| /s/ Director ------------------------- Director January 20, 1998 ------------------------- Date of Amendment -72- Consumer and Corporate Affairs Canada Canada Business Corporations Act Form 4 Articles of Amendment (Section 27 or 171) 1. Name of Corporation: PHOENIX INTERNATIONAL LIFE SCIENCES, INC. 2. Corporation No.: 307972-4 3. The articles of the above-named corporation are amended as follows: PARAGRAPH 1 THEREOF IS REPLACED WITH THE FOLLOWING: PHOENIX INTERNATIONAL LIFE SCIENCES INC. Signature: /s/ Jean-yves Caloz ------------------------------------------ Title: Senior Vice-President, Finance and Corporate Development and Secretary Date: July 1, 1998 EX-3.2 11 EXHIBIT 3.2 PHOENIX INTENTIONAL LIFE SCIENCES INC. BY-LAW NUMBER 94-1 1. CANADA BUSINESS CORPORATIONS ACT Unless otherwise provided in these by-laws, the provisions of the Canada Business Corporation Act ("Act") shall apply to the Corporation. Terms not defined in these by-laws shall have the same meanings as set forth in the Act. 2. SPECIAL MEETINGS OF SHAREHOLDERS Special meetings of shareholders may be called at any time by order of the Chairman of the Board or the President or any Vice-President of the Corporation in addition to the provisions for the calling thereof set forth in the Act. 3. PLACE OF MEETINGS OF SHAREHOLDERS Meetings of shareholders shall be held at the registered office of the Corporation or at any other place within Canada determined by the directors or, subject to the Act, at any place outside Canada. 4. PROCEDURE AT MEETINGS OF SHAREHOLDERS The Chairman of any meeting of shareholders shall conduct the procedure thereat in all respects and his decision on all matters or things, including, but without in any way limiting the generality of the foregoing, any question regarding the validity or invalidity of any instruments of proxy, shall be conclusive and binding upon the shareholders. A declaration by the Chairman at any meeting that a resolution has been carried or carried unanimously or carried by any particular majority or lost or not carried by a particular majority shall be conclusive evidence of the fact. The Chairman at any meeting of shareholders may vote as a shareholder but shall not have a second or casting vote in case of an equality of votes. A quorum of shareholders is present at a meeting of shareholders, irrespective of the number of persons actually present at the meeting, if holders of twenty-five percent (25%) of the shares entitled to vote at the meeting are present in person or represented by proxy. 5. SCRUTINEERS The Chairman at any meeting of shareholders may appoint one or more persons (who may but need not be shareholders, directors, officers or employees of the Corporation) to act as scrutineers at such meeting. 6. MEETINGS OF DIRECTORS AND NOTICES As soon as may be practicable after the annual meeting of shareholders in each year there shall be held, without notice, a meeting of such of the newly elected directors as are then present, provided they shall constitute a quorum, for the election or appointment of officers of the Corporation. Meetings of the directors may be called at any time by or by order of the Chairman of the Board, the President or any two directors, and may be held at the registered office of the Corporation, or at any other place determined by the directors. Notice specifying the place, day and time of each such meeting shall be served upon each director or left at his usual residence or usual place of business, or shall be mailed, telegraphed or cabled prepaid, addressed to each director at his address as it appears on the books of the Corporation at least 48 hours prior to the time fixed for such meeting in the case of notice served personally or telegraphed or cabled, and at least 72 hours prior to the time fixed for such meeting in other cases. 7. QUORUM AND VOTING AT MEETINGS OF DIRECTORS The directors may from time to time fix the quorum for meetings of directors, but unless so fixed a majority of the directors in office shall constitute a quorum. The Chairman at any meeting of directors may vote as a director but shall not have a second or casting vote in case of an equality of votes. 8. INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS 8.1 LIMITATION OF LIABILITY No director or officer shall be liable for the acts, receipts, neglects or default of any other director or officer or employee, or for joining in any receipt or other act for conformity, or for any loss, damage or expense happening to the Corporation through the insufficiency or deficiency of title to any property acquired for or on behalf of the Corporation, or for the insufficiency or deficiency of any security in or upon which any of the moneys of the Corporation shall be invested, or for any loss or damage arising from the bankruptcy, insolvency or tortious acts of any person with whom any of the moneys, securities or effects of the Corporation shall be deposited, or for any loss occasioned by any error of judgment or oversight on his part, or for any other loss, damage or misfortune whatever which shall happen in the execution of the duties of his office or in relation thereto, unless the same are occasioned by his own wilful neglect or default; provided that nothing herein shall relieve any director or officer from the duty to act in accordance with the Act and the regulations thereunder or from liability for any breach thereof. 8.2 INDEMNITY Subject to the limitations contained in the Act, the Corporation shall indemnify a director or officer, a former director or officer, or a person who acts or acted at the Corporation's request as a director or officer of a body corporate of which the Corporation is or was a shareholder or creditor (or a person who undertakes or has undertaken any liability on behalf of the Corporation or any such body corporate) and his heirs and legal representatives, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him in respect of any civil, criminal or administrative action or proceeding to which he is made a party by reason of being or having been a director or officer of the Corporation or such body corporate, if 8.2.1 he acted honestly and in good faith with a view to the best interests of the Corporation; and 8.2.2 in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, he had reasonable grounds for believing that his conduct was lawful. 8.3 INSURANCE Subject to the limitations contained in the Act, the Corporation may purchase and maintain such insurance for the benefit of its directors and officers as such, as the Board may from time to time determine. 9. FINANCIAL YEAR The directors may fix and from time to time change the financial year end of the Corporation. 10. DECLARATIONS Any officer, or any other person authorized by the directors, by any two officers or by the Chairman of the Board or the President, is authorized and empowered to appear and make answer for the Corporation to all writs, orders and interrogatories upon articulated facts issued out of any court, and to declare for and on behalf of the Corporation any answer to writs of attachment by way of garnishment in which the Corporation is garnishee, and to make affidavits and solemn declarations in connection therewith or in connection with any and all judicial proceedings to which the Corporation is a party, and to make petitions for winding-up or bankruptcy orders upon any debtor of the Corporation, and to attend and vote at all meetings of creditors of the Corporation's debtors and grant proxies in connection therewith. 11. REPRESENTATION AT MEETINGS Any officer, or any other person authorized by the directors, may: 11.1 represent the Corporation and attend and vote at any and all meetings of shareholders or members of any firm, syndicate, company or corporation in which the Corporation has shares or is otherwise interested, and any action taken and vote cast by him at any such meeting shall be deemed to be the act and/or vote of the Corporation; 11.2 authorize any person (whether an officer of the Corporation or not) to attend, vote and otherwise act, for and on behalf and in the name of the Corporation, at any and all meetings of shareholders or members of any firm, syndicate, company or corporation in which the Corporation has shares or is otherwise interested, and for such purpose may execute and deliver instruments of proxy in such form and terms as the person so executing and delivering the same may see fit, including therein, but without in any way limiting or restricting the generality of the foregoing, provision for the appointment of substitute proxies and the revocation of all instruments of proxy given by the Corporation prior thereto with respect to any such meeting. Enacted by the Board the 27th day of June, 1994. /S/ DR. JOHN W. HOOPER ------------------------ Dr. John W. Hooper President /S/ JEAN-YVES CALOZ ------------------------ Jean-Yves Caloz Secretary Confirmed by the Shareholders in accordance with the Act the 27th day of June, 1994. /S/ JEAN-YVES CALOZ ------------------------ Jean-Yves Caloz Secretary ADDENDUM The attached by-laws are intended to supplement the provisions of the Canada Business Corporations Act and of applicable securities laws; provisions which heretofore have normally been included in by-laws but which are set forth in the Act and applicable securities laws are not repeated in the attached by-laws; accordingly it is necessary to refer to the Act and to applicable securities laws when considering the provisions applicable to the Corporation; the following is a summary of items heretofore normally included in by-laws - the references to sections and parts are to the sections and parts of the Act and the references to by-laws are to the attached by-laws. SHAREHOLDERS Annual meetings - Subsections 133(a) and 155(1) Special meetings - Subsection 133(b) and Section 143; By-law 2 Place of meetings - Section 132; By-law 3 Notice of meetings - Sections 135 and 136; National Policy No. C-41 and adjournments and applicable securities laws Quorum - Section 139 Right to vote, proxies - Sections 140, 141 and Part XII; By-law 4; and proxy material National Policy No. C-41 and applicable securities laws Joint shareholders - Subsection 140(4) Procedure at meetings - By-law 4 Scrutineers - By-law 5 Proposals - Section 137 DIRECTORS Number - Paragraph 6(1)(e), Subsections 102(2) and Election, term of and 107(a) office and qualification - Sections 105, 106 and 116 General powers of directors - Subsection 102(1) and Section 122 Meetings and notices - Section 114; By-law 6 Quorum and voting - Section 114; By-law 7 Removal of directors - Section 109 Ceasing to hold office - Subsection 108(1) Filling vacancy - Subsection 111(1) Remuneration of directors - Section 125 Resolution in lieu of meeting - Section 117 Indemnities of directors and others - Section 124; By-law 8 Disclosure of interest - Section 120 COMMITTEES Appointment and powers - Sections 115 and 171 OFFICERS Appointment - Section 121 CAPITAL STOCK Issue of shares - Subsection 25(1) FINANCIAL YEAR AND AUDIT Financial year - By-law 9 Audit - Sections 162 and 163 FINANCIAL DISCLOSURE - Section 160; applicable securities laws CORPORATION REPRESENTATION FOR CERTAIN PURPOSES Declarations - By-law 10 Representation at meetings - By-law 11 ENACTMENT, REPEAL AND AMENDMENT OF BY-LAWS - Section 103 BY-LAW, 94-2 A BY-LAW RESPECTING THE BORROWING OF MONEY, THE ISSUING OF SECURITIES AND THE SECURING OF LIABILITIES BY PHOENIX INTERNATIONAL LIFE SCIENCES INC./ PHOENIX INTERANTIONALE SCIENCES DE LA VIE INC. BE IT ENACTED as a by-law of the Corporation as follows: 1. Without limiting the borrowing powers of the Corporation as set forth in the Act, the board may from time to time: (a) borrow money upon the credit of the Corporation; (b) issue, reissue, sell or pledge bonds, debentures, notes or other evidence of indebtedness or guarantee of the Corporation, whether secured or unsecured; and (c) mortgage, hypothecate, pledge or otherwise create an interest in or charge upon all or any property (including the undertaking and rights) of the Corporation, owned or subsequently acquired, by way of mortgage, hypothec, pledge or otherwise, to secure payment of any such evidence of indebtedness or guarantee of the Corporation. Nothing in this section limits or restricts the borrowing of money by the Corporation on bills of exchange or promissory notes made, drawn, accepted or endorsed by or on behalf of the Corporation. 2. The Board may from time to time delegate to such one or more of the directors and officers of the Corporation as may be designated by the board all or any of the powers conferred on the board by section 1 or by the Act to such extent and in such manner as the board shall determine at the time of each such delagation. ENACTED by the board the 27th day of June, 1994 President /S/ DR. JOHN W. HOOPER Secretary /S/ JEAN-YVES CALOZ ----------------------- ------------------------- DR. JOHN W. HOOPER JEAN-YVES CALOZ CONFIRMED by the shareholders in accordance with the Act the 27th day of June, 1994. Secretary /S/ JEAN-YVES CALOZ ----------------------------- JEAN-YVES CALOZ EX-4 12 EXHIBIT 4 Exhibit 4 SPECIMEN CERTIFICATE PHOENIX INTERNATIONAL [LOGO] Number OC-01831 Shares Specimen AUTHORIZED SHARE CAPITAL An unlimited number of common shares without par value and an unlimited number of preferred shares without par value issuable in series. Cusip 718919 10 3 PHOENIX INTERNATIONAL LIFE SCIENCES INC. Amalgamated under the Canada Business Corporations Act This certifies that _____________________________________is the registered holder of fully paid and non assessable common shares without par value in the share capital of PHOENIX INTERNATIONAL LIFE SCIENCES, INC. transferable only on the books of the Corporation by the registered holder hereof in person or by attorney duly authorized in writing upon surrender of this certificate properly endorsed. This certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar of the Corporation. In Witness Whereof the Corporation has caused this certificate to be signed by its duly authorized officers. Dated: ------------------------ ------------------------ ---------------------- Countersigned and Registered Vice-President Chairman, President Montreal Trust Company Finance and Corporate and Scientific Transfer Agent and Registrar Development, and Director Secretary By: --------------------------- Authorized Officer
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE TRANSFERABLE AT THE OFFICES OF THE MONTREAL TRUST COMPANY IN MONTREAL, TORONTO, HALIFAX, WINNIPEG, REGINA, CALGARY AND VANCOUVER. There are rights, privileges, restrictions or conditions attached to the shares by this certificate and the Corporation will furnish to a shareholder, on demand and without charge, a full copy of the text of (i) the rights, privileges, restrictions and conditions attached to each class authorized to be issued and to each series insofar as the same have been fixed by the directors and (ii) the authority of the directors to fix the rights, privileges, restrictions and conditions of subsequent series. For value received, the undersigned hereby sells, assigns and transfers unto - -------------------------------------------------------- Social Insurance Number: -------------------------------- _______________________ shares of the share capital represented by the within certificate and does hereby irrevocably constitute and appoint ______________________________ Attorney to transfer the said shares of the securities registers of the Corporation with full power of substitution in the premises. Date: ------------------------------ Signature: --------------------------- NOTICE: THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER. THE SIGNATURE SHOULD BE GUARANTEED BY A BANK OR BY A TRUST CORPORATION, OR BY A MEMBER OF A CANADIAN STOCK EXCHANGE WHOSE SIGNATURE IS KNOWN TO THE TRANSFER OFFICE. EX-5 13 EXHIBIT 5 Exhibit 5 MCCARTHY TETRAULT AVOCATS - AGENTS DE BREVETS & MARQUES DE COMMERCE BARRISTERS & SOLICITORS - PATENTS & TRADEMARK AGENTS "LE WINDSOR", 1170 PEEL, MONTREAL QUEBEC, CANADA H3B 4S8 FAX (514) 875-6246 - TELEPHONE (514) 397-4100 Montreal, April 7, 1999 Phoenix International Life Sciences Inc. 2350 Cohen Street Ville St-Laurent, Quebec H4R 2N6 Re: Phoenix International Life Sciences Inc. Registration Statement of Form F-4 ---------------------------------------- Sirs: We are Canadian legal counsel to Phoenix International Life Sciences Inc., a Canada corporation (the "Company"). We are issuing this opinion in connection with the Registration Statement of Form F-4 being filed by the Company with the Securities and Exchange Commission (the "Commission") on the date hereof (the "Registration Statement") for the purpose of registering with the Commission under the SECURITIES ACT OF 1933, as amended (the "1933 Act"), up to 1,500,000 shares (the "Shares") of no par value common stock of the Company, issuable pursuant to the Agreement and Plan of Merger by and among the Company, its wholly-owned subsidiary Phoenix Merger Sub Corp., a Delaware corporation ("Merger Sub") and Chrysalis International Corporation, a Delaware corporation ("Chrysalis") dated as of November 18, 1998, as amended (the "Merger Agreement"). In this connection, we have examined and are familiar with originals or copies, certified or otherwise identified to our satisfaction, of (i) the Registration Statement, (ii) the Merger Agreement, (iii) the Certificate of Amalgamation and the By-laws of the Company, as amended, each as currently in effect, and (iv) certain resolutions adopted by the Board of Directors of the Company relating to the issuance of the Shares and certain related matters. We have also examined originals or copies, certified or otherwise identified to our satisfaction, of such records of the Company and such agreements, certificates of public officials, certificates of the Company and others, and such other documents, certificates and records as we have deemed necessary or appropriate as a basis for the opinions set forth herein. In our examination, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified, conformed or photostatic copies and the authenticity of the originals of such copies. In making our examination of documents executed or to be executed by parties other than the Company, we have assumed that such parties had or will have the capacity and power, corporate or other, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate or other, and execution and delivery by such parties and the validity and binding effect thereof. As to any facts material to the opinions expressed herein which we have not independently established or verified, we have relied upon statements and representations of other officers and representatives of the Company and others contained in the Merger Agreement and in certificates. We express no opinion concerning any law other than the substantive law of the Province of Quebec and the laws of Canada applicable therein. Based upon and subject to the foregoing, we are of the opinion that the Shares have been duly authorized for issuance and, upon consummation of the merger in the manner contemplated in the Merger Agreement, the Shares will be validly issued, fully paid and non-assessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our name under the caption "Legal Opinions" in the proxy statement/prospectus included therein. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the 1933 Act or the rules and regulations of the Commission promulgated thereunder. This opinion is furnished by us, as counsel to the Company in Canada, in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the 1933 Act and, except as provided in the immediately preceding paragraph, is not to be used, circulated or quoted for any other purpose or otherwise referred to or relied upon by any other person without the express written permission of the Company. Very truly yours, McCarthy Tetrault -2- EX-8 14 EXHBIT 8 215.981.4362 arnoldj@pepperlaw.com April 7, 1999 Phoenix International Life Sciences Inc. 2350 Cohen Street Saint-Laurent, Montreal, Quebec Canada H4R 2N6 MERGER AGREEMENT DATED AS OF NOVEMBER 18, 1998 AMONG PHOENIX INTERNATIONAL LIFE SCIENCES INC., CHRYSALIS INTERNATIONAL CORPORATION AND PHOENIX MERGER SUB CORP. Ladies and Gentlemen: We have acted as counsel for Phoenix International Life Sciences Inc in connection with the proposed merger (the "Merger") of Phoenix Merger Sub Corp., a Delaware corporation (the "Sub") and a wholly owned subsidiary of Phoenix International Life Sciences Inc., a Canadian corporation ("Parent"), with and into Chrysalis International Corporation, a Delaware corporation ("Company"), pursuant to an Agreement and Plan of Merger dated as of November 18, 1998, as amended by Amendment No. 1 thereto dated as of March 24, 1999 (the "Merger Agreement"), by and among Parent, Sub and Company under which each issued and outstanding share of Company common stock, par value $.01 per share (the "Company Stock") will be converted into the right to receive common stock of Parent (the "Buyer Common Stock"). In that connection, you have requested our opinion regarding the taxability of the Buyer Common Stock received by the holders of Company Stock (in the aggregate the "Sellers") as a result of the Merger. In providing our opinion, we have examined the Merger Agreement and the proxy statement/prospectus filed on April 7, 1999 and such other documents and corporate records as we have deemed necessary or appropriate for purposes of our opinion. In addition, we have assumed that (i) the Merger will be consummated in accordance with the provisions of the Merger Agreement, (ii) the statements concerning the Merger set forth in the Merger Agreement are true, correct and complete and will continue to be true, correct and complete at all times up to and including the closing date of the Merger (the "Closing Date"), Phoenix International Life Sciences Inc. Page 2 April 7, 1999 (iii) the representations made to us by the Company and Parent in their respective letters to us each dated the date hereof, and delivered to us for purposes of this opinion are true, correct and complete and will continue to be true, correct and complete at all times up to and including the Closing Date (such letters, the "Representation Letters"), (iv) Parent and Company will complete all actions as represented in the Representation Letters that are to be completed after the Closing Date, and (iv) any representations made in the Representation Letters, the Merger Agreement, and the proxy statement/prospectus "to the best knowledge of" or similarly qualified are correct, and will continue to be true, correct and complete at all times up to and including the Closing Date, in each case without such qualification. If any of the above-described assumptions are untrue for any reason or if the Merger is consummated in a manner that is inconsistent with the manner in which it is described in the Merger Agreement or the proxy statement/prospectus, our opinions as expressed below may be adversely affected and may not be relied upon. Based upon the foregoing, in our opinion, for U.S. Federal income tax purposes, the Merger will constitute a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and will meet the requirements of Section 367 of the Code. It follows, therefore, that in our opinion, for Federal income tax purposes, the exchange by Sellers of Company Stock for Buyer Common Stock pursuant to the Merger will qualify as a tax free exchange under Section 354 of the Code, other than for Sellers who own 5% or more of Buyer Common Stock after the Merger who fail to file the gain recognition agreement as provided under Treasury Regulation Section 1.367(a)-3 and Treasury Regulation Section 1.367(a)-8. With respect to cash received for fractional shares, it is our opinion the difference between the cash received and the portion of the tax basis in the shares of the Company Stock surrendered that is allocable to the fractional shares will be capital gain or loss, assuming the Common Stock is held as a capital asset, as defined by Section 1221 of the Code by the Seller. The opinions expressed herein are based upon existing statutory, regulatory and judicial authority, any of which may be changed at any time with retroactive effect. In addition, our opinions are based solely on the documents that we have obtained, the statements contained in the Representation Letters, and the assumptions referred to above, all of which we have assumed will be true, correct and complete (without regard to any "to the best knowledge of" or similar qualification) as of the effective time of the Merger. Our opinions cannot be relied upon if any of the facts pertinent to the Federal income tax treatment of the Merger stated in such documents or in such additional information is, or later becomes, inaccurate, or if any of the statements contained in the Representation Letters, or the assumptions referred to above are, or later become, inaccurate. Finally, our opinions are limited to the tax matters specifically covered hereby, and we have not been asked to address, nor have we addressed, any other tax consequences of the Merger or any other transactions. Phoenix International Life Sciences Inc. Page 3 April 7, 1999 This opinion is being furnished to you for use in connection with the Form F-4 filed by Parent in connection with the Merger (the "Form F-4"). We consent to the filing of this opinion as an exhibit to the Form F-4. We also consent to the references to Pepper Hamilton LLP under the headings "Material Tax Consequences - TAX IMPLICATIONS OF THE MERGER TO U.S. HOLDERS OF CHRYSALIS COMMON STOCK" and "Legal Opinions" in the proxy statement/prospectus forming a part of the Form F-4. Very truly yours, Pepper Hamilton LLP EX-10.1 15 EXHIBIT 10.1 Exhibit 10.1 RESTRICTED ACCESS POLICY PHOENIX INTERNATIONAL LIFE SCIENCES INC. WORLDWIDE EXECUTIVE REMUNERATION PLAN, GRADES AND TITLES Version 1.8 September 25, 1998 THIS POLICY CONTAINS CONFIDENTIAL INFORMATION PERTINENT TO INDIVIDUAL EXECUTIVE REMUNERATION. ACCESS IS STRICTLY RESTRICTED TO MEMBERS OF THE BOARD OF DIRECTORS, THE CEO, COOS AND THE CFO 1 PHOENIX INTERNATIONAL LIFE SCIENCES INC. POLICY WORLDWIDE EXECUTIVE REMUNERATION PLAN, GRADES AND TITLES Version 1.8 September 25, 1998 1. BACKGROUND Until mid-1997, Phoenix International was primarily a Canadian-based specialized CRO, focussing on the North American market for Phase I and bioanalytical studies. However, at the time of writing Phoenix International has transformed into a global CRO with operations in many countries, and is in the process of acquiring or starting operations in other countries. It is considered important for harmonious and collaborative teamwork and to attract and retain executives, that executives in acquired companies, existing executives in Phoenix International's original operations, and newly hired executives, be remunerated on an equitable basis worldwide, and in a manner that is competitive in the international market for CRO executives. It is Phoenix International's policy that executive titles are standardized worldwide, to reflect salary grades and level of responsibility, and to ensure that executives and other senior staff relate appropriately, based on consistency of titles among all of Phoenix International's operations. This version 1.8 is the first official authorized version of this policy, although certain 1998 salary changes have been based on earlier drafts. 2. OBJECTIVES The objectives of this policy are: 2.1 To ensure that Phoenix International has a competitive and equitable Executive Remuneration Plan (ERP) that will appropriately attract, retain and reward high calibre executives at Phoenix International, in all countries in which Phoenix International has executive level personnel. 2.2 To define standard titles for executives worldwide 3. SCOPE All employees whose responsibilities, as judged by the HR committee of the Board of Directors, 2 are consistent with an executive level position in the CRO industry. This will usually apply to employees with the title of Vice President or higher. However, in some Phoenix International business units, certain employees who do not have executive responsibility have the title Vice President, based on historical practice prior to the acquisition of the business unit by Phoenix International. Such employees do not qualify for treatment under this policy. 4. RESPONSIBILITY The CEO is responsible for administration and application of this policy. He/she is also responsible for keeping records of executive salaries, bonuses, stock option eligibility and awards, and salary ranges; this responsibility may be delegated with appropriate supervision and review. 5. SALARIES, GRADES AND TITLES 5.1 ESTABLISHED EXECUTIVES An Established Executive is an executive who has served 3 or more years with Phoenix International or an organization acquired by Phoenix International, or a comparable organization, at the level of his/her current responsibilities. In general, Phoenix International pays salaries to Established Executives typical of those of the world's top 10 publicly traded CROs (most are based in the USA). These are referred to as "Salary Norms". Norms are generally maxima for executives with extensive experience, except in special circumstances (see below) since, as is common with high growth high technology-based organizations, Phoenix International prefers to pay "typical" salaries to established executives, and reward superior performance with superior annual incentives, rather than with higher than typical salaries. 5.2 NEW EXECUTIVES A New Executive is a newly appointed executive at Phoenix International who has less than three years experience with Phoenix International or a company acquired by Phoenix International or a comparable organization, at the level of his her current responsibilities. Such executives will usually be hired at salaries below the Norms, usually at the low end of the range, and may expect to progress to the Norm over a period of 1-3 years, depending on ability to meet the criteria for the position, and previous experience at the same executive level. 5.3 BASIS FOR SETTING THE NORMS 5.3.1 CEO AND COO Data on competitive salaries for the CEO and COOs are readily available from the 3 regulatory filings of publicly traded competitors. As of January 1, 1998, salaries for these positions and those with similar responsibilities will be based on the relevant (as determined by the HR Committee of the Board of Directors) mean salary for publicly traded CROs with annual net revenues of greater than or equal to US$40 million, based on the last available 12 month period published by those competitive CROs. These data will usually be adjusted for inflation, since they are typically one year out of date. When such salaries are reviewed in future years, the US$40 million threshold will be adjusted to reflect the average growth rate of the industry between the time of review of this Policy, and the last review of the Policy. 5.3.2 OTHER EXECUTIVES Data for executives below the CEO and COO levels are not generally publicly available and Norms will therefore be set by the company's Corporate Executive Committee, based on perceived market value and demand. The market for some CRO industry executives with particular qualifications or experience pays higher salaries than the CRO market for executives in general, and than other executives fulfilling similar functions in other areas of the business. These qualifications and experience are: 5.3.2.1 Executives who have an M.D. degree 5.3.2.2 Executives with advanced technical knowledge in an area where such knowledge is in great demand and short supply 5.3.2.3 Executives who are founding members of a company An executive in any of the above categories, as judged by the CEO, will normally receive a salary in a grade one higher than that justified by his/her responsibilities. In extraordinary circumstances, for industry leading executives, salaries could be two grades higher. 5.4 SALARY RANGES The market for CRO executives is a world market, with substantial executive movement within and between continents. Since the largest single-country market for CRO executives is the USA, the basis used for setting salary ranges in this Policy was US comparables in 1997, translated into Canadian dollars at the June, 1998 exchange rate. Factors affecting differences in salaries among countries include exchange rates, taxation, the purchasing power of the local currency, cost of living variations between countries, etc, and market supply and demand for executives. Although all such factors will be taken into account when translating ranges among countries, in view of the number of factors, their fluctuation, and the fact that some act positively and some negatively, the actual chosen ranges will inevitably be somewhat arbitrary. 4 For the first year of this policy, US and European ranges have been set simply using the exchange rates for the Canadian dollar prevailing at the time of original drafting of this policy (June, 1998). Critical evaluation of these ranges indicates that this produces executive salaries that are competitive at the time of writing. Salary Norms and ranges ranges for the period June 1, 1998 to May 31, 1999 are shown in Table 2, attached. Ranges are from 20% less than the Norm to 10% higher than the Norm. However, as a matter of policy, the Norm will usually be the highest salary for an executive, except in extraordinary circumstances as judged by the CEO and the HR committee of the Board of Directors, and as authorized by both the CEO and the HR Committee. 5.6 ANNUAL REVIEWS OF SALARIES, SALARY NORMS AND RANGES The basis for executive salary increases shall be the level of experience and expertise the incumbent CURRENTLY brings to the position, compared to that required of an Established Executive. Note that superior performance will be rewarded through an annual incentive (bonus and stock option) plan, and not by changes in salaries. All executive salary changes must be approved by the executive's direct supervisor and the next highest executive. For grades E1 and E2 and the CFO, all salary changes must be approved by the Human Resources Committee of the Board of Directors. The Salary Norms and ranges for executives specified in this policy will normally be changed effective May 31 of each year by the Human Resources Committee of the Board of Directors, to reflect the actual (for CEO and COO) and estimated (for all other positions) change in CRO industry executive salaries worldwide. Salaries will be reviewed annually on the anniversary of the last salary review for each executive. 5.7 GRANDFATHERED EXECUTIVES As of the implementation or revision of this policy, some existing executives may have higher salaries than the Norm for their grade, usually as a result of salary policies in companies acquired by Phoenix International, before these companies were acquired. The salaries of these executives are "grandfathered" and are not subject to reduction to match the requirements of this policy. However, while annual raises are applicable, these will normally be lower than is typical for other Phoenix International executives until such time as the salaries are compatible with Norms. 5.8 ASSIGNED AND PAID GRADES FOR INDIVIDUAL EXECUTIVES These will be listed by executive in a table maintained and updated by the CEO and made 5 available to the Human Resources Committee of the Board of Directors. 6. EXECUTIVE BONUS PLAN Annual bonuses are intended to provide an incentive for executives to achieve superior financial results and address objectives that will produce short term and/or long term beneficial change in the organization and their own performances. Only Senior Executives will benefit from the plan below. All other personnel with executive status or titles will benefit only from the company Plan for Incentives for Employees (PIE). A "Senior Executive" is an employee who is so identified by the CEO, as advised by the company's Corporate Executive Committee. Executive bonuses will consist of up to three components, based on worldwide profitability expressed as earnings per share (EPS) (Corporate Bonus), profitability (pretax profit) of the local business unit (Local Bonus), and achievement of personal objectives (Objectives Bonus). Bonuses will be paid based on % achievement for each of these components, multiplied by a "Base Bonus" for each component. Base Bonuses are specified percentages of the salary paid to the executive in the relevant fiscal year. All executive bonuses are subject to approval by the Human Resources Committee of the Board of Directors. 6.1 BASE BONUSES Bonuses are based on percentages of salary paid in the year. For 100% achievement for any component, the executive will be paid the Base Bonus for that component, as defined in the table below for various categories of executives: BASE BONUS AS % OF SALARY
CORPORATE LOCAL OBJECTIVES BASE BONUS BASE BONUS BASE BONUS Related to Related to Related to Total Corporate Fiscal Target Strategic Base Nominal Grade Net Profit Of Bus. Unit Objectives Bonus ------------- ---------- ------------ ---------- ----- CEO 37.5% 0% 12.5% 50% COO 10% 20% 10% 40% CFO 20% 0% 15% 35% Other Line Executive 7.5% 15% 7.5% 30% Staff Executive 10% 0% 15% 25%
A "Line Executive" is responsible either for a profit center, or for business development. 6 A "Staff Executive" is responsible for a cost center, or for a co-ordinating role. 6.2 CORPORATE BONUS The Corporate Bonus will be paid based on Phoenix International's worldwide earnings per share (EPS), as compared to the budgeted EPS. The Corporate Base Bonus is subject to upwards or downwards adjustments, based on an Adjustment Factor. This Factor is (% of target - 70%)/30, with a value of zero for less than or equal to 70% of target and a value of 2.0 for greater than or equal to 130% of target. Thus, the Corporate Bonus is calculated as follows: Salary Paid x [Actual EPS - 0.7 x Budgeted EPS]/[0.3 x Budgeted EPS] x Base Bonus 6.3 BASED ON PROFITABILITY OF THE LOCAL PROFIT CENTER (LOCAL BONUS) No Local Bonus, is payable if EITHER corporate or local profit achievement is less than or equal to 70% of target. The Local Bonus will be paid on the pretax profit of the local business unit. The Local Base Bonus is subject to upwards or downwards adjustments, based on an Adjustment Factor. This Factor is (% of target - 70%)/30, with a value of zero for less than or equal to 70% of target and a value of 2.0 for greater than or equal to 130% of target. Thus, this bonus is calculated as follows: Salary Paid x [Actual Pretax Profit - 0.7 x Budgeted Pretax Profit]/[0.3 x Budgeted Pretax Profit] x Base Bonus Note that for bonus purposes, local pretax profit excludes taxes and certain allocated corporate charges, but includes amortization of acquisition costs, interest charges associated with acquisition, and corporate charges for directly provided services, software, etc. 6.4 BASED ON ACHIEVEMENT OF NON-FINANCIAL OBJECTIVES (OBJECTIVES BONUS) The Objectives Base Bonus is subject to adjustment through multiplication of the Base Bonus by percentage achievement of objectives. These objectives must be agreed before the end of the first quarter of each year between the executive and his/her direct supervisor, or in the case of the CEO, with the Board of Directors. At the end of the fiscal year, the direct supervisor (or the HR Committee of the Board for the CEO) shall discuss with the executive the extent to which these objectives are achieved. While agreement between an executive and his/her supervisor on percentage completion is the objective, in the event of lack of agreement, the direct supervisor shall be the sole judge of the final percentage completion. This bonus shall be calculated as follows: Salary Paid x % Achievement of Objectives x Base Bonus 7 The Objectives Bonus is payable regardless of corporate or local financial achievement. 6.5 BONUS FOR OUTSTANDING ACHIEVEMENT WHEN FINANCIAL PERFORMANCE IS DEPRESSED If Phoenix International does not achieve 70% of its financial objectives in any particular year, and/or if a particular business unit does not achieve 70% of its financial objectives, then fiscally related bonuses may be minimal or zero. Under these circumstances, Phoenix International wishes to ensure that executives who have performed in an outstanding fashion despite the poor financial results, can be rewarded. Thus, in such years, the Human Resources Committee of the Board of Directors has the power to make Outstanding Performance Bonus awards to deserving individuals. 6.6 CALCULATION AND PAYMENT OF BONUSES All bonuses are calculated after subtraction of potential bonuses from Phoenix International's profit figures. Since this results in a circular calculation, it will be iterated several times. For bonus purposes, financial data for budgeted and actual results shall be calculated on a consistent basis. Extraordinary losses and gains will normally be excluded from such calculations. Annual Bonuses will be paid within 3 months of the end of the fiscal year. If an executive resigns or is dismissed for cause, any unpaid bonus shall be forfeited. If an executive dies, or is permanently disabled or is dismissed other than for cause, or his/her contract is not renewed, he/she shall receive, within one month of the event, a bonus proportionate to results achieved in the period between the first day of the fiscal year and the date in the fiscal year when the event occurs. 7. ANNUAL STOCK OPTION AWARDS Consistent with industry practice, annual stock option awards are provided to certain Senior Executives, as decided from time to time by the Human Resources Committee of the Board of Directors. These awards will be made each year at the first meeting of the Human Resources Committee of the Board of Directors following the fiscal year end (expected on or before November 15). The first such award will take place in the Fall of 1998. The number of options to be awarded annually will be calculated by taking the total value of the salary paid to the executive in the fiscal year, multiplying by the exchange rate of the Canadian dollar at the end of that year, multiplying by a fraction which will vary among Senior Executives, and dividing by the year end share price for Phoenix International shares in Canadian dollars. For Example, assuming the salary paid to a Senior Executive is US$150,000, a US dollar is equal to Can$1.40, and Phoenix International shares are trading at Can$15.00, and the fraction of salary is 25%, the 8 number of options to be awarded would be: 150,000 x 1.40 x 0.25/15.00 = 3,500 share options Annually awarded share options vest differently from options awarded on hiring or promotion. Annually awarded options vest 20% for each year of service following the award of such options. 8. BENEFITS Some executives will receive a car allowance. All executives will receive increased insurance coverage for death or disability. Benefits may vary by country and according to local situations and practice. 9. START UP AND FUTURE REVIEW OF THIS POLICY Phoenix International has implemented this policy by: 9.1 Adjusting salaries for incumbent executives whose salaries are significantly lower than specified by this policy. 9.2 Establishing an executive incentive scheme (bonus plan) based on corporate and local profitability and achievement of objectives. Since the company's financial resources and results, the nature of its business, and its objectives are all subject to more or less frequent change, the bonus plan is also subject to possible substantial change each year. 9.3 Providing for annual stock option awards to certain Senior Executives. 10. OVERRIDING FACTORS AND EXCEPTIONS Notwithstanding provisions elsewhere in this policy, salary increase and bonus policies and plans are contingent on the company's economic circumstances each year, and contingent on annual review by the HR committee of the Board of Directors, and approval of the Board of Directors. This review and approval shall deviate from this policy only if the economic circumstances of the company require this, or in the event of a significant performance issue for a particular executive, or in the event of a change in this policy as a result of a policy review initiated by the Board of Directors. On a country by country basis, the Chairman and CEO may authorize adjustment of the Norms for any grade except those subject to approval of the HR committee of the Board of Directors, in countries where this is necessary to reflect local conditions, such as taxation and competitive salaries in the particular country. 9 TABLE 1 TITLES, GRADES AND FUNCTIONS ----------------------------
TITLE GRADE - ------------------------------------------------------------------- Normal Founder Normal Founder/Expert Description - ------ ------- ------ -------------- ----------- Chairman and CEO Same E1 Same The company's legal Chief Executive Officer President and COO Same E2 E1* An executive responsible for all business for a country or group of countries, with combined annual net revenues in excess of US$35 million, or a corporate executive with line responsibilities second only to those of the CEO. President, CFO Same E3 E2* An executive responsible for all business for a country, or group of countries, or other independent business unit, with annual net revenues of between US$15 and $35 million, or the corporate CFO. President Same E4 E3* An executive responsible for all business for a country or independent business unit(s) with annual net revenues in the range US$7.5-15 million. Senior Vice President Same E4 E3*# A business development executive responsible for a business volume in excess of US$50 million and who has relationships with pertinent drug development executives above the Director level in client companies, or an executive responsible for a substantial business unit within an operating organization. VP (line or staff) Senior VP E5 E4*# Corporate or local Line or Staff VP with substantial direct staff management responsibilities. Business development executive responsible for an annual business volume in the range US$25-50 million and supervising greater than or equal to 4 BD - directors. VP (line or staff) Senior VP E6 E5*# Corporate or local line or staff VP with minimal staff management responsibilities, or senior director level employee with skills or knowledge in very high demand. Business Development executive responsible for annual business volume in the range US$25-50 million, and supervising less than or equal to 4 BD directors.
10 * = Founder, # = Expert 11 EX-10.2 16 EXHIBIT 10.2 Exhibit 10.2 PHOENIX INTERNATIONAL WORLDWIDE "PLAN FOR INCENTIVES FOR EMPLOYEES" [PIE] VERSION 1.3 JULY 8, 1998 1 "PLAN FOR INCENTIVES FOR EMPLOYEES" [PIE] VERSION 1.3 JULY 8, 1998 Note: This Plan refers to "business units". A business unit is a semi-autonomous operation, usually a single country operation (e.g. UK or France), but sometimes a unit within a country (e.g. Cincinnati or Neptune or the former IRG US). 1. BACKGROUND The history of employee incentives for the major business units is summarized below: 1.1 IBRD-ROSTRUM-GLOBAL (IRG) IRG Employees were awarded bonuses for the fiscal year ending December 31, 1997, totalling in excess of $900,000, despite major losses in those organizations. When Phoenix International acquired these operations, it informed IRG employees that its policy was to award bonuses only if profits were produced. This affected morale in IRG, mostly in the UK where, in contrast to IRG US which is now profitable, a significant profit in 1998 was seen by UK employees to be difficult to achieve. While profitability is and will always be a key to incentive plans, Phoenix International's Executive Committee believes that the employees of business units that are in a "recovery mode", such as the former IRG-UK, should have an incentive to perform other than salary, and it is thus revising its incentive plans to provide such encouragement. This is also true of start up operations, where profitability may not come quickly. 1.2 FRANCE (I.T.E.M.) In France, assuming the company meets certain criteria, profit sharing is compulsory by law for a business unit the size of Phoenix International France (previously I.T.E.M.). However, profits in France may be reduced by legitimate charges from corporate and European Head Offices. This could be viewed by employees as an ARTIFICIAL reduction in profitability in order to avoid profit sharing. Thus, a formal incentive plan is required in France to reward employees appropriately, if the amount provided by government-legislated profit sharing is inconsistent with amounts awarded to other Phoenix International business units with similar performance. 2 1.3 SPAIN, GERMANY (IPR) AND SWITZERLAND (ANAWA) Bonuses have been paid on a variable basis in previous years to some employees in some business units. 1.4 CINCINNATI While Cincinnati has been profitable for some periods, it has yet to be profitable for a complete fiscal year. Thus, bonuses have generally not been paid in Cincinnati. 1.5 MONTREAL In Montreal, employees have benefited from sharing of 20% of profits every year (except in loss years) since the start of the company in 1989. However, both Phoenix International's Board of Directors and its executives feel that use of a bonus formula in Montreal based entirely on local results is counter-productive in a multinational organization where mutual feeding of business between business units is desired. Additionally, the 20% of profit formula, while appropriate when Phoenix was a private company or a primarily Montreal-based public company, is an unusual formula for a multinational public company. 1.6 EMPLOYEES WITH CONTRACTUAL BONUSES Some employees have bonuses defined in their employment agreements. Such employees will not participate in this incentive plan, although they may revoke their contractual bonus at any time and become permanently subject to this plan. 2. OBJECTIVES To pay bonuses to employees based on results in the fiscal year ending August 31, that will provide an incentive to: 2.1 Maximize Corporate Net Profit 2.2 Maximize Local Net Profit 2.3 Meet or exceed the local budget 2.4 Achieve personal objectives that will assist the company in achieving its goals 3. THE INCENTIVE POOL FOR 1998 This Plan allocates a pool for incentive payments to various business units. An interim policy is 3 necessary for 1998, since it is a transition year: a) For Montreal, from a profit sharing scheme to a more formal incentive plan, equitable with business units in other countries, and b) For other operations, from their previous plans or lack of plans, to a formal plan based on performance. The interim incentive plan for 1998 reflects the pool of cash that can be made available, considering Phoenix International's profit targets. It will provide some incentive payment to all employees who perform at least adequately, regardless of whether or not their business unit is profitable in fiscal 1998. The pool of money available for incentives for fiscal 1998 will be approximately 20% of corporate net profit, and assuming current forecasts are achieved, this is estimated at approximately Can$2 million. This pool reflects the Phoenix International "Plan for Incentives for Employees", to be known as the "PIE". 4. THE 1998 INCENTIVE PLAN Phoenix International's 1998 Incentive Plan is designed to put different degrees of emphasis on each of the objectives in 2., above. Phoenix International recognizes that employees have most influence on their own activities and the results of their own business units. Nevertheless, without a strong corporate performance, and without collaboration and business sharing between business units, funds for incentive payments will not exist, and thus significant emphasis on corporate profits and international collaboration is necessary in allocating the PIE. The PIE will be allocated as follows: a) To reflect corporate net profit: 30% of the PIE b) To reward local net profit achievement: 30% of the PIE c) To reward local performance vs budget (or in 1998, forecast): 20% of the PIE d) For individual achievement and international collaboration: 20% of the PIE
Thus, 70% of the incentive payment will be largely associated with local results (Local Net Profit, Local Performance vs Budget, and Individual Achievement), and 30% with corporate performance. Some components of the PIE are allocated based partly on the percentage of the fiscal year that the business unit was part of the Phoenix International group. This will be called the Time Factor, or "TF". For example, for the former ANAWA, which will have been part of Phoenix International for 124 days as of August 31, 1998, its TF will be 124/365 = 34% of what its share would have been if it had been part of Phoenix International for a full year. Some components of the PIE are allocated based partly on the number of employees in the 4 business unit, relative to the total number of Phoenix International employees worldwide. This is called the Employee Factor, or "EF". For example, if the total number of Phoenix International employees is 1,800 and the number of employees in Montreal is 1,000, then the Montreal EF is 1,000/1,800 = 55.6%. Details of PIE allocation are as follows: 4.1 CORPORATE NET PROFIT (30%) The 30% of the PIE allocated to this category is simply multiplied by the EF to provide the piece allocated to a business unit. 4.2 LOCAL NET PROFIT (30%) Allocated proportional to actual Local Net Profit divided by Total Local Net Profit of all profitable business units. Note that if there is no Local Net Profit (i.e. a loss), then the allocation to the business unit from this piece of the PIE is zero. 4.3 LOCAL PERFORMANCE VS FORECAST (20%) This is allocated based on percentage of Net Profit (or Loss) vs forecast for 1998 (or in future years, vs budget), adjusted for the EF and for the TF. This category was included in order to reward startup and recovering business units whose forecast or budget does not predict profits, and who therefore are unlikely to benefit from 4.2, above. 4.4 INDIVIDUAL ACHIEVEMENT (20%) The 20% of the PIE allocated to this category is multiplied by the TF and the EF to arrive at the allocation for a particular business unit. 5. DISTRIBUTION OF POOLS AMONG EMPLOYEES Distribution of incentive pools among local employees is to be according to a local written policy that must be approved by the local COO and the Corporate CEO, and must be in place by July 31, 1998. The senior management of each business unit will choose a distribution plan that is consistent with the local corporate culture and objectives. Some portion of this must be based on achievement of personal objectives or performance. For all employees at Director level or higher, at least 35% of the achievement of personal objectives must reflect the extent to which they have contributed to collaboration between their own business unit and other business units, particularly business units in other countries. If an employee at Director level or higher has not had or created the opportunity to indulge in meaningful international collaboration, he/she will not be eligible for this portion of his/her bonus. 5 In France, individual bonuses will be the greater of government-mandated profit sharing (GMPS) or the bonuses derived from this plan. If the latter is higher than the GMPS, then the employee shall receive the GMPS plus the difference between bonus from this plan and the GMPS. 6. 1999 INCENTIVE PLAN 6.1 BONUS POOL Phoenix International will budget for an incentive pool of 5% of salaries (approximately $5 million). No incentive of any type, other than in 6.2, below, will be paid if corporate Net Profit is below 70% of target. The incentive pool will vary between 2.5 and 7.5% of salary for corporate profits between 70% and 130% of target, proportionate in this range. The pool will be capped at 7.5% of salaries. 6.2 RESCUE FUND A rescue fund will be established to provide incentives to outstanding performers in the event corporate profit does not reach 70% of target. This will be distributed at the discretion of Executive committee. 6.3 INCENTIVE ALLOCATION AND DISTRIBUTION To be identical to that described for 1998, above. 7. ELIGIBILITY AND PAYMENT Any full time permanent or part time permanent employee who has been employed for the last three months of the fiscal year is eligible for this plan. Employees who have worked less than a full fiscal year (but more than 3 months) and permanent part time personnel will receive a bonus payment proportional to their days of service that year. Annual bonuses will be paid within 3 months of the end of the fiscal year. If prior to payment of a bonus an employee gives notice of resignation, or his/her contract is not renewed, or he or she is dismissed, the bonus shall be forfeited. If an employee dies, or is permanently disabled, he/she or his/her estate shall receive within one month of the event a bonus proportionate to results achieved in the period between the first day of the fiscal year and the date in the fiscal year when the event occurs. 8. POSSIBLE EMPLOYEE SHARE OWNERSHIP PLAN (ESOP) Employee share ownership is seen as means of creating greater interest in profit generation among employees, and motivating and potentially profitable for the employee-investor. Phoenix International is investigating an ESOP that will allow any employee to purchase shares at market prices in an amount up to a defined percentage of annual salary. Phoenix International would make arrangements that result in an effective discount to market price for these employee share 6 purchases. These arrangements may vary with business unit, due to variations in tax and securities laws and regulations. A limit on the total benefit provided by Phoenix International will be imposed. Such share purchases would most likely be done on a regular basis through payroll deductions. Phoenix International will investigate the tax implications for employees in various countries, and the corporate and securities regulations in various countries. While viewed as desirable by management, there can be no guarantee that an ESOP will be implemented in any particular country, or at all, pending the results of these investigations and an evaluation of the cost of administering the plan. 9. POSSIBLE SHARE PURCHASES AT PUBLIC OFFERINGS It is proposed that Phoenix International offer interest free loans, repayable through payroll deductions, for employees to purchase shares at any public offering that Phoenix International may make. The shares will be held by Phoenix International as collateral until the loan is fully repaid. 10. APPROVAL OF PLAN This Plan for Incentives for Employees has been approved in principle by the Human Resources Committee of the Board of Directors of Phoenix International, and the company's Corporate Executive Committee. However, the Plan is subject to the final approval of Phoenix International's Board of Directors. 7 EX-10.3 17 EXHIBIT 10.3 Exhibit 10.3 PHOENIX INTERNATIONAL LIFE SCIENCES INC. KEY EMPLOYEE SHARE OPTION PLAN 1. PURPOSE. The Phoenix International Life Sciences Inc. Key Employee Share Option Plan (the "Plan") is intended to attract and retain highly qualified directors and employees who will be motivated toward the success of Phoenix International Life Sciences Inc. ("Phoenix") and to encourage share ownership in Phoenix by such persons. 2. NUMBER OF COMMON SHARES TO BE OFFERED. The shares subject to the options to be granted under this Plan shall be Common Shares of Phoenix ("Common Shares"). The maximum number of Common Shares that may be issued under this Plan shall not exceed 2,428,920 Common Shares. Upon the expiration, surrender or termination, in whole or in part, of an unexercised option, the Common Shares subject to such option shall be available for other options to be granted from time to time under this Plan. 3. TERMS AND CONDITIONS OF OPTION (a) EMPLOYEE ELIGIBLE TO RECEIVE OPTIONS. The individuals who shall be eligible to receive options under this Plan shall be directors, senior executives and key employees of Phoenix and its subsidiaries (the "Optionee") as the Compensation Committee of the Board of Directors of Phoenix ("Committee") from time to time shall determine. The maximum number of Common Shares that may be optioned in favour of any single Optionee will not exceed 5% of the total number of all of the outstanding Common Shares. (b) OPTION PRICE. The price at which Common Shares may be purchased under the Plan shall be the local currency equivalent on the date of grant of the option (the "Grant Date") as determined by the Committee, provided however, that such price may not be less than the average of the market price of the Common Shares for the five-day period immediately preceding the Grant Date. For the purpose hereof, "market price" shall mean: (i) the average of the high and low prices of the Common Shares on The Montreal Exchange and The Toronto Stock Exchange on a trading day, and (ii) if there was no trade for the Common Shares on one or both of such exchanges on any particular relevant trading day, then the market price will be the average of the bid and ask quotations for the Common Shares on such relevant trading day on such stock exchange. (c) OPTION PERIOD. Each option for Common Shares granted under the Plan (the "Option Shares") may be exercised at any time or from time to time as follows: (i) up to 4% of the Option Shares during the one year period following the date which is 12 months after the date of grant of such option, Page 2 (ii) up to 16% of the Option Shares during the one year period following the date which is 24 months after the date of grant of such option, (iii) up to 36% of the Option Shares during the one year period following the date which is 36 months after the date of grant of such option, (iv) up to 64% of the Option Shares during the one year period following the date which is 48 months after the date of grant of such option, and (v) up to 100% of the Option Shares following the date which is 60 months after the date of grant of such option. On the date which occurs ten years following the date of grant of an option, the option shall expire and terminate and be of no further force or effect whatsoever. (d) METHODS OF PAYMENT. The Optionee from time to time during the option period may elect to purchase all or part of the Option Shares which the Optionee is entitled to purchase by lump sum payment by delivering to Phoenix a completed stock option purchase form. Such form shall specify the number of Option Shares the Optionee desires to purchase and shall be accompanied by payment in full of the purchase price for such Option Shares. Payment can be made by cash, certified cheque, bank draft or money order payable to Phoenix. (e) WITHHOLDING. No Option Shares shall be issued by Phoenix to an Optionee until appropriate arrangements have been made for the payment of any amounts which may be withheld or paid by Phoenix with respect thereto, including, without limitation, withholding the transfer of a portion of the shares of Phoenix's stock otherwise issuable in order to satisfy all or a portion of the required withholdings or payments. (f) TERMINATION OF EMPLOYMENT OF AN OPTIONEE. In the event that an Optionee's employment with Phoenix or any subsidiary is terminated prior to the date which is ten years following the date of grant of the Optionee's option for any reason other than death, the Optionee's option may be exercised, at anytime during the period which is no more than 60 days following the date the Optionee's employment is terminated (but in no event after the date which is ten years following the date of grant of such option), as to such of the Option Shares in respect of which such option has not previously been exercised, but only to the extent that the Optionee was entitled at his termination of employment to purchase such Option Shares then exercisable pursuant to Section 3(c) above; provided, however, that in the event the employment of an Optionee who has received an option under the Plan is terminated as set forth above, the Compensation Committee of Phoenix may, in its own discretion, amend the terms of any option to permit the Optionee to exercise such options as if such Optionee's employment had not been terminated. For purposes of this Plan, the transfer of an Optionee's employment to Phoenix or to any subsidiary of Phoenix shall not be considered a termination of employment. Page 3 (g) NON-EMPLOYEE DIRECTOR CEASING TO ACT AS DIRECTOR. In the event that a non-employee director ceases to act as a director of Phoenix prior to the date which is ten years following the date of grant of the director's options, such non-employee director may exercise, at any time during the 180 days following the announcement of the quarterly results next following the date such director ceases to act as such and prior to the date which is ten years following the date of grant of the director's options, any or all of his options then exercisable pursuant to Section 3(c) above on the date he ceased to act as a director and not previously exercised; those options which are not exercisable pursuant to Section 3(c) above on or prior to the date such director ceases to act as such shall terminate on such date. (h) RIGHTS IN THE EVENT OF AN OPTIONEE'S DEATH. In the event of the death of an Optionee while in the employment of Phoenix or any subsidiary on or prior to the date which is ten years after the date of grant of the Optionee's option, the portion of the Optionee's option which is not exercisable on the date of such Optionee's death, if any, shall be accelerated so that the Optionee's option may be exercised by the Optionee's legal personal representative(s), at any time after the date of the Optionee's death up to and including (but not after) a date which is 180 days following the date of the Optionee's death (but in no event after the date which is ten years following the date of grant of such option), as to any or all of the Option Shares in respect of which such option was granted. (i) NO EMPLOYMENT RIGHT. Nothing in this Plan shall confer upon the Optionee the right to continue in the employ of Phoenix or interfere in any way with the right of Phoenix to terminate the Optionee's employment at any time and for any reason. (j) NO SHAREHOLDER RIGHTS. An Optionee shall have no rights as a shareholder with respect to any Option Shares covered by the Optionee's option until the date of the valid issuance of such shares to the Optionee and only after such shares are fully paid for. No adjustment will be made for dividends or other distributions or rights for which the record date is prior to the date of such issuance. (k) TRANSFER AND ASSIGNMENT. The Optionee's rights with respect to options granted under the Plan are not assignable or transferable by the Optionee or subject to any other alienation, sale, hypothec or encumbrance by such Optionee other than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the U.S. Internal Revenue Code. Therefore, the options are exercisable during the Optionee's lifetime only by the Optionee. The obligations of each Optionee shall be binding on his heirs, executors and administrators. (l) COMPLIANCE WITH UNITED STATES SECURITIES AND OTHER LAWS. Option Shares may be purchased only if Phoenix has obtained the necessary approvals to sell its Common Shares to Optionees who are citizens of, or who are employed in, the United States under applicable United States securities and other laws. Page 4 4. ADJUSTMENTS. Upon the happening of any of the following events, an Optionee's rights with respect to options granted under the Plan shall be adjusted as hereinafter provided. (a) In the event of any subdivision, redivision or change of the Common Shares into a greater number of shares at any time, or in the case of the issue of shares of Phoenix to the holders of its outstanding Common Shares by way of stock dividend or stock dividends (other than an issue of shares to shareholders pursuant to their exercise of options to receive dividends in the form of shares of Phoenix in lieu of cash dividends declared payable in the ordinary course by Phoenix on its Common Shares), the number of Common Shares deliverable by Phoenix upon the exercise of an option shall be appropriately increased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, redivision or change. (b) In the event of any consolidation or change of the Common Shares into a lesser number of shares at any time, the number of Common Shares deliverable by Phoenix upon the exercise of an option shall be appropriately decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such consolidation. (c) In the event of any reclassification or reclassifications of the Common Shares, an Optionee shall accept, at the time of purchase of Option Shares, in lieu of the number of Common Shares in respect of which the option to purchase is being exercised, the number of shares of Phoenix of the appropriate class or classes as the Optionee would have been entitled as a result of such reclassification or reclassifications had the option been exercised before such reclassification or reclassifications. (d) If Phoenix is to be amalgamated with or acquired by another entity in a merger, a sale of all or substantially all of Phoenix's assets or otherwise (an "Acquisition"), the Committee or the Board of Directors or any entity assuming the obligations of Phoenix under the Plan (the "Successor Board") shall, as to outstanding options, either (i) make appropriate provision for the continuation of such options by substituting on an equitable basis for the shares then subject to such options the consideration payable with respect to the outstanding Common Shares in conjunction with the Acquisition; or (ii) upon written notice to the Optionees, provide that all options must be exercised, to the extent then exercisable, within a specified number of days of the date of such notice, at the end of which period the options shall terminate; or (iii) terminate all options in exchange for a cash payment equal to the excess of the fair market value of the shares subject to such options (to the extent then exercisable) over the exercise price thereof. (e) In the event of the proposed dissolution or liquidation of Phoenix, each option will terminate immediately prior to the consummation of such proposed action or at such other time and subject to such other conditions as shall be determined by the Committee. (f) Except as expressly provided herein, no issuance by Phoenix of shares of any class, or securities convertible into shares of any class, shall affect, and no adjustment by reason thereof Page 5 shall be made with respect to, the number or price of shares subject to options. No adjustments shall be made for dividends paid in cash or in property other than securities of Phoenix. (g) No fractional shares shall be issued under the Plan and the Optionee shall receive from Phoenix cash in lieu of such fractional shares. (h) Upon the happening of any of the foregoing events described in subparagraphs (a), (b), (c) or (d) above, the aggregate number of shares set forth in paragraph 2 that are subject to options which previously have been or subsequently may be granted under the Plan shall also be appropriately adjusted to reflect the events described in such subparagraphs. The Committee or the Successor Board shall determine the specific adjustments to be made under this paragraph 4 and, subject to paragraph 5, its determination shall be conclusive. 5. ADMINISTRATION. This Plan shall be administered by the Compensation Committee. Members of the Committee shall be appointed by the Board of Directors of Phoenix and shall serve as such at the pleasure of the Board of Directors. The Committee shall have full power and authority to designate those directors, senior executive officers and key employees of Phoenix and its subsidiaries who are to be granted options under this Plan, the number of options to be granted and otherwise to interpret and construe the terms and conditions of the options granted under this Plan. Any determination by the Committee shall be final and conclusive unless otherwise determined by the Board of Directors of Phoenix, and in any such event such determination of the Board of Directors shall be final and conclusive. The day-to-day administration of this Plan may be delegated to such officers and employees of Phoenix or of any subsidiary of Phoenix as the Committee in its sole discretion shall determine. 6. AMENDMENT AND DISCONTINUANCE. The Board of Directors of Phoenix shall have the right to amend, modify or terminate this Plan or any option granted under this Plan at any time without notice; provided, however, that any such amendment or modification of this Plan which increases the total number of Common Shares which are to be offered under this Plan, as so amended or modified, shall be approved by the shareholders of Phoenix. Any amendment or modification of this Plan or of any option granted under this Plan, will be subject to the prior approval of The Montreal Exchange, The Toronto Stock Exchange and any regulatory body requiring similar approval. 7. QUEBEC STOCK SAVINGS PLAN. According to the current provisions of the TAXATION ACT (Quebec) (the "Act"), Option Shares issued to an Optionee under the Plan will qualify for inclusion in a Quebec Stock Savings Plan ("QSSP"), subject to certain conditions set forth in the Act. An Optionee who is a Quebec resident on the last day of a year will be entitled to deduct in the calculation of his taxable income the adjusted cost of Option Shares purchased in the year under the Plan and included in a QSSP no later than January 31 of the following year. The adjusted cost will be determined in accordance with the rates of deduction in effect at the time an option is exercised, based however on the characteristics of Phoenix and of the Option Shares at the date of the Page 6 exemption from filing a prospectus. The deduction allowed for an individual regarding all shares included in a QSSP during a given taxation year, including those purchased under the Plan, may not exceed 10% of his total income for the year. IT IS POSSIBLE THAT UPON EXERCISE OF OPTIONS, THE OPTION SHARES THEN ISSUED BY PHOENIX MAY NO LONGER BE ELIGIBLE FOR INCLUSION IN A QSSP BY REASON OF AMENDMENTS WHICH MAY HAVE BEEN MADE TO THE ACT SUBSEQUENT TO THE DATE HEREOF. ACCORDINGLY, THERE IS NO ASSURANCE THAT AT THE TIME OF EXERCISE OF OPTIONS, THE OPTION SHARES WILL CONTINUE TO BE ELIGIBLE FOR INCLUSION IN A QSSP. OPTIONEES WHO ARE RESIDENT IN QUEBEC SHOULD CONSULT WITH THEIR TAX ADVISORS WITH REGARD TO QUESTIONS CONCERNING THE QSSP. 8. TERMINATION OF THE PLAN. The Plan shall remain effective until terminated by the Board of Directors of Phoenix provided that the termination of the Plan shall have no effect on outstanding options, which shall remain in accordance with their terms and conditions and the terms and conditions of the Plan. 9. NO CORPORATE ACTION RESTRICTION. Nothing contained in the Plan shall be construed to prevent or preclude Phoenix from taking any corporate action which is deemed by Phoenix to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Plan or any option award made under the Plan. No Optionee, beneficiary or other person shall have any claim against Phoenix as a result of such corporate action. 10. GOVERNING LAW. The Plan and the options granted under the Plan shall be construed in accordance with and be governed by the laws of the Province of Quebec and the laws of Canada applicable therein. Dated this 24th day of October, 1994, amended to increase the total number of Common Shares which are to be offered under this Plan on December 18, 1997. EX-10.4 18 EXHIBIT 10.4 EMPLOYMENT AGREEMENT AGREEMENT ENTERED INTO AT MONTREAL, THIS 2ND DAY OF JUNE, 1998. BY AND BETWEEN: PHOENIX INTERNATIONAL LIFE SCIENCES INC., corporation duly incorporated according to law, having a place of business in the Province of Quebec, herein acting and represented by Claude Forget, Dave Goldman, Dr. Bert Spilker, Dr. Lucien Steru, Robert Raich, and duly authorized for the purposes hereof as they hereby declare (hereinafter referred to as "Phoenix"), AND; DR. JOHN W. HOOPER, residing and domiciled in the City of Hudson, Province of Quebec (hereinafter referred to as "JH") WHEREAS JH is currently employed by Phoenix and holds the position of Chairman of the Board and Chief Executive Officer of Phoenix; WHEREAS the parties hereto wish to amend certain terms and conditions of JH's employment with Phoenix and wish to provide that the terms and conditions contained herein shall supersede all previous terms and conditions relating to JH's employment with Phoenix, unless specifically provided herein. NOW, THEREFORE, FOR THE REASONS SET FORTH ABOVE, AND IN CONSIDERATION OF THE MUTUAL PREMISES AND AGREEMENTS HEREINAFTER SET FORTH, THE PARTIES HERETO ACKNOWLEDGE AND AGREE AS FOLLOWS: 1. PREAMBLE 1.1 The preamble hereto shall form an integral part hereof as if recited herein at length. 2. NATURE AND TERM OF SERVICES 2.1 The parties hereto hereby agree that the terms and conditions contained herein shall apply to JH's employment with Phoenix and shall supersede all previous agreements and terms and conditions relating to JH's employment with Phoenix, unless specifically provided herein. 2.2 The term of the present Agreement (the "Term") begins on January 1, 1998 and shall continue for an indeterminate period unless terminated in accordance with the provisions of the present Agreement. 2.3 JH agrees that he shall, during the Term, continue to provide the services that he is currently providing to Phoenix on a full-time basis. Without limiting the generality of the foregoing, in addition to the above mentioned services, JH shall do whatever is required of him during the Term to hire and train a person to replace him as Chief Executive Officer of Phoenix (hereinafter the "Services"). 2.4 JH shall use his best efforts in providing the Services and in fulfilling his duties and obligations hereunder pursuant to the terms hereof. 3. COMPENSATION 3.1 As consideration for the Services rendered pursuant to this Agreement, and in further consideration for the confidentiality, non-competition and non-solicitation covenants described in Article 4, 5, 6, 7 hereof, Phoenix shall pay to JH an annual salary of $400,000 for each year of the Term. 3.2 JH shall continue to be eligible for a merit bonus, subject to the discretion of the Board of Directors of Phoenix and to be determined in a manner consistent with other senior executives of Phoenix. 3.3 For the duration of the Term, JH shall be entitled to the following annual car allowance and maximum annual car mileage allowance: 3.3.1 Annual car allowance - $6,000 3.3.2 Annual maximum car mileage allowance - $7,500 (upon presentation of appropriate receipts). 4. CONFIDENTIALITY AND NON-COMPETITION 4.1 JH agrees to be bound by the provisions of that "Confidentiality, Proprietary Rights, Regulatory and Non-Competition" agreement dated May 7, 1998, a copy of which is attached hereto under Schedule A. For greater certainty, JH hereby agrees that the foregoing shall also apply during the term of the New Agreement, if any. 5. TERMINATION 5.1 The present Agreement may be terminated by either party, by written notice at least three (3) months prior to the effective date of termination, however, such notice may not be given prior to September 30, 1999. 6. OTHER-MATTERS -2- 6.1 Upon the termination of the Term and subject to the agreement of both parties hereto, Phoenix and JH may enter into an employment agreement (the "New Agreement") whereby JH provides services to Phoenix for a fee, the whole subject to the approval of the Board of Directors of Phoenix and Phoenix's new Chief Executive Officer. The fee for JH's services shall be $1,000 per day of services. If such a New Agreement is concluded, it may be terminated by either party thereto at any time, subject to a three (3) month prior notice to the other party. 6.2 The terms of the interest free loan currently due by JH to Phoenix shall continue to apply during the Term and during the term of the New Agreement, as the case may be. The foregoing amount shall immediately be reimbursed by JH to Phoenix upon the termination of the present Agreement or upon termination of the New Agreement, its the case may be. 6.3 All health, disability or other executive benefits which are specified in the current Executive Benefits Plan, as such plan may be amended from time to time, shall be provided to JH during the Term, and during the term of the New Agreement, as the case may be, and shall immediately cease upon the termination of the present Agreement or upon the termination of the New Agreement, as the case may be. 6.4 JH's stock options pursuant to Phoenix's Key Employee Share Option Plan shall expire in accordance with the said plan, that is, sixty (60) days following the termination of the present Agreement or upon termination of the New Agreement, as the case may be. 6.5 During the Term, as well as during the term of the New Agreement, as the case may be, JH shall be eligible to receive a bonus as well as annual stock grants in accordance with the executive bonus plan and the Key Employee Share Option Plan in effect at such time (and based on the position that JH will be occupying at such time) and as determined by the Board of Directors of Phoenix. 6.6 The parties hereto acknowledge that if they enter into the New Agreement, as the case may be, JH will be an employee of Phoenix pursuant to the terms thereof. 7. SEVERANCE 7.1 Following the termination of the Term in accordance with the provisions of the present agreement, Phoenix shall pay to JH the following amount: 7.1.1 If the parties hereto do not enter into the New Agreement, JH shall receive as severance the sum of $750,000 payable in sixty (60) equal, consecutive, monthly payments of $12,500, the first such payment being due and payable upon the expiry of the Term; or 7.1.2 If the parties hereto enter into the New Agreement and the New Agreement is terminated prior to the day that is one year from the beginning of the term of the -3- New Agreement, JH shall receive as severance the sum of $700,000 payable in sixty (60) equal consecutive monthly payments of $11,666, the first such payment being due and payable upon the termination of the New Agreement; or 7.1.3 If the parties hereto enter into the New Agreement and the New Agreement is terminated on or after the day that is one year from the beginning of the term of the New Agreement but prior to the day that is two years from the beginning of the term of the New Agreement, JH shall receive as severance the sum of $600,000 payable in sixty (60) equal, consecutive, monthly payments of $10,000, the first such payment being due and payable upon the termination of the New Agreement; of 7.1.4 If the parties hereto enter into the New Agreement and the New Agreement is terminated on or after the day that is two years from the beginning of the term of the New Agreement, JH shall receive as severance the sum of $500,000 payable In sixty (60) equal, consecutive, monthly payments of $8,333.33, the first such payment being due and payable upon the termination of the New Agreement; 8. MISCELLANEOUS 8.1 This Agreement shall be binding upon and shall enure to the benefit of the parties hereto, and any successor to or assignee of all or substantially all of the business and property of Phoenix. In addition, Phoenix may assign its rights hereunder to a direct or indirect subsidiary, affiliated company, or division of Phoenix without the consent of JH. For greater certainty, in the event of the death of JH, after the termination of the Term, the sums payable in accordance with Section 6 shall be payable to JH's estate. 8.2 This Agreement contains the entire agreement relating to JH's employment with Phoenix, and shall not be modified except in writing by the parties hereto. Furthermore, the parties hereto specifically agree that all prior agreements, whether written or oral, relating to the Services shall be of no further force or effect from and after the date hereof, other than as provided herein. 8.3 If any phrase, clause or provision of this Agreement is declared invalid or unenforceable by a court of competent jurisdiction, such phrase, clause or provision shall be deemed severable from this Agreement, but will not effect any other provisions of this Agreement which otherwise shall remain in full force and effect. If any restriction or limitation in this Agreement is deemed to be unreasonable, onerous and unduly restrictive by a court of competent jurisdiction, it shall not be stricken in its entirety and held totally void and unenforceable, but shall remain effective to the maximum extent permissible within reasonable bounds. 8.4 The waiver by JH or Phoenix of any breach of any term or condition of this Agreement shall not be deemed to constitute the waiver of any other breach of the same or any other term or -4- condition hereof. 8.5 The parties hereto agree that this Agreement shall be construed as to both validity and performance and shall be enforced in accordance with and governed by the laws of Quebec and the laws of Canada applicable therein. 8.6 The parties hereto have requested that this Agreement and all documentation relating thereto be drafted in English. LES PARTIES AUX PRESENTES ONT DEMANDE QUE CE CONTRAT ET TOUTES AUTRES DOCUMENTS Y AFFERENTES SOIENT REDIGEES EN ANGLAIS. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. PHOENIX INTERNATIONAL LIFE SCIENCES INC. Per: /s/ Claude Forget ----------------------------------- Claude Forget Per: /s/ Dave Goldman ----------------------------------- Dave Goldman -5- EX-10.5 19 EXHIBIT 10.5 Exhibit 10.5 Page 1 EMPLOYMENT AGREEMENT AGREEMENT ENTERED INTO AT MONTREAL, THIS 18th DAY OF NOVEMBER, 1998. BY AND BETWEEN: PHOENIX INTERNATIONAL LIFE SCIENCES INC., a corporation duly incorporated according to law, having a place of business in the Province of Quebec, herein acting and represented by Dr. John W. Hooper, duly authorized for the purposes hereof as he hereby declares (hereinafter referred to as "Phoenix"), AND: JEAN-YVES CALOZ, residing and domiciled at , in the City of Calabasas, California, USA (hereinafter referred to as "JYC") WHEREAS JYC is currently employed by Phoenix and holds the position of Senior Vice-president, Chief Financial Officer and Secretary; WHEREAS the parties hereto wish to provide that the terms and conditions of JYC's employment shall change,and his employment shall be limited as to term, in recognition of his having moved to the Los Angeles, California area with no prior notification by JYC to Phoenix of this move. NOW, THEREFORE, FOR THE REASONS SET FORTH ABOVE, AND IN CONSIDERATION OF THE MUTUAL PREMISES AND AGREEMENTS HEREINAFTER SET FORTH, THE PARTIES HERETO ACKNOWLEDGE AND AGREE AS FOLLOWS: 1. PREAMBLE 1.1 The preamble hereto shall form an integral part hereof as if recited herein at length. 2. NATURE AND TERM OF SERVICES 2.1 The parties hereto hereby agree that the terms and conditions which currently apply to JYC's employment with Phoenix shall continue to apply for the term specified herein, Page 2 unless specifically provided herein. 2.2 Subject to the provisions of paragraph 6.1, the parties hereto agree that JYC's employment with Phoenix shall terminate no earlier than March 1, 1999, and thereafter the earlier of when he has obtained alternative employment, or on August 31, 1999 (the "Expiry of the Term"). JYC will make all best efforts to obtain alternative employment as soon as possible. However, JYC agrees not to leave Phoenix before March 1, 1999. 2.3 JYC agrees that until December 31, 1998, he shall continue to provide the services that he is currently providing to Phoenix on the basis of four (4) days per week, namely three (3) days per week in Montreal (Monday, Tuesday and Wednesday) and one (1) day per week in California (Thursday). As of January 1, 1999, JYC will provide the bulk of his services from Phoenix's Irvine Office, and will travel to Montreal only on prior approval by Phoenix's CEO. In weeks where JYC does not travel to Montreal, he will work the normal 5 days per week. Without limiting the generality of the foregoing, JYC shall do whatever is required of him, when instructed by Phoenix's CEO from time to time, to rapidly and permanently transfer his current responsibilities to the person replacing him as Chief Financial Officer in Montreal. 2.4 JYC shall use his best efforts in providing the Services and in fulfilling his duties and obligations hereunder pursuant to the terms hereof. 2.5 Effective November 15, 1998, JYC's title shall be Senior Vice President, International Finance and Acquisitions. 3. COMPENSATION 3.1 As consideration for the Services rendered pursuant to this Agreement, and in further consideration for the confidentiality, non-competition and non-solicitation covenants described in Article 4 hereof, Phoenix shall, until the termination of the present Agreement, continue to pay to JYC the salary that he is currently being paid (hereinafter the "Salary"). However, JYC shall no longer be eligible for annual stock option awards. 3.2 JYC shall continue to be eligible for a merit bonus, subject to the discretion of the Human Resources Committee of the Board of Directors of Phoenix (HRCB) and to be determined by the HRCB in a manner consistent with other senior executives of Phoenix. 3.3 The parties hereto hereby declare that at the time of execution of the present agreement, they have no intention of renewing the present Agreement. However, if both parties agree, the present Agreement may be renewed. The foregoing provision shall not bind Phoenix in any manner whatsoever. Page 3 3.4 The terms of the interest free loan of $60,000 currently due by JYC to Phoenix shall continue to apply until the termination of the present Agreement. The foregoing amount shall immediately be reimbursed by JYC to Phoenix upon the termination of the present Agreement. 3.5 The terms of any health disability or other executive benefits plan which currently apply to JYC shall continue to apply until the Expiry of the Term and shall immediately cease upon the termination of the present Agreement. 3.6 JYC's stock options pursuant to Phoenix's Key Employee Share Option Plan shall expire as of December 1, 1999, regardless of the date his employment with Phoenix terminates. All options outstanding but not vested at the date or termination of JVC's employment shall be vested as of that date. Notwithstanding the foregoing, all changes in the status or stock options are subject to the approval of the HRBC. 3.7 For greater certainty, JYC shall be entitled to no additional compensation, other than as provided in the present Agreement. 4. CONFIDENTIALITY AND NON-COMPETITION 4.1 JYC agrees to be bound by the provisions of that "Confidentiality, Proprietary Rights, Regulatory and Non-Competition" agreement dated November 15, 1998, a copy of which is attached hereto as Schedule A. 5. EXPENSES 5.1 All costs and expenses incurred by JYC, until the termination of the present Employment Agreement, in the performance of the Services shall be reimbursed by Phoenix in the manner and as is currently the practice between JYC and Phoenix, provided such costs and expenses are incurred in the normal course of business. With reference to the costs incurred by JYC in travelling between his home in Los Angeles, CA to Montreal in order to fulfill his job functions, these costs and expenses may be terminated at any time at Phoenix's Option. 6. TERMINATION 6.1 In the event of a breach by JYC of any of the terms and conditions of the present Agreement, or upon death or permanent disability such that JYC cannot perform the services hereunder, or for any other just cause, this Agreement may be terminated by Phoenix without notice or penalty. Notwithstanding the foregoing, any Salary earned by JYC prior to such termination shall remain payable by Phoenix to JYC. In the event of JYC's death, all invested options shall be fully vested as of the date of his death. Page 4 6.2 The present Agreement may be terminated by JYC after March 1, 1999, by a Thirty (30) day written notice to Phoenix, which may be waived by Phoenix at its option. 7. MISCELLANEOUS 7.1 This Agreement contains the entire agreement relating to JYC's employment with Phoenix, and shall not be modified except in writing by the parties hereto. Furthermore, the parties hereto specifically agree that all prior agreements, whether written or oral, relating to the Services shall be of no further force or effect from and after the date hereof, other than as provided herein. 7.2 If any phrase, clause or provision of this Agreement is declared invalid or unenforceable by a court of competent jurisdiction, such phrase, clause or provision shall be deemed severable from this Agreement, but will not effect any other provisions of this Agreement, which otherwise shall remain in full force and effect. If any restriction or limitation in this Agreement is deemed to be unreasonable, onerous and unduly restrictive by a court of competent jurisdiction, it shall not be stricken in its entirety and held totally void and unenforceable, but shall remain effective to the maximum extent permissible within reasonable bounds. 7.3 The waiver by JYC or Phoenix of any breach of any term or condition of this Agreement shall not be deemed to constitute the waiver of any other breach of the same or any other term or condition hereof. Notwithstanding as well, all provisions relating to health disability benefits or life insurance will continue. 7.4 The parties hereto agree that this Agreement shall be construed as to both validity and performance and shall be enforced in accordance with and governed by the laws of Quebec and the laws of Canada applicable therein. 7.5 The parties hereto have requested that this Agreement and all documentation relating thereto be drafted in English. LES PARTIES AUX PRESENTES ONT DEMANDE QUE CE CONTRAT ET TOUTES AUTRES DOCUMENTS Y AFFERENTES SOIENT REDIGEES EN ANGLAIS. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. PHOENIX INTERNATIONAL LIFE SCIENCES INC. per: /s/ Dr. John W. Hooper --------------------------------------- Dr. John W. Hooper Page 5 /s/ Jean-Yves Caloz --------------------------------------- JEAN-YVES CALOZ EX-10.6 20 EXHIBIT 10.6 EXHIBIT 10.6 EMPLOYMENT AGREEMENT Lucien Steru, M.D. August 7th, 1997 31 Rue Robert de Flers 75015 Paris France Dear Mr. Steru, The undersigned, Phoenix International Life Sciences Inc. (Phoenix) hereby offers you employment subject to the following terms and conditions: 1. You hereby agree to commence employment with Phoenix on August 7th. 1997, on a full-time basis. You agree to continue to work for Phoenix, in the role specified below, or any other role you are assigned by mutual agreement, for a period of two years. In the three months prior to the expiration of this Employment Agreement, the parties may negotiate a further contract for continued employment. 2. Your titles shall be President, Phoenix International Life Sciences-Europe and President, Phoenix International Life Sciences (France) [formerly I.T.E.M.], reporting initially to the Phoenix's Chairman and CEO. You will be the Chairman of the Phoenix-Europe Executive Committee, and a member of the Board of Directors of Phoenix International Life Sciences Inc . Your initial duties will be described in a Position Description to be agreed with Phoenix's Chairman and CEO. 3. Your starting gross annual remuneration shall be 1,580,000 French francs. You will receive annual increases based on your ability to fulfill the position description and consistent with Phoenix's executive salary administration policies. You will also be reimbursed for kilometers traveled in your car on company business at the rate established from time to time by Phoenix. You have indicated you have or will establish residency in Brussels, Belgium. Phoenix will reimburse you for all reasonable travel expenses incurred for you and your family to move to Brussels, and for transport of your house furnishings and other personal effects to Brussels, to a maximum of 100,000 French francs. Please be advised that legal and real estate fees or charges of any type other than specified above are not reimbursable. Health insurance and other benefits comparable to those previously provided to you and your family by ITEM, will be provided at Phoenix's expense. 4. You will be entitled to 5 weeks (25 working days) annual vacation. 5. You will be eligible to receive a bonus following the end of each financial year, based on the Executive Bonus Plan approved by the Human Resources Committee of Phoenix's Board of Directors. Please note that this plan is subject to change on an annual basis. 6. Within one week of your first day of employment at Phoenix you will be awarded options to purchase 62,500 Phoenix shares. These options may be exercised as they become vested, subject to securities commission and stock exchange regulations. The options vest progressively each year on the anniversary of the date of granting of the options, as follows: Year Cumulative % Vested ---- ------------------- 1998 4% 1999 16% 2000 36% 2001 64% 2002 100% If your employment with Phoenix ceases before the anniversary date of the granting of options in the year 2002, you will have 60 days after your employment ceases to exercise vested options. Subsequent to this 60 days, all options will expire automatically. The option price shall be the average Market Price on the five trading days preceding the day the options are awarded to you. Market Price is defined as the average of the high and low prices of Phoenix's Common Shares on the Montreal Exchange and the Toronto Exchange on a trading day or, if there were no trades that day, the average of the bid and ask quotations for that day. If a take over bid for Phoenix common shares results in a change in legal control of Phoenix, defined as a person or persons achieving beneficial ownership of voting shares carrying more than 50% of the votes for the election of directors of Phoenix, or if Phoenix elects to sell substantially all of its assets, then all options for the purchase of shares held by you will vest and become exercisable, contingent on securities regulations. You and Phoenix agree that the other terms and conditions of Phoenix's Key Employee Share Option Plan (attached; Schedule A), as amended from time to time, shall apply. This offer of stock options is conditional on signature of the attached Confidentiality, Proprietary Rights, Regulatory Compliance and Non-Competition Agreement that requires, among other things, that you not compete with Phoenix for two years after leaving the company. 7. If, you are dismissed other than for cause, then you will receive a severance payment of 6 month's salary, in monthly installments, and the non-competition aspects of the Confidentiality, Proprietary Rights, Regulatory Compliance and Non-Competition Agreement you have signed, shall become null and void 6 months after your employment with Phoenix ceases. You affirm that you commit to remaining employed by Phoenix for 2 years. If you wish to terminate your employment with Phoenix subsequent to the expiration of 2 years of employment, you agree to give 6 months notice of termination of employment. 8. It is agreed that the obligations of Phoenix pursuant to Sections 3, 4, 5, 6 and 7 will only commence once you have started work on a full time basis with Phoenix accordance with Section 1 hereof. 9. During your employment you shall devote your full time and efforts to Phoenix and shall not, directly or indirectly, engage in any business competitive with or similar to any business carried on by Phoenix, its subsidiaries, affiliates or alliance partners. 10. You shall sign concurrently herewith a Confidentiality, Proprietary Rights, Regulatory Compliance and Non-Competition Agreement (Schedule B; also associated code of conduct) with Phoenix, as amended from time to time, which Agreement shall be, in form and content, satisfactory to Phoenix. 11. You hereby agree that any breach by yourself of Sections 1 or 9 of this Employment Agreement, or of the Confidentiality, Proprietary Rights, Regulatory Compliance and Non-Competition Agreement, will entitle Phoenix to damages of Can$200,000, which amount shall not be reduced for partial performance or any other reason whatsoever. You also agree that any breach of the Non-Competition or Non-Solicitation provisions of the Confidentiality, Proprietary Rights, Regulatory Compliance and Non-Competition Agreement will entitle Phoenix to damages of Can$1,000,000. which amount shall not be reduced for partial performance or any other reason whatsoever. You will not be considered in breach of Section 1 of this Employment Agreement if you are unable to start work with Phoenix on the date specified in Section 1, due to illness or other personal indisposition. 12. You understand fully the provisions of this Agreement and the Confidentiality, Proprietary Rights, Regulatory Compliance and Non-Competition Agreement, having had ample opportunity to review same and consult counsel, if desired. You recognize that, consistent with Phoenix's policies for all of its executives and senior managers who have equity in the company or who receive stock options, this agreement binds you to non-competition restrictions after your employment with Phoenix ceases. 13. The parties have agreed that this Agreement be drafted in English. Les parties ont convenue que cette convention soit redigee en anglais. 14. This agreement shall be interpreted under the laws of Belgium. If you are in agreement with the above mentioned terms and conditions, kindly signify your consent by initialing each page and signing a counterpart of this letter. Yours very truly, Phoenix International Life Sciences Inc. /s/ John W. Hooper ------------------------- per John W. Hooper, Ph.D. Chairman and CEO Accepted on this 7th day of August, 1997. /s/ Lucien Steru - ----------------------------- Signature of Dr. Lucien Steru EX-10.7 21 EXHIBIT 10.7 Exhibit 10.7 EMPLOYMENT AGREEMENT BETWEEN: PHOENIX INTERNATIONAL LIFE SCIENCES INC., a corporation duly incorporated under the laws of Canada, having its head office at 2350 Cohen Street, in the City of Saint-Laurent, Quebec, and represented herein by its duly authorized representative, (hereinafter called "PHOENIX") AND: STEPHANE HUGUET, M.D., domiciled and residing at 145 Linwood Crescent, Town of Mount Royal, Quebec H3P 1J1, (hereinafter called "DR. HUGUET") WHEREAS Phoenix wishes to retain the services of Dr. Huguet on the terms and conditions hereinafter set forth; and WHEREAS Phoenix acknowledges that Dr. Huguet enters into this Employment Agreement in consideration of Phoenix's undertaking that it EXPECTS THAT WITHIN THREE (3) WEEKS AND IN ANY CASE NO LATER THAN THREE (3) MONTHS AFTER SIGNATURE OF THIS EMPLOYMENT AGREEMENT, IT WILL obtain the necessary certificate of acceptance or employment authorization for Dr. Huguet; and WHEREAS Phoenix and Dr. Huguet wish to acknowledge by this agreement their mutual rights and obligations with respect to Dr. Huguet's employment by Phoenix. NOW THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto hereby agree as follows: 1 PREAMBLE 1.1 The preamble is deemed to form part of this agreement. 2 POSITION 2.1 Dr. Huguet's title with Phoenix shall be President and Chief Operating Officer, PHOENIX CANADA (a division of Phoenix), reporting to the Chairman and CEO of Phoenix. Dr. Huguet will be a member of the company's corporate Executive Management Committee, together with the CEO and other executives. (see attached Schedule "A" entitled "Initial Position Description"). 3 OTHER EMPLOYMENT AND DUTY TO DEVOTE WHOLE TIME 3.1 Dr. Huguet agrees that during the term of his employment, he shall devote his full time and efforts to Phoenix and shall not, directly or indirectly, engage in any business competitive with or similar to the business carried on by Phoenix. 4 REMUNERATION AND OTHER BENEFITS 4.1 Signing bonus: Upon execution of this agreement and in consideration thereof Dr. Huguet shall be entitled to receive a signing bonus of $100,000, less applicable deductions, which will be paid immediately by Phoenix to Dr. Huguet as a lump sum payment. 4.2 BASE SALARY: Dr. Huguet's starting annual salary shall be $240,000, less all applicable deductions, PAYABLE BI-WEEKLY IN ARREARS. 4.3 BASE SALARY INCREASES: Dr. Huguet will BE ELIGIBLE TO receive annual increases of his base salary. Said increases will be based on his ability to fulfill the position description and consistent with decisions of Phoenix's Board of Directors. 4.4 CAR EXPENSES: DR. HUGUET WILL RECEIVE A CAR ALLOWANCE OF $5,000 ANNUALLY. 2 4.5 HOUSE RENT: PHOENIX WILL PAY THE GROSS RENT ON DR. HUGUET'S HOUSE, ON A MONTHLY BASIS. THIS RENT IS CURRENTLY $4,000 MONTHLY. PHOENIX WILL PAY FOR REASONABLE INCREASES IN RENT, AS NEGOTIATED WITH THE OWNER. 4.6 BENEFIT PLANS: Subject to completion by Dr. Huguet of any medical examinations and other like procedures and such inquiries required by Phoenix's insurers, Phoenix shall pay and maintain a short term and long term disability benefits and insurance coverage CONSISTENT WITH THE BENEFITS PROVIDED TO OTHER CANADIAN EXECUTIVES OF PHOENIX. Dr. Huguet shall be entitled to participate in all present or future benefit, insurance, bonus, profit sharing, incentive, remuneration or compensation plans, stock ownership or purchase plans which Phoenix makes available to management and/or key employees IN CANADA. 4.7 VACATION: Dr. Huguet will be entitled to four (4) weeks (twenty (20) working days) annual vacation. 4.8 BONUS: Dr. Huguet will be entitled to receive an annual bonus on Phoenix's Executive Bonus Plan, which plan is subject to review by the Board of Directors on an annual basis. 4.9 SERVICES OF AN ACCOUNTANT: EACH YEAR, PHOENIX WILL PROVIDE AT ITS EXPENSE ACCOUNTING SERVICES FOR DR. HUGUET FOR THE PURPOSE OF PREPARING AND SUBMITTING HIS ANNUAL INCOME TAX RETURNS TO THE APPROPRIATE GOVERNMENTAL AGENCIES, PROVIDED HOWEVER THAT THE COST OF THESE SERVICES SHALL NOT EXCEED $3,000. 4.10 ATTORNEYS AND ACCOUNTANT FEES: Any and all attorneys and/or accountant fees that were paid or incurred by Dr. Huguet in order to revise and conclude the present Employment Agreement with Phoenix will be reimbursed by Phoenix to Dr. Huguet upon presentation of a proof of payment of said fees and provided such fees do not exceed $6,000. 5 PROFESSIONAL LIABILITY INSURANCE 5.1 Dr. Huguet will be covered by professional liability insurance to which the company subscribes, to the same extent as all Phoenix senior executives of his level. 6 PHOENIX SHARE OPTIONS 3 6.1 Within one week of Dr. Huguet's first day of employment at Phoenix Dr. Huguet will be awarded options to purchase 250,000 Phoenix shares. These options may be exercised as they become vested, subject to securities commission and stock exchange regulations. The options vest progressively on each anniversary of the date of granting of the options, as follows:
CUMULATIVE YEAR % VESTED ---- ---------- 1998 4% 1999 16% 2000 36% 2001 64% 2002 100%
6.2 The exercise price of the options shall be the average Market Price on the five trading days preceding the day the options are granted to Dr. Huguet. Market Price is defined as the average of the high and low prices of Phoenix's Common Shares on the Montreal Exchange and the Toronto Exchange on a trading day or, if there were no trades that day, the average of the bid and ask quotations for that day. 6.3 SUBJECT TO THE CHANGE IN CONTROL AGREEMENT ATTACHED HERETO AS ANNEX "A" AND WHICH IS EXECUTED CONCURRENTLY HEREWITH (THE "CHANGE IN CONTROL AGREEMENT"), if Dr. Huguet's employment is terminated before the fifth anniversary of the granting of options in the year 2002, Dr. Huguet will have sixty (60) days, after his employment ceases, to exercise vested options. Subsequent to this sixty (60) days, all options will expire automatically. 6.4 DR. HUGUET AND PHOENIX AGREE THAT THE OTHER TERMS AND CONDITIONS OF PHOENIX'S KEY EMPLOYEE SHARE OPTION PLAN (ATTACHED HERETO AS ANNEX "B"), AS AMENDED FROM TIME TO TIME, SHALL APPLY TO THE OPTIONS HELD BY HIM, SAVE THAT IN THE EVENT OF A PROPOSED CHANGE OF CONTROL OF PHOENIX, INCLUDING UNDER A TAKEOVER BID, OR ANY OF THE OTHER CIRCUMSTANCES COVERED BY THE CHANGE IN CONTROL AGREEMENT, THE TERMS AND CONDITIONS OF THE CHANGE OF CONTROL AGREEMENT CONCERNING THE VESTING AND EXERCISABILITY OF THE OPTIONS SHALL APPLY AND OVERRIDE THE PROVISIONS HEREOF AND OF THE KEY EMPLOYEES SHARE OPTION PLAN. 6.5 This offer of employment and the grant of stock options is conditional on signature of the attached Confidentiality, Proprietary Rights, regulatory Compliance and Non-Competition Agreement (Schedule "C" attached) that requires, among other things, that DR. HUGUET not compete with Phoenix for one year after leaving the company. 4 7 TERM OF THE AGREEMENT 7.1 Subject to Section 9, Dr. Huguet's employment shall commence on January 1, 1998 and shall be for an indeterminate term. 7.2 Dr. Huguet may however, at his option, decide to start his employment earlier. 7.3 Dr. Huguet will not be considered in breach of Section 7.1 or 7.2 of this Employment Agreement if he is unable to start work with Phoenix on the date specified in Section 7.1, due to illness or other personal indisposition, or by reason of circumstances beyond his reasonable control or because Phoenix has not obtained the necessary certificate of acceptance or employment authorization. 8 TERMINATION 8.1 TERMINATION BY PHOENIX FOR SERIOUS REASON: Phoenix may terminate this Employment Agreement at any time, for a serious reason. If Phoenix exercises its rights under this sub-section to terminate this Employment Agreement, Dr. Huguet shall not be entitled to receive any further remuneration, save any accrued base salary, benefits or bonuses accrued as at the date of termination and calculated notwithstanding any requirement for completing a full fiscal year or other period. For the purposes of this agreement, a "serious reason" shall mean that Dr. Huguet: a) has willfully refused, without valid reason, to comply with the reasonable instructions of the Board of Directors or the CEO given to him in his capacity as an executive of Phoenix having duties and privileges of an executive character as undertaken pursuant to the terms of this Agreement; b) has committed misconduct or has been grossly negligent in the performance of his duties hereunder; c) commits wrongful acts directly against the interests of Phoenix or against its property; d) becomes subject in any way to bankruptcy or insolvency laws; or e) commits and is found guilty of an indictable criminal offense or other similar offense involving fraudulent or dishonest conduct. 5 8.2 TERMINATION BY PHOENIX WITHOUT SERIOUS REASON 8.2.1 Phoenix may also terminate this agreement without a serious reason (if not related Phoenix's inability to obtain a certificate of acceptance or employment authorization which case shall be governed by Section 9) at will and for any reason whatsoever by giving Dr. Huguet an appropriate 6 month prior notice. 8.2.2 In order to give notice as set out in Section 8.2.1, Phoenix may, at any time prior to or during said notice period, choose to immediately discharge Dr. Huguet provided that Dr. Huguet is compensated for the duration or the remainder of said notice period by the payment of an amount equal to the gross base salary, all (calculated notwithstanding any requirement for completing a full fiscal year or other period) and all other benefits Dr. Huguet would have been entitled to if he had remained in the employment of Phoenix for the duration or any remainder of said notice period. 8.2.3 Phoenix's obligation to give the aforesaid 6 month notice or make payment in lieu thereof, will not be reduced or affected if Dr. Huguet has secured alternative employment. 8.2.4 In the event that Dr. Huguet has not commenced alternative equivalent employment within 6 months from the date notice of termination was given, he will be entitled to receive and Phoenix shall continue to pay him the equivalent of his gross base salary as at termination, by way of bi-weekly installments. Such bi-weekly payments shall commence 6 months from the date notice or termination was given and continue to be paid until such time as Dr. Huguet shall have commenced alternative employment. In no event shall such payments continue for more than 18 months (36 bi-weekly payments) after the first of such payments was made. 8.3 TERMINATION BY DR. HUGUET: Dr. Huguet may (subject to Section 9), at his option, terminate this agreement for any reason whatsoever provided that Phoenix is given at least 12 weeks notice before said termination becomes effective. 9 INABILITY TO OBTAIN A CERTIFICATE OF ACCEPTANCE OR EMPLOYMENT AUTHORIZATION 9.1 In the event Dr. Huguet is unable to commence or assume his employment by reason of Phoenix's inability to obtain a proper certificate of acceptance or employment authorization within 3 months of January 1, 1998, or if 6 Dr. Huguet is subsequently unable to perform his duties hereunder by reason of Phoenix's failure to maintain such certificate of acceptance or employment authorization, Phoenix agrees that Dr. Huguet will suffer irreparable harm and will therefore have the right to immediately receive from Phoenix, a lump sum payment equivalent to 2 years of Dr. Huguet's base salary and all benefits hereunder, payable as liquidated damages. 9.2 Such lump sum payment will be due and payable to Dr. Huguet on the date it will have been confirmed that Dr. Huguet will not be able to fulfill his obligations hereunder because of Phoenix's inability to obtain or maintain, as the case may be, said certificate of acceptance or employment authorization. Upon such confirmation, Dr. Huguet shall be released from any further obligations hereunder. 10 TERMINATION FOLLOWING CHANGE IN CONTROL 10.1 In the event of a Change in Control or proposed Take-over Bid (within the meaning of and as such terms are defined in the Change in Control Agreement), the terms and conditions of the Change of Control Agreement with respect to termination of employment shall override the provisions hereof to the extent and provided that they are no less favorable than these herein contained. 11 OBLIGATIONS OF PHOENIX 11.1 It is agreed that the obligations of Phoenix pursuant to Sections 2,4,5 and 6 will only commence once Dr. Huguet will have started work on a permanent full time basis with Phoenix in accordance with Section 2 and 7 hereof. 12 CONFIDENTIAL INFORMATION / NON-COMPETITION UNDERTAKINGS 12.1 Dr. Huguet shall sign concurrently herewith the Confidentiality, Proprietary Rights, Regulatory Compliance and Non-Competition Agreement with Phoenix, which Agreement shall be, in form and content, satisfactory to Phoenix (see attached Schedule "C"). 12.2 Dr. Huguet fully understands the provisions of this Agreement and the Confidentiality, Proprietary Rights, Regulatory Compliance and Non-Competition Agreement (Schedule "C" attached), having had ample opportunity to review same and consult counsel, if desired. Subject to Section 13 of this Employment Agreement, Dr. Huguet recognizes that, consistent with Phoenix's policies for all of its executives and senior managers who have equity in the company or who receive stock options, this agreement binds Dr. Huguet to non-competition restrictions for one year after his employment with Phoenix ceases. 7 12.3 Notwithstanding anything contained in the Confidentiality, Proprietary Rights, Regulatory Compliance and Non-Competition Agreement, Dr. Huguet shall not be in breach of that agreement if subsequent to the termination of his employment with Phoenix, he owns, maintains, operates, joins, controls, participates in, is connected with or has an interest in, as an officer, advisor, consultant, employee, partner, stockholder or otherwise in a pharmaceutical or biotechnology company, or an educational institution, provided that such company's or institution's core activities are not the provision to Phoenix's Clients (as defined in the Confidentiality, Proprietary Rights, Regulatory Compliance and Non-Competition Agreement) of services or computer software that compete with Phoenix's services or computer software. 13 SURVIVAL OF RESTRICTIVE COVENANTS 13.1 The parties agree that the undertakings of Dr. Huguet under Section 5 of the Confidentiality, Proprietary Rights, Regulatory Compliance and Non-Competition Agreement, shall only survive termination of this agreement in accordance with their respective terms, in the event that Dr. Huguet's employment is terminated by Phoenix, for a serious reason and/or following Dr. Huguet's resignation (if such resignation does not follow Change of Control, a constructive dismissal, or Phoenix's inability to obtain or maintain an employment authorization as set out in Section 9 of this Agreement). 14 DAMAGES 14.1 Dr. Huguet hereby agrees that any breach by him of Sections 3.1 or 7.1 of this Employment Agreement, or of the Confidentiality, Proprietary Rights, Regulatory Compliance and Non-Competition Agreement will entitle Phoenix to damages of no less than $100,000, which amount shall not be reduced for partial performance or any other reason whatsoever. 8 15 GENERAL 15.1 If any provision of this agreement is unenforceable or invalid, for any reason whatsoever, such enforceability or invalidity will not affect the enforceability or validity of the remaining provisions of this agreement and such provision will be severable from the remainder of this agreement. 15.2 This agreement shall be governed and construed in accordance with the laws of the Province of Quebec and federal laws of Canada applicable therein. 15.3 No consent to or waiver of any breach of a term of provision of this agreement by either party shall be construed as a consent to or waiver of a subsequent breach of the same term or provision, nor shall it be considered a consent to or waiver of any other then existing or subsequent breach of a different term or provision. 15.4 The parties declare that it is their desire that this agreement and all the documents and notices related thereto be drafted in the English language. Les parties ont manifeste le desir que la presente entente et tous les autres contrats, documents ou avis soient redigee en anglais. IN WITNESS THEREOF, the parties have executed this agreement in The City of St. Lawrent on the 7th day of November 1997 9 PHOENIX INTERNATIONAL LIFE SCIENCES INC. Per: /s/ John W. Hooper ---------------------------------------- JOHN W. HOOPER, Ph.D. CHAIRMAN and CEO /s/ Stephane Huguet ---------------------------------------- Dr. Stephane Huguet 10 EX-10.8 22 EXHIBIT 10.8 Exhibit 10.8 - 1 - EMPLOYMENT AGREEMENT MEMORANDUM OF AGREEMENT entered into at Montreal, Quebec, this 5th day of October, 1998. BY AND BETWEEN: PHOENIX INTERNATIONAL LIFE SCIENCES INC., a company duly incorporated under the laws of Canada, having its principal place of business at 2350 Cohen, Ville St. Laurent, Quebec, herein acting and represented by Dr. John Hooper, duly authorized to act hereunder for the purposes of the present Employment Agreement as he or she so declares; (hereinafter "PHOENIX") AND Mr. David Moszkowski, Executive, domiciled and residing at 2913 Lake Road, Dollard-des-Ormeaux, Quebec H9B 2K5. (hereinafter the "Employee") THE PARTIES DECLARE AS FOLLOWS: WHEREAS PHOENIX wishes to retain the Employee's services for the position set forth in Schedule 4.1 and whereas the Employee wishes to offer his or her services on such basis to PHOENIX, the whole in accordance with the conditions stipulated in this Employment Agreement; WHEREAS PHOENIX and the Employee wish to set forth the working conditions governing their employment relationship; NOW THEREFORE THIS AGREEMENT WITNESSETH THAT, in consideration of the mutual promises contained herein, and other good and valuable consideration the adequacy and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: - 2 - ARTICLE 1 PREAMBLE 1.1 The Preamble forms an integral part of this Employment Agreement. ARTICLE 2 GENERAL PROVISIONS 2.1 HEADINGS. The insertion of headings is for convenience of reference only and shall not affect or be utilized in the interpretation hereof. 2.2 SEVERABILITY. Any article, section, subsection or other subdivision of this Employment Agreement or any other provision of this Employment Agreement which is deemed to be or becomes, illegal, invalid or unenforceable shall be severed herefrom and shall be ineffective to the extent of such illegality, invalidity or unenforceability and shall not affect or impair the remaining provisions hereof which shall remain in full force and effect. 2.3 ENTIRE AGREEMENT. This agreement constitutes the entire agreement between the parties pertaining to the subject matter hereof and supersedes all prior agreements, understandings, negotiations, and discussions, whether oral or written, by the parties in respect of its subject matter. 2.4 AMENDMENT. No amendment hereto shall be binding unless expressly provided for in an instrument duly executed by the parties hereto. 2.5 WAIVER. No waiver by any party hereto, whether by conduct or otherwise, of any of the provisions of this Employment Agreement shall be deemed to constitute a waiver by such party of any other provisions nor shall such waiver constitute a continuing waiver hereof, unless otherwise expressly provided in an instrument duly executed by the party or parties hereto. 2.6 GOVERNING LAW. This Employment Agreement shall be governed by and interpreted and construed in accordance with the Laws of Quebec. 2.7 CONFLICTING AGREEMENTS. PHOENIX and the Employee acknowledge that there may be other contracts attached as Schedules to this Employment Agreement. If these Schedules contain terminology, definitions or terms, or create rights or obligations which are at variance or conflict with the terminology, definitions or terms, rights or obligations used or contained in this Employment Agreement, then the parties agree that the terms of this Employment Agreement shall be deemed to set forth their true and complete intention and agreement. 2.8 PHOENIX. The term "PHOENIX" used in this Employment Agreement shall mean Phoenix International Life Sciences Inc., a legal person having its head office and principal place - 3 - of business in the City of St. Laurent, district of Montreal, Quebec, Canada, and its subsidiaries and affiliated companies. 2.9 BUSINESS. For the purposes of this Employment Agreement, "Business" shall mean, in relation to PHOENIX, the business now and heretofore and hereafter conducted by PHOENIX to the termination of this Employment Agreement, as well as the business PHOENIX was in the process of actively developing at the time of the termination of this Employment Agreement and of which the Employee was aware. Without limiting the generality of the foregoing, the business at the time of the signing of this Employment Agreement is the business of a multi-service contract research organization ("CRO") which provides discovery, analytical services, preclinical studies, clinical studies, regulatory affairs services and scientific software products and services, to pharmaceutical and biotechnology companies in the United States, Canada, the European Common Market, and Switzerland. 2.10 SCHEDULES: The following Schedules form part of this Employment Agreement: Schedule 4.1 Initial Position Description Schedule 11.5 Key Employee Share Option Purchase Plan Schedule 14.3 Change in Control Agreement ARTICLE 3 DURATION 3.1 This Employment Agreement is hereby concluded for an indeterminate period of time, effective as of November 16, 1998. The Employee may, at his or her option, report for work at an earlier date than November 16, 1998. ARTICLE 4 DUTIES 4.1 As an employee of PHOENIX, the Employee's duties and responsibilities shall include, above and beyond those inherent to the position set forth in Schedule 4.1 and normally pertaining to it, those compatible with the position and which PHOENIX may delegate to the Employee from time to time, including but not limited to, holding director or officer positions in PHOENIX and/or one or more of PHOENIX's wholly owned subsidiary companies, as well as performing other duties on behalf of these latter companies as may be required from time to time. The Employee's initial title shall be Senior Vice President and Chief Financial Officer. 4.2 The Employee shall execute all duties and functions from Montreal but will travel - 4 - as reasonably required to properly perform the work required of him or her hereunder. 4.3 Without limitation, the Employee acknowledges that the Business depends to a considerable extent on PHOENIX's compliance with regulations particularly Good Laboratory Practices Regulations and Good Clinical Practices Regulations, governing drug development and issued by the International Committee on Harmonization, regulatory bodies in the U.S.A., Canada and Europe, and other national and international drug regulations. The Employee affirms and agrees that he or she is familiar with all drug regulations relevant to his or her duties, and that he or she will use his or her best efforts to strictly conform with these regulations in carrying out his or her duties. 4.4 The Employee shall report to the Chairman and CEO. ARTICLE 5 LOYALTY 5.1 The Employee shall devote his or her full time, attention, skills and competence to PHOENIX and to the Business. The Employee shall act with diligence, loyalty and honesty and shall make all necessary efforts to promote PHOENIX's legitimate business interests during the term of this Employment Agreement. 5.2 Subject to section 5.4, the Employee shall not, during the term of this Employment Agreement, on his or her own behalf or on behalf of any person, whether directly or indirectly, in any capacity whatsoever, alone, through or in connection with any person, carry on, or be engaged in, or have any financial or other interest in, or be otherwise commercially involved in any endeavor, activity or business whether or not such other endeavor, activity or business is in competition, in whole or in part, with the Business. 5.3 If the Employee breaches his or her obligations pursuant to section 5.2 above, then PHOENIX shall be entitled to receive the greater of any profits, benefits or other advantages which may result or ensue from the Employee's activities. 5.4 The Employee shall not be in default under this Employment Agreement by virtue of holding, strictly for portfolio purposes and as a passive investor, no more than five percent (5%) of the issued and outstanding shares of any body corporate which is listed on a recognized stock exchange, the business of which body corporate is in competition, in whole or in part, with the Business. The five percent (5%) limitation shall not apply to securities which the Employee may hold in a company affiliated with PHOENIX, within the meaning of the CANADA BUSINESS CORPORATIONS ACT. - 5 - ARTICLE 6 CONFIDENTIALITY 6.1 The Employee hereby agrees that during his or her employment and for a period of three (3) years following the termination of his or her employment, he or she shall not, directly or indirectly, use, divulge, diffuse, sell, transfer, give, circulate, or otherwise exploit for his or her own benefit or for the benefit of any other person, whatsoever or whomsoever, or otherwise make public, any Confidential Information. "CONFIDENTIAL INFORMATION": For the purposes of this Employment Agreement, shall mean all information or Works in whatever form (oral, written, machine readable or otherwise) pertaining to PHOENIX and its Business, operations, properties, assets and liabilities, including, without limitation, files and records pertaining to the Business and trade secrets (including, but not limited to, lists of Customers and suppliers, Customer requirements and practices, costings, equipment, technical information, research results, methodology, supplier availability, business plans, sales methods and ideas, marketing strategy, employee remuneration and benefits and pricing structures and information) as well as all financial information known to the Employee. "Confidential Information" shall also mean information which although not technically a trade secret, may prove prejudicial to PHOENIX and its Business if disclosed or disseminated, for example, related to products, services, computer software and the activities of PHOENIX or its Customers (whether of a financial, technical or planning nature), but the phrase "Confidential Information" shall not include information which: (i) is in the public domain through no fault of the Employee; (ii) is required by law, governmental authority or a court of law to be disclosed: or (iii) is approved in writing by PHOENIX for disclosure prior to its disclosure. "CUSTOMER": For the purposes of this Employment Agreement shall mean any pharmaceutical manufacturer (regardless of whether or not has contacted such manufacturer) and any other individual, partnership, legal person or entity for whom PHOENIX has performed services, or to whom has sold products or licensed computer software or contacted with a view to performing services, selling products or licensing software, during the twelve (12) month period preceding the date of termination of the Employee's employment. "WORKS": For the purposes of this Employment Agreement, shall mean all Standard Operating Procedures, techniques and methods used to perform research or services, all inventions, improvements, discoveries, literary and artistic works and other original works of any kind or nature whatsoever, industrial - 6 - designs, trade marks, patents, software programs, source codes and related materials (whether or not registered) and software validation procedures related to PHOENIX or to the Business. 6.2 Notwithstanding anything to the contrary herein contained, the Employee's covenant set forth in section 6.1 above shall be unlimited as to time insofar as it relates to trade secrets of PHOENIX and its Customers, and Confidential Information of Customers. 6.3 Any document or Works composed, assembled or produced by the Employee, or by any employee of PHOENIX, or any Customer, and containing Confidential Information shall be deemed to be Confidential Information within the meaning of this Employment Agreement and shall be treated as such. 6.4 Confidential Information and all embodiments thereof (including any reproduction) are and shall remain the sole property of PHOENIX and shall be returned to PHOENIX immediately on demand, whether before or after termination of this Employment Agreement. 6.5 Notwithstanding any provision hereof, nothing in this Employment Agreement shall prevent the disclosure of Confidential Information if such disclosure must be made in response to the formal request of a governmental body or is otherwise required under any applicable law; it being understood, however, that the Employee shall inform PHOENIX of such a request for disclosure in order that the latter may decide to contest the said disclosure. 6.6 All Works made or conceived in whole or in part by the Employee related to the Business, whether alone or with others, will promptly be disclosed by the Employee to PHOENIX and will be the sole and exclusive property of PHOENIX, the Employee hereby acknowledging that he or she shall have no right to, or title or interest of any nature whatsoever in such Works, unless otherwise agreed to in writing by PHOENIX. The Employee further agrees to assist PHOENIX and to sign all such documents or do all such things as may be required to protect or to register the Works. 6.7 The Employee agrees that he or she shall not, at any time during the term of his or her employment with PHOENIX make or cause to be made or remove or cause to be removed from PHOENIX's possession or premises any documents or materials of any nature whatsoever that are based upon Raw Data. For purposes of this Employment Agreement, Raw Data means any worksheets, records, memoranda, notes or exact copies thereof, that are the result of original observations and activities and are necessary or useful or related to a project. Raw Data may include, but is not limited to, photographs, microfilm or microfiche copies, computer printouts, magnetic or optical mass data storage media, including detailed observations and recorded data from automated instruments. ARTICLE 7 - 7 - OBLIGATION NOT TO COMPETE 7.1 In the grant of options referred to in article 11.5 hereof by PHOENIX, the Employee covenants and agrees that he or she shall not at any time within the period of one (1) year following the termination of his or her employment hereunder, on his or her own behalf or on behalf of any person, whether directly or indirectly, in any capacity whatsoever, alone, through or in connection with any person, compete or be employed by a business which competes with the Business anywhere within Canada, the United States of America, the European Common Market or Switzerland. ARTICLE 8 OBLIGATION NOT TO SOLICIT CUSTOMERS 8.1 In consideration the grant of options referred to in article 11.5 hereof by PHOENIX, the Employee shall not, for a period of one (1) year following the termination of his or her employment, on the Employee's own behalf or on behalf of any person, whether directly or indirectly, in any capacity whatsoever, alone, through or in connection with any person for any purpose which is in competition, in whole or in part, with the Business: 8.1.1 solicit any Customer or aid, procure or assist in the soliciting of any Customer; or 8.1.2 accept, or aid, procure or assist in the acceptance of, any business from any Customer. ARTICLE 9 OBLIGATION NOT TO SOLICIT EMPLOYEES 9.1 In consideration of the grant of options referred to in article 11.5 hereof by PHOENIX, the Employee shall not, for a period of one (1) year following the termination of his or her employment, on the Employee's own behalf, or on behalf of any person, whether directly or indirectly, in any capacity whatsoever, alone, through or in connection with any person: 9.1.1 employ, offer employment to, or solicit the employment or engagement of or otherwise entice away from the employment of PHOENIX any individual who is or was employed by PHOENIX at any time within the twelve (12) months preceding the termination of the Employee's employment, including but not limited to any employee, contractor, salesman, agent, consultant, distributor, representative, advisor, or supplier of PHOENIX having received remuneration from PHOENIX in recognition of services rendered to; or - 8 - 9.1.2 aid, procure or assist any person to employ, offer employment or solicit the employment or engagement of or otherwise entice away from the employment of PHOENIX any individual who is or was employed by at any time within the twelve (12) months preceding the termination of the Employee's employment, including but not limited to any employee, contractor, salesman, agent, consultant, distributor, representative, advisor, or supplier of PHOENIX having received remuneration from PHOENIX for services rendered to PHOENIX. ARTICLE 10 RECOGNITION 10.1 The Employee hereby expressly recognizes that Articles 6, 7, 8 and 9 of this Employment Agreement are of the essence of this Employment Agreement, and that PHOENIX would not have entered into this Employment Agreement without the inclusion of these Articles. 10.2 The Employee hereby recognizes and expressly acknowledges that Articles 6, 7, 8 and 9 above grant PHOENIX only such reasonable protection as is admittedly necessary to preserve the legitimate interests of PHOENIX and also recognizes that in this respect, the description of the Business is reasonable, and hereby agrees to waive (and irrevocably agrees not to raise) as a defense any issue of reasonableness, including, without limitation, arguments as to the duration and scope of the covenants or provisions contained in said Articles. 10.3 The Employee hereby further recognizes and expressly acknowledges: (a) that the application of the aforesaid Articles will not have the effect of prohibiting the Employee from earning a living in a satisfactory manner in the event of termination of his or her employment; (b) that serious and irreparable damage for which monetary damages would not be an adequate remedy would result to PHOENIX from any violation of the covenants set forth in Articles 6, 7, 8 and 9; and (c) that in addition to any and all remedies available to PHOENIX in the event of any actual or impending violation of such covenants, PHOENIX shall have the immediate remedy of injunction or such other relief as may be decreed or issued by any court of competent jurisdiction to enforce the provisions of this Employment Agreement. 10.4 The Employee hereby recognizes that Articles 6, 7, 8 and 9 of this Employment Agreement, being of the essence hereof, shall be interpreted independently from any other provisions of this Employment Agreement, the intention of the parties being to provide for the legitimate and reasonable protection of the interest of the Business and PHOENIX by providing, among other things, for the broadest scope, the longest duration and the widest territory allowable by law. - 9 - ARTICLE 11 REMUNERATION, BONUS AND SHARE OPTIONS 11.1 As remuneration for his or her services, the Employee shall receive an initial annual base salary in the amount of $200,000, less all applicable deductions. 11.2 The base salary shall be subject to an annual review upon each anniversary of the commencement date hereof. 11.3.1 In addition to the base salary specified above, the Employee will be paid a car allowance of $5,000. 11.4 At the sole discretion of the Board of Directors of PHOENIX, the Employee shall be entitled to receive an annual bonus, based on PHOENIX's Worldwide Executive Remuneration Plan, as same may be amended from time to time. The initial annual bonus shall be 20% of salary for 100% achievement of corporate budgeted net profit, and 15% of annual salary for 100% of achievement of personal objectives. 11.5 The Employee shall be awarded options to purchase PHOENIX on the terms and conditions specified in PHOENIX's Key Employee Share Option Plan (Schedule 11.5 hereof) as same may be amended from time to time, the whole subject to regulatory approval, if required. The amounts of these options are as follows: a) On joining the company, 50,000 shares. b) Annually, a number of shares equal to the salary earned by the Employee with the Employer in the previous fiscal year multiplied by 33% and divided by the option price. - 10 - ARTICLE 12 BENEFITS, VACATION AND LIABILITY INSURANCE 12.1 Subject to any medical or similar approvals which may be required, the Employee shall have the right to participate in benefit programs and/or plans of PHOENIX and his or her entitlement to vacation shall be determined and granted in accordance with the policy of PHOENIX at the time the benefits and vacation are granted, provided that the Employee's annual vacation shall not be less than four weeks (20 working days) in each calendar year. 12.2 If the Employee is required to serve as a director or officer of PHOENIX or one of its wholly owned subsidiaries: 12.2.1 PHOENIX shall subscribe for and pay the cost of Directors and Officers liability insurance for the Employee, which insurance coverage shall be no less favorable than the insurance coverage extended by PHOENIX to all of its directors and senior officers; 12.2.2 PHOENIX shall indemnify and hold harmless the Employee against all costs and expenses (including, without limitation, reasonable attorneys fees) if the Employee was or is a party to or threatened to be made a party to or otherwise is involved in any proceeding involving PHOENIX by reason of his or her corporate status or capacity, if the Employee acted in good faith and in a manner which he or she reasonably believed to be in, or not opposed to the best interests of PHOENIX, and with respect to any criminal proceeding, the Employee had no reasonable cause to believe that his or her conduct was unlawful; 12.2.3 Notwithstanding the foregoing, PHOENIX shall not indemnify or hold harmless the Employee in connection with a proceeding initiated by the Employee or a proceeding by the Employee against PHOENIX ARTICLE 13 TERMINATION OF THE EMPLOYMENT AGREEMENT 13.1 The parties hereto acknowledge and expressly agree this Employment Agreement and the Employee's employment shall be terminated in any of the following cases: (a) by PHOENIX, at any time, for a Serious Reason on simple notice from PHOENIX to the Employee, the whole without the Employee being entitled to the benefit of any other notice, or, notwithstanding the terms of the Key Employee Share Option Purchase Plan, any unexercised or unvested stock options, or any pay in lieu of notice, or any indemnity whatsoever. For the purpose of this Employment Agreement, a "Serious Reason" means that - 11 - the Employee: (i) has refused to comply with the reasonable instructions given to the Employee in his or her capacity as an executive of PHOENIX by the Board of directors of PHOENIX, or Phoenix's Chief Executive Officer, or the person to whom the Employee normally reports; (ii) has committed misconduct which is materially detrimental to PHOENIX, or has been consistently negligent in the performance of his or her duties hereunder; (iii) commits wrongful acts against the interests of PHOENIX or against the property of either; (iv) is found guilty of an indictable criminal offence or other offence involving fraudulent or dishonest conduct; or (v) gives cause to PHOENIX for dismissal for a reason similar in gravity to those set forth above. (b) upon the death, bankruptcy or Incapacity of the Employee, in which case termination shall be automatic, the whole without notice or the benefit of any unvested stock options, or any pay in lieu of notice or any indemnity whatsoever (except for payments in the ordinary course pursuant to PHOENIX's benefits program by which the Employee may be covered); or (c) by the Employee, upon providing PHOENIX with ninety (60) days notice of resignation; or (d) by PHOENIX, at any time, without cause, in accordance with Article 14. 13.2 "INCAPACITY": For the purposes of this Employment Agreement, shall mean any medical condition whatsoever, which leads to the Employee's absence from his or her job function for a continuous period of six (6) months, without the Employee being able to resume functions on a full time basis at the expiration of such period and unsuccessful attempts to return to work for periods under fifteen (15) working days shall not interrupt the calculation of the said six (6) month period. 13.3 The parties hereby agree that upon termination of this Employment Agreement, all provisions of this Employment Agreement, shall immediately terminate. Notwithstanding the foregoing, Articles 6, 7, 8, 9 and 10 of this Employment Agreement shall survive any termination hereof and shall remain in full force and effect. - 12 - ARTICLE 14 TERMINATION WITHOUT CAUSE 14.1 In consideration of the Employee's services and his or her respecting the covenants set forth in Articles 6, 7, 8, 9 and 10 above, the parties agree that if the Employee's employment be terminated by PHOENIX without cause, the Employee shall receive after the effective date of termination of his or her employment i) all amounts which are then due and owing to the Employee pursuant to this Employment Agreement, and ii) a further amount (the "Termination Payment") equal to the Employee's gross base annual salary (at the time of notice of termination) divided by 12 and multiplied by the number of complete years (not less than six years and to a maximum of twelve years) that the Employee has been employed by PHOENIX, less all applicable withholding at source. The Termination Payment shall be calculated from and as at the date notice of termination is given to the Employee. This payment shall be made in two equal installments, with the first installment due and payable by PHOENIX to the Employee thirty (30) days following the effective date of termination and the second installment payable by PHOENIX to the Employee five (5) months after the anniversary date of the first installment, the whole subject to the Employee's duty to mitigate his or her damages by seeking alternative employment. If the Employee continues to work after receiving notice of termination from PHOENIX and up to the effective date of termination, amounts earned during said period will reduce the Termination Payment. 14.2 The Employee hereby recognizes and accepts that neither PHOENIX nor its subsidiaries or affiliated companies nor PHOENIX shall in any case, be responsible to pay the Employee any additional amount, indemnity in lieu of notice, severance pay or other damages arising from the termination of this Employment Agreement or his or her employment, above and beyond the amounts specifically provided for in section 14.1. 14.3 If the employment of the Employee is terminated hereunder as a result of a Change of Control or Proposed Take-over Bid (within the meaning of and as such terms are defined in the Change of Control Agreement attached hereto as Schedule 14.3), then the terms and conditions of the Change in Control Agreement shall override the provisions hereof, if they are more favorable than those contained herein. - 13 - ARTICLE 15 COOPERATION WITH PHOENIX AFTER TERMINATION OF THE EMPLOYMENT AGREEMENT 15.1 The Employee hereby undertakes to cooperate with PHOENIX in all matters related to the conclusion of ongoing work or projects and to facilitate an orderly transfer of responsibilities or functions and duties hereunder to such other employees as may be designated by PHOENIX. ARTICLE 16 CONFIDENTIALITY OF EMPLOYMENT AGREEMENT 16.1 With the exception of his or her spouse, immediate family and legal and financial advisers, the Employee hereby agrees to keep strictly confidential all information contained in or concerning this Employment Agreement. ARTICLE 17 FINAL PROVISIONS 17.1 NOTICE. Any notice, direction or other communication required or permitted to be given hereunder shall be in writing and given by registered mail, hand delivered or sent by telecopier or similar telecommunications device and addressed as follows: (a) in the case of PHOENIX, to it at: Phoenix International Life Sciences Inc. c/o The Chief Executive Officer 2350 Cohen Ville St. Laurent Quebec, Canada H4R 2N6 (b) in the case of the Employee, to him or her at: 2913 Lake Road, Dollard-des-Ormeaux, Quebec, Canada H9B 2K5 - 14 - Any notice, direction or other communication given as aforesaid shall be deemed to have been effectively given and received, if by registered mail, then on the date of delivery thereof, if sent by telecopier or similar telecommunications device on the next business day following such transmission or, if hand delivered, to have been given and received on the date of such delivery. Any address for service may be changed by written notice given as aforesaid. 17.2 ASSIGNMENT. Except as otherwise expressly provided for herein, this Employment Agreement, and the rights granted and the obligations incurred hereunder, are not assignable, whether in whole or in part, by the Employee without the prior written consent of PHOENIX. 17.3 LANGUAGE. The parties hereto acknowledge that they have requested and are satisfied that this Employment Agreement and all related documents be drawn up in the English language. Les parties aux presentes reconnaissent avoir requis que la presente entente et les documents qui y sont relatifs soient rediges en anglais. - 15 - IN WITNESS WHEREOF this Employment Agreement has been executed by the parties hereto on the date and at the place first herein above mentioned: SIGNED AND DELIVERED BY: /s/ David Moszkowski ----------------------------------------- The Employee Phoenix International Life Sciences Inc. /s/ John Hooper ----------------------------------------- Per: John Hooper EX-10.9 23 EXHIBIT 10.9 EXHIBIT 10.9 EMPLOYMENT AGREEMENT George Engelberg, Ph.D. January 7, 1997 5608 Randall Avenue Montreal, Quebec H4V 2W2 Dear Mr. Engelberg, The undersigned, Phoenix International Life Sciences Inc. (Phoenix) hereby offers you employment subject to the following terms and conditions: 1. You hereby agree to commence employment with Phoenix on, or at your option before, February 10, 1997, on a permanent full-time basis. 2. Your title with Phoenix shall be Vice President, Information Technology, reporting initially to the Chairman and CEO of Phoenix International Life Sciences Inc. You will be a member of the company's Executive Management Committee, together with the CEO, the COO and other Vice Presidents. See attached initial Position Description. 3. Your starting annual remuneration shall be $160,000. You will receive annual increases based on your ability to fulfill the position description and consistent with Phoenix's salary administration policies. You will be reimbursed for business-related car mileage which is anticipated to be in the order of $5,000 annually, and you will receive a car allowance of $5,000 annually. 4. You will be entitled to 4 weeks (20 working days) annual vacation in accordance with Phoenix's policies and procedures. 5. You will be eligible to receive a bonus based on Phoenix's Executive Bonus Plan, which plan is subject to the approval of the Board of Directors on an annual basis. 6. Within one week of your first day of employment at Phoenix you will be awarded options to purchase 35,000 Phoenix shares. These options may be exercised as they become vested, subject to securities commission and stock exchange regulations. The options vest progressively each year on the anniversary of the date of granting of the options, as follows: Cumulative Year % Vested ---- ---------- 1998 4% 1999 16% 2000 36% 2001 64% 2002 100% If your employment with Phoenix ceases before the anniversary date of the granting of options in the year 2007, you will have 60 days after your employment ceases to exercise vested options. Subsequent to this 60 days, all options will expire automatically. The option price shall be the average Market Price on the five trading days preceding the day the options are awarded to you. Market Price is defined as the average of the high and low prices of Phoenix's Common Shares on the Montreal Exchange and the Toronto Exchange on a trading day or, if there were no trades that day, the average of the bid and ask quotations for that day. If a take over bid for Phoenix common shares results in a change in legal control of Phoenix, defined as a person or persons achieving beneficial ownership of voting shares carrying more than 50% of the votes for the election of directors of Phoenix, or if Phoenix elects to sell substantially all of its assets, then all options for the purchase of shares held by you will vest and become exercisable, contingent on securities regulations. This eventuality will be governed by a "Change of Control Agreement" currently being drafted for approval by Phoenix's Board of Directors. Such Change of Control Agreement may contain other options for dealing with outstanding share purchase options held by Phoenix's senior executives, which alternatives shall apply to all of Phoenix's senior executives at your level. You and Phoenix agree that the other terms and conditions of Phoenix's Key Employee Share Option Plan (attached; Schedule A), as amended from time to time, shall apply. This offer of stock options is conditional on signature of the attached Confidentiality, Proprietary Rights, Regulatory Compliance and Non-Competition Agreement that requires, among other things, that you not compete with Phoenix for one year after leaving the company. 7. If, you are dismissed other than for just cause, then you will receive a severance payment of 6 month's salary, in monthly installments. If, after 6 months, you have not found employment, the monthly payments from Phoenix will continue until such time as you are again employed, or one year has expired after your employment with Phoenix ceases, whichever is earlier. If you are again employed during the period between 6 months and one year after your employment with Phoenix ceases, and your salary with your new employer is less than that previously provided to you by Phoenix, then Phoenix will pay you the difference between these two salaries, on a monthly basis, until such time as one year has expired since your employment with Phoenix ceased. Employee benefits and your car allowance also continue until such time as you are again employed, or one year has expired after your employment with Phoenix ceases, whichever is earlier "Just Cause" is not defined in this Employment Agreement, but will be defined in the "Change of Control Agreement" currently being drafted for approval by Phoenix's Board of Directors. The definition of "Just Cause" in the Change of Control Agreement shall apply to you and all other senior executives of Phoenix at your level. 8. It is agreed that the obligations of Phoenix pursuant to Sections 3, 4, 5, 6 and 7 win only commence once you have started work on a full time basis with Phoenix in accordance with Section 1 hereof. 9. During your employment you shall devote your full time and efforts to Phoenix and shall not, directly or indirectly, engage in any business competitive with or similar to the business carried on by Phoenix. 10. You shall sign concurrently herewith the Confidentiality, Proprietary Rights, Regulatory Compliance and Non-Competition Agreement with Phoenix, which Agreement shall be, in form and content, satisfactory to Phoenix. 11. You hereby agree that any breach by yourself of Sections 1 or 9 of this Employment Agreement, or of the Confidentiality, Proprietary Rights, Regulatory Compliance and Non- Competition Agreement, will entitle Phoenix to damages of $100,000, which amount shall not be reduced for partial performance or any other reason whatsoever. You will not be considered in breach of Section 1 of this Employment Agreement if you are unable to start work with Phoenix on the date specified in Section 1, due to illness or other personal indisposition. 12. You understand fully the provisions of this Agreement and the Confidentiality, Proprietary Rights, Regulatory Compliance and Non-Competition Agreement, having had ample opportunity to review the same and consult counsel, if desired. You recognize that, consistent with Phoenix's policies for all of its executives and senior managers who have equity in the company or who receive stock options, this agreement binds you to non-competition restrictions for 1 year after your employment with Phoenix ceases. 13. You will be covered by professional liability insurance to which the company subscribes, to the same extent as all Phoenix senior executives at your level. If you are in agreement with the above mentioned terms and conditions, kindly signify your consent by initialing each page and signing a counterpart of this letter. Yours very truly, PHOENIX INTERNATIONAL LIFE SCIENCES INC. /S/ JOHN W. HOOPER ----------------------------------------- per John W. Hooper, Ph.D. President and CEO Accepted on this 13th day of January, 1997. /S/ GEORGE ENGELBERG - --------------------------------- Signature of Dr. George Engelberg EX-10.10 24 EXHIBIT 10.10 Exhibit 10.10 EMPLOYMENT AGREEMENT BETWEEN: PHOENIX INTERNATIONAL LIFE SCIENCES (IBRD) INC., a corporation duly incorporated under the laws of Delaware, having its head office at Gwynedd Hall, Suite 100, 17777 Sentry Parkway West, in the City of Blue Bell, Pennsylvania 19422, and represented herein by its duly authorized representative, (hereinafter called "PHOENIX") AND: SUSAN THORNTON, PH.D., domiciled and residing at 1101 Green Valley Road, Bryn Mawr, Pennsylvania 19010. (hereinafter called "DR. THORNTON") WHEREAS Phoenix is a subsidiary of Phoenix International Life Sciences (U.S.) Inc., itself a subsidiary of Phoenix International Life Sciences Inc. (The last mentioned company hereinafter "Phoenix International"), which term shall include, if the context so requires, all the subsidiaries of Phoenix International Life Sciences Inc.); and WHEREAS Phoenix International undertakes to guarantee performance of all of the terms and obligations undertaken by Phoenix for the benefit of Employee for the duration of such Employee's employment and conditional upon the Employee's respect of her own undertakings for the benefit of Phoenix hereunder; and WHEREAS Phoenix wishes to continue to employ Dr. Thornton on the terms and conditions hereinafter set forth; and WHEREAS Phoenix and Dr. Thornton wish to acknowledge by this agreement their mutual rights and obligations with respect to Dr. Thornton's employment by Phoenix; and WHEREAS this agreement shall be deemed to have commenced June 1, 1998 regardless of the date it is actually signed, NOW THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto hereby agree as follows: - 2 - 1. PREAMBLE 1.1 The preamble is deemed to form part of this agreement. 2. POSITION 2.1 Dr. Thornton's title shall be President and Chief Operating Officer, Phoenix International US, Phase II-IV, initially reporting to the Chairman and CEO of Phoenix International. Dr. Thornton will be a member of Phoenix International's corporate Executive Management Committee, together with the CEO and other executives (SEE ATTACHED SCHEDULE A ENTITLED "INITIAL POSITION DESCRIPTION"). Dr. Thornton will be invited to attend meetings of the Board of Directors of Phoenix International Life Sciences Inc., when other executives of her rank are so invited. Dr. Thornton agrees to serve as an Officer of Phoenix, at the discretion of the Board of Directors. 3. OTHER EMPLOYMENT AND DUTY TO DEVOTE WHOLE TIME 3.1 Dr. Thornton agrees that during the term of her employment, she shall devote her full time and efforts to Phoenix and shall not, directly or indirectly, engage in any other business whether or not said other business is competitive with or similar to the business carried on by Phoenix International. 4. REMUNERATION AND OTHER BENEFITS 4.1 BASE SALARY: Dr. Thornton's starting annual salary shall be $250,000, less all applicable deductions, payable bi-weekly in arrears. 4.2 BASE SALARY INCREASES: Dr Thornton will be eligible to receive annual increases of her base salary upon each anniversary of the commencement date, June 1, 1998, of this Agreement. Said increases will be based on her ability to fulfill the position description and consistent with decisions of Phoenix International's Board of Directors. 4.3 CAR EXPENSES: Dr. Thornton will receive a car allowance of $6,000 annually, payable in monthly installments. - 3 - 4.4 BENEFIT PLANS: Subject to completion by Dr. Thornton of any medical examinations and other like procedures and such enquiries, as may be required by Phoenix International's insurers, Phoenix shall pay and maintain for Dr. Thornton short term and long term disability benefits and insurance coverage consistent with the benefits provided to other executives of Phoenix International. Dr. Thornton shall be entitled to participate in all present or future benefit and insurance plans which Phoenix International makes available to its executives, including the 401k plan currently in place at Phoenix, or modifications thereof. 4.5 VACATION: Dr. Thornton will be entitled to 4 weeks (20 working days) annual vacation. 4.6 BONUS: Dr. Thornton will be eligible to receive an annual bonus in accordance with the provisions of Phoenix's WORLDWIDE EXECUTIVE REMUNERATION PLAN, a copy of which is attached hereto as SCHEDULE B, (but which may be amended from time to time). 5. PROFESSIONAL LIABILITY INSURANCE 5.1 Dr. Thornton will be covered by professional liability and Directors and Officer insurance to which Phoenix International subscribes, to the same extent as all Phoenix International executives of her level. Phoenix agrees that Dr. Thornton shall be covered by the INDEMNIFICATION AGREEMENT attached hereto as SCHEDULE C, subject to approval by the Human Resources Committee of the Board of Directors of Phoenix International. Such indemnification shall be no less favorable than for other Officers and Directors of Phoenix International. 6. PHOENIX SHARE OPTIONS 6.1 Dr. Thornton was granted options to purchase 125,000 of Phoenix International's common shares on July 14, 1998, in accordance with the terms and conditions of the KEY EMPLOYEE SHARE OPTION PLAN attached hereto as SCHEDULE D (but which may be amended from time to time). These options may only be exercised as they become vested, subject to securities commission and stock exchange regulations. The options vest progressively on each anniversary of the date of granting of the options, as follows: - 4 -
CUMULATIVE YEAR % VESTED ---- ---------- 1999 4% 2000 16% 2001 36% 2002 64% 2003 100%
6.2 Dr. Thornton will be eligible to be awarded further stock options annually in accordance with Phoenix International's WORLDWIDE EXECUTIVE REMUNERATION PLAN. The number of such options currently authorized by Phoenix International's Board of Directors is equal to 50% of the salary Dr. Thornton earned in the previous fiscal year, divided by the option exercise price. Subject to amending the KEY EMPLOYEE SHARE OPTION PLAN and obtaining shareholder and regulatory approval, these options will vest 20% for each year of continuous service subsequent to their granting. If shareholder or regulatory approval are not received for this vesting schedule, these options will vest as provided for by the KEY EMPLOYEE SHARE OPTION Plan. 6.3 The exercise price of all stock options shall be the price provided for by the KEY EMPLOYEE SHARE OPTION PLAN. 6.4 Subject to the CHANGE IN CONTROL AGREEMENT attached hereto as SCHEDULE E and which is executed concurrently herewith (the "CHANGE IN CONTROL AGREEMENT"), if Dr. Thornton's employment is terminated before the fifth anniversary of the granting of options in the year 2003, Dr. Thornton will have 60 days, after her employment ceases to exercise vested options. Subsequent to this 60 days, all options will expire automatically. 6.5 Dr. Thornton and Phoenix agree that the other terms and conditions of the KEY EMPLOYEE SHARE OPTION PLAN, shall apply to the options held by her, save that in the event of a proposed change of control of Phoenix International, including under a takeover bid, or any of the other circumstances covered by the CHANGE IN CONTROL AGREEMENT, the terms and conditions of the CHANGE IN CONTROL AGREEMENT concerning the vesting and exercisability of the options shall apply and override the provisions hereof and of the KEY EMPLOYEE SHARE OPTION PLAN, providing they are not less favorable than those contained herein. - 5 - 6.6 All grants of stock options are conditional on signature of the attached CONFIDENTIALITY, PROPRIETARY RIGHTS, REGULATORY COMPLIANCE AND NON-COMPETITION AGREEMENT (SCHEDULE F ATTACHED) that requires, among other things, that Dr. Thornton not compete with Phoenix International for one year after voluntarily leaving the company or being terminated for a serious reason pursuant to Article 8 of this Agreement. 7. TERM OF THE AGREEMENT 7.1 Dr. Thornton's employment with Phoenix in her new position shall commence on June 1, 1998 and shall be for an indeterminate term. 8. TERMINATION 8.1 TERMINATION BY PHOENIX FOR SERIOUS REASON 8.1.1 Phoenix may terminate this Employment Agreement at any time, for a serious reason, by resolution of its Board of Directors adopted at a duly constituted meeting of the Board. If Phoenix exercises its rights to terminate this Employment Agreement for a serious reason, Dr. Thornton shall not be entitled to receive any further remuneration, save any base salary, vacation, and benefits (but not bonuses), accrued as at the date of termination. For the purposes of this agreement, a "serious reason" shall mean that Dr. Thornton: (a) has refused, without valid reason, to comply with the reasonable instructions of the Board of Directors or the CEO of Phoenix International given to her in her capacity as an executive of Phoenix insofar as such instructions are not inconsistent with the terms of this Agreement; (b) has committed improper misconduct which is materially detrimental to Phoenix, or has been grossly negligent in the performance of her duties hereunder; (c) commits wrongful acts against the interests of Phoenix International or against its property; (d) becomes subject in any way to bankruptcy or insolvency laws; - 6 - (e) commits and is found guilty of an indictable criminal offence or other similar offence involving fraudulent or dishonest conduct, by a court of competent jurisdiction; or (f) gives cause to Phoenix International for a serious reason similar in gravity to those set forth above. 8.2 TERMINATION BY PHOENIX WITHOUT A SERIOUS REASON 8.2.1 Phoenix may also terminate this agreement at its discretion for any reason whatsoever by giving Dr. Thornton 12 weeks prior notice of its decision to dismiss. Phoenix may, at any time during the notice period, choose to immediately discharge Dr. Thornton, but in this case Dr. Thornton shall be entitled to receive and shall be paid all amounts which she would otherwise earn during the notice period. 8.2.2 If Phoenix terminates this agreement at its discretion, without a serious reason, Phoenix shall pay Dr. Thornton an amount equal to her gross base annual salary (at the time of notification of termination) divided by 12 and multiplied by the number of years of employment (not less than one (1)) Dr. Thornton has been employed by Phoenix International or any of its subsidiaries. All appropriate withholding as may be required by law will be deducted from the amount so calculated. The starting date of employment for the purpose of calculating the payment due hereunder is January 27, 1992. This payment shall be made within 7 days after the last day Dr. Thornton is employed. The bonus for the fiscal year in which termination takes place, if any, will be paid pro rata to the number of days worked in the fiscal year. With the exception of the amount referred to aforesaid, Dr. Thornton shall have no right to be paid or to claim any further payments related to or arising out of the termination of her employment by Phoenix and she renounces to any such further right or claim. 8.2.3 Phoenix's obligation to make the aforesaid payments will not be reduced or affected if Dr. Thornton has secured alternative employment. 8.3 TERMINATION BY DR. THORNTON 8.3.1 Dr. Thornton may, at her option, terminate this agreement for any reason whatsoever provided that Phoenix is given at least 90 days notice before said termination becomes effective. - 7 - 8.3.2 Dr. Thornton has the right to terminate this agreement if constructively dismissed, and receive compensation according to the terms and conditions of section 8.2, above. Dr. Thornton shall be considered to have been constructively dismissed if a) there is a material and adverse diminution on an accumulative basis of her duties, authority, position, compensation, benefits, or title, which is not applied to all other executives of Phoenix International, (b) she is required to move her home or residence anywhere other than in the municipality or metropolitan area in which her office and residence currently exist; or (c) there is a breach by Phoenix of any of the material terms of this Agreement. 9. TERMINATION FOLLOWING CHANGE IN CONTROL ETC. 9.1 In the event of a Change of Control or proposed Take-over Bid (within the meaning of and as such terms are defined in the CHANGE IN CONTROL AGREEMENT), the terms and conditions of the CHANGE IN CONTROL AGREEMENT with respect to termination of employment shall override the provisions hereof to the extent and provided that they are no less favourable than those herein contained. 10. CONFIDENTIAL INFORMATION / NON-COMPETITION AND OTHER UNDERTAKINGS 10.1 Dr. Thornton shall sign concurrently herewith the CONFIDENTIALITY, PROPRIETARY RIGHTS, REGULATORY COMPLIANCE AND NON-COMPETITION AGREEMENT with Phoenix and Phoenix International, which is ATTACHED AS SCHEDULE F. 10.2 Dr. Thornton fully understands the provisions of this Employment Agreement and the CONFIDENTIALITY, PROPRIETARY RIGHTS, REGULATORY COMPLIANCE AND NON-COMPETITION AGREEMENT, having had ample opportunity to review same and consult counsel, if desired. Subject to Section 12 of this Employment Agreement, Dr. Thornton recognizes that, consistent with Phoenix International's policies for all of its executives and senior managers who have equity in the company or who receive stock options, this agreement binds Dr. Thornton to non-competition restrictions for one year after her employment with Phoenix ceases if she voluntarily leaves Phoenix or is terminated for a serious reason pursuant to Article 8.1 of this Agreement.. 10.3 With respect to the non-competition provisions included in the CONFIDENTIALITY, PROPRIETARY RIGHTS, REGULATORY COMPLIANCE AND NON-COMPETITION AGREEMENT, which are applicable after cessation of employment of Dr. Thornton by Phoenix, it is understood and agreed by both Parties that the purpose of these - 8 - provisions is to ensure that Dr. Thornton does not join a CRO or any other organization offering similar services or software products to those provided by Phoenix International, for a period of one (1) year subsequent to the termination of her employment at Phoenix if she voluntarily leaves Phoenix or is terminated for a serious reason pursuant to Article 8.1 of this Agreement. Thus, Dr. Thornton would be free to work for any biotechnology or pharmaceutical company which does not offer similar services or software products to those provided by Phoenix International. 11. INCENTIVES SUBJECT TO CHANGE 11.1 Dr. Thornton acknowledges and accepts that all of Phoenix International's executive share option plans, bonus plans and other incentives are subject to future revision by Phoenix International's Board of Directors, and that if such revisions conflict with this Employment Agreement, the revisions to the incentive plans shall prevail and shall replace anything to the contrary contained in this agreement, provided such revisions shall have no effect on share options already issued to Dr. Thornton. Furthermore, such revisions, if made, shall not be a cause for constructive dismissal notwithstanding any other provision of this agreement. 12. SURVIVAL OF RESTRICTIVE COVENANTS 12.1 The parties agree that the undertakings of Dr. Thornton under Section 5 of the CONFIDENTIALITY, PROPRIETARY RIGHTS, REGULATORY COMPLIANCE AND NON-COMPETITION AGREEMENT, shall only survive termination of this agreement in accordance with their respective terms, in the event that Dr. Thornton's employment is terminated by Phoenix for a serious reason and/or following Dr. Thornton's resignation (if such resignation does not follow a Change of Control or a constructive dismissal), 13. DAMAGES 13.1 Dr. Thornton hereby agrees that any breach by her of Section 3.1 of this Employment Agreement, or of the CONFIDENTIALITY, PROPRIETARY RIGHTS, REGULATORY COMPLIANCE AND NON-COMPETITION AGREEMENT, will entitle Phoenix to damages of no less than $100,000, which amount shall not be reduced for partial performance or any other reason whatsoever. - 9 - 14. GENERAL 14.1 If any provision of this agreement is unenforceable or invalid, for any reason whatsoever, such unenforceability or invalidity will not affect the enforceability or validity of the remaining provisions of this agreement and such provision will be severable from the remainder of this agreement. 14.2 This agreement shall be governed and construed in accordance with the laws of the Commonwealth of Pennsylvania. 14.3 No consent to or waiver of any breach of a term of provision of this agreement by either party shall be construed as a consent to or waiver of a subsequent breach of the same term or provision, nor shall it be considered a consent to or waiver of any other then existing or subsequent breach of a different term or provision. 14.4 PHOENIX and the Employee acknowledge that there are other contracts attached as Schedules to this Employment Agreement. If these Schedules contain terminology, definitions or terms, or create rights or obligations which are at variance or conflict with the terminology, definitions or terms, rights or obligations used or contained in this Employment Agreement, then the parties agree that the terms of this Agreement shall be deemed to set forth their true and complete intention and agreement. - 10 - IN WITNESS WHEREOF, the parties have executed this agreement in the City of __________________ on the 1st day of June, 1998 PHOENIX INTERNATIONAL LIFE SCIENCES (IBRD) INC. Per: /s/ John W. Hooper ----------------------------------------- JOHN W. HOOPER, Ph.D. President PHOENIX INTERNATIONAL LIFE SCIENCES INC. Per: /s/ John W. Hooper ----------------------------------------- JOHN W. HOOPER, Ph.D. Chairman and CEO /s/ Susan Thornton ----------------------------------------- SUSAN THORNTON, Ph.D. EX-10.11 25 EXHIBIT 10.11 Exhibit 10.11 EMPLOYMENT AGREEMENT BETWEEN: PHOENIX INTERNATIONAL LIFE SCIENCES (IBRD) INC., a corporation duly incorporated under the laws of STATE, having its head office at ADDRESS, in the City of CITY, STATE ZIP, and represented herein by its duly authorized representative, (hereinafter called "PHOENIX") AND: JAMES CONKLIN, M.D., domiciled and residing at 1439 Buford Drive, Yardley, PA 19067 (hereinafter called "DR. CONKLIN") WHEREAS Phoenix is a subsidiary of Phoenix International Life Sciences (U.S.) Inc., itself a subsidiary of Phoenix International Life Sciences Inc. (The last mentioned company hereinafter "Phoenix International"), which term shall include, if the context so requires, all the subsidiaries of Phoenix International Life Sciences Inc.); and WHEREAS Phoenix International undertakes to guarantee performance of all of the terms and obligations undertaken by Phoenix for the benefit of Employee for the duration of such Employee's employment and conditional upon the Employee's respect of his own undertakings for the benefit of Phoenix hereunder; and WHEREAS Phoenix wishes to employ Dr. Conklin on the terms and conditions hereinafter set forth; and WHEREAS Phoenix and Dr. Conklin wish to acknowledge by this agreement their mutual rights and obligations with respect to Dr. Conklin's employment by Phoenix; and WHEREAS this agreement shall be deemed to have commenced September 1, 1998 regardless of the date it is actually signed, NOW THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto hereby agree as follows: - 2 - 1. PREAMBLE 1.1 The preamble is deemed to form part of this agreement. 2. POSITION 2.1 Dr. Conklin's initial title shall be Senior Vice President and General Manager, Scientific Software Division (SEE ATTACHED SCHEDULE A ENTITLED "INITIAL POSITION DESCRIPTION"). Phoenix International intends to spin off its Scientific Software Division as a separate company (MIPSS). If and when this takes place, it is intended that Dr. Conklin will immediately be appointed President and CEO of MIPSS. 3. OTHER EMPLOYMENT AND DUTY TO DEVOTE WHOLE TIME 3.1 Dr. Conklin agrees that during the term of his employment, he shall devote his full time and efforts to Phoenix and shall not, directly or indirectly, engage in any other business whether or not said other business is competitive with or similar to the business carried on by Phoenix International. 4. REMUNERATION AND OTHER BENEFITS 4.1 BASE SALARY: Dr. Conklin's starting annual salary shall be US$220,000, less all applicable deductions, payable bi-weekly in arrears. If Dr. Conklin is appointed President and CEO of MIPSS before August 31, 1999, his salary will be identical to that specified above, but will still be subject to annual review on the anniversary date of his hiring by Phoenix. 4.2 BASE SALARY INCREASES: Dr Conklin will be eligible to receive annual increases of his base salary upon each anniversary of the commencement date, September 1, 1998, of this Agreement. Said increases will be based on his ability to fulfill the position description and consistent with decisions of Phoenix International's Board of Directors. 4.3 CAR EXPENSES: Dr. Conklin will receive a car allowance of $5,000 annually, payable in monthly instalments. 4.4 BENEFIT PLANS: Subject to completion by Dr. Conklin of any medical examinations and other like procedures and such enquiries, as may be required by - 3 - Phoenix International's insurers, Phoenix shall pay and maintain for Dr. Conklin short term and long term disability benefits and insurance coverage consistent with the benefits provided to other executives of Phoenix International. Dr. Conklin shall be entitled to participate in all present or future benefit and insurance plans which Phoenix International makes available to its executives, including the 401k plan currently in place at Phoenix, or modifications thereof. 4.5 VACATION: Dr. Conklin will be entitled to 4 weeks (20 working days) annual vacation. 4.6 BONUS: Dr. Conklin will be eligible to receive an annual bonus in accordance with the provisions of Phoenix's WORLDWIDE EXECUTIVE REMUNERATION PLAN, a copy of which is attached hereto as SCHEDULE B, (but which may be amended from time to time). If and when Dr. Conklin is appointed President and CEO of MIPSS, his eligibility for the Phoenix International bonus plan will cease, and he will be eligible for a bonus plan agreed between him and the Board of Directors of MIPSS. 5. PROFESSIONAL LIABILITY INSURANCE 5.1 Dr. Conklin will be covered by professional liability and Directors and Officer insurance to which Phoenix International subscribes, to the same extent as all Phoenix International executives of his level. If and when Dr. Conklin becomes President and CEO of MIPSS, he will be covered by insurance no less favorable to him than that specified above and provided by Phoenix International. 6. EQUITY IN MIPSS 6.1 If and when Dr. Conklin is appointed President and CEO of MIPSS, he will be granted equity in MIPSS, as assigned by MIPSS Board of Directors. It is expected that such equity will be approximately 10% of the portion of the equity of MIPSS set aside for employees of MIPSS. 7. TERM OF THE AGREEMENT 7.1 Dr. Conklin's employment with Phoenix in his new position shall commence on September 1, 1998 and shall be for an indeterminate term. - 4 - 8. TERMINATION 8.1 TERMINATION BY PHOENIX FOR SERIOUS REASON 8.1.1 Phoenix may terminate this Employment Agreement at any time, for a serious reason, by resolution of its Board of Directors adopted at a duly constituted meeting of the Board. If Phoenix exercises its rights to terminate this Employment Agreement for a serious reason, Dr. Conklin shall not be entitled to receive any further remuneration, save any base salary, vacation, and benefits (but not bonuses), accrued as at the date of termination. For the purposes of this agreement, a "serious reason" shall mean that Dr. Conklin: (a) has refused, without valid reason, to comply with the reasonable instructions of the Board of Directors or the CEO of Phoenix International given to him in his capacity as an executive of Phoenix insofar as such instructions are not inconsistent with the terms of this Agreement; (b) has committed improper misconduct which is materially detrimental to Phoenix, or has been grossly negligent in the performance of his duties hereunder; (c) commits wrongful acts against the interests of Phoenix International or against its property; (d) becomes subject in any way to bankruptcy or insolvency laws; (e) commits and is found guilty of an indictable criminal offence or other similar offence involving fraudulent or dishonest conduct, by a court of competent jurisdiction; or (f) gives cause to Phoenix International for a serious reason similar in gravity to those set forth above. 8.2 TERMINATION BY PHOENIX WITHOUT A SERIOUS REASON 8.2.1 Phoenix may also terminate this agreement at its discretion for any reason whatsoever by giving Dr. Conklin 4 weeks prior notice of its decision to dismiss. Phoenix may, at any time during the notice period, choose to immediately discharge Dr. Conklin, but in this case Dr. Conklin shall be entitled to receive and shall be paid all amounts which he would otherwise - 5 - earn during the notice period. 8.2.2 If Phoenix terminates this agreement at its discretion, without a serious reason, Phoenix shall pay Dr. Conklin an amount equal to his gross base annual salary (at the time of notification of termination). All appropriate withholding as may be required by law will be deducted from the amount so calculated. This payment shall be made within 7 days after the last day Dr. Conklin is employed. The bonus for the fiscal year in which termination takes place, if any, will be paid pro rata to the number of days worked in the fiscal year. With the exception of the amount referred to aforesaid, Dr. Conklin shall have no right to be paid or to claim any further payments related to or arising out of the termination of his employment by Phoenix and he renounces to any such further right or claim. 8.2.3 Phoenix's obligation to make the aforesaid payments will not be reduced or affected if Dr. Conklin has secured alternative employment. 8.3 TERMINATION BY DR. CONKLIN 8.3.1 Dr. Conklin may, at his option, terminate this agreement for any reason whatsoever provided that Phoenix is given at least 120 days notice before said termination becomes effective. 8.3.2 Dr. Conklin has the right to terminate this agreement if constructively dismissed, and receive compensation according to the terms and conditions of section 8.2, above. Dr. Conklin shall be considered to have been constructively dismissed if a) there is a material and adverse diminution on an accumulative basis of his duties, authority, position, compensation, benefits, or title, which is not applied to all other executives of Phoenix International, or (b) there is a breach by Phoenix of any of the material terms of this Agreement. 9. CONFIDENTIAL INFORMATION / NON-COMPETITION AND OTHER UNDERTAKINGS 9.1 Dr. Conklin shall sign concurrently herewith the CONFIDENTIALITY, PROPRIETARY RIGHTS, REGULATORY COMPLIANCE AND NON-COMPETITION AGREEMENT with Phoenix and Phoenix International, which is ATTACHED AS SCHEDULE C. 9.2 Dr. Conklin fully understands the provisions of this Employment Agreement and the CONFIDENTIALITY, PROPRIETARY RIGHTS, REGULATORY COMPLIANCE AND NON-COMPETITION AGREEMENT, having had ample opportunity to review same and consult counsel, if desired. Subject to Section 11 of this Employment Agreement, Dr. Conklin recognizes that, consistent with Phoenix International's policies for - 6 - all of its executives and senior managers who are eligible to receive equity in the company or its subsidiaries, or who receive stock options, this agreement binds Dr. Conklin to non-competition restrictions for one year after his employment with Phoenix ceases if he voluntarily leaves Phoenix or is terminated for a serious reason pursuant to Article 8.1 of this Agreement.. 9.3 With respect to the non-competition provisions included in the CONFIDENTIALITY, PROPRIETARY RIGHTS, REGULATORY COMPLIANCE AND NON-COMPETITION AGREEMENT, which are applicable after cessation of employment of Dr. Conklin by Phoenix, it is understood and agreed by both Parties that the purpose of these provisions is to ensure that Dr. Conklin does not join a CRO or any other organization offering similar services or software products to those provided by Phoenix International, for a period of one (1) year subsequent to the termination of his employment at Phoenix if he voluntarily leaves Phoenix or is terminated for a serious reason pursuant to Article 8.1 of this Agreement. Thus, Dr. Conklin would be free to work for any biotechnology or pharmaceutical company which does not offer similar services or software products to those provided by Phoenix International. 10. INCENTIVES SUBJECT TO CHANGE 10.1 Dr. Conklin acknowledges and accepts that all of Phoenix International's executive bonus plans and other incentives are subject to future revision by Phoenix International's Board of Directors, and that if such revisions conflict with this Employment Agreement, the revisions to the incentive plans shall prevail and shall replace anything to the contrary contained in this agreement. Furthermore, such revisions, if made, shall not be a cause for constructive dismissal notwithstanding any other provision of this agreement. 11. SURVIVAL OF RESTRICTIVE COVENANTS 11.1 The parties agree that the undertakings of Dr. Conklin under Section 5 of the CONFIDENTIALITY, PROPRIETARY RIGHTS, REGULATORY COMPLIANCE AND NON-COMPETITION AGREEMENT, shall only survive termination of this agreement in accordance with their respective terms, in the event that Dr. Conklin's employment is terminated by Phoenix for a serious reason and/or following Dr. Conklin's resignation (if such resignation does not follow a constructive dismissal). - 7 - 12. DAMAGES 12.1 Dr. Conklin hereby agrees that any breach by him of Section 3.1 of this Employment Agreement, or of the CONFIDENTIALITY, PROPRIETARY RIGHTS, REGULATORY COMPLIANCE AND NON-COMPETITION AGREEMENT, will entitle Phoenix to damages of no less than US$100,000, which amount shall not be reduced for partial performance or any other reason whatsoever. 13. GENERAL 13.1 If any provision of this agreement is unenforceable or invalid, for any reason whatsoever, such unenforceability or invalidity will not affect the enforceability or validity of the remaining provisions of this agreement and such provision will be severable from the remainder of this agreement. 13.2 This agreement shall be governed and construed in accordance with the laws of the Commonwealth of Pennsylvania. 13.3 No consent to or waiver of any breach of a term of provision of this agreement by either party shall be construed as a consent to or waiver of a subsequent breach of the same term or provision, nor shall it be considered a consent to or waiver of any other then existing or subsequent breach of a different term or provision. 13.4 Phoenix, Phoenix International and the Employee acknowledge that there are other contracts attached as Schedules to this Employment Agreement. If these Schedules contain terminology, definitions or terms, or create rights or obligations which are at variance or conflict with the terminology, definitions or terms, rights or obligations used or contained in this Employment Agreement, then the parties agree that the terms of this Agreement shall be deemed to set forth their true and complete intention and agreement. - 8 - IN WITNESS WHEREOF, the parties have executed this agreement in the City of Montreal on the 1st day of September, 1998 PHOENIX INTERNATIONAL LIFE SCIENCES (IBRD) INC. Per: /s/ John W. Hooper ------------------------------------------- JOHN W. HOOPER, Ph.D. President PHOENIX INTERNATIONAL LIFE SCIENCES INC. Per: /s/ John W. Hooper ------------------------------------------- JOHN W. HOOPER, Ph.D. Chairman and CEO /s/ James Conklin ------------------------------------------- JAMES CONKLIN, M.D. EX-10.12 26 EXHIBIT 10.12 Exhibit 10.12 L E A S E A G R E E M E N T BY AND BETWEEN: GAMMA THREE ASSOCIATES LIMITED PARTNERSHIP, a New Jersey Limited Partnership, "LANDLORD" - and - INSTITUTE FOR BIOLOGICAL RESEARCH AND DEVELOPMENT, INC., a Delaware corporation, "Tenant" Premises: 105 Neptune Boulevard Neptune Business Center Neptune Township, New Jersey DATED: November 27, 1991 PREPARED BY: ROBERT K. BROWN, ESQ. #13740-198 RKB Disk #279 TABLE OF CONTENTS 3. RENT........................................................6 4. PARKING AND USE OF EXTERIOR AREA............................6 5. USE.........................................................7 6. CONSTRUCTION................................................7 7. REPAIRS AND MAINTENANCE.....................................8 8. UTILITIES..................................................11 11. SIGNS......................................................13 12. FIXTURES...................................................13 13. BROKERAGE..................................................14 14. FIRE AND CASUALTY..........................................15 15. COMPLIANCE WITH LAWS, RULES AND REGULATIONS................16 16. INSPECTION BY LANDLORD.....................................19 17. DEFAULT BY TENANT..........................................20 18. LIABILITY OF TENANT FOR DEFICIENT..........................24 19. NOTICES....................................................24 20. NON-WAIVER.................................................25 21. RIGHT OF TENANT TO MAKE ALTERATIONS AND IMPROVEMENTS.......25 22. NON-LIABILITY OF LANDLORD..................................26 23. RESERVATION OF EASEMENT....................................27 24. POLLUTION..................................................27 25. STATEMENT OF ACCEPTANCE....................................28 26. FORCE MAJEURE..............................................28 27. STATEMENTS BY LANDLORD AND TENANT..........................29 28. CONDEMNATION...............................................29 29. LANDLORD'S REMEDIES........................................30 30. QUIET ENJOYMENT............................................31 31. SURRENDER OF PREMISES......................................31 32. INDEMNITY..................................................32 33. LEASE CONSTRUCTION.........................................33 34. BIND AND INURE CLAUSE......................................33 35. DEFINITIONS................................................33 36. DEFINITION OF TERM OF "LANDLORD"...........................33 37. COVENANTS OF FURTHER ASSURANCES............................34 38. COVENANT AGAINST LIENS.....................................34 39. SUBORDINATION..............................................34 40. EXCULPATION OF LANDLORD....................................35 41. NET RENT...................................................35 42. SECURITY...................................................35 43. ASSIGNMENT AND SUBLETTING..................................36 44. OPTION TO RENEW............................................39 45. FINANCIAL STATEMENTS.......................................42 46. TENANT'S FIRST RIGHT OF NEGOTIATION........................42 47. LANDLORD IS DEFAULT........................................43 THIS AGREEMENT, made the day of 1991, by and between GAMMA THREE ASSOCIATES LIMITED PARTNERSHIP, a New Jersey Limited Partnership, having an office at 14A Worlds Fair Drive, Franklin Township, New Jersey 08873 (P.O. Box 5850, Somerset, New Jersey 08875) hereinafter called the "LANDLORD"; and INSTITUTE FOR BIOLOGICAL RESEARCH AND DEVELOPMENT, INC., a Delaware corporation, about to have an office at 105 Neptune Boulevard, Suite Neptune, New Jersey 07753, hereinafter called the "Tenant". W I T N E S S E T H : WHEREAS, the LANDLORD intends to lease to the Tenant a portion of the building commonly known as 105 Neptune Boulevard, Neptune Township, New Jersey (the "Building"), which portion is located on the first floor of the Building and contains 11,100 square feet, outside dimensions to center line of common wall, identified on the plot plan attached hereto and made a part hereof as Schedule "A", hereinafter referred to as the "Leased Premises"; and WHEREAS, the parties hereto wish to mutually define their rights, duties and obligations in connection with the said Lease, NOW, THEREFORE, KNOW ALL MEN BY THESE PRESENTS, that for the rents reserved, the mutual considerations herein and the parties mutually intending to be legally bound hereby, the LANDLORD does demise, lease and let unto the Tenant and the Tenant does rent and take from the LANDLORD the Leased Premises as described in ninety (90) days following the date of execution of this Lease Agreement. If the LANDLORD has not delivered possession of the Leased Premises to Tenant as required by this Lease by May 31, 1992, Tenant shall have the right to terminate this Lease. The foregoing right of termination is expressly subject to and contingent upon the execution of this Lease Agreement by LANDLORD and Tenant, and the approval of Tenant's Plan as well as the cost of installation of all improvements set forth thereon, by November 25, 1991; for each day of delay beyond November 25, 1991, the "outside" date hereinabove set forth of May 31, 1992 shall be extended for an additional day. In the event of termination of this Lease in accordance with this Article 2.1, LANDLORD hereby agrees that it shall refund to Tenant all monies previously paid to LANDLORD in accordance with the terms and conditions of this Lease, including the Tenant's Contribution as hereinafter defined in Article 6.2. 1. 2. 2.1 2.2 Subject to the terms and conditions of this Lease, in the event the Leased Premises are delivered to the Tenant in the manner provided in Article 2.1 above, prior to or after February 1, 1992, the Lease term of five (5) years shall commence on the first day of the next succeeding month following delivery of possession to the Tenant (hereinafter called the "Commencement Date") and shall continue for a term of five (5) years thereafter. The Tenant 2 shall, however, pay to the LANDLORD a sum equal to the pro rata share of one (1) month's rent for that portion of the month prior to the Commencement Date. During said period of partial monthly occupancy" if any, all other terms and conditions of this Lease shall be applicable to the occupancy of the Leased Premises by the Tenant. 2.3 It is expressly understood and agreed that for the purpose of this Lease, wherever and whenever the term "substantial completion" is used, the term "substantial completion" shall not include items of maintenance, service or guarantee, which may be required pursuant to the terms and conditions of this agreement. The Building and improvements shall be considered substantially completed upon the issuance of a Certificate of Occupancy. 3. RENT 3.1 Tenant covenants and agrees to pay the annual rent as follows:
RENT PER MONTHLY LEASE YEAR SQUARE FOOT ANNUAL RENT INSTALLMENT - ---------- ----------- ----------- ----------- 1 $10.00 $111,000.00 $ 9,250.00 2 $10.30 $114,330.00 $ 9,527.50 3 $10.60 $117,660.00 $ 9,805.00 4 $10.80 $119,880.00 $ 9,990.00 5 $11.00 $122,100.00 $10,175.00
The figures for "Annual Rent" and "Monthly Installment" are subject to adjustment as of the Commencement Date based Upon the gross 3 rentable area of the Leased Premises, as shall be certified by LANDLORD's architect or engineer, multiplied by "Rent Per Square Foot". All of the foregoing monthly installments shall be paid promptly in advance on the first day of each and every month during the term of the Lease without demand and without off-set or deduction, together with such additional rent and other charges required to be paid by Tenant as are hereinafter set forth. 3.2 Simultaneously with the execution hereof, the Tenant has delivered to the LANDLORD the first month's installment of annual rent payable hereunder. 4. PARKING AND USE OF EXTERIOR AREA 4.1 The LANDLORD shall reserve for the Tenant's exclusive use twelve (12) parking spaces at the Building. Otherwise and in addition thereto, the Tenant shall have the right to use the parking spaces on a non-exclusive basis in common with other tenants of the Complex and to use the access driveways and allocated parking spaces for its business purposes and for those of its agents, servants, employees or invitees. The LANDLORD reserves the right to allocate designated parking spaces if LANDLORD chooses. The LANDLORD and Tenant mutually agree that they will not block, hinder or otherwise obstruct the access driveways and parking areas so as to impede the free flow of vehicular traffic in and out of the Complex. In connection with the use of the loading platforms, if any, both LANDLORD and Tenant agree that 4 they will not use the same in connection with the conduct of their business so as to unreasonably interfere with the use of the access driveways and parking areas. 4.2 The Tenant may not utilize any portion of the land outside of the Leased Premises for outside storage of raw materials or finished products. 5. USE The Tenant covenants and agrees to use and occupy the Leased Premises for general offices and for an in-patient and outpatient clinic, biomedical research facility and future analytical laboratory together with ancillary medical and professional offices for the purpose of conducting pharmaceutical testing in compliance with applicable FDA procedures for Phases I, II, III and IV, which use by Tenant, however, is and shall be expressly subject to all applicable zoning ordinances, rules and regulations of any governmental instrumentalities, boards or bureaus having jurisdiction thereof. 6. CONSTRUCTION 6.1 Subject to the prior written approval of the Tenant and LANDLORD's architect, the LANDLORD shall construct and complete Tenant's Leased Premises in accordance with the Building Standard set forth on Schedule "B", and in accordance with the plan annexed hereto and made a part hereof as Schedule "B-1" ("Tenant's Plan") , provided that the LANDLORD shall have the right to substitute for the materials and equipment required by the Building Standard and Tenant's Plan, materials and equipment of equal or 5 better quality and standard, provided said substitutions conform with applicable Building Codes. 6.2 Upon execution of the within Lease Agreement, Tenant shall deliver to LANDLORD the sum of SEVENTY FIVE THOUSAND AND 00/100 ($75,000.00) DOLLARS (the "Tenant's Contribution"), which Tenant's Contribution represents the estimated cost of installation of all items set forth in Tenant's Plan which are in excess of Building Standard (which, for the purposes of this Article, is hereby deemed to include all cabinetry to be installed by LANDLORD in accordance with Tenant's Plan) . In the event the actual cost of installation of such excess requirements of Tenant shall be less than the sum of SEVENTY FIVE THOUSAND AND 00/100 ($75,000.00) DOLLARS, the difference shall be rebated to Tenant upon establishment of the actual cost of such work. In the event that the cost of installation of leasehold improvements which exceed the Building Standard shall exceed the sum of SEVENTY FIVE THOUSAND AND 00/100 ($75,000.00) DOLLARS, the Tenant shall deliver the amount in excess of Tenant's Contribution to the LANDLORD upon the Commencement Date. Prior to the commencement of the term of this Lease, LANDLORD shall provide Tenant with a detailed schedule of all costs for labor and materials actually paid by LANDLORD for completing Tenant's Plan. 6.3 LANDLORD hereby agrees that it shall give Tenant at least thirty (30) days prior written notice of the estimated date upon which the Leased Premises shall be delivered to the Tenant. 6 7. REPAIRS AND MAINTENANCE 7.1 The Tenant shall pay to the LANDLORD monthly, as additional rent, a sum equal to Tenant's Building Percentage of costs incurred by the LANDLORD for maintenance, repair and replacement of the structural parts of the Building, including the walls, roof, concrete floor, foundations, structural steel, the electrical system, together with the air-conditioning and heating plant, the plumbing, pipes, sewer lines and conduits, and fixtures belonging thereto, except for repairs or maintenance occasioned by the negligence or deliberate act of Tenant, or its agents, servants, employees and invitees, which shall then be repaired by LANDLORD at the cost and expense of the Tenant. LANDLORD warrants and represents that all fixtures, equipment and systems described herein shall, at the commencement of the term of this Lease, be new and in first-class condition and working order. In addition, the LANDLORD hereby warrants the condition of the foregoing items for a period of one (1) year following the Commencement Date hereunder, it being understood that Tenant shall nonetheless be responsible for its Building Percentage of the cost of all maintenance (but not repair and replacement) of said items. 7.2 The Tenant shall pay to the LANDLORD monthly as additional rent a sum equal to Tenant's Common Area Percentage of cost incurred by the LANDLORD for maintenance, repair and replacement of the following: (i) parking lot and roadways, driveways, sidewalks, walkways, 7 exterior lighting; (ii) exterior sewer and utility lines; (iii) lawns and shrubbery; (iv) snow removal; (v) signs serving the Complex; and (vi) detention ponds. In addition the Tenant shall pay the LANDLORD monthly as additional rent, Tenant's Building Percentage of costs incurred by the LANDLORD for the maintenance, repair and replacement of the following: roof, gutters, leaders, flashings, metal gravel stops and roof drains. Nothing hereinabove contained in Articles 7.1 and 7.2 shall require the Tenant to pay any portion of the construction costs applicable to the initial construction of other phases of the Complex. In addition LANDLORD hereby agrees that in the event the replacement of the roof, foundation, exterior walls, structural steel, heating, ventilating and air-conditioning system or the parking lot serving the Building is necessary during the term of this Lease, the cost of any such replacement shall be amortized over the useful life of the item being replaced [not to exceed ten (10) years in any event] and Tenant shall only be responsible to reimburse LANDLORD for that portion of said amortized expense as shall be applicable to the remaining term of this Lease. The remaining term of this Lease shall be deemed to include any extension or renewal of this Lease, effective as of the exercise by Tenant of its option to renew as hereinafter contained in Article 44, or upon execution of an agreement by and between LANDLORD and Tenant otherwise extending the term of this Lease. 7.3 Tenant agrees to keep the Leased Premises in as good repair as they are at the beginning of the term, reasonable use and wear thereof and 8 damage by fire or other casualty not caused by Tenant excepted. Tenant further agrees not to damage, overload, deface or commit waste of the Leased Premises. Tenant shall be responsible for all damage of any kind or character to the Leased Premises, including the windows, glass, floors, walls and ceilings, caused by Tenant or by anyone using or occupying the Leased Premises by, through or under the Tenant. LANDLORD shall repair the same, and Tenant agrees to pay the costs incurred therefor to LANDLORD upon demand. Anything hereinabove contained to the contrary notwithstanding, it is expressly understood and agreed that the Tenant shall, at its sole cost and expense, be responsible for the repair, maintenance and replacement of any items installed by LANDLORD for Tenant's use as leasehold improvements over and above the improvements furnished by LANDLORD, as part of LANDLORD's work. 7.4 During the first year of the Lease term, the LANDLORD shall estimate the cost of all of the maintenance, repair and replacement services required pursuant to Articles 7.1 and 7.2 above. LANDLORD shall furnish such estimate to the Tenant, and Tenant shall pay to LANDLORD one-twelfth (1/12th) of its Common Area Percentage or Building Percentage thereof, as applicable, during each month of the Lease year as additional rent. At the expiration of the first twelve (12) months of the Lease term, the LANDLORD shall furnish to Tenant a breakdown, certified by the LANDLORD, as to the total cost of maintenance, repair and replacement for the prior twelve (12) months. In the event Tenant's pro rata share shall be more than the aggregate 9 paid by the Tenant during the preceding twelve (12) month period, Tenant shall pay to the LANDLORD, in one lump sum, any difference in such obligation, said sum to be paid within fifteen (15) days after demand. In the event Tenant shall have overpaid its pro rata share, any such overage shall be applied to the monthly maintenance, repair and replacement charges prospectively due under the Lease. This procedure shall be followed during each year of the Lease term, and at the expiration of the Lease, any overage or underage shall be credited or paid after computation by the LANDLORD, which obligation of LANDLORD and Tenant shall survive the expiration of the Lease term. 7.5 Upon receipt of written request from Tenant, LANDLORD hereby agrees that it shall deliver copies of applicable invoices and supporting documentation which form thebasis of any statement delivered to Tenant pursuant to Article 7.4 hereof, within thirty (30) days of receipt by LANDLORD of Tenant's request therefor, it being the intention that Tenant shall be obligated to pay its pro rata share of such reasonable expenses as are actually incurred by LANDLORD. 7.6 LANDLORD shall be obligated to maintain the Building, Common Area, Complex and all other portions of the Property in a first-class condition. 8. UTILITIES 8.1 The Tenant shall, at its own cost and expense, pay all utility meter and service charges applicable to the Leased Premises, including gas, 10 sewer, electric, water, janitorial and garbage disposal services and Tenant's Building Percentage of standby sprinkler charges, if any, based upon invoices which will be submitted by LANDLORD to Tenant. It is understood and agreed that the Leased Premises are separately metered for gas and electrical consumption. 8.2 The LANDLORD is hereby granted the privilege of entering the Leased Premises for the purpose of repairing any 9. 10. 10.1 sprinkler damage, flood insurance and comprehensive liability for the whole of the land, Building and improvements of which the Leased Premises are a part, including LANDLORD's cost for umbrella insurance (excess coverage) in an amount not to exceed FIFTEEN MILLION ($15,000,000.00) DOLLARS. Tenant shall pay the full premium attributable to casualty rent insurance, insuring the value of one (1) year's gross rental obligation of Tenant hereunder, including taxes and insurance premiums. Any increase in the premiums hereinabove referred to due to change in rating of the Building, attributable to the use of the Leased Premises by the Tenant shall be paid entirely by the Tenant. LANDLORD covenants and agrees that it shall carry the aforementioned insurance policies and LANDLORD shall certify annually, the annual cost of such insurance premiums, and shall furnish to 11 Tenant, if requested, a copy of all insurance premium bills for which Tenant has been charged its pro rata share thereof. 10.2 In addition to the above, the Tenant covenants and agrees that it will, at its sole cost and expense, carry liability insurance covering the Leased Premises in the minimum amount of ONE MILLION ($1,000,000.00) DOLLARS per accident for one (1) person, THREE MILLION ($3,000,000-00) DOLLARS per accident for two (2) or more persons, and a minimum amount of TWO HUNDRED FIFTY THOUSAND ($250,000.00) DOLLARS for property damage, and the Tenant further covenants and agrees that it will add as a party insured by such policy the interest of the LANDLORD and will furnish LANDLORD with a certificate of said liability insurance. 10.3 It is expressly understood and agreed that all policies of insurance shall contain a clause that the same shall not be cancelled except on thirty (30) days' written notice to any and all parties in interest. 10.4 The parties hereto mutually covenant and agree that each party, in connection with insurance policies required to be furnished in accordance with the terms and conditions of this Lease, or in connection with insurance policies which they obtain insuring such insurable interest as LANDLORD or Tenant may have in its own properties, whether personal or real, shall expressly waive any right of subrogation on the part of the insurer against the LANDLORD or Tenant as the same may be applicable, which right to the extent not prohibited or violative of any such policy is hereby expressly 12 waived, and LANDLORD and Tenant each mutually waive all right of recovery against each other, their agents, or employees for any loss, damage or injury of any nature whatsoever to property or person for which either party is required by this Lease to carry insurance. 11. SIGNS Tenant shall have the right and privilege of placing a sign on the Building containing the Leased Premises which shall be of sufficient size and design so as to be clearly visible to vehicles and pedestrians on adjacent and contiguous streets. The said sign shall comply with the applicable rules and regulations of the applicable governmental boards and bureaus having jurisdiction thereof, and shall be approved by the LANDLORD, which approval shall not be unreasonably withheld. No other exterior signage of Tenant shall be permitted. 12. FIXTURES The Tenant is given the right and privilege of installing and removing property, machinery, equipment and fixtures in the Leased Premises during the term of the Lease subject to compliance with applicable rules and regulations of governmental boards and bureaus having jurisdiction thereof. However, if the Tenant is in default and moves out, or is dispossessed, and fails to remove any property, machinery, equipment and fixtures or other property prior to such default, dispossess or removal, then and in that event, the said property, machinery, equipment and fixtures or other property shall be 13 deemed, at the option of the LANDLORD, to be abandoned; or in lieu thereof, at the LANDLORD's option, the LANDLORD may remove such property and charge the reasonable cost and expense of its removal, storage and disposal to the Tenant. The Tenant shall be liable for any damage which it causes in the removal of said property from the Leased Premises. 13. BROKERAGE The parties mutually represent to each other that JACOBSON, GOLDFARB & TANZMAN ASSOCIATES, Ten Woodbridge Center Drive P.O. Box 1408, Woodbridge, New Jersey 07095, and GRUBB & ELLIS, Two Research Way, Princeton Forrestal Center, Princeton, New Jersey 08540, are the sole brokers who negotiated and consummated the within transaction, and that neither party dealt with any other broker in connection with the within Lease, it being understood and agreed that the LANDLORD shall be responsible, at its sole cost and expense, to pay the real estate brokerage in connection with this Lease transaction. LANDLORD agrees to indemnify, defend and save harmless Tenant in connection with the claims of any other real estate brokers claiming commissions in connection with the within transaction and claiming authority from LANDLORD. Tenant agrees to indemnify, defend and save harmless LANDLORD in connection with the claims of any other real estate brokers claiming commissions in connection with the within transaction and claiming authority from Tenant. 14. FIRE AND CASUALTY 14 14.1 In case of any damage to the Building by f ire or other casualty occurring during the Term or previous thereto, which renders the Leased Premises wholly untenantable so that the same cannot be repaired within one hundred eighty (180) days from the happening of such damage, then the Term hereby created shall, at the option of the LANDLORD, terminate from the date of such damage. If the LANDLORD elects to terminate the Lease, LANDLORD shall notify the Tenant of such election within thirty (30) days of the happening of the fire or casualty, and in such event the Tenant shall immediately surrender the Leased Premises and shall pay Fixed Rent and Additional Rent only to the time of such damage and the LANDLORD may re-enter and re-possess the Leased Premises, discharged from this Lease. In the event the LANDLORD can restore the Leased Premises within one hundred eighty (180) days, it shall advise the Tenant of such fact, and the Lease shall remain in full force and effect during the period of LANDLORD's restoration, except that all rent reserved hereunder shall abate, upon the happening of fire or casualty, and while the repairs and restorations are being made, but the rent shall recommence upon restoration of the Leased Premises and delivery of the same by the LANDLORD to the Tenant. LANDLORD agrees that it will undertake reconstruction and restoration of the Leased Premises with due diligence and reasonable speed and dispatch, subject to the terms and conditions of Article 8. 15 14.2 If the Building shall be damaged, but the damage is repairable within one hundred eighty (180) days the LANDLORD agrees to repair the same with due diligence and reasonable speed and dispatch subject to the terms and conditions of Article 8. In such event, the rent accrued and accruing shall not abate, except f or that portion of the Leased Premises that has been rendered untenantable and as to that portion the rent shall abate, based on equitable adjustments. 14.3 The Tenant shall immediately notify the LANDLORD in case of fire or other damage to the Leased Premises. 14.4 Notwithstanding anything contained in Article 14.1 or 14.2 above, if such repairs are for any reason not completed within two hundred ten (210) days, then the Tenant shall have the right to terminate this Lease upon written notice to the LANDLORD of such election, and in such event of termination LANDLORD and Tenant shall thereupon be released of liability one to the other, and the within Lease shall be deemed null and void. 14.5 Rent, as referred to in this Article 14, is intended to include annual rent, additional rent and all other Lease charges required to be paid by Tenant pursuant to this Lease. 15. COMPLIANCE WITH LAWS, RULES AND REGULATIONS 15.1 (i) The Tenant covenants and agrees that upon acceptance and occupancy of the Leased Premises, it, will, during the Lease term, promptly, at Tenant's cost and expense, execute and comply with all statutes, 16 ordinances, rules, orders, regulations and requirements of the Federal, State and Municipal governments and of any and all their instrumentalities, departments and bureaus, applicable to the Leased Premises, as the same may require correction, prevention and abatement of nuisances, violations or other grievances, in, upon or connected with the Leased Premises, and arising from the operations of the Tenant therein. (ii) The Tenant covenants and agrees at its own cost and expense, to comply with such regulations or requests as may be required by the fire or liability insurance carriers providing insurance for the Leased Premises, and will further comply with such other requirements that may be promulgated by the Board of Fire Underwriters, in connection with the use by the Tenant of the Leased Premises in the conduct of its business. (iii) The Tenant covenants and agrees that it will not commit any nuisance, nor permit the emission of any objectionable sound, noise or odors which would be violative of any applicable governmental rule or regulation or would per se create a nuisance. The Tenant further covenants and agrees that it will handle and dispose of all rubbish, garbage and waste in connection with the Tenant's operations in the Leased Premises in accordance with reasonable regulations established by the LANDLORD from time to time in order to keep the premises in an orderly condition and in order to avoid unreasonable emission of dirt, fumes, odors or debris which may constitute a nuisance or induce pests or vermin. In addition, the Tenant shall handle and 17 dispose of all medical waste, at Tenant's sole cost and expense, in accordance with all applicable statutes, laws, rules and regulations of governmental entities having jurisdiction thereof. 15.2 In case the Tenant shall fail or neglect to comply with the aforesaid statutes, ordinances, rules, orders, regulations and requirements or any of them, as hereinbefore provided, or in case the Tenant shall neglect or fail to make any necessary repairs, then the LANDLORD or the LANDLORD's agents may after thirty (30) days' written notice specifying the applicable statute, ordinance, rule, order, regulation or requirement, the nature of Tenant's failure or neglect to comply with the same and the required repair or other cure (except for emergency repairs, which may be made immediately) enter the Leased Premises and make said repairs and comply with any and all of the said statutes, ordinances, rules, orders, regulations or requirements, at the cost and expense of the Tenant and in case of the Tenant's failure to pay therefor, the said cost and expense shall be added to the next month's rent and be due and payable as such, or the LANDLORD may deduct the same from the balance of any sum remaining in the LANDLORD's hands. This provision is in addition to the right of the LANDLORD to terminate this Lease by reason of any default on the part of the Tenant, subject to the rights of the Tenant as hereinabove mentioned in the manner as in this Lease otherwise provided. Notwithstanding anything hereinabove contained, the Tenant shall have right to contest any of the aforementioned statute, ordinances, rules, orders, 18 regulations and requirements, provided that Tenant shall indemnify, defend and save harmless the LANDLORD from and against any and all claims or liabilities which may be incurred by LANDLORD due to Tenant's non-compliance with same. No such contest may be conducted which shall result in the imposition of any lien on the Complex or which would affect the use and occupancy of the Complex by any other tenant thereof. 15.3 Without limiting anything hereinabove contained in this Article 15, Tenant expressly covenants and agrees to fully comply with the provisions of the New Jersey Environmental Cleanup Responsibility Act (N.J.S.A. 13:1K-6, et seq.) hereinafter referred to as 11ECRA11, and all regulations promulgated thereto with respect to Tenant's use of the Leased Premises prior to the expiration or earlier termination of the within Lease, or at any time that any action of the Tenant triggers the applicability of ECRA. In particular, the Tenant agrees that it shall comply with the provisions of ECRA in the event of any "closing, terminating or transferring" of Tenant's operations, as defined by and in accordance with the regulations which have been promulgated pursuant to ECRA. In the event evidence of such compliance is not delivered to the LANDLORD prior to surrender of the Leased Premises by the Tenant to the LANDLORD, it is understood and agreed that the Tenant shall be liable to pay to the LANDLORD an amount equal to two times the annual rent then in effect, provided on monthly basis, together with all applicable additional rent from the date of such surrender until such time as 19 evidence of compliance with ECRA has been delivered to the LANDLORD, and together with any costs and expenses incurred by LANDLORD in enforcing Tenant's obligations under this Article 15.3. Evidence of compliance, as used herein, shall mean a "letter of non-applicability" issued by the New Jersey Department of Environmental Protection, hereinafter referred to as "NJDEP", or an approved "negative declaration" or a "cleanup plan" which has been fully implemented and approved by NJDEP. Evidence of compliance shall be delivered to the LANDLORD, together with copies of all submissions made to the NJDEP, including all environmental reports, test results and other supporting documentation. In addition to the above, Tenant hereby agrees that it shall cooperate with LANDLORD in the event of the termination or expiration of any other Lease affecting the Property, or a transfer of any portion of the property indicated on Schedule "A-l", or any interest therein, which triggers the provisions of ECRA. In such case, Tenant agrees that it shall fully cooperate with LANDLORD in connection with any information or documentation which may be requested by the NJDEP. In the event that a cleanup of the Property is required in connection with the conduct by Tenant of its business in the Leased Premises, Tenant expressly covenants and agrees that it shall be responsible for that portion of said cleanup which is attributable to the Tenant's use and occupancy thereof. Tenant hereby represents and warrants that its Standard Industrial Classification No. is .., and that Tenant shall not generate, manufacture, refine, transport, treat, store, 20 handle or dispose of "hazardous substances" as the same are defined under ECRA and the regulations promulgated pursuant thereto. Tenant hereby agrees that it shall promptly inform LANDLORD of any change in its SIC number or the nature of the business to be conducted in the Leased Premises. The within covenants shall survive the expiration or earlier termination of the Lease term. 16. INSPECTION BY LANDLORD The Tenant agrees that the said LANDLORD's agents, and other representatives, shall have the right to enter into and upon the Leased Premises, or any part thereof, at all reasonable hours for the purpose of examining the same, or for exhibiting the same to prospective purchasers (at any time) and tenants [within the last twelve (12) months of the term of this Lease, or during any period during which Tenant is in default under the terms and conditions of this Lease] upon reasonable advance oral notice of not less than twenty-four (24) hours (except in the event of emergency), or making such repairs or alterations therein as may be necessary for the safety and preservation thereof, or to repair and maintain the common utilities without unduly or unreasonably disturbing the operations of the Tenant (except in the event of emergency. LANDLORD understands and acknowledges that the nature of Tenant's business is such that one or more areas within the Leased Premises may be restricted by Tenant because of the presence of trade secrets or proprietary information or for reasons of patient confidentially. With respect 21 to such areas Tenant may restrict all non-emergency access or, at Tenant's option, grant non-emergency entrance on condition that each entrant sign a confidentiality statement in form and substance satisfactory to Tenant. Upon LANDLORD's prior oral request, Tenant hereby agrees that it shall specify a time that the entire Leased Premises may be inspected or exhibited by LANDLORD, during normal business hours, which time shall be within seven (7) days of receipt by Tenant of LANDLORD's oral request. LANDLORD agrees that any such inspection or exhibition shall be arranged to be made in the presence of a representative of Tenant, with due regard for Tenant's security requirements. LANDLORD hereby agrees that anyone inspecting the Leased Premises shall be required to sign a confidentiality statement, as hereinabove set forth. 17. DEFAULT BY TENANT 17.1 Each of the following shall be deemed a default by Tenant and a breach of this Lease: (1) (i) filing of a petition by the Tenant for adjudication as a bankrupt, or for reorganization, or for an arrangement under any federal or state statute, except in a Chapter 11 Bankruptcy where the rent and additional rent stipulated herein is being paid and the terms of the Lease are being complied with; (ii) dissolution or liquidation of the Tenant; (iii) appointment of a permanent receiver or a permanent trustee of all or substantially all of the property of the Tenant, if such appointment shall not be vacated within one hundred twenty (120) days, provided the rent and additional rent stipulated herein is 22 being paid and the terms of the Lease are being complied with, during said one hundred twenty (120) day period; (iv) taking possession of the property of the Tenant by a governmental officer or agency pursuant to statutory authority for dissolution, rehabilitation, reorganization or liquidation of the Tenant if such taking of possession shall not be vacated within one hundred twenty (120) days, provided the rent and additional rent stipulated herein is being paid and the terms of the Lease are being complied with,. during said one hundred twenty (120) day period; (v) making by the Tenant of an assignment for the benefit of creditors; (vi) abandonment, desertion or vacation of the Leased Premises by the Tenant. There shall be no abandonment, desertion or vacation provided that Tenant is current in the payment of rent and other sums due under this Lease, and further provided that prior written notice of such a vacation of the Leased Premises is given to LANDLORD which notice shall set forth the length of time that Tenant expects the Leased Premises to be vacant; the Tenant shall be responsible for any increased costs for insurance premiums or security services which may be necessitated by the vacation of the Leased Premises by the Tenant. If any event mentioned in this subdivision (1) shall occur, LANDLORD may thereupon or at any time thereafter elect to cancel this Lease by thirty (30) days' notice to the Tenant and this Lease shall terminate on the day in such notice specified with the same force and effect as if that date were the date herein fixed for the expiration of the term of the Lease. (2) (i) Default in the payment of the rent or additional rent herein reserved or any part thereof for a period of seven (7) days after the same is due and payable as in this Lease required. (ii) A default in the performance of any other covenant or condition of this Lease on the Oath of the Tenant to be 23 performed for a period of thirty (30) days after written notice. For purposes of this subdivision (2) (ii) hereof, no default on the part of Tenant in performance of work required to be performed or acts to be done or conditions to be modified shall be deemed to exist if steps shall have been commenced by Tenant diligently after notice to rectify the same and shall be prosecuted to completion with reasonable diligence, and if the LANDLORD is indemnified against loss or liability arising from the default. 17.2 In case of any such default under Article 17.1 (2), at any time following the expiration of the respective grace periods above mentioned, LANDLORD may serve a notice upon the Tenant electing to terminate this Lease upon a specified date not less than seven (7) days after the date of serving such notice and this Lease shall then expire on the date so specified as if that date had been originally fixed as the expiration date of the term herein granted; however, a default under Article 17.1 (2) hereof shall be deemed waived if such default is made good before the date specified for termination in the notice of termination served on the Tenant. 17.3 In case this Lease shall be terminated as hereinbefore provided, or by summary proceedings or otherwise, LANDLORD or its agents may, immediately or any time thereafter, reenter and resume possession of the Leased Premises or such part thereof, and remove all persons and property therefrom, either by summary proceedings or by a suitable action or proceeding at law, without being liable for any damages therefor. No re-entry by LANDLORD shall be deemed an acceptance of a surrender of this Lease. 24 17.4 In case this Lease shall be terminated as hereinafter provided, or by summary proceedings or otherwise, LANDLORD may, in its own name and in its own behalf, relet the whole or any portion of the Leased Premises, for any period equal to or greater or less than the remainder of the then current terms, for any sum which it may deem reasonable, to any tenant which it may deem suitable and satisfactory, and for any use and purpose which it may deem appropriate, and in connection with any such Lease LANDLORD may make such changes in the character of the improvements on the Leased Premises as LANDLORD may determine to be appropriate or helpful in effecting such Lease and may grant concessions or free rent. LANDLORD hereby agrees that it shall use reasonable efforts to relet the Leased Premises, so as to mitigate the damages otherwise payable by Tenant hereunder. LANDLORD shall not in any event be required to pay Tenant any surplus of any sums received by LANDLORD on a reletting of the Leased Premises in excess of the rent reserved in this Lease. 17.5 (1) In case this Lease be terminated by summary proceedings or otherwise, as provided in this Article 17, and whether or not the Leased Premises be relet, LANDLORD shall be entitled to recover from the Tenant, the following: (i) a sum equal to all expenses, if any, including reasonable counsel fees, incurred by LANDLORD in recovering possession of the Leased Premises, and all reasonable costs and charges for the care of the Leased Premises while vacant, which damages shall be 25 due and payable by Tenant to LANDLORD at such time or times as such expenses shall have been incurred by LANDLORD; and (ii) a sum equal to all damages set forth in this Article 17 and in Article 18. (2) Without any previous notice or demand, separate actions may be maintained by LANDLORD against Tenant from time to time to recover any damages which, at the commencement of any such action, have then or theretofore become due and payable to the LANDLORD under this Article 17 and subsections hereof without waiting until the end of the then current term. (3) All sums which Tenant has agreed to pay by way of adjustments to rent or equitable adjustments in utility charges shall be deemed rent reserved in this Lease within the meaning of this Article 17 and subsections hereof. 17.6 In addition to any other remedy, a ten (10%) per cent late charge shall be due and payable on any portion of rent or other charges not received by LANDLORD on or before the fifth (5th) day of the month in which it is due. This is liquidated damages for the added costs incurred by the LANDLORD. Notwithstanding the above, the foregoing late charge shall not be imposed until five (5) days following oral notice to the Tenant that any such payment is overdue, in connection with the first episode of late payment occurring during any twelve (12) month period during the term of this Lease. 18. LIABILITY OF TENANT FOR DEFICIENT 26 In the event that the relation of the LANDLORD and Tenant may cease or terminate by reason of the default by the Tenant and the re-entry of the LANDLORD as permitted by the terms and conditions contained in this Lease or by the ejectment of the Tenant by summary proceedings or other judicial proceedings, or after the abandonment of the Leased Premises by the Tenant, it is hereby agreed that the Tenant shall remain liable to pay in monthly payments the rent which shall accrue subsequent to the re-entry by the LANDLORD, and the Tenant expressly agrees to pay as damages for the breach of the covenants herein contained the difference between the rent reserved and the rent collected and received, if any, by the LANDLORD, during the remainder of the unexpired term, as the amount of such difference or deficiency shall from time to time be ascertained, subject to the LANDLORD's obligation to attempt to mitigate damages in accordance with Article 17.4 hereof. 19. NOTICES All notices required or permitted to be given to the LANDLORD shall be given by certified mail, return receipt requested, at the address hereinbefore set forth on the first page of this Lease, and/or such other place as the LANDLORD may designate in writing. All notices required or permitted to be given to the Tenant shall be given by certified mail, return receipt requested, at the Leased Premises, with a copy to Institute for Biological Research and Development, Inc., P. 0. Box 27 19759, Irvine, California 92713-9759, Attn: Thomas B. Semler, Executive Vice President/Chief Financial Officer, and/or such other place as the Tenant may designate in writing. 20. NON-WAIVER The failure by either party to insist upon strict performance of any of the covenants or conditions of this Lease, or to exercise any option herein conf erred (except for Tenant's Option to Renew, which must be exercised strictly in accordance with its terms) in any one or more instances, shall not be construed as a waiver by such party of any of its rights or remedies in this Lease, and shall not be construed as a waiver, relinquishment or failure of any such covenants, conditions, or options, but the same shall be and remain in full force and effect. 21. RIGHT OF TENANT TO MAKE ALTERATIONS AND IMPROVEMENTS 21.1 The Tenant may make non-structural alterations, additions or improvements to the Leased Premises having a cost of TWENTY FIVE THOUSAND AND 00/100 ($25,000.00) DOLLARS or less without the consent of LANDLORD. Tenant may make alterations, additions or improvements having a cost of more than TWENTY FIVE THOUSAND AND 00/100 ($25,000.00) DOLLARS, or those which are structural, only with the prior written consent of the LANDLORD, which consent shall not be unreasonably withheld, provided such alterations, additions or improvements do not require structural changes 28 in the Leased Premises, or do not lessen the value of the Leased Premises. Tenant hereby agrees to deliver to the LANDLORD revised "as built" plans showing any such alteration, addition or improvement, together with evidence of all required governmental approvals necessary for the performance of such work. Any consent which may be required of LANDLORD shall be conditioned upon Tenant furnishing to LANDLORD, detailed plans and specifications with respect to any such changes, to be approved by LANDLORD in writing. LANDLORD reserves the right to require Tenant to remove, at Tenant's sole cost and expense, any such alterations or additions prior to the expiration of the Lease term. If LANDLORD does not require such removal, any such alterations or additions shall be deemed to be part of the realty upon installation. LANDLORD and Tenant hereby agree that they shall perform a walk through inspection of the Leased Premises at least ninety (90) days prior to the date of expiration of the within Lease Agreement, at which time LANDLORD shall determine which improvements that have been installed by the Tenant are to be removed by the Tenant and which of said improvements are to remain. It is expressly understood and agreed that the LANDLORD shall have the right to require the Tenant to remove all or any portion of the built in cabinetry which shall be installed by LANDLORD prior to the Lease term in accordance with Tenant's Plan. All such alterations, additions or improvements shall be only in conformity with applicable governmental and insurance company requirements and regulations applicable to the Leased 29 Premises. Tenant shall hold and save LANDLORD harmless and indemnify LANDLORD against any claim for damage or injury in connection with any of the foregoing work which Tenant may make as hereinabove provided. 21.2 Nothing herein contained shall be construed as a concert on the part of the LANDLORD to subject the estate of the LANDLORD to liability under the Mechanic's Lien Law of the State of New Jersey, it being expressly understood that the Landlords estate shall not be subject to such liability. 22. NON-LIABILITY OF LANDLORD 22.1 It is expressly understood and agreed by and between the parties to this agreement that the Tenant shall assume all risk of damage to its property, equipment and fixtures occurring in or about the Leased Premises, whatever the cause of such damage or casualty. 22.2 It is expressly understood and agreed that in any event, the LANDLORD shall not be liable for any damage or injury to property or person caused by or resulting from steam, electricity, gas, water, rain, ice or snow, or any leak or flow from or into any part of said Building, or from any damage or injury resulting or arising from any other cause or happening whatsoever, except for such damage caused by the breach by LANDLORD of any warranty or representation made by LANDLORD or a failure by LANDLORD to perform any obligation on its part to be performed hereunder. 23. RESERVATION OF EASEMENT 30 The LANDLORD reserves the right, easement and privilege to enter on the Complex and Leased Premises in order to install, at its own cost and expense, any storm drains and sewers and/or utility lines in connection therewith as may be required by the LANDLORD, provided that such entry and/or installation does not materially interfere with the conduct of Tenant's business and subject to the restricted area provisions of Article 16. It is understood and agreed that if such work as may be required by LANDLORD requires an installation which may displace any paving, lawn, seeded area or shrubs the LANDLORD, shall, at its own cost and expense, restore said paving, lawn, seeded area or shrubs. The LANDLORD covenants that the foregoing work shall not unreasonably interfere with the normal operation of Tenant's business, and the LANDLORD shall indemnify and save the Tenant harmless in connection with such installations, notwithstanding any other provision of this Lease. 24. POLLUTION The Tenant expressly covenants and agrees to indemnify, defend, and save the LANDLORD harmless against any claim, damage, liability, costs, penalties, or fines which the LANDLORD may suffer as a result of air, water or ground, toxic or hazardous waste pollution caused by the Tenant in its use of the Leased Premises. The Tenant covenants and agrees to notify the LANDLORD immediately of any claim or notice served upon it with respect to any such claim the Tenant is causing water, air or ground pollution; and the 31 Tenant, in any event, will take immediate steps to halt, remedy or cure any pollution of air, water or ground, toxic or hazardous waste caused by the Tenant by its use of the Leased Premises. The within covenant on the part of the Tenant shall survive the expiration or earlier termination of this Lease. 25. STATEMENT OF ACCEPTANCE Upon the delivery of the Leased Premises to the Tenant, pursuant to the terms and conditions of this Lease, the Tenant covenants and agrees that it will furnish to the LANDLORD a statement that it accepts the Leased Premises (subject to LANDLORD's continuing responsibility for "punch list" or "pick-up" items and latent defects) and agrees to pay rent from the date of acceptance, subject to the terms and conditions of the Lease as herein contained, which statement may be in recordable form if required by the LANDLORD, and which statement shall set forth the Commencement Date and the date of expiration of the Lease term. 26. FORCE MAJEURE Except for the obligation of the Tenant to pay rent and other charges as in this Lease provided, the period of time during which the LANDLORD or Tenant is prevented from performing any act required to be performed under this Lease by reason of fire, catastrophe, strikes, lockouts, civil commotion, acts of God or the public enemy, government prohibitions or preemptions, embargoes, inability to obtain material or labor by reason of governmental regulations or prohibitions, the act or default of the other party, 32 or other events beyond the reasonable control of LANDLORD or Tenant, as the case may be, shall be added to the time for performance of such act. 27. STATEMENTS BY LANDLORD AND TENANT LANDLORD and Tenant agree at any time and from time to time upon not less than ten (10) days' prior notice from the other to execute, acknowledge and deliver to the party requesting same, a statement in writing, certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications) that it is not in default (or if claimed to be in default, stating the amount and nature of the default) and specifying the dates to which the basic rent and other charges have been paid in advance, if any; it being intended that any such statement delivered pursuant to this Article may be relied upon as to the facts contained therein. 28. CONDEMNATION 28.1 If due to the condemnation or taking or seizure by any authority having the right of eminent domain, (i) more than fifteen (15%) percent of the Leased Premises is taken or rendered untenantable, or (ii) in the event that more than twenty-five (25%) percent of the ground allocated to the Building is taken (including the parking areas, but exclusive of front, side and rear set back areas) , or (iii) if access to the Leased Premises be denied, which taking in the manner hereinabove referred to and in excess of the foregoing percentage amounts shall unreasonably or unduly interfere with the use of the 33 Building, ground area, parking area, or deny access to the Leased Premises, then and in either of such events as hereinabove provided, the Lease term created shall, at the option of the Tenant, terminate, cease and become null and void from the date when the authority exercising the power of eminent domain takes or interferes with the use of the Building or the Leased Premises, its use of the ground area, parking area, or area of access to the Leased Premises. The Tenant shall only be responsible for the payment of rent until the time of surrender. In any event, no part of the LANDLORD's condemnation award shall belong to or be claimed by the Tenant. Without diminishing LANDLORD's award, the Tenant shall have the right to make a claim against the condemning authority for such independent claim which it may have and as may be allowed by law, for costs and damages due to relocating, moving and other similar costs and charges directly incurred by the Tenant and resulting from such condemnation. 28.2 In the event of any partial taking which would not be cause for termination of the within Lease or in the event of any partial taking in excess of the percentages provided in Article 28.1, and in which event the Tenant shall elect to retain the balance of the Leased Premises remaining after such taking, then and in either event, the rent shall abate in an amount mutually to be agreed upon between the LANDLORD and Tenant based on the relationship that the character of the property prior to the taking bears to the property which shall remain after such condemnation. In any event, no part of 34 the LANDLORD's condemnation award shall belong to or be claimed by the Tenant. However, the LANDLORD shall, to the extent permitted by applicable law and as the same may be practicable on the site of the Leased Premises, at the LANDLORD's sole cost and expense, promptly make such repairs and alterations in order to restore the Building and/or improvements to usable condition to the extent of the condemnation award. 29. LANDLORD'S REMEDIES 29.1 The rights and remedies given to the LANDLORD in this Lease are distinct, separate and cumulative remedies, and no one of them, whether or not exercised by the LANDLORD, shall be deemed to be in exclusion of any of the others. 29.2 In addition to any other legal remedies for violation or breach by or on the part of the Tenant or by any undertenant or by anyone holding or claiming under the Tenant or any one of them, of the restrictions, agreements or covenants of this Lease on the part of the Tenant to be performed or fulfilled, such violation or breach shall be restrainable by injunction at the suit of the LANDLORD. 29.3 No receipt of money by the LANDLORD from any receiver, trustee or custodian or debtors in possession shall reinstate, continue or extend the term of this Lease or affect any notice theretofore given to the Tenant, or to any such receiver, trustee, custodian or debtor in possession, or operate as a waiver or estoppel of the right of the LANDLORD to recover 35 possession of the Leased Premises for any of the causes therein enumerated by any lawful remedy; and the failure of the LANDLORD to enforce any covenant or condition by reason of its breach by the Tenant shall not be deemed to void or affect the right of the LANDLORD to enforce the same covenant or condition on the occasion of any subsequent default or breach. 30. QUIET ENJOYMENT The LANDLORD further covenants that the Tenant, on paying the rental and performing the covenants and conditions contained in this Lease (within applicable notice and cure periods as are set forth within this Lease) , shall and may peaceably and quietly have, hold and enjoy the Leased Premises for the term aforesaid. 31. SURRENDER OF PREMISES On the last day, or earlier permitted termination of the Lease term, Tenant shall quit and surrender the Leased Premises in good and orderly condition and repair (reasonable wear and tear, and damage by fire or other casualty excepted) and shall deliver and surrender the Leased Premises to the LANDLORD peaceably, together with all alterations, additions and improvements in, to or on the Leased Premises made by Tenant as permitted under the Lease. The LANDLORD reserves the right, however, to require the Tenant at its cost and expense to remove any alterations or improvements installed by the Tenant, and not permitted pursuant to the terms and conditions of this Lease, which covenant shall survive the surrender and the 36 delivery of the Leased Premises as provided hereunder. Prior to the expiration of the Lease term the Tenant shall remove all of its property, fixtures, equipment and trade fixtures from the Leased Premises. All property not removed by Tenant shall be deemed abandoned by Tenant, and LANDLORD reserves the right to charge the reasonable cost of such removal to the Tenant, which obligation shall survive the Lease termination and surrender hereinabove provided. If the Leased Premises be not surrendered at the end of the Lease term, Tenant shall indemnify LANDLORD against loss or liability resulting from delay by Tenant in surrendering the Leased Premises, including, without limitation any claims made by any succeeding tenant founded on the delay. 32. INDEMNITY Anything in this Lease to the contrary notwithstanding, and without limiting the Tenant's obligation to provide insurance pursuant to Article 10 hereunder but subject to the provisions of Article 10.4, the Tenant covenants and agrees that it will indemnify, defend and save harmless the LANDLORD against and from all liabilities, obligations, damages, penalties, claims, costs, charges and expenses, including without limitation reasonable attorneys' fees, which may be imposed upon or incurred by LANDLORD by reason of any of the following occurring during the term of this Lease: (i) Any matter, cause or thing arising out of Tenant's use, occupancy, control or management of the Leased Premises and any part thereof; 37 (ii) Any negligence on the part of the Tenant or any of its agents, contractors, servants, employees or licensees; (iii) Any accident, injury, damage to any person or property occurring within the Leased Premises; (iv) Any failure on the part of Tenant to perform or comply with any of the covenants, agreements, terms or conditions contained in this Lease on its part to be performed or complied with, to the extent the same are not covered by any insurance which is carried by LANDLORD. The foregoing shall not be deemed to impose liability for consequential damages based solely on the non-payment of rent by the Tenant. LANDLORD shall promptly notify Tenant of any such claim asserted again*t it and shall promptly send to Tenant copies of all papers or legal process served upon it in connection with any action or proceeding brought against LANDLORD by reason of any such claim. 33. LEASE CONSTRUCTION This Lease shall be construed pursuant to the laws of the State of New Jersey. 34. BIND AND INURE CLAUSE The terms, covenants and conditions of the within Lease shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns. 35. DEFINITIONS The neuter gender, when used herein and in the acknowledgment hereafter set forth, shall include all persons and corporations, and words used 38 in the singular shall include words in the plural where the text of the instrument so requires. 36. DEFINITION OF TERM OF "LANDLORD" When the term "LANDLORD" is used in this Lease it shall be construed to mean and include only the owner of the title to the Building containing the Leased Premises. Upon the transfer by the LANDLORD of the title, the LANDLORD shall advise the Tenant in writing by certified mail, return receipt requested, of the name of the LANDLORD's transferee. In such event, the LANDLORD shall be automatically freed and relieved from and after the date of such transfer of title of all personal liability with respect to the performance of any of the covenants and obligations on the part of the LANDLORD herein contained to be performed, provided any such transfer and conveyance by the LANDLORD is expressly subject to the assumption by the grantee or transferee of the obligations of the LANDLORD to be performed pursuant to the terms and conditions of the within Lease. 37. COVENANTS OF FURTHER ASSURANCES If, in connection with obtaining financing for the improvements on the Complex, the Mortgage Lender shall request reasonable modifications in this Lease as a condition to such financing, Tenant will not unreasonably withhold, delay or refuse its consent thereto, provided that such modifications do not in Tenant's reasonable judgment increase the obligations of Tenant 39 hereunder or materially adversely affect the leasehold interest hereby created or Tenant's use and enjoyment of the Leased Premises. 38. COVENANT AGAINST LIENS Tenant agrees that it shall not encumber, or suffer or permit to be encumbered, the Leased Premises or the fee thereof by any lien, charge or encumbrance, and Tenant shall have no authority to mortgage or hypothecate this Lease in any way whatsoever. Any violation of this Article shall be considered a breach of this Lease. 39. SUBORDINATION This Lease shall be subject and subordinate at all times to the ,, lien of any mortgages or ground leases or other encumbrances now or hereafter placed on the land Complex without the necessity of any further instrument or act on the part of Tenant to effectuate such subordination, but Tenant covenants and agrees to execute and deliver upon demand such further instrument or instruments evidencing such subordination of the Lease to the lien of any such mortgage or ground lease or other encumbrances as shall be desired by a mortgagee or proposed mortgagee or by any person. LANDLORD hereby agrees that it shall use its best efforts to obtain a subordination, non-disturbance and attornment agreement from LANDLORD's current mortgagee, which agreement will be on said mortgagee's customary form. 40. EXCULPATION OF LANDLORD 40 Neither LANDLORD nor its principals shall have any personal obligation for payment of any indebtedness or for the performance of any obligation under this Lease but the payment of the indebtedness and the performance of obligations expressed herein may be enforced only against the Complex, and the rents, issues and profits thereof, and the Tenant agrees that no deficiency judgment or other judgment for money damages shall in any event be entered by it against the LANDLORD or its principals personally in any action; provided, however, that the provisions of this paragraph shall in no way affect Tenant's other remedies for the payment of any indebtedness or for the enforcement of LANDLORD's covenants under this Lease. 41. NET RENT It is the purpose and intent of the LANDLORD and Tenant that the rent shall be absolutely net to LANDLORD, so that this Lease shall yield, net, to LANDLORD, the rent specified in Article 3 and all additional rent and charges under the terms hereof, in each month during the term of the Lease, and that all costs, expenses and obligations of every kind and nature whatsoever relating to the Leased Premises which may arise or become due during or out of the term of this Lease, shall be paid by the Tenant, except for such obligations and charges as have otherwise expressly been assumed by the LANDLORD in accordance with the terms and conditions of the Lease. 42. SECURITY 41 The Tenant shall deposit with the LANDLORD, at least seven (7) days prior to the Commencement Date hereunder, the sum of THIRTY THOUSAND AND 00/100 ($30,000.00) DOLLARS as security for the full and faithful performance of this Lease upon the part of the Tenant to be performed. Anything herein contained to the contrary notwithstanding, it is expressly understood and agreed that the said security deposit shall be held by Epstein, Epstein, Brown & Bosek in an interest-bearing trust account, with interest to follow the deposit. Tenant covenants and agrees that it will not assign, pledge, hypothecate, mortgage or otherwise encumber the aforementioned security during the term of this Lease. It is expressly understood and agreed that the LANDLORD shall not have the right to co-mingle the security funds with its general funds and said security shall be required to be segregated. Upon termination of this Lease, and providing the Tenant is not in default hereunder and has performed all of the conditions of this Lease, the LANDLORD shall return to the Tenant the said sum of THIRTY THOUSAND AND 00/100 ($30,000.00) DOLLARS, together with interest thereon. 43. ASSIGNMENT AND SUBLETTING 43.1 Tenant shall neither assign this Lease nor sublet all or any portion of the Leased Premises to any person or entity other than a parent, subsidiary or affiliate of Tenant without LANDLORD's prior consent, which consent shall not be unreasonably withheld, subject to LANDLORD's rights hereinafter provided in Article 43.4. LANDLORD may withhold such consent if, 42 in the reasonable exercise of its judgment, it determines that any of the following enumerated conditions are applicable: (a) the proposed assignee's or subtenant's financial condition is not sufficient to meet its obligations undertaken in such assignment or sublease; (b) the proposed use of the Leased Premises is not appropriate for the Building or in keeping with the character of its existing tenancies; (c) such assignee's or subtenant's occupancy will cause an excessive density of traffic or make excessive demands on the building's services, maintenance or facilities; (d) such assignee or subtenant is a tenant of and is vacating premises in the Building, the property known as Neptune Business Center or any other building owned by or through the persons constituting LANDLORD hereunder, including any corporation in which LANDLORD's principals are majority stockholders, and any affiliates, subsidiaries or parent o f such corporation; (e) the rental obligation of such assignee or subtenant would be less than eighty (80%) percent of Tenant's rental obligations hereunder; (f) less than ninety (90%) per cent of the Building's rentable area is then rented; or 43 (g) LANDLORD wishes to accept the offer as provided in Article 43.4. 43.2 Any request by Tenant for LANDLORD's consent to an assignment of the Lease shall state the proposed assignee's address and be accompanied by a profit and loss and balance statements of the proposed assignee for the prior three (3) years, as well as duplicate original of the instrument of assignment (wherein the assignee assumes, jointly and severally with Tenant, the performance of Tenant's obligations hereunder). 43.3 Any request by Tenant for LANDLORD's consent to a sublease shall state the proposed subtenant's address and be accompanied by profit and loss and balance statements of the proposed subtenant for the prior three (3) years, as well as a duplicate original of the instrument of sublease (wherein Tenant and the proposed subtenant agree that such sublease is subject to the Lease and such subtenant agrees that, if the Lease is terminated because of Tenant's default, such subtenant shall, at LANDLORD's option, attorn to LANDLORD). 43.4 Any request by Tenant for LANDLORD's consent to an assignment of the Lease or a sublease of all or substantially all of the Leased Premises shall clearly set forth the proposed terms of such proposed assignment or sublease and shall constitute Tenant I s of f er to cancel the Lease. LANDLORD may accept such of f er by notice to Tenant within thirty (30) days after LANDLORD's receipt thereof, in which event, the Lease shall 44 terminate as of the end of the month following the month in which such notice is sent (with the same effect as if such date were the date fixed herein for the natural expiration of the term), annual rent and additional rent shall be apportioned to such date, Tenant shall surrender the Leased Premises on such date as herein provided, and subject to payment of required Lease adjustments, the parties shall thereafter have no further liability one to the other. If LANDLORD fails to send such notice, Tenant, within twenty (20) days after the expiration of such ninety (90) day period, may assign the Lease or sublet all or substantially all of the Leased Premises to the proposed assignee or subtenant and upon the terms specified in such request, subject, however, to LANDLORD's rights under Article 43.1(a) through (f). In any event, Tenant shall pay to LANDLORD, as additional rent, amounts received by Tenant from the assignee or subtenant in excess of the annual rent and additional rent payable by Tenant hereunder. 43.5 In the event of a permitted assignment, LANDLORD may collect annual rent and additional rent directly from the assignee. In the event of a permitted sublease, LANDLORD may, if Tenant defaults hereunder, collect annual rent and additional rent directly from the subtenant. In either such event, LANDLORD may apply any amounts so collected to the annual rent and additional rent hereunder without thereby waiving any provisions hereof or releasing Tenant from liability for the performance of its obligations hereunder. 45 43.6 LANDLORD's consent to any assignment or sublease hereunder shall not be deemed a consent to any further proposed assignment or sublease by Tenant or any one claiming under or through the Tenant, except in accordance with this Article 43. 43.7 It is expressly understood and agreed that Tenant's Option to Renew, as hereinafter set forth in Article 44, shall be personal to Tenant only (for the purposes of this Article 43.7 being deemed to include any parent, subsidiary or affiliate of Tenant) , and may not be exercised by any permitted assignee or subtenant hereunder. It is understood and agreed that Tenant I s Option to Renew shall be null and void in the event that fifty (50%) percent or more of the Leased Premises have been sublet by the Tenant prior to the date set for the exercise by Tenant of any Option to Renew hereinafter set forth. 44. OPTION TO RENEW Provided the Tenant is not in default pursuant to the terms and conditions of this Lease, the Tenant is hereby given the right and privilege to renew the within Lease for two (2) successive five (5) year periods, to commence at the end of the initial term of this Lease, which renewals shall be upon the same terms and conditions as in this Lease contained, except as follows: (1) During the first five (5) year renewal term, Tenant shall pay to LANDLORD annual rent in the amount of ONE HUNDRED FORTY SIX THOUSAND FIVE HUNDRED TWENTY AND 00/100 ($146,520.00) DOLLARS per annum, payable in equal monthly installments in the 46 amount of TWELVE THOUSAND TWO HUNDRED TEN AND 00/100 ($12,210.00) DOLLARS per month in the manner provided in Article 3 of this Lease. (2) (a) During the second five (5) year renewal term, there shall be paid annually the minimum annual rent of ONE HUNDRED FORTY SIX THOUSAND FIVE HUNDRED TWENTY AND 00/100 ($146,520.00) DOLLARS hereinafter referred to as the "Original Base Rent". The Original Base Rent shall be increased, if applicable, in the event of an increase in the Cost of Living Index based on application of the Cost of Living formula which is hereinafter defined as follows: At the inception of the second five (5) year renewal term, there shall be compared the "All Items" Index figures for the New York-Northeastern New Jersey average of the "Consumers Price Index for All Urban Consumers" (revised CPI-U) (1982-84 equal to 100) published by the Bureau of Labor Statistics of the U.S. Department of Labor (in this paragraph hereinafter referred to as the "Index") for the first month of the first five (5) year renewal term of this Lease with the first month of the second five (5) year renewal term. If there is an increase in the Index for the first month of the second five (5) year renewal period compared to the applicable Index for the first month of the first five (5) year renewal term of this Lease, said increase in Index figures shall be used to determine the applicable percentage of increase which shall be the basis for determining rent increase over the Original Base Rent in accordance with the formula hereinbefore set forth, and as shown in the following example: EXAMPLE: If the Index figure for the first month of the first five (5) year renewal term of this Lease is 100 (the denominator) and the Index figure for the first month of the second five (5) year renewal 47 term is 110, the increase in the Index figures will produce an increase of 10%. (110-100) ------- 100 Applying the formula, 10% of $146,520.00 is equal to $14,652.00. Adding said sum of $14,652.00 to the original Base Rent of $146,520.00 produces an annual renewal rent of $161,172.00 payable in equal monthly installments of $13,431.00. Since the rent payment for at least the first month of the second five (5) year renewal term will have been paid prior to the determination of any applicable rent increase in excess of the Original Base Rent payable for the second five (5) year renewal term, any increase for months already elapsed after commencement of the second five (5) year renewal term shall then be added to the next monthly rent payment then becoming due and payable. (b) Anything herein contained to the contrary notwithstanding, it is expressly understood and agreed that the minimum rent during the second five (5) year renewal period shall not be less than ONE HUNDRED FORTY SIX THOUSAND FIVE HUNDRED TWENTY AND 00/100 ($146,520.00) DOLLARS per annum. (c) It is understood and agreed that should the applicable Index figure not be published for any particular month when the same shall be applicable under the terms of this Lease, the last published figure prior to that date shall be used, but in no event shall such figure be retroactive for a period in excess of three (3) months. In the event that the applicable Index figure is 48 discontinued by way of publication with respect to the entire Index, then and in that event, the parties shall agree on an equivalent and substituted Cost of Living Index to be applied in the same manner as in this Lease provided. In the event the parties cannot mutually agree as to the equivalent substituted Index, then and in that event the question should be submitted for arbitration to the American Arbitration Association. (d) If the base year (1982-84 equal to 100) hereinabove referred to with respect to the "Index" shall be changed after the execution of this Lease, appropriate adjustments based on such new Index shall be made so as to have a proper application of the Cost of Living formula. (3) The right, option, and privilege of the Tenant to renew this Lease as hereinabove set forth is expressly conditioned upon the Tenant delivering to the LANDLORD, in writing, by certified mail, return receipt requested, six (6) months' prior notice of its intention to renew, which notice shall be given to the LANDLORD by the Tenant no later than six (6) months prior to the date fixed for termination of the original term or first renewal term of this Lease, as applicable. (4) In addition to Tenant's obligation to pay the renewal rent as hereinabove provided, Tenant shall be responsible to pay all Additional Rent and other charges as are in this Lease provided. (5) LANDLORD further agrees that it shall repaint and re-carpet the Leased Premises at the commencement of each five (5) year 49 renewal term, using building standard paint and carpeting. Tenant hereby agrees that it shall fully cooperate with LANDLORD in connection with the performance of such work so that the same may be accomplished as quickly as is possible and at the least possible cost to LANDLORD. 45. FINANCIAL STATEMENTS The Tenant agrees, at the request of the LANDLORD, to be made not more than once during any lease year, to furnish its latest current financial statements provided by the accountant and certified to by an officer of the corporation. 46. TENANT'S FIRST RIGHT OF NEGOTIATION 46.1 Tenant is hereby granted the first right to negotiate for the leasing of the balance of the space in the Building upon the following terms and conditions. Prior to leasing any unoccupied space within the Building to any other tenant, the LANDLORD hereby agrees that it shall give oral notice to the Tenant at such time as LANDLORD is actively discussing the leasing of such unoccupied space to any other person or entity. Tenant shall then have five (5) days within which to notify the LANDLORD, in writing, of its intention to negotiate a lease agreement with LANDLORD for such additional space. In the event Tenant elects to negotiate for the leasing of said space with LANDLORD, it is understood and agreed that an amendment to the within Lease Agreement shall be entered into by LANDLORD and Tenant within two 50 (2) weeks following the date upon which LANDLORD originally shall have given oral notice to the Tenant, as hereinabove set forth. In the event that Tenant does not respond to LANDLORD's notice within the five (5) day period hereinabove set forth, or in the event LANDLORD and Tenant do not enter into a lease amendment for such additional space within the two (2) week period hereinabove set forth, LANDLORD shall be entitled to lease such space to any third party, free and clear of Tenant I s rights hereunder. Tenant expressly acknowledges that the LANDLORD is currently involved in negotiations with Jersey Shore Medical Center for the leasing of approximately 2,100 square feet of the Building, and it is understood and agreed that Tenant shall have no rights whatsoever to negotiate for the leasing of said space. Nothing hereinabove contained shall prevent or prohibit the LANDLORD from extending the term of any lease agreement in the Building. Notwithstanding anything hereinabove contained, the LANDLORD hereby agrees that it shall not lease the space immediately contiguous to the Leased Premises, containing approximately 3,800 square feet, prior to January 1, 1992. 46.2 In addition, the Tenant shall have the first right of negotiation for the leasing of up to 10,000 square feet of the next building to be constructed by LANDLORD on the Complex, in the same manner as is hereinabove set forth in Article 46.1. said right shall expire on June 30, 1992. In the event that Tenant enters into a lease for any space within said building, the Tenant shall be given the additional first right of negotiation on all space 51 contiguous to that leased by the Tenant, which right shall continue for the balance of the initial term of the within Lease Agreement. 47. LANDLORD IS DEFAULT Notwithstanding the provisions of Article 3.1 to the contrary, in the event LANDLORD's failures to perform any obligation on its part to be performed after receiving thirty (30) days' prior written notice of such failure from Tenant, then, in addition to all other rights and remedies of Tenant at law or in equity, Tenant shall be entitled (but shall not be obligated) to remedy such failure and to charge the reasonable cost thereof to the LANDLORD. Nothing herein shall entitle the Tenant to any offset or deduction from the rent otherwise payable in accordance with the terms and conditions of this Lease. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals or caused these presents to be signed by its proper corporate officers and caused its proper corporate seal to be hereunto affixed, the day and year first above written. WITNESS: /s/ Sandra A. Steinberg GAMMA THREE ASSOCIATES LIMITED PARTNERSHIP BY: /s/ Herbert Punia --------------------------- ATTEST: /s/ Lisa M. Stensness INSTITUTE FOR BIOLOGICAL RESEARCH AND DEVELOPMENT, INC. 52 BY: /s/ Thomas Semler -------------------------- 53 STATE OF NEW JERSEY ) ) SS.: COUNTY OF SOMERSET ) BE IT REMEMBERED, that on this 27th day of November 1991, before me, the subscriber, Sandra A. Steinberg personally appeared Herbert Punia Partner of GAMMA THREE ASSOCIATES LIMITED PARTNERSHIP, a New Jersey Limited Partnership, who, I am satisfied, is the LANDLORD mentioned in the within Instrument, and thereupon he acknowledged that he signed, sealed and delivered the same as his act and deed, for the uses and purposes therein expressed. /s/ Sandra A. Steinberg STATE OF CALIFORNIA ) ) SS. COUNTY OF ORANGE ) BE IT REMEMBERED, that on this 26th day of November 1991, before me, Lisa Stensness the subs personally appeared Thomas Semler who, I am satisfied, is the person the within Instrument as of INSTITUTE FOR BIOLOGICAL RESEARCH AND DEVELOPMENT, INC., a Delaware corporation, the Tenant named therein, and he thereupon acknowledged that the said instrument made by the corporation and sealed with its corporate seal, was signed, sealed with the corporate seal and delivered by him as such officer and is the voluntary act and deed of the corporation, made by virtue of authority from its Board of Directors. /s/ Lisa M. Stensness 55 LIST OF SCHEDULES Schedule "A" - Site Plan Schedule "A-1" - Metes and Bounds Description Schedule "B" - Building Standard Work Letter Schedule "B-1" Tenant's Plan 56 EX-10.13 27 EXHIBIT 10.13 Exhibit 10.13 GWYNEDD HALL - SENTRY PARK WEST OFFICE LEASE BETWEEN SENTRY WEST JOINT VENTURE, AN ILLINOIS JOINT VENTURE ("LANDLORD") by its agent, Equity Office Properties, Inc. AND INSTITUTE FOR BIOLOGICAL RESEARCH AND DEVELOPMENT ("TENANT") TABLE OF CONTENTS
I. Basic Lease Information-Definitions......................................................................4 II. Lease Grant..............................................................................................7 III. Adjustment of Commencement Date/Possession...............................................................7 V. Rent....................................................................................................10 VI. Security Deposit........................................................................................11 VII. Services to be Furnished by Landlord....................................................................11 VIII. Leasehold Improvements..................................................................................14 IX. Graphics................................................................................................15 X. Repairs and Alterations by Tenant.......................................................................15 XI. Use of Electrical and HVAC Services by Tenant...........................................................16 XII. Entry by Landlord.......................................................................................17 XIII. Assignment and Subletting...............................................................................17 XV. Indemnity and Waiver of Claims..........................................................................20 XVI. Tenant's Insurance......................................................................................21 XVII. Subrogation.............................................................................................23 XVIII. Landlord's Insurance....................................................................................23 XIX. Casualty Damage.........................................................................................24 XX. Demolition..............................................................................................26 XXI. Condemnation............................................................................................26 XXII. Events of Default.......................................................................................27
XXIII. Remedies................................................................................................28 XXIV. LIMITATION OF LIABILITY.................................................................................30 XXV. No Waiver...............................................................................................30 XXVI. Event of Bankruptcy.....................................................................................31 XXVII. Quiet Enjoyment.........................................................................................32 XXVIII. Relocation..............................................................................................32 XXIX. Holding Over............................................................................................32 XXX. Subordination to Mortgages..............................................................................32 XXXI. Attorney's Fees.........................................................................................34 XXXII. Notice..................................................................................................34 XXXIII. Intentionally Omitted...................................................................................35 XXXIV. Excepted Rights.........................................................................................35 XXXIV. Surrender of Premises...................................................................................35 XXXV. Miscellaneous...........................................................................................36
OFFICE LEASE AGREEMENT This Office Lease Agreement (the "Lease"), is made and entered into as of the first day of FEBRUARY, 1994, by and between Sentry West Joint Venture, an Illinois joint venture ("Landlord") by its Agent, Equity Office Properties, Inc. and Institute for Biological Research and Development, a Delaware corporation ("Tenant"). I. BASIC LEASE INFORMATION-DEFINITIONS. A. The following is some of the basic lease information and defined terms used in this Lease. 1. "Broker" means Grubb & Ellis. 2. "Building" shall mean the office building located at 1777 Sentry Parkway West, Blue Bell, Montgomery County, State of Pennsylvania, and commonly known as Gwynedd Hall -Sentry Park West. 3. The "Lease Term" shall mean a period of forty-eight (48) months commencing on the later to occur of (1) February 1, 1994 (the "Target Commencement Date") and (II) the date upon which Landlord Work in the Premises has been substantially completed, as such date is determined pursuant to Section III.A. hereof (the later to occur of such dates being defined as the "Commencement Date"). The "Termination Date" shall, unless sooner terminated as provided herein, mean the last day of the Lease Term. Notwithstanding the foregoing, if the Termination Date, as determined herein, does not occur on the last day of a calendar month, Landlord, shall extend the Lease Term by the number of days necessary to cause the Termination Date to occur on the last day of the last calendar month of the Lease Term. Tenant shall pay Base Rental and Additional Bass Rental for such additional days at the same rate payable for the portion of the last calendar month immediately preceding such extension. The Commencement Date, Lease Term (including any extension by Landlord pursuant to this subsection) and Termination Date shall be set forth in a Commencement Letter prepared by Landlord and executed by Tenant in accordance with the provisions of Section III.A. hereof. 4. "Guarantor(s)" shall mean Kuraya Yakumin and any other party that agrees in writing to guarantee the Lease. 5. "Landlord Work" shall mean the work, if any, that Landlord is obligated to perform in the Promises pursuant to the Work Letter Agreement attached hereto as Exhibit "C". 6. "Notice Addresses" shall mean the following addresses for Tenant and Landlord, respectively: Tenant: Prior to the Commencement Date, notices shall be sent to Tenant at the following address: IBRD 2525 Campus Drive Irvine, CA 92715 Attn: Dottie Soteriou On or after the Commencement Date, notices shall be sent to Tenant at the Promises, with a copy to Tenant at the above address. Landlord: Sentry West Joint Venture c/o FKB Management, Inc. 1777 Sentry Park West - Gwynedd Hall - Suite 301 Blue Bell, PA 19422 Attention: Building Manager With a copy to: Equity Officer Property, Inc. Two North Riverside Plaza Suite 2200 Chicago, Illinois 60606 Attention: General Counsel Payments of Rent only shall be made payable to the order of Sentry West Joint Venture at the following address: Sentry West Joint Venture c/o FKB Management, Inc. 1777 Sentry Park West - Gwynedd Hall - Suite 301 Blue Bell, PA 19422 7. "Permitted Use" shall mean: General Office Use 8. "Premises" shall mean the area located on the 1st floor of the Building and outlined on Exhibit A-2 attached hereto and Incorporated herein and known as Suite # 100. 9. "Prepaid Rental": Eleven Thousand, Seven Hundred Twenty-One and 50/100 Dollars ($11,721.50) payable by Tenant upon execution of this Lease by Tenant in accordance with Article V hereof. 10. "Rentable Area of the Premises" shall mean the area contained within the demising walls of the Premises and any other area designated for the exclusive use of Tenant, without deduction for any columns or projections necessary to the Building, plus a proportionate share of any Common Areas located on the floor(s) on which the Premises is located and a proportionate share of the Building's public areas, management office, engineer's office and "Mechanical Spaces" i.e. spaces housing service areas, equipment and/or access corridors for HVAC and communications facilities, plumbing, fire protection and elevators. The Rentable Area of the Premises is deemed for all purposes under this Lease to be 11,032 square feet. The "Rentable Area of the Park" is deemed for all purposes under this Lease to be 216,000 square feet. The square footage amounts set forth for the Rentable Area of the Premises and the Rentable Area of the Park constitute a material part of the economic basis of this Lease and the execution thereof by Landlord and shall not be adjusted without the written consent of Landlord. 11. "Security Deposit" shall mean the sum of Eleven Thousand Seven Hundred Twenty-One and 50/100 Dollars ($11,721.50). 12. "Tenant's Pro Rate Share" shall mean 5.1074 percent (5.1074%), which is the sum derived by dividing the Rentable Area of the Premises by The Rentable Area of the Park and multiplying the result thereof by one hundred (100). B. The following are additional definitions of some of the defined terms used in the Lease. 1. "Basic Costs" shall mean the direct and indirect costs and expenses incurred in connection with the Park more fully defined in Exhibit B-2. 2. "Building Standard" shall mean the type, grade, brand, 3 quality and/or quantity of materials Landlord designates from time to time to be the minimum quality and/or quantity to be used in the Park. 3. "Business Day(s)" shall mean Mondays through Fridays exclusive of the normal business holidays ("Holidays") of New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day, and such other days as Landlord may designate which are then treated as business holidays at most comparable projects in Montgomery County. 4. "Common Areas" shall mean those areas provided for the common use or benefit of all tenants generally and/or the public, such as corridors, elevator foyers, common mail rooms, restrooms, vending areas, and lobby areas (whether at ground level or otherwise), and other similar facilities including the "Exterior Common Areas" as defined in Exhibit B-2. 5. "Maximum Rate" shall mean the greatest per annum rate of interest permitted from time to time under applicable federal and state law. 6. "Normal Business Hours" for the Park shall mean 8:00 a.m. to 6:00 p.m. Mondays through Fridays, exclusive of Holidays, and such other hours as Landlord may designate from time to time. 7. "Prime Rate" shall mean the per annum interest rate publicly announced by The First National Bank of Chicago from time to time (whether or not charged in each instance) as its prime or base rate. 8. "Park" shall mean the area described on Exhibit A-2 attached hereto and all improvements located thereon, including, without limitation, the Building and the following buildings: Meriontowle Hall, Abington Hall, Provident Bank Building and Dublin Hall. II. LEASE GRANT. Subject to and upon the terms herein set forth, Landlord leases to Tenant and Tenant leases from Landlord the Premises. Subject to the terms and conditions of this Lease, Landlord shall provide to Tenant possession and enjoyment of the Premises and the non-exclusive use of the "Common Areas" (as defined in Article I of this Lease) during the period commencing on the Commencement Date and ending on the expiration or earlier termination of this Lease. III. ADJUSTMENT OF COMMENCEMENT DATE/POSSESSION. 4 A. If Landlord is performing Landlord Work in the Premises, the Lease Term shall not commence until the later to occur of the Target Commencement Date and the date that Landlord has substantially completed the Landlord Work; provided, however, that if Landlord shall be actually delayed in substantially completing the Landlord Work as a result of the occurrence of any of the following (a "Delay"): 1. Tenant's failure to furnish information in accordance with the Work Letter Agreement or to respond to any request by Landlord for any approval or Information within any time period prescribed, or if no time period is prescribed, then within three (3) Business Days of such request; or 2. Tenant's insistence on materials, finishes or installations that have long lead times after having first been informed in writing by Landlord that such materials, finishes or installations will cause a Delay; or 3. Changes in any plans and specifications made at the request of Tenant, in writing; or 4. The performance by a person or entity employed by Tenant in the completion of any work (all such work and such persons or entities being subject to the prior approval of Landlord) which unreasonably interferes with the construction of the Landlord Work; or 5. Any request by Tenant in writing that Landlord delay the completion of any of the Landlord Work; or 6. Any breach or default by Tenant In the performance of Tenant's obligations under this Lease; or 7. Any delay resulting from Tenant's having taken possession of the Premises for any reason prior to substantial completion of the Landlord Work; or 8. Any other delay chargeable to unreasonable acts or omissions of Tenant, its agents, employees or independent contractors; then, for purposes of determining the Commencement Date, the date of substantial completion shall be deemed to be the day that said Landlord Work would have been substantially completed absent the net effect of such Delay(s). The Landlord Work shall be deemed to be substantially completed on the date 5 that is five (5) business days following receipt by Tenant of a factually correct written notice from Landlord that all of the following have occurred (or would have occurred absent any Delays): (a) Landlord has tendered possession of the Premises to Tenant; (b) Landlord's Work has been completed, other than any details of construction, mechanical adjustment or any other matter in the nature of punch-list items, the existence of which does not interfere with Tenant's use of the Premises; (c) a Temporary Certificate of Occupancy is in effect with respect to the Premises; (d) the Common Areas are completed and operating (including without limitation all parking facilities); and (e) all of the services and utilities to the Premises and the Common Area ware operating. Except as provided below with respect to Tenant's termination rights, the adjustment of the Commencement Date and, accordingly, the postponement of Tenant's obligation to pay Rent shall be Tenant's sole remedy and shall constitute full settlement of all claims that Tenant might otherwise have against Landlord by reason of the Premises not being ready for occupancy by Tenant on the Target Commencement Date. Landlord's determination of the Commencement Date shall, if not disputed by Tenant within five (5) Business Days after Tenant's receipt of the "Commencement Letter" (defined below), be final and binding on all parties for all purposes, Including, without limitation, determination of the date of commencement of the Lease Term and of Tenant's obligation to pay Rent hereunder. Promptly after the determination of the Commencement Date by Landlord, Landlord shall prepare a letter agreement (the "Commencement Letter") setting forth the Commencement Date, the Termination Date and any other dates that are affected by the adjustment of the Commencement Date. Tenant, within five Business (5) days after receipt thereof from Landlord, shall execute the Commencement Letter and return the same to Landlord. Notwithstanding anything herein to the contrary, Landlord shall use reasonable efforts to cause the Commencement Date to occur on or before February 1, 1994, or as soon thereafter as is reasonably practicable. In the event that the Commencement Date does not occur, for any reason other than Tenant Delays or Force Majeure delays, on or before May 1, 1994, then Tenant, as its sole remedy, shall be entitled to terminate this Lease by irrevocable written notice to Landlord on or before the earlier to occur of the 15th day thereafter and the day before the Commencement Date occurs. In the event that the Commencement Date does not occur, for any reason other than Tenant Delays (including any Force Majeure reason) on or before July 1, 1994, Tenant, as its sole remedy, shall be entitled to terminate this Lease by irrevocable written notice to Landlord on or before the earlier to occur of the 15th day thereafter and the pay prior to the Commencement Date. B. Subject to latent defects and the completion or correction of any items of Landlord Work set forth on a construction punchiest jointly prepared 6 by Landlord and Tenant in good faith based on a walk through of the Premises within fifteen (1 5) days after substantial completion (or subsequently disclosed on a second punchiest prepared within forty-five (45) days after substantial completion), by taking possession of the Premises, Tenant is deemed to have: 1. accepted the Premises and agreed that the Premises is in good order and satisfactory condition, with no representation or warranty by Landlord as to the condition or suitability of the Premises or of the Building for Tenant's use thereof; and 2. agreed that Landlord has no obligation to clean, decorate, alter, remodel, Improve or repair the Premises or the Building unless said obligation is specifically set forth in this Lease. Landlord agrees to proceed in good faith to complete or correct any items set forth on the punchiest. Notwithstanding the foregoing to the contrary, Landlord shall not be responsible for the correction of any latent defects in Tenant's equipment or other personal property, even if such equipment or personal property was installed by Landlord as part of the Landlord Work. C. Notwithstanding anything to the contrary contained in the Lease, Landlord shall not be obligated to tender possession of any Offering Space or Refusal Space that is occupied by a third party on the date that Landlord would otherwise be required to deliver possession, nor shall Landlord have any other obligations to Tenant under this Lease with respect to such space until the date Landlord: 1. recaptures such space from such existing tenant or occupant; and 2. regains the legal right to possession thereof. This Lease shall not be affected by any such failure to deliver possession and Tenant shall have no claim for damages against Landlord as a result thereof, all of which are hereby waived and released by Tenant. Notwithstanding the foregoing, Landlord agrees to proceed in good faith and with due diligence to obtain possession of any such Offering Space or Refusal Space. In such event, the commencement date for such space shall be postponed until the date Landlord delivers possession of the Premises to Tenant and any other commencement conditions are satisfied. D. So long as such work does not interfere with the completion of Landlord's Work, Tenant shall have the right prior to the Commencement Date to enter the Premises to install Tenant's communication and computer systems. Landlord shall cooperate with Tenant in scheduling performance of the Landlord's Work so that Tenant's communication and computer systems can be installed as efficiently as possible. Tenant's entry into the Premises prior to the Commencement Date for the purpose of installing its 7 communication and computer systems shall be subject to all of the terms and conditions of this Lease, including, without limitation, the insurance and indemnity provisions, but no Base Rental or Additional Base Rental shall accrue until the Commencement Date. If Tenant enters the Premises prior to the Commencement Date for the purpose of conducting its business therein such possession shall be subject to all of the terms and conditions of the Lease and Tenant shall pay Base Rental and Additional Base Rental to Landlord on a per diem basis for each day of occupancy prior to the Commencement Date. IV. USE. The Premises shall be used for the Permitted Use and for no other purposes. Tenant agrees not to use or permit the use of the Premises for any purpose which is illegal, dangerous to life, limb or property or which, in Landlord's opinion, creates a nuisance or which would increase the cost of insurance coverage with respect to the Building. Tenant shall conduct its business and control its agents, servants, contractors, employees, customers, licensees, and invitees in such a manner as not to interfere with, annoy or disturb other tenants, or in any way interfere with Landlord in the management and operation of the Building. Tenant will maintain the Premises in a clean and healthful condition, and comply with all laws, ordinances, orders, rules and regulations of any governmental entity with reference to the operation of Tenant's business and to the use, condition, configuration or occupancy of the Premises, including without limitation, the Americans with Disabilities Act. Notwithstanding the foregoing, nothing herein shall be construed to require Tenant to make structural changes to the Park or Premises, including changes to windows, sprinkler heads and other Building systems and structural elements of the Project or Premises, unless such changes are required as a result of the specific nature of Tenant's use (as opposed to general office use) or because of the specific nature of any alterations, additions or improvements performed by Tenant or contractors retained directly by Tenant, nor shall Tenant be responsible for the cost of compliance except and only to the extent such cost is included as a Basic Cost pursuant to the terms of this Lease. Tenant will comply with the rules and regulations of the Building adopted and altered by Landlord from time to time and will use reasonable efforts to cause all of its agents, servants, contractors, employees, customers, licensees and invitees to do so, provided that Landlord has delivered to Tenant a copy of such rules and regulations and that such rules and regulations (a) do not materially interfere with Tenant's use of the Premises or the Common Areas, and (b) do not unreasonably require Tenant to pay or incur any additional monetary obligations or liabilities. Landlord shall not enforce the rules and regulations in a discriminatory manner against Tenant, and Landlord shall use reasonable efforts to enforce the rules and regulations against other tenants of the Park to the extent necessary to avoid 8 interference by such other tenants with Tenant's use and enjoyment of the Premises and Common Areas. All changes to such rules and regulations will be sent by Landlord to Tenant in writing. A copy of the existing rules and regulations is attached hereto as Exhibit D and made a part hereof. Tenant agrees not to commit or allow any waste to be committed on any portion of the Premises, and at the termination of this Lease to deliver up the Premises to Landlord in accordance with Article XXXV hereof. Landlord, to the best of its knowledge, represents and warrants to Tenant that, as of the Commencement Date, the Premises (exclusive of any aspects of the Premises installed by Tenant), the Building and the Common Areas shall comply with each applicable law, ordinance, order, rule or regulation of any governmental body including, without limitation, the Americans with Disabilities Act (ADA). Landlord shall be responsible for complying with any such law, ordinance, order, rule or regulation with respect to the Common Areas, the Building systems and the Building (other than requirements resulting from changes in laws following the Commencement Date to the extent that such requirements relate to Leasehold Improvements in the Premises which do not constitute part of the Building systems or structure, which requirements shall be Tenant's responsibility); provided that Landlord shall have the right to contest any alleged violation in good faith, including, without limitation, the right to apply for and obtain a waiver or deferment of compliance, the right to assert any and all defenses allowed by law and the right to appeal any decisions, judgments or rulings to the fullest extent permitted by law. Landlord, after the exhaustion of any and all rights to appeal or contest, will make all repairs, additions, alterations or Improvements necessary to comply with the terms of any final order or judgment, provided that if Landlord elects not to contest any alleged violation, Landlord will promptly make all repairs, additions, alterations or improvements necessary to comply with the notice of violation. V. RENT. A. Tenant covenants and agrees to pay to Landlord during the Lease Term, without any setoff or deduction whatsoever, the full amount of all Base Rental payments, and any adjustments thereof, due in accordance with the rental schedule set forth in Exhibit B-1 hereof (the "Base Rental"), the full amount of all payments of Additional Base Rental due in accordance with Exhibit B-2 hereof (the "Additional Base Rental") and all such other sums of money as shall become due under this Lease (including, without limitation, any charges for replacement of electric lamps and ballasts and any other services, goods or materials furnished by Landlord at Tenant's request), all of which hereinafter may be collectively called "Rent." Except as otherwise provided herein, the Base Rental and Additional Bass Rental for each calendar year or 9 portion thereof during the Lease Term, shall be due and payable in advance in equal monthly installments on the first day of each calendar month during the Lease Term and any extensions or renewals hereof, and Tenant hereby agrees to pay such Base Rental and Additional Base Rental to Landlord without demand, provided that the installment of Base Rental for the first full calendar month of the Lease Term shall be payable upon the execution of this Lease by Tenant. If the Lease Term commences on a day other than the first day of a month or terminates on a day other than the last day of a month, then the installments of Base Rental and Additional Base Rental for such month or months shall be prorated, based on the number of days in such month. All such payments shall be by a good and sufficient check. No payment by Tenant or receipt or acceptance by Landlord of a lesser amount than the correct amount of Rent due under this Lease shall be deemed to be other than a payment on account of the earliest Rent due hereunder, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance or pursue any other available remedy. The acceptance by Landlord of any Rent on a date after the due date of such payment shall not be construed to be a waiver of Landlord's right to declare a default for any other late payment. Except as otherwise specifically provided herein, Tenant's covenant to pay Rent shall be independent of every other covenant set forth in this Lease. B. All Rent not paid within five (5) days after such amount was due and payable shall bear interest from the date due until paid (unless Tenant explains to Landlord in writing, in reasonable detail, that such delay resulted from a good faith error by Tenant) at the lesser of (1) ten percent (10%) per annum or (2) the Maximum Rate. In addition, if Tenant fails to pay any installment of Base Rental, Additional Base Rental or any other item of Rent within five (5) business days after written notice from Landlord that such amount was not paid when due and payable hereunder, a service fee equal to five percent (5%) of such unpaid amount will be due and payable immediately by Tenant to Landlord; provided that such five (5) business-day period shall be ten (10) business days for the first late charge imposed hereunder in any calendar year. VI. SECURITY DEPOSIT. INTENTIONALLY OMITTED. VII. SERVICES TO BE FURNISHED BY LANDLORD. A. Subject to the provisions of Article XI below, Landlord, as part of 10 Basic Costs, agrees to furnish Tenant the following services: 1. Hot and cold water in the Common Area lavatories and cold water at those points of supply provided for general use of tenants in the Building, central heat and air conditioning in season, at such temperatures thermostatically controlled by Tenant and in such amounts as are considered by Landlord to be standard for buildings of similar class, size, age and location, or as required by governmental authority. Notwithstanding the foregoing, Tenant acknowledges that electricity to the Promises is separately metered and that the electricity consumed in connection with supplying HVAC service to the Premises is included on such meter and billed directly to Tenant in accordance with the provisions of Article XI of this Lease. Notwithstanding the foregoing, if Tenant requires HVAC service after Normal Business Hours, in addition to the cost of electricity consumed, Tenant shall be required to pay Landlord a separate charge for the cost incurred by Landlord for operating its water source heat pumps and related equipment. Such additional costs shall be measured by a separate override meter and allocated proportionally between Tenant and any other tenants of the Building, if any, that requested after hours HVAC service for those hours during which such service is being supplied to Tenant. Tenant shall pay Landlord for such additional costs upon demand as additional Rent. 2. Routine maintenance and electric lighting service for all Common Areas of the Building in the manner and to the extent; and replacement of building standard fluorescent tubes, light bulbs and ballasts in the Premises as required as a result of normal usage standard for buildings of similar class, size, age and location. 3. Janitor service on Business Days in accordance with the schedule attached hereto as Exhibit H (or such reasonably comparable specifications designated by Landlord from time to time); provided, however, if Tenant's use, floor covering or other improvements require special services, Tenant shall, at Landlord's option, either (i) retain its own contractors (which contractor shall be subject to Landlord's reasonable approval) to do such work or, (ii) pay the additional cost reasonably attributable thereto as additional Rent upon presentation of statements therefor by Landlord. Upon request from Tenant, Landlord shall provide Tenant with a copy of its then current janitorial and cleaning specifications. 4. Elevator service in common with other tenants of the Building for ingress and egress to and from the floor of the Promises during Normal Business Hours, provided that, subject to force majeure, at least one 11 (1) elevator shall be available to serve the Premises 24 hours per day, 7 days a week. 5. Snow removal and ice treatment as necessary to provide the parking required hereunder and access to the Premises. Subject to Landlord's reasonable rules and regulations and temporary closures for emergency purposes, Tenant shall have access to its parking and the Premises 24 hours per day, 7 days per week. B. Except for the alteration, maintenance and repair responsibilities of Tenant with respect to the Premises which are expressly set forth in this Lease, Landlord shall operate and maintain the Building and the Park in accordance with all applicable laws, with all requirements of any applicable board of property insurance underwriters (to the extent necessary for Landlord to maintain the insurance required hereunder), and with the standards prevailing from time to time for projects of similar class, size, age and location, and, in any event, in as good a condition as at the time this Lease is executed by Landlord and Tenant, reasonable wear and tear excepted. Except as otherwise expressly provided herein, the failure by Landlord to any extent to furnish, or the interruption or termination of these services in whole or in part, resulting from adherence to laws, regulations and administrative orders, wear, use, repairs, improvements, alterations, Force Majeure (as hereinafter defined) or any other causes beyond the reasonable control of Landlord shall not render Landlord liable in any respect nor be construed as an eviction of Tenant, nor give rise to an abatement of Rent, nor relieve Tenant from the obligation to fulfill any covenant or agreement hereof. Should any of the equipment or machinery used in the provision of such services for any cause cease to function properly, Landlord shall use reasonable diligence to repair such equipment or machinery, but except as otherwise expressly provided herein, Tenant shall have no claim for offset or abatement of Rent or damages on account of an interruption in service or resulting therefrom. To the extent reasonably possible based on the nature of the work to be performed, Landlord shall schedule the performance of any repairs, improvements or alterations that will result In an interruption of service for non Business Days or after Normal Business Hours. Landlord's entire obligation with respect to the repair and maintenance of the Premises are set forth In this Lease. C. Notwithstanding anything to the contrary contained in this Section VII if (I) Landlord ceases to furnish any utility or service to the Premises, Building or Common Areas or any damaged or dysfunctional aspect of the Premises, Building or Common Areas which is not Tenant's repair 12 responsibility interferes with Tenant's use or the Premises and Tenant notifies Landlord of such cessation in writing (the "Interruption Notice'), (II) such cessation or other problem does not arise as a result of an act or omission of Tenant, (III) such cessation or other problem is not caused by a fire or other casualty (in which case Article XIX shall control), (iv) the repair or restoration of such cessation or other problem Is reasonably within the control of Landlord, and (v) as a result of such cessation or other problem, the Premises or a material portion thereof, is rendered untenantable (meaning that Tenant Is unable to use the Premises in the normal course of its business) and Tenant in fact ceases to use the Premises, or material portion thereof, then, Tenant's sole remedy shall be as follows: on the third (3rd) consecutive business day following the later to occur of the date the Premises (or material portion thereof) becomes untenantable, the date Tenant ceases to use such space and the date Tenant provides Landlord with an Interruption Notice, the Base Rental and Additional Base Rental payable hereunder shall be abated on a per them basis for each day after such three (3) business day period based upon the percentage of the Premises so rendered untenantable and not used by Tenant, and such abatement shall continue until the date the Premises become tenantable again. Landlord agrees to proceed in good faith and with due diligence to correct any such interruption of service or other problem. If, as a result of any such interruption in services or other problem, all or any part of the Premises are rendered untenantable for more than 30 consecutive days (or such longer period as may be necessary to cure [not to exceed 60 days]) or more than 60 days (in the aggregate) in any lease year, Tenant may, at Tenant's option, by 30 days' prior written notice given to Landlord at any time after such 30th day (as the same may be extended) or 60th day, as applicable, and before the Premises are again usable, terminate this Lease. D. Notwithstanding anything to the contrary contained in this Section VII.B. if (I) Landlord ceases to furnish any utility or service to the Premises, Building or Common Areas or any damaged or dysfunctional aspect of the Premises, Building or Common Areas which is not Tenant's repair responsibility interferes with Tenant's use or the Premises and Tenant notifies Landlord of such cessation In writing (the "Interruption Notice"), (II) such cessation or other problem does not arise as a result of an act or omission of Tenant, (III) such cessation or other problem is not caused by a fire or other casualty (in which case Article XIX shall control), (iv) the repair or restoration of such cessation or other problem IS NOT reasonably within the control of Landlord, and (v) as a result of such cessation or other problem, the Premises or a material portion thereof, is rendered untenantable (meaning that Tenant is unable to use the Premises in the normal course of its business) and Tenant in fact ceases to use the Premises, or material portion thereof, then, Tenant's sole 13 remedy shall be as follows: on the fifteenth (15th) consecutive business day following the later to occur of the date the Premises (or material portion thereof) becomes untenable, the date Tenant ceases to use such space and the date Tenant provides Landlord with an Interruption Notice, the Base Rental and Additional Base Rental payable hereunder shall be abated on a per diem basis for each day after such fifteen (15) business day period based upon the percentage of the Premises so rendered untenantable and not used by Tenant, and such abatement shall continue until the date the Premises become tenantable again. Landlord agrees to proceed in good faith and with due diligence to correct any such Interruption of service or other problem. If, as a result of any such interruption in services or other problem, all or any part of the Premises are rendered untenantable for more than 130 consecutive days, Tenant may, at Tenant's option, by 30 days' prior written notice given to Landlord at any time after such 130th day and before the Premises are again usable, terminate this Lease. Notwithstanding anything in Section VII.C. or the VII.D. to the contrary, it is understood and agreed that Landlord shall be entitled to take whatever action is necessary to restore the interrupted services, including, without limitation, the installation of a temporary generator to provide electrical service to the Building, providing portable washroom facilities, etc. and, upon such restoration of services, Tenant's obligation to pay Rent shall commence, provided that (x) if Landlord elects to restore services by such temporary measures, Landlord shall continue to provide such temporary services until the interrupted services in question are restored, and (y) the furnishing of temporary services shall not relieve Landlord of its obligation to proceed in good faith to perform any necessary repairs, replacements or other work that is necessary to restore the services in question. E. Tenant expressly acknowledges that If Landlord, from time to time, elects to provide security services, Landlord shall not be deemed to have warranted the efficiency of such security personnel, service, procedures or equipment and Landlord shall not be liable in any manner for the failure of any such security personnel, services, procedures or equipment to prevent or control, or apprehend any one suspected of personal injury or property damage in, on or around the Park. VIII. LEASEHOLD IMPROVEMENTS. A. Except as otherwise specifically provided elsewhere in this Lease or in the Work Letter Agreement, if any, attached hereto as Exhibit C and Incorporated herein, all Installations and Improvements now or hereafter placed on or In the Premises shall be for Tenant's account and at Tenant's cost, which cost shall be payable by Tenant to Landlord upon demand as additional 14 Rent. B. Any and all alterations, additions and improvements to the Premises, all attached furniture, equipment and non-trade fixtures (collectively, "Leasehold Improvements") shall, to the extent included In the Landlord Work, be owned and insured by Landlord and shall remain upon the Premises, all without compensation, allowance or credit to Tenant. Any unattached and movable equipment or furniture, trade fixtures or other personalty of Tenant, including computer, communications and security systems, and the wiring therefor, ("Tenant's Property") shall be owned and insured by Tenant, provided that Tenant shall also be required to insure any additions, alterations and improvements performed to the Premises subsequent to the performance of the Landlord Work by Landlord. Landlord may, nonetheless, require Tenant to remove any Leasehold Improvements performed by or for the benefit of Tenant (other than the Landlord Work) and all electronic, phone and data cabling as are designated by Landlord (the "Required Removables") at Tenant's sole cost. In the event that Landlord so elects, Tenant shall remove such Required Removables on or before the expiration or earlier termination of this Lease and repair any damage caused by such removal. If Tenant fails to remove the Required Removables after Landlord's request therefor, Landlord may remove, store or dispose of the Required Removables at Tenant's cost, and repair any damage caused by such removal and Tenant shall pay Landlord as additional Rent hereunder, on demand, all such costs. IX. GRAPHICS. Landlord shall provide and Install, at Tenant's cost, all letters or numerals on the exterior of the Premises; all such letters and numerals shall be In the standard graphics for the Building and no others shall be used or permitted on the Premises without Landlord's prior written consent. X. REPAIRS AND ALTERATIONS BY TENANT. A. Without limiting the generality of Section VII.B, above, Landlord shall diligently maintain and repair all aspects of the Premises which are structural or which relate to the Building systems, including without limitation the separate HVAC system for Tenant's computer area(s) and drug room, provided that, except with regard to the separate HVAC system, Tenant shall be responsible for any plumbing, electrical and other systems to the extent that they are located within the Premises and serve Tenant exclusively, e.g. any separate sink or shower installed in the Premises. Notwithstanding the foregoing, Landlord hereby represent and warrants that the separate sink and shower currently located on the Premises are in good working order and condition and, in addition, Landlord agrees that it will be responsible for 15 making any repairs to such sink and shower during the first ninety (90) days of the Lease Term. Tenant shall keep the interior of the Premises in good condition, and shall diligently maintain and repair all nonstructural aspects of the Premises not included in Landlord's obligations, above. Any such repairs by either party shall restore the Premises to as good a condition as it was in prior to the occurrence of the applicable damage or other problem. If Tenant fails to make any repair which is Tenant's responsibility with reasonable diligence, and in the event that such failure impairs the use or enjoyment of the Building by any other tenant, and if such repair remains incomplete on the 20th day following written notice to Tenant that Tenant has failed to exercise reasonable diligence (or a shorter period in the case of an emergency repair, or longer to the extent that Tenant is then proceeding diligently and diligent completion takes more than 20 days), then Landlord may, at its option, perform such repair itself and Tenant shall pay the cost thereof to Landlord on demand as additional Rent. B. Tenant shall not make or allow to be made any alterations, additions or improvements to the Premises, nor install any sates or other heavy property or equipment within the Premises, nor place signs or window coverings on the Premises which are visible from outside the Premises, without first obtaining the written consent of Landlord in each such instance, provided that Tenant may install vending machines for the sale of candy, food, beverages or other goods, for the sole and exclusive use of Tenant's employees and visitors, in locations within the Premises able to bear the weight of such machines. Notwithstanding the foregoing, Landlord's consent shall not be required for any alteration, addition or improvement that satisfies all of the following criteria: 1) costs less than $5,000.00, 2) is of a cosmetic nature such as painting, wallpapering, hanging pictures and installing carpeting, 3) Is not visible from the exterior of the Premises or Building, and 4) will not affect the systems or structure of the Building and does not require work to be performed inside the walls or above the ceiling of the Premises; provided that even if consent is not required, Tenant shall still comply with all the other provisions of this Section X.B. Prior to commencing any such work, Tenant must furnish Landlord with plans and specifications; names and addresses of contractors; copies of contracts; necessary permits; evidence of contractor's and subcontractor's insurance in accordance with section XVI.B. hereof; and all such improvements, alterations or additions shall be installed in a good workmanlike manner using new materials. Upon completion, Tenant shall furnish marked-up plans showing all changes from the plans originally approved by Landlord, contractor's affidavits and full and final waivers of lien and receipted bills covering all labor and materials. All improvements, alterations and additions shall comply with all insurance requirements, codes, 16 ordinances, laws and regulations, including without limitation, the Americans with Disabilities Act. Tenant shall reimburse Landlord upon demand as additional Rent for all reasonable sums expended by Landlord for examination of the architectural, mechanical, electric and plumbing plans for any alterations, additions or improvements and for the costs of repairing any damage done to the Building caused by Tenant or Tenant's agents, servants, employees, customers, licensees, or invitees in connection with such work. If Landlord so requests, Tenant shall permit Landlord to supervise construction operations, to the extent that they affect the Building structure or systems or the premises of any other tenant but no such supervision shall impose any liability upon Landlord. In the event Landlord supervises such construction, Landlord shall be entitled to a supervisory fee in an amount not to exceed the lesser of (1) five percent (5%) of the cost of the aspect of such work which affects the Building structure or systems or the premises of any other tenant, or (2) $40.00 per hour. Landlord's approval of Tenant's plans and specifications or supervision of any work performed for or on behalf of Tenant shall not be deemed to be a representation by Landlord that such plans and specifications comply with applicable Insurance requirements, building codes, ordinances. laws or regulations. XI. USE OF ELECTRICAL AND HVAC SERVICES BY TENANT. All electricity used by Tenant In the Premises shall, at Landlord's option, be paid for by Tenant either (1) by a separate charge (in an amount equal to the actual utility company charge) billed directly to Tenant by Landlord and payable by Tenant as additional Rent, or (2) by a separate charge billed by the utility company supplying electricity and payable by Tenant directly to such utility company. Tenant's use of electrical service furnished by Landlord shall not exceed 6 watts per square foot. In the event Tenant shall request that it be allowed to consume electrical or HVAC services in excess of 6 watts per square foot, Landlord may not refuse to consent to such usage but may reasonably condition such consent upon such conditions as Landlord elects (including the installation of utility service upgrades, submeters, air handlers or cooling units), and all such additional usage (to the extent permitted by law), installation and maintenance thereof shall be paid for by Tenant as additional Rent. XII. ENTRY BY LANDLORD. Landlord and its agents or representatives shall have the right (after 24 hours prior notice except in an emergency where Landlord shall give Tenant notice reasonable under the circumstances and except that notice shall not be required with respect to the furnishing of janitorial and cleaning service) to enter the Premises to inspect the same, or to show the Premises to prospective purchasers, mortgagees, tenants or insurers, or to 17 clean or make repairs, alterations or additions thereto, including any work that Landlord deems necessary for the safety, protection or preservation of the Building or any occupants thereof, or to facilitate repairs, alterations or additions to the Building or any other tenants premises. Notwithstanding the foregoing, Tenant may, at its own expense, provide its own locks to an area within the Premises ("Secured Area"). Tenant need not furnish Landlord with a key but upon the Termination Date, Tenant shall surrender all such keys to Landlord. If Landlord must gain access to a Secured Area in a non-emergency situation, Landlord shall contact Tenant and Landlord and Tenant shall arrange a mutually agreed upon time for Landlord to do so. Landlord shall comply with all reasonable security measures pertaining to the Secured Area. If Landlord determines in its sole discretion that an emergency in the Building or the Premises, including, without limitation, a suspected fire or flood, requires Landlord to gain access to the Secured Area, Tenant hereby authorizes Landlord to forcibly enter the Secured Area. In such event, Landlord shall have no liability whatsoever to Tenant, and Tenant shall pay all reasonable expenses incurred by Landlord In repairing or reconstructing any entrance, corridor, door or other portions of the Premises damaged as a result of a forcible entry by Landlord. Landlord shall have no obligation to provide either janitorial service or cleaning in the Secured Area. If reasonably necessary for the protection and safety of Tenant and its employees, Landlord shall have the right to temporarily close the Premises to perform repairs, alterations or additions in the Premises, provided that, except in the event of an emergency and to the extent possible based upon the nature of the work to be performed, Landlord shall perform all such work on weekends and after Normal Business Hours. Entry by Landlord in accordance with this Article XII shall not constitute a constructive eviction or entitle Tenant to any abatement or reduction of Rent by reason thereof. XIII. ASSIGNMENT AND SUBLETTING. A. Tenant shall not assign, sublease, transfer or encumber this Lease or any interest therein or grant any license, concession or other right of occupancy of the Premises or any portion thereof or otherwise permit the use of the Premises or any portion thereof by any party other than Tenant (any of which events is hereinafter called a "Transfer") without the prior written consent of Landlord, which consent shall not be unreasonably withheld with respect to any proposed assignment or subletting. Landlord's consent shall not be considered unreasonably withheld if: 1. the proposed transferee's financial responsibility does not meet the same criteria Landlord uses to select Building tenants; 2. the proposed transferee's business is not suitable for the Building considering the business of the other tenants and the Building's prestige or 18 would result in a violation of an exclusive right granted to another tenant in the Building; 3. the proposed use is different than the Permitted Use; 4. the proposed transferee is a government agency whose operations involve an average number of daily visits by non-employees which is materially inconsistent with the character of the Park, or occupant of the Building; or 5. Tenant is in default. Tenant acknowledges that the foregoing is not intended to be an exclusive list of the reasons for which Landlord may reasonably withhold its consent to a proposed Transfer. Any attempted Transfer in violation of the terms of this Article shall, at Landlord's option, be void. Consent by Landlord to one or more Transfers shall not operate as a waiver of Landlord's rights as to any subsequent Transfers. In addition, Tenant shall not, without Landlord's consent, publicly offer or advertise the Lease for Transfer in any media unless the Park is at least 90% occupied or Tenant Is advertising the space for sublease or assignment at no less than 90% of the then current rental rate for similar space In the Building offered by Landlord for direct lease. In the event Tenant or anyone acting on behalf of Tenant or with Tenant's knowledge violates the provisions of the foregoing sentence, Landlord, in addition to its other remedies, shall be entitled to seek injunctive relief preventing such action, and Tenant shall be responsible for all costs incurred by Landlord in connection therewith. B. If Tenant requests Landlord's consent to a Transfer, Tenant shall notify Landlord in writing at least 30 days prior to the effective date of the proposed Transfer of the name of the proposed transferee and the nature of the business of the proposed transferee, the term, use, rental rate and all other material terms and conditions of the proposed Transfer, including, without limitation, evidence satisfactory to Landlord that the proposed transferee is financially responsible. Notwithstanding the provisions of Section XIII.A. above, Landlord may, during said 30-day period, 1. consent to or refuse to consent to such Transfer in writing; or 2. negotiate directly with the proposed transferee and (in the event Landlord is able to reach agreement with such proposed transferee) upon execution of a lease with such transferee (or the date of Tenant's proposed transfer, if earlier), terminate this Lease, with respect to the portion of the Premises which Tenant proposed to sublease or assign, upon thirty (30) days' notice; or 3. cancel and terminate this Lease, with respect to the portion of the Premises which Tenant proposed to sublease or assign, upon 30 days notice. No termination date resulting from any Landlord election to terminate under this paragraph shall (unless Tenant otherwise consents) be later than the planned date of Tenant's proposed transfer. In the event that Landlord elects to terminate this Lease as provided in this paragraph, Tenant may elect, within 10 days following notice of Landlord's termination election, to withdraw Tenant's request for Landlord's consent to the applicable assignment 19 or sublease in which event this Lease shall not terminate and Landlord's and Tenant's rights shall be the same as if Tenant had never requested such consent. In the event Landlord consents to any such Transfer, the Transfer shall be in a form reasonably approved by Landlord (it being understood and agreed that Landlord's approval rights shall not extend to aspects of the Transfer which do not materially affect Landlord's interests in the Building or Premises), and Tenant shall bear all costs and expenses reasonably incurred by Landlord in connection with the review and approval of such documentation, which costs and expenses shall not exceed Five Hundred Dollars ($500.00). C. If for any assignment or sublease Tenant receives rent or other consideration (after deducting all reasonable costs of (a) free rent, tenant improvements and allowances provided to such assignee or sublessee, (b) to the extent that Tenant vacated the Premises no less than 1 0 days prior to the effective date of the applicable Transfer, all Rent (including without limitation Additional Base Rental) paid to Landlord for the period from Tenant's vacation of the Premises to the effective date of the Transfer, and (c) brokerage commissions and marketing costs) either initially or over the term of the assignment or sublease, In excess of the rent called for hereunder, or in case of the sublease of a portion of the Premises, in excess of such rent fairly allocable to such portion (the "Transfer Consideration") Tenant shall pay one-half of such Transfer Consideration to Landlord within ten (10) days following receipt thereof by Tenant. In addition to any other rights Landlord may have In connection with an uncured default by Tenant under the Lease, Landlord shall have the right to contact any transferee and require that all payments made pursuant to the Transfer shall be made directly to Landlord. D. If Tenant is a corporation and if at any time during the Lease Term the person or persons who own the voting shares at the time of the execution of this Lease cease for any reason, including but not limited to merger, consolidation or other reorganization involving another corporation, to own a majority of such shares, or if Tenant is a partnership and if at any time during the Lease Term the general partner or partners who own the general partnership interests In the partnership at the time of the execution of this Lease, cease for any reason to own a majority of such interests (except as the result of transfers by gift, bequest or inheritance to or for the benefit of members of the immediate family of such original shareholder(s) or partner(s)), such an event shall be deemed to be a Transfer. The preceding sentence shall not apply whenever Tenant is a corporation the outstanding stock of which is listed on a recognized security exchange, or if at least eighty per cent (80%) of its voting stock is owned by another corporation, the voting stock of which is so listed. Notwithstanding anything to the contrary contained herein or in Section 20 XIII.D., Tenant may assign its entire Interest under this Lease or sublet the Premises to a wholly owned corporation or controlled subsidiary or parent of Tenant (or entity under common control with Tenant) or to any successor to Tenant by purchase, merger, consolidation or reorganization (hereinafter collectively referred to as "Corporate Transfer") without the consent of Landlord, provided: (I) Tenant is not in default under this Lease; (II) if such proposed transferee is a successor to Tenant by purchase, said proposed transferee shall acquire all or substantially all of the stock or assets of Tenant's business or, if such proposed transferee is a successor to Tenant by merger, consolidation or reorganization, the continuing or surviving corporation shall own all or substantially all of the assets of Tenant; (III) such proposed transferee operates. the business in the Premises for the Permitted Use and no other purpose; and (iv) in 66 event shall any Transfer release or relieve Tenant from any of its obligations under this Lease. Tenant shall give Landlord written notice at least twenty (20) days prior to the effective date of such Corporate Transfer If such transfer involves an actual change in possession of the Premises. As used herein, the terms "controlled" or "subsidiary" shall mean a corporate entity wholly owned by Tenant or at least fifty-one percent (51%) of whose voting stock Is owned by Tenant. The parties to whom Tenant is entitled to assign this Lease or sublet all or any portion of the Premises pursuant to a Corporate Transfer shall be referred to herein as "Permitted Transferees". E. Any Transfer consented to by Landlord In accordance with this Article XIII shall be only for the Permitted Use and for no other purpose, and In no event shall any Transfer release or relieve Tenant or any Guarantors from any obligations under this Lease. XIV. LIENS. Tenant will not permit any mechanic's liens or other liens to be placed upon the Premises or Tenant's leasehold interest therein, the Building, or the real estate associated therewith. Landlord's title to the Building and Park is and always shall be paramount to the interest of Tenant, and nothing herein contained shall empower Tenant to do any act that can, shall or may encumber Landlord's title. In the event any such lien does attach, Tenant shall, within ten (10) days of notice of the filing of said lien, either discharge or bond over such lien to the satisfaction of Landlord and Landlord's Mortgagee (as hereinafter defined), and in such a manner as to stay the enforcement or foreclosure of such lien. If Tenant shall fail to so discharge or bond over such lien, then, in addition to any other right or remedy of Landlord, Landlord may, but shall not be obligated to, discharge the same. Any amount paid by Landlord for any of the aforesaid purposes, including reasonable attorneys fees (if and to the extent permitted by law) shall be paid by Tenant to Landlord on demand as additional Rent. 21 XV. INDEMNITY AND WAIVER OF CLAIMS. A. Tenant shall indemnify, defend and hold Landlord, its principals, beneficiaries, partners, officers, directors, agents, employees and Mortgagees (collectively, the "Landlord Related Parties") harmless against and from all liabilities, obligations, damages, penalties, claims, costs, charges or expenses arising, directly or indirectly, out of or in connection with the acts, negligence or wilful misconduct of Tenant or the failure on the part of Tenant to perform or comply with any of the covenants, agreements, terms or conditions contained in this Lease with which Tenant must comply or perform, but not including any liabilities, obligations, damages, penalties, claims, costs, charges or expenses arising, directly or indirectly, out of or in connection with the negligence or wilful misconduct of Landlord or the failure on the part of Landlord to perform or comply with any of the covenants, agreements, terms or conditions contained in this Lease with which Landlord must comply or perform. In case any action or proceeding is brought against Landlord or any of the Landlord Related Parties by reason of any of the foregoing, Tenant shall, at Tenant's sole cost and expense, resist and defend such action or proceeding with counsel reasonably approved by Landlord. Landlord shall indemnify, defend and hold Tenant, its principals, beneficiaries, partners, officers, directors, agents and employees (collectively, the "Tenant Related Parties") harmless against and from all liabilities, obligations, damages, penalties, claims, costs, charges or expenses arising, directly or indirectly, out of or in connection with the acts, negligence or wilful misconduct of Landlord or the failure on the part of Landlord to perform or comply with any of the covenants, agreements, terms or conditions contained in this Lease with which Landlord must comply or perform, but not including any liabilities, obligations, damages, penalties, claims, costs, charges or expenses arising, directly or indirectly, out of or in connection with the negligence or wilful misconduct of Tenant or the failure on the part of Tenant to perform or comply with any of the covenants, agreements, terms or conditions contained in this Lease with which Tenant must comply or perform. In case any action or proceeding is brought against Tenant or any of the Tenant Related Parties by reason of any of the foregoing, Landlord shall, at Landlord's sole cost and expense, resist and defend such action or proceeding with counsel reasonably approved by Tenant. B. Landlord and the Landlord Related Parties shall not be liable for, and Tenant waives, all claims for loss or damage to Tenant's business or damage to person or property sustained by Tenant or any person claiming by, through or under Tenant (including Tenant's employees) resulting from any accident or occurrence in, on or about the Premises, the Building or the Park, 22 unless such claim for loss or damage arises directly or indirectly out of or in connection with the negligence or willful misconduct of Landlord or the failure on the part of Landlord to perform or comply with any of the covenants, agreements, terms or conditions contained in this lease with which Landlord must comply or perform, including, without limitation, claims for loss, theft or damage resulting from: 1. the Premises, Building, or Park, or any equipment or appurtenances becoming out of repair; 2. wind or weather; 3. any defect in or failure to operate, for whatever reason, any sprinkler, heating or air-conditioning equipment, electric wiring, gas, water or steam pipes; 4. broken glass; 5. the backing up of any sewer pipe or downspout, 6. the bursting, leaking or running of any tank, water closet, drain or other pipe; 7. the escape of steam or water; 8. water, snow or ice being upon or coming through the roof, skylight, stairs, doorways, windows, walks or any other place upon or near the Building; 9. the failing of any fixture, plaster, tile or other material; or 10. any act, omission or negligence of other tenants, licensees or any other persons or occupants of the Building or of adjoining or contiguous buildings, of owners of adjacent or contiguous property or the public, or by construction of any private, public or quasi-public work. To the maximum extent permitted by law, and except as otherwise provided herein, Tenant agrees to use and occupy the Premises, and to use such other portions of the Building as Tenant Is herein given the right to use, at Tenant's own risk. XVI. TENANT'S INSURANCE. A. At all times commencing on and after the earlier of the Commencement Date and the date Tenant or its agents, employees or contractors enters the Premises for any purpose, Tenant shall carry and maintain, at its sole cost and expense: 1. Commercial General Liability Insurance with a Broad Form General Liability Endorsement application to the Premises and its appurtenances providing, on an occurrence basis, a minimum combined single limit of Two Million dollars ($2,000,000). 2. All Risks of Physical Loss Insurance written at replacement cost value and with a replacement cost endorsement covering all of Tenant's Property in the Premises. 3. Workers Compensation Insurance as required by the state in which the Premises is located and in amounts as may be required by applicable statute, and Employers Liability Coverage of One Million Dollars ($1,000,000) per occurrence. 23 4. Whenever good business practice, in Landlord's reasonable judgment, indicates the need of additional insurance coverage or different types of insurance in connection with the Premises or Tenant's use and occupancy thereof, Tenant shall, upon request, obtain such insurance at Tenant's expense and provide Landlord with evidence thereof. B. Except for items for which Landlord is responsible under the Work Letter Agreement, before any repairs, alterations, additions, improvements, or construction are undertaken by or on behalf of Tenant, Tenant shall carry and maintain, at its expense, or Tenant shall require any contractor performing work on the Premises to carry and maintain, at no expense to Landlord, in addition to worker's compensation insurance as required by the jurisdiction in which the Building is located, All Risk Builder's Risk Insurance in the amount of the replacement cost of any alterations, additions or improvements (or such other amount reasonably required by Landlord) and Commercial General Liability Insurance (including, without limitation, Contractor's Liability coverage, Contractual Liability coverage, Completed Operations coverage, a Broad Form Property Damage coverage and Contractor's Protective liability) written on an occurrence basis with a minimum combined single limit of Two Million Dollars ($2,000,000); such limit may be accomplished by means of an umbrella policy. C. Any company writing any insurance which Tenant is required to maintain or cause to be maintained pursuant to the terms of this Lease (all such insurance as well as any other insurance pertaining to the Premises or the operation of Tenant's business therein being referred to as "Tenant's Insurance"), as well as the form of such insurance, shall at all times be subject to Landlord's reasonable approval, and each such insurance company shall have an A.M. Best rating of "A-7" or better and shall be licensed and qualified to do business in the state in which the Premises are located. All policies evidencing Tenant's Insurance (except for. Workers Compensation) shall specify Tenant and the owners] of the Building and its (or their) respective principals, beneficiaries, partners, officers, directors, employees, agents and mortgagee[s]" (and any other designees of Landlord as the interest of such designees shall appear) as additional insureds. Provided that the coverage afforded Landlord and any designees of Landlord shall not be reduced or otherwise adversely affected, all of Tenant's Insurance may be carried under a blanket policy covering the Premises and any other of Tenant's locations. All policies of Tenant's Insurance shall contain endorsements that the insurer(s) will give to Landlord and its designees at least thirty (30) days' advance written notice of any change, cancellation, termination or lapse of said insurance. 24 Tenant shall be solely responsible for payment of premiums for all of Tenant's Insurance. Tenant shall deliver to Landlord at least fifteen (15) days prior to the time Tenant's Insurance is first required to be carried by Tenant, and upon renewals at least fifteen (15) days prior to the expiration of any such Insurance coverage, a certificate of insurance of all policies procured by Tenant in compliance with its obligations under this Lease. The limits of Tenant's Insurance shall in no event limit Tenant's liability under this Lease. D. Tenant shall not do or fail to do anything in, upon or about the Premises which will: 1. violate the terms of any of Landlord's insurance policies; 2. prevent Landlord from obtaining policies of insurance acceptable to Landlord or any Mortgagees; or 3. result in an increase in the rate of any insurance on the Premises, the Building, any other property of Landlord or of others within the Building. In the event of the occurrence of any of the events set forth in this Section, Tenant shall pay Landlord upon demand, as additional Rent, the cost of the amount of any increase in any such insurance premium. If Tenant fails to obtain the insurance coverage required by this Lease, Landlord may, at its option, obtain such insurance for Tenant, and Tenant shall pay, as additional Rent, the cost of all premiums thereon and all of Landlord's costs associated therewith. XVII. SUBROGATION. Notwithstanding anything set forth in this Lease to the contrary, Landlord and Tenant do hereby waive any and all right of recovery, claim, action or cause of action against the other, their respective principals, beneficiaries, partners, officers, directors, agents, and employees, and, with respect to Landlord, its Mortgagee[s], for any loss or damage that may occur to Landlord or Tenant or any party claiming by, through or under Landlord or Tenant, as the case may be, with respect to their respective property, the Building, the Park or the Premises or any addition or improvements thereto, or any contents therein, by reason of fire, the elements or an other cause regardless of cause or origin, including the negligence of Landlord or Tenant, or their respective principals, beneficiaries, partners, officers, directors, agents and employees and, with respect to Landlord, its Mortgagee[s], which loss or damage is (or would have been, had the insurance required by this Lease been carried) covered by insurance. Since this mutual waiver will preclude the assignment of any such claim by subrogation (or otherwise) to an insurance company (or any other person), Landlord and Tenant each agree to give each insurance company which has issued, or in the future may issue, its policies of fire, extended coverage or material damage insurance, written notice of the terms of this mutual waiver, and to have such insurance policies property endorsed, if necessary, to prevent the invalidation of any of the coverage provided by such insurance policies by reason of such mutual waiver. For the 25 purpose of the foregoing waiver, the amount of any deductible applicable to any loss or damage shall be deemed covered by, and recoverable by the insured under the insurance policy to which such deductible relates. In the event that Tenant is permitted to and self-insures any risk which would have been covered by the insurance required to be carried by Tenant pursuant to Article XVI of the Lease, or if Tenant fails to carry any insurance required to be carried by Tenant pursuant to Article XVI of this Lease, then all loss or damage to Tenant, its leasehold interest, its business, its property, the Premises or any additions or improvements thereto or contents thereof required to be covered by Tenant's insurance shall be deemed covered by and recoverable by Tenant under valid and collectible policies of insurance. XVIII. LANDLORD'S INSURANCE. Landlord shall maintain property insurance on the Building in the amount of 100% of the replacement cost thereof (excluding foundations) covering fire and all other hazards normally covered by "all-risk" insurance in the area in which the Building is located (including loss by flood or earthquake if in an area subject to such hazards). Landlord shall carry commercial general liability insurance in the types and no less than the amounts required to be carried by Tenant under Paragraphs XVI.A. and B. of this Lease. Any company writing any insurance which Landlord is required to maintain or cause to be maintained pursuant to the terms of this Lease (all such insurance as well as any other insurance pertaining to the Park being referred to as "Landlord's Insurance") shall have an A.M. Best rating of "A-7" or better and shall be licensed and qualified to do business in the state in which the Premises are located. The cost of such insurance shall be included as a part of the Basic Costs, and payments for losses thereunder shall be made solely to Landlord or the Mortgagees of Landlord as their interests shall appear. XIX. CASUALTY DAMAGE. A. DAMAGE DIRECTLY AFFECTING PREMISES. If any portion of the Premises is rendered untenantable by damage from any cause, or if any casualty to any portion of the Building or Common Areas materially impairs Tenant's use of, or access to, the Premises or reduces the parking available to Tenant and/or its invitees below the minimum amount required by law, the following shall apply: 1. DETERMINATION OF EXTENT OF DAMAGE. Landlord shall promptly (in any event, within 45 days following the date of the casualty), notify Tenant In writing as to how long, in Landlord's reasonable judgment, it will take to substantially restore the damage (ignoring any absence of insurance proceeds or delays in receiving the same). If Landlord fails to notify Tenant within such 45 day period and such failure continues for ten (10) days after written notice 26 from Tenant, Landlord's failure to so notify Tenant shall, if Tenant so chooses, be deemed to be Landlord's determination that such restoration will take longer than 240 days (measured from the date of the casualty). 2. RIGHTS TO TERMINATE FOLLOWING MAJOR DAMAGE OR DAMAGE NEAR END OF TERM. In the event that Landlord determines that such substantial restoration will take longer than 240 days (measured from the date of the casualty), or in the event that Landlord determines that such damage is restorable within a shorter period but the remaining term of this Lease following such restoration period is less than 2.5 times as long as such restoration period, then in either case Landlord or Tenant may terminate this Lease by irrevocable written notice to the other within 30 days following Tenant's receipt of Landlord's determination (or within 30 days following the 45th day following the date of the casualty, in the event that Landlord's determination is not timely delivered). Tenant shall not have the foregoing termination right in the event that Landlord notifies Tenant (within the 45-day period described above) that, notwithstanding the fact that substantial restoration will take longer than 240 days, substantial restoration of all damage to the Premises and all aspects of the damage to the Building and Common Areas which materially impair Tenant's available parking and/or access to the Premises has or would with the passage of time have, the rights to extend this Lease and (b) Tenant can be accomplished within 240 days of the casualty. Any termination by Landlord due solely to the fact that the remaining term of this Lease following such restoration period will be less than 2.5 times as long as such restoration period shall not be effective in the event that (a) Tenant then irrevocably notifies Landlord in writing, within 10 business days following Landlord's termination notice, that Tenant is exercising such extension. 3. RESTORATION. In the event that, following the occurrence of any damage described in Section XIX.A, this Lease is not terminated , (a) Landlord shall promptly commence and diligently proceed to restore the damage to the Premises and to all aspects of the Building and Common Areas necessary to remedy any material impairment to access to the Premises, except to the extent that the damage relates to aspects of the Premises that were made or installed by Tenant and were not required to be insured by Landlord hereunder, and (b) Tenant shall promptly commence and diligently proceed to restore all aspects of the Premises that were made or installed by Tenant and were not required to be insured by Landlord hereunder, and Tenant shall present Landlord with evidence satisfactory to Landlord of Tenant's ability to pay such costs prior to Landlord's commencement of repair and restoration of the Premises. Both Landlord's and Tenant's restoration obligations hereunder 27 shall be effective regardless of whether the damage is covered by insurance (except as otherwise expressly provided herein) and regardless of any delays in obtaining insurance proceeds. 4. ADDITIONAL TERMINATION RIGHTS. In the event that, for any reason, all damage required to be restored by Landlord is not substantially restored on or before the later of the 240th day following its occurrence or the date set forth in Landlord's initial notice of the estimated period of time for restoration (the later of such dates being referred to as the "Outside Completion Date"), and in the event that such nonrestoration involves the Premises or materially impairs access to the Premises or reduces the parking available to Tenant and/or its invitees below the minimum amount required by law, Tenant shall have the right, within 10 business days thereafter, to terminate this Lease by irrevocable written notice to Landlord; and Tenant shall thereafter have the same right to terminate this Lease within 10 business days following the 30th, 60th and 120th days following the Outside Completion Date. Notwithstanding the foregoing, if Landlord reasonably determines, at any time prior to the completion of the restoration work, that such restoration is not likely to be completed by the applicable Outside Completion Date (or such 30, 60 or 120 day periods, as applicable), Landlord shall be entitled to provide Tenant with written notice thereof, which notice shall advise Tenant of Landlord's revised estimate of the date on which the restoration work will be substantially completed. Tenant, within 1 0 business days after receipt of Landlord's notice, shall be entitled to terminate this Lease by written notice to Landlord. If Tenant does not terminate this Lease within such 10 business day period, the date set forth in Landlord's revised estimate shall be considered to be the Outside Completion Date for purposes hereof. B. OTHER DAMAGE TO BUILDING OR PARK. In the event that 20% or more of the Building or Park is destroyed, or In the event that 1) the cost to repair any damage to the Building or Park caused by a casualty is greater than the lesser of $200,000.00 and the then remaining net income that will be payable to Landlord under this Lease for the remainder of the Lease Term, and 2) either (a) the casualty was of a nature against which Landlord was not insured (and was not required to be insured hereunder) or (b) the casualty was of a nature with respect to which the applicable property insurance proceeds are ultimately paid to any mortgagee, ground lessor or other third party, then in any such event Landlord shall have the right to terminate this Lease by irrevocable written notice to Tenant within 45 days following the occurrence of the damage, but only in the event that Landlord (i) terminates the leases of all tenants similarly situated in relation to the damage, and (ii) does not restore such damage within 18 months following the date of the casualty. The percentages 28 of destruction referred to In this paragraph shall be determined by dividing the cost of the applicable restoration by the replacement cost of the entire Building (or Park, as applicable). C. ADJUSTMENT OF RENT. Following the occurrence of any damage described in this Article XIX, the Base Rental and Additional Base Rental shall each be proportionately abated to the extent that the Premises are thereby rendered unusable by Tenant in its business from the date of such casualty until the earlier of a. the date on which the Premises (or part thereof so rendered unusable) are again usable or b. the date on which (but only to the extent) Tenant again uses the Premises (or part thereof rendered unusable) in its business (and such rents shall be 100% abated in the event that no less than 30% of the Premises is rendered unusable by Tenant and Tenant reasonably elects not to use the remaining partial Premises pending restoration). Except for the foregoing rent abatement and except as otherwise expressly provided herein, Landlord shall have no liability to Tenant for any costs, damages or other losses incurred by Tenant in connection with any casualty to the Premises or Building. D. EFFECTIVE TERMINATION DATE. The effective date of any termination by Landlord or Tenant under this Article XIX shall be the date on which Tenant reasonably ceased, or ceases, to use the Premises for its ordinary business operations as the result of the casualty and, in the event that Tenant is still so using the Premises at the time of the notice of termination, such effective date shall be a date specified by the terminating party in such notice of termination, which date shall not be (i) later than the 60th day following such notice if Landlord is the terminating party; or (ii) earlier than the 60th day following such notice if Landlord is the terminating party; provided that, if both parties effectively give such termination notices, Tenant's effective date shall apply. E. WAIVER OF INCONSISTENT LAWS. Landlord and Tenant hereby waive the provisions to any law from time to time in effect during the Lease Term relating to the effect upon leases of partial or total destruction of leased property. Landlord and Tenant agree that their respective rights in the event of any damage to or destruction of the Premises shall be those specifically set forth herein. XX. DEMOLITION. INTENTIONALLY OMITTED. XXI. CONDEMNATION. If 1. the whole or any substantial part of the Premises or 2. any portion of the Building or Park which would leave the remainder of the Building 29 unsuitable for use as an office building comparable to its use on the Commencement Date, shall be taken or condemned for any public or quasi-public use under governmental law, ordinance or regulation, or by right of eminent domain, or by private purchase in lieu thereof, then Landlord may, at its option, terminate this Lease, by written notice given no later than sixty (60) days prior to the date the physical taking shall occur, effective as of the date the physical taking of said Premises or said portion of the Building or Park shall occur. Notwithstanding the foregoing, if the whole or any substantial part of the Premises shall be taken or condemned for any public or quasipublic use under governmental law, ordinance or regulation, or by right of eminent domain, or by private purchase in lieu thereof, Tenant shall also have the right to terminate this Lease effective as of the date the physical taking of the Premises occurs. Such right to terminate shall be exercised by written notice to Landlord within thirty (30) days after the date on which Tenant is first notified of the taking. In the event this Lease is not terminated, the Rentable Area of the Building, the Rentable Area of the Premises and Tenant's Pro Rata Share shall be appropriately adjusted. In addition, Rent for any portion of the Premises so taken or condemned shall be abated during the unexpired term of this Lease effective when the physical taking of said portion of the Premises shall occur. All compensation awarded for any such taking or condemnation, or sale proceeds in lieu thereof, shall be the property of Landlord, and Tenant shall have no claim thereto, the same being hereby expressly waived by Tenant, except for any portions of such award or proceeds which are specifically allocated by the condemning or purchasing party for the taking of or damage to trade fixtures of Tenant, relocation expenses and tenant improvements paid for by Tenant, which Tenant specifically reserves to itself. XXII. EVENTS OF DEFAULT. The following events shall be deemed to be events of default under this Lease: A. Tenant shall fall to pay any Base Rental, Additional Base Rental or other Rent under this Lease on or before the 5th business day following Tenant's receipt of written notice from Landlord that Tenant failed to pay such amount when due (hereinafter sometimes referred to as a "Monetary Default"). B. Any failure by Tenant (other than a Monetary Default) to comply with any term, provision or covenant of this Lease, which failure is not cured within twenty (20) days after delivery to Tenant of notice of the occurrence of such failure, provided that (i) if any such failure creates a hazardous condition, such failure must be cured Immediately; and (ii) if such failure cannot reasonably be cured within such twenty (20) days, Tenant shall not be in default hereunder so long as Tenant commences such cure within such 20 30 days and thereafter diligently prosecutes such cure to completion. C. Tenant or any Guarantor shall become insolvent, or shall make a transfer in fraud of creditors, or shall commit an act of bankruptcy or shall make an assignment for the benefit of creditors, or Tenant or any Guarantor shall admit in writing its inability to pay its debts as they become due. D. Tenant or any Guarantor shall file a petition under any section or chapter of the United States Bankruptcy Code, as amended, pertaining to bankruptcy, or under any similar law or statute of the United States or any State thereof, or Tenant or any Guarantor shall be adjudged bankrupt or insolvent in proceedings filed against Tenant or any Guarantor thereunder; or a petition or answer proposing the adjudication of Tenant or any Guarantor as a debtor or its reorganization under any present or future federal or state bankruptcy or similar law shall be filed in any court and such petition or answer shall not be discharged or denied within sixty (60) days after the filing thereof. E. A receiver or trustee shall be appointed for all or substantially all of the assets of Tenant or any Guarantor or of the Premises or of any of Tenant's property located thereon in any proceeding brought by Tenant or any Guarantor, or any such receiver or trustee shall be appointed in any proceeding brought against Tenant or any Guarantor and shall not be discharged with in sixty (60) days after such appointment or Tenant or such Guarantor shall consent to or acquiesce in such appointment. F. The leasehold estate hereunder shall be taken on execution or other process of law or equity in any action against Tenant. G. The liquidation, termination, dissolution, forfeiture of right to do business or death of Tenant or any Guarantor. XXIII. REMEDIES. A. Upon the occurrence of any event or events of default under this Lease, whether enumerated in Article XXII or not, Landlord shall have the option to pursue any one or more of the following remedies 1. Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord. If Tenant fails to surrender the Premises upon termination of the Lease hereunder, Landlord may without prejudice to any other remedy which it may have, enter upon and take 31 possession of the Premises and expel or remove Tenant and any other person who may be occupying said Premises, or any part thereof, and Tenant hereby agrees to pay to Landlord on demand the amount of all loss and damage which Landlord may suffer by reason of such termination, whether through inability to relet the Premises on satisfactory terms or otherwise, specifically including but not limited to all Costs of Reletting (hereinafter defined) and any deficiency that may arise by reason of any reletting or failure to relet. 2. Enter upon and take possession of the Premises and expel or remove Tenant or any other person who may be occupying said Premises, or any part thereof, without terminating this Lease. Landlord may (but shall be under no obligation to) relet the Premises or any part thereof for the account of Tenant, in the name of Landlord, without notice to Tenant for such term or terms which may be greater or less than the period which would otherwise have constituted the balance of the Lease Term and on such conditions (which may include concessions, free rent and alterations of the Premises) and for such uses as Landlord in its absolute discretion may determine, and Landlord may collect and receive any rents payable by reason of such relenting. Tenant agrees to pay Landlord on demand all Costs of Reletting and any deficiency that may arise by reason of such reletting or failure to relet. Landlord shall not be responsible or liable for any failure to relet the Premises or any part thereof or for any failure to collect any Rent due upon any such relenting. No such re-entry or taking of possession of the Premises by Landlord shall be construed as an election on Landlord's part to terminate this Lease unless a written notice of such termination is given to Tenant. 3. Enter upon the Premises and do whatever Tenant is obligated to do under the terms of this Lease, and Tenant agrees to reimburse Landlord on demand for any expense which Landlord may incur in thus affecting compliance with Tenant's obligations under this Lease together with interest at the lesser of a per annum rate equal to: a. the Maximum Rate, or b. the Prime Rate plus five percent (5%), and Tenant further agrees that Landlord shall not be liable for any damages resulting to Tenant from such action, unless caused by the negligence or wilful misconduct of Landlord. 4. In order to regain possession of the Premises and to deny Tenant access thereto in any instance in which Landlord has terminated this Lease or Tenant's right to possession, Landlord shall be entitled to exercise any and all rights provided to at law or in equity under the laws of the state and city in which the Building is located. Landlord may, without notice, remove and store, at Tenant's expense, any property belonging to Tenant that remains in the Premises after Landlord has regained possession thereof. 32 5. Terminate this Lease, in which event, Tenant shall immediately surrender the Premises to Landlord and pay to Landlord the sum of: a. all Rent accrued hereunder through the date of termination, and, upon Landlord's determination thereof, b. an amount equal to (i) the total Rent that Tenant would have been required to pay for the remainder of the Lease Term discounted to present value at the prime rate then in effect, minus (ii) the then present fair rental value of the Premises for the remainder of the Lease Term, similarly discounted, after deducting all anticipated Costs of Reletting. Landlord's determination of such amount shall be conclusive and binding on Tenant, and shall be deemed to have been made in good faith, subject only to manifest error. B. For purposes of this Lease, the term "Costs of Reletting" shall mean all costs and expenses incurred by Landlord in connection with the reletting of the Premises, including without limitation, Rent loss during the period the Premises are vacant prior to reletting, the cost of cleaning, renovation, repairs, decoration and alteration of the Premises for a new tenant or tenants, advertisement, marketing, brokerage and legal fees (if and to the extent permitted by law), the cost of protecting or caring for the Premises while vacant, the cost of removing and storing any property located on the Premises, any increase in insurance premiums caused by the vacancy of the Premises and any other out-of-pocket expenses incurred by Landlord including tenant inducements such as the cost of moving the new tenant or tenants and the cost of assuming any portion of the existing lease(s) of the new tenant(s). C. Except as otherwise herein provided, no repossession or re-entering on the Premises or any part thereof pursuant to Article XXIII hereof or otherwise shall relieve Tenant or any Guarantor of its liabilities and obligations hereunder, all of which shall survive such repossession or re-entering. Notwithstanding any such repossession or re-entering by reason of the occurrence of an event of default, Tenant will pay to Landlord the Rent required to be paid by Tenant pursuant to this Lease. D. No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing by agreement, applicable law or in equity. In addition to other remedies provided in this Lease, Landlord shall be entitled, to the extent permitted by applicable law, to injunctive relief, or to a decree compelling performance of any of the covenants, agreements, conditions or provisions of this Lease, or to any other remedy allowed to 33 Landlord at law or in equity. Forbearance by Landlord to enforce one or more of the remedies herein provided upon an event of default shall not be deemed or construed to constitute a waiver of such default. E. This Article XXIII shall be enforceable to the maximum extent such enforcement is not prohibited by applicable law, and the unenforceability of any portion thereof shall not thereby render unenforceable any other portion. F. If Tenant provides written notice to Landlord of an event or circumstance which requires the action of Landlord with respect to repair and/or maintenance and the continuation of which Is materially impairing Tenant's use or enjoyment of the Premises or Common Areas, and Landlord fails to provide such action within a reasonable period of time, given the circumstances, after the receipt of such written notice, but In no event earlier than thirty 30 days after receipt of such written notice, then Tenant may proceed to take the required action three (3) days after the delivery of an additional written notice to Landlord specifying that Tenant is taking such required action and, if such action was required under the terms of this Lease to be taken by Landlord, then Tenant shall be entitled to prompt reimbursement by Landlord for Tenant's reasonable costs and expenses in taking such action (unless, pursuant to this Lease, Tenant is solely responsible for the cost of such repair). If Landlord fails to pay such amounts within 30 days after written demand, then Tenant shall be entitled to deduct such amount from the Rent payable by Tenant under this Lease, provided, however, if Landlord disputes Tenant's right to receive reimbursement for the costs incurred by Tenant, Landlord shall have the right to place the disputed amount in an escrow account with an independent third party and to have the dispute between Landlord and Tenant resolved by appropriate legal proceedings. Notwithstanding the foregoing, in no event shall Tenant be entitled to (i) perform any work on any portion of the Building systems that serve tenants or occupants of the Building other than or in addition to Tenant, (ii) perform any work that affects the structure of the Building, or (iii) perform any work that requires entry into another tenant's or occupant's premises. XXIV. LIMITATION OF LIABILITY. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS LEASE, THE LIABILITY OF LANDLORD (AND OF ANY SUCCESSOR LANDLORD HEREUNDER) TO TENANT SHALL BE LIMITED TO THE INTEREST OF LANDLORD IN THE BUILDING, AND TENANT AGREES TO LOOK SOLELY TO LANDLORD'S INTEREST IN THE BUILDING FOR THE RECOVERY OF ANY JUDGMENT OR AWARD AGAINST THE LANDLORD, IT BEING INTENDED THAT LANDLORD SHALL NOT BE PERSONALLY LIABLE FOR ANY JUDGMENT OR DEFICIENCY. TENANT 34 HEREBY COVENANTS THAT, PRIOR TO THE FILING OF ANY SUIT FOR AN ALLEGED DEFAULT BY LANDLORD HEREUNDER, IT SHALL GIVE LANDLORD AND ALL MORTGAGEES WHOM TENANT HAS BEEN NOTIFIED HOLD MORTGAGES OR DEED OF TRUST LIENS ON THE PROPERTY, BUILDING OR PREMISES NOTICE AND REASONABLE TIME TO CURE SUCH ALLEGED DEFAULT BY LANDLORD. IN ADDITION, TENANT ACKNOWLEDGES THAT EQUITY OFFICE PROPERTIES, INC. IS ACTING SOLELY IN ITS CAPACITY AS AGENT FOR LANDLORD AND SHALL NOT BE LIABLE FOR ANY OBLIGATIONS, LIABILITIES, LOSSES OR DAMAGES ARISING OUT OF OR IN CONNECTION WITH THIS LEASE, ALL OF WHICH ARE EXPRESSLY WAIVED BY TENANT. XXV. NO WAIVER. Failure of Landlord or Tenant to declare any default immediately upon its occurrence, or delay in taking an action in connection with an event of default shall not constitute a waiver of such default, nor shall it constitute an estoppel against Landlord or Tenant, but Landlord or Tenant shall have the right to declare the default at any time and take such action as is lawful or authorized under this Lease. Failure by Landlord or Tenant to enforce its rights with respect to any one default shall not constitute a waiver of its rights with respect to any subsequent default. Receipt by Landlord of Tenant's keys to the Premises shall not constitute an acceptance or surrender of the Premises. XXVI. EVENT OF BANKRUPTCY. In addition to, and in no way limiting the other remedies set forth herein, Landlord and Tenant agree that if Tenant ever becomes the subject of a voluntary or involuntary bankruptcy, reorganization, composition, or other similar type proceeding under the federal bankruptcy laws, as now enacted or hereinafter amended, then: A. "Adequate protection" of Landlord's interest in the Premises pursuant to the provisions of Section 361 and 363 (or their successor sections) of the Bankruptcy Code, 11 U.S.C. Section 101 et seq., (such Bankruptcy Code as amended from time to time being herein referred to as the "Bankruptcy Code"), prior to assumption and/or assignment of the Lease by Tenant shall include, but not be limited to all (or any part) of the following: the continued payment by Tenant of the Base Rental and all other Rent due and owing hereunder and the performance of all other covenants and obligations hereunder by Tenant; B. "Adequate assurance of future performance" by Tenant and/or any assignee of Tenant pursuant to Bankruptcy Code Section 365 will include (but not be limited to) payment of an additional/new Security Deposit in the 35 amount of two (2) times the then-current monthly Base Rental payable hereunder. C. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code, shall be deemed without further act or deed to have assumed all of the obligations of Tenant arising under this Lease on and after the effective date of such assignment. Any such assignee shall, upon demand by Landlord, execute and deliver to Landlord an instrument confirming such assumption of liability. D. Notwithstanding anything in this Lease to the contrary, all amounts payable by Tenant to or on behalf of the Landlord under this Lease, whether or not expressly denominated as "Rent", shall constitute "rent" for the purposes of Section 502(b) (6) of the Bankruptcy Code. E. It this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code, any and all monies or other considerations payable or otherwise to be delivered to Landlord (including Base Rentals and other Rent hereunder), shall be and remain the exclusive property of Landlord and shall not constitute property of Tenant or of the bankruptcy estate of Tenant. Any and all monies or other considerations constituting Landlord's property under the preceding sentence not paid or delivered to Landlord shall be held in trust by Tenant or Tenant's bankruptcy estate for the benefit of Landlord and shall be promptly paid to or turned over to Landlord. F. If Tenant assumes this Lease and proposes to assign the same pursuant to the provisions of the Bankruptcy Code to any person or entity who shall have made a bona fide offer to accept an assignment of this Lease on terms acceptable to the Tenant, then notice of such proposed offer/assignment, setting forth 1. the name and address of such person or entity, 2. all of the terms and conditions of such offer, and 3. the adequate assurance to be provided Landlord to assure such person's or entity's future performance under the Lease, shall be given to Landlord by Tenant no later than twenty (20) days after receipt by Tenant, but in any event no later than ten (10) days prior to the date that Tenant shall make application to a court of competent jurisdiction for authority and approval to enter into such assumption and assignment, and, unless such transfer is to a Permitted Transferee, Landlord shall thereupon have the prior right and option, to be exercised by notice to Tenant given at any time prior to the effective date of such proposed assignment, to accept an assignment of this Lease upon the same terms and conditions and for the same consideration, if any, as the bona fide offer made by such persons or entity, less any brokerage commission which may be payable out of the consideration 36 to be paid by such person for the assignment of this Lease. XXVII. QUIET ENJOYMENT. Tenant shall, and may peacefully have, hold, and enjoy the Premises, subject to the other terms of this Lease (including. without limitation, Article XXX hereof), provided that Tenant pays the Rent herein recited to be paid by Tenant and performs all of Tenant's covenants and agreements herein contained. This covenant and any and all other covenants of Landlord shall be binding upon Landlord and its successors only during its or their respective periods of ownership of the Landlord's Interest hereunder. XXVIII. RELOCATION. INTENTIONALLY OMITTED. XXIX. HOLDING OVER. In the event of holding over by Tenant after expiration or other termination of this Lease or in the event Tenant continues to occupy the Premises after the termination of Tenant's right of possession pursuant to Articles XXII and XXIII hereof, occupancy of the Premises subsequent to such termination or expiration shall be that of a tenancy at sufferance and in no event from month-to-month or year-to-year, but Tenant shall, throughout the entire holdover period, pay rent (on a per month basis without reduction for any partial months during any such holdover) equal to 150% of the sum of the Base Rental and Additional Base Rental due for the period immediately preceding such holding over, provided that in no event shall Base Rental and Additional Base Rental during the holdover period be less than the fair market rental for the Premises. No holding over by Tenant or payments of money by Tenant to Landlord after the expiration of the term of this Lease shall be construed to extend the Lease Term or prevent Landlord from recovery of immediate possession of the Premises by summary proceedings or otherwise. Tenant shall be liable to Landlord for all damage, including any consequential damage, which Landlord may suffer by reason of any holding over by Tenant, and Tenant shall indemnity Landlord against any and all claims made by any other tenant or prospective tenant against Landlord for delay by Landlord in delivering possession of the Premises to such other tenant or prospective tenant. Notwithstanding the foregoing, Tenant shall not be liable for consequential damages unless (1) Landlord notifies Tenant that it has entered into a lease for the Premises or has received a bona fide offer to lease the Premises, and (2) Tenant fails to vacate the Premises within ten (10) days after the date of Landlord's notice. XXX. SUBORDINATION TO MORTGAGES. A. Tenant accepts this Lease subject and subordinate to any mortgage, deed of trust, ground lease or other lien presently existing or 37 hereafter arising upon the Premises, or upon the Building and/or the Park and to any renewals, modifications, refinancings and extensions thereof (any such mortgage, deed of trust, lease or other lien being hereinafter referred to as a "Mortgage", and the person or entity having the benefit of same being referred to hereinafter as a "Mortgagee'), but Tenant agrees that any such Mortgagee shall have the right at any time to subordinate such Mortgage to this Lease on such terms and subject to such conditions as such Mortgagee may deem appropriate in its discretion. This clause shall be self-operative and no further instrument of subordination shall be required. However, Landlord is hereby irrevocably vested with full power and authority to subordinate this Lease to any Mortgage, and Tenant agrees upon demand to execute such further instruments subordinating this Lease, acknowledging the subordination of this Lease or attorning to the holder of any such Mortgage as Landlord may request. The terms of this Lease are subject to approval by the Landlord's existing lender(s) and any lender(s) who, at the time of the execution of this Lease, have committed or are considering committing to Landlord to make a loan secured by all or any portion of the Park, and such approval is a condition precedent to Landlord's obligations hereunder. If any person shall succeed to all or part of Landlord's interests in the Premises whether by purchase, foreclosure, deed in lieu of foreclosure, power of sale, termination of lease or otherwise, and if and as so requested or required by such successor-in-interest, Tenant shall, without charge, attorn to such successor-in-interest if and so long as such successors) agree(s) that Tenant's possession of the Premises and this Lease, including any options to extend the term hereof, any rights of first offer and rights of first refusal, and any other options hereunder, will not be disturbed so long as Tenant is not In default hereunder (subject to any applicable notice and cure periods). Tenant and Landlord each agree that it will from time to time upon request by the other and, within fifteen (15) days of the date of such request, execute and deliver to such persons as the requesting party shall request an estoppel certificate or other similar statement in recordable form certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as so modified), stating the dates to which Rent and other charges payable under this Lease have been paid, stating that the requesting party is not in default hereunder (or if the requesting party alleges a default stating the nature of such alleged default) and further stating such other matters as the requesting party shall reasonably require. B. Notwithstanding the foregoing to the contrary, this Lease is contingent upon Landlord providing Tenant with a fully executed non-disturbance, attornment, estoppel and subordination agreement from Landlord's current Mortgagee on the form attached hereto as Exhibit I (the 38 "Non-disturbance Agreement") within ten (10) business days after the full and final execution of this Lease by Landlord and Tenant. Tenant shall execute the Non-disturbance Agreement upon receipt from Landlord and shall return the same to Landlord for execution by Landlord's Mortgagee. In the event that Landlord fails to provide Tenant with the Non-Disturbance Agreement within such ten (10) business day period, Tenant, as its sole remedy, shall have the right to terminate this Lease by written notice to Landlord within ten (10) days after the expiration of such ten (10) day period. Notwithstanding anything herein to the contrary, Landlord shall also be required to provide Tenant with a non-disturbance, subordination and attornment agreement in favor of Tenant from any Mortgagee who comes into existence after the Commencement Date. Such non-disturbance, subordination and attornment agreement in favor of Tenant shall provide that, so long as Tenant is paying the Rent due under this Lease and is not otherwise in default under the Lease, its right to possession and other terms of the Lease shall remain in full force and effect. Such non-disturbance, subordination and attornment agreement may include additional time on behalf of the Mortgagee to cure defaults of the Landlord and provide that a) neither Mortgagee nor any successor in interest shall be bound by (i) any payment of Base Rental, Additional Base Rental or other sum due hereunder for more than one (1) month in advance, or (ii) any amendment or modification of this Lease made without the express written consent of Mortgagee or any successor in interest; b) neither Mortgagee nor any successor in interest will be liable for (i) any act or omission or warranties of any prior landlord (including Landlord), except with regard to any continuing default of which Tenant has provided Mortgagee with written notice and a reasonable opportunity to cure after the date on which Mortgagee takes title to the Building, or (ii) the breach of any warranties or obligations relating to construction of improvements on the Property or any tenant finish work performed or to have been performed by any prior landlord (including Landlord), provided that in the event Mortgagee, after notice and a reasonable opportunity to perform, fails to perform any tenant finish work required to be performed under this Lease with respect to Offering Space A, Offering Space B or any Refusal Space, Tenant shall have the right to perform such work and to offset the reasonable cost thereof against Rent, or (iii) the return of any security deposit, except to the extent such deposits have been received by Mortgagee; c) neither Mortgagee nor any successor in interest shall be subject to any offsets or defenses which Tenant might have against any prior landlord (including Landlord). Notwithstanding the foregoing, Landlord shall use reasonable efforts to attempt to cause any Mortgagee to delete, prior to execution by Tenant and the Mortgagee, any provision of the Mortgagees non-disturbance, subordination and attornment agreement with Tenant that requires Tenant to waive any offsets or defenses which Tenant might have against any prior 39 landlord. XXXI. ATTORNEY'S FEES. In the event that Landlord should retain counsel and/or institute any suit against Tenant for violation of or to enforce any of the covenants or conditions of this Lease, or should Tenant institute any suit against Landlord for violation of any of the covenants or conditions of this Lease, or should either party intervene in any suit in which the other is a party to enforce or protect its interest or rights hereunder, the prevailing party in any such suit shall be entitled to all of its costs, expenses and reasonable fees of its attorneys) (if and to the extent permitted by law) in connection therewith. XXXII. NOTICE. Whenever any demand, request, approval, consent or notice ("Notice") shall or may be given to either of the parties by the other, each such Notice shall be in writing and shall be sent by registered or certified mail with return receipt requested, or sent by overnight courier service (such as Federal Express) at the respective addresses of the parties for notices as set forth in Section I.A.6. of this Lease, provided that if Tenant has vacated the Premises or is in default of this Lease Landlord may serve Notice by any manner permitted by Law so long as such notice is delivered in such manner permitted by law (1) to the Irvine address set forth in Section I.A.6 (or any substitute for such address of which Tenant has notified Landlord in writing) in all events and (2) also to the Premises unless Tenant has vacated the Premises. Any Notice under this Lease delivered by registered or certified mail shall be deemed to have been given and effective on the earlier of (a) the third day following the day on which the same shall have been mailed with sufficient postage prepaid or (b) the delivery date indicated on the return receipt. Notice sent by overnight courier service shall be deemed given and effective upon the day after such notice is delivered to or picked up by the overnight courier service. Either party may, at any time, change its Notice Address by giving the other party Notice stating the change and setting forth the new address. XXXIII. Intentionally Omitted. XXXIV. EXCEPTED RIGHTS. This Lease does not grant any rights to light or air over or about the Building. Landlord specifically excepts and reserves to itself the use of any roofs, the exterior portions of the Premises, all rights to and the land and improvements below the improved floor level of the Premises, the improvements and air rights above the Premises and the improvements and air rights located outside the demising walls of the Premises, and such areas within the Premises as are required for installation of utility lines and other installations required to serve any occupants of the Building and the right to maintain and repair the same, and no rights with respect thereto are conferred 40 upon Tenant unless otherwise specifically provided herein. Landlord further reserves to itself the right from time to time, after notice to Tenant as required under this Lease or as otherwise reasonable under the circumstances and subject to any abatement rights granted to Tenant in this Lease: A. to change the Building's name or street address; B. to install, fix and maintain signs on the exterior and interior of the Building; C. to designate and approve window coverings; D. to make any decorations, alterations, additions, improvements to the Building, or any part thereof (including the Premises) which Landlord shall desire, or deem necessary for the safety, protection, preservation or improvement of the Building, or as Landlord may be required to do by law; E. to have access to the Premises to perform its duties and obligations and to exercise its rights under this Lease; F. to retain at all times and to use pass-keys to all locks within and into the Premises, except to the Secured Ares (as defined in Paragraph XII of this Lease); G. to approve the weight, size or location of heavy equipment, articles in and about the Premises; H. to close or restrict access to the Building at all times other than Normal Business Hours subject to Tenant's right to admittance at all times under such regulations as Landlord may prescribe from time to time, or to close (temporarily or permanently) any of the entrances to the Building; 1. to change the arrangement and/or location of entrances of passageways, doors and doorways, corridors, elevators, stairs, toilets and public parts of the Building; and J. to grant to anyone the exclusive right to conduct any business or undertaking in the Building, subject to the Tenant's right to continue to use the Premises for the purposes for which Tenant is entitled to use the Premises. Landlord, in accordance with Article XII hereof, shall have the right to enter the Premises in connection with the exercise of any of the rights set forth herein and such entry into the Premises and the performance of any work therein shall not constitute a constructive eviction or entitle Tenant to any abatement or reduction of Rent by reason thereof, except as otherwise provided in this Lease to the contrary. XXXV. SURRENDER OF PREMISES. At the expiration or earlier termination of this Lease or Tenant's right of possession hereunder, Tenant shall quit and surrender the Premises to Landlord, broom clean, and in good order, condition and repair, ordinary wear and tear and damage from casualty or condemnation excepted. If Tenant fails to remove any of Tenant's Property within three (3) days after the termination of this Lease or Tenant's right to possession hereunder, Landlord may, without notice to Tenant, remove and/or store such Tenant's Property at the risk, cost and expense of Tenant and Landlord shall in no event be responsible for the value, preservation or safekeeping thereof. Tenant shall pay Landlord, upon demand, any and all expenses caused by such removal and all storage charges against such property so long as the 41 same shall be in the possession of Landlord or under the control of Landlord. In addition, if Tenant fails to remove any of its Tenant's Property within thirty (30) days after the termination of this Lease of Tenant's right to possession, such Tenant's Property, at the option of Landlord, shall be conclusively presumed to have been abandoned by Tenant and title to such items shall pass to Landlord. XXXVI. MISCELLANEOUS. A. If any term or provision of this Lease, or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and enforced to the fullest extent permitted by law. B. Tenant agrees not to record this Lease or any memorandum hereof without Landlord's prior written consent. C. This Lease and the rights and obligations of the parties hereto shall be interpreted, construed, and enforced in accordance with the laws of the state in which the Building is located. D. Events of "Force Majeure" shall include strikes, riots, acts of God, shortages of labor or materials, war, governmental law, regulations or restrictions and any other cause whatsoever that is beyond the control of Landlord. Whenever a period of time is herein prescribed for the taking of any action by Landlord or Tenant, Landlord or Tenant, as applicable, shall not be liable or responsible for, and there shall be excluded from the computation of such period of time, any delays due to events of Force Majeure. E. Landlord shall have the right to transfer and assign, in whole or in part, all of its rights and obligations hereunder and in the Building and Park referred to herein, and in such event and upon such transfer (and the assumption of Landlord's obligations by such transferee) Landlord shall be released from any further obligations hereunder, except for liabilities which accrued prior to such transfer, and Tenant agrees to look solely to such successor in interest of Landlord for the performance of such obligations. F. Tenant hereby represents to Landlord that it has dealt directly with and only with the Broker as a broker in connection with this Lease. Tenant agrees to indemnify and hold Landlord and the Landlord Related Parties 42 harmless from all claims of any brokers claiming to have represented Tenant in connection with this Lease. G. If there is more that one Tenant, or if the Tenant is comprised of more that one person or entity, the obligations hereunder imposed upon Tenant shall be joint and several obligations of all such parties. All notices, payments, and agreements given or made by, with or to any one of such persons or entities shall be deemed to have been given or made by, with or to all of them. H. In the event Tenant is a corporation (including any form of professional association), partnership (general or limited), or other form of organization other than an individual, then each individual executing or attesting this Lease on behalf of Tenant hereby covenants, warrants and represents: 1. that such individual is duly authorized to execute or attest and deliver this Lease on behalf of Tenant in accordance with the organizational documents of Tenant; 2. that this Lease is binding upon Tenant; 3. that Tenant is duly organized and legally existing in the state of its organization, and is qualified to do business in the state in which the Premises is located; 4. that upon request, Tenant will provide Landlord with true and correct copies of all organizational documents of Tenant, and any amendments thereto; and 5. that the execution and delivery of this Lease by Tenant will not result in any breach of, or constitute a default under any mortgage, deed of trust, lease, loan, credit agreement, partnership agreement or other contract or instrument to which Tenant is a party or by which Tenant may be bound. If Tenant is a corporation, Tenant will, within ten (10) Business Days after the later of (i) request therefor by Landlord, or (ii) the date this Lease is executed by Landlord and Tenant, deliver to Landlord a copy of a resolution of Tenant's board of directors authorizing or ratifying the execution and delivery of this Lease, which resolution will be duly certified to Landlord's satisfaction by the secretary or assistant secretary of Tenant. I. Tenant acknowledges that the financial capability of Tenant to perform its obligations hereunder is material to Landlord and that Landlord would not enter into this Lease but for its belief, based on its review of Tenant's financial statements, that Tenant is capable of performing such financial obligations. Tenant hereby represents, warrants and certifies to Landlord that its financial statements previously furnished to Landlord were at the time given true and correct in all material respects and that there have been no material subsequent changes thereto as of the date of this Lease. At any time during the Lease Term, Tenant shall provide Landlord, upon forty-five (45) days' prior written notice from Landlord, with a current consolidated financial statement 43 and financial statements of the two (2) years prior to the current financial statement year. Such statement shall be prepared in accordance with generally accepted accounting principles (or, in the case of any Japanese or other foreign entity, in accordance with the Japanese or other foreign accounting standards applicable to such entity) and, if such is the normal practice of Tenant, shall be audited by an independent certified public accountant. J. Except as expressly otherwise herein provided, with respect to all required acts of Tenant, time is of the essence of this Lease. This Lease shall create the relationship of Landlord and Tenant between the parties hereto, and no estate shall pass out of Landlord. Tenant has only a usufruct, not subject to purchase or sale, which may not be assigned by Tenant except as expressly provided in this Lease. K. This Lease and the covenants and conditions herein contained shall inure to the benefit of and be binding upon Landlord and Tenant and their respective permitted successors and assigns. L. Notwithstanding anything to the contrary contained in this Lease, the expiration of the Lease Term, whether by lapse of time or otherwise, shall not relieve Tenant from Tenant's obligations accruing prior to the expiration of the Lease Term. M. The headings and titles to the paragraphs of this Lease are for convenience only and shall have no effect upon the construction or interpretation of any part hereof. N. Landlord has delivered a copy of this Lease to Tenant for Tenant's review only, and the delivery hereof does not constitute an offer to Tenant or option. This Lease shall not be effective until an original of this Lease executed by both Landlord and Tenant and an original Guaranty, if any, executed by each Guarantor Is delivered to and accepted by Landlord, and this Lease has been approved by Landlord's Mortgagees, if required. XXXVII. ENTIRE AGREEMENT. This Lease Agreement, including the following Exhibits: EXHIBIT A-1 - Legal Description of Park EXHIBIT A-2 - Outline of Premises 44 EXHIBIT B-1 - Schedule of Base Rental EXHIBIT C - Work Letter Agreement (if required) EXHIBIT D - Rules and Regulations EXHIBIT E - Additional Terms EXHIBIT F - Expansion Rights EXHIBIT G - Guaranty EXHIBIT H - Cleaning and Janitorial Specifications EXHIBIT I - Subordination, Attornment and Non-Disturbance Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter of this Lease. TENANT EXPRESSLY ACKNOWLEDGES AND AGREES THAT LANDLORD HAS NOT MADE AND IS NOT MAKING, AND TENANT, IN EXECUTING AND DELIVERING THIS LEASE, IS NOT RELYING UPON, ANY WARRANTIES, REPRESENTATIONS, PROMISES OR STATEMENTS, EXCEPT TO THE EXTENT THAT THE SAME ARE EXPRESSLY SET FORTH IN THIS LEASE. ALL UNDERSTANDINGS AND AGREEMENTS HERETOFORE MADE BETWEEN THE PARTIES ARE MERGED IN THIS LEASE WHICH ALONE FULLY AND COMPLETELY EXPRESSES THE AGREEMENT OF THE PARTIES, NEITHER PARTY RELYING UPON ANY STATEMENT OR REPRESENTATION NOT EMBODIED IN THIS LEASE. THIS LEASE MAY BE MODIFIED ONLY BY A WRITTEN AGREEMENT SIGNED BY LANDLORD AND TENANT. LANDLORD AND TENANT EXPRESSLY AGREE THAT THERE ARE AND SHALL BE NO IMPLIED WARRANTIES OF MERCHANTABILITY, HABITABILITY, SUITABILITY, FITNESS FOR A PARTICULAR PURPOSE OR OF ANY OTHER KIND ARISING OUT OF THIS LEASE, ALL OF WHICH ARE HEREBY WAIVED BY TENANT, AND THAT THERE ARE NO WARRANTIES WHICH EXTEND BEYOND THOSE EXPRESSLY SET FORTH IN THIS LEASE. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease in multiple original counterparts as of the day and year first above written. ATTEST: /s/ Eric Marx LANDLORD: SENTRY WEST JOINT VENTURE, an Illinois joint venture 45 Name (print): Eric Marx BY: EQUITY OFFICE PROPERTIES, INC., as agent By: /s/ Michael Sheinkop ------------------------------------------ Name (print): Name: /s/ Michael Sheinkop ---------------------------------------- Title: Vice President --------------------------------------- TENANT: INSTITUTE FOR BIOLOGICAL RESEARCH AND DEVELOPMENT, a Delaware Corporation ATTEST: /s/ Grace R. Davis By: /s/ Thomas B. Semler ----------------------------------------- Name (print): Grace R. Davis Name: /s/ Thomas Semler ----------------- --------------------------------------- /s/ Dorothy Soteriou Title: Executive Vice President and CFO -------------------------------------- Name (print) Dorothy Soteriou ----------------- 46 FIRST AMENDMENT This First Amendment (the "Amendment") is made and entered into as of the day of 1994, by and between SENTRY WEST JOINT VENTURE, an Illinois joint venture ("Landlord") by its agent, Equity Office Properties, Inc. and INSTITUTE FOR BIOLOGICAL RESEARCH AND DEVELOPMENT, a Delaware corporation ("Tenant"). WITNESSETH A. WHEREAS, Landlord and Tenant are parties to that certain lease dated the 1st day of February, 1994, currently containing approximately 11,032 rentable square feet of space described as Suite No. 100 on the first floor ("Original Premises") of the building commonly known as Gwynedd Hall - Sentry Park West, and the address of which is 1777 Sentry Parkway West, Blue Bell, Montgomery County, State of Pennsylvania (the "Building"), which lease has not been previously amended or assigned (the "Lease"); and B. WHEREAS, Tenant desires to lease additional space consisting of approximately 10,540 rentable square feet on the first floor of the Building (the "Expansion Space"), as shown on Schedule 1 to Exhibit F of the Lease as Offering Space A and Offering Space B (the Original Premises and Expansion Space are sometimes collectively referred to as the "Premises"), and Landlord is willing to do the same on the terms and conditions set forth below; C. WHEREAS, the Lease by its terms shall expire on February 28, 1998 ("Prior Termination Date"), and the parties desire to extend the Lease, all an the term and conditions set forth below. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows: I. EXPANSION. Effective December 1, 1994 ("Expansion Effective Date"), the Premises is increased from 11,032 rentable square foot on the first floor to 21,572 rentable square feet on the first floor by the addition of the Expansion Space. The lease term for the Expansion Space shall commence on the Expansion Effective Date and end on the Extended Termination Date (as hereinafter defined). The Expansion Space is subject to all the terms and conditions of the Lease except as expressly modified herein and except that Tenant shall not be entitled to receive any allowances, abatements or other financial concessions granted with respect to the Original Premises unless such concessions are expressly provided for herein with respect to the Expansion Space. 1 II. EXTENSION. The Lease Term is hereby modified from forty-eight (48) months and seven (7) days expiring on February 26, 1996 ("Prior Termination Date") to seventy-eight (78) months and seven (7) days ("Extended Lease Term") expiring on August 31, 2000 ("Extended Termination Date"), unless sooner terminated in accordance with the terms of the Lease. That portion of the Lease Term commencing the day immediately following the Prior Termination Date ("Extension Date") and ending on the Extended Termination Date should be referred to herein as the "Extended Term." III. MONTHLY BASE RENTAL. Section A of Exhibit B-1 to the Lease (Schedule of Base Rental) is hereby deleted in its entirety and replaced with the following Section A: "Tenant shall pay Landlord the sum of One Million Eight Hundred Eighty-Four Thousand Sixty-Nine and 52/100's Dollars ($1,884,069.52) as Base Rental for the Lease Term in monthly installments as follow: 1. One (1) installment in the amount of $2,930.41 for the period beginning February 22, 1994 and ending February 28, 1994. 2. Nine (9) equal monthly installments of $11,721.50 each payable on or before the first day of each month during the period beginning March 1, 1994 and ending November 30, 1994. 3. Fifteen (15) equal monthly installments of $22,920.25 each payable on or before the first day of each month during the period beginning October 1, 1994 and ending February 29, 1996. 4. Fifty-four (54) equal monthly installments of $26,515.59 each payable on or before the first day of each month during the period beginning March 1, 1996 and ending August 31, 2000." IV. TENANT'S PRO RATA SHARE. For the period commencing with the Expansion Effective Date and ending on the Extended Termination Date, Tenant's Pro Rata Share for the Premises (inclusive of the Expansion Space) shall be 9.987%, it being agreed that Tenant shall pay for Tenant's Pro Rate Share of Basic Costs for the Expansion Space in accordance with the terms and conditions of Exhibit B-2 to the Lease, including, without limitation, a 1994 Base Year. V. IMPROVEMENTS TO EXPANSION SPACE. Landlord shall perform Landlord Work in the Expansion Space in accordance with the terms and conditions of Exhibit C to the Lease, including without limitation, the Plans described in Exhibit C to the Lease (to the extent applicable to the Expansion Space). Landlord agrees to proceed in good faith to complete the 2 Landlord Work in the Expansion Space within a reasonable time following the execution of this Amendment. Notwithstanding the foregoing, the Expansion Effective Date and, accordingly, Tenant's obligation to pay Base Rental and Additional Base Rental for the Expansion Space shall not be postponed as a result of Landlord's failure to complete the Landlord Work by the Expansion Effective Date, it being agreed that the Base Rental Abatement set forth in Article VI.1 hereof is intended to compensate Tenant for any such delays. Notwithstanding the foregoing, if the Landlord Work in the Expansion Space is not substantially completed on or before eighty-four (84) days after the date on which a copy of this Amendment, executed by Tenant, is delivered to Landlord (the "Inside Completion Date"), Tenant, as its sole remedy, shall be entitled to receive a credit against Base Rental in the amount of $368.18 per day for each day in the period beginning on the Inside Completion Date and ending on the earlier to occur at (x) the day prior to the date on which the Landlord Work in the Expansion Space is substantially completed and (y) the day prior to the date the Landlord Work in the Expansion Space would have been substantially completed absent any Delays by Tenant and events of Force Majeure. Such Rent credit shall be applied against Base Rental beginning on June 1, 1995 and shall continue from day to day thereafter until Tenant has received the full value of the Rent credit provided herein. In addition, if the Landlord Work in the Expansion Space is not substantially completed by one hundred eighty (180) days after the date on which a copy of this Amendment, executed by Tenant, is delivered to Landlord, as such date shall be extended on a day by day basis by the number of days of delay resulting from Tenant Delays and events of Force Majeure (the "Outside Completion Date"), then Tenant, as its sole remedy, shall be entitled to terminate this Lease with respect to the Expansion Space only by providing written notice of termination to Landlord by the later to occur of five (5) days after the Outside Completion Date, as the same may be extended, or the date on which Landlord Work in the Expansion Space is substantially completed. Notwithstanding the foregoing, if Landlord determines that it will be unable to substantially complete the Landlord Work in the Expansion Space by the Outside Completion Date, Landlord shall have the right to provide Tenant with written notice (the "Outside Extension Notice") of such inability, which Outside Extension Notice shall set forth the date on which Landlord reasonably believes that it will be able to substantially complete the Landlord Work. Upon receipt of to Outside Extension Notice, Tenant shall have the right to terminate this Lease with respect to the Expansion Space only by providing written notice of termination to Landlord within five (5) days after the date of the Outside Extension Notice. In the event that Tenant does not terminate this Lease with respect to the Expansion Space within such five (5) day period, the Outside Completion Date shall automatically be amended to be the date set forth in Landlord's Outside Extension Notice, as such date may thereafter be extended in accordance the terms hereof. VI. OTHER PERTINENT PROVISIONS. Landlord and Tenant agree that this Lease shall be amended in the following additional respects: 1. BASE RENTAL ABATEMENT. Notwithstanding Article III above to the contrary, as long as Tenant shall be entitled to an abatement of Base Rental in the amount of $11,196.75 per month for six (6) consecutive full calendar months period beginning December 1, 3 1994 and ending May 31, 1995 (the "Base Rental Abatement Period"). The total amount of Base Rental abated during the Base Rental Abatement Period shall equal Sixty-Seven Thousand One Hundred Ninety-Two and 50/100 Dollars ($67,192.50) (the "Abated Base Rental"). In the event Tenant defaults at any time during the Lease Term, all Abated Base Rental shall immediately become due and payable. The payment by Tenant of the Abated Base Rental in the event of a default shall not limit or effect any of the Landlord's other rights, pursuant to this Lease or at law or in equity. During the Base Rental Abatement Period, only Base Rental shall be abated and all Additional Base Rental and other costs and charges specified in this Lease shall remain as due and payable pursuant to the provisions of this Lease. 2. Paragraph 2 of Exhibit F, Right of First Offering/Refusal, is hereby deleted in its entirety and rendered null and void and of no further force and effect. 3. Promptly following the execution and delivery of this First Amendment by Tenant and Landlord, Landlord will use reasonable efforts to cause its existing mortgagee to enter into an amendment to the existing non-disturbance, subordination and attornment agreement between Tenant and such mortgagee, which amendment shall extend the scope of such non-disturbance, subordination and attornment agreement to include the Expansion Space. "Reasonable efforts" of Landlord shall not require Landlord to incur any cost, expense or liability to obtain such agreement. It being agreed that Tenant shall be responsible for any fee or review costs charged by the mortgagee. Upon request of Landlord, Tenant will execute the mortgagee's form of non-disturbance, subordination and attornment agreement and return the same to Landlord for execution by the mortgagee. Landlord's failure to obtain a non-disturbance, subordination and attornment agreement for Tenant shall have not effect on the rights, obligations and liabilities of Landlord and Tenant or be considered to be a default by Landlord hereunder. VII. MISCELLANEOUS. A. This Amendment sets forth the entire agreement between the parties with respect to the matters set forth herein. There have been no additional oral or written representations or 4 agreements. Under no circumstances shall Tenant be entitled to any Rent abatement, improvement allowance, leasehold improvements, or other work to the Premises, or any similar economic incentives that may have been provided Tenant in connection with entering into the Lease, unless specifically set forth in this Amendment. B. Except as herein modified or amended, the provisions, conditions and terms of the Lease shall remain unchanged and in full force and affect. C. In the case of any inconsistency between the provisions of the Lease and this Amendment the provisions of this Amendment shall govern and control. Under no circumstances shall this Amendment be deemed to grant Tenant any further right to expand the Premises or extend the Lease, provided, however, any such additional rights specifically provided Tenant in the Lease are not hereby relinquished or waived. D. Submission of this Amendment is not an offer to enter into this Amendment but rather a solicitation for such an offer by Tenant. Landlord shall not be bound by this Amendment until Landlord has executed and delivered the same to Tenant. E. The capitalized terms used in this Amendment shall have the same definitions as set forth in the Lease to the extent that such capitalized terms are defined therein and not redefined in this Amendment. F. Tenant hereby represents to Landlord that Tenant has dealt with Grubb & Ellis in connection with this Amendment. Tenant agrees to indemnify and hold Landlord and the Landlord Related Parties harmless from all claims of any other brokers claiming to have represented Tenant in connection with this Amendment. IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Amendment as of the day and year first above written. WITNESS; ATTESTATION LANDLORD: 5 SENTRY WEST JOINT VENTURE, an Illinois joint venture By: EQUITY OFFICE PROPERTIES, INC., as agent - ------------------- By: /s/ Michael Sheinkop ------------------------------------------ - ------------------- Name: Michael Sheinkop Title: Vice-President, Asset Management TENANT: INSTITUTE FOR BIOLOGICAL RESEARCH AND DEVELOPMENT, a Delaware corporation /s/ Grace Davis - ------------------- By: /s/ Thomas B. Semler Executive Secretary Name: Thomas B. Semler - ------------------- Title: Executive Vice-President and Chief Financial Officer 6 EX-10.14 28 EXHIBIT 10.14 Exhibit 10.14 October 22, 1993 Phoenix International Life Sciences Inc. Dear Sirs: Notwithstanding the terms and conditions of the Offer and Amendment to Lease to ensue and more particularly the Article entitled "Entire Agreement" the following modifications and/or option shall be granted to Tenant upon the terms and conditions therein contained: (A) Article 50 of the existing Lease executed between the parties hereto on the 28th day of February 1989 shall be modified by the deletion of the last four (4) paragraphs thereof and by the inclusion of the following paragraphs at the end of the said Article: "Notwithstanding anything herein contained to the contrary, the present right of first refusal shall not apply to one sale by the Landlord during the first year of the term. Furthermore, the present Article shall not apply and there shall be no right of first refusal in the following circumstances: i) the offer to purchase or lease from the third party involves the purchase and/or sale and/or lease of one or more other properties of the Landlord; and/or ii) there is a sale or purchase or lease of the Property to any of Landlord's affiliates or subsidiaries or related companies or to any existing partners of Landlord; and/or iii) there is any transfer/roll-over of the Property for income tax or corporate reorganization purposes. iv) the sale of the shares of the company or companies owning the Property." In the event that any person other than the Landlord acquires the Property under conditions such that the Tenant is not permitted to exercise its right of first refusal (such person being hereinafter referred to as the "Exempt Purchaser") then such person shall be required to enter into an agreement directly with the Tenant in registrable form providing that the exempt Person agrees to abide by the terms of the right of first refusal. (B) Provided Tenant pays the Minimum Net Net Rental and all other amounts payable in virtue of the Lease and Amendment to Lease and has fulfilled all the terms and conditions of the Lease and Amendment to Lease, then Tenant shall have a one-time option to purchase the lands and building upon which the Leased Premises are situate (including the Parking Lot as defined in the Offer and Amendment to Lease) (the "Property") at any time after the expiry of the first year of the Term and up to the expiry of the fifth year of the term ("Option to Purchase"), the whole subject to the conditions, hereunder enumerated: a) The Tenant shall advise the Landlord in writing four (4) months in advance that it intends to purchase the Property upon the terms and conditions set out hereinbelow on a date specified (the "Closing Date") in default whereof, the present Option to Purchase shall be deemed to be null and void and/or to have expired by lapse of time. It is understood and agreed that the notification for the exercise of the option may be sent by Tenant at the earliest after the expiration of the first four (4) months of the Term of the Amendment to Lease and at the latest, before the expiry of the first four (4) years and eight (8) months of the Term of the Amendment to Loan. b) The purchase price of the Property shall be to product obtained by i) multiplying the sum of six million four hundred thousand dollars ($6,400,000.00) by a fraction, the numerator of which is the Consumer Price Index for the City of Montreal, All Items (the "CPI") for the month in which the Closing Date is scheduled and this denominator of which is the CPI for the month of May 1993, and by ii) adding thereto the applicable factor based on the Deficiencies described in Schedule "Z" annexed hereto and entitled "Compensation for cash flow deficiency" calculated as follows: the difference, between the Deficiency with respect to the year in which the Closing Date occurs and the Deficiency for the year prior thereto shall be pro-rated based on the applicable month during which the Closing Date occurs and such pro-rata portion shall be added to the Deficiency for the year prior to that in which the Closing Date occurs to after that will be added to the price otherwise determined. By way of example, if the Closing Date occurs after two years and seven months of the term have elapsed then the factor shall equal ($244,431 - $214,723) x 7/12 + $214,723. c) In the event the Tenant has so exercised its Option to Purchase in the manner hereinabove described, the Landlord and Tenant shall sign the deed of sale before the notarial firm chosen by Tenant out of three notarial firms designated by Landlord on the Closing Date and Tenant shall assume all notarial costs incurred with respect thereto, such deed of sale to include all terms and conditions herein agreed as well as the usual terms and conditions of a deed of sale, in default whereof the present Option to Purchase shall, at Landlord's sole discretion be deemed to be null and void and/or to have expired by the lapse of time. Notwithstanding anything heretofore contained, the Option to Purchase shall, at no time be interpreted as restricting the absolute right of Landlord to sell, lease, alienate, transfer or exchange the Property, in whole or in part, at any time to any person, moral or corporate, during the Term of the Lease or extension thereof, provided it has compiled with the of Article 50 of the existing Lease as amended herein and has required the third party acquireror to respect the present Option to Purchase. The present is conditional upon the signing of the Offer and subsequent Amendment to Lease. The parties hereby confirm having requested that the present document be drafted in the English language. Les parties certifient avoir exige qua les presentes soient redigees en langue anglaise. Your truly, BELCOURT INC. /s/ Joseph Zunenshine - --------------------------------- Joseph Zunenshine Director of Leasing AYD:012 We, the undersigned, acknowledge having read the foregoing letter and accept the terms and conditions contained therein. SIGNED at __________________________ this day of ________________, 1993. PHOENIX INTERNATIONAL LIFE SCIENCES INC Per: -------------------------------- SCHEDULE "Z" COMPENSATION FOR CASH FLOW DEFICIENCY Year 1: $ 187,830 Year 2: $ 214,723 Year 3: $ 244,431 Year 4: $ 277,250 Year 5: $ 313,506
MEMORANDUM OF AGREEMENT BETWEEN: BELCOURT INC., a body politic and corporate, duly incorporated, having its head office and principal place of business at 7405 Trans Canada Highway, St. Laurent, Quebec, H4T 1Z2, herein acting and represented by JOSEPH ZUNENSHINE and A. YVONNE DAIGLE duly authorized, AND: LES INVESTISSEMENTS RENARY INC., a body politic and corporate, duly incorporated, having its head office and principal place of business at 7405 Trans Canada Highway, St. Laurent, Quebec, H4T IZ2, herein acting and represented by JOSEPH ZUNENSHINE, duly authorized, (hereinafter jointly the "Landlord") PARTY OF THE FIRST PART AND: PHOENIX INTERNATIONAL LIFE SCIENCES INC., a body politic and corporate, duly incorporated, having a place of business in the district of Montreal, Province of Quebec, herein acting through and represented by its hereunto duly authorized as he declares, (hereinafter the "Tenant") PARTY OF THE SECOND PART WHEREAS by a lease entered into between the Landlord and the Tenant on the 28th day of February 1989 (hereinafter the "Lease") the Landlord agreed to lease to the Tenant that certain thirty-three thousand three hundred thirty-one (33,331) square feet situated on the ground floor of the building of which the leased premises form part bearing civic number 2330 Cohen, St. Laurent, Quebec and being part of the building erected upon that certain parcel of land more specifically described in Schedule "B" attached hereto and initialed by the parties for identification to form an integral part of the Lease, for a term expiring on the last day of June 2004. The Building is situated upon the land described in the attached Schedule "B"; WHEREAS by a Memorandum of Agreement entered into on the 1st day of January 1990, the Landlord agreed to lease to the Tenant an additional space situated on the ground floor, of three thousand eight hundred forty-eight (3,848) square feet, bringing the total area of the premises to thirty-seven thousand one hundred and seventy-nine (37,179) square feet (hereinafter the "Original Premises"), for a term expiring on the last day of June 2004: WHEREAS Tenant offers to lease from Landlord additional space situated on the ground floor and mezzanine level of the building, having an area of approximately thirty-four thousand four hundred and ninety-six (34,496) square feet (hereinafter the "Additional Premises"); WHEREAS Landlord accepts to lease to Tenant the aforesaid additional space on the conditions stipulated hereunder and consequently, the total area of the Leased Premises shall be seventy-one thousand six hundred and seventy-five (71,675) square feet which represents the entire building (hereinafter the "Leased Premises"): WHEREAS the parties hereto desire to amend the Lease accordingly; WHEREFORE IT IS HEREBY AGREED AS FOLLOWS: 1. The preamble hereto shall form part of these presents as though set out at length herein. 2. The Landlord hereby leases to Tenant thirty-four thousand four hundred and ninety-six (34,496) square feet, located on the ground floor and mezzanine level of the building to be constructed as shown outlined in blue on the plan attached hereto as Schedule "A-2" (hereinafter the "Additional Premises") and as a consequence of the leasing of such Additional Space, Tenant will have leased the entire Building as it then stands. 3. The term (hereinafter the "Term") for the Additional Premises shall commence (hereinafter the "Commencement Date") on the first day of May 1993 and terminate (hereinafter the "Termination Date") on the last day of April 2008. 4. During the year through to the expiration of the fifth year of the Term, the Tenant covenants and agrees to pay to the Landlord for the Additional Premises, without deduction, abatement or setoff, an annual minimum net rental of one hundred seventy- two thousand four hundred eighty dollars ($172,480.00) calculated on the basis of five dollars ($5.00) per square foot per annum and payable in advance on the first day of each month in equal consecutive monthly instalments during said period of fourteen thousand three hundred seventy-three at the Landlord dollars ($14,373.00); and During the 6th year through to the expiration of the 15th year of the Term, the Tenant covenants and agrees to pay to the Landlord for the Additional Premises, without deduction, abatement or setoff, an annual minimum net net rental of two hundred twenty-nine thousand fifty-three dollars and forty-four cents ($229,053.44) calculated on the basis of six dollars and sixty-four cents ($6.64) per square foot per annum and payable in advance on the first day of each month in equal, consecutive monthly instalments during said period of nineteen thousand eighty-seven dollars and seventy-nine cents ($19,087.79). 5. Tenant shall pay with respect to the Additional Premises all those expenses referred to in Article 9 of the Lease ("Proportionate Expense Rental") except that the parties acknowledge that there is currently no policing or supervision being done by the Landlord and the Tenant will not be charged for any Proportionate Expense Rental with respect to same, it being agreed and understood that the Tenant renounces the right to ask the Landlord for this service. Furthermore, all expenses incurred by the Landlord shall be reasonable. At any time during the term, upon six (6) months prior written notice to the Landlord the Tenant shall have the option of assuming the landscaping and gardening or the snow removal or both for the property, and from and after the expiry of the six (6) month period the Tenant shall not be required to pay Landlord for such service or services. 6. The Landlord will effect in the Additional Premises, at its expense, the work outlined in Schedule "C-2" attached hereto, hereinafter "Landlord's Work" with the exception of a maximum of fourteen (14) roof openings for which the Tenant will contribute the sum of forty thousand dollars ($40,000.00) plus applicable taxes at the date of completion of Landlord's Work. Should the Tenant require modifications in writing which involve work other than Landlord's Work, the said work shall be deemed extra work and shall be payable by Tenant in accordance with the following provisions: In the event Landlord agrees to execute the said extra work, it shall forward Tenant a written estimate indicating the cost of said extra work. Tenant shall have a delay of five (5) days upon receipt of said estimate to confirm, in writing to Landlord, that it wishes Landlord to proceed with the work. Tenant shall have the option of having the extra work performed by other parties. The Landlord shall perform Landlord's Work in accordance with the state of the art and shall guarantee Landlord's Work for a period of one (1) year from the Completion Date being March 15, 1993. Furthermore and in addition to the foregoing, the Landlord shall warrant that the roof and walls for the building shall be watertight for a period of five (5) years from the Completion Date. Tenant shall ensure that the window caulking is maintained by Tenant during the aforesaid period. This warranty shall not apply to the extent that the leakage is the result of any access, maintenance, use, or abuse, or Tenant's equipment and installations thereof, to which the roof and walls were subjected by Tenant's employees, subcontractors or agents. 7. Tenant will be allowed to place such signage on the exterior of the building as it shall in its sole discretion consider to be advisable provided that it shall comply with all laws and regulations applicable thereto and it shall hold the Landlord harmless and indemnify it against any damages, losses or penalties that the Landlord might suffer or incur as a result of any signage which might be erected by the Tenant. Tenant shall at its sole expense repair any damage or holes left in the Building following removal of their signage at the expiration of the Lease as amended herein. 8. Landlord undertakes to provide to Tenant for the Additional Premises one hundred and one (101) additional exterior parking spaces, in addition to all the one hundred and eleven (111) parking spaces located on the property. 9. The Lease is amended as follows: a. Article 3 of the Lease is deleted as it no longer applies. b. Article 5 of the Lease is deleted and replaced by the following: "The Leased Premises can be used for any purpose permitted by law and the Landlord expressly acknowledges that Tenant intends to perform research and other scientific studies with respect to AIDS and other infectious diseases. The Tenant agrees to hold the Landlord harmless from and against any damages, losses or penalties that the Landlord might suffer or incur as a result of the use to which the Tenant might put the Premises. Furthermore, at the end at the term or the earlier termination of the term the Tenant shall take such measures as shall reasonably satisfy the Landlord that there is no danger or inconvenience to any party as a result of the use to which the Leased Premises have been put. In addition, Tenant agrees to sign and conform to the Hazardous Substances Amendment attached hereto as Schedule "Z". c. Article 9 is amended by deleting subsection (iii) thereof and making such other amendments thereto so that Article 9 corresponds to Section 5 hereof. Article 9 is further amended by inserting a provision whereby the Tenant shall be entitled to contest the Real Estate Taxes without the consent of the Landlord provided that it will pay the Real Estate Taxes notwithstanding its contestation and that it informs the Landlord of such contestation. d. The second paragraph of Article 11 is hereby amended so that the Tenant shall be required to regularly maintain and repair the heating, ventilating and air conditioning system. e. Article 12 is amended by deleting the Landlord's right to cancel the Lease on a sublet or assignment. f. Article 13 shall provide that expropriation shall entitle both parties to the maximum compensation permitted by law to each of them for their respective interests and that the lease shall not automatically be cancelled. g. Article 14 and Article 20 are amended by changing the interest payable by the Tenant to the prime rate of the Royal Bank of Canada plus four percent (4%). h. The first five lines of Article 15 are replaced by "The Tenant shall save the Landlord harmless...". i. Article 16 is amended so that the Tenant shall be entitled to remove at the end of the term anything that it installed in the Leased Premises or whose installation was paid for by the Tenant (all of such items being herein expressly referred to as the "Leasehold Improvements") with the exception of the air-conditioning and ventilation units, in addition to any base building, electrical or gas installation (but, specifically including the electrical generator which Tenant shall be entitled to remove) in respect of which Landlord reserves its right to either keep, at its discretion, provided that any damage caused as a result at any such removal is repaired by the Tenant. Tenant shall not in any event be required to remove base Building installations of any type or any floors or walls. It is expressly agreed and understood that during the term all of the Leasehold Improvements shall belong to the Tenant. j. The first sentence of the second paragraph of Article 19 is amended so that the Tenant shall not be required to carry out any modifications for which it appeals to the relevant organizations and which those organizations eventually agree are not required. As well any need for the Landlord's consent for the Tenant's alterations and improvements is also deleted provided that the Tenant informs the Landlord of any significant alterations and Improvements and provides the Landlord with as-built drawings on completion where same is appropriate. However, the consent of the Landlord is only required for major structural changes, said consent not being unreasonably withhold. k. Article 24 is deleted, the Tenant having the right to make any alterations or Improvements that it desires to the Leased Promises provided that the Tenant informs the Landlord of any significant alterations and Improvements and provides the Landlord with as-built drawings on completion where same is appropriate. However, the consent of the Landlord is only required for major structural changes, said consent not being unreasonably withheld. l. Article 26 is amended by inserting in the second line from the bottom of page 26 after "solvents" the words "and other toxic or flammable materials" and by providing that the Tenant shall not be required to obtain an environmental Impairment Insurance policy unless same is required by the Insurer of the Building, by the hypothecary creditor of the Building or by some governmental authority having jurisdiction thereover. m. Article 27 is amended so that the Landlord shall not be entitled to re-enter the Leased Promises unless it has attempted and failed to obtain other reasonable insurance for the Building. n. Article 29 is amended to delete the Landlord's, right to terminate the Lease. o. Article 35 is amended in accordance with Section 8 hereof. p. The sum deposited with the Landlord pursuant to Article 40 shall be applied as indicated therein notwithstanding the extension of the Lease. q. Article 49 is deleted. r. Article 64 is deleted. s. Article 68 is amended to provide that the Tenant shall be entitled to all one hundred and eleven (111) parking spaces on the Property and one hundred and one (101) parking spaces as outlined in red on a plan attached hereto as part of Schedule "A". 10. The Tenant Acknowledges that the additional space agreement prepared and sent to the Tenant for the three thousand eight hundred and forty-eight (3,848) square feet of additional space located on the ground floor and forming part of the Original Premises, which commenced on the first day of January, 1990 shall be comprised and executed simultaneously with the present Memorandum of Agreement. 11. The term for the Original Promises shall be extended so that it shall be coterminous with the present Memorandum of Agreement, the minimum rent for such extension namely, the period starting July 1, 2004 and terminating on the Termination Date to be the market rental for similar space of a similar size with similar improvements at the beginning of the calendar year 2004 with a maximum of ten dollars ($10.00) per square foot. If the parties are unable to agree on the market rent, same shall be settled by arbitration. Any arbitration shall be conducted and finally decided prior to the extension of the term for the Original Premises, such that the rental shall be due and payable at the commencement of such extension. A single arbitrator shall be named by the Syndic du Barreau from his list of available arbitrators. Said arbitrator shall render the final decision to any dispute in this matter having taken into account the considerations hereinabove described. 12. Schedules "A-2", "B", "C-2", "Z" and the plan attached hereto and initialed by the parties for identification form part of the Lease. 13. Save and except for the modifications stipulated herein, all the terms and conditions of the Lease shall apply mutatis mutandis to the Additional Premises. 14. It is hereby declared and agreed that these presents and everything herein contained shall enure to the benefit of and be binding upon the parties hereto and their respective heirs, administrators, successors and assigns. 15. These presents shall come into force as of the first day of May 1993. 16. The parties hereto hereby confirm that they have requested that these presents be drawn in English. Les parties aux presentes confirment avoir exigequo les presentes soient redigees en anglais. IN WITNESS WHEREOF THE LANDLORD HAS SIGNED IN THE CITY OF ST. LAURENT, PROVINCE OF QUEBEC., ON THIS 9 DAY OF NOVEMBER 1993. BELCOURT INC. Per: /s/ Belcourt Inc. Signature ---------------------------------------------- Per: /s/ Belcourt Inc. Signature ---------------------------------------------- /s/ Suelyn Li - ----------------------------- Witness /s/ Linda Fraraccio - ----------------------------- Witness LES INVESTISSEMENTS RENARY INC. Per: /s/ Les Investissements Renary Inc. Signature ---------------------------------------------- /S/ SUELYN LI - ----------------------------- Witness /S/ LINDA FRARACCIO - ----------------------------- Witness IN WITNESS WHEREOF THE TENANT HAS SIGNED IN THE CITY OF MONTREAL ON THIS 8TH DAY OF NOVEMBER, 1993. PHOENIX INTERNATIONAL LIFE SCIENCES INC. Per: /s/ Heather Savage ---------------------------------------------- /s/ Blake Glover - ----------------------------- Witness /s/ Witness - ----------------------------- Witness EX-10.15 29 EXHIBIT 10.15 LEASE AGREEMENT BETWEEN AMENAGEMENTS ROVO INC. AND PHOENIX INTERNATIONAL LIFE SCIENCES INC.
COMMERCIAL LEASE TABLE OF CONTENTS ARTICLE TITLE PAGE ------- ----- ---- PARTIES 1 PREAMBLE 1 I DEFINITIONS, INTENT AND INTERPRETATION 3 1.1 Definitions 3 1.2 Intent 4 1.3 Duty to act reasonably 5 II LEASE 5 2.1 Lease of Premises 5 2.2 Defects 5 III TERM 5 3.1 Term 5 IV RENT 5 4.1 Rental 5 4.2 Late Payment Charges 6 V OPERATING EXPENSES 6 5.1 Operating Expenses 6 5.2 Initial Amount of Operating Expenses 6 VI TAXES 7 6.1 Tax Contestation 7 6.2 Business and Other Taxes of the Tenant 7 6.3 Taxes 7
i 6.4 Sales and Services Tax 8 6.5 Surtax 9 VII UTILITIES AND HEATING, VENTILATION, AIR-CONDITIONING 9 7.1 Heating, Utilities - Additional Rent 9 7.2 Overloading of Utility Facilities 9 7.3 Heating, Ventilation and Air-Conditioning 9 7.4 Failure of Tenant to Comply 9 VIII USE OF LEASED PREMISES 10 8.1 Use of Premises 10 8.2 Compliance with Laws 10 8.3 Remedies of Landlord 10 IX MAINTENANCE, REPAIRS AND ALTERATIONS 10 9.1 Improvements to Leased Premises 10 9.2 Conditions of Premises 11 9.3 Maintenance and Repairs by Tenant 12 9.4 Approval of Tenant's Repairs 12 9.5 Special Repairs 13 9.6 Maintenance by the Landlord 13 9.7 Landlord's Right of Maintenance 13 9.8 Right of Inspection 13 9.9 Loss of Enjoyment 14 9.10 Overloading of Floors 14 9.11 Discharge of Hypothecs 14 9.12 Signs, Awnings and Canopies 14 9.13 Surrender of Premises 14 9.14 Tenant's Obligation to Protect 15 X INSURANCE AND INDEMNITY 15 10.1 Tenant's Insurance 15 10.2 Terms and Conditions of Tenant's Insurance 15 10.3 Increase in Landlord's Insurance Premiums 16 10.4 Cancellation of Insurance 17 10.5 Loss or Damage 17 10.6 Indemnification of Landlord 18
ii XI DAMAGE AND DESTRUCTION AND EXPROPRIATION 18 11.1 Destruction of Leased Premises 18 11.2 Lease in Force 19 11.3 Rebuilding 19 11.4 Expropriation 19 XII SUB-LET AND ASSIGNMENT 20 12.1 Consent to Sublet or Assign 20 12.2 Conditions Precedent 20 12.3 Landlord's Option 20 12.4 Conditions of Consent 21 12.5 Change in Control 21 12.6 Solidary Liability 21 12.7 Liability to Landlord 21 12.8 Assignment by Landlord 22 12.9 Documents 22 XIII DEFAULT AND TERMINATION 22 13.1 Events of Default 22 13.2 Re-entry 23 13.3 Right to Re-let 24 13.4 Application of Moneys 24 13.5 Abandoned Goods 24 13.6 Landlord's Right to Cure Defaults 24 13.7 Remedies Generally 25 13.8 Surrender of Leased Premises 25 XIV ACCESS BY LANDLORD 25 14.1 Right of Entry 25 14.2 Excavation 25 XV SUBORDINATION, ATTORNMENT AND STATUS STATEMENT BY TENANT 25 15.1 Subordination and Attornment by Tenant to Hypothecary Creditor 25 15.2 Status Statement (Estoppel Certificate) 26
iii XVI MISCELLANEOUS 26 16.1 No Tacit Renewal 26 16.2 Accord and Satisfaction 26 16.3 Entire Agreement 27 16.4 Waiver 27 16.5 No Partnership 27 16.6 Force Majeure 27 16.7 Notice 27 16.8 Governing Law and Severability 28 16.9 Registration 28 16.10 Successors and Assigns 28 16.11 Security Deposit 28 16.12 Qualification to do Business 29 16.13 Non-Canadian Person 29 16.14 Waiver 29 16.15 Waiver of Liability 29 16.16 Peaceable Enjoyment 29 16.17 Interest on Overdue Payments 29 16.18 Brokerage Commission 30 16.19 Headings and Numbers 30 16.20 Interpretation 30 16.21 Financial Information 30 16.22 Hypothecary Creditor Changes 30 16.23 Solidary Liability 30 16.24 Election of domicile 30 16.25 Language 30 SCHEDULE "A" Description of Land SCHEDULE "B" Site Plan of Leased Premises SCHEDULE "C" Landlord's Work and Tenant's Work SCHEDULE "D" Operating Expenses SCHEDULE "E" Pre-Authorized Payment Plan SCHEDULE "F" Building Modification Plans
iv THIS LEASE made in Ville Mont-Royal, the eighteenth (18) day of April nineteen hundred and ninety-five (1995) BETWEEN: AMENAGEMENTS ROVO INC., a corporation duly incorporated under the laws of Canada and having its head office in the City of Ville Mont-Royal, Province of Quebec, herein acting and represented by Mr. Norman Zavalkoff, its President, duly authorized for the purposes hereof as he so declares, (hereinafter referred to as the "Landlord"), OF THE FIRST PART; AND: PHOENIX INTERNATIONAL LIFE SCIENCES INC., a company duly incorporated according to law and having its head office in the City of St. Laurent, herein acting and represented by J.Y. Caloz, it duly authorized for the purposes hereof in virtue of a resolution passed at a meeting of its Board of Directors held on the 23rd day of January, nineteen hundred and ninety-five (1995), a certified copy whereof being annexed hereto (hereinafter referred to as the "Tenant"). OF THE SECOND PART. THE PARTIES hereby agree as follows: PREAMBLE BASIC LEASE PROVISIONS SECTION I - NAME OF LEASED PREMISES - N/A SECTION II - LOCATION OF THE LEASED PREMISES - N/A SECTION III - AREA OF THE LANDS AND THE LEASED PREMISES The Leased Premises hereunder contain a Gross Leasable Building Area of approximately twenty-six thousand square feet (26,000 sq ft) measured to the outermost limit of all walls, and a total land area approximately fifty-nine thousand, one hundred thirty-nine (59,139) square feet, English Measure. SECTION IV - TERM 1 The Term referred to in Section 3.1 shall be of an approximate period of fourteen (14) years and one-half month (1/2) month, commencing on the Commencement Date, (being the date Landlord gives Tenant vacant possession of the Leased Premises), and ending on April 30, 2009. SECTION V - MINIMUM RENT The Minimum Rent provided for in Sub-Section 4.1.1 is:
PERIOD MINIMUM ANNUAL MONTHLY RENTAL PAYMENT ------ -------------- ------- Commencement Date to April 30, 1999 $175,500.00 $14,625.00 From May 1, 1999 to April 30, 2004 $201,500.00 $16,791.67 From May 1, 2004 to April 30, 2009 $227,500.00 $18,958.33
payable according to the provisions of Sub-Section 4.1.1. SECTION VI - INITIAL PAYMENT OF TAXES AND OPERATING EXPENSES For purposes of Sections 5 and 6, the initial payments of Taxes and Operating Expenses shall be a per annum amount of Fifty-three thousand, seven hundred and forty-one dollars and eighteen cents ($53,741.18) per square foot of the Gross Leasable Area, that is, a per month amount of Four Thousand, four hundred and seventy-eight dollars and forty-three cents (4,478.43); SECTION VII - USE OF THE LEASED PREMISES The Tenant shall use the Leased Premises solely for the purpose of conducting the business of office, laboratory and related uses. SECTION VIII -NOTICE Notices shall be sent to the following addresses: (i) Landlord: 5500 Royalmount Avenue Suite 200 2 Ville Mont-Royal, Quebec H4P 1H7 (ii) Tenant: 4625 Dobrin Street St. Laurent, Quebec H4R 2127 SECTION IX - DEPOSIT The Tenant shall deposit with the Landlord the sum of ______________ ($________) applicable to ARTICLE I DEFINITIONS- INTENT AND INTERPRETATION 1.1 DEFINITIONS When used in this Lease or in any schedule attached to this Lease, the following words or expressions have the meaning hereinafter set forth, unless the context indicates otherwise: 1.1.1 "Additional Rent" means any and all sums of money or charges required to be paid by the Tenant under this Lease (except Minimum Rent), whether or not the same are designated "Additional Rent" and whether or not the same are payable to the Landlord or otherwise, and, notwithstanding anything contained in the Civil Code to the contrary, without deduction, diminution, set-off or compensation whatsoever. Unless otherwise specifically provided, Additional Rent is due and payable with and in addition to each monthly instalment of Minimum Rent; 1.1.2 "Architect" means the architect from time to time named by the Landlord, and whose decision or certificate, whenever required hereunder, shall be final and binding on the parties hereto provided that such decision or certificate is reasonable and in accordance with the standards of such person's profession. 1.1.3 "Bankruptcy Act" means the Bankruptcy and Insolvency Act, S.C. 1992, c. 27 and any amendments thereto or replacements thereof. 1.1.4 "Building" means the building part of the Leased Premises, as may be altered or expanded from time to time. 1.1.5 "C.P.I." means the Consumer Price Index (All items for regional cities) for the City of Montreal as published by Statistics Canada, or failing it, the index most nearly 3 corresponding thereto and with the appropriate conversions being made where the basis of comparison or calculation has changed; 1.1.6 "Civil Code" means the Civil Code of Quebec, S.Q. (1991) ch. 64 as amended. 1.1.7 "Creditors Arrangement Act" means the Companies Creditors Arrangements Act, S.C. c. 36 and any amendments thereto or replacements thereof. 1.1.8 "Gross Leasable Area" means the building area expressed in square feet, as certified by the Architect, of the Leased Premises, measured from the exterior face of all exterior walls, 1.1.9 "HVAC System" means the entirety of the system in the Building, for the supply of heating, ventilating and air-conditioning to the Building wherever such system, or portions thereof, is located, including any central plant therefor and the improvement and fixtures necessary for any such central plant and all the appurtenances and equipment and systems associated with or for such a system and includes the apparatus for the further processing and distribution of exhaust air such as ducts, diffusers, reheat coils, controls and other apparatus and equipment therefor; 1.1.10 "Hypothecary Creditor" means any hypothecary creditor of the Leased Premises or any part thereof; 1.1.11 "Landlord" means the Party of the First Part and its successors and assigns. 1.1.12 "Lease" means the present agreement, including the Preamble, all written modifications or amendments, all schedules as well as all Rules and Regulations adopted and promulgated by the Landlord; 1.1.13 "Lease Year" means a period of time, the first Lease Year commencing on the first day of the Term hereof, and ending on the last day of the ensuing twelve (12) month period. Lease Year, insofar as Operating Expenses are concerned, for the first Lease Year signifies the period from commencement to July 31st, for all subsequent Lease Years, all consecutive twelve (12) month periods commencing on the first day of the month of August and terminating on the 31st day of July; It is understood that the Landlord may at anytime during the Term change the Lease Year, provided that the Tenant is not prejudiced financially as a result. 1.1.14 "Leased Premises" means the building bearing civic number 2350 Cohen Street, Ville Saint Laurent, Province of Quebec, and the lands described in Schedule "A", and other 4 improvements, equipment and facilities erected or situated on those lands from time to time; 1.1.15 "Minimum Rent" means the rent payable by the Tenant pursuant to Sub-Section 4.1.1 hereof; 1.1.16 "Operating Expenses" are defined in Schedule "D"; 1.1.17 "Sales Tax" means all goods and services tax, provincial sales tax, value added tax and any other existing or future tax of a similar nature imposed by any governmental authority with respect to any amount payable by Tenant to Landlord under this Lease. 1.1.18 "Surtax" means the tax on non-residential immoveables and all additions to and substitutions for any such tax, imposed against the Landlord and/or the Leased Premises. 1.1.19 "Taxes" means all municipal, school, urban community taxes (if any), local improvement, snow removal and special taxes (and including any tax on the Landlord and/or the owners of the Leased Premises, which may replace the special, local improvement, municipal, school and/or urban community taxes, rates, levies, assessments) any business and/or water taxes now levied against the Landlord that were previously levied against the Tenant by the province or the municipality, and all tax on paid-up capital assessed against the Landlord or the owners of the Leased Premises with respect to the Leased Premises, and all other taxes, rates, duties, charges, assessments, impositions and levies assessed, levied or imposed by any competent authority having jurisdiction upon or against the Leased Premises or levied, assessed or imposed against the Landlord on account of its ownership of the Leased Premises or its interest therein. 1.1.20 "Tenant" means the Party of the Second Part and its permitted successors and assigns; 1.1.21 "Term" means the period of time for which this Lease has been granted as described in Section 3.1 hereof; 1.1.22 "Utilities" means electricity, gas, water, fuel, steam, power and all other utilities consumed in any part of the Leased Premises. 1.2 INTENT It is the intent of the parties to this Lease that the Lease shall be totally net and care free to the Landlord, except as expressly stipulated in this Lease. Subject only to the latter exception, the Landlord will not be liable to contribute to any costs, charges, expenses or outlays with respect to the Leased Premises and/or to the Building. 1.3 DUTY TO ACT REASONABLY 5 The parties agree to act reasonably with one another in their respective dealings regarding this Lease and will cause their professionals, agents, employees and others acting on their behalf to do likewise. ARTICLE II LEASE 2.1 LEASE OF PREMISES The Landlord hereby leases to the Tenant and the Tenant hereby leases from the Landlord, the Leased Premises which have an approximate Gross Lessable Area as set forth in Section III of the Preamble, subject to certification by the Architect. 2.2 DEFECTS The Landlord shall have no obligation to the Tenant regarding defects, if any, in or in respect to the Leased Promises or in respect to the use for which the Premises are leased. The Landlord will assign any rights that it has against the person from whom it acquired the Leased Premises to the Tenant with respect to any defects in the Leased Premises, or, in the event such assignment is not legally recognized, then Landlord shall take such steps as Tenant shall request, at Tenant's sole cost and expense, to pursue the person from whom Landlord acquired the Leased Premises. ARTICLE III TERM 3.1 TERM The Tenant shall occupy the Leased Premises throughout the Term which shall be, unless sooner terminated pursuant to any other provision hereof, a period equal to that set forth in Section IV of the Preamble. ARTICLE IV RENT 4.1 RENTAL The Tenant covenants and agrees to pay from and after the Commencement Date, to the Landlord, or as the Landlord may direct, in lawful money of Canada, and, notwithstanding any law, usage or custom to the contrary, without any prior demand therefor and without any set-off, compensation, diminution, or deduction whatsoever, rental comprised as follows: 6 4.1.1 Minimum Rent with respect to each year of the Term equal to the amount provided for in Section V of the Preamble and payable in equal monthly instalments equal to the amount provided for in Section V, in advance on the first day of each calendar month, the first instalment of Minimum Rent to become due on the Commencement Date. If the Commencement Date is on a day other than the first day of a calendar month, then the Tenant shall pay, on the Commencement Date, a portion of the Minimum Rent pro-rated on a per diem basis from the Commencement Date to the end of the month in which the Commencement Date occurs, based upon a period of three hundred and sixty-five (365) days. 4.1.2 The Tenant shall also pay as Additional Rent: (a) its Operating Expenses in the manner set forth in Article V; (b) Taxes, as set out in Article VI; (c) unless the Surtax is included within Taxes and/or Operating Expenses, the surtax as provided for in Section 6.5; (d) the cost of Utilities, heating and air-conditioning as provided for in Article VII. 4.2 LATE PAYMENT CHARGES Tenant recognizes that the late payment of any rent or other sum due hereunder will result in administrative expense to Landlord, the extent of which additional expense is extremely difficult and economically impractical to ascertain. Tenant therefore agrees that if rent or any other sum is due and unpaid five (5) days after said amount is due more than twice in any Lease Year, such amount shall be increased by a late charge of an amount equal to: (a) $50.00 plus (b) $5.00 per day for each day after said five (5) day period. The amount of the late charge to be paid by Tenant shall be reassessed and added to Tenant's obligation for each successive monthly period until paid. The provision of this paragraph in no way relieves the Tenant of the obligation to pay rent or other payments on or before the date on which they are due, nor to pay interest on past due amounts as required under this Lease, nor do the terms of this paragraph in any way affect Landlord's remedies under this Lease in the events that rent or other payment is unpaid after the date due. ARTICLE V OPERATING EXPENSES 7 5.1 OPERATING EXPENSES The Tenant covenants and agrees to pay to the Landlord, or as the Landlord may direct, during each Lease Year, in equal consecutive monthly instalments in advance as Additional Rent, without any set-off, compensation or deduction whatsoever, an amount equal to Taxes and Operating Expenses on the first day of each month, as hereinafter determined. 5.2 INITIAL AMOUNT OF TAXES AND OPERATING EXPENSES The initial amount of Taxes and Operating Expenses shall be an annual amount equal to the amount provided for in Section VI of the Preamble. This amount shall be adjusted at the end of the Lease Year or during any Lease Year based on real costs incurred by the Landlord and on the Landlord's expectation of costs for the current or following Lease Year or part thereof. The amounts payable by the Tenant pursuant to the above paragraph shall be estimated by the Landlord for each Lease Year; the Tenant agrees to pay to the Landlord, in addition to its Minimum Rent, the Operating Expenses in monthly instalments in advance, on the first day of each calendar month, subject, in the case of the Surtax, to Section 6.5.2. At the end of each Lease Year for which estimates have been determined, the Tenant shall be advised of the real amounts payable as Operating Expenses, and, if the amount the Tenant has paid is less than the amounts due, the Tenant shall pay such additional amounts due with the next monthly payment of Minimum Rent. If the Tenant has paid in excess of the amounts due, the excess shall be refunded by the Landlord in the form of a credit applied towards the next Minimum Rent and Additional Rent payments due. Landlord may require adjustments for taxes and insurance during any Lease Year if the expected or actual expenses exceed the initial estimates. Landlord may alternately, at its sole option, require Tenant to pay Taxes and/or Insurance directly to Landlord upon Landlord being required to make payment for same, in accordance with the procedure set forth in Section 6.3 (e). ARTICLE VI TAXES 6.1 TAX CONTESTATION The Landlord shall not have the right to contest taxes during the first ten (10) years of the Term, unless the Tenant so requests. The Tenant shall pay to the Landlord, within five (5) days after demand therefor by the Landlord, as Additional Rent, any expenses, including legal, appraisal, administration and overhead expenses, incurred by the Landlord in obtaining or attempting to obtain a reduction of any Taxes, provided, however, the Landlord shall have no obligation to contest the levying or imposition of any Taxes. 6.2 BUSINESS AND OTHER TAXES OF THE TENANT 8 As Additional Rent and to the complete exoneration of the Landlord, the Tenant shall pay to the competent authority having jurisdiction, all water and business taxes, garbage taxes and all taxes imposed or levied against the personal or moveable property, trade fixtures and other property placed by the Tenant in, on or about the Leased Premises. If any such taxes are imposed or levied against the Landlord or the Landlord's property in or on the Leased Premises and the Landlord pays the same (which the Landlord shall have the right to do regardless of the validity of such levy) then the Tenant shall forthwith reimburse the Landlord, as Additional Rent, the amount of such payment by the Landlord. Should the assessed value of the Leased Premises be increased by the inclusion of the value of such property or trade fixtures of the Tenant or be increased by alterations, additions or improvements made by the Tenant in and to the Leased Premises and if the Landlord pays the taxes based on such increased assessments (which the Landlord shall have the right to do regardless of the validity thereof) then and in such event the Tenant shall upon demand likewise pay to the Landlord as Additional Rent the amount of such taxes resulting from such increase in the assessment. Should any competent authority having jurisdiction require that any of the taxes mentioned in this Section 6.2 be paid by the Landlord in lieu of payment by the Tenant, then, regardless of the validity or correctness of such requirement, the Tenant undertakes to pay to the Landlord the amount of any such taxes charged to the Landlord on account of or related to the Leased Premises. 6.3 [6.3a) DELETED BY THE PARTIES.] b) The Tenant shall (i) pay to the taxing authorities or to the Landlord as Additional Rent as the Landlord may direct, and discharge in each year during the Term and within the times provided for by the taxing authorities, all Taxes that are levied, rated, charged or assessed from time to time, respectively against the Leased Premises or any part thereof, on the basis of a separate property tax bill and separate property assessment notice rendered by any lawful taxing authority; (ii) provide the Landlord within ten (10) days after demand with a copy of any separate tax bills and assessment notices for the Leased Premises or any part thereof, (iii) promptly deliver to the Landlord receipts evidencing the payment of such Taxes payable to any such taxing authorities as aforesaid and furnish such other information in connection therewith as the Landlord reasonably requires. c) In addition to the taxes payable by the Tenant pursuant to paragraph (b) of this Article, the Tenant shall pay as Additional Rent to the lawful taxing authorities, or to the Landlord, as it may direct, and shall discharge in each Lease Year when the same becomes due and payable (i) all taxes, rates, duties, assessments, or surtaxes charged against the Landlord in lieu thereof and other charges that are levied, rated, charged or assessed against or in respect of all improvements, equipment and facilities of the Tenant on or in the Leased Premises, or any part or parts thereof, or against the Landlord on account of its ownership thereof or interest therein, including Tax on capital; and (ii) every tax and license fee which is levied, rated, charged or assessed against or in respect 9 of any and every business carded on in the Leased Premises, or any surcharge exigible in lieu thereof against the Landlord on account of its ownership thereof or interest therein, (all of the foregoing being collectively referred to as "Business Taxes") and whether in any case, any such taxes, rates, duties, assessments or license fees are rated, charged or assessed by any Federal, Provincial, Municipal, School or other body during the Term or any extension thereof. d) The Tenant shall (a) upon request of the Landlord [d(i) AND (ii) DELETED BY THE PARTIES] (iii) furnish such other information in connection with any such Taxes and any such Business Taxes payable by the Tenant pursuant to Section "c" of this Article as the Landlord reasonably determines from time to time; and (b) promptly deliver to the Landlord notice of any appeal or contestation which the Tenant shall intend to institute with respect to any such Taxes payable pursuant to Section "b" of this Article or any such Business Taxes payable pursuant to Section "c" of this Article and consult with the Landlord prior to any such appeal or contestation. If the Tenant proceeds to appeal or contest, the Tenant shall deliver to the Landlord such security for the payment of such Taxes and Business Taxes as the Landlord deems advisable and the Tenant shall diligently prosecute any such appeal or contestation to a speedy resolution and shall keep the Landlord informed of its progress in that regard, from time to time. The Tenant shall promptly indemnify and keep indemnified the Landlord from and against all loss, costs, charges and expenses occasioned by or arising from all such Taxes and all such Business Taxes and any taxes which may in future be levied in lieu of such Taxes or Business Taxes or which may be assessed against any rentals payable pursuant to this Lease in lieu of such Taxes or Business Taxes, whether against the Landlord or the Tenant, including without limitation, any increase whensoever occurring in Taxes or Business Taxes directly or indirectly arising out of any appeal or contestation by the Tenant of the Taxes or Business Taxes relating to the Leased Premises. Excluded from this indemnity will be any failure by Landlord to pay Taxes or Business Taxes that have been paid to it by the Tenant. e) All Taxes payable to Landlord by Tenant shall be paid ten (10) days after invoice by Landlord to Tenant for Taxes, and not more than ten (10) days before such payment is due to the Taxing Authority. 6.4 SALES AND SERVICES TAX The Tenant shall pay to the Landlord all Sales Tax calculated in accordance with applicable legislation, it being the intention of the parties that the Landlord shall be fully reimbursed by the Tenant with respect to any and all Sales Taxes. Sales Tax will be paid at the same time as the payment to which same relates. Despite any other section or clause in this Lease, the amount payable by the Tenant under this paragraph shall be deemed not to be Rent, but the Landlord 10 shall have all of the same remedies for and rights of such amount as it has for recovery of Rent under this Lease. 6.5. Surtax [6.5.1 DELETED BY THE PARTIES.] 6.5.2 The Tenant will pay the of Surtax in the manner described in Section 5.2 or by the date or dates the Landlord must pay the Surtax to the taxing authority. [6.5.3 DELETED BY THE PARTIES.] ARTICLE VII UTILITIES AND HEATING, VENTILATION, AIR-CONDITIONING 7.1 HEATING AND UTILITIES - ADDITIONAL RENT 7.1.1 The Tenant shall pay the cost of heating and air-conditioning (if any) of the Building. 7.1.2 The Tenant shall assume and pay for all gas, water, steam or hot water, electricity or other utilities which may be used in the Leased Premises or in respect thereof and for fittings, machines, apparatus, meters or other devices and things leased and/or to be installed in respect thereof, or for all work or services performed by any corporation or commission in connection with such public utility, the whole during the Term of this Lease or any extension thereof. 7.1.3 in no event shall the Landlord be liable for, nor has the Landlord any obligation with respect to, an interruption or cessation of, or a failure in the supply of any such Utilities, services or systems in, to or serving the Leased Premises, whether supplied by the Landlord or others. 7.2 OVERLOADING OF UTILITY FACILITIES The Tenant will not install equipment that will exceed or overload the capacity of any utility facilities. If equipment installed by the Tenant requires additional utility facilities, such equipment will be installed at the Tenant's expense in accordance with plans and specifications approved by the Landlord prior to installation. 7.3 HEATING VENTILATING AND AIR-CONDITIONING The Tenant shall, at its expense, operate, repair, maintain and replace, when necessary, the heating, air-conditioning and ventilation systems in and for the Building. Any additional 11 installation over and above the initial equipment installed shall conform to specifications approved by the Landlord, prior to their installation in the Leased Premises. 7.4 FAILURE OF TENANT TO COMPLY In the event that Tenant fails to commence to carry out any of the above (other than any obligation to pay imposed with respect to the foregoing) within ten (10) days after notice in writing from Landlord or in the event Tenant fails to diligently continue until same shall be fully remedied, the Landlord may carry out such obligation and include the cost in Operating Expenses, including a fifteen percent (15%) administration fee. ARTICLE VIII USE OF LEASED PREMISES 8.1 USE OF PREMISES The Tenant shall use the Leased Premises solely for the purpose of conducting the business set forth in Section VII of the Preamble and the Tenant will not use or permit the use of the Leased Premises or any part thereof for any other business or purpose, without the consent of the Landlord, which consent shall not be unreasonably withheld. 8.2 COMPLIANCE WITH LAWS The Tenant shall, at its sole cost and expense, promptly: 8.2.1 observe and comply with all provisions of law, by-law or regulation of all governmental, para-governmental or insurance company authorities and, without limiting the generality of the foregoing, with all requirements of all such authorities having jurisdiction now or hereafter in force which pertain to the Leased Premises, the Tenant's use of the Leased Premises or the conduct of any business in the Leased Premises, or the making of any repairs, replacements, alterations, additions, changes, substitutions or improvements to the Leased Promises; 8.2.2 carry out all modifications, alterations or changes of or to the Leased Premises and the Tenant's conduct of business in or use of the Leased Premises which are required by any such authorities, provided, however, that prior to effecting any such modification, alteration or change, the Tenant shall deliver to the Landlord for its written approval, plans and specifications in connection therewith. 8.3 REMEDIES OF LANDLORD 12 Should the Tenant in any way fail to observe any of the obligations of the present Article VIII, Landlord shall be entitled, without prejudice to any and all other rights and recourses hereunder, to immediate injunctive relief in order to force the Tenant to abide by the present Article VIII or prevent the Tenant from breaching same. The foregoing in no way restricts the right to specific performance for any other default of the Tenant mentioned elsewhere in this Lease. ARTICLE IX MAINTENANCE, REPAIRS AND ALTERATIONS 9.1 IMPROVEMENTS TO LEASED PREMISES 9.1.1 The Landlord shall effect at its expense, the improvements more fully described in Schedule "C" hereto annexed. All improvements in and to the Leased Premises other than those set forth in Schedule "C" shall be the responsibility of Tenant and shall be performed at Tenant's sole cost and expense, the whole subject to the terms and conditions hereinafter set forth, and shall become the property of the Landlord once incorporated into the Leased Premises. The Tenant undertakes to carry out, at its own expense, modifications to the building according to the plans annexed hereto as Schedule "F", prior to July 1, 1997, in which case, Tenant shall furnish the Landlord with all appropriate performance bonds and such other assurances in favour of the Landlord as Landlord may reasonably require, before commencing any work. The following is also required as relating to Tenant's proposed improvements: 9.1.2 The Tenant shall forward for approval by the Landlord mechanical / electrical plans which shall be issued in final format and shall be stamped by a professional engineer. Plans shall be accompanied by full specifications for all materials provided. 9.1.3 All sprinkler and fire protection work shall be installed in accordance with standards required by Landlord's insurers. Plans for the sprinkler work shall be submitted to the Landlord's insurer for approval. 9.1.4 The Tenant, at his expense shall obtain an architect's opinion that drainage is adequate in new parking lot. 9.1.5 The Tenant, at his expense, shall provide the services of a roof inspector acceptable to the Landlord who shall supervise the roof cuts and provide the Landlord with a copy of his reports. 9.1.6 All work shall be in accordance with all governing codes and regulating agencies having jurisdiction over the work. 13 9.1.7 The Tenant shall provide details with regards to environmental protective measures taken for the generator fuel tank. (Ignore this item, if generator is gas fired.). 9.1.8 Tenant to provide full and final quittances from all trades performing work on the property no later than 60 days following final substantial completion of the work. 9.1.9 Tenant to provide full "as built" set of drawings no later than 60 days following substantial completion of the work, which shall be signed by the professionals supervising the work. 9.1.10 The Landlord reserves the right to review the plans of any "lien future" between the property known as 2350 Cohen and the property known as 4625 Dobrin. 9.1.11 The Tenant shall provide the Landlord with satisfactory proofs of insurance of all contractors working on the Leased Premises prior to the commencement of work and shall be responsible that insurance satisfactory to the Landlord is held in force for the duration of the work or any other major improvements which the Tenant wishes to undertake from time to time. These certificates shall name the Landlord as named insured. The parties agree that the above comments are not all-inclusive. Landlord has not examined Tenant's plans and specifications in detail and assumes no responsibility for the sufficiency or standards of the plans or for their execution. Any implied approval hereby given is for the broad concept shown by the plans, and is still subject to the comments annexed. 9.2 CONDITIONS OF PREMISES 9.2.1 Subject to Section 2.2, the taking of possession of the Leased Premises by the Tenant shall be conclusive evidence as against the Tenant that the Leased Premises were satisfactory to the Tenant at the time of such possession. The Tenant acknowledges that it has received no promise of the Landlord to after, remodel, improve, repair, decorate or clean any part of the Leased Premises, and no representation respecting the condition of the Leased Premises has been made by the Landlord to the Tenant. The Tenant shall, at all times, keep the Leased Premises in a clean and sanitary condition, in accordance with the laws, directions, rules and regulations of governmental agencies having jurisdiction, and at Tenant's sole expense, and in all respects the Tenant shall comply with all requirements of law applicable to the Leased Premises. 9.2.3 The Tenant shall at all times during the Term hereof or any extension or renewal thereof, at its own cost and expense, maintain the Leased Premises and shall keep them and every part thereof in working order and condition and shall promptly make all necessary repairs 14 and replacements (including major structural repairs) to the Leased Premises and to pipes, mains and any other machinery, facilities and equipment belonging to or connected with the Leased Premises or used in their operation, including without limitation, heating, plumbing, ventilating, electrical, parking areas, loading areas, driveways, ramps, sidewalks, fences, lawns and shrubs, the whole at the Tenant's expense and whether the repairs are normally defined at Landlord's or Tenant's and whether such repairs be major or minor, and shall heat the Building to a sufficient temperature to avoid damage or deterioration of the Building. When used in this Section, the term "repairs" shall include replacements or renewals when necessary, and all such repairs made by the Tenant shall be equal in quality and class to the original work. 9.3 MAINTENANCE AND REPAIRS BY TENANT 9.3.1 The Tenant shall, at all times during the Term, at it sole expense, keep and maintain in good order, first-class condition and repair as reasonably determined by the Landlord, the whole of the Leased Premises and the Tenant shall, notwithstanding any article to the contrary in the Civil Code with respect to maintenance and repairs and subject to Section 9.4, make all needed repairs and replacements (whether major or minor and those which the Civil Code requires of a landlord) and notwithstanding Article 1867 of the Civil Code, any work that may be required from time to time to maintain the Leased Premises for the purpose for which they are leased, with due diligence and dispatch. If the Tenant fails to maintain, repair or replace and if it does not commence to remedy the defect within ten (10) days after written notice from the Landlord to that effect and diligently proceed to complete said work thereafter, the Landlord may then remedy the defect and take all necessary measures thereto; the Tenant shall then pay to the Landlord, on demand, as Additional Rent, all required costs for work done, plus fifteen percent (15%) for the Landlord's overhead and supervision costs, and the Tenant agrees that such entry into the Leased Premises by the Landlord does not constitute an eviction or breach of any obligation to provide peaceable enjoyment. 9.3.2. The Tenant shall provide the Landlord, upon written request, with evidence of the following contracts which shall be kept in force during the Term: a) Fire alarm service contract; b) Sprinkler service contract and test reports; c) Air conditioning service contract and reports; d) Grease interceptor cleaning contract and reports. 9.3.3 The Tenant shall permit the regular inspections of the Landlord's insurer and shall comply with all reasonable recommendations of the Landlord's insurer. 15 9.4 APPROVAL OF TENANT'S REPAIRS Before commencing any repair, alteration, replacement, change or improvement in and to the Leased Premises, the Tenant shall submit to the Landlord: 9.4.1 for the Landlord's prior approval, details of the proposed work, including drawings and specifications prepared by qualified architects or engineers and conforming to good engineering practice; 9.4.2 such indemnification against hypothecs, costs, damages and expenses as the Landlord reasonably requires; and 9.4.3 evidence satisfactory to the Landlord that the Tenant has obtained, at its expense, all necessary consents, permits, licences and inspections from all governmental authorities having jurisdiction. Any repair, replacement, alteration, change or improvement which is made by the Tenant without the prior written approval of the Landlord or which is not made in accordance with the drawings and specifications approved by the Landlord and acting reasonably, shall, if requested by the Landlord, be promptly removed by the Tenant at the Tenant's expense and the Leased Premises shall be restored to its previous condition. Should the Tenant not comply with the Landlord's request to Restore the Leased Premises to its previous condition, the Landlord, acting reasonably, shall have the right to have the Leased Premises restored to its previous condition at the expense of the Tenant, including an additional charge of fifteen percent (15%) for the Landlord's overhead and supervision costs, payable on demand. All such repairs, replacements, alterations, changes or improvements by the Tenant in and to the Leased Premises approved of by the Landlord shall be performed at the sole cost of the Tenant, by competent workmen, in a good and workmanlike manner, and in accordance with the drawings and specifications approved by the Landlord and subject to the reasonable regulations, controls and inspection of the Landlord. The Landlord shall have the right, at the Tenant's expense, to have all such work in and to the Leased Premises approved by outside consultants chosen by the Landlord. 9.5 SPECIAL REPAIRS Should Landlord effect repairs, alterations, additions or improvements to the Leased Premises (which are not Tenant's responsibility under this Lease), the Tenant shall permit same to be performed without being entitled to any indemnity or reduction in rental or any damages or compensation therefor. All such work shall be completed by the Landlord with reasonable dispatch and the cost thereof shall, subject to Section 10.5, be included in Operating Expenses. 9.6 MAINTENANCE BY THE LANDLORD 16 The Landlord shall at all times throughout the Term, but subject to Article X, maintain and repair or cause to be maintained and repaired, as would a prudent owner of a reasonably similar property, the structure of the Building including, without limitation, the foundations, exterior weather walls, sub-floor, roof, bearing walls and structural columns and beams of the Building. The cost of such maintenance and repairs shall be included in Operating Expenses unless the Landlord is required, due to the business carried on by the Tenant, to perform such maintenance and repairs by reason of the application of laws or ordinances or the direction, rules or regulations of any duly constituted regulatory body, or by reason of any act, omission to act, neglect or default of the Tenant, or those for whom the Tenant is in law responsible, in which event, the Tenant shall be liable and responsible for the total cost of such maintenance and repairs plus a sum equal to fifteen percent (15%) of the total cost of such maintenance and repairs representing the Landlord's administrative and supervision costs, which amount shall immediately become due and payable to the Landlord as Additional Rent upon demand. [9.7 DELETED BY THE PARTIES.] 9.8 RIGHT OF INSPECTION During the Term, upon notice to Tenant, except in the event of emergency, the Landlord, its servants, employees and agents may enter the Leased Premises from time to time, as the Landlord sees fit, during normal business hours, or in the case of emergency, at any other time, to examine the state of repair, decoration and order of the Leased Premises and the equipment, fixtures and improvements therein and to make such alterations or repairs as the Landlord shall deem necessary acting reasonably for the safety or preservation of the Leased Premises. All lack of repair and maintenance found upon such examination and for which the Tenant is responsible pursuant to this Lease shall, within ten (10) days after notice to the Tenant or such longer time as is reasonable in the circumstances, be properly and sufficiently repaired by the Tenant. If the Tenant fails to repair and maintain as provided for in this Lease, the Landlord may, without prejudice to any of its other rights or recourses, but shall not be obliged to, carry out such repairs or maintenance as may be necessary and all costs incurred by the Landlord for making such repairs or maintenance, together with a sum equal to fifteen percent (1 5%) of such sum representing the Landlord's administrative and supervision costs, which amount shall be payable forthwith by the Tenant as Additional Rent. In no event shall the Landlord, its contractors, subcontractors, agents, servants or employees be liable for any damage, contractual or extra- contractual, suffered to the Leased Premises by reason of the foregoing entry, examination or work as provided for in this Section. 9.9 LOSS OF ENJOYMENT It is expressly understood that any loss of enjoyment of the Leased Premises resulting from the necessity to make repairs, replacements, maintenance or re-building, alterations, or improvements or resulting from the carrying out thereof, whether by the Landlord or the Tenant and regardless of whether the party so carrying out is or is not bound thereto to this Lease, shall 17 not constitute grounds for the cancellation, termination or resolution of this Lease, or for diminution of the rent payable herein, or for a claim in damages, contractual or extra-contractual. Notwithstanding anything to the contrary contained herein, Landlord shall not carry out any repairs, replacements, construction or improvements in the Leased Premises except in accordance with Sections 9.6, 9.7 and 9.8 hereof. 9.10 OVERLOADING OF FLOORS The Tenant shall not bring upon the Leased Premises any machinery, equipment, article or thing that by reason of its weight, size or use might, in the opinion of the Landlord, damage the Leased Premises nor shall the Tenant at any time overload the floors of the Leased Premises. If any damage is caused to the Leased Premises by any machinery, equipment, object or thing or by overloading, or by any act, neglect or misuse on the part of the Tenant or any of its servants, agents or employees or any person having business with the Tenant, the Tenant shall forthwith repair such damage or, at the option of the Landlord, pay the Landlord forthwith on demand as Additional Rent the costs of repairing such damage plus the sum equal to fifteen percent (15%) of such costs representing Landlord's administrative costs. 9.11 DISCHARGE OF HYPOTHECS The Tenant shall, throughout the Term, promptly pay all its contractors, suppliers and workmen for any work or services performed or materials supplied which might give rise to a prior claim or hypothec and shall ensure that no hypothec be registered against the Leased Premises or any part thereof as a result of any work carried out by or at the request of Tenant. Should a hypothec be registered against the Leased Premises or any part thereof as a result of work or services performed by or on behalf of the Tenant or as the result of materials supplied to the Tenant, the Tenant shall upon request by the Landlord, its agents or representatives, cause the hypothec to be discharged forthwith and, should the Tenant fail to discharge same promptly, then in such event and in addition to any other right or remedy of the Landlord, the Landlord may, but shall not be obliged to, discharge the same by paying the amount claimed directly to the hypothecary creditor. The amount so paid together with all costs and expenses, including attorney's fees incurred for the discharge of the hypothec, shall, upon demand, be immediately due and payable by the Tenant to the Landlord as Additional Rent. 9.12 SIGNS, AWNINGS AND CANOPIES The Tenant shall not paint, affix, display or cause to be painted, affixed or displayed any sign, picture, advertisement, notice, lettering or decoration on any part of the exterior of the Building or the Leased Premises without, in each instance, the prior written approval of the Landlord, which approval shall not be unreasonably withheld or delayed. 9.13 SURRENDER OF PREMISES 18 At the expiration of the Term or earlier termination of this Lease, the Tenant will surrender the Leased Premises in the same condition in which the Leased Promises were upon delivery of possession thereof for reasonable wear and tear and except for repair which is the responsibility of the Landlord hereunder and will surrender all keys for the Leased Premises to the Landlord at the place then fixed for the payment of Minimum Rent and will inform the Landlord of all combinations of locks, safes and vaults, if any, in the Leased Premises. The Tenant shall not be permitted or required to remove anything from the Premises at the end of the Term unless, at the time that Landlord gives its consent to any changes or improvements, Landlord indicates to Tenant that it will require Tenant to remove same at the end of the Term, and shall forthwith repair any damage to the Leased Premises caused by their installations or removal. The Tenant's obligation to observe or perform this obligation will survive the expiration or other termination of this Lease. 9.14 TENANT'S OBLIGATION TO PROTECT The Tenant shall protect from damage all the heating and air-conditioning apparatus, water, gas and drain pipes, water closets, sinks and accessories thereof in and about the Leased Premises and keep same free from all obstructions that might prevent their free working and give to the Landlord prompt written notice of any accident to or defects in same or any of their accessories. Any damage resulting from misuse or failure to protect same shall be the sole responsibility of the Tenant. ARTICLE X INSURANCE AND INDEMNITY 10.1 TENANT'S INSURANCE The Tenant shall, throughout the Term and during such other time as the Tenant occupies the Leased Premises or part thereof, at its sole cost and expense, take out and keep in full force and effect the following insurance: 10.1.1 "all-risk" insurance, including the perils of fire, upon property of every kind and description owned by the Tenant, or for which the Tenant is legally liable, or installed by or on behalf of the Tenant and which is located within the Leased Premises, in amounts not less than the full replacement cost, in each case, thereof. If there is a dispute as to the amount which comprises full replacement cost, the decision of the Architect or the Hypothecary Creditor shall be conclusive; 10.1.2 business interruption insurance in such amount as will reimburse the Tenant for direct or indirect loss of earnings attributable to all perils insured against in Sub-Section 10.1.1 when applicable and other perils commonly insured against by prudent tenants operating under similar circumstances; 19 10.1.3 comprehensive general liability insurance including but not limited to personal injury liability, contractual liability, contingent employer's liability, non-owned automobile liability and owners' and contractors' protective insurance coverage with respect to the Leased Premises, to the business carried on, in or from the Leased Premises and to the Tenant's use of the Leased Premises, coverage to include the activities and operations conducted by the Tenant and any other person on the Leased Premises, and by the Tenant and any other person performing work on behalf of the Tenant and those for whom the Tenant is in law responsible in any other part of the Leased Premises. Such policies shall be issued for the global amount of not less than Two Million Dollars ($2,000,000.) for each occurrence involving bodily injury, death or property damage, or for such higher limits as the Landlord may reasonably require from time to time; 10.1.4 any other form of insurance as the Hypothecary Creditor or the Landlord may reasonably require from time to time in form, in amounts and for insurance risks determined by them, acting reasonably. 10.2 TERMS AND CONDITIONS OF TENANT'S INSURANCE Each insurance policy referred to in Section 10.1, other than the "all-risk" insurance referred to in Subsection 10.1.1 and the business interruption insurance referred to in Subsection 10.1.2, shall name the Landlord and any persons, firms or corporations designated by the Landlord, as named insureds as their interests may appear, and will contain: 10.2.1 the standard mortgage clause as may be required by the Hypothecary Creditor; 10.2.2 a waiver of any subrogation rights which the Tenant's insurers may have against the Landlord and/or against those for whom the Landlord is in law responsible, and, in the case of comprehensive general liability, a cross liability and severability of interests clause; 10.2.3 a waiver in favour of the Landlord and the Hypothecary Creditor of any breach of warranty clause such that the insurance policies in question shall not be invalidated as respects their interests, by reason of any breach or violation of any warranties, representations, declarations or conditions contained in the policies; 10.2.4 a clause stating that the Tenant's insurance policy will be considered as primary insurance and shall not call into contribution any other insurance that may be available to the Landlord. The Landlord, for purposes of insurance, shall be designated as: Amenagements Rovo Inc. Les Associes Presud 20 The Landlord reserves the right to modify this list periodically at no cost to the Landlord. All policies shall be issued by insurers acceptable to the Landlord and shall be in a form satisfactory from time to time to the Landlord. The Tenant agrees that certificates of insurance or, if required by the Landlord or the Hypothecary Creditor upon written request, certified copies of each such insurance policy will be delivered to the Landlord as soon as practicable after the issuance of the required insurance. All policies shall contain an undertaking by the insurers to notify the Landlord, at the address for sending notices to the Landlord and the Hypothecary Creditor, in writing, not less than thirty (30) days prior to any material change, cancellation or termination thereof. The Tenant also agrees that if the Tenant fails to take out or keep in force any policy of insurance referred to in Section 10.1, the Landlord shall have the right, after notice in writing to Tenant of at least three (3) business days, but not the obligation to do so, to pay the premium and in that event the Tenant will pay to the Landlord the amount so paid as premium plus fifteen percent (15%) for administrative costs as Additional Rent and it will be due and payable on the first day of the month next following the payment by the Landlord. The acquisition and maintenance by the Tenant of the insurance policies as required pursuant to Section 10.1 shall in no manner whatsoever limit or restrict the liability of the Tenant under this Lease. Notwithstanding any contribution by the Tenant to the insurance premiums, the Tenant agrees that it shall have no insurable interest in the insurance carried by the Landlord, and the Tenant will have no right to receive any proceeds of any such insurance. 10.2.5 a clause stating that the Tenant's insurance policy will extend to any and all activities which may occur on the exterior of the Building but within the Leased Premises (which shall included the lands) as defined in Article 1. Furthermore, for purposes of clarity, the policy shall clearly stipulate that coverage is extended to the parking lot of the Tenant. 10.3 INCREASE IN LANDLORD'S INSURANCE PREMIUMS The Tenant will not keep, or suffer to be kept, anything, or use, sell or offer for sale any article or merchandise in, upon or about the Leased Premises that may contravene or be prohibited by any of the Landlord's insurance policies covering the Leased Premises or any part thereof or which will prevent the Landlord from procuring such policies with companies acceptable to the Landlord. If the occupancy of the Leased Premises, the conduct of business in the Leased Premises, the sale of any merchandise on the Leased Premises (whether or not the Landlord has consented to the sale of such merchandise) or in any other portion of the Leased Premises or any acts or omission of the Tenant in the Leased Premises or any other portion of the Leased Premises causes or results in any increase in premiums for any of the Landlord's insurance policies, the Tenant shall, upon the rendering by the Landlord of the invoices for such additional premiums forthwith pay such increase in premiums as Additional Rent forthwith. In determining whether increased premiums are the result of the Tenant's use of the Leased premises or any 21 other portion the Leased Premises, a statement issued by the organization establishing the insurance rate on the Leased Premises will be conclusive evidence of the reasons causing the increase in premiums. 10.4 CANCELLATION OF INSURANCE If any insurance policy on the Leased Premises or any part thereof is cancelled or threatened by the insurer to be cancelled, or the coverage thereunder reduced or threatened to be reduced by the insurer by reason of the use or occupancy of the Leased Premises or any part thereof by the Tenant or by any assignee or sub-tenant of the Tenant, or by anyone permitted by the Tenant to be upon the Leased Premises, and if the Tenant falls to remedy the condition giving rise to cancellation, threatened cancellation, reduction or threatened reduction of coverage within twenty-four (24) hours after notice thereof by the Landlord, the Landlord may, at its option, and without liability to the Tenant, either: 10.4.1 enter the Leased Premises and remedy the conditions giving rise to the cancellation or reduction or threatened cancellation or reduction and the Tenant will pay, on demand as Additional Rent to the Landlord the cost thereof. The Tenant agrees that any such entry by the Landlord is not a re-entry or a breach of any obligation for peaceable enjoyment contained in this Lease; or 10.4.2 re-enter the Leased Premises forthwith and thereupon the provisions of Article XIV will apply. The Tenant agrees that the Landlord will not be liable for damage or injury caused to property of the Tenant or others located on the Leased Premises as a result of any entry or re-entry by the Landlord under this Section 10.4. 10.5 LOSS OR DAMAGE 10.5.1 The Landlord shall not be liable for any loss, damage, death or injury arising from or out of any occurrence in, upon, at or relating to the Leased Premises (to the extent that this waiver is permitted by law), or damage to property of the Tenant or of others located on the Leased Premises, nor shall it be responsible for any loss of or damage to any property of the Tenant or others from any cause whatsoever, unless such death, injury, loss or damage results from the negligence of the Landlord, its agents, servants and employees or other persons for whom it may in law be responsible. Without limiting the generality of the foregoing, the Landlord shall not be liable for any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water, rain, flood, snow or leaks from any part of the Leased Premises or from the pipes, appliances, plumbing works, roof, sub-surfaces of any floor or ceiling or from the street or any other place or by dampness or by any other cause whatsoever and, notwithstanding any provision of the Civil Code to the contrary, any act or omission of any other tenant or 22 occupant of the Leased Premises. The Landlord shall not be liable for any such damage caused by other tenants or by persons in the Leased Premises or by occupants of property adjacent thereto or the public, or caused by construction or by any private, public or quasi-public work. All property kept or stored on the Leased Premises shall be so kept and stored at the risk of the Tenant only and the Tenant shall indemnify the Landlord and save it harmless from and indemnify it against any claims resulting or arising out of any damages to the same, including, without limitation, any subrogation claims by the Tenant's insurers. 10.5.2 Without in any way limiting the application of the foregoing subsection, where any damage to person or property is caused by the Landlord or any person for whom the Landlord is responsible on or about the Leased Premises, and the loss is wholly or partly covered by insurance which the Tenant is either: (a) in fact maintaining; or (b) is required to maintain under the terms of this Lease, then to the extent the Landlord is liable for damage, the Tenant hereby releases the Landlord for any amount equal to the greater of the actual insurance proceeds Tenant receives in respect of such damage or the insurance proceeds it would receive if it maintains the required insurance and diligently pursues all claims against each applicable insurer. 10.6 INDEMNIFICATION OF LANDLORD Notwithstanding any other term, obligation and condition contained in this Lease, including, without limitation, the Landlord's obligation to repair and the Tenant's obligation to pay the costs of insurance, but subject to Section 10.7 hereof, the Tenant shall indemnify and save it harmless from and against any and all loss, claim, action, damage, liability and expense in connection with loss of life, personal injury, damage to property or any other loss or injury whatsoever arising from or out of this Lease, or any occurrence in, upon or at the Leased Premises, or the occupancy or use by the Tenant of the Leased Promises or any part thereof or occasioned wholly or in part by any act or omission of the Tenant or by anyone permitted to be on the Leased Premises by the Tenant. If the Landlord without fault on its part should be made a party to any litigation commenced by or against the Tenant, then the Tenant shall protect, indemnify and hold the Landlord harmless and shall pay all costs and expenses and reasonable legal fees incurred or paid by the Landlord in connection with such litigation. The Tenant shall also pay all costs, expenses and legal fees that may be incurred or paid by the Landlord in enforcing the terms, obligations and conditions of this Lease. 10.7 The Landlord will insure the Building and the Land as a reasonably prudent landlord of a similar building, it being, however, agreed and understood that the Landlord will not insure any of Tenant's improvements that are not incorporated into the Building, same being the responsibility of the Tenant. The Landlord's property insurance will contain a waiver of any subrogation rights which the Landlord's insurers may have against the Tenant and/or those for whom the Tenant is in law 23 responsible. The Landlord releases and waives any and all claims for damages against the Tenant and those for whom the Tenant is in law responsible with respect to occurrences insured or to be insured by the Landlord, whether or not such claims arise as a result of the negligence of the Tenant or of those for whom Tenant is in law responsible. ARTICLE XI DAMAGE AND DESTRUCTION AND EXPROPRIATION 11.1 DESTRUCTION OF LEASED PREMISES a) In the event that the Building is wholly destroyed, then either Tenant or Landlord shall have an option to cancel the Lease, upon giving the other notice within forty-five (45) days of the event. b) Should the Building be partially destroyed and it will take longer than six (6) months to rebuild, then either Landlord or Tenant shall have an option to cancel the Lease, upon giving the other notice within forty-five (45) days of the event. If neither party elects to cancel, then Landlord shall rebuild and all rent will abate in the proportion that the unusable part of the Building forms to the whole of the Building. c) If it will take less than six (6) months to rebuild, then, provided that Landlord is insured therefor or would have been insured therefor had it insured as a reasonable prudent Landlord, then Landlord shall proceed to rebuild and all rent will abate as aforementioned. d) The Landlord's architect shall notify the Landlord and the Tenant within thirty (30) days of the damage or destruction of the time needed to repair. From the date of the destruction or damage until the Leased Premises have been restored and rendered fit for occupancy. Upon the Tenant being notified in writing by the Landlord that the Landlord's obligations pursuant to this Section 11.1 have been substantially completed, the Tenant shall forthwith complete all Tenant's work, including, without limitation, such work as provided in Schedule "C" hereto and all work required to fully restore the Leased Premises for business fully fixtured, stocked and staffed. The Tenant shall diligently complete the Tenant's Work and Minimum Rent and Additional Rent shall recommence at the earlier of the expiration of sixty (60) days following completion of Landlord's Work or the commencement of business by Tenant in the portion of the Leased Premises that have been damaged or destroyed. 11.2 LEASE IN FORCE 24 Notwithstanding anything to the contrary contained in the Civil Code, and except as may otherwise be provided in this Article XI, this Lease shall continue to be and remain in full force and effect upon the occurrence of any damages or destruction to the Leased Premises and/or the Leased Premises or any part(s) thereof as contemplated in this Article XI. 11.3 REBUILDING It is expressly understood that all repair and rebuilding by the Landlord under any provision of this Article XI may be carried out by the Landlord, as the Landlord, in its discretion, determines and, without limiting the generality of the foregoing, in no event shall the Landlord be bound to repair or rebuild the Leased Premises to their original form, specification or dimension, providing that the parties agree, acting reasonably. to the form, specification and dimension of the rebuilt premises. 11.4 EXPROPRIATION Both the Landlord and the Tenant agree to cooperate with each other in respect of any expropriation of all or any part of the Leased Premises, so that each may receive the maximum award to which each is respectively entitled by law. In the event that the whole or any part of the Leased Premises is condemned, reserved, expropriated or taken or acquired in any manner for any public or quasi-public use or purpose, rendering the operation of the Leased Premises, no longer practical, then either party may, at its option, terminate this Lease by giving notice to the other party, to the effect that the Term shall expire upon the date of the taking of possession thereof by the expropriating authority and, in the event of such expiration, each party shall have no claim against other for any reason whatsoever. The Landlord and the Tenant hereby reserve all right to claim damages against the expropriating authority. The Tenant agrees that the Landlord shall have no obligation to contest any expropriation proceedings. ARTICLE XII SUB-LET AND ASSIGNMENT 12.1 CONSENT TO SUB-LET OR ASSIGN Notwithstanding any law, usage or custom to the contrary, the Tenant shall not transfer, assign, hypothecate or encumber this Lease or any of the Tenant's right, title or interest therein or thereto, or sub-let the whole or any part of the Leased Premises or permit the Leased Premises or any part thereof to be used, occupied or possessed by another without conforming to the terms of Section 12.3, and in any event without the prior written consent of the Landlord, which consent shall not be unreasonably withheld as it applies only to a transfer, assignment or sublet. The consent to hypothecation or encumbrance may be withheld at the Landlord's sole discretion and 25 shall not be subject to any test of reasonableness. Without limiting or restricting, in any manner whatsoever, the Landlord's right to refuse its said consent on other reasonable grounds, it is expressly understood and agreed that the refusal by the Landlord to grant its said consent shall be deemed reasonable, where the Tenant is in monetary and/or material default under this Lease, or where the occupant, transferee, assignee or sub-lessee is not, in its sole discretion and determination, satisfactory to the Landlord as regards financial standing. The consent of the Landlord to any such transfer, assignment, encumbrance, sub-let or use shall not constitute a waiver of this Section and shall not be deemed to permit any further transfer, assignment, encumbrance, sub-let or use by another. 12.2 CONDITIONS PRECEDENT As a condition precedent to any transfer or assignment of this Lease or sub-letting of the whole or any part of the Leased Premises, the Tenant shall indicate, in writing, to the Landlord the proposed assignee, transferee or sub-lessee and providing other information as the Landlord, acting reasonably, may request, including, without limitation, information concerning the principals thereof and such other financial or business information as the Landlord or the Hypothecary Creditor may request, and the specific terms and conditions of such proposed assignment or sub-lease. 12.3 LANDLORD'S OPTION The Landlord shall have a period of fifteen (15) days from receipt of the request for its consent required pursuant hereto and all requested information to either: 12.3.1 consent; 12.3.2 refuse its consent as provided in Section 12.1; [12.3.3 deleted by the parties.] If the Landlord consents to such assignment, transfer or sub-let, the Tenant shall have a delay of sixty (60) days commencing from receipt of such consent to proceed to assign, transfer or sub-let to the interested party in accordance with the terms and conditions indicated to the Landlord. If the Tenant fails to so assign, transfer or sub-let within the said delay of sixty (60) days, the Landlord's consent shall be deemed null and void and the Tenant shall not be permitted to assign, transfer or sub-let without again conforming to the provisions of this Article XIII. 12.4 CONDITIONS OF CONSENT Notwithstanding the provisions of Section 12.3 and in addition thereto, the Landlord shall have the right to require the prospective sub-lessee, transferee or assignee to execute a new lease with the Landlord on the same terms and conditions as contained in this Lease, and in such event the 26 Tenant shall guarantee to the Landlord, in form and substance satisfactory to the Landlord, the performance of all obligations of such sub-lessee, transferee or assignee under the new lease. 12.5 CHANGE ON CONTROL The following shall be deemed to be a sub-lease for the purposes of this Lease and shall be subject to the provisions of Article XII: 12.5.1 any transfer, sale or assignment involving in effect (by one or more transactions) a transfer, directly or indirectly, of fifty percent (50%) or more of the voting shares of the share capital of the Tenant; 12.5.2 any transfer, sale or assignment involving in effect (by one or more transactions) a transfer, directly or indirectly, of fifty percent (50%) or more of the ownership in a partnership, where the Tenant is a partnership; 12.5.3 if any person other than the Tenant has or exercises the right to manage or control the Leased Premises or any part thereof, or any of the business carded on therein other than subject to the direct and full supervision and control of the Tenant: 12.5.4 if effective control of the Tenant is acquired or exercised by any person not having effective control of the Tenant as at the date of execution of this Lease. Notwithstanding the foregoing, this Section 12.5 shall not apply to the Tenant at the time of execution of this Lease and thereafter continuing during the Term and so long as the Tenant is a public corporation whose shares are traded and listed on any recognized stock exchange in Canada. 12.6 SOLIDARY LIABILITY Notwithstanding Article 1873 of the Civil Code of Quebec or any other legislation to the contrary, the Tenant shall remain solidarily liable with the assignee, transferee or sub-lessee for the due fulfillment of all of the obligations undertaken herein by the Tenant, or as the case may be, all of the obligations of such sub-lessee, transferee or assignee. The Tenant shall not be released from performing any of the terms, obligations and conditions of this Lease, the Tenant hereby waiving the benefits of division and discussion. 12.7 LIABILITY TO LANDLORD No assignment, transfer or sub-let shall be permitted unless the sub-lessee or assignee, as the case may be, shall have expressly agreed to be bound directly towards the Landlord for the due fulfilment of all of the Tenant's obligations under this Lease. The Tenant and the assignee, transferee and subtenant will execute such documentation as Landlord requires. At the 27 Landlord's option, the assignee or transferee will enter into a new lease with the Landlord at the same terms and conditions as this Lease save for the Leased Premises which will be delivered as is, whereas, the Term, which will be the unexpired portion of the Term, and the Minimum Rent of which will be calculated in accordance with Section 4.1.1. The Tenant will guarantee the obligations of the "Tenant" under the new lease in a manner Landlord determines, acting reasonably. If Landlord consents to a sublease, all sub-rentals and similar amounts payable by a subtenant or other person to the Tenant are hereby irrevocably and unconditionally assigned to the Landlord such that the subtenant or other person will pay all such sums directly to the Landlord and the amounts so paid will be credited against Tenant's monetary obligations under this Lease. In no event will this assignment or any dealings with the subtenant or other person have the effect of releasing the Tenant from any of its obligations under this Lease. Furthermore, it is understood that if Landlord does not collect any sub-rentals or other amounts from any subtenant or other person the Tenant will have no claim or defense against the Landlord in any manner whatsoever, provided that the Landlord notifies Tenant of the defaults on a timely basis. Even in the case of an assignment or transfer, the Tenant shall at all times be considered a solidary cotenant, until the end of the Term stipulated herein, and remain subject to all obligations of the Lease; in case of repudiation of the Lease by the Assignee or Subtenant, its trustee or liquidator or other legal representative, the Tenant shall remain liable and in no way relieved of any obligation of the present Lease. 12.8 ASSIGNMENT BY LANDLORD In the event of the sale, lease, transfer or other disposition by the Landlord of the Leased Premises or any part thereof, or the assignment by the Landlord of this Lease or any interest of the Landlord hereunder, and to the extent that such purchaser or assignee assumes the obligations of the Landlord hereunder or by law, the Landlord shall, thereupon and without further agreement, be released of all liability with respect to such obligations, but only those falling due after the date of the applicable sale, lease, transfer or other disposition or the assignment. 12.9 DOCUMENTS The cost of preparing, negotiating and executing any document in respect of any assignment, transfer or sublease will be borne exclusively by Tenant. ARTICLE XIII DEFAULT AND TERMINATION 13.1 EVENTS OF DEFAULT 28 Each of the following events (hereinafter called an "Event of Default") shall be a default hereunder by the Tenant and a breach of this Lease: 13.1.1 if the Tenant fails to pay Minimum Rent and any other sum payable pursuant to this Lease as and when the same become payable and fails to correct such default within five (5) days after notice in writing from the Landlord, it being hereby agreed and understood that if the Landlord shall be required to send two (2) such notices in any consecutive period of twelve (12) months, Tenant shall not be entitled to any further notice; or 13.1.2 if, during the Term, any of the goods or moveable effects on the Leased Premises are seized or taken in execution or attachment by any creditor of the Tenant, pursuant to a judgment rendered against the Tenant, or pursuant to this Lease (in the event of a seizure before judgment it shall be considered an Event of Default under the present Article if a main-levee of the seizure is not obtained within fifteen (1 5) days of the seizure being practiced); or 13.1.3 if a writ of execution is issued against the goods or property of the Tenant or against this Lease; or 13.1.4 if the Tenant or any person occupying the Leased Premises files any proposal or makes any assignment for the benefit of creditors or any arrangement or compromise or becomes bankrupt or insolvent or takes the benefit of or becomes subject to any legislation that may be in force relating to bankrupt or insolvent debtors; or 13.1.5 if any application or petition or certificate or order is made or granted for the winding-up or dissolution or liquidation of the Tenant or its assets, voluntarily or otherwise; or 13.1.6 if the Leased Premises, at any time during the Term, becomes vacant by reason of their abandonment by the Tenant or by the removal of the Tenant by legal process for non-payment of rent, breach of covenant or any other cause; or 13.1.7 if any insurance policy insuring the Leased Premises or the Landlord with respect to the Leased Premises is cancelled or threatened to be cancelled by reason of the use and occupation of the Leased Premises or any part thereof, or 13.1.8 if the Tenant assigns, transfers, encumbers, sub-lets or permits the occupation or use or the parting with or sharing possession of all or any part of the Leased Premises by anyone except in a manner permitted by this Lease and the default is not cured within fifteen (15) days of written notice of such default from the Landlord; or 13.1.9 if any hypothec or other encumbrance is registered against the Leased Premises by reason of any act or omission of the Tenant and the default is not cured within fifteen (15) days of written notice of such default from the Landlord; or 29 13.1.10 if at any time during the Term, the Tenant or any other person removes or attempts to remove any of the moveable effects of the Tenant from the Leased Premises, save and except in the ordinary course of the Tenant's business, without the written approval of the Landlord; or 13.1.11 if a receiver or a sequestrator is appointed for all or any portion of the Tenant's property; or 13.1.12 if the Tenant is in default in fulfilling any other term, condition or obligation of this Lease and the default is not cured within fifteen (15) days of written notice of such default from the Landlord. [13.1.13 deleted by the parties.] then and in every such Event of Default, at the Landlord's option, the Lease will be ipso facto resiliated without judicial proceedings being required and without prejudice to the Landlord's other rights and recourses, and the Term of this Lease will forthwith become forfeited, without diminishing or extinguishing the liability of any guarantor or indemnifier. No payment or acceptance of rental subsequent to such Event of Default will give the Tenant the right to continue occupancy of the Leased Premises or in any way affect the rights of the Landlord herein. If the Landlord at any time terminates this Lease for any breach or by reason of the occurrence of an Event of Default or if any legal action is taken for the recovery of possession of the Leased Premises or for the recovery of possession of the Leased Premises, then the equivalent of six (6) months instalments of Minimum Rent and Additional Rent will immediately become due and payable as accelerated rent, and the Landlord may, in addition to any other remedies it may have hereunder or by law, recover from the Tenant all damages and all expenses it may incur or suffer by reason thereof, including, without limitation, legal fees and legal costs and the cost of repossessing the Leased Premises. 13.2 RE-ENTRY Upon the occurrence of an Event of Default, the Landlord may, without notice to the Tenant and without prejudice to any other right of the Landlord hereunder or by law, enter and repossess the Leased Premises and it may use such force as it may deem necessary for that purpose and for gaining admittance to the Leased Premises and it may expel all persons and remove all property from the Leased Premises, which property may be removed and sold or disposed of by the Landlord as it deems advisable, or may be stored in a public warehouse or elsewhere at the cost and for the account of the Tenant, the whole without the Landlord being considered guilty or trespassing or becoming subject to any prosection or becoming liable for any loss or damage which may be occasioned thereby, any statute or law to the contrary notwithstanding. 13.3 RIGHT TO RE-LET 30 If the Landlord elects to repossess the Leased Premises as herein provided, or if it takes possession pursuant to legal proceedings, or pursuant to any notice provided for by law, it may either terminate this Lease or it may from time to time, without terminating this Lease, make such alterations and repairs as may be necessary in order to re-let the Leased Premises, and re-let the Leased Premises or any part thereof, either in the name of the Landlord or otherwise for a term or terms which may, if the Landlord chooses, be less or greater than the balance of the Term and at such rent and upon such other terms and conditions as the Landlord, in its sole discretion, deems advisable, and the Landlord may grant reasonable concessions in connection therewith. Upon each such re-letting all rent received by the Landlord from such re-letting shall be applied firstly to the payment of any indebtedness, other than rent, due hereunder from the Tenant to the Landlord, secondly to the payment of any costs and expenses of such re-letting, including legal costs, legal fees and brokerage fees and the expenses of keeping the Leased Premises in good order and of preparing the Leased Premises for re-letting, thirdly to the payment of rent due and unpaid hereunder, and the residue, if any, shall be held by the Landlord and applied in payment of future rent as the same becomes due and payable hereunder. If such rentals received from such re-letting during any month be less than that paid during that month by the Tenant, the Tenant shall pay such deficiency to the Landlord. Such deficiency shall be calculated and paid monthly. No such taking possession of the Leased Premises by the Landlord shall be constituted as an election on its part to terminate this Lease unless a written notice of such intention in accordance with the present Section is given to the Tenant. Notwithstanding any re-letting, without termination, in accordance with the present Section, the Landlord may, at any time thereafter, elect to terminate this Lease for a previous Event of Default. 13.4 APPLICATION OF MONEYS All payments by the Tenant under the terms of this Lease, whether in respect of Minimum Rent, may be applied or allocated by the Landlord towards the payment of any other amounts due and payable by the Tenant to the Landlord at the date of such payment, irrespective of the purpose for which such payment by the Tenant was effected, the whole in such manner as the Landlord, in its sole discretion, sees fit. 13.5 ABANDONED GOODS Should the Tenant leave in or about the Leased Premises any moveable effects or fixtures for more than eight (8) days after having abandoned or vacated the Leased Premises or remitted the key therefor to the Landlord, and Landlord shall have notified Tenant of the presence of such movable effects or fixtures and Tenant has not reacted within a further period of eight (8) days, then the Landlord shall, ipso facto without any notice being required, become the owner of such moveable effects and fixtures and the Tenant shall have no claim in damages, whether contractual or extra-contractual or otherwise, in connection therewith and the Tenant shall hold the Landlord harmless and indemnified from and against any claims or actions in connection therewith from whomsoever. 31 13.6 LANDLORD'S RIGHT TO CURE DEFAULTS Without limiting the generality of any provision of this Lease, if the Tenant defaults in the performance of any of its obligations under this Lease, the Landlord may, from time to time, after giving ten (10) days notice (or without notice in the case of an emergency) perform or cause to be performed any of such obligations and for such purposes, may do such things as may be required, including, without limitation, entering upon the Leased Premises and doing such things upon or in respect of the Leased Premises or any part thereof as the Landlord reasonably considers requisite or necessary. All expenses incurred pursuant to this Section 13.6 plus a sum equal to fifteen percent (15%) thereof, representing the Landlord's administrative costs shall be paid by the Tenant, as Additional Rent, forthwith upon demand. The Landlord shall not be liable to the Tenant for any loss or damage resulting from any such action or entry by the Landlord and the same shall not be considered a breach of any obligation for peaceable enjoyment contained in this Lease or implied by law. 13.7 REMEDIES GENERALLY Mention in this Lease of any particular remedy or remedies of the Landlord in respect of any default by the Tenant shall not preclude the Landlord from any other remedy in respect thereof, including the right to specific performance of any obligation of the Tenant under this Lease. No remedy shall be exclusive or dependent upon any other remedy, but the Landlord may, from time to time, exercise any one or more of such remedies simultaneously or in combination, such remedies being cumulative and not alternative 13.8 SURRENDER OF LEASED PREMISES Should the Landlord validly repossess the Leased Premises as a result of an event of default, or validly terminate this Lease and should it give notice in writing to the Tenant to that effect, the Tenant shall, within five (5) days notice, remove all goods located in the Leased Premises, in default of which the Tenant undertakes to pay the rent for the period during which its goods or goods under its care remain in the Leased Premises and the Tenant shall pay an Additional Rent equal to three (3) times the Minimum Rent until complete surrender of the Leased Premises, the whole without prejudice to the Landlord's other rights hereunder or by law. ARTICLE XIV ACCESS BY LANDLORD 14.1 RIGHT OF ENTRY Upon twenty-four (24) hours prior notice, the Landlord and its agents have the right to enter the Leased Premises at all reasonable times to show them to prospective purchasers, lessees, the Hypothecary Creditor, insurers or their representatives. During the twelve (12) months prior to 32 the expiration of the Term, the Landlord may place upon the Leased Premises the usual notice "For Rent" or "For Sale" at any time which the Tenant must tolerate, without damaging same. In the event the Tenant is not personally present to open and permit an entry into the Leased Premises, at any time, when for any reason under this Lease an entry therein is necessary or permissible, and the Landlord has notified Tenant of same, if required, the Landlord or its agents may forcibly enter the same, without rendering the Landlord or such agents liable therefor, and without in any manner affecting the obligations under this Lease. 14.2 EXCAVATION If an excavation is made upon land adjacent to the Building, or is authorized to be made by the Landlord, the Tenant will give to the person making the excavation permission to enter upon the Building for the purpose of doing the work that the Landlord considers necessary to preserve the wall of the Building from injury or damage and to support it by proper foundation, without any claim for damages or indemnification against the Landlord or diminution of rent. Any work undertaken by or on behalf of the Landlord pursuant to this Section 14.2 shall not be considered a breach by the Landlord of its obligations, contained in this Lease or implied by law, to provide peaceable enjoyment. ARTICLE XV SUBORDINATION ATTORNMENT AND STATUS STATEMENT BY TENANT 15.1 SUBORDINATION AND ATTORNMENT BY TENANT TO HYPOTHECARY CREDITOR It is a condition of this Lease that it and all of the Tenant's rights hereunder shall at all times be subject to and subordinate to the rights of each Hypothecary Creditor, provided that each Hypothecary Creditor agrees that the peaceful possession of the Leased Premises by Tenant shall not be disturbed as long as Tenant is not in default hereunder. The Tenant shall, upon demand, subordinate this Lease and all of its rights hereunder to the rights of each Hypothecary Creditor, in such form as the Landlord may require, and, if requested, the Tenant shall become the Tenant of each Hypothecary Creditor. Whenever and under whatsoever circumstances ownership of the leased Premises changes, the Tenant shall attorn to and become the tenant of the new owner of the Leased Promises as if such new owner were the Landlord under this Lease and the future obligations and liabilities of the Landlord hereunder shall then, IPSO FACTO, cease and terminate, provided that the new owner has assumed all future obligations of Landlord hereunder. 15.2 STATUS STATEMENT (ESTOPPEL CERTIFICATE) At any time during the Term and within ten (10) days of the Landlord's request therefor, the Tenant shall execute and deliver, as directed by and in the form prepared by the Landlord to any person, a certificate or status statement certifying among such other things as the Hypothecary 33 Creditor or any prospective purchaser of the Leased Premises or any part thereof, from time to time, require: 15.2.1 that this Lease has been validly executed and delivered by the Tenant pursuant to due corporate action properly taken by it; 15.2.2 that this Lease is unmodified and in full force and effect or, if there have been modifications, that this Lease is in full force and effect, as modified and identifying the modification agreements; 15.2.3 the Commencement Date and the termination date; 15.2.4 the date to which Minimum Rent have been paid; 15.2.5 that there is no existing default by the Tenant in the payment of any Minimum Rent under this Lease and that there is no other existing or alleged default by either party under this Lease and if there is any such default, specifying the nature and extent thereof; 15.2.6 that no rent has been paid more than thirty (30) days in advance of its due date; 15.2.7 that the Tenant has accepted and is in possession of and is occupying the Leased Premises; 15.2.8 that the Landlord's work, as provided in Schedule "C" hereto, has been completed to the satisfaction of the Tenant; and 15.2.9 whether there are any set-offs, defenses or counter-claims against the enforcement of the obligations to be performed by the Tenant under this Lease. ARTICLE XVI MISCELLANEOUS 16.1 NO TACIT RENEWAL Notwithstanding the Civil Code, there shall be no tacit renewal of this Lease. Should the Tenant remain in possession of the Leased Premises after the expiration of the Term without the written consent of the Landlord, such continued occupation shall be at a monthly rate payable in advance equal to one and a half (1-1/2) times the aggregate of the monthly instalment of Minimum Rent and Additional Rent payable for the last month of the Term and shall be without prejudice to the Landlord's right to re-enter and take possession of the Leased Premises and remove the Tenant 34 therefrom, without notice or indemnity to the Tenant, and without prejudice to the Landlord's other recourses hereunder or by law. 16.2 ACCORD AND SATISFACTION No payment by the Tenant or receipt by the Landlord of a lesser amount than the monthly payment of Minimum Rent herein stipulated is deemed to be other than on account of the earliest stipulated Minimum Rent, nor is any endorsement or statement on any cheque or any letter accompanying any cheque or payment as rent deemed an acknowledgment of full payment or an accord and satisfaction, and the Landlord may accept and cash such cheque or payment without prejudice to the Landlord's right to recover the balance of such rent or pursue any other remedy provided in this Lease or by law. 16.3 ENTIRE AGREEMENT This Lease together with the schedules referred to herein and the reasonable Rules and Regulations adopted and promulgated by the Landlord pursuant to the provisions hereof set forth the entire agreement and understanding between the parties concerning the Leased Premises, and the Tenant acknowledges that there have been no promises, representations, agreements, conditions or understandings, either oral or written, express or implied, collateral or otherwise, between the Landlord and the Tenant other than as herein set forth. Except as otherwise expressly provided, no subsequent alteration, amendment, change or addition to this Lease shall be binding upon the Landlord or the Tenant unless in writing and duly signed by the Tenant and the Landlord. 16.4 WAIVER The waiver by the Landlord of any breach of any term, obligation or condition herein contained is not deemed to be a waiver of such term, obligations or condition or of a subsequent breach of the same or of any other term, obligation or condition herein contained. The subsequent acceptance of rent by the Landlord will not be deemed to be a waiver of any preceding breach by the Tenant of any term, obligation or condition of this Lease, regardless of the Landlord's knowledge of the preceding breach at the time of acceptance of the rent. No obligation, term or condition of this Lease will be deemed to have been waived by the Landlord unless the waiver is in writing, signed by the Landlord. All Minimum Rent to be paid by the Tenant to the Landlord hereunder shall be paid without any deduction, abatement, set-off or compensation whatsoever and the Tenant hereby waives the benefit of any statutory or other rights in respect of abatement, set-off or compensation which could exist in its favour at the present time hereof or at any future time. 16.5 NO PARTNERSHIP The Landlord shall not, in any way, or for any purpose, become a partner of the Tenant in the conduct of its business or otherwise, or a joint venturer or a member of a joint enterprise with the 35 Tenant. The provisions of this Lease payable hereunder are included solely for the purpose of providing a method whereby the rent is to be measured and ascertained, and neither the method of computation of rent nor any other provision contained herein, nor any acts of the parties hereto shall create a relationship between the parties other than that of landlord and tenant. 16.6 FORCE MAJEURE Notwithstanding anything to the contrary contained in this Lease, if either party hereto is BONA FIDE delayed or hindered in, or prevented from, the performance of any term, obligation or act required hereunder by reason of strikes, lock-outs, labour troubles, inability to procure materials, failure of power, restrictive governmental laws or regulations, riots, insurrection, war, act of God or other reason of a like nature or not the fault of the party delayed in performing work or doing acts required under the terms of this Lease, then performance of the act will be excused for the period of the delay and the period for the performance of the act will be extended for a period equivalent to the period of the delay. The provisions of this Section 16.6 do not cancel or postpone or delay the due date of any payment to be made by the Tenant hereunder, or operate to excuse the Tenant from the prompt payment of Minimum Rent or other payments required by the terms of this Lease. 16.7 NOTICE Any notice, demand, request or other instrument which may be or is required to be given under this Lease shall be delivered in person or sent by registered mail postage prepaid and shall be addressed: 16.7.1 if to the Landlord: at the address set forth in Section IX (i) of the Preamble: 16.7.2 if to the Tenant at the Leased Premises or, at the Landlord's option, to the Tenant's head office at the address set forth in Section VIII(ii) of the Preamble. Any such notice, demand, request or other instrument shall be conclusively deemed to have been given or made on the day upon which such notice, demand, request or other instrument was delivered or, if mailed, then on the fifth (5th) business day following the date of mailing (provided at such time no postal strike is in progress or has been publicly announced), as the case may be. Either party may at any time give notice to the other of any change of address of the party giving such notice and from and after the giving of such the address therein specified is deemed to be the address of such party for the giving notices hereunder. 16.8 GOVERNING LAW AND SEVERABILITY This Lease will be interpreted and governed by the laws of the Province of Quebec. If for any reason whatsoever any provision or any part of any provision of this Lease, or the application thereof to any person or circumstance, is to any extent held or rendered in valid, unenforceable or 36 illegal, then such provision or part in question shall be deemed to be independent, severable and divisible from the remainder of the Lease and its invalidity, unenforceability or illegality shall not affect, impair or invalidate the remainder of the Lease or any part thereof and such provision or partial provision shall continue to be applicable to and enforceable against any other person or circumstance other than those to which it has been held or rendered invalid, unenforceable or illegal. 16.9 REGISTRATION The parties hereto hereby agree not to register this Lease without the prior written consent of the Landlord; only a summary of this Lease (the "Summarized Lease") prepared by Landlord's attorneys, excluding the financial consideration of this Lease, may, at the written request of the Tenant and then only after receiving the prior written consent of the Landlord to such Summarized lease, be executed by the parties, for purposes of registration only. The inscription shall include an extreme date equivalent to the Term of this Lease. In any and all respects, this Lease shall govern and supersede any provision of such Summarized Lease. Upon the termination of this Lease, the Tenant shall radiate at its expense the registration of such Summarized Lease, the Tenant hereby expressly and irrevocably appointing the Landlord as attorney for the Tenant with full power and authority to radiate such inscription and to execute and deliver in the name of the Tenant any instruments or certificates required for such purpose. The Tenant hereby undertakes to forthwith sign and deliver to the Landlord any further power of attorney or document which the Landlord may request to confirm the foregoing. 16.10 SUCCESSORS AND ASSIGNS All rights and liabilities herein granted to or imposed upon the respective parties hereto extend to and bind the successors and assigns of the Landlord and the heirs, executors, administrators and permitted successors and assigns of the Tenant, as the case may be. No right, however, shall enure to the benefit of any assignee or successor of the Tenant unless such successor or the assignment to such assignee has been approved by the Landlord in writing as provided in Article XII of these presents. 16.11 SECURITY DEPOSIT Concurrently with the execution of this Lease, the Tenant has deposited with the Landlord the sum set forth in Section IX of the Preamble. The said deposit is given by the Tenant as security for the due performance by the Tenant of all the terms, obligations and conditions herein to be respectively paid, observed and performed by the Tenant. If the Tenant shall breach any of such terms, covenants and conditions, the Landlord may, at its option, appropriate and apply the said deposit, or so much thereof as may be necessary, as full or partial compensation to the Landlord for loss or damage suffered or sustained by the Landlord arising out of or in connection with such breach by the Tenant. The Tenant upon demand shall forthwith pay to the Landlord an amount sufficient to restore the deposit to the original sum required to be deposited. In the event of 37 bankruptcy or other creditor-debtor proceedings against the Tenant, such security deposit shall be applied first to the payment of rent and other sums due to the Landlord under the terms of this Lease and will be deemed to have been applied no later than the day prior to the bankruptcy or the institution of such other debtor/creditor proceedings. Within thirty (30) days of the termination of this Lease, such security deposit, or so much thereof as shall then remain in the Landlord's hands, shall be returned, without interest, to the Tenant. In the event of a sale, transfer or assignment of this Lease by the Landlord, the Landlord may transfer such security deposit or so much thereof as shall then remain to the purchaser, transferee or assignee and thereupon the Landlord shall be free and discharged from any further liability in connection with such security deposit. 16.12 QUALIFICATION TO DO BUSINESS The Tenant represents to the Landlord that it has obtained or shall, prior to the opening of the Leased premises or any part thereof for business, have obtained any necessary licences and permits to carry on business in the Province of Quebec and shall, throughout the Term, maintain same in good standing. Upon request of the Landlord, the Tenant shall from time to time promptly provide the Landlord with evidence satisfactory to the Landlord and its solicitors of the status of any such licence or permit. 16.13 NON-CANADIAN PERSON The Tenant represents to the Landlord that it is not a non-Canadian person within the meaning of the Investment Canada Act (Bill C-15). 16.14 WAIVER The Tenant hereby waives any rights it may have in virtue of articles 1859, 1861, 1862, the second paragraph of article 1863, the second and third paragraphs of article 1865 and, article 1867 of the Civil Code of Quebec. Except as otherwise expressly permitted in this Lease, the Tenant hereby also waives any right to compensation for sums which the Tenant may owe under this Lease as well as any right to claim sums presently owing to it or which may become owing to it by the Landlord and the Tenant agrees to pay the rent as well as any sum due under this Lease, notwithstanding the existence of one or several claims which it may have against the Landlord. 16.15 WAIVER OF LIABILITY Notwithstanding any law, usage or custom to the contrary, the Landlord shall not be liable to the Tenant for damages resulting from the act of a third person, except such third person for whom the Landlord is responsible in law, including other tenants in the Leased Premises, and the Tenant hereby expressly renounces to any right or recourse it may have against the Landlord, as a 38 result of such act, and, without limiting the generality of the foregoing, the Tenant renounces to and waives its right to obtain a reduction of rent, cancellation of the Lease or damages. 16.16 PEACEABLE ENJOYMENT So long as the Tenant pays the Minimum Rent, Additional Rent and other sums herein provided, and observes and performs all of the terms, obligations and conditions on the Tenant's part to be observed and performed under this Lease, the Tenant shall have peaceable enjoyment of the Leased Premises during the Term, without hindrance or interruption by the Landlord or any other person lawfully claiming by, through or under the Landlord, subject, nevertheless, to the terms, obligations and conditions of this Lease. 16.17 INTEREST ON OVERDUE PAYMENTS The Tenant shall pay to the Landlord interest on all overdue Minimum Rent and Additional Rent at a per annum aggregate rate equal to the prime rate of interest from time to time charged by any Canadian chartered bank determined by the Landlord to its prime commercial borrowers, plus two percent (2%), such rate to be compounded monthly. Such interest shall be calculated from the due date until payment is made, the whole without the necessity of any demand being made therefor. 16.18 BROKERAGE COMMISSION The Tenant hereby warrants and represents that any brokerage commission with respect to this Lease or the transaction contemplated herein shall be borne exclusively by the Tenant and the Tenant shall indemnity and hold harmless the Landlord from any and all claims with respect thereto. 16.19 HEADINGS AND NUMBERS The headings, captions, section numbers, article numbers and table of contents appearing in this Lease are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or intent of this Lease nor in any way affect this Lease. 16.20 INTERPRETATION The words "hereof", "herein", "hereunder" and similar expressions used in any Section or SubSection of this Lease relate to the whole of this Lease and not to that Section or Sub-Section only, unless otherwise expressly provided. Where required by the context hereof the singular shall include the plural and the neuter gender, the masculine or feminine. 16.21 FINANCIAL INFORMATION 39 The Tenant shall, upon request and without undue delay, provide the Landlord with such public information as to the Tenant's financial standing and corporate organization as the Landlord or the Hypothecary Creditor requires and the Landlord agrees to strictly maintain the confidentiality of said information and only to release the same to the Hypothecary Creditor or other person having an interest or potential interest in the Leased Promises. 16.22 HYPOTHECARY CREDITOR CHANGES If the Hypothecary Creditor requires reasonable changes to this Lease, the Tenant shall execute such documents or other instruments necessary to give effect to such changes, provided no such change shall affect the Term, the Leased Premises, the Gross Leasable Area of the Leased Premises or any Minimum Rent payable hereunder. 16.23 SOLIDARY LIABILITY In the event that the Lease is signed by more than one person, these persons shall be solidarily liable for the execution of the obligations of this Lease and they hereby waive the benefit of subrogation. 16.24 ELECTION OF DOMICILE The parties herein hereby elect domicile in the District of Montreal, where any and all legal proceedings by either party against the other shall be instituted. 16.25 LANGUAGE The parties acknowledge having expressly required that this Lease and all documents relating thereto be drawn in English. Les parties declarent avoir expressement requis que ce Bail et tous les documents s'y rapportant soient rediges en anglais. 40 IN WITNESS WHEREOF the parties hereto have executed this Lease as of the date first above- written. LANDLORD: AMENAGEMENTS ROVO INC. Per: /s/ Norman Zavalkoff - ----------------------------- ------------------------------ Witness Norman Zavalkoff TENANT: PHOENIX INTERNATIONAL LIFE SCIENCES INC. Per: /s/ Jean-Vyes Caloz - ------------------------------- --------------------------------- Per: - ------------------------------- --------------------------------- Witness 41 SCHEDULE "A" DESCRIPTION OF LAND SCHEDULE "B" SITE PLAN OF LEASED PREMISES SCHEDULE "C" LANDLORD'S AND TENANT'S WORK SCHEDULE "D" OPERATING EXPENSES SCHEDULE "E" PRE-AUTHORIZED PAYMENT PLAN SCHEDULE "F" BUILDING MODIFICATION PLANS 42 EX-10.16 30 EXHIBIT 10.16 MEMORANDUM OF AGREEMENT OF LEASE ENTERED INTO AT THE CITY AND DISTRICT OF MONTREAL IN THE PROVINCE OF QUEBEC AS OF THE THIRD (3rd) DAY OF MARCH 1995. BY AND BETWEEN: LIBERTY SITES LTD, a body politic and corporate duly incorporated according to law and having its head office at 1450 St. Amour Street, in the City and District of St. Laurent, Province of Quebec, H4S 1J3, herein acting and represented by Sandra Levy, duly authorized for the purposes of the present Agreement. (hereinafter referred to as the "Landlord") AND PHOENIX INTERNATIONAL LIFE SCIENCES INC, a body politic and corporate duly incorporated according to law and having its head office at 4625 Dobrin Street in the City and District of Saint-Laurent, Province of Quebec, H4R 2P7, herein acting and represented by Jean- Yves Caloz, duly authorized for the purposes of the present Agreement in virtue of a resolution of its Board of Directors, a certified copy of which remains annexed hereto. (hereinafter referred to as the "Tenant") 1. DESCRIPTION AND LEASE OF PREMISES Landlord, in consideration of the rents, covenants and agreements hereinafter contained on the part of the Tenant to be paid, kept and performed, hereby leases to Tenant and Tenant does hereby accept from the Landlord that certain part of the building located at 4850 Dobrin and 4901 Levy streets, in the City of Saint-Laurent (the "Building"), having an office and a warehouse area, of approximately seventy thousand nine hundred and eighty (70,980) square feet, the whole as will be determined and certified by the Landlord's architect in accordance with BOMA Standards, and as outlined in red on the floor plans attached hereto as Schedule "A", (hereinafter referred to as either the "Leased Premises" or the "Premises") and an outside loading and trucking area, and exterior parking areas of approximately one hundred and sixty (160) spaces for Tenant employee and visitor vehicles, the whole as shown in yellow on Schedule "B" attached hereto (but which may change from time to time, subject to the reasonable approval of the parties), together with any landspaced areas in front of the Leased Premises, and the right to use with others the driveways to access the Leased Premises (the said Building and land hereinafter referred to as the "Property" as outlined in Schedule "A" attached hereto). 2. TERM OF LEASE The Term of this lease shall be for a period of fifteen (15) years to be computed from the first (1st) day of July 1995 (the "Commencement Date") and to terminate on June 30, 2010 (the "Term"). The Tenant shall have the right to occupy the Premises as of the signing of this Lease save and except the premises presently occupied by CIBC, outlined in blue on Schedule "A", and to begin to build the Tenant's Work (as those words are defined in Section 21 hereof) in the whole of the Leased Premises except the premises occupied by CIBC. As soon as CIBC vacates its present location, which is expected to be on or about May 1, 1995 the Tenant shall be able to occupy that part of the Premises. The Landlord undertakes to use its best effort to have CIBC vacate their premises on or about May 1, 1995. The Tenant shall be bound during the period from the date of occupancy until the Commencement Date by all the provisions of this Lease and, without limiting the generality of the foregoing, the Tenant shall be liable for any and all damages caused by its actions or omission or those of its contractors, subcontractors, agents and employees. During this period, the Tenant shall be responsible to pay for all electricity and other utility costs and all special services provided by third parties whether or not arranged for by the Landlord. 3. USE OF PROPERTY The Leased Premises shall be used in a first class and reputable manner solely to carry out pharmaceutical research as well as any use in connection therewith and for no other purpose. 4. NET LEASE It is the intention of the parties that the Minimum Net Rental set out in Section 5 of this lease shall be absolutely net to the Landlord and that the Tenant shall pay for its own account, to the complete exoneration of the Landlord, all costs and expenses affecting the Leased Premises or the business carried on therein, and its proportionate share of all Property Taxes and Costs as hereinafter defined, except as is otherwise provided in this lease. Furthermore, any amount and any obligation which is not expressly declared herein to be that of the Landlord pertaining to the Premises shall be deemed to be an obligation of the Tenant and/or at the expense of the Tenant. 5. NET RENTAL During the term of the lease, the Tenant shall pay the Landlord the following minimum net rental (the "Minimum Net Rental"): (a) Nine Dollars and Fifty Cents ($9.50) per square foot per year during the first five (5) years of the Term; and -2- (b) Thirteen Dollars and Forty Cents ($13.40) per square foot per year during years six (6) through ten (10) inclusively; and (c) Eleven Dollars and Fifty Cents ($11.50) per square foot per year during years eleven (11) through fifteen (15) inclusively; each payable in equal monthly instalments in advance on the first day of each month. The Minimum Net Rental as herein provided shall be paid to the Landlord and/or its nominee at the Head Office of the Landlord in the City of Saint-Laurent, at 1450 St. Amour Street, in the Province of Quebec, or at such other place in Canada as shall be designated by the Landlord in writing to the Tenant. Notwithstanding the above, the Tenant shall not have to pay any Minimum Net Rental during the first year of the Term. It shall, nevertheless, pay all Additional Rental and the cost of all electricity and utilities consumed in the Premises as of the Commencement Date of the Term. 6. ADDITIONAL RENTAL In this lease, unless there is something in the context inconsistent herewith, the parties agree that "Additional Rental" means any and all amounts due or becoming payable to the Landlord pursuant to this lease other than the Minimum Net Rental, whether such amounts are specifically referred to as Additional Rental or not. It is agreed and understood that such amounts other than Proportionate Expense Rental (as hereinafter defined) and any other amounts for which a specific payment date is provided for in this lease, whether specifically referred to as Additional Rent or not, shall be payable on the first day of the month immediately following the date the said amount is claimed, or such other date that Landlord designates. 7. PROPORTIONATE EXPENSE RENTAL The Tenant shall pay without duplication as Additional Rental in each lease year, its proportionate share of all Property Taxes and Costs, reasonable expenses and disbursements incurred by the Landlord or on its behalf to operate, clean, maintain and repair the Property (hereinafter referred to as "Proportionate Expense Rental") which include without limitation: (a) The total cost of insuring the Property (including such insurance as the Landlord shall, acting reasonably, effect or shall be required to effect by any secured creditor) against fire and any other perils which presently are or hereafter may be from time to time embraced by or defined in a standard fire insurance policy with -3- extended coverage, comprehensive general liability insurance, boiler and pressure vessel insurance, business interruption and/or loss of rentals insurance equal to at least (1) one year's Minimum Net Rental and Proportionate Expense Rental, and such other insurance as the Landlord, acting reasonably may deem necessary or advisable. (b) The cost of cleaning, sweeping, snow removal, gardening and landscaping maintaining and operating the Property. (c) The part of such costs reasonably allocated to the Property with respect to seeing to the security of the Trans Canada Business Park. (d) The cost of repairs and replacements to (including major repairs and structural repairs and replacements but excluding repairs due to structural defects which relate to the state of the Building prior to the Tenant's Work (as those words are defined hereinafter)), and maintenance of the building and improvements of the Property and their appurtenances and equipment including the common areas and facilities. (e) Remuneration, including contributions toward usual fringe benefits, unemployment insurance and similar contributions, of employees engaged in maintaining, operating and supervising the Property, it being agreed and understood that where employees are not employed on site on a full time basis, there shall be attributed to the Property only such sums as are the product obtained by multiplying the aforementioned remuneration and contributions by a fraction, the numerator of which is the average time per week that the employee spends working on the Property on site and the denominator of which is the average number of hours that such employee spends each week working for the Landlord. (f) The Taxes on Capital as defined hereinafter. "Taxes on Capital" means an amount imputed by the Landlord acting reasonably to the Property in respect of taxes, rates, duties and assessments presently or hereafter levied, rated, charged or assessed from time to time upon the Landlord and payable by the Landlord to the Government of Canada and to the Province of Quebec on account of its capital. Capital Taxes shall be imputed on the basis of the Landlord's determination of the amount of capital attributable to the Property, which shall be based on the original capital cost of the Building together with the cost of any improvements made to it paid by the Landlord together with the book value of the Land at the moment of the determination by the Landlord of the amount of capital attributable to the Property. Capital Taxes also means the amount of any capital or place of business tax levied by any government or other applicable taxing authority against the -4- Landlord with respect to the Property whether known as Capital Taxes or by any other name. (g) All Montreal Urban Community, municipal, school, special taxes and taxes and surtaxes on non-residential immovables, for the Property on which the Leased Premises are situated and any other taxes assessed against the building and/or land during the Term of the lease (hereinafter collectively called "Real Estate Taxes"). Should the mode of collecting business taxes, water taxes or other assessments be such that the Landlord shall be required to pay for same, or if the system of Real Estate Taxes shall be altered or varied and any new tax or levy shall be levied or imposed on the building and/or land and/or the revenues there from and/or the Landlord in substitution for and/or in addition to Real Estate Taxes presently levied or imposed on immovables in the City of Ville St.Laurent or Montreal Urban Community in which the property is situated, then any such new tax or levy shall be included within the definition of Real Estate Taxes as contained in this section and the provisions of this section shall apply mutatis mutandis. For greater certainty, the Surtax and the Tax on Non-Residential Immovables will be recoverable from the Tenant on the same basis as Real Estate Taxes, that is, on its proportionate share basis, notwithstanding any percentage entered on the schedule to the real estate assessment roll for the Property or any omissions or errors in same. The benefit of any reduction in Real Estate Taxes obtained because of any vacancy in the Building during the previous fiscal year, if any, will remain with the Landlord and shall not be shared with the tenants of the Building. (h) Administrative cost equal to fifteen percent (15%) of all costs and expenses incurred by the Landlord with respect to paragraphs (a) to (g) inclusively of this Section 7, less the exclusions hereinafter provided for. Notwithstanding the above, the Tenant shall not be required to pay any of the following costs: (a) interest and principal payments on outstanding financing of the Landlord and any other debt costs of the Landlord; (b) costs or expenses incurred with respect to the acquisition, development, construction or furnishing of the Building prior to the commencement of Tenant's Work (as those words are defined hereinafter); -5- (c) costs of repairs done by the Landlord and for which the Landlord has been or is to be reimbursed, either as a result of an insurance claim or otherwise; (d) costs of structural repairs which relate to the state of the Building prior to the Tenant's Work (as those words are defined hereinafter); (e) commissions, fees and all other expenses incurred in connection with marketing or leasing the Premises or any part thereof; (f) any amount paid as a fine or a penalty as result of a violation of a violation of law (provided such violation of law was not caused by or contributed to by the Tenant); (g) income, business and corporate taxes and other personal taxes to the Landlord (other than capital taxes and large corporation taxes); (h) the amount of any sales tax, goods and services tax, value-added tax or any similar tax ("Sales Tax") paid or payable by the Landlord on the purchase of goods and services included in Additional Rent which may be available to the Landlord as a credit in determining the Landlord's net tax liability or refund on account of Sales Tax, but only to the extent Sales Tax is included in Additional Rent; (i) the cost of any insurance premiums relating to risks or amounts which are not normally insured against by reasonably prudent owners of similar buildings; (j) operating costs which are recoverable from insurance proceeds or which would be recoverable assuming compliance by the Landlord with its insurance obligations; (k) costs covered by warranties or guarantee; and (l) any cost which would otherwise be included in the Additional Rent but consists of an amount paid to a corporate affiliate, parent or subsidiary of the Landlord to the extent such amount is in excess of the fair market value of the said item or service where the expense is incurred in an arm's length transaction. Notwithstanding anything else contained herein, all Additional Rent shall be calculated without duplication or profit to the Landlord and in accordance with generally accepted accounting principles. In the event that there are separate assessments and tax bills for the Leased Premises (including but not limited to all licence fees, charges, rates assessed against the Leased Premises and/or all equipment and facilities thereon or therein, and every tax and licence -6- fee in respect of any and every business carried on therein, or in respect of the occupancy of the Leased Premises by the Tenant), the Tenant shall pay to the taxing authority and discharge same, and discharge in each lease year during the Term and within the times provided for by the taxing authority all taxes so levied, the Tenant shall provide the Landlord within thirty (30) days after receipt with a copy of any separate tax bills and assessments for the Leased Premises and shall promptly deliver to the Landlord receipts evidencing the payment of such taxes. The Tenant shall pay to the Landlord as Additional Rental its Proportionate Share of any expenses, including, without limitation, legal and appraisal expenses incurred by the Landlord in obtaining or attempting to obtain a reduction of or to prevent an increase of any Real Estate Taxes. The Landlord shall act as a prudent and reasonable Landlord when exercising its discretion to contest Real Estate Taxes. Should the Tenant request that the Landlord contest Real Estate Taxes, the Landlord agrees to cooperate with the Tenant. The Tenant's Proportionate Share shall be the proportion that the gross floor area of the Leased Premises bears to the gross leasable floor area of the building wherein the Leased Premises are situated. The Tenant's proportionate share can be adjusted, however, by the Landlord in terms of Real Estate Taxes and capital taxes, to take into consideration the value of the improvements made to the Premises or the number of parking spaces used by the Tenant, the whole to be calculated by the Landlord in an equitable and fair manner to the Landlord and to the Tenant and provided the Landlord does not recover more than one hundred percent (100%) of such expenditures. The amount payable by the Tenant under the provisions of this section shall be reasonably estimated by the Landlord in advance for each calendar year. The Tenant agrees to pay to the Landlord such amount in equal, monthly instalments in advance, during such period together with the Minimum Net Rental provided for in Section 6. Within a reasonable period of time after the end of the period for which such estimated payments have been made, the Landlord shall send the Tenant a statement showing the actual amount required to be paid under the provisions of this Section. Overpayments or underpayments shall be adjusted within thirty (30) days after the delivery of the Landlord's statement. Should the first year of the Term not commence on the first day of January, or should the last year of the Term not terminate on the thirty-first day of December, then, prior to the commencement of the Term, or of the last year of the Term, as the case may be, or as soon thereafter as is reasonably possible, the Landlord shall furnish to the Tenant a reasonable estimate of the charges for the part of the year in question and the Tenant shall pay to the Landlord on the first day of each month in advance during the part of the year in question forming part of the Term, Additional Rental equal to the portion of the estimated charges divided by the number of months during the part of the year in question. -7- Any capital expenditures incurred by the Landlord will be amortized over the useful life of the expenditure in question. 8. UTILITIES AND EQUIPMENT The Tenant shall promptly pay for its electricity (including without limitation any electricity used for heating and/or air conditioning the Leased Premises), for the cost of operating, repairing, maintaining and replacing the machinery and other facilities required for the heating, ventilating and air conditioning of the Leased Premises and facilities, and gas, water, sewer and electric utility costs relating to same, telephone and all public utilities with respect to the Leased Premises. Throughout the Term of the lease, the Tenant shall engage a qualified air conditioning maintenance contractor to maintain and repair the heating, ventilating and air conditioning system. The Tenant shall provide the Landlord with a copy of a duly executed heating, ventilating and air conditioning maintenance and repair contract, as well as all renewals of said contract as soon as same are signed. 9. SUBLETTING AND ASSIGNMENT Subject to the provisions hereinafter detailed, the Tenant shall not have the right to sublet the Premises or any part thereof, or assign its rights in the present lease, or allow the Premises or any part thereof to be used by another, nor hypothecate or encumber this lease or the Premises or any part thereof, without the prior written consent of the Landlord, which consent may not be unreasonably withheld. Notwithstanding the foregoing, the Tenant shall have the right to assign or transfer the Lease or sublet the Premises without the prior written approval of the Landlord if such assignment or sublet is to a corporation associated (as such terms are defined in the Canada Business Corporations Act) with the Tenant, provided such subtenant or assignee carries on the same use of the Leased Premises authorized herein. Notwithstanding such subletting and assignment, or permitted use by another, the Tenant shall remain jointly and severally liable with such sub-lessee, assignee or user, for the performance of all the terms and conditions of the present lease, for the residue of the lease, or any renewal thereof. If the Tenant wishes to so sublet or assign it must provide the name of the prospective sublessee or assignee together with such other reasonable information as Landlord shall require together with a request for consent of the Landlord at least thirty (30) days prior to the effective date of the proposed transfer or assignment and the Landlord shall have twenty-one (21) days from receipt of a registered letter or courier from the Tenant to send a notice to the Tenant withholding its consent to said sublet or assignment, together with the basis for such refusal, failing which Landlord shall be deemed to have given its consent. -8- Any document or consent evidencing any assignment of this lease or any sublet of the Leased Premises if permitted or consented to by the Landlord shall be prepared by the Landlord or its attorneys and all reasonable legal costs with respect thereto shall be paid by the Tenant to the Landlord forthwith upon demand as Additional Rent. 10. EXPROPRIATION If the whole or a substantial portion of the Property be condemned, expropriated or taken in any manner for any public or quasi-public use or purpose such that it is no longer feasible for the Landlord to continue to operate the Property, then Landlord may at its option terminate this lease provided such termination shall not affect Tenant's right of action or the amount claimed pursuant to its right of action against the expropriating authority by giving notice in writing to Tenant that the Term hereof shall expire upon the day when possession is required for such purpose and in the event of such expiration Landlord shall have no liability to Tenant of any nature. 11. INSPECTION AND REPAIR Subject to the requirements of Tenant's activities in the Premises, Landlord and its agent shall have, upon a prior twenty-four (24) hour notice (except in an emergency), the right at all reasonable hours during the Term of this lease and any renewals thereof to enter the Leased Premises to examine the condition thereof and to ascertain whether Tenant is performing its obligations hereunder, and Tenant shall make any repairs which Tenant is obliged to make pursuant to the terms of this lease. If Tenant fails to make any such repairs within thirty (30) days after written notice from Landlord requesting Tenant to do so, provided that such repairs may reasonably be made within the said period. If the Tenant fails to carry out the repairs within the appropriate delay Landlord may, without prejudice to any other rights or remedies it may have, make such repairs and charge the cost thereof to Tenant, plus an administrative fee of fifteen percent (15%) for doing so, which shall be charged to Tenant as additional rent. Nothing in this lease shall be construed to obligate or require Landlord to make any repairs for which the Tenant is responsible hereunder, but Landlord shall have the right at any time to make emergency repairs without prior notice to Tenant and, provided same are the responsibility of Tenant hereunder, charge the cost thereof to Tenant, plus an administrative fee of fifteen percent (15%) for doing so, which shall be charged to Tenant as additional rent. Any costs chargeable to Tenant hereunder shall be payable forthwith on written demand as Additional Rental. 12. OBSTRUCTIONS The sidewalks, entries, passage corridors, and stairways shall not be obstructed by the Tenant, its officers, agents, servants, employees, or customers or used for any other purposes than for ingress and egress to or from the Leased Premises, and the Tenant shall -9- save the Landlord harmless from damages to persons or Property because, of any nuisance or other act which obstruct the free movements of persons to, in and from the building and Property. 13. EXPIRATION OF LEASE The present lease shall terminate ipso facto and without notice or demand on the date stated in Section 2 hereof and any continued occupation of the Premises by Tenant shall not have the effect of extending the period or of renewing the present lease for any period of time, the whole notwithstanding any provisions of law and Tenant shall be presumed to occupy the Premises against the will of Landlord who shall thereupon be entitled to make use of any and all remedies by law providing for the expulsion of Tenant and for damages, provided, however, that Landlord shall have the right at its option in the event of such continued occupation by Tenant to give to Tenant at any time written notice that Tenant may continue to occupy the Premises under a tenancy from month to month in consideration of a net rental one and a half (1.5) times the monthly Minimum Net Rentals that was payable during the year immediately preceding the expiry date of this lease, payable monthly and in advance and otherwise under the same terms and conditions as are herein set forth. The Tenant shall, at the expiration or sooner termination of the Term of this lease, peaceably surrender with all additions, alterations, changes or installations which at any time during the Tenn hereof shall be made therein or thereon, in good repair and condition, subject to reasonable wear and tear and damage by fire, lightening, tempest, structural weakness or defect, Acts of God, civil commotion, right and insurrection, cause beyond the control of the Tenant and damage for which Landlord is insured or damage for which a prudent Landlord would be insured and those repairs which are the responsibility of the Landlord pursuant to the terms hereof only. Notwithstanding the foregoing, the Tenant shall at or prior to the expiration of the Term hereof remove its movable effects and/or articles belonging to or brought upon the Leased Premises by Tenant and the Tenant shall repair any damages caused by such removal. The Tenant must forthwith remove, at Tenant's expense, all its alterations or improvements to the Leased Premises upon the written request of Landlord, unless the Landlord prefers that the whole or any part of such alterations or installations excluding movable effects and/or movable articles should remain, without any compensation whatsoever being allowed to the Tenant for same. At the expiration or sooner termination of the Term of this lease, Landlord shall have the right, at Tenant's expense, plus an administrative fee of fifteen percent (15%) for doing so, which shall be charged to Tenant as additional rent, to repair any damages caused by the Tenant or those for whom it is responsible in law to the Leased Premises and not repaired by Tenant, the whole subject to reasonable wear and tear and damage by fire, lightening, tempest, structural weakness or defect, Acts of God, civil commotion, right and insurrection, causes beyond -10- the control of the Tenant and damage for which Landlord is insured or damage for which a prudent Landlord would be insured and those repairs which are the responsibility of the Landlord pursuant to the terms hereof. Furthermore, Landlord shall have the right at Tenant's expense plus an administrative fee of fifteen percent (15%) for doing so, to remove any signage that Tenant may have left on the Building and to repair any damages caused by such removal and to restore the Building to its condition at the commencement of this Lease subject to reasonable wear and tear and damage by fire, lightening, tempest, structural weakness or defect, Acts of God, civil commotion, rights and insurrections, causes beyond the control of the Tenant and damage for which Landlord is insured or damage for which a prudent Landlord would be insured and those repairs which are the responsibility of the Landlord pursuant to the terms hereof. Notwithstanding the foregoing, the Tenant shall not have to remove the second floor of the Leased Premises, any structural reinforcement thereto, the freight elevator and its machine room. exterior walls and windows. 14. PLATE GLASS AND DOOR SIGNS Any breakage of glass or plate glass in or about the Leased Premises and any damage to signs on Tenant's doors, which are not caused by the negligence of Landlord or those for whom it is in law responsible, shall be repaired and replaced by the Tenant at its expense. 15. WAIVER The failure of the Landlord to insist upon the strict performance of any of the agreements, terms, covenants and conditions hereof shall not be deemed a waiver of any subsequent breach or default in any of such agreements, terms, covenants and conditions. 16. COMPLIANCE WITH LAWS AND REGULATIONS The Tenant shall, at its own expense, promptly comply with the requirements of every applicable statute, law and ordinance and with every applicable lawful regulation or order with respect to the removal of any encroachment placed by the Tenant, or to the condition, equipment, maintenance, or use or occupation of the Leased Premises, including the making of any alteration, addition in or to any structure upon, connected with or appurtenant to the Leased Premises, whether or not such alteration is required on account of any particular use to which the Leased Premises or part thereof may be put and whether or not such requirement, regulation or order be of a kind now existing or within the contemplation of the parties hereto; and shall comply with any applicable regulation, recommendation or order of the Canadian Fire Underwriters' Association, or any body having similar functions or of any liability or fire insurance company by which the Landlord and/or the Tenant may be insured. -11- 17. FAILURE OF TENANT TO PERFORM If the Tenant fails to pay any taxes, rates, insurance premiums or charges which it has herein covenanted to pay, and which Tenant has failed to pay within a period of ten (10) days after notice in writing from the Landlord to remedy such default, the Landlord may pay the same and shall be entitled to charge the sums so paid to the Tenant, plus an administrative fee of fifteen percent (15%) for doing so, which shall be charged to Tenant as Additional Rental, who shall pay them forthwith on demand and the Landlord, in addition to any other rights, shall have the same remedies and may take the same steps for all such sums as it might take for the recovery of rent. Such amounts so paid by the Landlord and any payments of Minimum Net Rental and/or Additional Rental when not paid on any due date as provided for herein shall bear interest from the due date to the date of payment, calculated daily at the prime rate of the Canadian Imperial Bank of Commerce, plus two percent (2%). 18. DEFAULT The following shall be considered defaults under the terms of this lease: (a) If the Tenant shall fail to pay the Landlord any instalments of Minimum Net Rental, any Additional Rental, or any other amounts owing, after it shall have become due and payable as herein provided and Tenant fails to correct such default within five (5) days after notice in writing from the Landlord; (b) If the Tenant shall assign, sublet or permit the use of the Premises by other except in the manner herein permitted; (c) If any seizure is practiced against the property of the Tenant in the Premises as a result of a judgment rendered against Tenant; (d) If the Tenant shall fail to take possession of the Premises, or if the Tenant should abandon or vacate the Premises; (e) If any insurance carried by the Landlord be cancelled in consequence of the business carried by the Tenant, or in consequence of anything brought into or stored in the Premises by the Tenant, it being agreed and understood that if the insurer of the Landlord threatens to cancel any of the Landlord's insurance with respect to the Property, the Tenant shall be immediately notified in writing; and (f) If the Tenant shall default in the performance of any of its other obligations under this lease, including without limitation the obligation to pay business and water taxes in a timely manner, or fail to effect any payment that may result in a charge, -12- lien, encumbrance, or other right on the Property, or shall violate any of the rules and regulations hereinafter set forth, or hereafter to be established by the Landlord, and such default continues for fifteen (15) days following written notice thereof from the Landlord unless such default is incapable of being remedied with due diligence within such fifteen (15) day period, in which case, if Tenant fails to commence to remedy such default within such fifteen (15) day period and thereafter to continue with due diligence the cure of such default until it is remedied. In the event of any default of the terms of this lease, this lease may be terminated ipso facto, at the option of the Landlord, upon written notice to the Tenant to such effect. It is expressly agreed that such right of termination shall be, in addition to and without prejudice to all other rights as provided by law or herein, the Landlord may re-enter and re-let the Premises to whomsoever it may choose, acting reasonably, without further notice or demand being necessary, and may recover from the Tenant all amounts due hereunder at the date of such termination, expenses of such reletting (including any repairs, decorating, alterations or improvements necessitated thereby), and rental for the six (6) months next succeeding the date of such termination, all of which shall immediately become due and payable. Thereafter, (that is, after the period for which Tenant has paid accelerated rent) the Tenant shall pay to the Landlord as liquidated damages until the end of the Term an amount equivalent to the rental provided in this lease, less the sum of the net receipts (if any), derived by the Landlord from re-letting of the Premises. As used herein, the expression "rental" shall mean the Minimum Net Rental, and the Additional Rental, and all other additional rents payable hereunder. The Tenant hereby irrevocably waives the benefit which may limit or diminish the Landlord's termination of this lease if the Tenant owes the Landlord One Hundred Thousand Dollars ($100,000.00) or more, and any right granted to the Tenant to prevent his eviction in the event of any default, nor will the payment after legal proceedings have been instituted entitle the Tenant to avoid the resiliation of the lease. 19. BANKRUPTCY AND INSOLVENCY In the event that Tenant shall be adjudicated a bankrupt or make any general assignment for the benefit of creditors, or take the benefit of any insolvency or bankruptcy act, or if a receiver or trustee be appointed for the property of the Tenant, or any major part thereof, the present lease shall automatically terminate on the occurrence of any of the aforesaid events without further notice or delay, and Landlord shall be entitled to recover all arrears of Minimum Net Rental and Additional Rental as well as six (6) months of future Minimum Net Rental, Proportionate Expense Rental and Additional Rental or such other accelerated amount that the law may at any time provide. The Tenant hereby irrevocably waives his right to repudiate this lease pursuant to section 65.2 of the Bankruptcy and Insolvency Act or any section passed to amend or replace it. -13- 20. MAINTENANCE AND REPAIRS Notwithstanding the provisions of Article 1864 of the Civil Code of the Province of Quebec, the Tenant, at its own expense shall operate, maintain and keep the Leased Premises including all facilities, equipment and services, both inside and outside, in such good order and condition, as they would be kept by a careful owner and shall promptly make all needed repairs and replacements to the Leased Premises which a careful owner would make (save and except for repairs for which Tenant is not required to contribute to Proportionate Expense Rental) including, without limitation, the water, gas, drain and sewer connections, pipes and mains, electrical wiring, water closets, sinks and accessories thereof, and all equipment belonging to or connected with the Leased Premises or used in its operation. The Tenant shall also be responsible, at its sole expense, to wash the inside and outside of the windows of the Premises and to maintain and clean the Premises daily. 21. LEASEHOLD IMPROVEMENTS The Tenant shall carry out all of the improvements and modifications required for its use of the Leased Premises including the building of a second floor and the work necessary to change the location of the premises of Fuji Photo Film Canada Inc. ("Fuji") in order for the Leased Premises to comply with the floor plans attached hereto as Schedule "A" (the "Tenant's Work"). The Tenant shall also be responsible for any structural work or modifications which are necessary to the Building as a result of the Tenant's Work. Once completed, all of the Tenant's Work will remain the property of the Landlord. The Tenant shall also be responsible to obtain all required permits to carry out said Tenant's Work. The second floor to be built by the Tenant must be at the same height as the mezzanine presently above the premises occupied by Fuji. It must be of sufficient quality to carry a minimum load of one hundred pounds (100 lbs.) per square foot, it shall have a minimum two-hour (2 hr) fire rating resistance and it shall be sufficiently insulated to be sound proof. The ceiling of the ground floor of the Leased Premises must have a minimum of eleven clear feet (11 ft.) wherever Possible. The ceiling of the second floor of the Leased Premises must have a minimum of ten clear feet (10 ft.) wherever possible. Doors throughout the Leased Premises must have a minimum of eight feet (8 ft.) in height. Windows to be built must be wherever possible approximately fifteen feet wide (15 ft.) by six feet high (6 ft.) all around, matching the glass and frame of the existing windows on the Building. The Tenant shall submit to the Landlord, for the Landlord's review and approval having regards to the first class nature and quality of the Building, the Tenant's build out plans (the "TBP") on or about March 7, 1995. Once the Landlord has approved the TBP, the -14- Tenant's Work will be carried out in a good and workmanlike manner in accordance with the approved TBP and the requirements of section 22 hereof. The Landlord agrees to pay for the cost of the Tenant's Work up to a maximum sum of One Million Seven Hundred and Fifty Thousand Dollars ($1,750,000.00), plus GST and QST thereof. If the Tenant's Work cost less than One Million Seven Hundred and Fifty Thousand Dollars ($1,750,000.00), the Landlord shall pay to the Tenant the difference within thirty (30) days of the substantial completion of the leasehold improvements. The choice of the contractor will be made by both parties, acting reasonably, from at least three contractors. The Landlord shall pay for the cost of the Tenant's Work progressively in accordance with the schedule of payments established in the winning construction bid. If the Tenant's Work costs more than One million Seven Hundred and Fifty Thousand Dollars ($1,750,000.00), the Tenant shall pay to the contractor the balance owing in accordance with the schedule of payments established in the construction bid. The Landlord warrants that the current premises of the Tenant can be connected to the Premises by networking computer cable. The Landlord further warrants that the Volunteer dormitories can be located inside the Premises without windows in accordance with Ville Saint-Laurent by-laws, regulations, directives and ordinances (subject to the condition that windows will be built all around the outside of the Leased Premises). The Tenant shall have the right to use an exterior landscaped space for the purposes of a play area for a day-care centre to be located in a location to be established by mutual consent of both parties within 500 meters of the day-care centre for the Premises, provided municipal approval is obtained for same. The Tenant will have the right to fence in this play area with a fence of 1.2 meters high and the Tenant shall have access to the play area during all hours that the day-care centre is in operation, provided municipal approval is obtained for same. 22. IMPROVEMENTS AND ALTERATIONS The Tenant shall have the right to make the Tenant's Work and any other subsequent improvements, alternations or additions (the "Work"), with the prior written consent of the Landlord, which consent shall not be unreasonably withheld, in the Leased Premises in compliance with the following conditions. (a) Tenant shall furnish to Landlord plans and specifications showing in reasonably complete detail the Work proposed to be carried out and the estimated cost thereof and Landlord shall approve or reject such plans and specifications within thirty -15- (30) days after receipt of the same. If such plans and specifications are approved, all Work shall be carried out in compliance with the same; (b) The value of the Leased Premises shall not, as a result of any Work proposed to be carried on by Tenant, be less than the value of the Leased Premises before the commencement of such Work and Landlord, acting reasonably, shall be the sole judge of such value; (c) All Work shall be carried out as expeditiously and diligently as possible, and in a good Workmanlike manner and in compliance with all applicable permits, authorizations and building and zoning by-laws and with all regulations and requirements of all competent authorities having jurisdiction over the Leased Premises; using first quality materials. (d) The Leased Premises shall at all times be free of all Workmen's and suppliers' hypothecs and other similar hypothecs and charges; (e) Tenant shall maintain Workmen's Compensation insurance covering all persons employed in connection with the Work and shall produce evidence of such insurance to Landlord and shall also maintain such general liability insurance for the protection of Landlord and Tenant as Landlord may reasonably require; (f) All Work, when completed, shall be comprised in, and form part of the Leased Premises and shall be subject to all the provisions of this lease and Tenant shall not have any right to claim compensation therefor and the same shall not be removed by Tenant on termination of this lease. (g) Tenant shall pay the Landlord a sum equal to all its out-of-pocket expenses with respect to the review and supervision of the Work, together with an administration fee of fifteen percent (15%) of such out-of-pocket expenses. The Tenant shall pay to the Landlord the amount of any increase for any Real Estate Taxes or Capital Taxes to the extent that such increase is attributable to any action by the Tenant under this Section or any of the Tenant's Work set out in Section 21 hereof. No repairs, alterations, additions, decorations or improvements to the Premises by or on behalf of the Tenant shall be permitted which may weaken or endanger the structure, adversely affect the condition or operation of the Premises, or the building, or diminish the value thereof, or restrict or reduce the Landlord's coverage for insurance purposes. 23. RIGHT OF FIRST REFUSAL -16- The Tenant shall have the right of first refusal to lease any vacant space in the Building during the term of the Lease on the same terms and conditions as offered by another party which the Landlord is prepared to accept. The Landlord shall submit to the Tenant any offer to lease received from any party and the Tenant shall have a period of ten (10) days thereafter in which to exercise its right of first refusal with respect thereto. If the Tenant fails to notify the Landlord of its desire to exercise a right of first refusal in the time permitted therefore, the Landlord shall be permitted to lease the space on the terms and conditions contained in the offer submitted to the Tenant to the party in question for a period of sixty (60) days thereafter. If the Landlord fails to lease the space in question within such sixty (60) day period or should the terms and conditions be changed, the offer shall, once again, be subject to the Tenant's right of first refusal. 24. UNDERSTANDING OF THIS LEASE Notwithstanding the fact that the Landlord drafted this lease and submitted it to the Tenant, the Tenant recognizes that the essential stipulations of this lease were negotiable and that he understands all of its stipulations and that the Landlord gave him adequate explanations with respect to the terms and conditions of this lease. 25. DAMAGE AND DESTRUCTION In the event that the Leased Premises shall be destroyed or damaged, then: (a) if, in the opinion of Landlord, the damage or destruction is such that the Leased Premises are rendered wholly unfit for occupancy or it is impossible or unsafe to use and occupy them, and if in either event the damage, in the further reasonable opinion of Landlord (which shall be given by written notice to Tenant within sixty (60) days of the happening of such damage or destruction) cannot be repaired with reasonable diligence within one hundred and twenty (120) days from the giving of such notice, either Landlord or Tenant may within five (5) days next succeeding the giving of Landlord's opinion as aforesaid, terminate this lease by giving to the other notice in writing of such termination, in which event the Term of this lease shall cease and be at an end as of the date of such destruction or damage and the rent and all other payments for which Tenant is liable under the Terms of this lease shall be apportioned and paid in full to the date of such destruction or damage. In the event that neither Landlord nor Tenant so terminates this lease, rent and all other payments for which Tenant is liable hereunder shall abate from the date of the happening of the damage until the damage shall be made good to the extent of enabling Tenant to use and occupy the Leased Premises; (b) if the damage be such that the Leased Premises are wholly unfit for occupancy, or if it is impossible or unsafe to use or occupy them but if in either event the -17- damage, in the opinion of Landlord (which shall be given to Tenant within sixty (60) days from the happening of such damage) can be repaired with reasonable diligence within one hundred and twenty (120) days of the giving of such notice, rent and all other payments for which Tenant is liable hereunder shall abate from the date of the happening of the damage until the damage shall be made good to the extent of enabling Tenant to use and occupy the Leased Premises; (c) if, in the opinion of Landlord, the damage can be made good as aforesaid within one hundred and twenty (120) days of the giving of such notice, and the damage is such that the Leased Premises are capable of being partially used for the purposes for which leased, until such damage has been repaired, rent and all other payments for which Tenant is liable hereunder shall abate in the proportion that the part of the Leased Premises rendered unfit for occupancy bears to the whole of the Leased Premises. In the event that the building is partially destroyed or damaged so as to affect twenty-five percent (25%) or more of the rentable area of the building containing the Leased Premises, or in the opinion of Landlord the building is rendered unsafe, and whether or not the Leased Premises are affected, and in the reasonable opinion of Landlord (which shall be given by written notice to Tenant within sixty (60) days of the happening of such destruction), cannot be repaired with reasonable diligence within one hundred and twenty (120) days of the giving of such notice, Landlord may within five (5) days next succeeding the giving of Landlord's opinion as aforesaid, terminate this lease by giving to Tenant notice in writing of such termination, in which event the Term of this lease shall cease and be at an end as of the date of such destruction or damage and the rent and all other payments for which the Tenant is liable under the Terms of this lease shall be apportioned and paid in full to the date of such destruction or damage. Nothing herein contained shall oblige Landlord to repair or reconstruct any leasehold alterations or improvements made to the Premises. On the contrary, all improvements in and to the Premises shall be the responsibility of Tenant, who shall be obliged to repair, replace and re-fixture them to a standard at least the equivalent of that which existed prior to the date of damage and destruction. For greater clarity, it is agreed by the parties that rent and all other payments for which Tenant is liable hereunder shall abate as provided for in this section until the earlier of the two (2) following dates: i. the date on which the Tenant begins to use and occupy the Leased Premises to carry on its business therein after it has substantially completed its leasehold improvements to the Premises; -18- ii. ninety (90) days after the Landlord has completed its repairs to the Property and the Premises to the extent set out herein. Despite anything contained in this lease to the contrary, and without limiting Landlord's right or remedies hereunder, if more than twenty-five percent (25%) of the leasable area of the Property is damaged or destroyed, by reason of any cause in respect of which there are no proceeds of insurance available to Landlord despite the fact that Landlord has insured as a reasonably prudent landlord of a similar property, or if the proceeds of insurance are insufficient to pay Landlord for the cost of rebuilding or making fit the Property by at least Two Hundred and Fifty Thousand Dollars ($250,000.00) in excess of the deductible and despite the fact that Landlord has insured as a reasonably prudent landlord of a similar property, or any part thereof, or if any mortgagee does not consent to the payment to Landlord of such proceeds for such purpose, or if the Term of the lease which remains is less than twenty-four (24) months, then Tenant agrees that Landlord may, without obligation or liability to Tenant, terminate this lease by three (3) months written notice to Tenant, and all rents shall be adjusted as of then, and Tenant shall vacate and surrender the leased premises on such termination date. Notwithstanding anything to the contrary contained in this Lease, the Landlord releases and waives any and all claims for damages against the Tenant and those for whom Tenant is in law responsible with respect to occurrences insured or to be insured by the Landlord, and for which the Landlord receives insurance proceeds (or would have received insurance proceeds had it acted as a prudent administrator), whether or not such claims arise as the result of the negligence of the Tenant or of those for whom the Tenant is in law responsible and all policies of insurance taken out by the Landlord with respect to the Property shall provide that the insured shall not have any right of subrogation against the Tenant or any of its employees, agents or contractors. Notwithstanding the foregoing, the Landlord shall not be permitted to terminate this lease as a result of a damage or destruction unless concurrently therewith, it also terminates the leases of all other tenants of the Property. Should the Landlord rebuild the Property within a period of one (1) year from the date of the damage or destruction, Tenant shall have an option for thirty (30) days after being notified of Landlord's decision to rebuild to lease Premises similar to the Premises for the balance of the term after the damage or destruction and otherwise on the same terms and conditions as contained in this lease. 26. INSURANCE REQUIREMENTS Tenant shall not do or commit any act upon the Leased Premises or bring into or keep upon the premises any article which will affect the fire risk or increase the rate of fire insurance or other insurance on the building. The Tenant shall be entitled to use those solvents and materials which are customarily used in the carrying on of its business. The -19- Tenant shall from time to time provide the Landlord with a list of such solvents and materials in order that the Landlord shall be able to advise its insurer accordingly. Tenant shall comply with the rules and requirements of the Insurers' Advisory Organization of Canada or any successor body, and with the requirements of all insurance companies having policies of any kind whatsoever in effect covering the building, including policies insuring against tort or delictual liability. Subject to the foregoing, in no event shall any inflammable material, except for kinds and quantities required for ordinary office occupancy and permitted by the insurance policies covering the building, or any explosives or radioactive material whatsoever, be taken into the Leased Premises or retained therein. Should the rate of any type of insurance on the building be increased by reason of any violation of this lease by Tenant, Landlord, in addition to all other remedies, shall pay the amount of such increase, and the amount so paid shall become due and payable immediately by Tenant and collectible as Additional Rental. Tenant shall take out and keep in force during the Term of this lease comprehensive general liability insurance in amounts and with policies in form satisfactory from time to time to Landlord and with insurers reasonably acceptable to Landlord, the comprehensive general liability insurance in no event to be for less than five million dollars ($5,000,000.00), inclusive limits and all risks insurance covering furniture, fixtures and improvements in an amount equal to the full insurable value thereof. Copies of each insurance policy shall forthwith upon execution be delivered to Landlord, at the request of the Landlord. Each such policy shall name Landlord as an additional insured as its interest may appear and the comprehensive general liability policy shall contain a cross liability clause. The cost of premium for each and every such policy shall be paid by Tenant. Tenant shall obtain form the insurers under such policies, undertakings to notify Landlord in writing at least ten (10) days prior to any cancellation thereof. Tenant agrees that if Tenant fails to take out or to keep in force such insurance and Tenant had failed to remedy such default within two (2) days after written notice from Landlord specifying such default, Landlord will have the right to do so and to pay the premium therefor and in such event Tenant shall repay to Landlord the amount paid as premium, plus fifteen percent (15%) administration fee for doing so, which repayment shall be collectible as Additional Rental payable on the first day of the next month following the said payment of Landlord. 27. CANCELLATION OF INSURANCE If any insurance policy on the Property or any part of it is cancelled or threatened by the insurer to be cancelled, or refused to be renewed, or if the coverage under it is reduced in -20- any way by the insurer because of the use or occupation of any part of the Leased Premises by the Tenant or by any occupant of the Leased Premises, and if the Tenant fails to remedy the condition giving rise to the cancellation, threatened cancellation or reduction of coverage within forty-eight (48) Working hours after notice by the Landlord, the Landlord may, either: (a) re-enter and take possession of the Leased Premises immediately by leaving upon the Leased Premises a notice of its intention to do so upon which the Landlord will have the same rights and remedies that are available to him under this lease or in virtue of the general law; or, (b) enter upon the Leased Premises and remedy the condition giving rise to the cancellation, threatened cancellation or reduction of coverage and the Tenant will immediately pay the costs and expenses to the Landlord, together with a fee of fifteen percent (15%) of such costs and expenses representing the Landlord's overhead, which costs and expenses may be collected by the Landlord as Additional Rent and the Landlord will not be liable for any damage or injury caused to any Property of the Tenant or others located on the Leased Premises as the result of the entry. Such an entry by the Landlord is not a re-entry or a breach of any covenant for quiet enjoyment. Tenant will pay the amount of any increase in insurance premiums on the whole of the Property of which the Leased Premises form part, if such increase is caused by Tenant's operations in the Leased Premises. Tenant covenants that nothing will be done or omitted to be done whereby any policy shall be cancelled or the Leased Premises rendered uninsurable. 28. SUBORDINATION The Landlord declares that it may assign its rights under this lease to a lending institution as collateral security for a loan to the Landlord and in the event that such an assignment is given and executed by the Landlord and notification thereof is given to the Tenant by or on behalf of the Landlord, it is expressly agreed between the Landlord and Tenant that this lease shall not be cancelled or modified for any reason whatsoever without the consent in writing of such lending institution. Tenant hereby covenants and agrees that it will and whenever reasonably required by Landlord and at Landlord's expense, consent to and become a party to any instrument or instruments permitting a mortgage, trust deed or hypothec: to be placed on the Property, or any part thereof which the Leased Premises are a part as security for any indebtedness covered by the said trust deed, mortgage or hypothec in order to subordinate this lease to the said trust deed, mortgage or hypothec, provided that any trust deed, mortgage or -21- hypothec shall provide that Tenant's peaceful possession of the Premises shall not be disturbed as long as it does not default in accordance with the provisions hereof. 29. ATTORNEY The Tenant will, upon request of the Landlord or the mortgagee, hypothecary creditor or any person having an interest in the project, execute and deliver promptly those instruments and certificates referred to in Section 30 above which are requested by the Landlord. However, if ten (10) days after the date of request by the Landlord the Tenant has not executed and delivered them, the Tenant hereby irrevocably appoints the Landlord as the Tenant's attorney with full power and authority to execute and deliver in the name of the Tenant the instruments and certificates required. 30. INDEMNIFICATION Except in the event of negligence of Landlord or those for whom it is in law responsible, the Landlord shall not be liable nor responsible in any way for any injury of any nature whatsoever that may be suffered or sustained by the Tenant or any employee, agent or customer of the Tenant or any other person who may be upon the Leased Premises or for any loss of or damage to any property belonging to the Tenant or to its employees or to any other person while such property is on the leased Premises and in particular (but without limiting the generality of the foregoing) the Landlord shall not be liable for any damage or damages of any nature whatsoever to any such property caused by the failure, by reason of a breakdown or other cause, to supply adequate drainage, snow or ice removal, or by reason of the interruption of any public utility or service or in the event of steam, water, rain or snow which may leak into, issue or flow from any part of the building or from the water, steam, sprinkler, or drainage pipes or plumbing Works of the same, or from any other place or quarter or for any damage caused by anything done or omitted by any tenant, but the Landlord shall use all reasonable diligence to remedy such condition, failure or interruption of service, after notice of same, when it is within its power and obligation so to do. Nor shall the Tenant be entitled to any abatement of Minimum Net Rental and Additional Rental in respect of any such condition, failure or interruption of service. The Tenant will indemnify and save harmless the Landlord from and against all fines, liability, damage suits, claims, demands and actions of any kind or nature which the Landlord shall or may become liable for or suffer by reason of any breach, violation or non-performance by the Tenant of any covenant, term or provision hereof or by reason of any injury (including death resulting at any time therefrom) or damage to property occasioned to or suffered by any person or persons including the Landlord by reason of any such breach, violation or non-performance or of any wrongful act, neglect, or default on the part of the Tenant or any of its employees or officers. -22- The Landlord will indemnify and save harmless the Tenant from and against all fines, liability, damage, suits, claims, demands and actions of any kind or nature which the Tenant shall or may become liable for or suffer by reason of any breach, violation or non performance by the Landlord of any covenant, term or provision hereof or by reason of any injury (including death resulting at any time therefrom) or damage to Property occasioned to or suffered by any person or persons including the Tenant by reason of any such breach, violation or non-performance of any wrongful act, neglect or default on the part of the Landlord or any of its employees or officers. Notwithstanding anything to the contrary contained in this Lease, the Tenant releases and waives any and all claims for damages against the Landlord and those for whom Landlord is in law responsible with respect to occurrences insured or to be insured by the Tenant, and for which the Tenant receives insurance proceeds or for which it would have received insurance proceeds had it acted as a prudent administrator, whether or not such claims arise as the result of the negligence of the Landlord or of those for whom the Landlord is in law responsible and all policies of insurance taken out by the Tenant shall provide that the insured shall not have any right of subrogation against the Landlord or any of its employees, agents or contractors. 31. CONDITION OF PREMISES The Tenant represents that the Premises have been examined by the Tenant and save and except for any latent defects, the Tenant accepts the same in the condition or state which they now are, without representation or warranty, expressed or implied, in fact or by law, by the Landlord, and without recourse to the Landlord as to the nature, condition or usability thereof. 32. OUTSIDE AREAS The Tenant shall not use any part of the exterior parking and loading areas or any other areas outside the Leased Premises for any purpose other than parking shipping or receiving in the areas designated by the Landlord for same save and except for the day care centre mentioned in section 21 hereof, 33. PERMITS, ETC The Tenant shall obtain all necessary permits and licenses required for the occupancy and carrying on of its business. 34. HEATING Tenant shall suitably heat the Leased Premises at its own cost and expense. -23- 35. SIGNS The Tenant shall be entitled to install on the upper part of the Building such signs as are normally installed in connection with its business, provided such signs comply with municipal by-laws and are approved by the Landlord in accordance with its criteria, which approval shall not be unreasonably withheld. Installation, if approved, will be at the sole expense of the Tenant. At the expiration of this lease, Tenant shall remove its signs at its own cost. Tenant shall be responsible for any and all damages incurred by the removal of its signs, and shall restore that portion of the building or the Property to its original condition, subject to normal wear and tear and damage by fire, lightening tempest, structural weakness or defects, Acts of God, civil commotion, rights and insurrections, causes beyond the control of Tenant and damage for which the Landlord is insured or damage for which a prudent Landlord would be insured and those repairs which are the responsibility of the Landlord pursuant to the terms hereof. 36. RIGHT OF ENTRY Upon a twenty-four (24) hour notice, the Landlord shall have the right to exhibit the Property from time to time to any prospective mortgagee, purchaser or Tenant at all reasonable hours. The Tenant hereby renounces to Article 1885 of the Civil Code. Landlord shall have the right at all times during the Term of this lease to place upon the Leased Premises a notice of reasonable dimensions and reasonably placed so as not to interfere with the business of Tenant, stating that the Leased Premises are for sale and, for six (6) months prior to the end of the Term, Landlord shall have the right to place upon the Leased Premises a similar notice that the Leased Premises are for rent and Tenant win not remove such notice or knowingly permit same to be removed. 37. DISTURBANCE The Tenant will not hold the Landlord in any way responsible for any damages or annoyance which the Tenant may sustain through the fault of any Tenant or Tenants who occupy any premises adjacent to, near or above the Leased Premises unless Landlord does not use its reasonable efforts in order to stop or prevent any such further damage or annoyance, and not use the Leased Premises for any purpose, notwithstanding anything stated herein, which may cause noise, disturbance or noxious odours, to the discomfort of other tenants and neighbours, and renounces to any claims he may have or acquire against the Landlord under Article 1861 of the Civil Code of the Province of Quebec, except to the extent hereinabove otherwise provided. 38. NOTICE AND DEMANDS -24- Any notice or demand given by the Landlord to the Tenant shall be deemed to be duly given when served upon the Tenant personally, or when mailed (registered) to the Tenant at the address of the premises. The Tenant elects domicile at ______ for the purpose of service of all notices, writs of summons or other legal documents in any suit at law, action or proceeding which the Landlord may take under this lease. Any notice or demand given by the Tenant to the Landlord shall be deemed to be duly given when served upon the Landlord personally or when mailed (registered) to the Landlord at the address designated by the Landlord for purposes of payment of rent hereunder. 39. RULES AND REGULATIONS The Landlord shall have the right at its discretion to make reasonable rules and regulations not contrary to the spirit and intent of this lease which may from time to time be needful for the safety, care, cleanliness and proper administration of the Property including the Leased Premises, and for the preservation of good order therein, and the same be observed and performed by the Tenant and by the clerks, servants, employees, agents and customers of the Tenant, and all such rules and regulations now or hereafter to be established by the Landlord as herein provided shall form part of this lease as if now set forth at length herein. 40. PUBLICATION The parties agree that this Lease is a confidential document which cannot be shown to any third party. The rights resulting from the present Lease may be published against the title to the Property, by way of a summary to which shall be annexed an abbreviated form of the Lease, which shall not contain any financial information in order to keep such financial information from the public. The said abbreviated lease and summary forms shall be prepared and completed by the Tenant who shall submit them for prior written approval by the Landlord or its legal counsel prior to depositing same at the registry office for publication. The provisions of this Lease shall take precedence over the provisions of the abbreviated lease which shall be executed by the parties for publication reasons only. The publication costs and the costs for providing copy of the said summary to the Landlord shall also be at the Tenant's expense. Should this Lease be published by way of a summary, the Tenant shall, at the termination of the Lease, cause the registration of such summary to be cancelled at its expense, failing which the Landlord will have the right to cause such cancellation and charge the Tenant with the cost of same. 41. WASTE OR GARBAGE -25- The Tenant agrees that it will keep the Leased Premises in a clean and tidy condition and will not permit waste paper, garbage, ashes, waste, debris or other objectionable material to accumulate thereon. Tenant shall arrange for removal and disposal of waste or garbage at its sole expense. 42. ODOURS, DUST OR NOISE The Tenant warrants that no noxious odours, dust or unreasonable noise will emanate from the Leased Premises as a result of the operations conducted by the Tenant therein and Tenant further covenants that it will not cause or maintain any nuisance in, at or on the Leased Premises and/or the Property. Accordingly, the Tenant agrees that should such noxious odour, dust, or noise conditions exist, it will, at its own expense, take such steps as may be necessary to rectify the same, provided further that if the Tenant shall fail to commence to do so within forty-eight (48) hours and complete the same within a reasonable time after notice is received by the Tenant from Landlord, then the Landlord may, at its option and without prejudice to its other rights or recourses: (a) notify Tenant that it must shut down the offending operation in the Leased Premises; and (b) Landlord may proceed forthwith to take reasonable measures to correct the situation and the Landlord shall be entitled to cover the cost thereof from the Tenant forthwith upon demand, plus an administrative fee of fifteen percent (15%) for doing so, which shall be charged to Tenant as additional rent, such cost to be considered as Additional Rental hereunder. 43. MANAGEMENT OF PROPERTY The Landlord shall have the right to have the Property managed by a property management corporation that it designates in writing from time to time. 44. CUMULATIVE REMEDIES No reference to or exercise of any specific right or remedy by the Landlord shall preclude the Landlord from or prejudice the Landlord in exercising any other right under this lease in pursuing any other remedy or maintaining any action to which it may otherwise be entitled at law. 45. ACCORD AND SATISFACTION No payment by the Tenant or receipt by the Landlord of a lesser amount other than the monthly payment of Minimum Net Rental is to be construed as other than on account of -26- the earliest stipulated Minimum Net Rental and/or Property Expense rental and/or Additional Rental nor is any endorsement or statement on any cheque or any letter accompanying any cheque or payment as rent to be considered in acknowledgment of full payment or an accord and satisfaction, and the Landlord may accept payment and cash cheques without prejudice to the Landlord's right to recover the balance of the rent or pursue its other remedies. Except in case of emergency, should the Landlord be required to do any Work in the Premises, it shall notify the Tenant of the nature and the location of same and the parties shall agree on mutually convenient time for the performance of same. 46. ACCESS Upon a twenty-four (24) hour notice (except in an emergency), the Landlord shall have the right of access to the Leased Premises only during business hours except in an emergency, to perform work necessary for the Building or other tenants in the Building, the Tenant renouncing any claim to any indemnity or diminution of rent provided the same be carried out with reasonable diligence. 47. FLOOR LOADING Tenant shall not bring upon the Leased Premises or any part thereof any machinery, equipment, article or thing that by reason of its weight or size might damage the Leased Premises and win not at any time overload the floors of the Leased Premises and if any damage is caused to the Leased Premises by any machinery, equipment, article or thing or by overloading or by any act, neglect or misuse on the part of Tenant or any of its servants, agents or employees or any person having business with Tenant, Tenant will forthwith pay to Landlord the cost of making good the same. 48. OPTION TO RENEW Provided the Tenant is not in default in virtue of this Lease, Tenant shall have the option, upon giving a written notice to Landlord not less than twelve (12) months prior to expiration of the Term of any renewal period, of renewing the Term of this Lease for three (3) additional periods of five (5) years each. The Lease shall be renewed on the same terms and conditions, except for the Minimum Net Rental which shall be the fair market rental for similar premises; in the same geographic area for similar renewal terms. 49. SUCCESSORS AND ASSIGNS This lease binds and benefits the parties and their respective heirs, executors, administrators, successors and assigns as limited in this lease. -27- 50. DESCRIPTIVE HEADINGS The descriptive headings of this lease are inserted for convenience in reference for possible registration purposes only and do not constitute a part of this lease. 51. INTERPRETATION This lease shall be construed and governed by the laws of the Province of Quebec. Should any of the provisions of this lease and/or its conditions be illegal or not enforceable under the laws of the Province of Quebec, it or they shall be considered severable and the lease and its conditions shall remain in force and be binding upon the parties as though the said provisions or conditions had never been included. 52. WAIVER OF RESPONSIBILITY Landlord and Tenant shall not be liable for failure or delays in performing any of their obligations hereunder, should such failure or delays be caused by fire or other casualty, war, disaster, riots, strikes, walk-outs, acts of God, or other causes, except monetary inability beyond Landlord's or Tenant's reasonable control. 53. LANGUAGE The Tenant hereby confirms that it has requested that the present document be drafted in the English language. Le Locataire certifie qu'il a requis que les presentes soient redigees en anglais. EXTRACT OF A RESOLUTION OF THE BOARD OF DIRECTORS OF PHOENIX INTERNATIONAL LIFE SCIENCES INC. CONSENTED TO BY ALL OF THE DIRECTORS OF THE COMPANY AS OF THE THIRD (3rd) DAY OF MARCH 1995. - -------------------------------------------- BE IT RESOLVED AND IT IS HEREBY RESOLVED: THAT this Corporation lease from Liberty Sites Ltd. part of the building situated at 4850 Dobrin and 4901 Levy streets, in the City of St. Laurent, Province of Quebec, containing an office and warehouse area of approximately seventy thousand nine hundred and eighty square feet (70,980 sq. ft.) for a term of fifteen (15) years commencing on July 1, 1995, the whole pursuant to the terms of a draft lease approved by the directors; THAT Jean-Yves Caloz, secretary of the Corporation, be and she is hereby authorized to execute the lease and to furthermore sign such further documents and do such things that may be necessary or incidental in connection with the foregoing. -28- TRUE copy of a resolution of Phoenix International Life Sciences Inc. adopted as of the third (3 rd) day of March 1995, in full compliance with the relevant provisions of the articles and by-laws of the Corporation, which resolution is presently in force, without amendment. CERTIFIED in St. Laurent as of the third (3d) day of March 1995. Name: /S/ JEAN-YVES CALOZ -------------------- Jean-Yves Caloz, Secretary -29- EX-10.17 31 EXHIBIT 10.17 Exhibit 10.17 AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-GROSS (DO NOT USE THIS FORM FOR MULTI-TENANT PROPERTY) 1. Basic Provisions ("Basic Provisions") 1.1 Parties: This Lease ("Lease"), dated for reference purposes only, September 30, 1998 is made by and between Jamboree Associates, a joint venture ("Lessor") and Institute for Biological Research and Development, Inc., a Delaware corporation ("Lessee"), (collectively the "Parties", or individually a "Party"). 1.2 Premises: That certain real property, including all improvements therein to or to be provided by Lessor under the terms of this Lease, and commonly known by the street address of 2525 Campus Drive, Irvine, located in the County of Orange, State of California and generally described as (describe briefly the nature of the property) the 30,200 rentable square foot building commonly known as 2525 Campus Drive ("Premises"). (See Paragraph 2 for further provisions.) 1.3 Term: Ten (10) years and 0 months ("Original Term") commencing [SEE ADDENDUM] ("Commencement Date") and ending [SEE ADDENDUM] ("Expiration Date"). (See Paragraph 3 for further provisions). 1.4 OMITTED 1.5 Base Rent: $27,482,00 per month ("Base Rent"), payable on the 1st day of each month commencing in the 1st month of the Original Term [SEE ADDENDUM] (See Paragraph 4 for further provisions.) /X/ If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 Base Rent Paid Upon Execution: $27,482.00 as Base Rent for the 1st month of the Original Term. 1.7 Security Deposit: $26,274.00 ("Security Deposit"). (See Paragraph 5 for further provisions.) 1.8 Permitted Use: office and lawful related purposes (See Paragraph 6 for further provisions.) 1.9 Insuring Party: Lessor is the "Insuring Party." $______ is the "Base Premium" (See Paragraph 8 for further provisions.) 1.10 Real Estate Brokers: The following real estate brokers (collectively, the "Brokers") and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes): represents - ---------------------------------------------------------------------- / / Lessor exclusively ("Lessor's Broker"); / / both Lessor and Lessee, and MARCUS & MILLICHAP represents - ---------------------------------------------------------------------- /X/ Lessee exclusively ("Lessee's Broker"); / / both Lessee and Lessor (See Paragraph 15 for further provisions.) 1.11 OMITTED 1.12 Addenda. Attached hereto is an Addendum or Addenda consisting of Paragraphs 49 through 66 and Exhibits "A", "B", "C" and "D" all of which constitute a part of this Lease. 2. Premises. 2.1 Letting. Lessor hereby leases to Lessee and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set -1- forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental, is an approximation which Lessor and Lessee agree is reasonable and the rental based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 Condition. Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date and warrants to Lessee that the existing plumbing, fire sprinkler system, lighting, air conditioning, heating, and loading doors, if any, in the Premises, other than those constructed by Lessee, shall be in good operating condition on the Commencement Date. If a non-compliance with said warranty exists as of the Commencement Date, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. 2.3 Compliance with Covenants, Restrictions and Building Codes. Lessor warrants to Lessee that the improvements on the Premises comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alternations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has been advised by the Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, compliance with Applicable Law, as defined in Paragraph 6.3) and the present and future suitability of the Premises for Lessee's intended use; (b) that Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to Lessee's occupancy of the Premises and/or the term of this Lease, and (c) that neither Lessor, nor any of Lessee's agents, has made any oral or written representations or warranties with respect to the said matters other than as set forth in this Lease. 2.5 OMITTED 3. Term. 3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 Early Possession. [SEE INSERT 1A] the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease, however, (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term. 3.3 OMITTED 4. Rent. 4.1 Base Rent. Lessee shall cause payment of Base Rent and other rent or charges, as the same may be adjusted from time to time, to be received by Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of the calendar month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. -2- 5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit moneys with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any moneys to be paid by Lessee under this Lease. 6. Use. [SEE ADDENDUM] 6.1 Use. Lessee shall use and occupy the Premises only for the purposes set forth in Paragraph 1.8 or any other use which is comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to, neighboring premises or properties. 6.2 Hazardous Substances. (a) Reportable Uses Require Consent. The term "Hazardous Substance" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in, on or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority. Reportable Use shall also include Lessee's being responsible for the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Law requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but in compliance with all Applicable Law, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of Lessee's business permitted on the Premises, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to the use or presence of any Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonably discretion, deems necessary to protect itself, the public, the Premise and the environment against damage, contamination or injury and/or liability therefrom or therefor, including, but not limited to, the installation (and removal on or before Lease expiration or earlier termination) of -3- reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) Duty to Inform Lessor. if Lessee knows, or has reasonably cause to believe, that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action or proceeding given to, or received from, any governmental authority or private party, or persons entering or occupying the Premises, concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in, on, or about the Premises, including but not limited to all such documents as may be involved in any Reportable Uses involving the Premises. (c) Indemnification. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorney's and consultant's fees arising out of or involving any Hazardous Substance or storage tank brought onto the Premises by or for Lessee or under Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultant's and attorneys' fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No terminating, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances or storage tanks, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 Lessee's Compliance with Law. Except as otherwise provided in this Lease, Lessee shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "Applicable Law," which term is used in this Lease to include all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, relating in any manner to Lessee's specific use of the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill or release of any Hazardous Substance or storage tank), now in effect or which may hereafter come into effect, and whether or not reflecting a change in policy from any previously existing policy. Lessee shall, within ten (10) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information [INSERT 2A] including, but not limited to, permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Law specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Law. 6.4 Inspection; Compliance. Lessor and Lessor's Lender(s) (as defined in Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to employ experts and/or consultants in connection therewith and/or to advise Lessor with respect to Lessee's activities, including, but not limited to the installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance or storage tank on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease, violation of Applicable -4- Law, or a contamination, caused or materially contributed to by Lessee is found to exist or be imminent. In any such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. Maintenance; Repairs; Utility Installations; Trade Fixtures and Alterations. 7.1 Lessee's Obligations. (a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty as to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc.), 7.2 (Lessor's obligations to repair), 9 (damage and destruction), 14 (condemnation) [INSERT 2B] Lessee shall, at Lessee's sole cost and expense and at all times, keep the interior of the Premises and every part thereof in good order, condition and repair, (whether or not such portion of the Premises requiring repair, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, without limitation the generality of the foregoing, all interior surfaces of walls, ceilings, floors, windows and doors. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on under or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of, the Premises, the elements surrounding same, or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance and/or storage tank brought onto the Premises by or for Lessee or under its control. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. (b) Lessee shall, at Lessee's sole cost and expense [INSERT 3A] 7.2 Lessor's Obligations. Upon receipt of written notice of the need for such repairs and subject to Paragraph 13.5 and except for damage by any negligent or intentional act or omissions of Lessee, Lessee's employees, suppliers, shippers, customers, or invitees, in which event Lessee shall repair the damage, Lessor shall, subject to reimbursement pursuant to paragraph 53 of the Addendum, keep the foundations, exterior roof and structural aspects of the Premises [INSERT 3B] in good order, condition and repair. Lessor shall not, however, be obligated to paint the exterior surface of the exterior walls or to maintain the windows, doors or plate glass or the interior surface of exterior walls. Lessor shall not, in any event, have any obligation to make any repairs until Lessor receives written notice of the need for such repairs. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises. Lessee and Lessor expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease with respect to, or which affords Lessee the right to make repairs at the expense of Lessor or to terminate this Lease by reason of, any needed repairs. [INSERT 3BB] 7.3 Utility Installations; Trade Fixtures; Alterations. (a) Definitions; Consent Required. The term "Utility Installations" is used in this Lease to refer to all carpeting, window coverings, air lines, power panels, electrical distribution, security, fire protection systems, communication systems, lighting fixtures, heating, ventilating, and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements on the Premises from that which are provided by Lessor under the terms of this Lease, other than Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility -5- Installations to the interior of the Premises (excluding the roof), as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during the term of this Lease as extended does not exceed $25,000. (b) Consent. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with proposed detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities, (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon, and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and in compliance with all Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. Lessor may (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $10,000 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor under Paragraph 36 hereof. (c) Indemnification. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien claim or demand indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorney's fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. 7.4 Ownership; Removal; Surrender; and Restoration. (a) Ownership. Subject to Lessor's right to require their removal or become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Additions made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon and be surrendered by Lessee with the Premises. (b) Removal. Unless otherwise agreed in writing, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or earlier termination of this Lease, notwithstanding their installation may have been consented to by Lessor. lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent of Lessor. [INSERT 3C] -6- (c) Surrender/Restoration. [INSERT 3D] Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, with all of the Improvements, parts and surfaces thereof clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified in writing by Lessor, the Premises, as surrendered, removal of Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil material or ground water contaminated by Lessee, all as may then be required by Applicable Law and/or good practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. Insurance; Indemnity. 8.1 Payment of Premium Increases. (a) Lessee shall pay to Lessor any insurance cost increase ("Insurance Cost Increase") occurring during the term of this Lease. "Insurance Cost Increase" is defined as any increase in the actual cost of the insurance required under Paragraph 8.2(b), 8.3(a) and 8.3(b). ("Required Insurance"), over and above the Base Premium, as hereinafter defined, calculated on an annual basis. "Insurance Cost Increase" shall include, but not be limited to, increases resulting from the nature of Lessee's occupancy, any act or omission or Lessee, requirements of the holder of a mortgage or deed of trust covering the Premises, increased valuation of the Premises, and/or a premium rate increase. If the Parties insert a dollar amount in Paragraph 1.9, such amount shall be considered the "Base Premium." In lieu thereof, if the Premises have been previously occupied, the "Base Premium" shall be the annual premium applicable to the Calendar Year 1994. If the Premises have never been occupied, the "Base Premium" shall be the lowest annual premium reasonably obtainable for the Required Insurance as of the commencement of the Original term, assuming the most nominal use possible of the Premises. In no event, however, shall Lessee be responsible for any portion of the premium cost attributable to liability insurance coverage in excess of $1,000,000 procured under Paragraph 8.2(b) (Liability Insurance Carried by Lessor). [INSERT 3DD] (b) Lessee shall pay any such Insurance Cost increase to Lessor after receipt by Lessee of a copy of the premium statement or other reasonable evidence of the amount due. [INSERT 3E] If the insurance policies maintained thereunder cover other property besides the Premises, Lessor shall also deliver to Lessee a statement of the amount of such Insurance Cost Increase attributable only to the Premises showing in reasonable detail the manner in which such amount was computed. Premiums for policy periods commencing prior to, or extending beyond, the term of this Lease shall be prorated to coincide with the corresponding Commencement or Expiration of the Lease Term. 8.2 Liability Insurance. (a) Carried by Lessee. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee and Lessor (as an additional insured) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" Endorsement and contain the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall no, however, limit the -7- liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) Carried by Lessor. In the event Lessor is the Insuring Party, Lessor may [INSERT 4A] also maintain liability insurance described in Paragraph 8.2(a) above. In addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 Property Insurance - Building, Improvements and Rental Value. (a) Building and Improvements. The Insuring Party shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds of trust or ground leases on the Premises ("Lender(s)"), insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by Lenders, but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. Lessee Owned Alterations and Utility Installations shall be insured by Lessee under Paragraph 8.4 If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Premises required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered cause of loss, but not including plate glass insurance. Said policy or policies shall also contain and agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. (b) Rental Value. Lessor shall, in addition, obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full rental and other charges payable by Lessee to Lessor under this Lease foe one (1) year (including all real estate taxes, insurance costs, and any scheduled rental increases). Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount f coverage shall be adjusted annually to reflect the projected rental income, property taxes, insurance premium costs and other expenses, if any, otherwise payable by Lessee, for the next twelve (12) month period. (c) Adjacent Premises. If the Premises are part of a larger building, or if the Premises are part of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) Tenant's Improvements. Since Lessor is the Insuring Party, the Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. 8.4 Lessee's Property Insurance. Subject to the requirement of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property. Lessee Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by the Insuring Party under -8- Paragraph 8.3. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property or the restoration of Lessee Owned Alterations and Utility Installations. Lessee shall be the Insuring Party with respect to the insurance required by this Paragraph 8.4 and shall provide Lessor with written evidence that such insurance is in force. 8.5 Insurance Policies. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, or such other rating as may be required by a Lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide," Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor certified copies of, or certificates evidencing the existence and amounts of, the insurance, and with the additional insureds, required under Paragraphs 8.2(a) and 8.4. No such policy shall be cancellable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable to Lessee to Lessor upon demand. 8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor ("Waiving Party") each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss of or damage to the Waiving party's property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. 8.7 Indemnity. Except for Lessor's [INSERT 4B] and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises. Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, permits attorneys' and consultant's fees, expenses and/or liabilities caused in whole by or in party by but only to the extent caused by the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligations on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment, and whether well founded or not. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 Exemption of Lessor from Liability [INSERT 4C]. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about he Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding -9- Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. Damage or Destruction. 9.1 Definitions. (a) "Premises Partial Damage" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than 50% of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (b) "Premises Total Destruction" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations the repair cost of which damage or destruction is 50% or more of the then Replacement cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (c) "Insured Loss" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as define din Paragraph 6.2(a), in, on, or under the Premises. 9.2 Partial Damage - Insured Loss. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessee's expense repair such damage (but not Lessee's Trade Fixtures or Lessee Owner Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds as and when required to complete said repairs. 9.3 Partial Damage - Uninsured Loss. If a Premises Partial damage that is not an Insured Loss occurs, unless caused by a grossly negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option, either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice in the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible and the required funds are -10- available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 Total Destruction. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a grossly negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 8.6. 9.5 Damage Near End of Term. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, within twenty (20) days following the occurrence of the damage, or before the expiration of the time provided in such option for its exercise, whichever is earlier ("Exercise Period"), exercising such option. if Lessee duly exercises such option during said Exercise Period Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option during said Exercise Period, then Lessor may at Lessor's option terminate this Lease as of the expiration of said sixty (60) day period following the occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of the Exercise Period, notwithstanding any term or provision in the grant of option to the contrary. 9.6 Abatement of Rent; Lessee's Remedies. (a) In the event of damage described in paragraph 9 to the Premises or a Hazardous Substance Condition, whether or not Lessor or Lessee repairs or restores the Premises the Base Rent, Real Property Taxes, Insurance premiums, and other charges, if any, payable by Lessee hereunder for the period during which such damage, its repair or the restoration continues (not to exceed the period for which rental value insurance is required under Paragraph 8.3(b), shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. if Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after receipt of such notice, this Lease shall continue in full force and effect. "Commence" as used in this Paragraph shall mean either [INSERT 5AA] or the beginning of the actual work on the Premises, whichever first occurs. 9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Law and this Lease shall continue in -11- full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) it the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the Event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the investigation and remediation of such Hazardous Substance Condition totally at Lessee's expense and without reimbursement from Lessor except to the extent of an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment, in such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. If a Hazardous Substance Condition occurs for which Lessee is not legally responsible, there shall be abatement of Lessee's obligations under this Lease to the same extent as provided in Paragraph 9.6(a) for a period of not to exceed twelve months. 9.8 Termination - Advance Payments. Upon termination of this Lease pursuant to this Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, ir is not then required to be, used by Lessor under the terms of this Lease. 9.9 Waive Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with [INSERT 5A] respect to the termination of this Lease and hereby waive the provisions of any present of future statute to the extent inconsistent therewith. 10. Real Property Taxes. 10.1 (a) Payment of Taxes. Lessor shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Premises: provided, however, that Lessee shall pay, in addition to rent, the amount, if any by which Real Property Taxes applicable to the Premises increase over the Base Year of 1994 ("Tax Increase"). Subject to Paragraph 10.1(b), payment of any such Tax Increase shall be made by Lessee after receipt of Lessor's written statement setting forth the amount due and the computation thereof [INSERT 5B]. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes to be paid by Lessee shall cover any period of time prior to or after the expiration or earlier termination of the term hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment after such proration. (b) Advance Payment. In order to insure payment when due and before delinquency of any or all Real Property Taxes, Lessor reserves the right, at Lessor's option, to estimate the current Real Property Taxes applicable to the Premises, and to require such current year's Tax Increase to be paid in advance to Lessor by Lessee, either (i) in a lump sum amount equal to the amount due no more than twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent [INSERT 5B] if Lessor elects to require payment monthly in advance, the monthly payment shall be that equal monthly amount which, over the number of months remaining before the month in which the applicable tax installment would become delinquent (and without interest thereon), would provide a fund large enough to fully -12- discharge before delinquency the estimated Tax Increase to be paid. When the actual amount of the applicable Tax Increase is known, the amount of such equal monthly advance payment shall be adjusted as required to provide the funds needed to pay the applicable Tax Increase before delinquency. If the amounts paid to Lessor by Lessee under the provisions of this Paragraph are insufficient to discharge the obligations of Lessee to pay such Tax Increase as the same become due, Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are necessary to pay such obligation. All moneys paid to Lessor under this Paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of the obligations of Lessee under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may, subject to proration as provided in Paragraph 10.1(a), at the option of Lessor, be treated as an additional Security Deposit under Paragraph 5. (c) Additional Improvements. Notwithstanding Paragraph 10.1(a) hereof, Lessee shall pay to Lessor upon demand therefor the entirety to any increase in Real Property Taxes assessed by reason of Alterations of Utility Installations placed upon the Premises by Lessee or at Lessee's request. 10.2 Definition of "Real Property Taxes". As used herein, the term "Real Property Taxes" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Premises by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Premises or in the real property of which the Premises are a part, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "Real Property Taxes" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in applicable law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Premises or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether to not contemplated by the Parties. [INSERT 5C] 10.3 Joint Assessment. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all f the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.4 Personal Property Taxes. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installation, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause its Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b). 11. Utilities. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered with other premises. 12. Assignment and Subletting. [SEE ADDENDUM] 12.1 Lessor's Consent Required. -13- (a) Subject to Section 55 of the Addendum, Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "assignment") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36. (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five percent (25%) or more of the voting control of Lessee shall constitute a change in control for this purpose. (c) OMITTED (d) An assignment or subletting of Lessee's Interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unconsented to assignment or subletting as a noncurable Breach, Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon thirty (30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to fair market rental value or one hundred ten percent (110%) of the Base Rent then in effect, whichever is greater. Pending determination of the new fair market rental value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment(s) of Base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, in the event of such Breach and market value adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition), or one hundred ten percent (110%) of the price previously in effect, whichever is greater, (iii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iv) any fixed rental adjustments scheduled during the remainder of the Lease term shall be increased in the same ratio as the new market rental bears to the Base Rent in effect immediately prior to the market value adjustment. 12.2 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) after the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or any else liable on the Lease or sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or sublease. (d) In the event of any Default or Breach of Lessee's obligations under this Lease, Lessor may proceed directly against Lessee, any Guarantors or any one else responsible for the performance of the Lessee's obligations under this Lease, including the -14- sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee for sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a non-refundable deposit of $1,000 or ten percent (10%) of the current monthly Base Rent, whichever is greater, as reasonable consideration for Lessor's considering and processing the request for consent. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by letter. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. (g) The occurrence of a transaction described in Paragraph 12.1(c) shall give Lessor the right (but not the obligation) to require that the Security Deposit be increased to an amount equal to six (6) times the then monthly Base Rent, and Lessor may make the actual receipt by Lessor of the amount required to establish such Security Deposit a condition to Lessor's consent to such transaction. (h) Lessor, as a condition to giving its consent to any assignment or subletting, may require that the amount and adjustment structure of the rent payable under this Lease be adjusted to what is then the market value and/or adjustment structure for property similar to the Premises as then constituted. 12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions hall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein. (a) Lessee hereby assigns and transfers to Lessor all of Lessee's Interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not -15- be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior Defaults or Breaches of such sublessor under such sublease. (c) OMITTED (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. Default; Breach; Remedies. 13.1 Default; Breach. A Default is defined as a failure by the Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "Breach" is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3. (a) The abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent or any other monetary payment required to be made by Lessee hereunder, whether to Lessor or to a third party, as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of five (5) days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable of (i) compliance with applicable law per Paragraph 6.3, (ii) the recision of an unauthorized assignment or subletting per Paragraph 12.1(b), (iii) a Tenancy Statement per Paragraphs 16 or 37, (iv) the subordination or non-subordination of this Lease per Paragraph 30, (v) the execution of any document requested under Paragraph 42 (easements), or (vi) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of twenty (20) days following written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, that are to be observed, complied with or performed by Lessee, other than those described in subparagraphs (a), (b), or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) The making by Lessee of any general arrangement or assignment for the benefit of creditors (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to -16- Lessee within thirty (30) days; provided, however in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee or any Guarantor of Lessee's obligation hereunder was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed; (i) the death of a guarantor, (ii) the termination of a guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a guarantor's becoming insolvent or the subject of a bankruptcy filing, or (iv) a guarantor's refusal to honor the guaranty and Lessee's failure, within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the guarantors that existed at the time of execution of this Lease. 13.2 Remedies. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessee may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided, and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorney's fees and that portion of the leasing commission paid by Lessor applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the prior sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent. Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve therein the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required by subparagraphs -17- 13.1(b), (c), or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by subparagraphs 13.1(b), (c), or (d). In such case, the applicable grace period under subparagraphs 13.1(b), (c), or (d) and under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and abandonment and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. See Paragraphs 12 and 36 for the limitations on assignment and subletting which limitations Lessee and Lessor agree are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under the Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 Inducement Recapture In Event Of Breach. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions," shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended upon the occurrence of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, and recoverable by Lessor as additional rent due under this Lease, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this Paragraph shall not be deemed a waiver by Lessor of the provisions of this Paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lease, mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within five (5) days after written notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than -18- thirty (30) days after receipt by Lessor, and by the holders of any ground lease, mortgage or deed of trust covering the Premises whose name and address shall have been furnished Lessee in writing for such purpose of written notice specifying wherein such obligation of Lessor has not been performed, provided; however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the land area not occupied by any building is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within twenty (20) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within twenty (20) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the building located on the Premises. No reduction of Base Rent shall occur if the only portion of the Premises taken is land on which there is no building. Any award for the taking of all or nay part of the Premises under the power of eminent domain or any payment made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages, provided, however, that Lessee shall be entitled to any compensation, separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation, except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 15. Broker's Fee. 15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this Lease. 15.2 Upon execution of this Lease by both Parties, Lessor shall pay to said Brokers jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate written agreement between Lessor and said Brokers for brokerage services rendered by said Brokers to Lessor in this transaction. 15.3 OMITTED 15.4 OMITTED 15.5 Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any named in Paragraph 1.10) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and that no broker or other person, firm or entity other than said named Brokers is entitled to any commission or finder's fee in connection with said transaction. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of ;any dealings or actions of the Indemnifying Party, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto. 15.6 OMITTED -19- 16. Tenancy Statement. 16.1 Each Party (as "Responding Party") shall within twenty (20) days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "Tenancy Statement" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 If Lessor desires to finance, refinance, or sell the Premises, any part thereof, or the building of which the Premises are a part, Lessee and all Guarantors of Lessee's performance hereunder shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the lessee's interest in the prior lease, in the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer of assignment. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. 18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. Interest on Past-Due Obligations. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor within thirty (30) days following the date on which it was due, shall bear interest from the thirty-first (31st) day after it was due at the rate of 12% per annum, but not exceeding the maximum rate allowed by law, in addition to the late charge provided for in Paragraph 13.4. 20. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein and no other prior or contemporaneous agreement or understanding shall be effective. 23. Notices. 23.1 All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. -20- 23.2 Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same if addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail. If notice is received on a Sunday or legal holiday, it shall be deemed received on the next business day. 24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any preceding Default or Breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. Recording. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. No Right to Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law on in equity. 28. Covenants and Conditions. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. Binding Effect; Choice of Law. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. Subordination; Attornment; Non-Disturbance. 30.1 Subordination. Subject to Paragraph 30.3, this Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, r other hypothecation or security device (collectively, "Security Device"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default and allow such Lender thirty (30) days following receipt of such notice for the cure of said default before invoking any remedies Lessee may have by reason thereof. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its -21- Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 Attornment. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquired ownership of the Premises by reason of a foreclosure of a Security Device. 30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a "non-disturbance agreement") from the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. INSERT 9A 30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Less and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. 31. Attorney's Fees. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) or Broker in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorney's fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term "Prevailing Party" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorney's fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to attorney's fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times [INSERT 9B] for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are a part, as Lessor may reasonably deem necessary. Lessor may at time place on or about the Premises or building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred twenty (120) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. Signs. Lessee shall not place any sign upon the Premises, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business. The installation of any sign on ht Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). [SEE ADDENDUM] 35. Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any -22- sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. Consents. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' or other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time for consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 37. OMITTED 38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and the observance and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. Options. 39.1 Definition. As used in Paragraph 38 the word "Option" has the following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to purchase the Premise, or the right of first offer to purchase the Premises, or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor, or the right of first offer to purchase other property of Lessor. 39.2 Options Personal To Original Lessee. Each Option granted to Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Lessee or Permitted Transferee, while the original Lessee are not assignable (other than to a Permitted Transferee) either as a part of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this Lease in any manner, by reservation or otherwise. 39.3 OMITTED 39.4 OMITTED 40. Multiple Buildings. If the Premises are part of a group of buildings controlled by Lessor, Lessee agrees that it will abide by, keep and observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, care, and cleanliness of -23- the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of such other buildings and their invitees. [INSERT 10A] 41. Security Measures. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. Reservations. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights, dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof it was not legally required to pay under the provisions of this Lease. 44. Authority. If either Party hereto is as a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is as a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. Offer. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is not intended to be binding until executed by all Parties hereto. 47. Amendments. This Lease may be modified only in writing, signed by the parties in interest at the time of the modification. The parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. long they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease may be reasonably required by an institutional, insurance company, or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are as a part. 48. Multiple Parties. Except otherwise expressly provided herein, if more than one person or entity is named herein either Lessor or Lessee, the obligations of such multiple parties shall be the joint and several responsibility of all persons or entities named herein such Lessor or Lessee. SEE ADDENDUM FOR SIGNATURES -24- ADDENDUM TO LEASE OF 2525 CAMPUS DRIVE, IRVINE, CALIFORNIA This Addendum to Lease (the "Addendum"), is made by and between JAMBOREE ASSOCIATES, a joint venture ("Lessor"), and INSTITUTE FOR BIOLOGICAL RESEARCH AND DEVELOPMENT, INC., a Delaware corporation ("Lessee"), as of the day and year set forth on the first page of the form lease to which this Addendum is attached (the "Form Lease"). The promises, covenants, agreements and declarations made and set forth herein are intended to and shall have the same force and effect as if set forth in the body of the Form Lease. To the extent that the provisions of this Addendum are inconsistent with the terms and conditions of the Form Lease, the provisions of this Addendum shall control. The Form Lease and this Addendum shall together constitute the "Lease" for purposes hereof. INSERTS TO FORM LEASE INSERT 1A Lessor shall provide to Lessee possession and enjoyment of the Premises and the non-exclusive use of the "Common Areas" (as defined in Paragraph 49 of the Addendum attached hereto) during the period commencing on the date of execution of this Lease and ending on the expiration or earlier termination of this Lease. During the period commencing on the date of execution of this Lease and ending on the Commencement Date, INSERT 2A in Lessee's possession or reasonably available to Lessee, INSERT 2B and Lessor's other repair and maintenance obligations under this Lease, INSERT 3A provide its own janitorial, carpet cleaning, interior window cleaning, plant maintenance, light bulb replacement, interior painting, refuse collection and other interior services. INSERT 3B and all other parts of the Premises which are not the obligation of Lessee pursuant to Paragraph 7.1 above, INSERT 3BB Notwithstanding anything to the contrary contained in this Lease, the cost of any repair to the structure and/or the foundation of the Premises shall not be deemed to be an Operating Expense and such costs shall be paid by Lessor, at Lessor's sole cost and expense; provided, however, if such repair arises as a result of any negligent or intentional act or omission of Lessee, Lessee's employees, suppliers, shippers, customers or invitee, then Lessee shall bear the cost of such re air to the extent the cost of such repair is not covered by any insurance maintained by Lessor pursuant to the terms hereof. INSERT 3C Notwithstanding any provision to the contrary, Lessee shall not be obligated to remove from the Premises any of the Lessee Improvements or other improvements, fixtures, equipment or other items installed by Lessor, unless such other improvements, fixtures, equipment or other items were installed by Lessor at -1- Lessee's request and, at the time of such installation by Lessor, Lessor notified Lessee in writing that Lessor may require such items to be removed by Lessee at the expiration or sooner termination of this Lease. INSERT 3D Subject to Lessor's obligations under this Lease, including, without limitation, Lessor's maintenance, repair, alteration and replacement obligations under this Lease, INSERT 3DD If during any Comparison Year (defined in Paragraph 53, below) Lessor desires to maintain any new insurance coverage, or increase any liability or policy limits or other coverage, which insurance coverage was not maintained during the Base Year, then effective as of the Comparison Year in which Lessor first maintains or increases such insurance and continuing until such time as Lessor ceases to maintain or again decreases such insurance, the initial cost of such insurance shall be deemed to be an Operating Expense. For purposes of determining Lessee's share of such new or increased insurance coverage, the initial cost thereof shall be added to Operating Expenses for the Base Year (but only to the extent that the cost thereof exceeds the cost of any insurance maintained during the Base Year which is replaced in whole or in part by such new or increased insurance coverage). INSERT 3E and in accordance with Paragraph 53 of the Addendum. INSERT 4A I subject to reimbursement pursuant to Paragraph 53 of the Addendum, INSERT 4B gross negligence, willful misconduct, breach of obligations INSERT 4C Except for Lessor's gross negligence, wilful misconduct, breach of obligations and/or breach of express warranties, INSERT 5A 9.10 TERMINATION. Notwithstanding anything to the contrary contained in this Lease, if (a) there is any damage to the Premises or any Hazardous Substance Condition at the Premises which unreasonably interferes with Lessee's use of or access to or parking for the Premises, (b) such damage or Hazardous Substance Condition was not caused by any negligent or intentional act or omission of Lessee, Lessee's employees, suppliers, shippers, customers or invitee, (c) such damage or Hazardous Substance Condition takes a period in excess of nine (9) months from the date of the occurrence of such damage or Hazardous Substance Condition to repair or remediate, as such date may be extended by the number of days of Force Majeure Delays (as defined below) and Lessee Delays (the "Outside Date") (provided, however, in no event shall the Outside Date be extended by more than one hundred and twenty (120) days as a sole result of Force Majeure Delays), then Lessee may, at Lessee's option, terminate this Lease by delivering written notice of such -2- termination to Lessor, not earlier than the Outside Date and not later than thirty (30) days after the Outside Date; provided, however, if such written notice of termination by Lessee is not delivered to Lessor within said thirty (30) day period, Lessee's right to terminate this Lease shall be of no further force or effect. For purposes hereof, "Force Majeure Delay" shall mean any delay in the completion of any construction, repair, maintenance, and/or restoration obligations of Lessor hereunder which is attributable to any: (i) delay or failure to perform attributable to any strike, lockout or other labor or industrial disturbance (whether or not on the part of the employees of either party hereto), civil disturbance, future order claiming jurisdiction, act of a public enemy, war, riot, sabotage, blockade, embargo, inability to secure customary materials, supplies or labor through ordinary sources by reason of regulation or order of any government or regulatory body; (ii) delay attributable to the failure of governmental agencies to issue building permits and approvals to the extent that such delays are not attributable to actions or inactions of Lessor or Lessee; (iii) delay not attributable to actions or inactions of Lessor or Lessee in completing plans, repair and/or construction as a result of changes in any laws or building codes or the interpretation thereof from the applicable laws or building codes in effect, or the interpretation thereof, at the time the applicable plans were prepared by Lessor or Lessee; or (iv) delay attributable to lightning, earthquake, fire, storm, hurricane, tornado, flood, washout, explosion, or any other cause beyond the reasonable control of the party from whom performance is required, or any of its contractors or other representatives. INSERT 5AA the delivery to Lessee of preliminary plans for the repair or restoration work INSERT 5B and in accordance with Paragraph 53 of the Addendum. INSERT 5C Notwithstanding any provision to the contrary (a) any obligation of Lessee to pay for any increase in the amount of Real Property Taxes shall be subject to Paragraph 53 of the Addendum, and (b) if the amount of the Real Estate Taxes during the Base Year of 1994 shall be reduced under California Proposition 8 or any similar law, then for so long as such reduction remains in effect, the amount of Real Estate Taxes in any Comparison Year (as defined in Paragraph 53) shall be reduced by the same amount for the purposes of calculating the portion of such Real Estate Taxes to be paid by Lessee. INSERT 9A No later than ten (10) business days after the later to occur of (a) the execution of this Lease, or (b) the recordation of a deed of trust or mortgage in favor of Eastrich No. 126 Corporation, a Massachusetts corporation ("Eastrich") encumbering the Premises or Common Areas (i) and as a condition to Lessor's obligations hereunder, Lessee shall execute and deliver to Eastrich, an estoppel certificate in form and substance satisfactory to Eastrich and Lessee, and (ii) and -3- as a condition to Lessee's obligations hereunder, Lessor shall deliver to Lessee a non-disturbance agreement executed and acknowledged by Eastrich and Lessor in the form attached hereto as Exhibit "D". INSERT 9B after 24 hours prior notice, INSERT 10A provided that Lessor has delivered to Lessee a copy of such rules and regulations and that such rules and regulations (a) do not materially interfere with Lessee's use of the Premises or the Common Areas, (b) do not require Lessee to pay or incur any additional monetary obligations or liabilities, and (c) do not burden Lessee more than any other occupant or tenant. 49. PREMISES. The Premises consist of the building (the "Building") located at 2525 Campus Drive, Irvine, California and is situated in part of a larger project known as the Irvine Technology Center shown on Exhibit "C" attached hereto (the "Project"). The common areas of the Project are also shown on Exhibit "C" attached hereto (the "Common Areas"). For purposes of this Lease, Lessor and Lessee agree that the Building contains a total of 30,200 square feet of rentable floor space. 50. CONSTRUCTION OF THE LESSEE IMPROVEMENTS. (a) DESCRIPTION OF LESSEE IMPROVEMENTS. Lessor and Lessee acknowledge that Lessor shall construct certain improvements to Lessee's Premises (the "Lessee Improvements") as more particularly described in Section 8 of that certain letter dated as of July 7, 1993, from David L. Kray to Marcus & Millichap and the plans prepared by H. Hendy & Associates captioned "Design Drawings" and dated May 14, 1993, as revised on July 13, 1993, a copy of which is attached hereto as Exhibit "A" and incorporated herein by reference (the "Preliminary Plan"). Execution of this Lease by Lessor and Lessee shall be deemed to constitute each party's approval of the matters set forth in the Preliminary Plan. Lessor shall cause the Lessee Improvements to be constructed in a good and workmanlike manner and in compliance with all applicable laws and the Lessee Improvement Plan (as defined below). The understandings and agreements for such construction and payment of Lessor's costs in connection therewith are set forth below. (b) SCHEDULE OF APPROVALS. Lessor and Lessee shall use their respective best good faith efforts to cause all working drawings (the "Lessee Improvement Plan") with respect to the Lessee Improvements to be completed by H. Hendy & Associates and approved by Lessee as soon as possible. The Lessee Improvement Plan shall be prepared in accordance with Lessee's requirements, and Lessor's and Lessee's approval of said Lessee Improvement Plan shall not be unreasonably withheld. (c) COST OF IMPROVEMENTS. All "Costs" of constructing the Lessee Improvements in accordance with the Lessee Improvement Plan shall be borne by Lessor. As -4- used in this Paragraph 50, the term "Costs" shall mean and refer to all costs incurred by Lessor for the construction of the Lessee Improvements which shall include, but shall not be limited to, cost of equipment, material and labor, management and supervision fees, contractors field overhead and fee, architectural and engineering fees, governmental agency fees, testing and inspection costs, the cost of any requirements regarding construction which are imposed by any federal, state or local governmental entity or agency which are not reflected in the plans and specifications, sales and use taxes, permits, plan check fees, bonds, the costs of preparing the Preliminary Plans and the Lessee Improvement Plan, inspection and approval fees, certificate of occupancy costs, overtime for night and weekend work, and other costs related to the construction of the Lessee Improvements. (d) CHANGES IN IMPROVEMENTS. In the event that Lessee desires Lessee Improvements other than or in addition to the Lessee Improvements described in the Lessee Improvement Plan, or if Lessee desires to change the Lessee Improvement Plan for the Lessee Improvements, Lessee shall provide written notice of such proposed change to Lessor for Lessor's prior written approval, which approval shall not be unreasonably withheld. Lessor's approval of such proposed change order shall include an estimate of any additional or decreased Costs resulting from such a change, as well as an estimate of the delay or time-saving involved in complying with such change order. Any net additional Costs caused by such change orders requested by Lessee in writing, to the extent that they are in excess of the Costs to be paid by Lessor to construct the Lessee Improvements in accordance with the Lessee Improvement Plan as set forth above, shall be paid by Lessee to Lessor no later than the later to occur of (i) ten (10) days after Lessor's delivery to Lessee of an invoice therefor, or (ii) as the invoices therefor (as delivered by Lessor to Lessee) become due and payable. That part of the actual time delay in the Commencement Date caused by such change orders requested by Lessee in writing shall be considered a "Lessee Delay" hereunder and any time by which the Commencement Date is accelerated as a result of such change shall be set off against any other Lessee Delay hereunder. Lessor agrees to use reasonable efforts to pursue such change orders without delay and to reasonably work with the contractor so as to avoid any unreasonable Lessee Delay. Notwithstanding anything to the contrary contained in this Lease, upon the Commencement Date, Lessee shall pay to Lessor an additional payment of a sum calculated by multiplying the per them fixed Base Rent applicable during the first (1st) month of the Original Term, as set forth in Paragraph 52 of this Addendum, times the number of days of Lessee Delays. (e) COMPLETION OF LESSEE IMPROVEMENTS. The Premises shall be deemed to be "Ready for Occupancy" when all of the following have occurred: (i) Lessor has obtained a temporary certificate of occupancy for the Premises and the Lessee Improvements from the City of Irvine, if required, and (ii) the work of construction of the Lessee Improvements has been substantially completed in accordance with the Lessee Improvement Plan (subject to normal so-called "punch list items" which are mutually approved by Lessor and Lessee) as evidenced by the delivery to Lessee of a certificate of Lessor's architect or space planner. Lessor shall diligently complete as soon as reasonably possible any items of work and adjustment not completed when the Premises are Ready for Occupancy. -5- (f) COORDINATION OF WORK WITH LESSEE'S OCCUPANCY. Lessor agrees that Lessee shall have the right to access, occupy and use the Premises during the period that Lessor is constructing and installing the Lessee Improvements (the "Construction Period"), and that Lessor agrees to minimize any disruption of, or interference with, Lessee's access to or operation of its business in the Premises or the safety of Lessee and its employees and other individuals who are in the Premises during the Construction Period. Without limitation on the generality of the foregoing, Lessor agrees as follows: (i) Lessor and its contractors) shall be available for weekly meetings with Lessee and Lessee's construction consultant ("Lessee's Consultant"), and shall give to Lessee at such meetings a report on the status of the work and a proposed schedule and plan for the future work by Lessor and its contractor (Lessee shall pay the entire cost of Lessee's Consultant); (ii) Lessor's work schedule and plan shall be subject to the mutual approval of Lessor, Lessee and Lessee's Consultant and shall provide for scheduling and planning the Lessor's work in a manner that minimizes the interference with Lessee's access to, and operating its business in, the Premises, and protecting the safety of Lessee and its employees and other individuals in the Premises; (iii) without limitation on the generality of the foregoing (A) Lessor's work shall be conducted in phases mutually approved by Lessor and Lessee, and Lessor shall install appropriate barriers reasonably approved by Lessee to protect Lessee and its employees and other individuals in the Premises against Lessor's work, including, without limitation, any dust or smoke related to such work; and (B) Lessor shall perform all demolition of walls, sawcutting of floors and new exterior windows, replacement of the roof-top heating, ventilating and air conditioning system and any work involving the use of low-impact guns during the hours of 5:00 p.m. and 7:00 a.m. Monday through Friday and at any time on Saturday, Sunday and public holidays and pursuant to a schedule mutually acceptable to Lessor and Lessee; and (iv) Lessor and its contractor shall provide reasonable access to Lessee and Lessee's Consultant to inspect all work by Lessor and its contractor, provided that such inspections shall not interfere with Lessor's work and shall be solely for Lessee's benefit and shall not relieve Lessor of its obligation to assure that its work is performed in accordance with this Lease. Lessee agrees to cooperate with Lessor and to make such portions of the Premises available to Lessor in order that Lessor may construct the Lessee Improvements in a timely and orderly manner. Any interference by Lessee with Lessor's construction of the Lessee Improvements in accordance with the schedule approved by Lessor and Lessee shall constitute a Lessee Delay. 51. COMMENCEMENT DATE. Notwithstanding the commencement date set forth in Paragraph 1.3 of the Form Lease, the "Commencement Date" shall be the later of (a) the date which is four (4) months after the date of execution of this Lease, or (b) the date upon which the Premises are Ready for Occupancy. The Original Term of the Lease shall end on that date which is ten (10) years after the Commencement Date. At the request of either party, Lessor and Lessee shall execute a letter agreement setting forth the actual Commencement Date and expiration date hereof. 52. RENT. -6- (a) Subject to Lessor's obligation to provide the rent abatement as set forth in Paragraph 64, Lessee shall pay to Lessor as Base Rent for the Premises, monthly payments as follows: Months 1 through 30 of $27,482.00 per month, or $0.91 per square foot per month the Original Term Months 31 through 60 $28,690.00 per month, or $0.95 per square foot per month of the original Term Months 61 through 90 $30,502.00 per month, or $1.01 per square foot per month of the Original Term Months 91 through 120 $32,012.00 per month, or $1.06 per square foot per month of the Original Term
(b) Lessor and Lessee acknowledge that the Base Rent set forth in Paragraph 52(a) shall be the monthly fixed Base Rent paid by Lessee to Lessor pursuant to the terms of this Lease for the Original Term hereof. The first monthly fixed Base Rent payment has been received by Lessor, as set forth in Paragraph 1.6 of the Form Lease. The second fixed monthly Base Rent payment shall be due and payable on the first day of the second (2nd) full month after the Commencement Date (the "First Rent Payment Date") and shall also include a payment of a pro rata portion of the monthly fixed Base Rent for any partial month prior to the First Rent Payment Date and subsequent to the Commencement Date. For purposes hereof "Base Rent" shall mean the monthly fixed payment of rent. The term "rent" shall mean Base Rent plus operating costs, taxes and all other amounts to be paid by Lessee pursuant to the terms of this Lease. 53. OPERATING EXPENSE INCREASE. (a) For purposes of this Lease, the following terms shall be defined as follows: (i) "Lessee's Building Share" shall be equal to 100%. (ii) "Lessee's Project Share" shall be equal to 12.13% for Project Operating Expenses incurred with respect to both Phase I and Phase II of the Project, and 22.26% for Project operating Expenses incurred with respect to Phase I only of the Project. (iii) "Base Year" shall be the calendar year 1994. (iv) "Comparison Year" is defined as each calendar year during the term of this Lease subsequent to the Base Year. Lessee's Building Share of Building -7- Operating Expense Increase (as defined below) and Lessee's Project Share of Project Operating Expense Increase (as defined below) for the first and last Comparison Years of the term of the Lease shall be prorated according to that portion of such Comparison Year as to which Lessee is responsible for a share of such increase. (v) "Project Operating Expense" shall mean all costs, if any, incurred by Lessor in the exercise of its reasonable discretion, for the operation, repair, maintenance, and replacement, in neat, clean, safe, good order and condition, of the Common Areas, including, but not limited to, the following: (1) The Common Areas, including their surfaces, coverings, decorative items, parking areas, trash areas, roadways, sidewalks, walkways, stairways, parkways, driveways, landscaped areas, striping, bumpers, irrigation systems, and common area lighting facilities. (2) All plumbing, electrical and sprinkler systems. (3) Janitorial and security services. (4) The cost of the premiums for the liability and property insurance policies attributable to the common areas. (5) The amount of the real property taxes attributable to the common areas, subject to the limitations set forth in this Paragraph 53. (6) The cost of water, sewer, gas, electricity, and other publicly mandated services to the Common Areas. (7) Labor, salaries and applicable fringe benefits and costs, materials, supplies and tools, used in maintaining and/or cleaning the Common Areas and accounting and a management fee attributable to the operation of the Project. (8) Replacing and/or adding improvements where such replacement or addition is mandated by any governmental agency and any repairs or removals necessitated thereby amortized over its useful life according to Federal income tax regulations or guidelines for depreciation thereof (including interest on the unamortized balance as is then reasonable in the judgment of Lessor's accountants). (9) Costs of any capital improvements made to the Common Areas which improvements actually reduce Project Operating Expenses (limited to the amount of actual savings realized) amortized over its useful life according to Federal income tax regulations or guidelines for depreciation thereof (including interest on the unamortized balance as is then reasonable in the judgment of Lessor's accountants). -8- (vi) "Building Operating Expense" shall mean all costs, if any, incurred by Lessor in the exercise of its reasonable discretion, for the operation, repair, maintenance, and replacement, in neat, clean, safe, good order and condition, of the Building, including, but not limited to, the following: (1) The cost of performing Lessor's obligations under Paragraph 7 of the Form Lease (except as otherwise provided in Paragraph 7). (2) The cost of the premiums for the liability and property insurance policies to be maintained by Lessor pursuant to the terms of Paragraph 8 of the Form Lease. (3) The amount of the real property taxes to be paid by Lessor pursuant to the terms of Paragraph 10.1 of the Form Lease, subject to the other terms of this Lease. (4) Labor, salaries and applicable fringe benefits and costs, materials, supplies and tools, used in maintaining and/or cleaning the Building and accounting and a management fee attributable to the operation of the Building. (5) Loading and unloading areas, all heating, air conditioning, plumbing, electrical systems, life safety equipment, telecommunication and other equipment used for the Premises, including fire detection systems including sprinkler system maintenance and repair. (6) Building exteriors and roofs. (7) Replacing and/or adding improvements (other than improvements to the structure or foundations of the Building) where such replacement or addition is mandated by any governmental agency and any repairs or removals necessitated thereby amortized over its useful life according to Federal income tax regulations or guidelines for depreciation thereof (including interest on the unamortized balance as is then reasonable in the judgment of Lessor's accountants). (8) Costs of any capital improvements (other than improvements to the structure or foundations of the Building) made to the Building which improvements actually reduce Building Operating Expenses (limited to the amount of actual savings realized) amortized over its useful life according to Federal income tax regulations or guidelines for depreciation thereof (including interest on the unamortized balance as is then reasonable in the judgment of Lessor's accountants). -9- (vii) Notwithstanding anything to the contrary contained in this Addendum and/or in the Form Lease, Building Operating Expenses and/or Project Operating Expenses shall not include any of the following costs: (1) Any ground lease rentals; (2) Costs incurred by Lessor for the repair of damage to the Building and/or to the Common Areas to the extent that Lessor is reimbursed by insurance proceeds; (3) Costs, including permit, license and inspection costs, incurred with respect to the installation of improvements for lessees or occupants of the Building or in other part(s) or the Project, or incurred in renovating or otherwise improving, decorating, painting or redecorating vacant space for lessees or other part(s) of the Project other than in the Common Areas; (4) Depreciation, amortization and interest payments, except as provided herein and except on materials, tools, supplies and vendor-type equipment purchased by Lessor to enable Lessor to supply services Lessor might otherwise contract for with a third party where such depreciation, amortization, and interest payments would otherwise have been included in the charge for such third party's services, all as determined in accordance with generally accepted accounting principles, consistently applied; (5) Leasing commissions, attorneys' fees, space planning costs, and other costs and expenses in connection with negotiations or disputes with present or prospective lessees or occupants of the Building or other part(s) of the Project; (6) Expenses in connection with services or other benefits which are not offered to Lessee but which are provided to other lessees of the Project; (7) Costs incurred by Lessor due to the violation by Lessor or any lessees (other than Lessee) of the terms and conditions of any lease of space in the Building or other part(s) of the Project; (8) Overhead and profit increments paid to Lessor or to subsidiaries or affiliates of Lessor for goods and/or services in the Building to the extent the same exceeds the costs of such goods and/or services rendered by unaffiliated third parties on a competitive basis; (9) Interest, principal, points and fees on debts or amortization of any mortgage or mortgages or any debt instrument encumbering the Building or any other part or interest in the Project; -10- (10) Any compensation paid to clerks, attendants or other persons in commercial concessions operated by Lessor or in the parking concession at the Project except wherever Lessee is granted its parking privileges; (11) All items and services for which Lessee or any lessee in the Building or in another part of the Project reimburses Lessor (other than through payment of a tenant's share of building operating expenses and/or project operating expenses) or which Lessor provides selectively to one or more lessees or occupants (other than Lessee) without reimbursement; (12) Costs arising from Lessor's charitable or political contributions; (13) Capital costs for sculpture, painting or other objects or art; (14) Lessor's general corporate overhead and general and administrative expenses that are not directly related to the Project (except salaries, benefits and other compensation of employees whose time is divided between or among more than one Project, and only provided that such salaries, benefits and other compensation is included in Building Operating Expenses and/or Project Operating Expenses pro rata based on the portion of such employee's time spent working on the Building and/or the Project); (15) Costs arising from the gross negligence or wilful misconduct of Lessor or other tenants; (16) Costs arising from repairs of latent defects in the base, shell or core of the Building; (17) Except for the specific capital costs described in Paragraphs 53(a)(v) and/or 53(a)(vi), any costs of a capital nature, including, but not limited to, capital improvements, capital repairs, capital equipment, and capital tools, all as determined in accordance with generally accepted accounting principles and sound management practices consistently applied, or any reserves or sinking funds for any such capital costs; and (18) Except as otherwise specifically provided in Paragraphs 53(a)(v) and/or 53(a)(vi), any costs of a recurring nature which were incurred by Lessor in the Base Year but were not included in Project Operating Expenses or Building Operating Expenses for the Base Year, unless the inclusion of such costs in Project Operating Expenses or Building Operating Expenses does not result in a net increase in Project Operating Expenses or Building Operating Expenses paid by Lessee on account of a reduction in other expenses or a redetermination by Lessor of how Project Operating Expenses or Building Operating Expenses are calculated and charged. -11- (b) Lessee shall pay to Lessor during the term of this Lease, in addition to the Base Rent (i) Lessee's Building Share of the amount by which all Building Operating Expenses for each Comparison Year exceeds the amount of all Building Operating Expenses for the Base Year, such excess being hereinafter referred to as the "Building Operating Expense Increase", and (ii) Lessee's Project Share of the amount by which all Project Operating Expenses for each Comparison Year exceeds the amount of all Project Operating Expenses for the Base Year, such excess being hereinafter referred to as the "Project Operating Expense Increase". (c) Lessee's Building Share of Building Operating Expense Increase and Lessee's Project Share of Project Operating Expense Increase shall be payable by Lessee within thirty (30) days after a reasonably detailed statement of actual expenses is presented to Lessee by Lessor. At Lessor's option, however, an amount may be estimated by Lessor from time to time in advance of Lessee's Building Share of the Building Operating Expense Increase and/or Lessee's Project Share of Project Operating Expense Increase for any Comparison Year, and the same shall be payable monthly or quarterly, as Lessor shall designate, during each Comparison Year of the term of this Lease, on the same day as the Base Rent is due hereunder. In the event that Lessee pays Lessor's estimate of Lessee's Building Share of Building Operating Expense Increase and/or Lessee's Project Share of Project Operating Expense Increase as aforesaid, Lessor shall deliver to Lessee within sixty (60) days after the expiration of each Comparison Year a reasonably detailed statement showing Lessee's Building Share of the actual Building Operating Expense Increase and/or Lessee's Project Share of the actual Project Operating Expense Increase incurred during such year. If Lessee's payments under this subparagraph during said Comparison Year exceed Lessee's share as indicated on said statement, Lessee shall, at Lessee's option, either be entitled to credit the amount of such overpayment against Lessee's Building Share of Building Operating Expense Increase and/or Lessee's Project Share of Project operating Expense Increase next falling due, or receive payment from Lessor in the amount of such overpayment within thirty (30) days after written demand therefor from Lessee. If Lessee's payments under this subparagraph during said Comparison Year were less than Lessee's share as indicated on said statement, Lessee shall pay to Lessor the amount of the deficiency within thirty (30) days after delivery by Lessor to Lessee of said statement. Lessor and Lessee shall forthwith adjust between them by cash payment any balance determined to exist with respect to that portion of the last Comparison Year for which Lessee is responsible as to Building Operating Expense Increase, and/or Project Operating Expense Increase notwithstanding that the term of this Lease may have terminated before the end of such Comparison Year. (d) In the event the occupancy of the Project during the Base Year or any Comparison Year is less than ninety-five percent (95%), then Project Operating Expenses for that Base Year and Comparison Year shall be "grossed up" to that amount of Project Operating Expenses that, using reasonable projections, would normally be expected to be incurred during the Base Year or Comparison Year if the Building and the Project were ninety-five percent (95%) occupied during the Base Year and Comparison Year, as determined under generally accepted -12- accounting principles consistently applied. Only those expenses that are affected by variations in occupancy levels shall be grossed up. (e) Notwithstanding any other provision in this Lease to the contrary, for the first (lot) three (3) years of the Original Term of this Lease, the term "Real Property Taxes" shall not include that increased portion of real property taxes payable with respect to the Premises which is imposed as a result of a. sale of Lessor's interest in the Premises during the first (1st) three (3) years of the Original Term of this Lease. Effective as of the commencement of the fourth (4th) year of the Original Term, the real property taxes payable by Lessee hereunder shall by adjusted to market. (f) Lessor shall use only those expenses directly attributable to the Premises and the Common Areas, as the case may be, for the calculation of Building Operating Expenses and Project Operating Costs, as the case may be. To the extent that Lessor is unable to charge expenses for the Project separately to the Building and/or the Common Areas, Lessor may allocate expenses on a ro rata basis based on the rentable square footage of the Premises divided by the total rentable square footage for the buildings in the Project benefitting from a particular expenditure by Lessor. Lessor may include any expenses incurred pursuant to this subparagraph in the estimated expenses calculated by Lessor pursuant to Paragraph 53(c) above, and Lessee shall pay such additional amount as provided in Paragraph 53(c) above. (g) Lessor hereby grants to Lessee the non-exclusive right to use the Common Area. Subject to reimbursement pursuant to Paragraph 53 of the Addendum, Lessor shall operate, maintain, repair and replace, in neat, clean, safe, good order and condition, the Project, including the Common Areas, subject to Lessee's maintenance obligations with respect to the Premises that are expressly set forth in this Lease, and except for damage by any grossly negligent or intentional act or omission of Lessee, Lessee's employees, suppliers, shippers, customers or invitees, in which event Lessee shall pay for the cost of the repair of such damage to the extent the cost of the repair of such damage is not covered by the insurance maintained by Lessor pursuant to the terms of this Lease. Subject to reimbursement pursuant to Paragraph 53 of the Addendum, Lessor shall pay all real estate taxes and assessments and other obligations secured by any or all of the Project. Subject to reimbursement pursuant to Paragraph 53 of the Addendum, Lessor shall maintain the same types and amounts of property and liability insurance coverage for the Common Areas, other than the Premises as the types and amounts of property and liability insurance coverage that Lessor and/or Lessee is obligated to maintain for the Premises pursuant to the terms of this Lease. (h) Within ninety (90) days following Lessee's receipt of any statement of Building operating Expenses and/or Project Operating Expenses for any Comparison Year, Lessee may, so long as Lessee gives written notice to Lessor within said ninety (90) day period, cause an audit by an independent, certified public accountant or other qualified person or entity of Lessor's books and records pertaining to Building operating Expenses and/or Project Operating -13- Expenses for the Base Year, the Comparison Year which is the subject of Lessor's statement and the immediately preceding Comparison Year. Such independent certified public accountant or other qualified person or entity shall be subject to the prior reasonable approval of Lessor. Within fifteen (15) days after Lessor's receipt of such notice from Lessee, Lessor shall makes its books and records available for audit by such independent, certified public accountant or other qualified person or entity at Lessor's office. Upon completion of the audit, Lessee shall promptly deliver to Lessor the written results of such audit. If Lessor has in fact overcharged Lessee for Lessee's share of Building Operating Expenses and/or Project Operating Expenses, then Lessee shall receive a credit in the amount of such overcharge against the next installment of Building Operating Expenses and/or Project Operating Expenses. If Lessor has in fact undercharged Lessee, then no later than thirty (30) days after the earlier to occur of completion of such audit or Lessor's delivery to Lessee of written notice, Lessee shall pay to Lessor the amount of such undercharge. Any such audit shall be conducted at the sole cost and expense of Lessee; provided, however, if Lessor has in fact overcharged Lessee by an amount in excess of five percent (5%) then Lessor shall pay the reasonable cost of such independent, certified public accountant or other qualified person or entity. If Lessor has in fact overcharged Lessee, and Lessee did not initially request an audit of the Building Operating Expenses and/or Project Operating Expenses for the Comparison Year immediately preceding the Comparison Year which is the subject of Lessor's current statement, then Lessee may, within ninety (90) days following the completion of the initial audit, cause an audit of the Building operating Expenses and/or Project operating Expenses for such preceding Comparison Year in accordance with the audit procedures described above. Lessor shall maintain records of all Building operating Expenses and Project Operating Expenses for the Base Year until the 90th day after the expiration or termination of this Lease and for the entirety of the two (2) year period following Lessor's delivery to Lessee of the statement setting forth Lessee's share of Building Operating Expenses and Project Expenses in any Comparison Year. 54. ASSIGNMENT OF WARRANTIES. Lessor hereby assigns to Lessee all warranties against defective workmanship and materials as may be received by Lessor from the contractor(s) of the Premises and the Lessee Improvements (collectively, "Improvements") to the extent that such warranties cover any defects in any of the Improvements which Lessee is required to repair hereunder. Lessee may proceed in its own name as the assignee of any such warranties or, at the request of Lessee and at Lessor's sole cost and expense, Lessor agrees to cause the enforcement of the warranties so assigned to Lessee. As a matter with respect to which Lessor is to incur no obligation, Lessor hereby advises Lessee that the warranty period for all of Lessor's work of construction will be one (1) year from the date of filing of the notice of completion for such work. 55. ASSIGNMENT AND SUBLETTING. In connection with any proposed assignment or sublease, Lessee shall submit to Lessor in writing: (i) the name of the proposed assignee or sublessee; (ii) such information as to the proposed assignee's or sublessee's financial responsibility and standing as Lessor may reasonably require; and (iii) all of the material terms and conditions upon which the proposed assignment or subletting is to be made. If for -14- any assignment or sublease Lessee received rent or other consideration (after deducting all reasonable costs of (a) free rent, tenant improvements and allowances provided to such assignee or sublessee, (b) brokerage commissions and marketing costs, and (c) the Base Rent paid to Lessor by Lessee subsequent to the "Start Date" (as defined below) and prior to the effective date of the assignment, provided however that such period shall not exceed four (4) months) either initially or over the term of the assignment or sublease, in excess of the rent called for hereunder, or in case of the sublease of a portion of the Premises, in excess of such rent fairly allocable to such portion (the "Excess Rent"), Lessee shall pay one-half (1/2) of such Excess Rent to Lessor promptly after its receipt. For purposes hereof, the "Start Date" shall mean the later of W thirty (30) days after Lessee notifies Lessor in writing that it intends to employ a broker to market the space, and in the event of a sublease, such notice shall also describe in reasonable detail the portion of the Premises which Lessee intends to sublease, (ii) the date which Lessee commences to market the space with such broker, and (iii) the date that Lessee vacates the space and thereafter does not reoccupy the space (unless Lessee intends to sublet only a portion of the Premises, in which case the condition set forth in this clause (iii) shall not apply). Lessee shall bear, at its cost, any brokerage commissions, tenant improvement expenses and all other expenses pertaining to such assignment or sublease. In no event shall the consideration to be received by Lessee pursuant to such assignment or sublease depend in whole or part on the income or profits derived by any person from the Premises within the meaning of Section 512(b)(3)(B)(ii) of the Internal Revenue Code of 1986, as amended. Notwithstanding anything to the contrary contained in this Lease, Lessee may assign or sublet its interest in this Lease or in the Premises, or any portion thereof, without Lessor's consent, to (collectively, a "Permitted Transfer") (i) any corporation or other person or entity which at the time such assignment or sublease and at all times thereafter controls, is controlled by or is under common control with the original Lessee, (ii) any corporation or other person or entity resulting from the merger or consolidation or other reorganization with the original Lessee, (iii) any corporation or other person or entity which acquires all or substantially all of the assets of Lessee in connection with the business conducted at the Premises as a going concern and continues to operate the business conducted by Lessee at the Premises, or (iv) any corporation or other person or entity which acquires all or any part of the stock of Lessee and continues to operate the business conducted by Lessee at the Premises (collectively, a "Permitted Transferee"); provided that in connection with any such Permitted Transfer, said assignee or sublessee assumes, in full, the obligations of Lessee under this Lease. Any assignment or sublease to a Permitted Transferee shall not, in any way, affect or limit the liability of Lessee under the terms of this Lease even if after such assignment or subletting the terms of this Lease (if Lessee exists after such assignment or subletting) or the sublease are materially amended or modified without notifying Lessee or anyone liable on this Lease or the sublease and without obtaining their consent the consent of whom shall not be necessary, and Lessee (if Lessee exists after such assignment or subletting) shall continue to remain liable under the terms of this Lease or any such sublease, as this Lease or such sublease may from time to time be amended or modified. 56. SIGNS. Notwithstanding the provisions of Paragraph 34 of the Form Lease, Lessee hereby agrees to comply with the sign program of the City of Irvine and further -15- agrees to pay any and all costs of signage required in connection with this Lease and Lessee's use of the Premises. Provided that Lessee obtains all permits and approvals required by the City of Irvine, Lessee shall have the right, at Lessee's sole cost and expense, to maintain all existing signage of Lessee at the Building as of the date of the execution of this Lease. Except for the signs permitted under Paragraph 32 of the Form Lease, no person or entity other than Lessee (including Lessor) shall have any right to place or maintain any signs on the Building (including on the roof of the Building). 57. LIMITATION ON LESSOR'S LIABILITY. Notwithstanding any provisions to the contrary set forth in this Lease, Lessor shall not in any event or at any time be personally liable for the payment or performance of any obligation required or permitted of Lessor pursuant to this Lease or in any document executed in connection herewith. In the event of any breach or default by Lessor under this Lease or any such document, the sole recourse of Lessee shall be against Lessor's interest in the Premises, and no attachment, execution, writ or other process shall be Bought or obtained, and no judicial proceeding shall be initiated by or on behalf of Lessee against Lessor personally or Lessor's assets except with respect to Lessor's interest in the Premises. 58. OPTION TO EXTEND. (a) Lessee shall have one (1) option (the "Option") to extend the Original Term of this Lease for a period of sixty (60) months (the "Option Term"). The Option to extend the Original Term of this Lease may be exercised only in the event that Lessee is not in material default under this Lease. Notwithstanding the foregoing, if Lessee is in default under this Lease during the period Lessee is otherwise entitled to exercise the Option, then Lessee may still exercise the option provided that Lessee cures such default within the cure period provided under this Lease, if any. If Lessee fails to cure any such default within the cure period provided under this Lease, if any, then Lessee's exercise of the Option shall automatically be deemed revoked. The period of time for Lessee to exercise the Option shall not be extended as a result of Lessee being in default during such exercise period. The Option must be exercised by notice in writing of such exercise (the 'Option Notice"), delivered by Lessee to Lessor not earlier than fifteen (15) months and not later than nine (9) months prior to the end of the Original Term. Lessee's failure to deliver the Option Notice within the time-period set forth above shall be deemed to constitute Lessee's waiver of the Option. (b) The monthly Base Rent payable by Lessee during the Option Term shall be equal to ninety-five percent (95%) of the "market rate" prevailing for comparable space in the immediate vicinity of the Building including the Project, at the time of the commencement of the Option Term. For purposes hereof, the "market rate" prevailing for comparable space shall mean and refer to the rate then being charged or projected to be charged to tenants for non-renewal and non-expansion space, similarly improved, taking into consideration annual rental rates per rentable square foot, the type of escalation clauses, (including, but not without limitation, fixed and CPI adjustments), the length of the relevant term, the extent of services to -16- be provided to the premises and any other relevant conditions. Without limiting the generality of the foregoing, in the event the market rate provides for rental increases, then the monthly Base Rate payable during the Option Term shall be Similarly increased. Notwithstanding the foregoing, in no event shall the monthly Base Rent payable during the Option Term be less than the monthly Base Rent payable during the last month of the Original Term. The parties shall have thirty (30) days after Lessor receives the option Notice in which to agree on the monthly Base Rent payable during the Option Term. If the parties agree on such monthly Base Rent, they shall immediately execute an amendment to this Lease stating the new monthly Base Rent. If the parties are unable to agree on the monthly Base Rent within the above-stated period, then no later than ten (10) business days after the expiration of such thirty (30) day period, Lessee shall have the right to rescind its exercise of the Option by delivering written notice of such rescission to Lessor within such ten (10) business day period. Lessee's failure to deliver such notice of rescission within the time period set forth above shall be deemed to constitute Lessee's waiver of such right. If the parties are unable to agree on the monthly Base Rent within the above-stated period and Lessee waives or is deemed to have waived its right to rescind its exercise of the Option, then either party shall have the option to submit the issue to arbitration by delivering written notice to the other party. Within twenty (20) days after such notice is delivered by either party to the other party, each party, at its cost and by giving notice to the other party, shall appoint a real estate appraiser with at least five (5) years' full time commercial appraisal experience in the vicinity of the Project to appraise and set the monthly Base Rent for the Option Term. If a party does not appoint an appraiser within the time allotted, the single appraiser appointed shall be the sole appraiser and shall set the monthly Base Rent for the Option Term. If two appraisers are appointed by the parties as stated in this paragraph, they shall meet and promptly attempt to set the monthly Base Rent for the Option Term. If the two appraisers are unable to agree within thirty (30) days after the second appraiser has been appointed, the two appraisers shall, within ten (10) days, elect a third appraiser meeting the qualification set forth herein. Each of the parties shall bear one-half (1/2) of the cost of appointing the third appraiser and paying the third appraiser's fee. Within thirty (30) days after the selection of the third appraiser, the monthly Base Rent for the Option Term shall be determined by a majority of the appraisers. 59. PARKING. During the Original Term of this Lease and any extensions thereof, Lessor agrees to provide four (4) standard vehicular parking spaces per 1,000 square feet of rentable floor space of the Premises (the "Parking Spaces") free of charge for Lessee's use. The Parking Spaces shall be unassigned and located in the area set forth on Exhibit "B' attached hereto. 60. HOLDING OVER. Lessee shall have no right to retain possession of the Premises or any part thereof beyond the expiration or sooner termination of this Lease without the written consent of Lessor. If Lessor does not object to Lessee's holding over, then this Lease shall continue as a tenancy from month-to-month on the terms and conditions contained herein and at one hundred twenty-five percent (125%) of the rent in effect immediately preceding the expiration or sooner termination of this Lease. -17- 61. EARLY TERMINATION. Provided that Lessee is not in material default under this Lease, Lessee shall have the right to terminate this Lease effective as of the end of the commencement of the sixtieth (60th) month of the Original Term (the "First Termination Right") or effective as of the ninetieth (90th) month of the Original Term (the "Second Termination Right"). Notwithstanding the foregoing, if Lessee is in default under this Lease during the period Lessee is otherwise entitled to exercise the applicable termination right, then Lessee may still exercise the applicable termination right provided that Lessee cures such default within the cure period provided under this Lease, if any. If Lessee fails to cure any such default within the cure period provided under this Lease, if any, then Lessee's exercise of the applicable termination right shall automatically be deemed revoked. The period of time for Lessee to exercise the applicable termination right shall not be extended as a result of Lessee being in default during such exercise period. In order to exercise the First Termination Right or the Second Termination Right, as applicable, Lessee shall (a) deliver to Lessor a notice in writing of such exercise (the "Termination Notice") no earlier than fifteen (15) months and no later than nine (9) months prior to the commencement of (i) the sixtieth (60th) month of the Original Term with respect to the First Termination Right, or (ii) the ninetieth (90th) month of the Original Term with respect to the Second Termination Right, and (b) concurrently with such Termination Notice, pay to Lessor the Termination Fee (as defined below), in cash or by cashier's or corporate check. Lessee's failure to deliver the Termination Notice within the time-period set forth above shall be deemed to constitute Lessee's waiver of the First Termination Right or the Second Termination Right, as applicable. For purposes of this Lease, the "Termination Fee" shall be $150,000.00 with respect to the First Termination Right, and $100,000.00 with respect to the Second Termination Right. If Lessee exercises a termination right, then no later than the effective date of such termination, Lessee shall surrender the entire Premises to Lessor free and clear from all occupancies and in accordance with the terms of Paragraph 7.4 of the Form Lease. 62. SECURITY DEPOSIT. Lessor and Lessee acknowledge that as of the date hereof, Lessee has deposited with Lessor a security deposit pursuant to the terms of the Existing Lease. Upon the execution of this Lease, such security deposit held by Lessor under the existing Lease shall be deemed to be the security deposit required under Paragraphs 1.7 and 5 of the Form Lease. 63. TERMINATION OF EXISTING LEASE. Upon the execution of this Lease, the Existing Lease shall be deemed irrevocably and unconditionally terminated and of no further force or effect, except for any indemnity obligations expressly surviving such termination. 64. FREE RENT. Provided that Lessee is not in Breach under this Lease, then commencing as of the date of Lessor's receipt of all permits required to construct the Lessee Improvements, and continuing until the date the Commencement Date would have occurred but for Lessee Delays (the "Rent Abatement Period"), Lessor hereby agrees to abate the monthly fixed rent paid by Lessee to Lessor pursuant to the terms of this Lease. Lessee shall during the Rent Abatement Period pay all rent other than fixed monthly rent (e.g., Lessee's share -18- of operating costs, taxes, insurance, etc.) that would have been payable by Lessee during such period under the terms of the Existing Lease as if the Existing Lease were still in full force and effect. 65. ALLOWANCE. Provided that Lessee is not in Breach under this Lease, then (a) subject to Lessor's receipt of invoices setting forth the expenses incurred by Lessee in detail reasonably satisfactory to Lessor, Lessor shall reimburse Lessee in the amount of $16,250.00 on the date two (2) months after the date of execution of this Lease and $16,250.00 on the Commencement Date for the removal and reinstallation of Lessee's furniture system, and (b) concurrently with the execution hereof, Lessor shall pay to H. Hendy & Associates the sum of $2,500.00 for architectural services rendered to Lessee. 66. PAINT AND CARPETING. Provided that Lessee is not in Breach under this Lease, then within thirty (30) days after Lessee's delivery of written notice to Lessor (which notice may only be delivered after the sixtieth (60th) month of the original Term of this Lease), Lessor shall commence and thereafter complete the repainting and recarpeting of the Premises in accordance with building standard. IN WITNESS WHEREOF, the parties have executed this Lease as of the day and year set forth on the first page of the Form Lease. Address for notices to LESSOR: Lessor: JAMBOREE ASSOCIATES, c/o Bowers Perez Associates a joint venture 811 W. 7th Street, Suite 320 Los Angeles, CA 90017 By: Copley Investors Limited Attn: Donald E. Bowers Partnership, a Delaware limited partnership By: Copley Management Limited Partnership, a Delaware limited partnership, its general partner By: Copley Advisors, Inc., a Massachusetts corporation, its managing partner By: /s/ James D. Flynn ---------------------------- Its Managing Director -19- By: Jamboree Partners a California general partnership, a Joint Venturer By: /s/ Donald E. Bowers ---------------------------- Donald E. Bowers, a partner Address for notices to LESSEE: Lessee: INSTITUTE FOR BIOLOGICAL RESEARCH 2525 Campus Drive AND DEVELOPMENT, INC., a Delaware Irvine, CA 92715 corporation By: /s/ Thomas Lehrl --------------------------------- Its: Executive VP ----------------------------- -20- EX-10.18 32 EXHIBIT 10.18 Exhibit 10.18 CIVIL LEASE AGREEMENT BETWEEN: JEROUN S.A. 327 Louise Avenue BRUSSELS 1050 Represented by Mr. Magnus Claesson Acting in his capacity as Delegated Administrator Hereinafter referred to as "THE LESSOR" AND: PHOENIX INTERNATIONAL 145 Dieweg BRUSSELS 1180 Represented by Mr. Lucien Steru Acting in his capacity as President, Europe Hereinafter referred to as "THE LESSEE" THE FOLLOWING HAS HEREBY BEEN AGREED UPON: ARTICLE I - LEASED PREMISES THE LESSOR leases to THE LESSEE, who accepts, the following property for exclusive office usage: Part of the 9th Floor of the building located at 327 Louise Avenue in Brussels 1050, of an approximate surface area of 222 sq. m. (see attached plan), 3 parking spaces and some archive space (7 sq. m) # 15 in -2. The furniture and partitions are part of the leased property and shall be described in the inventory of the premises as mentioned in Article VI. All other particulars are perfectly known by THE LESSEE, who does not request any further description thereof. It is expressly specified that under no circumstance shall the leased premises be used for retail activity or craftsmanship directly in contact with the public, so that the present lease is not and shall not ever be governed by the Law of April 30, 1951 on Commercial Leasing. ARTICLE II - TERM OF LEASE The lease is entered into for a period of nine (9) consecutive years starting on March 1st, 1998 and terminating automatically at midnight on February 28, 2007. Each of the parties shall have the right to terminate this agreement at the end of each 3-year period with a notice sent by registered mail to the other party at least six (6) months prior to the end of such 3-year period. The continued occupation of the leased premises beyond the contractual term of nine (9) years shall in no way constitute a renewal by tacit agreement. ARTICLE III - RENT AND INDEXATION The amount of the annual base rent is set at 1,092,100 Belgian francs, payable each quarter and in advance on January lst, April 1st, July 1st and, October 1st of each year, and is to be deposited to the account indicated by the owner. The rent for the month of March shall be paid prior to March 1st, 1998. Failure to receive payment upon each due date shall render the rent overdue without the need for a demand letter. The parties expressly agree to adjust the rent presently established according to the variation of the consumer price index published monthly by the Ministry of Economics Affairs. Each year, at the anniversary date of the lease, the rent shall be adjusted, automatically and without formal notice, according to the variation of the price index of the month immediately preceding the year-end of the lease, according to the following formula: BASE RENT X NEW INDEX = ADJUSTED RENT - --------------------- BASE INDEX The new index is that of the month which immediately precedes the anniversary date of the beginning of the lease. The starting index is that of the month which precedes the current month in which this lease agreement is executed, i.e. the index for the month of January 1998 = 125.17 points The consumer price index of the Kingdom is temporarily replaced by a special index established to this effect, called "health index", i.e. the one for the month of January 1998 is 101.83 points. The adjusted rent shall never be less than the applicable rent at the adjustment date. ARTICLE IV - EXPENSES TAXES The property withholding tax and all other property taxes levied or to be levied on the leased premises shall be borne solely by THE LESSEE; the same shall apply to all taxes which might be levied on the leased premises due to their occupation or due to the activities of THE LESSEE in these premises. COMMON EXPENSES THE LESSEE shall pay his share of the common expenses of the building, as they shall be established by THE LESSOR or the administrator of the building. The common expenses include all consumption and maintenance costs related to the building, IN particular, without limitation, the consumption of water, electricity, and fuels, and common devices for heating and lighting, the maintenance and cleaning of the building (common areas, facades, etc.), the administrator's fee, the salaries, insurance and fringe benefits of the eventual janitor and of the personnel in charge of the maintenance of the common areas. The participation of THE LESSEE in these above-mentioned costs shall be proportional to his shares, that is, 438/10,000 for office shares and 21/10,000 for parking shares. THE LESSEE shall make an advance payment on the common expenses at the same time and in the same account as the payment of the rent. The first advance payment shall be BEC 72,150 per quarter, estimated according to the average of actual expenses incurred during the four preceding quarters in the building. The expenses for the month of March 1998 shall be paid prior to March 1st, 1998. At least once a year, THE LESSOR or his administrator shall establish a statement of actual cost of all incurred expenses. THE LESSEE shall have the right to verify, in the premises of THE LESSOR or the administrator, the original documents establishing the expenses. The potential difference between the amount of actual expenses and the advance payments made by THE LESSEE shall be reimbursed by the party concerned to the other, within ten (10) days of its request. At that moment, the future advance payments shall be adjusted according to the actual expenses. PRIVATE EXPENSES Shall be borne by THE LESSEE: all private expenses related to the leased premises such as water, electricity, gas, telephone, fax and others, as well as related costs such as the cost of connection, consumption, advance payments, and renting of the meters. ARTICLE V - PAYMENT AND INTEREST Without prejudice to all other rights and actions of THE LESSOR, all amounts due or to be due by THE LESSEE under this lease agreement shall bear, as of their due date, automatically and without the need for a demand letter, a penalty interest at a rate of 12% per year. ARTICLE VI - INVENTORY OF THE PREMISES Prior to any use of the leased premises by THE LESSEE, it is agreed that an inventory of the premises shall be established by an expert mutually appointed by both parties, each party bearing half of the expenses and fees of the said expert, or if there is no agreement, by two (2) experts, each party shall then appoint and pay his own. At the expiration of the lease, an inventory of the premises shall be conducted following the same procedure as described above, in order to have an expert establish the amount of damage caused by THE LESSEE and the compensation for the potential unavailability of the premises. ARTICLE VII - REPAIRS AND MAINTENANCE THE LESSEE undertakes to use the premises prudently and to maintain them during the entire period of the lease in a good state of repairs. Only major repairs are the responsibility of THE LESSOR. Other repairs are the responsibility of THE LESSEE; THE LESSEE shall notify, without delay and by registered mail, THE LESSOR of all necessary repairs incumbent upon the latter, otherwise he shall be deemed responsible for the degradation which might result and of all harmful consequences. THE LESSEE shall replace, at his expense, all broken or cracked windows or mirrors, regardless of the cause. THE LESSEE shall repair and, if necessary, replace, at his expense, the locks of doors and windows, the hinges and latches, the taps, the sanitary appliances and, all other devices, except in the case of hidden defects inherent to the installation. THE LESSEE shall protect the water pipes and, the sanitary and central heating installations against frost. THE LESSEE shall not overload the floors with more than 250 kg per sq. m, including the weight of the partitions, without giving notice to THE LESSOR. THE LESSEE shall endure the major repairs, which become necessary and which are incumbent upon THE LESSOR, even though they may last longer than 40 days, without claiming any compensation. When an interruption of the services in the building, is due to a cause beyond the control of THE LESSOR and, as long as he has shown reasonable care to ensure the operation of these services or their restoration, THE LESSEE shall not claim any compensation because of any resulting inconvenience for him. ARTICLE VIII - TRANSFORMATIONS AND MODIFICATIONS THE LESSEE shall not proceed with any change, modification, construction or demolition in the leased premises without prior written consent of THE LESSOR. At the expiration of the lease or in the case of termination, all modifications, transformations or improvements, including the partitions, shall become the property of THE LESSOR, at no cost, and shall be left in good condition; however, THE LESSOR shall have the right to request THE LESSEE that he restore the premises to their original condition as when they were taken, at no cost to THE LESSOR. ARTICLE IX - GUARANTEE The Company, Phoenix International Life & Sciences, acts as a guarantor for the proper performance of the obligations of THE LESSEE under this lease agreement. This guarantee shall be confirmed to THE LESSOR in writing before March lst, 1998. ARTICLE X - SUBLETTING - TRANSFER The premises leased under this lease agreement shall not be transferred or sublet in all or in any part by THE LESSEE without the prior express and written consent from THE LESSOR. In the case where THE LESSOR would authorize the sublet or the transfer, THE LESSEE and sublessee or the transferor and transferee shall remain jointly responsible towards THE LESSOR for all the obligations under this lease agreement. The duration of the sublease shall not in any way last beyond the term of this lease agreement. ARTICLE XI - INSURANCE THE LESSEE shall insure his furniture at his expense, at minimum, against the damage which may be caused by fire, explosion, water and breaking glass. In accordance with Articles 1733 and following of the Civil Code, THE LESSEE shall also insure for the tenant's risks incumbent upon him as well as against third-party claims. These insurance policies shall be taken out with companies agreed upon by THE LESSOR, and for sufficient amounts. These policies shall stipulate that the coverage may not cease to be effective, for any cause whatsoever, except with a prior one-month notice given to THE LESSOR. THE LESSEE shall distribute copies of the policies to THE LESSOR within thirty (30) days of the effective date of this lease agreement. If the activity of THE LESSEE leads to an increase in the property insurance premium for the owner, this increase shall be borne by THE LESSEE. THE LESSEE shall allocate all sums received in virtue of the insurance policies to the restoration of the building and its furniture, and if applicable, he shall provide all the necessary shortfall of funds. THE LESSEE expressly states that he waives all recourses that he might exercise against THE LESSOR in accordance with Articles 1386 and 1721 of the Civil Code. ARTICLE XII - TERMINATION BY ORDER OF A COURT In the event of termination of the present lease due to a fault of THE LESSEE, he shall owe, as an indemnity for the termination, an amount equal to six (6) months of rent, in addition to the rent and the expenses of the current quarter, and to all costs, disbursements, and legal costs resulting from the termination, without prejudice to the application of Article IX. In the event of a bankruptcy, an out-of-court or court-ordered settlement, a fraudulent bankruptcy, the invalidation or liquidation of THE LESSEE, this lease agreement shall terminate automatically. In such case, THE LESSEE shall be liable for an indemnity equal to six (6) months of rent, without prejudice to the other obligations imposed upon him under this lease in the event of early termination. ARTICLE XIII - EXPROPRIATION In the event of expropriation for public use, THE LESSEE shall not claim any compensation from THE LESSOR; THE LESSEE shall assert his claim only against the expropriating authority. ARTICLE XIV- VISITS During the entire period of the lease, THE LESSOR shall have the right to visit or to have the leased premises visited by one of his representatives, each time that he shall deem appropriate, with a prior appointment taken with THE LESSEE. During the last six (6) months of the lease and in the event the building is put up for sale, THE LESSEE shall allow visits of the leased premises three (3) days a week, for three (3) consecutive hours. He shall also tolerate the installation, at the most visible locations, of "For Sale" or "For Rent" signs. ARTICLE XV - REGISTRATION THE LESSEE shall be responsible for registering this lease agreement. Each of the parties shall bear half of the registration fees, fines and potential duplicate rights. For the purposes of registration fees only, the parties estimate at 15% of the annual rent the expenses imposed upon THE LESSEE under this lease agreement. ARTICLE XVI - CHOICE OF RESIDENCE With regard to anything relating to this lease agreement, THE LESSEE chooses the leased premises as his residence. ARTICLE XVII - GOVERNING LAW AND JURISDICTION OF COURTS This lease agreement shall be governed by the laws of Belgium; any dispute related to this lease agreement, or its interpretation, performance or breach, shall be subject to the exclusive jurisdiction of the Courts of Brussels. ARTICLE XVIII - MISCELLANEOUS As of December 1st, 1998, THE LESSEE shall have the possibility to lease the remaining available space on the 9th Floor of the premises leased under this lease agreement (+/- 66 sq. m), under the same terms and conditions which apply to the surface areas mentioned in Article I of this lease agreement. The lease of the entire surface area on the 9th Floor shall terminate automatically on February 28, 2007. The intermediate periods shall be the same as those described in Article I of this lease agreement. This decision shall be notified to THE LESSOR by registered letter no later than September 1st, 1998. Executed in triple copies, including one for registration purposes, in Brussels, on February 13, 1998. THE LESSOR THE LESSEE - ---------- ---------- /s/ Magnus Claesson /s/ Lucien Steru Rider #1 to the Civil Lease Agreement entered into as of February 13, 1998 BETWEEN JEROUN S.A. 327 Louise Avenue Brussels 1050 Represented by Mr. Magnus Claesson, Delegated Administrator Hereinafter referred to as "THE LESSOR" AND PHOENIX INTERNATIONAL 327 Louise Avenue Brussels 1050 Represented by Mr. Lucien Steru, President, Europe Hereinafter referred to as "THE LESSEE" PREAMBLE Under a lease agreement executed by the parties hereto as of February 13, 1998 (hereinafter referred to as "THE PRINCIPAL LEASE"), THE LESSOR leased to THE LESSEE 222 sq. m. of the 9th Floor of the building located at 327 Louise Avenue in Brussels 1050, for office usage. THE LESSOR also gave the possibility to THE LESSEE to lease the remaining surface area available on the 9th Floor, under the same terms and conditions. THE LESSOR hereby also leases to THE LESSEE additional space in the same building. It is expressly further agreed upon: ARTICLE 1: LEASED PREMISES THE LESSOR leases to THE LESSEE, who accepts, the remaining space of the 9th Floor, that is to say 66 gross sq. m, of the building located at 327 Louise Avenue in Brussels 1050. All other particulars are perfectly known by THE LESSEE, who does not request any further description thereof. ARTICLE II: USE OF LEASED PREMISES The premises are leased exclusively as office space and shall under no circumstance be used for retail activity or craftsmanship directly in contact with the public, so that the present lease is not and shall not ever be governed by the Law of April 30, 1951 on Commercial Leasing. ARTICLE III: TERM OF LEASE This lease agreement shall be effective December 1st, 1998 and shall terminate at the same time and under the same terms and conditions as THE PRINCIPAL LEASE. ARTICLE IV: RENT AND INDEXATION The present lease is granted and accepted for an annual base rent set at: BEC 283,800 for offices (that is to say BEC 4,300/sq. m/yr.) The rent is payable quarterly and in advance, at the same time and in the same manner as the rent of THE PRINCIPAL LEASE. The rent shall be indexed at the same time and in the same manner as the rent of THE PRINCIPAL LEASE; the index is the one for the month of January 1998, i.e., 125.17 points. ARTICLE V: EXPENSES All taxes pertaining to the leased premises shall be borne by THE LESSEE. The participation of THE LESSEE in the common expenses shall be proportional to his shares, that is: 131 /10,000 for offices The advance payment on common expenses set forth in Article IV b of THE PRINCIPAL LEASE is increased by BEC 21,450. THE LESSEE shall pay the common expenses and all taxes provided for in THE PRINCIPAL LEASE as of the effective date of occupation of the leased premises. In any case, the expenses and taxes shall be borne by THE LESSEE no later than as of the effective date of this rider. ARTICLE VI: INVENTORY OF THE LEASED PREMISES An inventory of the premises shall be established in accordance with the provisions of Article VI of THE PRINCIPAL LEASE. ARTICLE VII: LEASING GUARANTEE The leasing guarantee set forth in Article IX of THE PRINCIPAL LEASE shall be increased to an amount equal to six months' rent provided for in Article IV of this rider. ARTICLE VIII: APPLICATION OF THE PROVISIONS OF THE PRINCIPAL LEASE All provisions of THE PRINCIPAL LEASE that are not hereby modified or overridden fully apply to this rider. ARTICLE IX: REGISTRATION This rider shall be registered by and at the expense of THE LESSEE. For the purposes of registration fees, the parties estimate at 15% of the annual rent the expenses imposed upon THE LESSEE under this rider. Executed in Brussels in three (3) copies, including one for registration purposes, on September 15, 1998. THE LESSOR THE LESSEE - ---------- ---------- /s/ Magnus Claesson /s/ Lucien Steru EX-10.19 33 EXHIBIT 10.19 EXHIBIT 10.19 COMMERCIAL LEASE BETWEEN THE UNDERSIGNED PARTIES The Company named LION SCPI, with a capital value of SIX HUNDRED TWENTY SIX MILLION TWO HUNDRED NINETY TWO THOUSAND FRENCH FRANCS (FF 626,292,000), whose head office is located in PARIS, 1st district, 164 de Rivoli Street, registered in the Register of Companies of PARIS (REGISTRE DU COMMERCE ET DES SOCIETES DE PARIS) under No. D 344 084 611, the said Company represented by its manager: The SOCIETE LYONNAISE DE GERANCE IMMOBILIERE "SLIGERI" S.A., business corporation with a capital value of ONE MILLION FIVE HUNDRED THOUSAND FRENCH FRANCS (FF 1,500,000), whose head office is located in PARIS 1st district, 164 de Rivoli, registered in the Register of Companies of PARIS under No. B 682 006 135, with legal representative Mr. Alain LEMAITRE domiciled in PARIS 1st district, 164 de Rivoli Street, Chairman of the Board, Hereinafter referred to as "THE LESSOR" AND The Company PHOENIX INTERNATIONAL FRANCE, SA with a capital value of FF 2,295,000 whose head office is located at LE KREMLIN BICETRE 94270, 93 de Fontainebleau Avenue, registered with the Register of Companies of CRETEIL under No. B326 152 915 represented by Mr. Bruno MAUGEE, residing at KREMLIN BICETRE, 93 de Fontainebleau Avenue, specially empowered to act hereby, Hereinafter referred to as "THE LESSEE" THE FOLLOWING IS HEREBY AGREED UPON AND SETTLED: -1- CHAPTER I--GENERAL TERMS AND CONDITIONS 0.ARTICLE 1--OBJECT OF LEASE AND DESCRIPTION OF PREMISES THE LESSOR leases to THE LESSEE, who accepts to lease, the premises described in the "Specific Terms and Conditions". 0.ARTICLE 2--EFFECTIVE DATE--TERM This lease shall be effective as of the date indicated in the "Specific Terms and Conditions." As of that date, it shall be for a term of nine (9) full and consecutive years. However, THE LESSEE shall have the right to terminate this lease at the end of each of the two first three-year periods, by serving written notice to THE LESSOR at least six (6) months prior to the expiration of the applicable three-year period. ARTICLE 3--INVENTORY OF THE PREMISES THE LESSEE states that he is well aware of the condition of the leased premises as they were visited with the purpose of leasing and releases THE LESSOR of any further description other than the one comprised in the "Specific Terms and Conditions". He accepts them in their present condition without any right to demand any repairs or restorations. It is specified that any difference between the assessments and the surface areas mentioned herein or resulting from plans that might be attached hereto, and the actual dimensions of the premises, shall not justify an increase or a decrease in rent; the parties shall refer to the consistency of the premises as they exist. THE LESSEE agrees to allow access to the premises to companies in charge of executing work required for the collection of refuse as well as for repairs to damage which might be noted subsequently. An inventory of the premises after hearing both parties shall be drawn up, at THE LESSEE's expense, within fifteen days, at the latest, of THE LESSEE's entry into the premises. Otherwise, the premises shall be considered having been leased in perfect condition. N.B.: The articles marked with a (0) are strictly completed in the Specific Terms (in Chapter II). -2- (0) 0.ARTICLE 4--TERMS AND CONDITIONS OF LEASE 1) PURPOSE AND USE (0)The premises shall be occupied exclusively for the purpose and use set forth in the "Specific Terms and Conditions." THE LESSEE shall use the premises quietly and so as not to disturb the peace of neighbours or third parties. If the leased premises belong to a group divided in volumes or to a co-ownership, or to a regulated area, or are only a part of a group which belongs to THE LESSOR or of a group divided in volumes, THE LESSEE agrees to comply with the provisions of the specifications, of the regulation of the area, of the articles of association, of the rules of co-ownership, of internal rules or of any agreements pertaining to the leased premises and mentioned in the "Specific Terms and Conditions." This lease does not include any guarantee of exclusivity or of non-competition by THE LESSOR, who reserves the right to lease all premises for the exercise of any operations similar or identical to THE LESSEE's. 2) PROVISIONS RELATING TO SAFETY THE LESSEE shall comply with the administrative regulations and the safety rules relative to the category of the building of which are part the leased premises. 3) ADMINISTRATIVE AUTHORIZATIONS THE LESSEE agrees to be solely responsible for obtaining any and all authorizations deriving from legal, regulatory (in particular, Articles L 510.1 and R 510.1 and subsequent articles in the Town Planning Code, if the premises are located in the region of Ile-de-France), administrative or other provisons, concerning the use of the leased premises and, if applicable, their access to the public; THE LESSOR may in no way be the subject of demand letters or sued with regard to any matter set forth in this clause. He shall execute all formalities and bear all expenses which might be necessary in the exercise of his business, and, consequently, releases THE LESSOR of any possible responsibility in this regard. 4) SUBLETTING--TRANSFER a) SUBLETTING Any subletting, partial or total, is forbidden. -3- b) TRANSFER THE LESSEE shall not transfer, in any manner whatsoever, his rights to this lease without obtaining the prior written approval of THE LESSOR, unless the transferee is the purchaser of his business. In all cases, THE LESSEE shall remain a jointly liable guarantor, without being able to oppose the benefit of discussion or of division, of the transferee and the successive transferees, with regard to the payment of the rent and incidental expenses and the performance of all terms and conditions of this lease. The transfer shall be carried out by deed executed and authenticated by a notary with the participation of THE LESSOR's notary; the latter shall be called upon, by registered letter return receipt requested, to intervene in this deed, of which he shall receive an official copy without charge to him. 5) OBLIGATION TO FURNISH THE PREMISES AND TO OPERATE HIS BUSINESS THE LESSEE shall maintain the premises constantly furnished, at all times, with equipment and furniture in sufficient quantity and value to answer for the payment of the rent and the performance of the terms and conditions of the lease, and shall actually operate, without interruption, the above-mentioned business. 6) WORK a) REPAIR AND MAINTENANCE WORK THE LESSEE shall be responsible not only for the repairs incumbent upon him and for minor maintenance (Art. 1720 Par. 2 and Art. 1754 Par. 1 of the Civil Code) but also for repairs of any nature, whatever their importance and whatever the origin of the degradation (defects in construction, normal wear and tear, etc.), even Acts of God, regarding the building itself as well as the equipment it contains. THE LESSOR shall be responsible only for major repairs as described in Article 606 of the Civil Code. THE LESSEE shall inform THE LESSOR immediately, with written confirmation, of any repairs incumbent upon the latter, as well as of all deterioration, destruction or accidents caused to the leased premises or which occurred because of them, otherwise he shall be deemed responsible for the consequences which might result from his silence or delay. THE LESSEE agrees, in order to allow, if applicable, the validation of the two-year or ten-year warranties, to inform THE LESSOR, as soon as they are noticed, of the faults or defects affecting the constructions. THE LESSEE shall proceed, without delay and at his expense, with the extermination -4- of all rodents and other parasites which might appear in the leased premises. He shall take all the necessary preventative measures against frost. Upon his departure, THE LESSEE shall prove, by an inventory of the premises drawn up at his expense after due hearing of the parties, that the premises are in excellent condition regarding maintenance and repairs of all nature pursuant to the above provisions. Failing that, he shall pay THE LESSOR the cost of renovations not covered by the security deposit provided for herein. b) IMPROVEMENT AND CONVERSION WORK THE LESSEE shall not proceed, in the leased premises, with any conversion, any installation or any equipment affecting the shell or modifying the interior layout, without prior written authorization of THE LESSOR, who may impose the control of his architect, whose fees shall be borne by THE LESSEE. The plans and descriptions of the conversions, installations or equipment intended by THE LESSEE, shall be attached to the request for authorization. Upon the departure of THE LESSEE, all conversions, installations, improvements and embellishments that he shall have made shall become, by accession and without compensation, the property of THE LESSOR, unless he prefers to require that the premises be restored to their original condition at the sole expense of THE LESSEE, even if he had already authorized the work. c) WORK IMPOSED BY REGULATIONS PERTAINING TO THE LESSEE'S BUSINESS THE LESSEE shall carry out all the work, whatever the cost, imposed in the building either by legislative or regulatory provisions, or by administrative orders, and in particular, all work affecting hygiene and safety, even in the case of Acts of God. d) COMMON PROVISIONS REGARDING WORK In the event of inefficiency of THE LESSEE, THE LESSOR may have the work referred to in (a) and (c) executed and the cost shall be reimbursed to him, upon first request, by THE LESSEE. THE LESSEE shall carry out all the work set forth in paragraphs (a), (b), and (c) above, under his sole responsibility and without recourse against THE LESSOR. He shall obtain all administrative and other authorizations and take out all necessary insurance policies, and in particular, mandatory insurance policies, and require that the companies have sufficient coverage for professional, contractual, and tort liability. If the leased premises belong to a co-ownership or are only one part of a building owned by THE LESSOR, the above-mentioned obligations incumbent upon THE LESSEE shall apply to the work relating to the private leased parts. -5- (0)7) SIGNS The installation of exterior signs or billboards is forbidden, except with prior written approval by THE LESSOR which is set forth in the "Specific Terms and Conditions." THE LESSEE shall comply with the prescriptions of THE LESSOR regarding all inscriptions or indications relating to his corporate name or his purpose that he might wish to install in the common parts of the building. 8) LIABILITY AND RECOURSES THE LESSEE may not request any reduction in rent or exercise any recourse against THE LESSOR: - -- in case of interruption or malfunction of the various services in the building; - -- in case of theft, looting, destruction or other criminal acts committed in the leased premises; in particular, THE LESSOR does not assume any obligation of surveillance. He renounces any recourse against THE LESSOR for disturbance of possession caused by third parties, and agrees to be solely responsible for legal action to be taken against the latter; THE LESSOR subrogates him in his rights in this regard. 9) INSURANCE a) THE LESSEE shall insure at his expense and maintain insured, for the entire term of the lease, his furniture, equipment, windows, installations against risks of fire, explosions, water damage, and the recourses of neighbours or third parties, acts of malicious intent, terrorism, sabotage, riots, and mass movements. b) THE LESSEE shall also be insured at his expense, in his capacity as occupying tenant, for third-party liability for all damage, property or bodily injury, that might be caused by either his occupying the premises, or his employees, or the use of the installations. c) THE LESSEE's insurance policies shall also provide for their cancellation to take effect only fifteen days after notice is given by the insurer to THE LESSOR. THE LESSEE renounces and shall have his insurance company renounce any recourse against THE LESSOR. Reciprocally, THE LESSOR renounces and shall have his insurer renounce any recourse against THE LESSEE. d) THE LESSEE shall provide THE LESSOR, upon first request by the latter, with all vouchers of the above-mentioned policies and of the payment of the respective premiums. -6- By express agreement, THE LESSOR shall have a privileged claim on all indemnities due to THE LESSEE by any insurance companies in case of claims, for any cause whatsoever; this contract constitutes, to the extent necessary, transfer up to the sums that may be due. e) THE LESSOR shall be solely responsible for insuring the building; however the premiums shall be reimbursed to him by THE LESSEE. 10) INCOME TAX AND TAXES THE LESSEE shall pay all city, police and public works costs which are usually borne by tenants, so that THE LESSOR might not be troubled about it and, in particular, he shall pay the business tax and all income tax incumbent upon THE LESSEE for which THE LESSOR is or might be deemed responsible, in any capacity, and prove their payment upon request, and, in any case, eight (8) days prior to his departure from the leased premises. 11) MISCELLANEOUS EXPENSES THE LESSEE shall be responsible for the payment of water, electricity, telephone, etc. (0)12) RESTAURANT If the building in which the leased premises are located includes an intercompany restaurant, which in this case is indicated in the "Specific Terms and Conditions," such restaurant will be made available to tenants for the service of meals to be eaten on site by their employees, excluding any other use. However, the initial opening will be dependent upon the needs expressed by all the users; THE LESSOR shall remain the sole judge as to the advisibility of its opening. Upon the execution of this lease, THE LESSEE automatically becomes a member of the Association or of the Group that will manage the restaurant. He agrees to maintain his membership for the entire duration of his occupancy and to perform all obligations, notably financial, incumbent upon him as a member. He shall comply with the specific provisions of the internal regulation of the building that apply to the restaurant. THE LESSEE agrees, for the entire term of the lease, personally, and, if applicable, in his capacity as a member of the Association or the Group: 1--to use the restaurant according to its purpose as defined above; 2--to be solely responsible for the operation of the company restaurant; consequently, he shall establish the internal regulation determining the terms and conditions of its use by his personnel, and enter into all necessary contracts, notably the contract with the restaurateur and all appropriate insurance contracts; in all cases, THE LESSEE shall -7- be the only one to assume the entire responsibility of all damage which might be caused to people or property, while using or after having used the restaurant, without having the right to trouble or sue THE LESSOR in this regard; THE LESSEE expressly waives any recourse against THE LESSOR. 3--to bear all expenses relating to equipment of any nature necessary for the restaurant's operation, including that which may become a fixture, even though they may have to be replaced completely, because of normal wear and tear, Acts of God or any other cause. 5--to bear the share of expenses related to the space that comprises the restaurant, and all related taxes, expenses, and costs, including property taxes. In the event of vacancy of all or part of the office space belonging to the above-mentioned building, other than that covered by this lease, the total amount of expenses of the restaurant resulting from the above-mentioned obligations shall be borne by its only user or users, so that THE LESSOR does not have to bear any. An inventory of the premises shall be drawn up prior to the start of operations after due hearing of THE LESSEE (or the Association or the Group) and THE LESSOR. 13) VISIT OF THE PREMISES During the term of the lease, THE LESSEE shall allow the representatives of THE LESSOR to visit the leased premises, at any moment, to ensure their good condition, and shall provide any vouchers that might be requested from him to prove the proper performance of the terms and conditions of the lease, and without those visits being abusive, provided he be given, except in cases of emergency, at least one (1) week's notice. In the six (6) months preceding the expiration of the lease, THE LESSEE shall allow visits of the leased premises, on all business days from 9:00 a.m. to 11:00 a.m. and from 2:00 p.m. to 5:00 p.m., by any person authorized by THE LESSOR. During this same period, he shall allow THE LESSOR to install a notice or a sign to indicate that the space is for rent. (0)ARTICLE 5--FINANCIAL TERMS AND CONDITIONS OF THE LEASE 1) RENT The rent is due as of the effective date of the lease. a) ANNUAL BASE RENT (0)This lease is granted and accepted for an annual rent exclusive of tax, the amount of -8- which is set forth hereinafter in the "Specific Terms and Conditions." This rent shall be payable in installments equal to one quarter of the said amount, for each quarter and in advance, on the first day of the first month of each calendar quarter. The rent pertaining to the period comprised between the effective date of the lease and the expiration of the calendar quarter that is ongoing at such date, shall be paid on the effective date of the lease. THE LESSOR agrees that the value added tax will be levied on revenues from this lease. Such tax shall be borne by THE LESSEE who agrees to pay it to THE LESSOR at the same time as the corresponding rental payment, exclusive of tax, and to bear any tax that may be substituted or added to the VAT by regulation. In the event of non-payment when due of the entire amount of the rent, the corresponding VAT, or the expenses, THE LESSEE shall owe to THE LESSOR a compensation equal to 1.50% plus taxes, per month or per fraction of month in arrears. This compensation, calculated on the amount of the unpaid sum when due, shall be due automatically, without prior demand letter, and its payment shall not constitute an extension in favour of THE LESSEE. (0)b) INDEXATION OF ANNUAL RENT The annual rent shall be adjusted according to the National Construction Cost Index (INDICE NATIONAL DU COUT DE LA CONSTRUCTION), published quarterly by the INSEE (National Institute of Statistics and Economic Studies). The index used for the calculation of the annual base rent is indicated in the "Specific Terms and Conditions." Consequently, the annual rent shall automatically be adjusted each year on the anniversary of the effective date of the lease in the same direction and the same proportion as the variation, from one year to the other, of the index of that same quarter. In the event of the late publication of the index, the rent shall be calculated in the interim according to the last published index. The variation of the rent shall be automatic; it shall not be subordinated to any notification; the fact that it is not calculated immediately shall in no way cancel the right of either of the parties to request at a later date that it be applied retroactively. -9- If the INSEE index ceases to be published, it shall be replaced, if no official index is available, by an equivalent index chosen either by amiable agreement between the parties, or if there is no agreement between them, through expertise executed by only one expert, appointed either jointly by the parties or by order of the President of the High Court, upon request of the most diligent party; the fees relating to the expertise and to the legal proceedings shall be borne exclusively THE LESSEE. The expert shall act as common agent for both parties in accordance with Article 1592 of the Civil Code, the provisions of which have been extended to renting. This indexation clause constitutes an essential and determining clause without which THE LESSOR would not have entered into this lease. Consequently, its partial or total non-application shall authorize THE LESSOR, and him only, to request the termination of the lease, without compensation. (0)2) CHARGES THE LESSEE shall bear all expenses, charges, services, supplies, taxes, and expenses relating to the leased premises, including, in particular, property taxes and, if the premises are located in the region of Ile-de-France, the tax on office space instituted by Article 40 of the rectified law of Finance for 1989, as well as the fees of the management firm and/or the manager, and the insurance premiums of the building. In the event, however, that THE LESSOR has to pay any amounts because of THE LESSEE, the latter shall reimburse the former without delay upon his first request. The charges usually incumbent upon THE LESSOR but transferred contractually to THE LESSEE are, for tax purposes, assimilated to the rent as a supplement. Consequently, the VAT shall be added to them. (0)THE LESSEE shall paY THE LESSOR, with each quarterly rent, an advance payment on charges calculated according to the estimated expenses for the year. They shall be adjusted afterwards according to the definitive statement of the expenses relating to the leased premises. The amount of the advance payment shall be readjusted, each year, according to the evolution of the charges. The first quarterly advance payment is set in the "Specific Terms and Conditions." (0)3) SECURITY DEPOSIT THE LESSEE has paid upon the execution of this lease, as a security deposit, to THE LESSOR, who acknowledges it, an amount equal to three (3) months' rent inclusive of tax; such amount is indicated in the "Specific Terms and Conditions." The security deposit shall be used, at the expiration of the lease or if it is terminated earlier for any cause whatsoever, to pay any amounts that might be owed by THE LESSEE to THE LESSOR; it is specified that THE LESSEE shall in no case use this -10- deposit to pay rent or other charges. At the time of the annual adjustment of the rent, the security deposit shall be increased or decreased, so as to always correspond to three (3) months of rent inclusive of tax. The increases on the payments, or the reimbursements, shall be paid upon first request. In the event of termination of this lease due to non-performance by THE LESSEE of any of his obligations, the security deposit shall be kept by THE LESSOR as compensation, without prejudice to his right to the payment of the accrued rent and the rent that will accrue until the end of the current quarterly period, and of repairs incumbent upon THE LESSEE, and subject to damages that might be due to THE LESSOR. ARTICLE 6--TERMINATION It is expressly agreed that failure to pay when due any one quarterly rental payment, corresponding VAT, or charges, or failing to perform any of the other provisions of the lease, this lease shall be automatically terminated, at THE LESSOR's choice, without any need to have such termination ordered by a court, one month after an order to pay or a demand letter has been served and remained unfulfilled. THE LESSOR shall redeem possession of the premises by the simple eviction of THE LESSEE, pronounced by provisional order, and no later offers may end the effect of this clause, and without prejudice to his right to payment of the accrued rent and rent that will accrue until the end of the current quarterly period, and of the cost of repairs incumbent upon THE LESSEE, and subject to any other amounts due, rights or actions. (0)ARTICLE 7--GUARANTEES They are indicated and set forth in the "Specific Terms and Conditions." ARTICLE 8--REGISTRATION This deed shall be registered at THE LESSOR's request and at THE LESSEE's expense. ARTICLE 9-- ARTICLE 10--DOCUMENTS GIVEN TO THE LESSEE They are indicated in the "Specific Terms and Conditions." ARTICLE 11--CHOICE OF RESIDENCE AND JURISDICTION OF COURTS -11- For the purposes of the performance of this lease, THE LESSOR chooses his head office as his residence and THE LESSEE chooses his head office as his residence. THE PARTIES AGREE THAT ALL DISPUTES RELATING TO THIS DEED SHALL BE SUBJECT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE HEAD OFFICE OF THE LESSOR. -12- CHAPTER II--SPECIFIC TERMS AND CONDITONS In this Chapter II, only those articles from the General Terms and Conditions that are completed or modified for the purposes of this contract, are repeated. ARTICLE 1--DESCRIPTION OF PREMISES - -- Building: BUILDING F, CALLED "LA CRISTALLERIE", which belongs to the building complex named "Le Quartier d'Affaires Sevres Manufacture," located in the SEVRES MANUFACTURE Z.A.C. (Commercial Activity Zone), 6/8 RUE DE LA CRISTALLERIE 92310 SEVRES Leased premises: the entire 1st, 2nd, 3rd, 4th, 5th, and 6th floors the main entrance and, generally, all the areas and equipment common to all tenants, 74 parking spaces located in the 2nd basement and bearing No. 1 to 74 The plans of the leased premises are attached hereto. ARTICLE 2--EFFECTIVE DATE OF LEASE The lease shall be effective as of January 1st, 1999. It shall be, as of that date, for a firm term of six (6) whole and consecutive years; THE LESSEE has already expressly renounced his right to terminate the lease after the first three-year period. ARTICLE 3--INVENTORY OF THE PREMISES THE LESSOR agrees to deliver the leased premises in good condition and it is specified that the 3rd, 4th, 5th, and 6th floors shall be delivered as they exist on the day of their availability, i.e., with their current partitions. To this effect, THE LESSOR shall execute the following restoration work: -- restore walls and carpeting to be identical to the ones on the 2nd floor, up to FF 700,000 exclusive of tax (seven hundred thousand French francs exclusive of tax); -- restore computer cables, up to FF 450,000 exclusive of tax (four hundred fifty thousand French francs, exclusive of tax); -13- --remove partitions on the 1st floor; --take out removed partitions that are on the 2nd floor. Also, THE LESSOR agrees to deliver the equipment, hereby defined, in good working order. THE LESSOR shall be responsible, in accordance with the provisions of Article 1721 of the Civil Code, for hidden defects of the leased premises, even unknown, as of the day of the execution of this lease. ARTICLE 4--TERMS AND CONDITIONS OF THE LEASE 1) USE OF THE PREMISES They are to be used exclusively for the following: - -- commercial offices of the company, the activity of which is: any and all theoretical and practical studies and research on medication in any manner and in all fields, as well as all activities directly or indirectly related thereto. - -- archives - -- parking spaces according to the specific allocation of the space, as indicated in the description, excluding any other use. 2) PROVISIONS RELATING TO SAFETY THE LESSOR gives to THE LESSEE a diagnostic report relating to the presence of asbestos in the leased premises and agrees to assume the costs and responsibility of any diagnostic and evaluation, of any processing of the asbestos, of any work in the leased building and of any possible damages that the presence of this product may cause. 4) a) SUBLETTING Notwithstanding the provisions of the General Terms and Conditions, partial or total subletting is subject to the prior written approval of THE LESSOR. To this end, THE LESSEE shall inform THE LESSOR, by registered letter return receipt requested, of his intention of subletting. This notice shall indicate the identity of the sublessee, the activity contemplated, and the term of the subletting. If THE LESSOR does not respond within fifteen days after receipt of the notice, he shall be deemed to -14- have given his approval. The partial or total subletting is already authorized in favour of a company that belongs to the same group as THE LESSEE, i.e., for a company of which more than 50% of the capital or voting rights are held, directly or indirectly, by THE LESSEE or by a company holding, directly or indirectly, more than 50% of the capital or the voting rights of THE LESSEE or, finally, in favour of a company holding more than 50% of the capital or the voting rights, directly or indirectly, of THE LESSEE. 3) b) TRANSFER THE LESSEE may transfer his rights to the present lease to the purchaser of his business. In other cases, THE LESSEE shall transfer his rights to this lease only after obtaining the prior written approval of THE LESSOR. To this end, THE LESSEE shall request the approval of THE LESSOR by registered letter return receipt requested, indicating to him the name and address of the purchaser and the terms and conditions of the transfer. If THE LESSOR does not respond within fifteen days after receipt of the request, he shall be deemed to have given his approval. The transfer shall be notified to THE LESSOR pursuant to the provisions of Article 1690 of the Civil Code. A copy of the deed of transfer shall be given to THE LESSOR free of charge. In event the lease is transfered, THE LESSEE shall remain a jointly liable guarantor with the transferee and successive transferees for the payment of the rent and incidental expenses, as well as for the performance of the provisions of the lease, for the full term of the lease and its first renewal, unless expressly discharged by THE LESSOR. 6) a) REPAIRS AND MAINTENANCE WORK THE LESSEE shall constantly maintain the leased premises in perfect condition with regard to repairs incumbent upon him and to minor maintenance work provided for in Article 1754 of the Civil Code; he shall bear all repairs that may become necessary because of failure to execute repairs incumbent upon him or minor maintenance work, or degradation resulting from his actions, those of his personnel or his clientele. All other repairs shall be incumbent upon THE LESSOR pursuant to the provisions of Article 1719, Par. 2 of the Civil Code. -15- 6) b) IMPROVEMENTS AND CONVERSION WORK THE LESSOR shall not change the configuration of the leased premises or cancel any of its services, except for minor modifications or modifications intended to improve the leased premises without changing their use. The improvement and conversion work, even when authorized, shall not entail any compensation by THE LESSOR upon THE LESSEE's departure. Such work executed by THE LESSEE in the leased premises, and which can not be detached without being fractured, deteriorated or without deteriorating the part of the shell to which it is attached, shall remain the property of THE LESSOR. However, with regard to work done without authorization, THE LESSOR may demand that the premises be restored to their original condition at the end of the lease, at THE LESSEE's expense. The equipment and conversions executed by THE LESSEE that can be dismantled without causing damages, shall remain his property, if he so wishes, and shall be removed by him upon his departure, provided he restores the premises to their previous condition. 6) c) WORK IMPOSED BY REGULATIONS THE LESSOR shall be responsible for all transformations, improvements or conversions and, more generally, for all work, whatever its nature or duration, which may be imposed by and in compliance with any existing or future regulation relating to hygiene, safety and health. The work pertaining to the shell of the building remains incumbent upon THE LESSOR. 6) d) COMMON PROVISIONS REGARDING WORK THE LESSEE shall endure all work, whatever its importance or duration, that THE LESSOR may have the right to have executed in the leased premises under this lease. If such work lasts more than 40 days and makes impossible the use of at least one floor of the leased building the surface of which is larger than 600 square meters, the price of the lease shall be reduced according to the period of time and for the part of the leased premises of which he is deprived. 9) INSURANCE Notwithstanding the 2nd paragraph of item (d): THE LESSOR shall have a privileged claim only on indemnities from insurance companies in case of damage of which THE LESSEE is the cause and up to the amounts due to THE LESSOR. -16- 12) INTERCOMPANY RESTAURANT The building complex, consisting of 6 buildings for office use, in which the leased premises are located includes an intercompany restaurant that belongs jointly to the group of owners and co-owners of those buildings. Building "F" is allocated 121 joint shares out of a total of 1,400 shares. The owners of common spaces have made the intercompany restaurant available to an association governed by the law of July 1st, 1901, under a free loan agreement. THE LESSEE shall bear, in proportion to the leased areas and up to the share of building "F", the entire expenses incumbent upon the Association together with the cost of renewal of equipment, furnishings and furniture of the intercompany restaurant. THE LESSEE shall be responsible, during the term of the lease, for the work and repairs, as defined in Article 1754 of the Civil Code, and for all repairs that may become necessary because of his failure to execute repairs incumbent upon him or resulting from his actions or those of his personnel. All other repairs shall be incumbent upon THE LESSOR. Moreover, THE LESSEE shall bear, in proportion to the leased areas, the share allocated to the restaurant in the expenses of the Association (L'ASSOCIATION SYNDICALE LIBRE). Excluding the fees to be paid to THE LESSOR for the intercompany restaurant and set at 50 F/m2 exclusive of tax, and excluding the admission fee to be paid to SODEXHO, the entire aforementioned charges relating in particular to operation expenses, to the cost of renewal of equipment, furnishings and furniture of the restaurant, and to repair expenses, are included in the advance payment on charges paid by THE LESSEE under Article 5-2 of this lease. 5) ARTICLE 5--FINANCIAL TERMS AND CONDITIONS OF THE LEASE 1) RENT A) ANNUAL BASE RENT - -- Annual Base Rent, exclusive of tax............FF 3,939,000.00 (three million nine hundred thirty-nine thousand French francs) - -- Value Added Tax...............................FF 811,434.00 - -- Annual Base Rent, inclusive of all taxes......FF 4,750,434.00 -17- This lease includes a rent deductible from January 1st, 1999 to March 14, 1999. The charges shall be borne by THE LESSEE as of January 1st, 1999. b) INDEXATION OF THE ANNUAL BASE RENT Index used for setting the Annual Base Rent: 1058 Index for the 1st quarter of 1998 2) CHARGES - -- Quarterly advance payment: FF 196,594.00 exclusive of tax. THE LESSEE shall bear 58% of property taxes and of the cost of the tax roll, the other 42% being borne by THE LESSOR. It is specified, if necessary, that the obligation of THE LESSEE pertaining to all the expenses includes those incumbent upon THE LESSOR in his capacity as a member of the Association (ASSOCIATION SYNDICALE LIBRE), in which building "F is subject to shares, and those resulting from the specifications, easements, and modifications applicable to the building compex, as well as the parking management agreement. 3) SECURITY DEPOSIT The security deposit is set, for the first year of the lease, at FF 984,750.00 (nine hundred eighty-four thousand seven hundred fifty French francs), which corresponds to three (3) months' rent, exclusive of tax. ARTICLE 9--REPRESENTATIONS OF THE LESSOR THE LESSOR represents: - -- that he is under no contractual or legal restriction to enter into this lease; - -- that, to the best of his knowledge, the leased property is not subject to any current threat or action of expropriation, that this property is not located in a renovation area of and, more generally, that no current measure of townplanning is susceptible to affect the right of usage resulting from this lease; - -- that no order of foreclosure or other has been given as of the date of execution of this lease with regard to the leased property; - -- that there is no restriction to the use of the leased property, as defined in this lease, resulting from the provisions of Articles L 631-7 to L 631-9 of the Construction and -18- Housing Code (CODE DE LA CONSTRUCTION ET DE L'HABITATION) pertaining to the transformation of spaces previously affected to housing use to another use, and resulting from the provisions of Articles L 520-1 to L 520-13 of the Townplanning Code relating to the payment of the fee payable by owners upon the construction of office space and research facilities or the transformation of space previously affected to another use in the region of Ile-de-France. ARTICLE 10--DOCUMENTS GIVEN TO THE LESSEE THE LESSEE acknowledges having received, prior to the execution of this lease, the following: - -- plans of the leased premises (attached) - -- description of the division in volume - -- settlement, specifications and easements - -- statutes of the ASL (ASSOCIATION SYNDICALE LIBRE) - -- report on asbestos Executed in Paris on October 1st, 1998 In two (2) original copies THE LESSOR THE LESSEE /s/ Alain Lemaitre /s/ Bruno Maugee - ------------------ ----------------- -19- EX-10.20 34 EXHIBIT 10.20 Exhibit 10.20 REVOLVING CREDIT AGREEMENT between IBRD-ROSTRUM GLOBAL INC. and BANQUE NATIONALE DE PARIS Los Angeles Branch Dated as of March 13, 1998 TABLE OF CONTENTS
PAGE ---- SECTION 1. DEFINITIONS....................................................................................... 1 1.1 DEFINED TERMS..................................................................................... 1 1.2 OTHER DEFINITIONAL PROVISIONS..................................................................... 13 SECTION 2. AMOUNT AND TERMS OF LOANS; COMMITMENT AMOUNTS..................................................... 14 2.1 REVOLVING LOANS.................................................................................... 14 2.2 OPTIONAL PREPAYMENTS............................................................................... 15 2.3 CONVERSION AND CONTINUATION OPTIONS................................................................ 15 2.4 MINIMUM AMOUNTS OF TRANCHES........................................................................ 16 2.5 INTEREST RATES, FEES AND PAYMENT DATES............................................................. 16 2.6 COMPUTATION OF INTEREST............................................................................ 17 2.7 INABILITY TO DETERMINE INTEREST RATE............................................................... 17 2.8 PAYMENTS........................................................................................... 18 2.9 ILLEGALITY......................................................................................... 18 2.10 INCREASED COSTS.................................................................................... 18 2.11 TAXES.............................................................................................. 20 2.12 INDEMNITY.......................................................................................... 21 2.13 MITIGATION OF COSTS................................................................................ 22 SECTION 3. REPRESENTATIONS AND WARRANTIES.................................................................... 22 3.1 FINANCIAL CONDITION................................................................................ 22 3.2 NO CHANGE.......................................................................................... 23 3.3 CORPORATE EXISTENCE; COMPLIANCE WITH LAW........................................................... 23 3.4 CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS............................................ 23 3.5 NO LEGAL BAR....................................................................................... 24 3.6 NO MATERIAL LITIGATION............................................................................. 24 3.7 OWNERSHIP OF PROPERTY; LIENS; CONDITION OF PROPERTIES.............................................. 24 3.8 INTELLECTUAL PROPERTY.............................................................................. 24 3.9 TAXES.............................................................................................. 25 3.10 FEDERAL REGULATIONS................................................................................ 25 3.11 ERISA.............................................................................................. 25 3.12 INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY ACT......................................... 26 3.13 SUBSIDIARIES....................................................................................... 26 3.14 PURPOSE OF LOANS................................................................................... 26 3.15 ENVIRONMENTAL MATTERS.............................................................................. 26 3.16 ACCURACY AND COMPLETENESS OF INFORMATION........................................................... 27 3.17 REAL PROPERTY ASSETS............................................................................... 27 3.18 PERMITS, ETC....................................................................................... 27 3.19 PATENTS, TRADEMARKS, ETC........................................................................... 28 3.20 COPYRIGHT ACT REQUIREMENTS......................................................................... 28 3.21 NATURE OF BUSINESS................................................................................. 28 3.22 CAPITAL STOCK OF BORROWER AND ITS SUBSIDIARIES..................................................... 28 3.23 RANKING OF LOANS................................................................................... 29 3.24 EXECUTIVE OFFICES.................................................................................. 29 3.25 INSOLVENCY......................................................................................... 29 3.26 LABOR MATTERS...................................................................................... 29 3.27 CONDEMNATION....................................................................................... 29
i 3.28 LEASES, LICENSES, PERMITS, SITE USE AGREEMENTS AND OTHER OCCUPANCY AGREEMENTS...................... 29 SECTION 4. CONDITIONS PRECEDENT.............................................................................. 29 4.1 CONDITIONS TO CLOSING DATE......................................................................... 29 4.2 CONDITIONS TO EACH LOAN............................................................................ 32 SECTION 5. AFFIRMATIVE COVENANTS............................................................................. 33 5.1 FINANCIAL STATEMENTS............................................................................... 33 5.2 CERTIFICATES; OTHER INFORMATION.................................................................... 34 5.3 PAYMENT OF OBLIGATIONS............................................................................. 35 5.4 CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE................................................... 36 5.5 MAINTENANCE OF PROPERTY; INSURANCE................................................................. 36 5.6 INSPECTION OF PROPERTY; BOOKS AND RECORDS; DISCUSSIONS............................................. 37 5.7 ENVIRONMENTAL LAWS................................................................................. 38 5.8 USE OF PROCEEDS.................................................................................... 38 5.9 COMPLIANCE WITH LAWS, ETC.......................................................................... 38 5.10 LEASE AND LICENSE APPROVALS........................................................................ 39 5.11 ACQUISITION OF REAL PROPERTY IN FEE SIMPLE......................................................... 39 5.12 LEASES AND LICENSES................................................................................ 39 5.13 NOTICES............................................................................................ 40 5.14 EMPLOYEE CONTRACTS................................................................................. 40 5.15 CONDITIONS SUBSEQUENT.............................................................................. 40 SECTION 6. NEGATIVE COVENANTS................................................................................ 40 6.1 LIMITATION ON FUNDAMENTAL CHANGES.................................................................. 40 6.2 LIMITATION ON RESTRICTED PAYMENTS.................................................................. 41 6.3 TRANSACTIONS WITH AFFILIATES....................................................................... 41 6.4 FISCAL YEAR........................................................................................ 41 6.5 UNFUNDED LIABILITIES............................................................................... 41 6.6 LINE OF BUSINESS................................................................................... 41 6.7 LIMITATION ON LIENS................................................................................ 42 6.8 LIMITATION ON LOANS AND ADVANCES................................................................... 42 SECTION 7. EVENTS OF DEFAULT................................................................................. 43 SECTION 8. MISCELLANEOUS..................................................................................... 46 8.1 AMENDMENTS AND WAIVERS............................................................................. 46 8.2 NOTICES............................................................................................ 46 8.3 NO WAIVER; CUMULATIVE REMEDIES..................................................................... 47 8.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES......................................................... 47 8.5 PAYMENT OF EXPENSES AND TAXES...................................................................... 47 8.6 SUCCESSORS AND ASSIGNS............................................................................. 48 8.7 COUNTERPARTS....................................................................................... 48 8.8 SEVERABILITY....................................................................................... 48 8.9 INTEGRATION........................................................................................ 48 8.10 GOVERNING LAW...................................................................................... 49 8.11 CLAIMS OR CONTROVERSIES SUBJECT TO JUDICIAL REFERENCE.............................................. 49 8.12 ACKNOWLEDGEMENTS................................................................................... 51 8.13 HEADINGS........................................................................................... 51 8.14 CONFLICT OF TERMS.................................................................................. 51
- ii - Exhibits A Form of Revolving Note B Form of No Default/Representation Certificate C Form of Continuation Notice D Form of Closing Opinion E Form of Borrower Security Agreement F Form of Guarantees (U.S. and Canadian) G Form of Monthly Declaration of Borrowing Limit H Form of Environmental Compliance Agreement Schedules 1 Borrower's Indebtedness 2 Borrower's Liens 3 Borrower's Permits and Approvals 4 Borrower's Real Property Assets 5 Borrower's Litigation Proceedings 6 Certain Environmental Matters 7 Regarding the Capital Stock of Borrower 8 Borrower Subsidiaries 9 Mortgages - iii - REVOLVING CREDIT AGREEMENT THIS REVOLVING CREDIT AGREEMENT, dated as of March 13, 1998, between IBRD-ROSTRUM GLOBAL INC., a Delaware corporation (the "BORROWER") and BANQUE NATIONALE DE PARIS, Los Angeles Branch (the "LENDER"). RECITALS A. The Borrower has requested that the Lender make loans available to the Borrower on a revolving basis in a maximum aggregate amount not to exceed at any time $7,000,000. Such revolving credit facility would be available to finance the Borrower's general corporate operations. B. The Lender is willing to make available such revolving credit facility on the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto hereby agree as follows: SECTION 1. DEFINITIONS 1.1 DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings: "ACCOUNTANTS": Ernst & Young LLP, or such other firm of independent certified public accountants or chartered accountants of recognized national standing as shall be selected by the Borrower and satisfactory to the Lender. "ACCOUNT DEBTORS": any Person who is or who may become obligated under, with respect to, or on account of an Account Receivable. "ACCOUNTS RECEIVABLE": all presently existing and hereafter arising accounts receivable, contract rights and all other forms of obligation owing to the Borrower arising out of the sale or lease of goods or the rendition of services by the Borrower, whether or not earned by performance, all credit insurance, guaranties and other security therefor, as well as all goods returned to or reclaimed by the Borrower and all of the Borrower's books and records relating to any of the foregoing. "AFFILIATE": as to any Person, (a) any other Person (other than a Subsidiary) which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person or (b) any Person who is a shareholder having control or a director, officer, or partner (i) of such Person, (ii) of any Subsidiary of such Person or (iii) of any Person described in the preceding clause (a). For purposes of this definition, "control" of a Person means the power, directly or indirectly, either to (i) vote securities having 10% or more of the ordinary voting power for the election of directors of such Person or (ii) direct or cause the direction of the management and policies of such Person whether by contract or otherwise. "AGREEMENT": this Revolving Credit Agreement, as amended, waived, supplemented or otherwise modified from time to time. "APPLICABLE LENDING OFFICE": for the Lender, its offices for LIBOR Loans and Reference Rate Loans, specified on the signature pages hereof, any of which offices may, upon 10 days' prior written notice to the Borrower, be changed by the Lender. "APPLICABLE LIBOR RATE MARGIN": with respect to the Loans which are LIBOR Loans, for each Interest Period, 1.25% per annum. "APPLICABLE REFERENCE RATE MARGIN": with respect to the Loans which are Reference Rate Loans, .25% per annum. "BORROWER": as defined in the preamble hereto. "BORROWING BASE": as at any date, (a) 80% of the Borrower's Eligible Accounts Receivable PLUS (b) 50% of the EXCESS (which number shall not be negative) of (i) the costs and estimated profit in excess of progress billings on contracts in progress OVER (ii) progress billings in excess of costs and estimated profit on contracts in progress, the whole determined by using the percentage of completion method, MINUS (c) the liabilities to be deducted according to the Lender's form "Quarterly Declaration of Borrowing Limit" (as provided by the Lender). "BUSINESS DAY": a day other than a Saturday, Sunday or other day on which commercial banks in the State of California are authorized or required by law to close and which, in the case of a LIBOR Loan, is a Eurodollar Business Day. "CAPITALIZED LEASE OBLIGATIONS": obligations for the payment of rent for any real or personal property under leases or agreements to lease that, in accordance with GAAP, 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 GAAP. "CAPITAL STOCK": any and all shares, interests, participation or other equivalent (however designated) of capital stock of a corporation, any and all equivalent ownership interest in a Person (other than a corporation), any and all warrants, - 2 - options or rights to purchase or any other securities convertible into any of the foregoing. "CLOSING DATE": the date on which the conditions set forth in Section 4.1 are satisfied and the initial Loan is made. "CODE": the Internal Revenue Code of 1986, as amended from time to time. "COLLATERAL": all of the property (tangible or intangible) subject to the lien or security interest to be created by any mortgage, deed of trust, security agreement, pledge agreement, assignment or other security document heretofore or hereafter executed by the Borrower as security for all or part of the Obligations. "COLLATERAL DOCUMENTS": the Security Agreement, the Mortgages, all notices of security interests in deposit accounts requested by the Lender pursuant to the Security Agreement, Form UCC-1 Financing Statements and amendments thereto and any other document encumbering the Collateral or evidencing or perfecting a security interest therein for the benefit of the Lender executed by the Borrower, as the same may be amended or modified from time to time in accordance with the terms hereof. "COMMONLY CONTROLLED ENTITY": as to any Person, an entity, whether or not incorporated, which is under common control with such Person within the meaning of Section 4001 of ERISA or is part of a group which includes such Person and which is treated as a single employer under Section 414 of the Code. "CONTINUATION NOTICE": a request for continuation or conversion of a Loan as set forth in Section 2.3, substantially in the form of Exhibit C. "CONTRACTUAL OBLIGATION": as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its Property is bound. "DEFAULT": any of the events specified in Section 7, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "DOLLARS" and "$": dollars in lawful currency of the United States. "ELIGIBLE ACCOUNT RECEIVABLES": those Accounts Receivable created by the Borrower in the ordinary course of business that arise out of the Borrower's sale of goods or rendition of services, are owing from Account Debtors that are reasonably acceptable to the Lender. In determining such eligibility, the Lender may, but is not obligated to, rely on agings, reports and - 3 - schedules of Accounts Receivables furnished by the Borrower, but reliance by the Lender thereon from time to time shall not be deemed to limit the Lender's right to revise standards of eligibility at any time as to both the Borrower's present and future Accounts Receivable. Eligible Accounts shall not include any of the following: (a) Accounts Receivable, any portion of which has been due for more than 90 days, except for Accounts Receivable which have been previously approved by the Lender as good quality Accounts Receivable notwithstanding that any portion thereof may be past due beyond 90 days, in which case the portion of such Accounts Receivable which has been outstanding for less than 90 days may be included as "Eligible Account Receivables"; (b) Accounts Receivable with respect to which the Account Debtor is an officer, director, employee or agent of the Borrower; (c) Accounts Receivable with respect to which the Account Debtor is a subsidiary of, related to, affiliated with, or has common shareholders, officers or directors with the Borrower; (d) Accounts Receivable with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold or which contain other terms by reason of which payment by the Account Debtor may be conditional; (e) Accounts Receivable with respect to which the Account Debtor is the United States or any department, agency or instrumentality of the United States; (f) Accounts Receivable with respect to which the Borrower is or may become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to the Borrower or, for any other reason, are subject to any right of offset in favor of the Account Debtor; (g) Accounts Receivable with respect to which the Account Debtor disputes liability or makes any claim with respect thereto, or is subject to any insolvency or bankruptcy proceeding, or becomes Insolvent or goes out of business; and (h) Accounts Receivable that are payable in currency other than Dollars. "ENVIRONMENTAL COMPLIANCE AGREEMENT": the Environmental Compliance Agreement (substantially in the form of Exhibit H) made by the Borrower in favor of the Lender, as requested by the Lender from time to time, as it may be amended or modified in accordance with the terms hereof. - 4 - "ENVIRONMENTAL LAWS": any and all federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any governmental authority or Requirements of Law (including common law) regulating, relating to or imposing liability or standards of conduct concerning protection of human health or the environment, as now or at any time hereafter in effect. "ERISA": the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA AFFILIATE": as to any Person, each trade or business including such Person, whether or not incorporated, which together with such Person would be treated as a single employer under Section 4001(a)(14) of ERISA. "EVENT OF DEFAULT": any of the events specified in Section 7, PROVIDED that any requirement for the giving of notice, the lapse of time, or both, and all other conditions, have been satisfied. "EURODOLLAR BUSINESS DAY": any day on which banks are open for dealings in Dollar deposits in the London interbank market. "EXCLUDED TAXES": all taxes imposed on or by reference to the net income of the Lender or its Applicable Lending Office by any Governmental Authority and all franchise taxes, taxes on doing business or taxes measured by capital or net worth imposed on the Lender or its Applicable Lending Office by any Governmental Authority and any taxes imposed by any Governmental Authority arising as a consequence of the failure of the Lender to provide accurate documentation required to be provided by the Lender pursuant to Section 2.11(b). "FINANCIAL STATEMENTS": as defined in Section 3.1 hereof. "GAAP": generally accepted accounting principles in the United States in effect from time to time. "GOVERNMENTAL AUTHORITY": any nation or government, any federal, state or other political subdivision thereof and any federal, state or local entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "GUARANTEE OBLIGATION": as to any Person (the "GUARANTEEING PERSON"), any obligation of (a) the guaranteeing Person or (b) another Person (including, without limitation, any bank under any letter of credit) which Person the guaranteeing Person has agreed to reimburse or indemnify for undertaking such obligation in either case guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other obligations (the "PRIMARY OBLIGATIONS") of any other third Person (the "PRIMARY OBLIGOR") in - 5 - any manner, whether directly or indirectly, including, without limitation, any obligation of the guaranteeing Person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds for the purchase or payment of any such primary obligation or to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; PROVIDED, HOWEVER, that the term Guarantee Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation of any guaranteeing Person shall be deemed to be the lesser of (a) an amount equal to the stated or determinable (by the Borrower) amount of the primary obligation in respect of which such Guarantee Obligation is made and (b) the maximum amount for which such guaranteeing Person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing Person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing Person's maximum reasonably anticipated liability in respect thereof as determined by the Borrower in good faith. "GUARANTEES": the guarantees, substantially in the forms of Exhibit F (as applicable), made by each Guarantor in favor of the Lender, on the Closing Date, as the same may be amended or modified from time to time in accordance with the terms hereof. "GUARANTORS": the Parent and Phoenix. "INDEBTEDNESS": of any Person at any date, without duplication, (a) all indebtedness of such Person for borrowed money or for the deferred purchase price of property (other than such amounts which are contingent upon earnings performance or similar circumstances) or services (other than current trade liabilities incurred in the ordinary course of business and payable in accordance with customary practices) or which is evidenced by a note, bond, debenture or similar instrument, (b) all obligations of such Person under Capitalized Lease Obligations, (c) all obligations of such Person in respect of acceptances issued or created for the account of such Person, (d) all liabilities secured by any Lien on any property owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof, (e) all obligations of such Person, whether absolute or contingent, in respect of letters of credit opened for the account of such Person and (f) all Guarantee Obligations of such Person in respect of any indebtedness, - 6 - obligations or liabilities of any other Person of the type referred to in clauses (a) through (e) of this definition. "INSOLVENCY": with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA. "INSOLVENT": pertaining to a condition of Insolvency. "INTELLECTUAL PROPERTY": as defined in Section 3.8 hereof. "INTERCREDITOR AGREEMENT": an intercreditor agreement dated as of February 5, 1998 among the Lender, Banque Nationale de Paris (Canada) and Royal Bank of Canada, the Borrower, the Parent and Phoenix all in form and substance satisfactory to the Lender, as it may be amended or modified in accordance with the terms hereof. "INTEREST PAYMENT DATE": for Reference Rate Loans, on the first day of each calendar month while the Loans are outstanding and the day on which the Loans become due and payable in full and are paid or prepaid in full and for LIBOR Loans, the last day of each Interest Period therefor and if such Interest Period is more than three months in length on each three-month anniversary date of borrowing and the day on which the Loans become due and payable in full and are paid or prepaid in full. "INTEREST PERIOD": with respect to any LIBOR Loan: (a) initially, the period commencing on the borrowing or conversion date, as the case may be, with respect to such LIBOR Loan and ending one, two, three or six months thereafter, as selected by the Borrower in its notice of borrowing or its Continuation Notice, as the case may be, given with respect thereto; and (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such LIBOR Loan and ending one, two, three or six months thereafter, as selected by the Borrower by irrevocable notice to the Lender not less than three Eurodollar Business Days prior to the last day of the then current Interest Period with respect thereto; PROVIDED that, all of the foregoing provisions relating to Interest Periods are subject to the following: (i) if any Interest Period pertaining to a LIBOR Loan would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; - 7 - (ii) any Interest Period that would otherwise extend beyond the date final payment is due on the Loans shall end on the date of such final payment; and (iii) any Interest Period pertaining to a LIBOR Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month. "INVESTMENT COMPANY ACT": as defined in Section 3.12 hereof. "LENDER": as defined in the preamble hereto. "LETTER OF GUARANTEE": a nontransferable letter of guarantee for the benefit of the Lender issued by Banque Nationale de Paris (Canada) in the face amount of $7,000,000, in form and substance acceptable to the Lender, as it may be amended or modified in accordance with the terms hereof and thereof. "LIBOR": with respect to each day during each Interest Period pertaining to a LIBOR Loan, the rate of interest determined by the Lender to be the rate per annum at which deposits in Dollars would be offered to the Lender by leading banks in the London interbank market at or about 9:00 a.m., Los Angeles time, two Eurodollar Business Days prior to the beginning of such Interest Period, for delivery on the first day of such Interest Period for the number of days comprised therein and in an amount comparable to the amount of its LIBOR Loan to be outstanding during such Interest Period. "LIBOR ADJUSTED RATE": with respect to each day during each Interest Period pertaining to a LIBOR Loan, a rate per annum determined for such day in accordance with the following formula (rounded upward to the nearest 1/100th of 1%): LIBOR --------------------------------- 1.00 - LIBOR Reserve Requirements "LIBOR LOANS": Loans the rate of interest applicable to which is based upon LIBOR. "LIBOR RESERVE REQUIREMENTS": for any day as applied to a LIBOR Loan, the aggregate (without duplication) of the maximum rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve System or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such Board) maintained by a member bank of such Federal Reserve System. - 8 - "LIEN": any mortgage, pledge, charge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), security interest or other security agreement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any Capitalized Lease Obligation having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction in respect of any of the foregoing). "LOAN": a revolving loan made to the Borrower by the Lender pursuant to the provisions of Section 2.1 and "LOANS" means the aggregate of all revolving loans outstanding at any given time. "LOAN DOCUMENTS": this Agreement, the Note, the Collateral Documents, the Guarantees, the Environmental Compliance Agreement and any other agreement executed by a Loan Party in connection therewith and herewith including, but not limited to, UCC-1 Financing Statements, as such agreements and documents may be amended, supplemented and otherwise modified from time to time in accordance with the terms hereof. "LOAN PARTIES": the Borrower and the Guarantors. "MARGIN STOCK": as defined in Regulation U. "MATERIAL ADVERSE EFFECT": a material adverse effect on (a) the business, operations, property or financial condition of the Borrower and its Subsidiaries, taken as a whole, (b) the ability of the Borrower and its Subsidiaries, taken as a whole, to perform their obligations under the Loan Documents or (c) the validity or enforceability of the Loan Documents or the rights or remedies of the Lender hereunder or thereunder. "MATURITY": in respect of the Note, the date it shall become due and payable in full, whether at stated maturity, by acceleration or otherwise. "MORTGAGES": such mortgages, deeds of trust, collateral assignments of leases and collateral assignments of licenses and permits as may be made by the Borrower in favor of the Lender in respect of the Properties owned by the Borrower, in form and substance satisfactory to the Lender, securing the Obligations to the extent provided therein, as the same may be amended or modified from time to time in accordance with the terms hereof. "MULTIEMPLOYER PLAN": a plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "NOTE": as defined in Section 2.1(c) hereof. - 9 - "OBLIGATIONS": the unpaid principal of and interest on (including, without limitation, interest accruing after the maturity of the Loans and interest accruing on or after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding and whether or not at a default rate) the Note, and all other obligations and liabilities of the Borrower and its Subsidiaries to the Lender, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, this Agreement, the Note, any other Loan Document and any other document made, delivered or given in connection herewith or therewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all reasonable fees and disbursements of counsel to the Lender that are required to be paid by the Borrower and its Subsidiaries pursuant to the terms of this Agreement) or otherwise. "OCCUPANCY AGREEMENTS": as defined in Section 5.12. "PARENT": Phoenix International Life Sciences (U.S.) Inc., a Delaware corporation, which directly owns all of the Capital Stock of the Borrower. "PBGC": the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA or any successor thereto. "PERSON": any individual, firm, partnership, joint venture, corporation, association, business enterprise trust, unincorporated organization, government or department or agency thereof or other entity, whether acting in an individual, fiduciary or other capacity. "PHOENIX": Phoenix International Life Sciences Inc., a Canadian corporation which directly or indirectly owns all of the Capital Stock of the Borrower and the Parent. "PLAN": as to any Person, any plan (other than a Multiemployer Plan) subject to Title IV of ERISA maintained for employees of such Person or any ERISA Affiliate of such Person (and any such plan no longer maintained by such Person or any of such Person's ERISA Affiliates to which such Person or any of such Person's ERISA Affiliates has made or was required to make any contributions within any of the five preceding years). "PROPERTIES": the collective reference to the real and personal property owned, leased, or under license or permit, by the Borrower or any of its Subsidiaries. - 10 - "REFERENCE RATE": the rate of interest per annum publicly announced from time to time by the Lender, at its Los Angeles Branch office as its "Reference Rate". The Reference Rate is determined by the Lender from time to time as a means of pricing credit extensions to some customers and is neither directly tied to any external rate of interest or index nor necessarily the lowest rate of interest charged by the Lender at any given time for any particular class of customers or credit extensions. Any change in the applicable interest rate due to a change in the Reference Rate shall be effective on the effective date of such change in the Reference Rate. "REFERENCE RATE LOANS": Loans the rate of interest applicable to which is based upon the Reference Rate. "REGULATION D": Regulation D of the Board of Governors of the Federal Reserve System, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof and any successor regulation thereto. "REGULATION U": Regulation U of the Board of Governors of the Federal Reserve System, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof and any successor regulation thereto. "REORGANIZATION": with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA. "REPORTABLE EVENT": any of the events set forth in Section 4043(b) of ERISA, other than those events as to which the thirty-day notice period is waived under PBGC regulations. "REQUIREMENT OF LAW": as to any Person, the Articles of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule, order, judgment or regulation of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "RESPONSIBLE OFFICER": the chief executive officer, the president, any senior vice president, treasurer or any vice president of the applicable Loan Party, or, with respect to financial matters, the chief financial officer, treasurer or controller of the applicable Loan Party, as applicable. "RESTRICTED PAYMENTS": as defined in Section 6.2. "REVOLVING COMMITMENT": the commitment of the Lender to make Loans hereunder through its Applicable Lending Office in an amount not to exceed $7,000,000, as the same may be adjusted pursuant to the provisions hereof. - 11 - "REVOLVING PERIOD": as defined in Section 2.1(a). "SECURITY AGREEMENT": the Security Agreement dated as of the Closing Date by the Borrower in favor of the Lender in respect of the tangible and intangible personal property of the Borrower described therein, substantially in form of Exhibit E hereto, as it may be amended or otherwise modified from time to time in accordance with the terms hereof. "SINGLE EMPLOYER PLAN": any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan. "SOLVENT": when used with respect to any Person, that: (a) the present fair salable value of such Person's assets is in excess of the total amount of the probable liability on such Person's liabilities; (b) such Person is able to pay its debts generally as they become due; and (c) such Person does not have unreasonably small capital to carry on such Person's business as theretofore operated and all businesses in which such Person is about to engage. "SUBSIDIARY": as to any Person at any time of determination, a corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary Voting Power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries or Subsidiaries, or both, by such Person. Unless otherwise qualified, all references to a "subsidiary" or to "subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower. "TAXES": as defined in Section 2.11(a) hereof. "TERMINATION EVENT": (a) a Reportable Event, (b) the institution of proceedings to terminate a Single Employer Plan by the PBGC under Section 4042 of ERISA, (c) the appointment by the PBGC of a trustee to administer any Single Employer Plan or (4) the existence of any other event or condition that would reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment by the PBGC of a trustee to administer, any Single Employer Plan. "TRANCHE": the collective reference to LIBOR Loans the Interest Periods with respect to all of which begin on the same - 12 - date and end on the same later date (whether or not such LIBOR Loans shall originally have been made on the same day). "TRANSACTION COSTS": for any period, reasonable nonrecurring out-of-pocket costs, fees and expenses (including reasonable attorneys' fees) which are incurred by the Borrower and its Subsidiaries in connection with (a) the negotiation, preparation and consummation of the transactions contemplated under this Agreement and (b) financing agreements and proposed financing agreements related to this Agreement. "TYPE": as to any Loan, its nature as a Reference Rate Loan or a LIBOR Loan. "U.S. PERSON": a citizen or resident of the United States, a corporation, a partnership or other entity created or organized in or under any laws of the United States or any State thereof, or any estate or trust that is subject to Federal income taxation regardless of the source of its income. "VOTING POWER": the aggregate number of votes of all classes of Capital Stock of such Person which ordinarily has voting power for the election of directors of such Person. 1.2 OTHER DEFINITIONAL PROVISIONS. (a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in any other Loan Document or any certificate or other document made or delivered pursuant hereto or thereto. (b) As used herein, in any other Loan Document, and in any certificate or other document made or delivered pursuant hereto or thereto, accounting terms not defined in Section 1.1 and accounting terms partly defined in Section 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP. Unless otherwise provided herein, all financial calculations made with respect to the Borrower for the purpose of determining compliance with the terms of this Agreement shall be made on a consolidated basis. (c) The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, subsection, Schedule and Exhibit references are to this Agreement unless otherwise specified. (d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. (e) References to agreements, other contractual instruments and other documents include all subsequent amendments and other modifications to such agreement and documents, but only to the - 13 - extent such amendments and other modifications are not prohibited by the terms of any Loan Document. SECTION 2. AMOUNT AND TERMS OF LOANS; COMMITMENT AMOUNTS 2.1 REVOLVING LOANS. (a) Subject to the terms and conditions hereof, the Lender agrees to make revolving loans through its Applicable Lending Office to the Borrower during the period from and including the Closing Date to the date upon which the Lender shall, by notice to the Borrower, terminate the right of the Borrower to obtain revolving loans hereunder or demand the immediate repayment of all revolving loan amounts hereunder (the "REVOLVING PERIOD") in an aggregate principal amount not to exceed at any time outstanding the lesser of (i) the Revolving Commitment, as such amount may be reduced hereunder and (ii) the Borrowing Base (collectively, the "LOANS"). During the Revolving Period Loans may be repaid and reborrowed up to the limits set forth herein. (b) Subject to Sections 2.9 and 2.11, the Loans may from time to time be (i) LIBOR Loans, (ii) Reference Rate Loans or (iii) a combination thereof, as determined by the Borrower and notified to the Lender in accordance with either Section 2.1(e) or 2.3. The Lender may make or maintain its Loans to the Borrower by or through any Applicable Lending Office. (c) The Loans made by the Lender to the Borrower shall be evidenced by a promissory note of the Borrower, substantially in the form of Exhibit A (the "NOTE"), with appropriate insertions therein, payable to the order of the Lender and representing the obligation of the Borrower to pay the aggregate unpaid principal amount of the Loans made by the Lender to the Borrower pursuant to Section 2.1(a), with interest thereon as prescribed in Sections 2.5 and 2.6. The Lender is hereby authorized (but not required) to record the date and amount of each payment or prepayment of principal of its Loans made to the Borrower, each continuation thereof, each conversion of all or a portion thereof to another Type and, in the case of LIBOR Loans, the length of each Interest Period with respect thereto, in the books and records of the Lender, and any such recordation made as part of its normal lending practices shall constitute PRIMA FACIE evidence of the accuracy of the information so recorded. The failure of the Lender to make any such recordation or notation in the books and records of the Lender (or any error in such recordation or notation) shall not affect the obligations of the Borrower hereunder or under the Note. The Note shall (i) be dated the Closing Date, (ii) provide for the payment of interest in accordance with Sections 2.5 and 2.6 and (iii) be stated to be payable on the Lender's demand. (d) On Lender's demand, the Borrower shall immediately repay the principal of the Note and all interest accrued and unpaid thereon (even if such demand occurs during the Revolving Period). - 14 - The Borrower shall immediately prepay the Loans in an amount equal to the excess of any Loans outstanding over the lesser of (i) the Revolving Commitment and (ii) the Borrowing Base. (e) The Borrower shall give the Lender irrevocable written notice (which notice must be received by the Lender prior to 9:00 a.m., Los Angeles time, in the case of Reference Rate Loans, one Business Day prior to the proposed date of borrowing and, in the case of a Eurodollar Loan, on the third Business Day before the date of the proposed borrowing. Each such notice of a Loan shall be by telephone and confirmed, by the end of the same Business Day, by telecopy specifying therein the requested (i) date of such Loan, (ii) Type of such Loan, (iii) amount of such Loan and (iv) in the case of a Eurodollar Loan, the initial Interest Period for such Loan. Each Loan shall be in the amount of $500,000 or in integral multiple of $100,000 in excess thereof. 2.2 OPTIONAL PREPAYMENTS. The Borrower may on the last day of any applicable Interest Period with respect thereto or at any time subject to compliance with Section 2.12, in the case of LIBOR Loans, or at any time and from time to time, in the case of Reference Rate Loans, prepay the Loans, in whole or in part, upon at least three Business Days' irrevocable written notice, in the case of LIBOR Loans, and upon at least one Business Day's irrevocable written notice, in the case of Reference Rate Loans, from the Borrower to the Lender, specifying the date and amount of prepayment and whether the prepayment is of LIBOR Loans, Reference Rate Loans or a combination thereof and, if of a combination thereof, the amount allocable to each. If any such notice is given, the amount specified in such notice shall be due and payable by the Borrower on the date specified therein, together with accrued interest to such date on the amount prepaid. Partial prepayments of the Loans shall be in an aggregate principal amount of $500,000 or whole multiples of $100,000 in excess thereof. 2.3 CONVERSION AND CONTINUATION OPTIONS. (a) The Borrower may elect from time to time to convert LIBOR Loans to Reference Rate Loans by the Borrower giving the Lender at least two Business Days' prior irrevocable written notice of such election pursuant to a Continuation Notice, PROVIDED that any such conversion of LIBOR Loans may only be made on the last day of an Interest Period with respect thereto. The Borrower may elect from time to time to convert Reference Rate Loans to LIBOR Loans by the Borrower giving the Lender at least three Eurodollar Business Days' prior irrevocable written notice of such election pursuant to a Continuation Notice. Any such notice of conversion to LIBOR Loans shall specify the length of the initial Interest Period or Interest Periods therefor. All or any part of outstanding LIBOR Loans and Reference Rate Loans may be converted as provided herein, PROVIDED that (i) any such conversion may only be made if, after giving effect thereto, Section 2.4 shall not have been contravened, (ii) no such Loan may be converted into a LIBOR Loan after the date that is one month prior to the end of the Revolving - 15 - Period and (iii) the Borrower shall not have the right to elect to continue at the end of the applicable Interest Period, or to convert to, a LIBOR Loan if a Default shall have occurred and be continuing. (b) Any LIBOR Loan may be continued as such upon the expiration of the then current Interest Period with respect thereto by the Borrower giving at least three Eurodollar Business Days' prior irrevocable written notice to the Lender, in accordance with the applicable provisions of the term "Interest Period" set forth in Section 1.1, of the length of the next Interest Period to be applicable to such LIBOR Loan, PROVIDED that no LIBOR Loan may be continued as such (i) if, after giving effect thereto, Section 2.4 would be contravened, (ii) after the date that is one month prior to the end of the Revolving Period or (iii) if a Default shall have occurred and be continuing and PROVIDED, FURTHER, that if the Borrower shall fail to give any required notice as described above in this Section or if such continuation is not permitted pursuant to the preceding proviso, such Loans shall be automatically converted to Reference Rate Loans on the last day of such then-expiring Interest Period. 2.4 MINIMUM AMOUNTS OF TRANCHES. All borrowings, conversions and continuations of the Loans hereunder and all selections of Interest Periods hereunder shall be in such amounts and be made pursuant to such elections so that, after giving effect thereto, the aggregate principal amount of the Loans comprising such Tranche shall be equal to $500,000 or a whole multiple of $100,000 in excess thereof, and, in any case, there shall not be more than ten Tranches. 2.5 INTEREST RATES, FEES AND PAYMENT DATES. (a) Each LIBOR Loan shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the LIBOR Adjusted Rate plus the Applicable LIBOR Rate Margin. (b) Each Reference Rate Loan shall bear interest at a rate per annum equal to the Reference Rate plus the Applicable Reference Rate Margin. (c) If an Event of Default shall exist hereunder, at the option of the Lender all amounts outstanding under the Note shall bear interest at a rate per annum which is the rate otherwise applicable under Sections (a) and (b) above plus 2% from the date of such Event of Default until the date such Event of Default is cured or waived (after as well as before judgment). (d) Should the Lender determine that the utilization of the credit facility established hereunder is not adequately supported by the Borrowing Base (which determination shall be in the Lender's sole and absolute discretion), the Borrower agrees to pay - 16 - a fee of 0.50% (with a minimum of $250) as calculated on the amount of the coverage deficit established on the last day of each calendar month. This fee will be charged to the account of the Borrower the month following the determination of such deficit. (e) If the Borrower fails to deliver to the Lender the reports required by Section 5.2(a) within the time periods required, the Borrower shall pay to the Lender a monthly fee of $250 for each month (or a prorated amount for any portion thereof) for which such reports were not delivered; provided, however, that payment of such fee shall not waive any resulting Default or Event of Default which shall occur as a result of the Borrower's failure to provide such reports to the Lender as required hereunder. (f) Interest shall be payable in arrears on each Interest Payment Date, provided that interest accruing pursuant to paragraph (c) of this Section shall be payable on demand. The fees referenced in (d) and (e) above shall be payable on demand of the Lender. 2.6 COMPUTATION OF INTEREST. Interest on Loans and all Obligations shall be calculated on the basis of a 360-day year for the actual days elapsed. Each determination of an interest rate or the applicable fees described in Section 2.5(d) and (e) by the Lender pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower and the Lender in the absence of manifest error. 2.7 INABILITY TO DETERMINE INTEREST RATE. In the event that prior to the first day of any Interest Period: (a) the Lender shall have determined (which determination shall be conclusive and binding upon the Borrower absent manifest error) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the LIBOR Adjusted Rate for such Interest Period, or (b) the LIBOR Adjusted Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the cost to the Lender (as conclusively certified by the Lender) of making or maintaining its affected Loans during such Interest Period; the Lender shall give telecopy or telephonic notice thereof to the Borrower as soon as practicable thereafter. If such notice is given (i) any LIBOR Loans requested to be made on the first day of such Interest Period shall be made as Reference Rate Loans and (ii) any outstanding LIBOR Loans shall be converted, on the first day of such Interest Period, to Reference Rate Loans. Until such notice has been withdrawn by the Lender, no further LIBOR Loans shall be made or continued as such, nor shall the Borrower have the right to convert Reference Rate Loans to LIBOR Loans. - 17 - 2.8 PAYMENTS. All payments (including prepayments) to be made by the Borrower hereunder and under the Note, whether on account of principal, interest, fees or otherwise, shall be made without set off or counterclaim and shall be made prior to 10:00 a.m., Los Angeles time, on the due date thereof to the Lender to such account as the Lender shall specify to the Borrower in writing, in Dollars and in immediately available funds. All payments due to the Lender from the Borrower hereunder shall be deemed paid when received by the Lender. If any payment hereunder (other than payments on the LIBOR Loans) becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day, and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. If any payment on a LIBOR Loan becomes due and payable on a day other than a Eurodollar Business Day, the maturity thereof shall be extended to the next succeeding Eurodollar Business Day (and interest shall continue to accrue thereon at the applicable rate) unless the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Eurodollar Business Day. 2.9 ILLEGALITY. Notwithstanding any other provision herein, if any change after the Closing Date in any Requirement of Law or in the interpretation or application thereof shall make it unlawful for the Lender or Applicable Lending Office to maintain LIBOR Loans as contemplated by this Agreement, (a) the commitment of the Lender hereunder to continue LIBOR Loans as such and to convert Reference Rate Loans to LIBOR Loans shall forthwith be suspended during such period of illegality and (b) the Loans of the Lender or Applicable Lending Office then outstanding as LIBOR Loans, if any, shall be converted automatically to Reference Rate Loans on the respective last days of the then current Interest Periods with respect to such Loans or within such earlier period as required by law. If any such conversion of a LIBOR Loan occurs on a day which is not the last day of the then current Interest Period with respect thereto, the Borrower shall pay to the Lender such amounts, if any, as may be required pursuant to Section 2.12. To the extent that the Lender's LIBOR Loans have been converted to Reference Rate Loans pursuant to this Section 2.9, all payments and prepayments of principal that otherwise would be applied to the Lender's LIBOR Loans shall be applied instead to its Reference Rate Loans. 2.10 INCREASED COSTS. (a) In the event that any change after the Closing Date in any Requirement of Law or in the interpretation or application thereof or compliance by the Lender with any request or directive (whether or not having the force of law but, if not having such force, the compliance with which is - 18 - generally accepted and standard in the banking industry) from any central bank or other Governmental Authority having jurisdiction or authority over the Lender made subsequent to the Closing Date: (i) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirements against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of the Lender or Applicable Lending Office which is not otherwise included in the determination of the LIBOR Adjusted Rate hereunder; or (ii) shall impose on the Lender or Applicable Lending Office any other condition (other than with respect to a Tax matter or an Excluded Tax matter); and the result of any of the foregoing is to increase the cost to the Lender or Applicable Lending Office, by an amount which the Lender reasonably deems to be material, of converting into, continuing or maintaining LIBOR Loans or to reduce any amount receivable hereunder in respect thereof then, in any such case, the Borrower shall promptly pay to the Lender or Applicable Lending Office, upon the demand of the Lender, any additional amounts necessary to compensate the Lender for such increased cost or reduced amount receivable. If the Lender or any Applicable Lending Office becomes entitled to claim any additional amounts pursuant to this Section, it shall promptly notify the Borrower of the event by reason of which it has become so entitled. A certificate as to any additional amounts payable pursuant to this Section submitted by the Lender or Applicable Lending Office to the Borrower, which shall demonstrate in reasonable detail the computation of such amounts, shall be conclusive evidence of the accuracy of the information so recorded, absent manifest error. Requests by the Lender for compensation hereunder shall not be for a period more than six months retroactive. This covenant shall survive the termination of this Agreement and the payment of the Note. (b) If, after the date of this Agreement, the introduction of or any change in any applicable law, rule, regulation or guideline regarding capital adequacy, or any change in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, affects the amount of capital required or expected to be maintained by the Lender and the Lender (taking into consideration the Lender's policies with respect to capital adequacy) determines that the amount of capital maintained by the Lender which is attributable to or based upon the Loans or this Agreement must be increased as a consequence of such introduction or change by an amount deemed by the Lender to be material, then, upon demand of the Lender, the Borrower shall promptly pay to the Lender additional amounts sufficient to compensate the Lender for the - 19 - increased costs to such Lender of such increased capital, without duplication of any adjustment in interest based on the LIBOR Reserve Requirement. Any such demand shall be accompanied by a certificate of the Lender setting forth in reasonable detail the computation of any such increased costs, which certificate shall be conclusive, absent manifest error. Requests by the Lender for compensation hereunder shall not be for a period more than six months retroactive. This obligation of the Borrower under this Section 2.10(b) shall survive the termination of this Agreement and the payment of the Note and all other amounts payable hereunder in full. 2.11 TAXES. (a) All payments made by the Borrower in respect of the Obligations shall be made free and clear of, and without deduction or withholding (except to the extent required by law, in which case the following sentence shall apply) for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any United States Governmental Authority or any political subdivision or taxing authority thereof or therein, other than Excluded Taxes (all such non-Excluded Taxes being hereinafter called "TAXES"). If any Taxes are required to be withheld from any amounts payable to the Lender in respect of the Obligations, the amounts so payable to the Lender shall be increased to the extent necessary to yield to the Lender (after payment of all Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement and the other Loan Documents; provided, however, that no increased amount shall be required to be paid to the Lender under this sentence except to the extent that any change after the date hereof in any such withholding requirement (other than a change occasioned by an action of the Lender) results in an increase in the rate of such withholding from that in effect as of the date hereof in respect of payments to the Lender. The Lender shall deliver to the Borrower a certificate setting forth the amount of such Taxes, the calculation of such Taxes and an explanation of the requirement therefor, all in reasonable detail and such certificate shall be conclusive, absent manifest error. Whenever any Taxes are payable by the Borrower, as promptly as possible thereafter, the Borrower shall send to the Lender a copy of an original official receipt received by the Borrower showing payment thereof or such other evidence of payment reasonably satisfactory to the Lender. If the Borrower fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Lender the required receipts or other required documentary evidence, the Borrower shall indemnify the Lender for any incremental taxes, interest or penalties (and related reasonable fees and expenses of counsel) that may become payable by the Lender as a result of any such failure. The agreements in this Section shall survive the termination of this Agreement and the payment of the Note and all other amounts payable hereunder. - 20 - (b) The Lender agrees that it will deliver to the Borrower on or prior to the Closing Date (i) two duly completed copies of United States Internal Revenue Service Form 1001 or 4224 or successor applicable form, as the case may be, and (ii) an Internal Revenue Service Form W-8 or W-9 or successor applicable form. The Lender also agrees to deliver to the Borrower two further copies of the said Form 1001 or 4224, as applicable, and Form W-8 or W-9, or successor applicable forms or other manner of certification as to such tax matters, as the case may be, on or before the date that any such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrower, and such extensions or renewals thereof as may reasonably be requested by the Borrower, unless in any such case an event beyond the control of the Lender (including, without limitation, any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent the Lender from duly completing and delivering any such form with respect to it and the Lender so advised the Borrower. The Lender shall certify (i) in the case of a Form 1001 or a Form 4224, that it is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes and (ii) in the case of a Form W-8 or W-9, that it is entitled to an exemption from United States backup withholding tax. (c) The Borrower shall not be required to pay any additional amounts to any Person in respect of United States withholding tax pursuant to Section 2.11(a) if the obligation to pay such additional amounts would not have arisen but for a failure by such Person to comply with the requirements of Section 2.11(b) (including the accuracy of the certificate described in the final sentence thereof). 2.12 INDEMNITY. The Borrower agrees to indemnify the Lender and to hold the Lender harmless from and to pay the Lender on demand the amount of any reasonable liability, loss or expense arising from the reemployment of funds obtained by it or from fees payable to terminate the deposits from which such funds were obtained (including reasonable fees and expenses of counsel) which the Lender may sustain or incur as a consequence of (a) default by the Borrower in payment when due of the principal amount of or interest on any LIBOR Loan, (b) default by the Borrower in making a borrowing of, conversion into or continuation of LIBOR Loans after the Borrower has given a notice requesting the same in accordance with the provisions of this Agreement, but only if the Lender has suffered actual loss, liability or expense in reliance on such notice, (c) default by the Borrower in making any prepayment after the Borrower has given a notice thereof in accordance with the provisions of this Agreement or (d) the making by the Borrower of a prepayment or conversion of LIBOR Loans on a day which is not the last day of an Interest Period with respect thereto. The Lender's certificate as to such liability, loss or - 21 - expense shall be deemed conclusive, absent manifest error. This covenant shall survive the termination of this Agreement and the payment of the Note and all other amounts payable hereunder. 2.13 MITIGATION OF COSTS. If the Lender, by changing its Applicable Lending Office or taking any other reasonable action, so long as making such change or taking such other action is not disadvantageous to it in any financial, regulatory or other respect, can mitigate any adverse effect on the Borrower under Section 2.7, 2.9, 2.10 or 2.11, the Lender shall take such action. SECTION 3. REPRESENTATIONS AND WARRANTIES To induce the Lender to enter into this Agreement and to make the Loans, the Borrower hereby represents and warrants to the Lender that: 3.1 FINANCIAL CONDITION. (a) The reviewed balance sheet of the Borrower and its consolidated Subsidiaries as at December 31, 1997, and the related reviewed statements of income and of cash flows for the fiscal year ended on such date, certified by the Accountants, copies of which will be furnished to the Lender on or before May 15, 1998 will present fairly in all material respects the financial condition of the Borrower and its consolidated Subsidiaries as at such date, and the results of its operations and its cash flows for the fiscal year then ended. All such financial statements (the "FINANCIAL STATEMENTS"), including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by such Accountants or Responsible Officer, as the case may be, and as disclosed therein and for the absence of notes). The Borrower does not have any, as of such date, Guarantee Obligation, contingent liability or liability for taxes, or any long-term lease or unusual forward or long-term commitment, including, without limitation, any interest rate or foreign currency swap or exchange transaction, which is not reflected in the foregoing statements or in the notes thereto and which is material in relation to the financial condition of the Borrower at such date. During the period from December 31, 1997 to and including the Closing Date, there has been no sale, transfer or other disposition by the Borrower of any material part of its business or property and no purchase or other acquisition of any business or property (including any Capital Stock of any other Person) other than the acquisition of Borrower's Capital Stock by the Parent material in relation to the financial condition of the Borrower at December 31, 1997. (b) The unaudited balance sheet of the Borrower as at February 28, 1998, a copy of which has heretofore been furnished to the Lender, presents fairly in all material respects, in the opinion of the Borrower, the financial condition of the Borrower as at such date, subject to year-end adjustments and changes resulting from audit. - 22 - 3.2 NO CHANGE. Since December 31, 1997 no events have occurred which, individually or in the aggregate, constitute a material adverse change in the financial condition or business of the Borrower and its Subsidiaries taken as a whole. 3.3 CORPORATE EXISTENCE; COMPLIANCE WITH LAW. The Borrower and each Subsidiary, (a) is (or, when formed, will be) duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has (or, when formed, will have) the corporate, partnership or limited liability company power, as the case may be, and authority, and the legal right, to own and operate its Properties, to lease the property it operates as lessee and to conduct the business in which it is currently engaged and in which it proposes to be engaged after the Closing Date, (c) is (or, when formed, will be) duly qualified as a foreign entity and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification and (d) is (or, when formed, will be) in compliance with all Requirements of Law except to the extent that the failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 3.4 CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The Borrower and each of its Subsidiaries has the corporate, partnership or limited liability company power, as the case may be, and authority, and the legal right, to make, deliver and perform the Loan Documents, to which it is or will be a party, to borrow hereunder and the applicable Loan Party has taken all necessary corporate action to authorize (a) the borrowings on the terms and conditions of this Agreement and the Note and (b) the execution, delivery and performance of the Loan Documents to which it is or will be a party. Each Subsidiary has (or, when formed, will have) the corporate, partnership or limited liability company power and authority, and the legal right, to make, deliver and perform the Loan Documents to which it is or will be a party and has (or, when formed, will have) taken all corporate, partnership or limited liability company action, as the case may be, to authorize the execution, delivery and performance of such Loan Documents. Except as set forth on Schedule 3, no consent or authorization of, filing with or other act by or in respect of, any Governmental Authority or any other Person is required in connection with the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of this Agreement, the Note or the other Loan Documents except for any consent, authorization, filing or other act the failure to obtain or make which could not reasonably be expected to have a Material Adverse Effect. This Agreement has been, and the Note and the other Loan Documents to which the Borrower or any Subsidiary is or will be a party will be, duly executed and delivered by it. This Agreement constitutes, and the Note and the other Loan Documents when executed and delivered will constitute, a legal, valid and binding obligation of the Borrower and each Subsidiary (to the - 23 - extent the Borrower or such Subsidiary is a party thereto) enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 3.5 NO LEGAL BAR. The execution, delivery and performance of this Agreement, the Note and the other Loan Documents, the borrowings hereunder and the use of the proceeds thereof will not violate any Requirement of Law or Contractual Obligations of the Borrower or any Subsidiary which could reasonably be expected to have a Material Adverse Effect and will not result in, or require, the creation or imposition of any Lien on any of its properties or revenues pursuant to any such Requirement of Law or Contractual Obligation, except pursuant to the Loan Documents or except as otherwise permitted pursuant to Section 6.7, which Lien could reasonably be expected to have a Material Adverse Effect. 3.6 NO MATERIAL LITIGATION. Except as set forth in Schedule 5, no litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Borrower, threatened by or against the Borrower or any Subsidiary or against any of its or their properties or revenues or by or against any "affiliated person" of the Borrower or any Subsidiary, within the meaning of the Investment Company Act, (a) on the Closing Date with respect to this Agreement, the Note or the other Loan Documents or any of the transactions contemplated hereby or thereby or (b) which could reasonably be expected to have a Material Adverse Effect. 3.7 OWNERSHIP OF PROPERTY; LIENS; CONDITION OF PROPERTIES. (a) The Borrower and each Subsidiary has (or, when formed, will have) good title in fee simple to, a valid leasehold interest in or rights as a permittee or licensee to, all of its real property, and good title to all of its other Property which is material to its business, and to the best of the Borrower's current actual knowledge, none of such Property is subject to any Lien except as permitted by Section 6.7. (b) All of the Properties used or useful in the conduct of the Borrower's business or the business of any Subsidiary are in good repair, working order and condition (reasonable wear and tear excepted) and suitable for use in the operation of its businesses currently conducted. 3.8 INTELLECTUAL PROPERTY. The Borrower and each Subsidiary owns, or is licensed to use, all trademarks, trade names, patents and copyrights necessary for the conduct of its business as currently conducted except for those the failure to own or license which could not reasonably be expected to have a Material Adverse Effect (the "INTELLECTUAL PROPERTY"). To the Borrower's - 24 - knowledge, no claim which could reasonably be expected to have a Material Adverse Effect has been asserted and is pending by any Person challenging or questioning the use of any such Intellectual Property or the validity or effectiveness of any such Intellectual Property, nor does the Borrower or any Subsidiary know of any valid basis for any such claim. To the Borrower's knowledge, the use of such Intellectual Property by the Borrower and its Subsidiaries, if any, does not infringe on the rights of any Person, nor, to the Borrower's knowledge, does the use by other Persons of such Intellectual Property infringe on the rights of the Borrower or any Subsidiary. 3.9 TAXES. Except as previously disclosed in writing to the Lender, the Borrower and each Subsidiary has (or, when formed, will have) filed or caused to be filed all tax returns which are required to be filed and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than any not yet delinquent or the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of the Borrower or such Subsidiary, as appropriate); and no tax Lien has been filed, and no claim is being asserted with respect to any such tax, fee or other charge which could reasonably be expected to have a Material Adverse Effect. 3.10 FEDERAL REGULATIONS. No part of the proceeds of any Loans are intended to be or will be used, directly or indirectly, for "purchasing" or "carrying" any Margin Stock within the respective meanings of each of the quoted terms under Regulation U or for any purpose which violates the provisions of the Regulations of the Board of Governors of the Federal Reserve System. If requested by the Lender, the Borrower will furnish to the Lender a statement to the foregoing effect in conformity with the requirements of Form U-1 referred to in Regulation U. 3.11 ERISA. No Reportable Event has occurred during the five-year period prior to the date on which this representation is made with respect to any Plan which has or would likely result in a Material Adverse Effect. Each Plan has complied in all material respects with the applicable provisions of ERISA and the Code. The present value of all accrued benefits under all Single Employer Plans maintained by the Borrower, any Subsidiary, or any Commonly Controlled Entity (based on those assumptions used to fund the Plans) did not, as of the last annual valuation date prior to the date on which this representation is made, exceed by an amount which could cause a Material Adverse Effect the value of the assets of such Plans allocable to such accrued benefits. Neither the Borrower, any Subsidiary, nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan which has or would likely result in a Material - 25 - Adverse Effect. The present value (determined using actuarial and other assumptions which are reasonable in respect of the benefits provided and the employees participating) of the liability of the Borrower, each Subsidiary, if any, and each Commonly Controlled Entity for post retirement benefits (excluding benefits required by Section 4980B of the Code) to be provided to their current and former employees under plans which are welfare benefit plans (as defined in Section 3(a) of ERISA) does not, in the aggregate, exceed by an amount which could cause a Material Adverse Effect the assets under all such plans allocable to such benefits. 3.12 INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY ACT. Neither the Borrower nor any Subsidiary is an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended (the "INVESTMENT COMPANY ACT"). Neither the Borrower nor any Subsidiary is a "holding company," or an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. 3.13 SUBSIDIARIES. As of the Closing Date, the Borrower has those Subsidiaries listed on Schedule 8 hereto. 3.14 PURPOSE OF LOANS. The proceeds of the Loans are intended to be and shall be used by the Borrower to finance its operational needs and for general corporate purposes. 3.15 ENVIRONMENTAL MATTERS. To the Borrower's knowledge after reasonable inquiry, with respect to such of the Properties as is real property: (a) Such Properties and all operations at such Properties are in compliance in all material respects with all applicable Environmental Laws, and there is no contamination at, under or about such Properties, or violation of any Environmental Law with respect to such Properties or the business conducted at such Properties which involves a matter or matters which has caused or are reasonably likely to cause a Material Adverse Effect. (b) The Borrower has not received any notice of violation, alleged violation, non-compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to any of such Properties or the business conducted at such Properties which involves a matter or matters which has caused or are reasonably likely to cause a Material Adverse Effect, nor does the Borrower have knowledge or reason to believe that any such notice will be received or is being threatened except insofar as such notice or threatened notice, or any aggregation thereof, does not involve a matter or matters that is or are reasonably likely to cause a Material Adverse Effect. - 26 - (c) No judicial proceedings or governmental or administrative action is pending, or, to the knowledge of the Borrower, threatened, under any Environmental Law to which the Borrower or any of its Subsidiaries is named as a party with respect to such Properties or the business conducted at such Properties which involves a matter or matters which has caused or are reasonably likely to cause a Material Adverse Effect, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to such Properties or such business except insofar as such proceeding, action, decree, order or other requirement, or any aggregation thereof, is not reasonably likely to cause a Material Adverse Effect. 3.16 ACCURACY AND COMPLETENESS OF INFORMATION. Unless otherwise expressly indicated in writing to the Lender, the documents furnished and the statements made in writing to the Lender by the Borrower in connection with the negotiation, preparation or execution of this Agreement or any of the other Loan Documents do not contain any untrue statement of fact material to the creditworthiness of the Borrower or omit to state any such material fact necessary in order to make the statements contained therein not misleading, in either case which has not been corrected, supplemented or remedied by subsequent documents furnished or statements made in writing to the Lender prior to the date hereof. The projections and pro forma financial information contained in such materials are based upon good faith estimates and assumptions believed by the Borrower to be reasonable at the time made and as of the date of this Agreement, it being recognized that such projections as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such projections may differ from the projected results. 3.17 REAL PROPERTY ASSETS. Schedule 4 sets forth all real property that, as of the Closing Date, is owned or leased by the Borrower and its Subsidiaries. 3.18 PERMITS, ETC. Except as set forth on Schedule 3, the Borrower and its Subsidiaries have (or, when formed, will have) all permits, licenses, authorizations and approvals required for each of them lawfully to acquire, own, lease, control, manage or operate their businesses as currently conducted, except for such permits, licenses, authorizations or approvals required for the lawful ownership, lease, control, management or operation of their businesses as currently conducted, the failure to obtain or maintain which will not have a Material Adverse Effect. Except as set forth in Schedule 5, no condition exists or event has occurred which, in itself or with the giving of notice or lapse of time or both, would result in the suspension, revocation, impairment, forfeiture or non-renewal of any such permit, license, authorization or approval required for the lawful ownership, - 27 - lease, control, management or operation of their businesses as currently conducted, and, there is no claim that any thereof is not in full force and effect, except for such of the immediately preceding matters which are not likely or reasonably likely to cause a Material Adverse Effect. Except as set forth on Schedule 5 and for such of the immediately preceding matters and such of the following matters which are not reasonably likely to cause a Material Adverse Effect, there are (a) no judgments, decrees or orders issued, or to the Borrower's knowledge, threatened, by the any court or regulatory Person with respect to the Borrower or any Subsidiary, (b) no complaints, petitions, filings or other proceedings pending, or to the Borrower's knowledge, threatened, before the any court or regulatory Person with respect to the Borrower or any Subsidiary and (c) no events that have occurred that could reasonably be expected to result in the imposition of any financial penalty by the any court or regulatory Person upon the Borrower or any Subsidiary. 3.19 PATENTS, TRADEMARKS, ETC. Schedules A, B and C to the Security Agreement accurately and completely lists all material patents, trademarks, service marks, trade names and copyrights owned by or licensed to the Borrower and its Subsidiaries on the Closing Date. 3.20 COPYRIGHT ACT REQUIREMENTS. The Borrower and its Subsidiaries have (or, when formed, will have) recorded or deposited with and paid to the United States Copyright Office, the Registrar of Copyrights, the Patent and Trademark Office and/or any other licensors of copyrighted materials, all notices, statements of account, royalty fees and other documents and instruments required under the terms and conditions of any patent, trademark, service mark, trade name and copyright used in the operation of their businesses as currently conducted and are not liable to any Person for copyright infringement under any law, rule, regulation, contract or license as a result of their business operations, all except to the extent that noncompliance with the preceding requirements would not, in the aggregate, be reasonably expected to have a Material Adverse Effect. 3.21 NATURE OF BUSINESS. Neither the Borrower nor any of its Subsidiaries is (or, when formed, will be) engaged in any material business other than the ownership and provision of clinical research and clinical design management services for the evaluation and certification of new pharmaceutical products. 3.22 CAPITAL STOCK OF BORROWER AND ITS SUBSIDIARIES. The Parent is the direct owner of all of the issued and outstanding Capital Stock of the Borrower as of the Closing Date. All Capital Stock of the Borrower and its Subsidiaries has been duly authorized and validly issued and is fully paid and non-assessable. As of the Closing Date (a) no Capital Stock of the Borrower or its Subsidiaries carries any preemptive rights, (b) neither the Borrower nor any Subsidiary is obligated to redeem - 28 - or repurchase any of its Capital Stock, (c) no agreement, arrangement, or plan exists, except as has been disclosed in writing to the Lender, which could directly or indirectly affect the capital structure of the Borrower or its Subsidiaries and (d) there are no outstanding options, rights or warrants for the acquisition by any Person, directly or indirectly, of shares of the Capital Stock of the Borrower or its Subsidiaries. 3.23 RANKING OF LOANS. This Agreement and the other Loan Documents to which the Borrower is a party, when executed, and the Loans, when borrowed are and will be the direct and general obligations of the Borrower. The Borrower's obligations hereunder and thereunder rank and will rank at least PARI PASSU in priority of payment to all other Indebtedness of the Borrower. 3.24 EXECUTIVE OFFICES. The location of the Borrower's executive office and principal place of business as of the Closing Date is 2525 Campus Drive, Irvine, California 92612-1503. 3.25 INSOLVENCY. After giving effect to the funding of Loans on the Closing Date, the application of the proceeds of such Loans as provided herein, and the payment of all estimated legal, underwriting, investment banking, accounting and other fees related hereto and thereto, the Borrower and each other Loan Party will be Solvent as of and on the Closing Date. 3.26 LABOR MATTERS. As of the Closing Date, there are no strikes or other labor disputes against the Borrower or any Subsidiary pending, or to the Borrower's knowledge, threatened against it or any Subsidiary. 3.27 CONDEMNATION. To the Borrower's knowledge no taking of any of the Properties comprising real property or any part thereof through eminent domain, conveyance in lieu thereof, condemnation or similar proceeding is pending or, to the knowledge of the Borrower, threatened by any Governmental Authority which would reasonably be expected to have a Material Adverse Effect. 3.28 LEASES, LICENSES, PERMITS, SITE USE AGREEMENTS AND OTHER OCCUPANCY AGREEMENTS. To the Borrower's knowledge, true and complete copies of all material leases, licenses, permits, site use agreements and any other type of occupancy permit to which the Borrower or any Subsidiary is (or, when formed, will be) a party have been delivered to the Lender and are in full force and effect with no material defaults existing thereunder which individually or in the aggregate would have a Material Adverse Effect. SECTION 4. CONDITIONS PRECEDENT 4.1 CONDITIONS TO CLOSING DATE. The agreement of the Lender to make the Loans requested to be made by it on the Closing Date for the purposes set forth in Section 3.14, is subject to the satisfaction, immediately prior to or concurrently with the making - 29 - of the Loans on the Closing Date (except as otherwise expressly provided hereunder), of the following conditions precedent: (a) CREDIT AGREEMENT. The Lender shall have received this Agreement, executed and delivered by an officer of the Borrower as of the Closing Date. (b) OTHER LOAN DOCUMENTS. The Lender shall have received the Note, the Guarantees and the Security Agreement, in each case executed and delivered by an officer of the relevant Loan Party. (c) LETTER OF GUARANTEE. The Lender shall have received the Letter of Guarantee executed and delivered by Banque Nationale de Paris (Canada). (d) INTERCREDITOR AGREEMENT. The Lender shall have received the Intercreditor Agreement, dated as of February 5, 1998, executed and delivered by officers of all of the relevant parties thereto. (e) INCUMBENCY CERTIFICATE. The Lender shall have received an incumbency certificate of the Borrower, and each other Loan Party, dated the Closing Date, executed by one of its Responsible Officers or its Secretary or Assistant Secretary. (f) CORPORATE PROCEEDINGS. The Lender shall have received a copy of the resolutions of the Board of Directors of the Borrower and each other Loan Party authorizing (i) the Loan Documents referred to in Sections 4.1(a) and 4.1(b) and to which it is or will be a party and (ii) the borrowings contemplated under Section 2.1 in each case certified by the Secretary or an Assistant Secretary of the Borrower and each other Loan Party as of the Closing Date, which certificate states that the resolutions thereby certified have not been amended, modified, revoked or rescinded and are in full force and effect. (g) ORGANIZATIONAL DOCUMENTS. The Lender shall have received copies of the articles of incorporation and by-laws of the Borrower and each other Loan Party, as of the Closing Date, certified as of the Closing Date as complete and correct copies thereof by the Secretary or an Assistant Secretary of the Borrower and each other Loan Party. (h) COSTS. The Lender shall have received payment or evidence of payment by the Borrower of all reasonable costs, expenses and taxes (including, without limitation, those payable pursuant to Section 8.5) accrued and unpaid and otherwise due and payable on or before the Closing Date by the Borrower pursuant to this Agreement. - 30 - (i) LEGAL OPINIONS. The Lender shall have received the following executed legal opinions: (i) the executed legal opinion of Pepper Hamilton LLP, counsel to the Borrower and the other Loan Parties substantially in the form of Exhibit D hereto; and (ii) the executed legal opinion of Pillsbury Madison & Sutro LLP, counsel to the Lender, in form and substance satisfactory to the Lender; and (iii)such other legal opinions as the Lender may reasonably request. (j) RECORDING. The Lender shall have received as of the Closing Date evidence of the recording, or of the provision acceptable to the Lender for the recording, of all documents reasonably necessary to be recorded in such office or offices as may be necessary or, in the reasonable opinion of the Lender, desirable to perfect each Lien purported to be created thereby or to otherwise protect the rights of the Lender thereunder and evidence of the filing, or of provision acceptable to the Lender for the filing, of appropriate financing statements on Form UCC-1, or amendments to existing financing statements on Form UCC-2 (as the Lender may deem appropriate), naming the Lender as secured party, duly executed by the applicable Loan Party under the Security Agreement, in such office or offices as may be necessary or, in the reasonable opinion of the Lender, desirable to perfect the security interests purported to be created by any of the Collateral Documents. (k) LIEN SEARCHES. The Lender shall have received certified copies of requests for information from all relevant jurisdictions, listing all effective financing statements which name the Borrower or its Subsidiaries, as applicable, as debtor, together with copies of such financing statements, none of which, except for Liens permitted by Section 6.7 or Liens otherwise agreed to in writing by the Lender, shall cover any of the Collateral. (l) GOOD STANDING CERTIFICATES. The Lender shall have received certificates, each dated a recent date, of the Secretary of State of the State of California and the California Franchise Tax Board, respectively, certifying as to the existence and good standing of, and the payment of taxes by, the Borrower and each Subsidiary in such state and listing all charter documents of the Borrower and each Subsidiary on file with such officials. (m) NO DEFAULT/REPRESENTATIONS. No Default shall have occurred and be continuing on the Closing Date or would occur after giving effect to the making of the Loans requested to be made on the Closing Date and the representations and warranties contained in this Agreement and each other Loan Document, and the - 31 - representations and warranties contained in each certificate or other writing delivered to the Lender in satisfaction of the conditions set forth in this Section 4.1 prior to or on the Closing Date, except to the extent such representations and warranties expressly relate to an earlier date, shall be correct in all material respects on and as of the Closing Date, and the Lender shall have received a certificate of the Borrower to such effect in the form of Exhibit B, dated as of the Closing Date and executed by a Responsible Officer of the Borrower. (n) INSURANCE POLICIES. The Lender shall have received evidence that the insurance policies provided for in Section 5.5 and in the other Loan Documents (including but not limited to flood insurance) are in full force and effect, certified by the insurance broker therefor, together with appropriate evidence showing the Lender as an additional named insured or loss payee, as appropriate, all in form and substance reasonably satisfactory to the Lender. (o) OPERATIONAL CONSENTS. The Lender shall have received evidence, in form and substance reasonably satisfactory to the Lender, that the Borrower and its Subsidiaries have obtained all material consents and licenses, in each case as required by law or necessary for the operation of the Borrower and its Subsidiaries. (p) FINANCIAL STATEMENTS. The Lender shall have received the February 28, 1998 balance sheet referred to in Section 3.1(b). (q) ADDITIONAL PROCEEDINGS. The Lender shall have received such other approvals, opinions and documents as it may reasonably request and all legal matters incident to the making of the Loans shall be reasonably satisfactory to the Lender. 4.2 CONDITIONS TO EACH LOAN. The agreement of the Lender to make Loans, including Loans to be made on the Closing Date, is subject to the satisfaction, immediately prior to or concurrently with the making of such Loans of the following conditions precedent: (a) REPRESENTATIONS AND WARRANTIES; NO DEFAULT. The following statements shall be true and the Borrower's acceptance of the proceeds of each Loan shall be deemed to be a representation and warranty of the Borrower on the date of such Loan that: (i) The representations and warranties contained in this Agreement, each other Loan Document and each certificate or other writing delivered to the Lenders in connection herewith are correct on and as of such date in all material respects as though made on and as of such date except to the extent that such representations and warranties expressly relate to an earlier date; and - 32 - (ii) No Default has occurred and is continuing or would result from the making of the Loan to be made on such date. (b) LEGALITY. The making of such Loan shall not contravene any law, rule or regulation applicable to the Lender or the Borrower or any other Loan Party. (c) BORROWING NOTICE. The Lender shall have received a borrowing notice for each such Loan pursuant to the provisions of this Agreement from the Borrower. SECTION 5. AFFIRMATIVE COVENANTS The Borrower hereby agrees that from and after the Closing Date, so long as the Note remains outstanding and unpaid or any other amount is owing to the Lender hereunder: 5.1 FINANCIAL STATEMENTS. The Borrower shall furnish to the Lender: (a) except in respect of the fiscal year ended December 31, 1997, which financial statements will be delivered to the Lender by May 15, 1998, and will be on a reviewed basis and will include only the Borrower and its Subsidiaries as at such date, as soon as available, but in any event within 90 days after the end of each fiscal year of the Borrower, a copy of the audited consolidated and consolidating balance sheets of Phoenix and its consolidated Subsidiaries, its Subsidiaries as at the end of such year and the related statements of operations and retained earnings, stockholders' equity and of cash flows for such year, setting forth in each case in comparative form the figures for the previous year, reported on without a "going concern" or like qualification or exception, or other qualification arising out of the scope of the audit, by the Accountants; and (b) as soon as available, but in any event not later than 60 days after the end of each fiscal quarter of the Borrower, the unaudited consolidated and consolidating balance sheets of Phoenix and its consolidated Subsidiaries as at the end of such quarter and the related unaudited statements of operations, retained earnings, stockholders' equity and of cash flows for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the previous year, certified by a Responsible Officer of the Borrower as being fairly stated in all material respects (subject to normal year-end audit adjustments); all such financial statements to be complete and correct in all material respects and to be prepared in reasonable detail and in accordance with generally accepted accounting principles in Canada applied consistently throughout the periods reflected therein and with prior periods (except as approved by the Accountants or Responsible Officer, as the case may be, and disclosed therein). - 33 - 5.2 CERTIFICATES; OTHER INFORMATION. The Borrower shall: (a) furnish to the Lender within 15 days after the end of each calendar month, the "Monthly Declaration of Borrowing Limit" form substantially as set forth as Exhibit G duly completed and executed, together with a chronological Accounts Receivable listing based on the billing date and an accounts payable listing (all in form and substance satisfactory to the Lender) and, upon request by the Lender, but at least annually concurrently with the delivery of the financial statements referred to in Section 5.1(a) above, a detailed list of the Borrower's Accounts Receivable including names, addresses, telephone numbers, banking locations and any other information which the Lender may request; (b) furnish to the Lender concurrently with the delivery of the financial statements referred to in Section 5.1(b) a certificate of a Responsible Officer of the Borrower stating that, to the best of such Officer's knowledge, the Borrower and its Subsidiaries during such period have observed or performed in all material respects all of their agreements, and satisfied in all material respects every condition, contained in this Agreement and the other Loan Documents to which the Borrower or any Subsidiary is a party to be observed, performed or satisfied by it, and that such Responsible Officer has obtained no knowledge of any Default except as specified in such certificate; (c) furnish to the Lender within five Business Days after the same are filed, copies of all financial statements and reports which the Borrower or any Subsidiary may make to, or file with, the Securities and Exchange Commission or any successor or analogous Governmental Authority; (d) furnish to the Lender as soon as available and in any event not later than August 31 of each fiscal year of the Borrower, a copy of the projected monthly cash flow and the annual operating budget for the Borrower and its Subsidiaries for the following fiscal year; (e) furnish to the Lender as soon as possible and in any event within five Business Days after a Responsible Officer has knowledge of the occurrence of a Default or, in the good faith determination of a Responsible Officer of the Borrower, a Material Adverse Effect, the written statement by a Responsible Officer of the Borrower, setting forth the details of such Default or Material Adverse Effect and the action which the Borrower proposes to take with respect thereto; (f) furnish to the Lender (i) as soon as possible and in any event within five days after the Borrower knows or has reason to know that any Termination Event with respect to any Plan has occurred, a statement of a Responsible Officer of the Borrower describing such Termination Event and the action, if any, which - 34 - the Borrower proposes to take with respect thereto, (ii) promptly and in any event within five Business Days after receipt thereof by the Borrower, any Subsidiary or any of its or their ERISA Affiliates from the PBGC, copies of each notice received by the Borrower, any Subsidiary or any of its or their ERISA Affiliates of the PBGC's intention to terminate any Plan or to have a trustee appointed to administer any Plan, (iii) promptly and in any event within five Business Days after the filing thereof with the Internal Revenue Service, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Single Employer Plan maintained for or covering employees of the Borrower or any of its Subsidiaries if the present value of the accrued benefits under the Plan exceeds its assets by an amount which could cause a Material Adverse Effect and (iv) promptly and in any event within five Business Days after receipt thereof by the Borrower, any Subsidiary or any of its or their ERISA Affiliates from a sponsor of a Multiemployer Plan or from the PBGC, a copy of each notice received by the Borrower, any Subsidiary or any of its ERISA Affiliates concerning the imposition or amount of withdrawal liability under Section 4202 of ERISA or indicating that such Multiemployer Plan may enter reorganization status under Section 4241 of ERISA; (g) furnish to the Lender promptly after the commencement thereof, but in any event not later than five Business Days after service of process with respect thereto on, or the obtaining of knowledge by, the Borrower, notice of each action, suit or proceeding before any court or governmental authority or other regulatory body or any arbitrator as to which there is a reasonable possibility of a determination that would have a Material Adverse Effect; (h) furnish to the Lender promptly after the sending or filing thereof, copies of all statements, reports and other information filed by or on behalf of the Borrower or any Subsidiary with any relevant regulatory body, the failure of which to file could reasonably be expected to result in a Material Adverse Effect; (i) furnish to the Lender promptly upon receipt thereof, but in any event not later than five Business Days following such receipt, copies of all notices and other communications that the Borrower or any Subsidiary shall have received from any relevant regulatory body with respect to any hearing, order or dispute directly concerning the Borrower or any Subsidiary that could reasonably be expected to have a Material Adverse Effect; and (j) furnish to the Lender promptly such additional financial and other information as the Lender may from time to time reasonably request. 5.3 PAYMENT OF OBLIGATIONS. The Borrower shall, and shall cause each of its Subsidiaries to, pay, discharge or otherwise - 35 - satisfy at or before maturity or before they become delinquent, as the case may be, all its obligations of whatever nature, except where the failure to so satisfy such obligations would not have a Material Adverse Effect or except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the Borrower or such Subsidiary, as applicable. 5.4 CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. Subject to Section 6.6 and except as otherwise permitted pursuant to Section 6.1, the Borrower shall continue, and shall cause each Subsidiary to continue, to engage in business of the same general type as conducted by the Borrower or such Subsidiary as of the Closing Date or as of the date of the formation of such Subsidiary, as applicable, and preserve, renew and keep in full force and effect its corporate existence and take all reasonable action to maintain all rights, registrations, licenses, privileges and franchises necessary or desirable in the normal conduct of its business, (except to the extent that a failure to maintain such rights, registrations, licenses, privileges and franchises would not have a Material Adverse Effect) and comply with all Contractual Obligations and Requirements of Law (except to the extent that failure to comply therewith would not, in the aggregate, have a Material Adverse Effect). 5.5 MAINTENANCE OF PROPERTY; INSURANCE. (a) The Borrower shall, and shall cause each of its Subsidiaries to, keep all property useful or necessary in its business in good working order and condition (ordinary wear and tear excepted); maintain with financially sound and reputable insurance companies or associations insurance on such of its property in at least such amounts and against such risks as are usually insured against in the same general area by companies engaged in the same or a similar business; and furnish to the Lender, upon written request, full information as to the insurance carried. All such policies of insurance shall contain an endorsement, in form and substance reasonably satisfactory to the Lender in its sole discretion, showing the Lender as additional insured or loss payee, as appropriate, or as its interests appear. Such endorsement, or an independent instrument furnished to the Lender, shall provide that the insurance companies will give the Lender at least 30 days' prior written notice before any such policy or policies of insurance shall be altered or canceled. All policies of insurance required to be maintained under this Agreement shall be in customary form and with insurers recognized as adequate by the Lender in its reasonable judgment and all such policies shall be in such amounts as shall be customary for similar companies in the same or similar business in the same geographical area. The Borrower shall deliver to the Lender insurance certificates certified by the Borrower's insurance brokers, as to the existence and effectiveness of each policy of insurance and evidence of payment of all premiums then due and payable therefor. In - 36 - addition, the Borrower shall notify the Lender promptly of any occurrence causing a material loss of any insured Property and the estimated (or actual, if available) amount of such loss. Further, the Borrower shall maintain all insurance required under the other Loan Documents. (b) Each policy for liability insurance shall provide for all losses to be paid on behalf of the Lender and the Borrower, as their respective interests may appear, and each policy for property damage insurance shall, to the extent applicable to equipment and inventory, provide for all losses to be paid directly to the Lender. (c) Reimbursement under any liability insurance maintained by the Borrower or any Subsidiary pursuant to this Section 5.5 may be paid directly to the Person who shall have incurred liability covered by such insurance. In the case of any loss involving damage to equipment or inventory as to which Section 5.5(d) is not applicable, the Borrower will make or cause to be made the necessary repairs to or replacements of such equipment or inventory, and any proceeds of insurance maintained by the Borrower pursuant to this Section 5.5 shall be paid by the Lender to the Borrower, upon presentation of invoices and other evidence of obligations, as reimbursement for the costs of such repairs or replacements. (d) Upon the actual or constructive total loss of any equipment or inventory during the continuance of a Default, all insurance proceeds in respect of such equipment or inventory shall be paid to the Lender and applied in repayment of the Loans; provided that if no Event of Default or Default has occurred and is continuing, such proceeds shall be paid to the Borrower to purchase replacements of such equipment or inventory. 5.6 INSPECTION OF PROPERTY; BOOKS AND RECORDS; DISCUSSIONS. The Borrower shall, and shall cause each Subsidiary to, keep proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all material dealings and transactions in relation to its business and activities; and upon reasonable notice and at such reasonable times during usual business hours, permit representatives of the Lender to visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of the Borrower and its Subsidiaries with the Chief Financial Officer of the Borrower and its Subsidiaries and with its Accountants (provided that the Borrower may, if it so chooses, be present at or participate in any such discussion). - 37 - 5.7 ENVIRONMENTAL LAWS. The Borrower shall, and shall cause each of its Subsidiaries to: (i) Comply with, and ensure compliance by all tenants and subtenants, if any, with, all applicable Environmental Laws and obtain and comply in all material respects with any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Laws except to the extent that failure to do so could not be reasonably expected to have a Material Adverse Effect; (ii) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities regarding Environmental Laws except to the extent that the same are being contested in good faith by appropriate proceedings; and (iii) Defend, indemnify and hold harmless the Lender, and its employees, agents, officers and directors, from and against any and all claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature known or unknown, contingent or otherwise, arising out of, or in any way relating to the violation of, noncompliance with or liability under any Environmental Laws applicable to the operations of the Borrower, each Subsidiary or the Borrower's or such Subsidiary's interest in Properties, or any orders, requirements or demands of Governmental Authorities related thereto, including, without limitation, reasonable attorneys' and consultants' fees, investigation and laboratory fees, response costs, court costs and litigation expenses, except to the extent that any of the foregoing arise out of the gross negligence or willful misconduct of the party seeking indemnification therefor. This indemnity shall continue in full force and effect and survive the termination of this Agreement and payment of the Note. 5.8 USE OF PROCEEDS. The Borrower will use the proceeds of the Loans as set forth in Section 3.14, and not for the purchasing or carrying of any Margin Stock. 5.9 COMPLIANCE WITH LAWS, ETC. Except as set forth in Section 5.7 relating specifically to Environmental Laws, the Borrower shall comply in all material respects with all applicable laws, rules, regulations and orders except where noncompliance would not reasonably be expected to have a Material Adverse Effect, such compliance to include, without limitation (a) paying before the same become delinquent all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or upon any of its Properties and (b) paying all lawful claims which if unpaid might become a Lien upon any of its Properties; PROVIDED, HOWEVER, that the Borrower shall not be required to pay and discharge or to cause to be paid and - 38 - discharged any such tax, assessment, charge, levy or claim so long as (i) the validity or applicability thereof is being contested in good faith by appropriate proceedings or the failure to pay such tax, assessment, charge, levy or claim would not have a Material Adverse Effect and (ii) the Borrower shall, to the extent required by GAAP, have set aside on its books adequate reserves with respect thereto. 5.10 LEASE AND LICENSE APPROVALS. Except as set forth in Section 5.12(b), the Borrower shall notify the Lender of any leases, licenses, permits or other Occupancy Agreements relating to real property or real property interests that the Borrower or any Subsidiary executes or obtains which provide for the payment of rent or license fees in excess of $1,000,000 in any fiscal year. The Lender may request that any lease, license or other similar agreement become part of the Collateral and the Borrower shall provide or cause to be provided any and all Collateral Documents or other documents to be executed in connection therewith requested by the Lender and provide the Lender with title insurance (to the extent applicable) as a condition to approval. 5.11 ACQUISITION OF REAL PROPERTY IN FEE SIMPLE. The Borrower shall promptly notify the Lender of any documents relating to any fee simple real property interest acquired by the Borrower or any Subsidiary. The Lender may request that any such fee simple real property interest of which it receives such notice shall become part of the Collateral. The Borrower shall provide or cause to be provided any and all information relating to a real property interest which the Borrower or any Subsidiary desires to acquire and for which it is required to provide notice and, if such real property interest shall become Collateral, the Borrower shall execute any and all Collateral Documents and other documents to be executed in connection therewith requested by the Lender and shall provide the Lender with title insurance as a condition to approval. 5.12 LEASES AND LICENSES. Unless such failure is not reasonably likely to cause a Material Adverse Effect, the Borrower shall, and shall cause each Subsidiary to, perform and carry out all of the leases, licenses, permits and any other occupancy agreements relating to real property or real property interests (the "OCCUPANCY AGREEMENTS") to be performed by the Borrower or any Subsidiary and shall appear in and defend any action in which the validity of any of the Occupancy Agreements relating to any real property or real property interests is at issue and shall commence and maintain any action or proceeding necessary to establish or maintain the validity of any of such Occupancy Agreements and to enforce the provisions thereof. The Borrower shall provide to the Lender true, correct and complete copies of any information relating to any of the Occupancy Agreements as the Lender may reasonably request in writing. Unless such amendment or termination is not likely to cause a Material Adverse Effect, - 39 - the Borrower shall not, and shall not permit any Subsidiary to, amend in a materially adverse manner or terminate any of such Material Occupancy Agreements, without the prior written consent of the Lender, which consent shall not be unreasonably withheld or delayed. The Borrower shall immediately give notice to the Lender of any default by it or any of its Subsidiaries or, to the knowledge of the Borrower, by any other party to an Occupancy Agreement, which causes or is reasonably likely to cause a Material Adverse Effect. The Borrower shall not, and shall not permit any Subsidiary to, execute any new Material Occupancy Agreements without giving prior or concurrent notice to the Lender. 5.13 NOTICES. The Borrower will provide to the Lender, within five Business Days following receipt by the Borrower, copies of all notices received by the Borrower or any Subsidiary from the Internal Revenue Service or other taxing authority relating to any dispute regarding deductions, audits or any other material matter which, if adversely determined against the Borrower or such Subsidiary, would have a Material Adverse Effect. 5.14 EMPLOYEE CONTRACTS. The Borrower shall give to the Lender prompt notice of any material dispute arising out of, or material uncured default occurring under, any employee contract of the Borrower or any Subsidiary if any of such contracts shall be terminated or not renewed on substantially similar terms. 5.15 CONDITIONS SUBSEQUENT. The Borrower will provide to the Lender, within thirty days of the Closing Date, Mortgages on real property leased by the Borrower and as more specifically described on Schedule 4, located in Neptune, New Jersey and Irvine, California, together with appropriate Environmental Compliance Agreements and such other documents (other than title policies and environmental phse one reports) as the Lender may reasonably request to perfect its security interest in such Properties. SECTION 6. NEGATIVE COVENANTS The Borrower hereby agrees that from and after the Closing Date, except with the prior written consent of the Lender, and so long as the Note remains outstanding and unpaid or any other amount is owing to the Lender hereunder: 6.1 LIMITATION ON FUNDAMENTAL CHANGES. The Borrower shall not, and shall not permit any Subsidiary to, (a) amend its corporate charter or by-laws in any way that would have a Material Adverse Effect, (b) permit (to the extent within its control), vote to or for, or take any other action to commence or acquiesce to any bankruptcy or similar proceeding, (c) enter into any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution) except any merger, consolidation or amalgamation between or among the Loan Parties; PROVIDED THAT such Loan Party shall give the Lender - 40 - thirty days' prior written notice thereof and shall comply with all reasonable actions requested by the Lender to protect and maintain its security interests and Liens granted pursuant to the Loan Documents or (d) except as permitted hereby, convey, sell, lease, assign, transfer or otherwise dispose of, all or substantially all of its property, business or assets other than in connection with a consolidation of its operations including without limitation a cessation of operations in one or more locations so long as such cessation does not affect a substantial portion of the Borrower's and its Subsidiaries' business, taken as a whole. 6.2 LIMITATION ON RESTRICTED PAYMENTS. The Borrower shall not declare or pay any dividend in cash or in stock on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of Capital Stock of the Borrower or any warrants or options to purchase any such Capital Stock, whether now or hereafter outstanding (the foregoing being "RESTRICTED PAYMENTS") other than (a) Restricted Payments in favor of any Guarantor and (b) other Restricted Payments in amounts not to exceed $1,000,000 in the aggregate in any twelve-month period. 6.3 TRANSACTIONS WITH AFFILIATES. The Borrower shall not, and shall not permit any Subsidiary to, enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Subsidiary (other than wholly-owned Subsidiaries or wholly-owned subsidiaries of any Guarantor) or any other Affiliate, unless such transaction (a) is otherwise permitted under this Agreement or (b) is in the ordinary course of the Borrower's or such Subsidiary's business and is upon terms no less favorable to the Borrower or such Subsidiary, than it would obtain in a comparable arm's length transaction with a Person not an Affiliate. 6.4 FISCAL YEAR. The Borrower shall not permit the fiscal year of the Borrower or any Subsidiary to end on a day other than December 31, except a change may be made to conform the fiscal year end to the Parent's fiscal year end. 6.5 UNFUNDED LIABILITIES. The Borrower shall not permit to exist, at any time, unfunded liabilities which, in the aggregate, for any and all Plans maintained for or covering employees of the Borrower or any of its Subsidiaries are an amount which has resulted or would likely result in a Material Adverse Effect. 6.6 LINE OF BUSINESS. Neither the Borrower nor any of its Subsidiaries shall engage in any material business other than the provisions of clinical research and clinical design management services for the evaluation and certification of new pharmaceutical products or services related thereto. - 41 - 6.7 LIMITATION ON LIENS. The Borrower shall not, and shall not permit any Subsidiary to, create, incur, assume or suffer to exist any Lien upon any of its Property, assets or revenues, whether now owned or hereafter acquired, except for: (a) Liens created hereunder or under any of the other Loan Documents; (b) Liens for taxes not yet delinquent or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect thereto are maintained on the books of the Borrower or a Subsidiary, as applicable, in conformity with GAAP; (c) Liens created by operation of law not securing the payment of Indebtedness from money borrowed or guaranteed, including carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 45 days or which are being contested in good faith by appropriate proceedings; (d) Pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation and deposit securing liability to insurance carriers under insurance or self-insurance arrangements; (e) Deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (f) Easements, rights of way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, would not cause a Material Adverse Effect; (g) Liens in existence on the Closing Date listed on Schedule 2, provided that no such Lien is spread to cover any additional property after the Closing Date and that the amount of Indebtedness secured thereby is not increased; and (h) Liens securing capital expenditures incurred by Phoenix and all of its Subsidiaries not to exceed an aggregate amount of $15,000,000 in fiscal year 1998 and of $10,000,000 in fiscal year 1999. 6.8 LIMITATION ON LOANS AND ADVANCES. The Borrower shall not, and shall not permit any Subsidiary to, make any advance, loan, extension of credit or capital contribution to any Person, except (a) extensions of trade credit in the ordinary course of business; (b) advances to employees of the Borrower and its Subsidiaries for travel, entertainment and relocation expenses in - 42 - the ordinary course of business; (c) loans to Subsidiaries or Affiliates; and (d) as contemplated by the Acquisition Agreement. SECTION 7. EVENTS OF DEFAULT If any of the following events shall occur and be continuing: (a) The Borrower shall fail to pay any principal on the Note when due or the Borrower shall fail to pay any other amount payable hereunder within three days after such amount becomes due; or (b) Any representation or warranty made by any Loan Party herein or in any other Loan Document, or which is contained in any certificate, document or financial or other statement furnished at any time under or in connection with this Agreement or any other Loan Document shall prove to have been incorrect in any material respect when made; or (c) The Borrower shall default in the observance or performance of any agreement contained in Section 5 or Section 6; or (d) Any Loan Party shall default in the observance or performance of any other agreement contained in this Agreement or the other Loan Documents (other than as provided in paragraphs (a) through (c) of this Section), and such default shall continue unremedied for a period of twenty Business Days after the earlier of (i) notice thereof from the Lender to the Borrower and (ii) actual knowledge thereof by a senior officer of such Loan Party; or any provision of any Loan Document shall at any time for any reason be declared null and void by a court; or (e) The validity or enforceability of any Loan Document shall at any time be contested by any Loan Party in writing, or a proceeding shall be commenced by any Loan Party or by any Governmental Authority or other Person having jurisdiction over any Loan Party, seeking to establish the invalidity or unenforceability thereof, or any Loan Party shall deny in writing that it has any liability or obligation purported to be created under any Loan Document; or (f) Any Guarantee or the Letter of Guarantee shall cease, for any reason to be in full force and effect; or (g) The Borrower or any Loan Party shall (i) default in any payment of principal or interest, regardless of the amount, due in respect of any (A) Indebtedness (other than the Note), or (B) any Guarantee Obligation, if such default is reasonably likely to cause a Material Adverse Effect or (ii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or Guarantee Obligation or contained in any instrument or agreement evidencing, securing or relating thereto, - 43 - if the effect of such default referred to in this clause (ii) is to cause, or to permit the holder thereof to cause, such Indebtedness or Guarantee Obligation to become or be declared due and payable prior to its stated maturity or the stated maturity of any underlying obligation, as the case may be, and if the effect of such default referred to in this clause (ii) is to cause a Material Adverse Effect; or (h) (i) The Borrower or any other Loan Party shall commence any voluntary case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or the Borrower or any other Loan Party shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Borrower or any other Loan Party any involuntary case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment and (B) remains undismissed, undischarged, unstayed or unbonded for a period of 60 days; or (iii) there shall be commenced against the Borrower or any other Loan Party any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) the Borrower or any other Loan Party shall take any action in writing in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) the Borrower or any other Loan Party shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due or there shall be a general assignment for the benefit of creditors; or (i) (i) Any Person shall engage in any non-exempt "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan which would subject the Borrower or any Loan Party to any tax, penalty, or other liabilities in the aggregate exceeding $1,000,000, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee would reasonably be expected to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA (other than a standard termination) or (v) the Borrower or any Commonly Controlled Entity would reasonably be - 44 - expected to incur any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan; and in each case regarding clauses (ii) through (v) above, such event or condition, together with all other such events or conditions, if any, would reasonably be expected to cause a Material Adverse Effect; or (j) One or more judgments or decrees shall be entered against the Borrower or any other Loan Party that in the aggregate are reasonably likely to have a Material Adverse Effect, and that portion of such judgements or decrees the failure to vacate, discharge, stay or bond pending appeal would be reasonably likely to have a Material Adverse Effect shall not have been vacated, discharged, stayed or bonded pending appeal within sixty days from the entry thereof or in any event five days before the date of any sale pursuant to such judgment or decree or any non-monetary judgment or order shall be entered against the Borrower or any other Loan Party that is reasonably likely to have a Material Adverse Effect and either (i) enforcement proceedings shall have been commenced by any Person upon such judgment which has not been stayed pending appeal or (ii) there shall be any period of ten 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 (k) The Parent shall cease to own directly or indirectly and beneficially 100% of the Capital Stock and Voting Power of the Borrower; or Phoenix shall cease to own 100% of the Capital Stock and Voting Power of the Parent; or (l) There shall occur any default in the material observance or material performance of the Inter-Lender Agreement or the Letter of Guarantee or the Inter-Lender Agreement or the Letter or Credit shall terminate or otherwise no longer be in full force and effect; or (m) Any material provision of any Loan Document, after delivery thereof pursuant to the provisions hereof, shall, for any reason other than pursuant to the terms thereof or an act or omission by the Lender, cease to be valid or enforceable in accordance with its terms and such cessation shall have a Material Adverse Effect, or any security interest created under any Loan Document shall for any reason other than pursuant to the terms thereof or an act or omission by the Lender, cease to be a valid and perfected first priority (except for any Lien or security interests permitted under any of the Loan Documents or which have priority by operation of law) security interest or Lien (except as otherwise stated or permitted herein or therein) in any material - 45 - portion of the Collateral or the Property purported to be covered thereby; then, and in any such event, notwithstanding that the Lender may make demand hereunder at any time, (A) if such event is an Event of Default specified in paragraph (h) above, automatically the Loans made to the Borrower hereunder (with accrued interest thereon, including interest accrued after the filing of a petition initiating any proceeding referred to in paragraph (h) above) and all other Obligations shall immediately become due and payable, and (B) if such event is any other Event of Default, the Lender may, by notice of default to the Borrower, declare the Loans (with accrued interest thereon) and all other Obligations under this Agreement and the Note to be due and payable forthwith, whereupon the same shall immediately become due and payable. In all cases the Lender may enforce any or all of the Liens and security interests and other rights and remedies created pursuant to any Loan Document or available at law or in equity. Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived by the Borrower. SECTION 8. MISCELLANEOUS 8.1 AMENDMENTS AND WAIVERS. Neither this Agreement, nor the Note, nor any other Loan Document, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this Section. With the prior written consent of the Lender and the Borrower (and, in the case of any Loan Document other than this Agreement, the relevant Loan Party), the Borrower (or such Loan Party, as the case may be) may, from time to time, enter into written amendments, supplements or modifications hereto and to the other Loan Documents for the purposes of adding any provisions to this Agreement or the other Loan Documents or changing in any manner the rights of the Lender, the Borrower or any other Loan Party hereunder or thereunder or waiving, on such terms and conditions as may be specified in such instrument, any of the requirements of this Agreement or the Note or the other Loan Documents or any Default and its consequences. Any such waiver and any such amendment, supplement or modification shall apply equally to the Lender and shall be binding upon the Borrower, the other Loan Parties, the Lender and all future holders of the Note. In the case of any waiver, the Borrower, the other Loan Parties and the Lender, shall be restored to their former position and rights hereunder and under the outstanding Note and any other Loan Documents, and any Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default, or impair any right consequent thereon. 8.2 NOTICES. All notices, requests and demands or other communications to or upon the respective parties hereto to be effective shall be in writing (including by telecopy), and, unless - 46 - otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered by hand, or 3 days after being deposited in the United States mail, certified and postage prepaid and return receipt requested, or, in the case of telecopy notice, when received, in each case addressed to the parties at their addresses as set forth on the signature pages hereof or to such other address as may be hereafter notified by the respective parties hereto; PROVIDED that any notice, request or demand to or upon the Lender pursuant to Section 2.1, 2.2, 2.3 or 2.4 or any notice to the Borrower pursuant to Section 7 shall not be effective until received. 8.3 NO WAIVER; CUMULATIVE REMEDIES. No failure to exercise and no delay in exercising, on the part of the Lender, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder 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. 8.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made hereunder and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement (but shall not be deemed to be restated unless otherwise expressly provided for). 8.5 PAYMENT OF EXPENSES AND TAXES. The Borrower agrees, whether or not the transactions contemplated hereby are consummated, (a) to pay or reimburse the Lender for all its reasonable costs and out-of-pocket expenses incurred in connection with the preparation and execution of, and any amendment, supplement or modification to, this Agreement and the Note and the other Loan Documents and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby (including the transactions to occur on the Closing Date), including, without limitation, the reasonable fees and disbursements of outside counsel to the Lender and as to any amendment, supplement or modification to this Agreement or any other Loan Document and the administration of the transactions contemplated thereby, (b) after the occurrence and during the continuance of a Default, to pay or reimburse the Lender, for all its reasonable costs and out-of-pocket expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the other Loan Documents and any such other documents or in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement in the nature of a "work-out" or of any insolvency or bankruptcy proceeding, including, without limitation, reasonable legal fees and disbursements of outside counsel to the Lender, (c) to pay, - 47 - and indemnify and hold harmless Lender from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes (but not including Excluded Taxes), if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the Note, the other Loan Documents and any such other documents and (d) to pay, and indemnify and hold harmless the Lender from and against, any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs (including, without limitation, the reasonable legal fees and disbursements of outside counsel to the Lender), expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement, the Note, the other Loan Documents or the use of the proceeds of the Loans and any such other documents (all the foregoing, collectively, the "indemnified liabilities"), PROVIDED, that the Borrower shall have no obligation hereunder to the Lender with respect to indemnified liabilities arising from the gross negligence or willful misconduct of the Lender or its agents or attorneys-in-fact. The agreements in this Section shall survive repayment of the Note and all other amounts payable hereunder. 8.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the Borrower, the Lender, all future holders of the Note and their respective successors and assigns, except that the Borrower may not assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of the Lender. The Lender may assign or participate its interest hereunder, without cost or expense to the Borrower or any other Loan Party. 8.7 COUNTERPARTS. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 8.8 SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 8.9 INTEGRATION. This Agreement, together with the other Loan Documents, represents the entire agreement of the Borrower and the Lender with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties - 48 - by the Lender relative to the subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents. 8.10 GOVERNING LAW. THIS AGREEMENT AND THE NOTE AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT AND THE NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA (WITHOUT REFERENCE TO ITS CHOICE OF LAW RULES). 8.11 CLAIMS OR CONTROVERSIES SUBJECT TO JUDICIAL REFERENCE. (a) SUBMISSION TO JUDICIAL REFERENCE. Any claim or controversy alleged in or subject to a lawsuit between or among the parties to this Agreement (collectively, the "Parties" and individually, a "Party") which arises out of or relates to this Agreement, or any negotiations, correspondence or communications, whether or not incorporated or integrated into or relating to this Agreement, including but not limited to any claim or controversy which arises out of or is based upon an alleged tort, shall, at the written request of any Party, be determined by a reference in accordance with California Code of Civil Procedure Sections 638 ET SEQ. In connection with such reference, the Parties hereby expressly, intentionally and deliberately waive any right they may otherwise have to trial by jury of such claim or controversy. (b) SELECTION OF REFEREE. Within 30 days after commencement by any Party of any lawsuit subject to this Agreement, each Party shall provide the other with a list of three potential referees acceptable to it. If the lists have one or more referees in common, the person having the highest position on each list shall be the referee hereunder. If such lists do not have a common referee, the Parties shall select pursuant to the Commercial Rules of the American Arbitration Association ("AAA") a single neutral referee and submit by stipulation such referee to the court for an order of reference of such claim or controversy. However, the referee selected must be a retired state or federal court judge with at least five years of judicial experience in civil matters. In the event that the Parties do not submit such stipulation to the court within such 30 day period, any Party may move the court pursuant to this Agreement for an order of reference of such claim or controversy to a single neutral referee having such qualifications. The Parties shall equally bear the fees and expenses of the referee unless the referee otherwise provides in the award. (c) POWERS OF AND LIMITATIONS ON THE REFEREE. The Referee shall have the powers provided by Title 9 of the California Code of Civil Procedure Sections 1280 ET SEQ. (the "California Arbitration Act") and the Commercial Rules of the AAA except as provided in this Agreement, including without limitation the following: - 49 - (1) The referee shall determine all challenges to the legality and/or enforceability of this Agreement. (2) The referee shall apply the rules of evidence to the same extent as they would be applied in a court of law. (3) Subject to the provisions of this Agreement, the referee may order any remedy or relief, including without limitation judicial foreclosure, a deficiency judgment or equitable relief, and give effect to all legal and equitable defenses, including without limitation statutes of limitation, the statute of frauds, waiver and estoppel. (4) The Parties shall have the right to conduct discovery with respect to any dispute, controversy or issue arising out of or resulting from this Agreement pursuant to the provisions of California Code of Civil Procedure Section 1283.05, which provisions are incorporated herein by reference and made a part hereof. (5) The referee shall determine the time of the hearing. The hearing shall take place in Los Angeles, California. The hearing must be commenced within 60 days after completion of discovery, unless the referee grants a continuance upon a showing of good cause by any Party. At least 14 days before the date set for hearing, the Parties shall exchange copies of exhibits to be offered as evidence, and lists of witnesses who will testify, at such hearing. Once commenced, the hearing shall proceed day to day until completed, unless the referee grants a continuance upon a showing of good cause by any Party. Any Party may cause to be prepared, at its expense, a written transcription or electronic recordation of such hearing. (6) Any award by the referee shall be set forth in a statement of decision supported by written findings of fact and conclusions of law which the referee shall concurrently deliver to the Parties. (7) The referee shall have the authority to award in the referee's discretion reasonable attorneys' fees and costs to the prevailing party. (8) The provisions of California Civil Code Sections 47 ET SEQ. shall apply to the judicial reference to the same extent as they would apply to a judicial proceeding subject to such provisions. (9) The laws of the State of California shall govern the judicial reference pursuant to this Agreement. (d) PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No provision of this Section 8.11 shall limit the right of either Party (i) to exercise any self-help remedies or seek specific - 50 - performance in each case, in accordance with applicable law, (ii) to foreclose upon or sell any collateral, by power of sale or otherwise, in accordance with applicable law, or (iii) to obtain or oppose provisional remedies or necessary procedural orders from a court of competent jurisdiction, including without limitation appointment of a receiver, before, after or during the pendency of the judicial reference. The exercise of, or opposition to, any such remedy does not waive the right of any Party to judicial reference pursuant to this Agreement. (e) MISCELLANEOUS. Judgment upon the award of the referee shall be final and binding (subject to vacation or correction in the amounts set forth, respectively, in California Code of Civil Procedure Sections 1286.2, 1286.4, 1286.6 and 1286.8) and may be entered in any court of competent jurisdiction in accordance with California Code of Civil Procedure Sections 644 and 645 and no party shall take any action to contest such award or judgment except as set forth above. In the event that multiple claims are asserted, some of which are found not subject to this Agreement, the Parties agree to stay the proceedings of the claims not subject to this Agreement until all other claims are resolved in accordance with this Agreement. In the event that claims are asserted against multiple parties, some of whom are not subject to this Agreement, the Parties agree to sever the claims subject to this Agreement and resolve them in accordance with this Agreement. 8.12 ACKNOWLEDGEMENTS. The Borrower hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents; (b) the Lender has no fiduciary relationship to the Borrower solely by virtue of any of the Loan Documents, and the relationship pursuant to the Loan Documents between the Lender, on one hand, and the Borrower on the other hand, is solely that of creditor and debtor; and (c) no joint venture exists among the Lender and the Borrower. 8.13 HEADINGS. Section headings herein are included for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 8.14 CONFLICT OF TERMS. Except as otherwise provided in this Agreement or any of the other Loan Documents by specific reference to the applicable provisions of this Agreement, if any provision contained in this Agreement is in conflict with, or inconsistent with, any provision in any of the other Loan Documents, the provision contained in this Agreement shall govern and control. - 51 - IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered in Los Angeles, California by their proper and duly authorized officers as of the day and year first above written. IBRD-ROSTRUM GLOBAL INC. By: /s/ Jean-Yves Caloz ------------------------------- Name: Jean-Yves Caloz ------------------------ Title: Secretary & Treasurer ------------------------ Address for Notices: 2525 Campus Drive Irvine, California 92612-1503 Attention: JoAnne Rosal Telephone: (714) 476-2727 Facsimile: (714) 752-7297 and 2350 Cohen Street Saint-Laurent (Montreal), Quebec Canada H4R 2N6 Attention: Jean-Yves Caloz Telephone: (514) 333-0033 Facsimile: (514) 333-7306 BANQUE NATIONALE DE PARIS Los Angeles Branch By: /s/ Deborah Y. Gohh ------------------------------- Name: Deborah Y. Gohh ------------------------- Title: Vice President ------------------------- By: /s/ Stephane Ronze ------------------------------ Name: Stephane Ronze ------------------------ Title: Assistant Vice President ------------------------ Address for Notices: Banque Nationale de Paris 725 So. Figueroa St., Suite 2090 Los Angeles, CA 90017 Attention: Deborah Y. Gohh Telephone: (213) 688-6419 Facsimile: (213) 488-9602 Applicable Lending Office for Reference Rate Loans: 725 So. Figueroa St., Suite 2090 Los Angeles, CA 90017 Applicable Lending Office for LIBOR Loans: 725 So. Figueroa St., Suite 2090 Los Angeles, CA 90017 EXHIBIT A FORM OF REVOLVING NOTE Los Angeles, California $7,000,000 March 13, 1998 FOR VALUE RECEIVED, the undersigned, IBRD-ROSTRUM GLOBAL, INC. (U.S.) INC., a Delaware corporation (the "BORROWER"), hereby unconditionally promises to pay to the order of BANQUE NATIONALE DE PARIS, Los Angeles Branch (the "LENDER"), in lawful money of the United States and in immediately available funds, the aggregate unpaid principal amount of the Loans made by the Lender to the undersigned pursuant to Section 2.1(a) of the Revolving Credit Agreement (as hereinafter defined), ON DEMAND. Such payment shall be made for the account of the Lender at the office of Banque Nationale de Paris, Los Angeles Branch, located at 725 South Figueroa Street, Suite 2090, Los Angeles, CA 90017 or at such other office as the holder of this Note may notify the undersigned. The undersigned further agrees to pay interest in like money at such office or such other office on the unpaid principal amount hereof from time to time from the date hereof at the rates per annum and on the dates specified in Sections 2.5 and 2.6 of the Revolving Credit Agreement until paid in full (both before and after judgment to the extent permitted by law). This Note is the Note referred to in the Revolving Credit Agreement dated as of March 13, 1998 (as amended, supplemented or otherwise modified from time to time, the "REVOLVING CREDIT AGREEMENT"), between the undersigned and the Lender, and is entitled to the benefits thereof and of the other Loan Documents and is subject to optional and mandatory prepayment in whole or in part as provided therein. Capitalized terms used herein which are defined in the Revolving Credit Agreement shall have such meanings unless otherwise defined herein. Notwithstanding that the Lender may make demand hereunder at any time, upon the occurrence of any one or more of the Events of Default specified in the Revolving Credit Agreement, all amounts then remaining unpaid on this Note shall become, or may be declared to be, immediately due and payable, all as provided therein. -1- THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA (WITHOUT REFERENCE TO ITS CHOICE OF LAW RULES). IBRD-ROSTRUM GLOBAL INC. By:________________________________ Name:______________________________ Title:_____________________________ -2- EXHIBIT G MONTHLY DECLARATION OF BORROWING LIMIT TO: Banque Nationale de Paris, Los Angeles Branch, (the "Bank"). According to the authorized line of credit (established by the Revolving Credit Agreement with the Bank dated as of March 13, 1998) the undersigned Borrower hereby informs the Bank that the maximum amount available to it in the next month, as calculated by the Borrower, has been calculated as indicated below with all reports attached hereto as at _________________, 19___. ACCOUNTS RECEIVABLE Total Accounts Receivable (aged list attached) $________ SUBTRACT the following accounts: o accounts that are partly or entirely unpaid after -________ 90 days o holdbacks/accounts excluded from margin provisions/credit notes/intercompany - accounts/sums due from __________ management o lesser amount due from or owed to suppliers on -________ receivable list o doubtful accounts; -________ o any other accounts excluded by the Bank and specified in writing to the Borrower -________ Total Eligible Accounts Receivable =$________ Margin percentage applicable: x 80% Lending value of Accounts Receivable =$________(1)
-1- PROGRESS BILLINGS Cost and estimated profits $________ in excess of progress billings on contracts in progress Progress billings in =$_______ excess of costs and estimated profit on contracts in progress =$_______(2) CLAIMS TO BE DEDUCTED Wages: $________ Rent: +________ Total contributions to a social plan (unemployment insurance, pension plan, medical plan, worker's compensation, etc...) +________ Fiscal obligations (income tax, deductions at source, sales tax, etc...); +________ Other sums payable to the government or one of its agencies (Identify): -------------------------- +________ Total claims to be deducted =$________(3) BORROWING LIMIT Net lending value of Eligible =$______(4=1+2-3) Accounts Receivable and Progress Billings Authorized credit amount =$________(5) Global Borrowing limit (the lesser of 4 or 5) =$________(6) ORDERS ON HAND: Present season to ship =$________ ORDERS ON HAND: Next season =$________ ACCOUNTS PAYABLE =$________ SALES - CURRENT MONTH =$________ SALES - YEAR TO DATE =$________
-2- The Borrower hereby certifies to the Bank that all the information herein and on any accompanying reports is complete and accurate in all respects. In addition, the Borrower certifies that all sums owed to privileged and preferred creditors, including federal and provincial government agencies have been paid and that the sums specified above as claims to be deducted are current amounts owing. Date:__________________________ IBRD-ROSTRUM GLOBAL INC. (The Borrower) By: By: ----------------------------- ------------------------- (authorized signature) (authorized signature) -3- EX-10.21 35 EXHIBIT 10.21 Exhibit 10.21 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TERM LOAN AGREEMENT between PHOENIX INTERNATIONAL LIFE SCIENCES (U.S.) INC. and BANQUE NATIONALE DE PARIS Los Angeles Branch Dated as of February 5, 1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS
Page ---- SECTION 1. DEFINITIONS....................................................................................... 2 1.1 DEFINED TERMS............................................................................... 2 1.2 OTHER DEFINITIONAL PROVISIONS............................................................... 13 SECTION 2. AMOUNT AND TERMS OF LOANS; COMMITMENT AMOUNTS..................................................... 14 2.1 FACILITY A TERM LOAN........................................................................ 14 2.2 FACILITY B TERM LOAN; FACILITY B TERM LOAN COMMITMENT.................................................................................. 15 2.3 OPTIONAL PREPAYMENTS........................................................................ 16 2.4 CONVERSION AND CONTINUATION OPTIONS......................................................... 17 2.5 MINIMUM AMOUNTS OF TRANCHES................................................................. 18 2.6 INTEREST RATES AND PAYMENT DATES............................................................ 18 2.7 COMPUTATION OF INTEREST AND FEES............................................................ 18 2.8 INABILITY TO DETERMINE INTEREST RATE........................................................ 18 2.9 PRO RATA TREATMENT AND PAYMENTS............................................................. 19 2.10 ILLEGALITY.................................................................................. 19 2.11 INCREASED COSTS............................................................................. 20 2.12 TAXES....................................................................................... 21 2.13 INDEMNITY................................................................................... 23 2.14 MITIGATION OF COSTS......................................................................... 23 SECTION 3. REPRESENTATIONS AND WARRANTIES.................................................................... 23 3.1 FINANCIAL CONDITION......................................................................... 23 3.2 NO CHANGE................................................................................... 24 3.3 CORPORATE EXISTENCE; COMPLIANCE WITH LAW.................................................... 24 3.4 CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS................................................................................. 25 3.5 NO LEGAL BAR................................................................................ 25 3.6 NO MATERIAL LITIGATION...................................................................... 26 3.7 OWNERSHIP OF PROPERTY; LIENS; CONDITION OF PROPERTIES.................................................................................. 26 3.8 INTELLECTUAL PROPERTY....................................................................... 26 3.9 TAXES....................................................................................... 26 3.10 FEDERAL REGULATIONS......................................................................... 27 3.11 ERISA....................................................................................... 27 3.12 INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY ACT................................................................................. 27 3.13 SUBSIDIARIES................................................................................ 28 3.14 PURPOSE OF LOANS............................................................................ 28 3.15 ENVIRONMENTAL MATTERS....................................................................... 28 3.16 ACCURACY AND COMPLETENESS OF INFORMATION.................................................... 29 3.17 REAL PROPERTY ASSETS........................................................................ 30 3.18 PERMITS, ETC................................................................................ 30 3.19 PATENTS, TRADEMARKS, ETC.................................................................... 30 3.20 COPYRIGHT ACT REQUIREMENTS.................................................................. 30 3.21 NATURE OF BUSINESS.......................................................................... 31 3.22 CAPITAL STOCK OF BORROWER AND ITS SUBSIDIARIES.............................................. 31 3.23 RANKING OF LOANS............................................................................ 31 3.24 EXECUTIVE OFFICES........................................................................... 31 3.25 INSOLVENCY.................................................................................. 31 3.26 LABOR MATTERS............................................................................... 32 3.27 CONDEMNATION................................................................................ 32
3.28 LEASES, LICENSES, PERMITS, SITE USE AGREEMENTS AND OTHER OCCUPANCY AGREEMENTS.............................................................. 32 3.29 REPRESENTATIONS AND WARRANTIES IN ACQUISITION AGREEMENT................................................................................... 32 SECTION 4. CONDITIONS PRECEDENT.............................................................................. 32 4.1 CONDITIONS TO CLOSING DATE.................................................................. 32 SECTION 5. AFFIRMATIVE COVENANTS............................................................................. 37 5.1 FINANCIAL STATEMENTS........................................................................ 37 5.2 CERTIFICATES; OTHER INFORMATION............................................................. 37 5.3 PAYMENT OF OBLIGATIONS...................................................................... 39 5.4 CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE............................................ 39 5.5 MAINTENANCE OF PROPERTY; INSURANCE.......................................................... 39 5.6 INSPECTION OF PROPERTY; BOOKS AND RECORDS; DISCUSSIONS................................................................................. 40 5.7 ENVIRONMENTAL LAWS.......................................................................... 41 5.8 USE OF PROCEEDS............................................................................. 41 5.9 COMPLIANCE WITH LAWS, ETC................................................................... 41 5.10 LEASE AND LICENSE APPROVALS................................................................. 42 5.11 ACQUISITION OF REAL PROPERTY IN FEE SIMPLE.................................................. 42 5.12 LEASES AND LICENSES......................................................................... 42 5.13 NOTICES..................................................................................... 43 5.14 EMPLOYEE CONTRACTS.......................................................................... 43 SECTION 6. NEGATIVE COVENANTS................................................................................ 43 6.1 LIMITATION ON FUNDAMENTAL CHANGES........................................................... 43 6.2 LIMITATION ON RESTRICTED PAYMENTS........................................................... 44 6.3 TRANSACTIONS WITH AFFILIATES................................................................ 44 6.4 FISCAL YEAR................................................................................. 44 6.5 UNFUNDED LIABILITIES........................................................................ 44 6.6 LINE OF BUSINESS............................................................................ 44 6.7 ASSET DISPOSITIONS.......................................................................... 45 6.8 LIMITATION ON LIENS......................................................................... 45 6.9 LIMITATION ON LOANS AND ADVANCES............................................................ 46 SECTION 7. EVENTS OF DEFAULT................................................................................. 46 SECTION 8. MISCELLANEOUS..................................................................................... 49 8.1 AMENDMENTS AND WAIVERS...................................................................... 49 8.2 NOTICES..................................................................................... 50 8.3 NO WAIVER; CUMULATIVE REMEDIES.............................................................. 50 8.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES.................................................. 50 8.5 PAYMENT OF EXPENSES AND TAXES............................................................... 50 8.6 SUCCESSORS AND ASSIGNS...................................................................... 51 8.7 COUNTERPARTS................................................................................ 51 8.8 SEVERABILITY................................................................................ 51 8.9 INTEGRATION................................................................................. 52 8.10 GOVERNING LAW............................................................................... 52 8.11 CLAIMS OR CONTROVERSIES SUBJECT TO JUDICIAL REFERENCE................................................................................... 52 8.12 ACKNOWLEDGEMENTS............................................................................ 54 8.13 HEADINGS.................................................................................... 55
-ii- 8.14 CONFLICT OF TERMS........................................................................... 55
Exhibits A-1 Form of Facility A Term Note A-2 Form of Facility B Term Note B Form of No Default/Representation Certificate C Form of Continuation Notice D Form of Closing Opinion E Form of Borrower Security Agreement F Form of Guarantees (U.S. and Canadian) G Form of Mortgage H Form of Environmental Compliance Agreement Schedules 1 Borrower's Indebtedness 2 Borrower's Liens 3 Borrower's Permits and Approvals 4 Borrower's Real Property Assets 5 Borrower's Litigation Proceedings 6 Certain Environmental Matters 7 Regarding the Capital Stock of Borrower 8 Borrower Subsidiaries 9 Mortgages -iii- TERM LOAN AGREEMENT THIS TERM LOAN AGREEMENT, dated as of February 5, 1998, between PHOENIX INTERNATIONAL LIFE SCIENCES (U.S.) INC., a Delaware corporation (the "BORROWER") and BANQUE NATIONALE DE PARIS, Los Angeles Branch (the "LENDER"). RECITALS A. The Borrower has entered into a Stock Purchase Agreement (such Agreement, as it has been or may be amended or otherwise modified from time to time, including, without limitation, by a letter agreement dated February 5, 1998, in accordance with the terms hereof, the "ACQUISITION AGREEMENT") dated as of December 24, 1997 with Kuraya American Systems, Inc., identified as "Seller" therein (the "SELLER"), pursuant to which the Borrower acquired on February 6, 1998 all of the issued and outstanding shares of IBRD-Rostrum Global Inc. (the "IRG ACQUISITION"), which operates clinical research and clinical design management services for the evaluation and certification of new pharmaceutical products and which has its principal place of business in Irvine, California. B. In connection with the IRG Acquisition, the Borrower requested that the Lender make available a short term loan under a Demand Promissory Note dated February 5, 1998 (the "Demand Note") in an amount equal to $25,440,000. Such short term loan was made and it is the parties' intention that this term loan facility shall amend and restate in its entirety the Demand Note and the Collateral pledged to secure the Demand Note shall continue to secure the Borrower's obligations hereunder. Such term loan facility would be available to finance the IRG Acquisition and to pay closing and other costs related to the IRG Acquisition. C. The Lender is willing to make available such term loan on the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto hereby agree as follows: SECTION 1. DEFINITIONS 1.1 DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings: "ACCOUNTANTS": Ernst & Young LLP or such other firm of independent certified public accountants or chartered accountants of recognized national standing as shall be selected by the Borrower and satisfactory to the Lender. "ACQUISITION AGREEMENT": as defined in Recital A hereto. "AFFILIATE": as to any Person, (a) any other Person (other than a Subsidiary) which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person or (b) any Person who is a shareholder having control or a director, officer, or partner (i) of such Person, (ii) of any Subsidiary of such Person or (iii) of any Person described in the preceding clause (a). For purposes of this definition, "control" of a Person means the power, directly or indirectly, either to (i) vote securities having 10% or more of the ordinary voting power for the election of directors of such Person or (ii) direct or cause the direction of the management and policies of such Person whether by contract or otherwise. "AGGREGATE TERM LOAN COMMITMENT": $25,440,000. "AGREEMENT": this Term Loan Agreement, as amended, waived, supplemented or otherwise modified from time to time. "APPLICABLE LENDING OFFICE": for the Lender, its offices for LIBOR Loans and Reference Rate Loans, specified on the signature pages hereof, any of which offices may, upon 10 days' prior written notice to the Borrower, be changed by the Lender. "APPLICABLE LIBOR RATE MARGIN": with respect to the Loans which are LIBOR Loans, for each Interest Period, the interest rate margin set forth below opposite the applicable Facility for that Interest Period:
FACILITY MARGIN -------- ------ A .35% B .40%
"ASSET DISPOSITION": the sale, sale and leaseback, transfer, conveyance, exchange, long-term lease accorded sales treatment under GAAP or similar disposition (including by means of a merger, consolidation, amalgamation, joint venture or other substantive combination) of any of the Properties, business or assets (other than marketable securities, including "margin stock" within the meaning of Regulation U, liquid investments and other financial instruments but, including, without -2- limitation, the assignment of any lease, license or permit relating to the Properties) of the Borrower or any of its Subsidiaries to any Person or Persons other than to the Borrower or any of its Subsidiaries; PROVIDED that Asset Dispositions shall not include sales in the ordinary course of business. "BORROWER": as defined in the preamble hereto. "BUSINESS DAY": a day other than a Saturday, Sunday or other day on which commercial banks in the State of California are authorized or required by law to close and which, in the case of a LIBOR Loan, is a Eurodollar Business Day. "CAPITALIZED LEASE OBLIGATIONS": obligations for the payment of rent for any real or personal property under leases or agreements to lease that, in accordance with GAAP, 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 GAAP. "CAPITAL STOCK": any and all shares, interests, participation or other equivalent (however designated) of capital stock of a corporation, any and all equivalent ownership interest in a Person (other than a corporation), any and all warrants, options or rights to purchase or any other securities convertible into any of the foregoing. "CLOSING DATE": the date on which the conditions set forth in Section 4.1 are satisfied and the Term Loan is made. "CODE": the Internal Revenue Code of 1986, as amended from time to time. "COLLATERAL": all of the property (tangible or intangible) purported to be subject to the lien or security interest purported to be created by any mortgage, deed of trust, security agreement, pledge agreement, assignment or other security document heretofore or hereafter executed by the Borrower as security for all or part of the Obligations. "COLLATERAL DOCUMENTS": the Security Agreement, the Mortgages, all notices of security interests in deposit accounts requested by the Lender pursuant to the Security Agreement, Form UCC-1 Financing Statements and amendments thereto and any other document encumbering the Collateral or evidencing or perfecting a security interest therein for the benefit of the Lender executed by the Borrower, as the same may be amended or modified from time to time in accordance with the terms hereof. "COMMONLY CONTROLLED ENTITY": as to any Person, an entity, whether or not incorporated, which is under common control with such Person within the meaning of Section 4001 of ERISA or is part -3- of a group which includes such Person and which is treated as a single employer under Section 414 of the Code. "CONTINUATION NOTICE": a request for continuation or conversion of a Loan as set forth in Section 2.4, substantially in the form of Exhibit C. "CONTRACTUAL OBLIGATION": as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its Property is bound. "DEFAULT": any of the events specified in Section 7, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "DEMAND NOTE": as defined in Recital B hereto. "DOLLARS" and "$": dollars in lawful currency of the United States. "ENVIRONMENTAL COMPLIANCE AGREEMENT": the Environmental Compliance Agreement dated as of the Closing Date made by the Borrower in favor of the Lender, as it may be amended or modified in accordance with the terms hereof. "ENVIRONMENTAL LAWS": any and all federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any governmental authority or Requirements of Law (including common law) regulating, relating to or imposing liability or standards of conduct concerning protection of human health or the environment, as now or at any time hereafter in effect. "ERISA": the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA AFFILIATE": as to any Person, each trade or business including such Person, whether or not incorporated, which together with such Person would be treated as a single employer under Section 4001(a)(14) of ERISA. "EVENT OF DEFAULT": any of the events specified in Section 7, PROVIDED that any requirement for the giving of notice, the lapse of time, or both, and all other conditions, have been satisfied. "EURODOLLAR BUSINESS DAY": any day on which banks are open for dealings in Dollar deposits in the London interbank market. "EXCLUDED TAXES": all taxes imposed on or by reference to the net income of the Lender or its Applicable Lending Office by any Governmental Authority and all franchise taxes, taxes on doing -4- business or taxes measured by capital or net worth imposed on the Lender or its Applicable Lending Office by any Governmental Authority and any taxes imposed by any Governmental Authority arising as a consequence of the failure of the Lender to provide accurate documentation required to be provided by the Lender pursuant to Section 2.12(b). "FACILITY A TERM LOAN": a term loan made to the Borrower by the Lender pursuant to the provisions of Section 2.1. "FACILITY B TERM LOAN": a term loan made to the Borrower by the Lender under the provisions of Section 2.2. "FACILITY A TERM NOTE": as defined in Section 2.1(c) hereof. "FACILITY B TERM NOTE": as defined in Section 2.2(c) hereof. "FINANCIAL STATEMENTS": as defined in Section 3.1 hereof. "FIXED RATE": the rate of interest per annum determined by the Lender and accepted by the Borrower as at any date. "FIXED RATE LOANS": Loans the rate of interest applicable to which is based upon the Fixed Rate. "GAAP": generally accepted accounting principles in the United States in effect from time to time. "GOVERNMENTAL AUTHORITY": any nation or government, any federal, state or other political subdivision thereof and any federal, state or local entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "GUARANTEE OBLIGATION": as to any Person (the "GUARANTEEING PERSON"), any obligation of (a) the guaranteeing Person or (b) another Person (including, without limitation, any bank under any letter of credit) which Person the guaranteeing Person has agreed to reimburse or indemnify for undertaking such obligation in either case guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other obligations (the "PRIMARY OBLIGATIONS") of any other third Person (the "PRIMARY OBLIGOR") in any manner, whether directly or indirectly, including, without limitation, any obligation of the guaranteeing Person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds for the purchase or payment of any such primary obligation or to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation -5- or (iv) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; PROVIDED, HOWEVER, that the term Guarantee Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation of any guaranteeing Person shall be deemed to be the lesser of (a) an amount equal to the stated or determinable (by the Borrower) amount of the primary obligation in respect of which such Guarantee Obligation is made and (b) the maximum amount for which such guaranteeing Person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing Person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing Person's maximum reasonably anticipated liability in respect thereof as determined by the Borrower in good faith. "GUARANTEES": the guarantees, substantially in the form of Exhibit F, made by each Guarantor in favor of the Lender, on the Closing Date, as the same may be amended or modified from time to time in accordance with the terms hereof. "GUARANTORS": the Parent and IRG. "INDEBTEDNESS": of any Person at any date, without duplication, (a) all indebtedness of such Person for borrowed money or for the deferred purchase price of property (other than such amounts which are contingent upon earnings performance or similar circumstances) or services (other than current trade liabilities incurred in the ordinary course of business and payable in accordance with customary practices) or which is evidenced by a note, bond, debenture or similar instrument, including obligations under non-compete agreements, (b) all obligations of such Person under Capitalized Lease Obligations, (c) all obligations of such Person in respect of acceptances issued or created for the account of such Person, (d) all liabilities secured by any Lien on any property owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof, (e) all obligations of such Person, whether absolute or contingent, in respect of letters of credit opened for the account of such Person and (f) all Guarantee Obligations of such Person in respect of any indebtedness, obligations or liabilities of any other Person of the type referred to in clauses (a) through (e) of this definition. "IRG": IBRD-Rostrum Global Inc., a Delaware corporation. "IRG ACQUISITION": as defined in Recital A hereto. "INSOLVENCY": with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA. -6- "INSOLVENT": pertaining to a condition of Insolvency. "INTELLECTUAL PROPERTY": as defined in Section 3.8 hereof. "INTERCREDITOR AGREEMENT": an intercreditor agreement dated as of February 5, 1998 among the Lender, Banque Nationale de Paris (Canada) and Royal Bank of Canada, the Borrower, IRG and the Parent all in form and substance satisfactory to the Lender, as it may be amended or modified in accordance with the terms hereof. "INTEREST PAYMENT DATE": the first day of each calendar month while the Loans are outstanding and the day on which the Loans become due and payable in full and are paid or prepaid in full; provided, however, that if the Loans are Fixed Rate Loans, the Interest Payment Date shall be each Reduction Date while the Loans are outstanding and the day on which the Loans become due and payable in full and are paid or prepaid in full. "INTEREST PERIOD": with respect to any LIBOR Loan: (a) initially, the period commencing on the borrowing or conversion date, as the case may be, with respect to such LIBOR Loan and ending one, two, three or six months thereafter, as selected by the Borrower in its notice of borrowing or its Continuation Notice, as the case may be, given with respect thereto; and (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such LIBOR Loan and ending one, two, three or six months thereafter, as selected by the Borrower by irrevocable notice to the Lender not less than three Eurodollar Business Days prior to the last day of the then current Interest Period with respect thereto; PROVIDED that, all of the foregoing provisions relating to Interest Periods are subject to the following: (i) if any Interest Period pertaining to a LIBOR Loan would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; (ii) any Interest Period that would otherwise extend beyond the date final payment is due on the Loans shall end on the date of such final payment; and (iii) any Interest Period pertaining to a LIBOR Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day -7- in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month. "INVESTMENT COMPANY ACT": as defined in Section 3.12 hereof. "LENDER": as defined in the preamble hereto. "LETTERS OF CREDIT": collectively, a nontransferable letter of undertaking for the benefit of the Lender issued by Banque Nationale de Paris (Canada) in the face amount of $11,440,000 and a standby letter of credit for the benefit of the Lender issued by the Royal Bank of Canada in the face amount of $14,000,000, both in form and substance acceptable to the Lender, as they may be amended or modified in accordance with the respective terms hereof and thereof. "LIBOR": with respect to each day during each Interest Period pertaining to a LIBOR Loan, the rate of interest determined by the Lender to be the rate per annum at which deposits in Dollars would be offered to the Lender by leading banks in the London interbank market at or about 9:00 a.m., Los Angeles time, two Eurodollar Business Days prior to the beginning of such Interest Period, for delivery on the first day of such Interest Period for the number of days comprised therein and in an amount comparable to the amount of its LIBOR Loan to be outstanding during such Interest Period. "LIBOR ADJUSTED RATE": with respect to each day during each Interest Period pertaining to a LIBOR Loan, a rate per annum determined for such day in accordance with the following formula (rounded upward to the nearest 1/100th of 1%): LIBOR --------------------------------- 1.00 - LIBOR Reserve Requirements "LIBOR LOANS": Loans the rate of interest applicable to which is based upon LIBOR. "LIBOR RESERVE REQUIREMENTS": for any day as applied to a LIBOR Loan, the aggregate (without duplication) of the maximum rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve System or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such Board) maintained by a member bank of such Federal Reserve System. "LIEN": any mortgage, pledge, charge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), security interest or other security agreement of any kind -8- or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any Capitalized Lease Obligation having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction in respect of any of the foregoing). "LOAN": a Facility A Term Loan or a Facility B Term Loan, as applicable; and "LOANS" means the aggregate of both the Facility A Term Loan and the Facility B Term Loan outstanding at any given time. "LOAN DOCUMENTS": this Agreement, the Notes, the Collateral Documents, the Guarantees, the Environmental Compliance Agreement and any other agreement executed by a Loan Party in connection therewith and herewith including, but not limited to, UCC-1 Financing Statements, as such agreements and documents may be amended, supplemented and otherwise modified from time to time in accordance with the terms hereof. "LOAN PARTIES": the Borrower and the Guarantors. "MARGIN STOCK": as defined in Regulation U. "MATERIAL ADVERSE EFFECT": a material adverse effect on (a) the business, operations, property or financial condition of the Borrower and its Subsidiaries, taken as a whole, (b) the ability of the Borrower and its Subsidiaries, taken as a whole, to perform their obligations under the Loan Documents or (c) the validity or enforceability of the Loan Documents or the rights or remedies of the Lender hereunder or thereunder. "MATURITY": in respect of the Notes, the date they shall become due and payable in full, whether at stated maturity, by acceleration or otherwise. "MORTGAGES": such mortgages, deeds of trust, collateral assignments of leases and collateral assignments of licenses and permits as may be made by the Borrower in favor of the Lender in respect of the Properties owned by the Borrower, substantially in the form of Exhibit G (with such changes as may be necessary to reflect the leasehold nature of such Property, if applicable and if requested by the Lender), securing the Obligations to the extent provided therein, as the same may be amended or modified from time to time in accordance with the terms hereof. "MULTIEMPLOYER PLAN": a plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "NOTE": the Facility A Term Note or the Facility B Term Note; and "NOTES" means both the Facility A Term Note and Facility B Term Note. -9- "OBLIGATIONS": the unpaid principal of and interest on (including, without limitation, interest accruing after the maturity of the Loans and interest accruing on or after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding and whether or not at a default rate) the Notes, and all other obligations and liabilities of the Borrower and its Subsidiaries to the Lender, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, this Agreement, the Notes, any other Loan Document and any other document made, delivered or given in connection herewith or therewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all reasonable fees and disbursements of counsel to the Lender that are required to be paid by the Borrower and its Subsidiaries pursuant to the terms of this Agreement) or otherwise. "OCCUPANCY AGREEMENTS": as defined in Section 5.12. "PARENT": Phoenix International Life Sciences Inc., a Canadian corporation. "PBGC": the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA or any successor thereto. "PERSON": any individual, firm, partnership, joint venture, corporation, association, business enterprise trust, unincorporated organization, government or department or agency thereof or other entity, whether acting in an individual, fiduciary or other capacity. "PLAN": as to any Person, any plan (other than a Multiemployer Plan) subject to Title IV of ERISA maintained for employees of such Person or any ERISA Affiliate of such Person (and any such plan no longer maintained by such Person or any of such Person's ERISA Affiliates to which such Person or any of such Person's ERISA Affiliates has made or was required to make any contributions within any of the five preceding years). "PROPERTIES": the collective reference to the real and personal property owned, leased or under license or permit, by the Borrower or any of its Subsidiaries. "REDUCTION DATES": the first day of each May, August, November and February, commencing May 1, 1998 and continuing through November 1, 1999. "REDUCTION INSTALLMENTS": the payments required under Sections 2.1(d) and 2.2(d) hereof. -10- "REFERENCE RATE": the rate of interest per annum publicly announced from time to time by the Lender, at its Los Angeles Branch office as its "Reference Rate". The Reference Rate is determined by the Lender from time to time as a means of pricing credit extensions to some customers and is neither directly tied to any external rate of interest or index nor necessarily the lowest rate of interest charged by the Lender at any given time for any particular class of customers or credit extensions. Any change in the applicable interest rate due to a change in the Reference Rate shall be effective on the effective date of such change in the Reference Rate. "REFERENCE RATE LOANS": Loans the rate of interest applicable to which is based upon the Reference Rate. "REGULATION D": Regulation D of the Board of Governors of the Federal Reserve System, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof and any successor regulation thereto. "REGULATION U": Regulation U of the Board of Governors of the Federal Reserve System, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof and any successor regulation thereto. "REORGANIZATION": with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA. "REPORTABLE EVENT": any of the events set forth in Section 4043(b) of ERISA, other than those events as to which the thirty-day notice period is waived under PBGC regulations. "REQUIREMENT OF LAW": as to any Person, the Articles of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule, order, judgment or regulation of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "RESPONSIBLE OFFICER": the chief executive officer, the president, any senior vice president, treasurer or any vice president of the applicable Loan Party, or, with respect to financial matters, the chief financial officer, treasurer or controller of the applicable Loan Party, as applicable. "RESTRICTED PAYMENTS": as defined in Section 6.2. "SECURITY AGREEMENT": the Security Agreement dated as of the Closing Date by the Borrower in favor of the Lender in respect of the tangible and intangible personal property of the Borrower described therein, substantially in form of Exhibit E hereto, as -11- it may be amended or otherwise modified from time to time in accordance with the terms hereof. "SELLER": as defined in Recital A hereto. "SINGLE EMPLOYER PLAN": any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan. "SOLVENT": when used with respect to any Person, that: (a) the present fair salable value of such Person's assets is in excess of the total amount of the probable liability on such Person's liabilities; (b) such Person is able to pay its debts generally as they become due; and (c) such Person does not have unreasonably small capital to carry on such Person's business as theretofore operated and all businesses in which such Person is about to engage. "SUBSIDIARY": as to any Person at any time of determination, a corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary Voting Power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries or Subsidiaries, or both, by such Person. Unless otherwise qualified, all references to a "subsidiary" or to "subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower. "TAXES": as defined in Section 2.12(a) hereof. "TERMINATION EVENT": (a) a Reportable Event, (b) the institution of proceedings to terminate a Single Employer Plan by the PBGC under Section 4042 of ERISA, (c) the appointment by the PBGC of a trustee to administer any Single Employer Plan or (4) the existence of any other event or condition that would reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment by the PBGC of a trustee to administer, any Single Employer Plan. "TERM LOAN COMMITMENT": the commitment of the Lender to make Loans hereunder through its Applicable Lending Office as set forth on the signature pages hereof, as the same may be adjusted pursuant to the provisions hereof. "TERM LOAN MATURITY DATE": February 5, 2000. -12- "TRANCHE": the collective reference to LIBOR Loans the Interest Periods with respect to all of which begin on the same date and end on the same later date (whether or not such LIBOR Loans shall originally have been made on the same day). "TRANSACTION COSTS": for any period, reasonable nonrecurring out-of-pocket costs, fees and expenses (including reasonable attorneys' fees) which are incurred by the Borrower and its Subsidiaries in connection with (a) the negotiation, preparation and consummation of the transactions contemplated under this Agreement and the Acquisition Agreement and (b) financing agreements and proposed financing agreements related to this Agreement and the Acquisition Agreement. "TYPE": as to any Loan, its nature as a Reference Rate Loan, a LIBOR Loan or a Fixed Rate Loan. "U.S. PERSON": a citizen or resident of the United States, a corporation, a partnership or other entity created or organized in or under any laws of the United States or any State thereof, or any estate or trust that is subject to Federal income taxation regardless of the source of its income. "VOTING POWER": the aggregate number of votes of all classes of Capital Stock of such Person which ordinarily has voting power for the election of directors of such Person. 1.2 OTHER DEFINITIONAL PROVISIONS. (a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in any other Loan Document or any certificate or other document made or delivered pursuant hereto or thereto. (b) As used herein, in any other Loan Document, and in any certificate or other document made or delivered pursuant hereto or thereto, accounting terms not defined in Section 1.1 and accounting terms partly defined in Section 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP. Unless otherwise provided herein, all financial calculations made with respect to the Borrower for the purpose of determining compliance with the terms of this Agreement shall be made on a consolidated basis. (c) The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, subsection, Schedule and Exhibit references are to this Agreement unless otherwise specified. (d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. -13- (e) References to agreements, other contractual instruments and other documents include all subsequent amendments and other modifications to such agreement and documents, but only to the extent such amendments and other modifications are not prohibited by the terms of any Loan Document. SECTION 2. AMOUNT AND TERMS OF LOANS; COMMITMENT AMOUNTS 2.1 FACILITY A TERM LOAN. (a) Subject to the terms and conditions hereof, the Lender agrees to make a term loan through its Applicable Lending Office to the Borrower on the Closing Date in an aggregate principal amount equal to $11,440,000 (the "FACILITY A TERM LOAN") for the sole purpose of refinancing the Demand Note. After the funding of the Facility A Term Loan on the Closing Date, the Commitment to make a Facility A Term Loan shall expire. Facility A Term Loan may not be reborrowed if repaid or prepaid. (b) Subject to Sections 2.8 and 2.10, the Facility A Term Loan may from time to time be (i) LIBOR Loans, (ii) Reference Rate Loans, (iii) a combination thereof or (iv) if adequate funding is available to the Lender, a Fixed Rate Loan, as determined by the Borrower and notified to the Lender in accordance with either Section 2.1(e) or 2.4. The Lender may make or maintain its Facility A Term Loan to the Borrower by or through any Applicable Lending Office. (c) The Facility A Term Loan made by the Lender to the Borrower shall be evidenced by a promissory note of the Borrower, substantially in the form of Exhibit A-1 (the "FACILITY A TERM NOTE"), with appropriate insertions therein, payable to the order of the Lender and representing the obligation of the Borrower to pay the aggregate unpaid principal amount of the Facility A Term Loan made by the Lender to the Borrower pursuant to Section 2.1(a), with interest thereon as prescribed in Sections 2.6 and 2.7. The Lender is hereby authorized (but not required) to record the date and amount of each payment or prepayment of principal of its Facility A Term Loan made to the Borrower, each continuation thereof, each conversion of all or a portion thereof to another Type and, in the case of LIBOR Loans, the length of each Interest Period with respect thereto, in the books and records of the Lender, and any such recordation made as part of its normal lending practices shall constitute PRIMA FACIE evidence of the accuracy of the information so recorded. The failure of the Lender to make any such recordation or notation in the books and records of the Lender (or any error in such recordation or notation) shall not affect the obligations of the Borrower hereunder or under the Facility A Term Note. The Facility A Term Note shall (i) be dated the Closing Date, (ii) provide for the payment of interest in accordance with Sections 2.6 and 2.7 and (iii) be stated to be payable in installments of principal in accordance with, and subject to the provisions of Section 2.1(d). -14- (d) On each Reduction Date, the Borrower shall repay the principal of the Facility A Term Note in an aggregate amount equal to $437,500; provided, that the outstanding Facility A Term Loan shall be due and payable on the Term Loan Maturity Date. (e) The Borrower shall give the Lender irrevocable written notice (which notice must be received by the Lender, unless waived by the Lender prior to 9:00 a.m., Los Angeles time, one Business Day prior to the Closing Date) requesting that the Lender make the Facility A Term Loan on the Closing Date. 2.2 FACILITY B TERM LOAN; FACILITY B TERM LOAN COMMITMENT. (a) Subject to the terms and conditions hereof, the Lender agrees to make a term loan through its Applicable Lending Office to the Borrower on the Closing Date in an aggregate principal amount equal to $14,000,000 (the "FACILITY B TERM LOAN") for the sole purpose of refinancing the Demand Note. After the funding of the Facility B Term Loan on the Closing Date, the Commitment to make a Facility B Term Loan shall expire. Facility B Term Loan may not be reborrowed if repaid or prepaid. (b) Subject to Sections 2.8 and 2.10, the Facility B Term Loan may from time to time be (i) LIBOR Loans, (ii) Reference Rate Loans, (iii) a combination thereof or (iv) if adequate funding is available to the Lender, Fixed Rate Loans, as determined by the Borrower and notified to the Lender in accordance with either Section 2.2(e) or 2.4. The Lender may make or maintain its Facility B Term Loan to the Borrower by or through any Applicable Lending Office. (c) The Facility B Term Loan made by the Lender shall be evidenced by a promissory note of the Borrower, substantially in the form of Exhibit A-2 (the "FACILITY B TERM NOTE"), with appropriate insertions therein, payable to the order of the Lender and representing the obligation of the Borrower to pay the aggregate unpaid principal amount of the Facility B Term Loan made by the Lender to the Borrower pursuant to Section 2.2(a), with interest thereon as prescribed in Sections 2.6 and 2.7. The Lender is hereby authorized (but not required) to record the date and amount of each payment or prepayment of principal of its Facility B Term Loan made to the Borrower, each continuation thereof, each conversion of all or a portion thereof to another Type and, in the case of LIBOR Loans, the length of each Interest Period with respect thereto, in the books and records of the Lender, and any such recordation made as part of its normal lending practices shall constitute PRIMA FACIE evidence of the accuracy of the information so recorded. The failure of the Lender to make any such recordation or notation in the books and records of the Lender (or any error in such recordation or notation) shall not affect the obligations of the Borrower hereunder or under the Facility B Term Note. The Facility B Term Note shall (i) be dated the Closing Date, (ii) provide for the payment of interest in accordance with Sections 2.6 and 2.7 and -15- (iii) be stated to be payable in installments of principal in accordance with, and subject to the provisions of, Section 2.2(d). (d) On each Reduction Date, the Borrower shall repay the principal of the Facility B Term Note in an aggregate amount equal to $437,500; PROVIDED, that the outstanding Facility B Term Loan shall be due and payable on the Term Loan Maturity Date. (e) The Borrower shall give the Lender irrevocable written notice (which notice must be received by the Lender, unless waived by the Lender, prior to 9:00 a.m., Los Angeles time, one Business Day prior to the Closing Date) requesting that the Lender make the Facility B Term Loan on the Closing Date. 2.3 OPTIONAL PREPAYMENTS. The Borrower may on the last day of any applicable Interest Period with respect thereto or at any time subject to compliance with Section 2.13, in the case of LIBOR Loans and/or Fixed Rate Loans, or at any time and from time to time, in the case of Reference Rate Loans, prepay the Loans, in whole or in part, upon at least three Business Days' irrevocable written notice, in the case of LIBOR Loans and/or Fixed Rate Loans, and upon at least one Business Day's irrevocable written notice, in the case of Reference Rate Loans, from the Borrower to the Lender, specifying the date and amount of prepayment and whether the prepayment is of LIBOR Loans, Reference Rate Loans or a combination thereof or a Fixed Rate Loan, and, if of a combination thereof, the amount allocable to each. If any such notice is given, the amount specified in such notice shall be due and payable by the Borrower on the date specified therein, together with accrued interest to such date on the amount prepaid. Any such prepayment shall be applied against the Facility A Term Loan and the Facility B Term Loan as set forth in Section 2.9. Partial prepayments of the Loans shall be applied to the then outstanding Reduction Installments in inverse order of maturity. Amounts prepaid on account of the Loans may not be reborrowed. Partial prepayments of the Loans shall be in an aggregate principal amount of $500,000 or whole multiples of $100,000 in excess thereof. In the case of any prepayment (whether voluntary or involuntary) of a LIBOR Loan or a Fixed Rate Loan, in addition to the amounts payable pursuant to Section 2.13, the Borrower shall also pay to the Lender a prepayment fee equal to the surplus of (a) the interest which the prepaid Loan amount would have produced, at the applicable interest rate on the date of prepayment, for the period beginning on such prepayment date and ending on the Term Loan Maturity Date over (b) the interest which the prepaid Loan amount would have produced, for the same period, at the Lender's then-prevailing rate for term deposits of the same amount and period, as determined by the Lender in its sole discretion. Notwithstanding the foregoing, the prepayment fee payable to the Lender in the case of any prepayment of a Fixed Rate Loan or a LIBOR Loan must be at least equal to $150,000, -16- together with the payment of all costs resulting from such prepayment, which costs shall be determined by the Lender in its sole discretion at the time of each prepayment (provided that if such prepayment occurs as a result of a public offering or a private placement (whether debt or equity) of either the Borrower or any of its Subsidiaries or Affiliates, no such prepayment fee shall be required). 2.4 CONVERSION AND CONTINUATION OPTIONS. (a) The Borrower may elect from time to time to convert LIBOR Loans to Reference Rate Loans by the Borrower giving the Lender at least two Business Days' prior irrevocable written notice of such election pursuant to a Continuation Notice, PROVIDED that any such conversion of LIBOR Loans may only be made on the last day of an Interest Period with respect thereto. The Borrower may elect from time to time to convert Reference Rate Loans to LIBOR Loans or a Fixed Rate Loan by the Borrower giving the Lender at least three Eurodollar Business Days' prior irrevocable written notice of such election pursuant to a Continuation Notice. Any such notice of conversion to LIBOR Loans shall specify the length of the initial Interest Period or Interest Periods therefor. Any such Fixed Rate Loan shall be for the period beginning on the conversion date and ending on the Term Loan Maturity Date and must be in an amount equal to the then-outstanding Loan amount for both other or the Facility A Term Loan and the Facility B Term Loan. A Fixed Rate Loan may not be converted to either Reference Rate Loans or LIBOR Loans. All or any part of outstanding LIBOR Loans and Reference Rate Loans may be converted as provided herein, PROVIDED that (i) any such conversion may only be made if, after giving effect thereto, Section 2.5 shall not have been contravened, (ii) no such Loan may be converted into a LIBOR Loan or a Fixed Rate Loan after the date that is one month prior to the Term Loan Maturity Date and (iii) the Borrower shall not have the right to elect to continue at the end of the applicable Interest Period, or to convert to, a LIBOR Loan or a Fixed Rate Loan if a Default shall have occurred and be continuing. (b) Any LIBOR Loan may be continued as such upon the expiration of the then current Interest Period with respect thereto by the Borrower giving at least three Eurodollar Business Days' prior irrevocable written notice to the Lender, in accordance with the applicable provisions of the term "Interest Period" set forth in Section 1.1, of the length of the next Interest Period to be applicable to such LIBOR Loan, PROVIDED that no LIBOR Loan may be continued as such (i) if, after giving effect thereto, Section 2.5 would be contravened, (ii) after the date that is one month prior to the Term Loan Maturity Date or (iii) if a Default shall have occurred and be continuing and PROVIDED, FURTHER, that if the Borrower shall fail to give any required notice as described above in this Section or if such continuation is not permitted pursuant to the preceding proviso, such Loans shall be automatically converted to Reference Rate Loans on the last day of such then-expiring Interest Period. -17- 2.5 MINIMUM AMOUNTS OF TRANCHES. All borrowings, conversions and continuations of the Loans hereunder and all selections of Interest Periods hereunder shall be in such amounts and be made pursuant to such elections so that, after giving effect thereto, the aggregate principal amount of the Loans comprising such Tranche shall be equal to $500,000 or a whole multiple of $100,000 in excess thereof, and, in any case, there shall not be more than ten Tranches. 2.6 INTEREST RATES AND PAYMENT DATES. (a) Each LIBOR Loan shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the LIBOR Adjusted Rate, plus the Applicable LIBOR Rate Margin. (b) Each Reference Rate Loan shall bear interest at a rate per annum equal to the Reference Rate. (c) Each Fixed Rate Loan shall bear interest at a rate per annum equal to the Fixed Rate. (d) If an Event of Default shall exist hereunder, at the option of the Lender all amounts outstanding under the Notes shall bear interest at a rate per annum which is the rate otherwise applicable under Sections 2.6(a), 2.6(b) and 2.6(c), plus 2% from the date of such Event of Default until the date such Event of Default is cured or waived (after as well as before judgment). (e) Interest shall be payable in arrears on each Interest Payment Date, provided that interest accruing pursuant to paragraph (d) of this Section shall be payable on demand. 2.7 COMPUTATION OF INTEREST AND FEES. Interest on Loans and all Obligations shall be calculated on the basis of a 360-day year for the actual days elapsed. Each determination of an interest rate by the Lender pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower and the Lender in the absence of manifest error. 2.8 INABILITY TO DETERMINE INTEREST RATE. In the event that prior to the first day of any Interest Period: (a) the Lender shall have determined (which determination shall be conclusive and binding upon the Borrower absent manifest error) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the LIBOR Adjusted Rate for such Interest Period, or (b) the LIBOR Adjusted Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the cost to the Lender (as conclusively certified by the Lender) -18- of making or maintaining its affected Loans during such Interest Period; the Lender shall give telecopy or telephonic notice thereof to the Borrower as soon as practicable thereafter. If such notice is given (i) any LIBOR Loans requested to be made on the first day of such Interest Period shall be made as Reference Rate Loans and (ii) any outstanding LIBOR Loans shall be converted, on the first day of such Interest Period, to Reference Rate Loans. Until such notice has been withdrawn by the Lender, no further LIBOR Loans shall be made or continued as such, nor shall the Borrower have the right to convert Reference Rate Loans to LIBOR Loans. 2.9 PRO RATA TREATMENT AND PAYMENTS. Each payment (including each prepayment) by the Borrower (a) on account of interest on the Loans shall be made pro rata between the Facility A Term Loan and the Facility B Term Loan then held by the Lender and (b) on account of principal of the Loans, (i) prior to acceleration pursuant to Section 7 hereof, shall be applied equally between the Facility A Term Loan and the Facility B Term Loan then held by the Lender and (ii) subsequent to acceleration pursuant to Section 7 hereof, shall be applied pro rata between the Facility A Term Loan and the Facility B Term Loan then held by the Lender. All payments (including prepayments) to be made by the Borrower hereunder and under the Notes, whether on account of principal, interest, fees or otherwise, shall be made without set off or counterclaim and shall be made prior to 10:00 a.m., Los Angeles time, on the due date thereof to the Lender to such account as the Lender shall specify to the Borrower in writing, in Dollars and in immediately available funds. All payments due to the Lender from the Borrower hereunder shall be deemed paid when received by the Lender. If any payment hereunder (other than payments on the LIBOR Loans) becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day, and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. If any payment on a LIBOR Loan becomes due and payable on a day other than a Eurodollar Business Day, the maturity thereof shall be extended to the next succeeding Eurodollar Business Day (and interest shall continue to accrue thereon at the applicable rate) unless the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Eurodollar Business Day. 2.10 ILLEGALITY. Notwithstanding any other provision herein, if any change after the Closing Date in any Requirement of Law or in the interpretation or application thereof shall make it unlawful for the Lender or Applicable Lending Office to maintain LIBOR Loans as contemplated by this Agreement, (a) the commitment of the Lender hereunder to continue LIBOR Loans as such and to convert Reference Rate Loans to LIBOR Loans shall forthwith be suspended during such period of illegality and (b) the Loans of -19- the Lender or Applicable Lending Office then outstanding as LIBOR Loans, if any, shall be converted automatically to Reference Rate Loans on the respective last days of the then current Interest Periods with respect to such Loans or within such earlier period as required by law. If any such conversion of a LIBOR Loan occurs on a day which is not the last day of the then current Interest Period with respect thereto, the Borrower shall pay to the Lender such amounts, if any, as may be required pursuant to Section 2.13. To the extent that the Lender's LIBOR Loans have been converted to Reference Rate Loans pursuant to this Section 2.10, all payments and prepayments of principal that otherwise would be applied to the Lender's LIBOR Loans shall be applied instead to its Reference Rate Loans. 2.11 INCREASED COSTS. (a) In the event that any change after the Closing Date in any Requirement of Law or in the interpretation or application thereof or compliance by the Lender with any request or directive (whether or not having the force of law but, if not having such force, the compliance with which is generally accepted and standard in the banking industry) from any central bank or other Governmental Authority having jurisdiction or authority over the Lender made subsequent to the Closing Date: (i) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirements against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of the Lender or Applicable Lending Office which is not otherwise included in the determination of the LIBOR Adjusted Rate hereunder; or (ii) shall impose on the Lender or Applicable Lending Office any other condition (other than with respect to a Tax matter or an Excluded Tax matter); and the result of any of the foregoing is to increase the cost to the Lender or Applicable Lending Office, by an amount which the Lender reasonably deems to be material, of converting into, continuing or maintaining LIBOR Loans or to reduce any amount receivable hereunder in respect thereof then, in any such case, the Borrower shall promptly pay to the Lender or Applicable Lending Office, upon the demand of the Lender, any additional amounts necessary to compensate the Lender for such increased cost or reduced amount receivable. If the Lender or any Applicable Lending Office becomes entitled to claim any additional amounts pursuant to this Section, it shall promptly notify the Borrower of the event by reason of which it has become so entitled. A certificate as to any additional amounts payable pursuant to this Section submitted by the Lender or Applicable Lending Office to the Borrower, which shall demonstrate in reasonable detail the computation of such amounts, shall be conclusive evidence of the accuracy of the information so recorded, absent manifest error. -20- Requests by the Lender for compensation hereunder shall not be for a period more than six months retroactive. This covenant shall survive the termination of this Agreement and the payment of the Notes. (b) If, after the date of this Agreement, the introduction of or any change in any applicable law, rule, regulation or guideline regarding capital adequacy, or any change in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, affects the amount of capital required or expected to be maintained by the Lender and the Lender (taking into consideration the Lender's policies with respect to capital adequacy) determines that the amount of capital maintained by the Lender which is attributable to or based upon the Loans or this Agreement must be increased as a consequence of such introduction or change by an amount deemed by the Lender to be material, then, upon demand of the Lender, the Borrower shall promptly pay to the Lender additional amounts sufficient to compensate the Lender for the increased costs to such Lender of such increased capital, without duplication of any adjustment in interest based on the LIBOR Reserve Requirement. Any such demand shall be accompanied by a certificate of the Lender setting forth in reasonable detail the computation of any such increased costs, which certificate shall be conclusive, absent manifest error. Requests by the Lender for compensation hereunder shall not be for a period more than six months retroactive. This obligation of the Borrower under this Section 2.11(b) shall survive the termination of this Agreement and the payment of the Notes and all other amounts payable hereunder in full. 2.12 TAXES. (a) All payments made by the Borrower in respect of the Obligations shall be made free and clear of, and without deduction or withholding (except to the extent required by law, in which case the following sentence shall apply) for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any United States Governmental Authority or any political subdivision or taxing authority thereof or therein, other than Excluded Taxes (all such non-Excluded Taxes being hereinafter called "TAXES"). If any Taxes are required to be withheld from any amounts payable to the Lender in respect of the Obligations, the amounts so payable to the Lender shall be increased to the extent necessary to yield to the Lender (after payment of all Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement and the other Loan Documents; provided, however, that no increased amount shall be required to be paid to the Lender under this sentence except to the extent that any change after the date hereof in any such withholding requirement (other than a change occasioned by an action of the Lender) results in an increase in the rate of such withholding from that in effect as of the date -21- hereof in respect of payments to the Lender. The Lender shall deliver to the Borrower a certificate setting forth the amount of such Taxes, the calculation of such Taxes and an explanation of the requirement therefor, all in reasonable detail and such certificate shall be conclusive, absent manifest error. Whenever any Taxes are payable by the Borrower, as promptly as possible thereafter, the Borrower shall send to the Lender a copy of an original official receipt received by the Borrower showing payment thereof or such other evidence of payment reasonably satisfactory to the Lender. If the Borrower fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Lender the required receipts or other required documentary evidence, the Borrower shall indemnify the Lender for any incremental taxes, interest or penalties (and related reasonable fees and expenses of counsel) that may become payable by the Lender as a result of any such failure. The agreements in this Section shall survive the termination of this Agreement and the payment of the Notes and all other amounts payable hereunder. (b) The Lender agrees that it will deliver to the Borrower on or prior to the Closing Date (i) two duly completed copies of United States Internal Revenue Service Form 1001 or 4224 or successor applicable form, as the case may be, and (ii) an Internal Revenue Service Form W-8 or W-9 or successor applicable form. The Lender also agrees to deliver to the Borrower two further copies of the said Form 1001 or 4224, as applicable, and Form W-8 or W-9, or successor applicable forms or other manner of certification as to such tax matters, as the case may be, on or before the date that any such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrower, and such extensions or renewals thereof as may reasonably be requested by the Borrower, unless in any such case an event beyond the control of the Lender (including, without limitation, any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent the Lender from duly completing and delivering any such form with respect to it and the Lender so advised the Borrower. The Lender shall certify (i) in the case of a Form 1001 or a Form 4224, that it is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes and (ii) in the case of a Form W-8 or W-9, that it is entitled to an exemption from United States backup withholding tax. (c) The Borrower shall not be required to pay any additional amounts to any Person in respect of United States withholding tax pursuant to Section 2.12(a) if the obligation to pay such additional amounts would not have arisen but for a failure by such Person to comply with the requirements of Section 2.12(b) (including the accuracy of the certificate described in the final sentence thereof). -22- 2.13 INDEMNITY. The Borrower agrees to indemnify the Lender and to hold the Lender harmless from and to pay the Lender on demand the amount of any reasonable liability, loss or expense arising from the reemployment of funds obtained by it or from fees payable to terminate the deposits from which such funds were obtained (including reasonable fees and expenses of counsel) which the Lender may sustain or incur (but without duplication of any amounts payable pursuant to Section 2.3 hereof) as a consequence of (a) default by the Borrower in payment when due of the principal amount of or interest on any LIBOR Loan or any Fixed Rate Loan, (b) default by the Borrower in making a borrowing of, conversion into or continuation of LIBOR Loans or Fixed Rate Loans after the Borrower has given a notice requesting the same in accordance with the provisions of this Agreement, (c) default by the Borrower in making any prepayment after the Borrower has given a notice thereof in accordance with the provisions of this Agreement, but only if the Lender has suffered actual loss, liability or expense in reliance on such notice or (d) the making by the Borrower of a prepayment or conversion of LIBOR Loans on a day which is not the last day of an Interest Period with respect thereto, or of a prepayment of Fixed Rate Loans on a day other than the Term Loan Maturity Date. The Lender's certificate as to such liability, loss or expense shall be deemed conclusive, absent manifest error. This covenant shall survive the termination of this Agreement and the payment of the Notes and all other amounts payable hereunder. 2.14 MITIGATION OF COSTS. If the Lender, by changing its Applicable Lending Office or taking any other reasonable action, so long as making such change or taking such other action is not disadvantageous to it in any financial, regulatory or other respect, can mitigate any adverse effect on the Borrower under Section 2.8, 2.10, 2.11 or 2.12, the Lender shall take such action. SECTION 3. REPRESENTATIONS AND WARRANTIES To induce the Lender to enter into this Agreement and to make the Loans, the Borrower hereby represents and warrants to the Lender as to itself and as to each Subsidiary other than IRG and, as to IRG, to Borrower's actual knowledge and otherwise based solely on the representations of the Sellers set forth in the Acquisition Agreement (including all exhibits) that: 3.1 FINANCIAL CONDITION. (a) The audited balance sheet of the Parent and its Subsidiaries as at August 31, 1997, and the related audited statements of income and of cash flows for the fiscal year ended on such date, certified by the Accountants, copies of which have heretofore been furnished to the Lender present fairly in all material respects the financial condition of the Parent and its Subsidiaries as at such date, and the results of its operations and its cash flows for the fiscal year then ended. All such financial statements (the "FINANCIAL -23- STATEMENTS"), including the related schedules and notes thereto, have been prepared in accordance with generally accepted accounting principles in Canada applied consistently throughout the periods involved (except as approved by such Accountants or Responsible Officer, as the case may be, and as disclosed therein and for the absence of notes). The Borrower does not have any, as of such date, Guarantee Obligation, contingent liability or liability for taxes, or any long-term lease or unusual forward or long-term commitment, including, without limitation, any interest rate or foreign currency swap or exchange transaction, which is not reflected in the foregoing statements or in the notes thereto and which is material in relation to the financial condition of the Borrower at such date. During the period from August 31, 1997 to and including the Closing Date, there has been no sale, transfer or other disposition by the Borrower of any material part of its business or property and no purchase or other acquisition of any business or property (including any Capital Stock of any other Person), other than the IRG Acquisition, material in relation to the financial condition of the Borrower at August 31, 1997. (b) The PRO FORMA balance sheet of the Borrower as at the Closing Date, a copy of which has heretofore been furnished to the Lender, presents fairly, in the opinion of the Borrower, the PRO FORMA financial condition of the Borrower as at such date, subject to such accounting adjustments as may be customary in acquisition transactions similar to the IRG Acquisition, subject to year-end adjustments and changes resulting from audit. 3.2 NO CHANGE. Since August 31, 1997 no events have occurred which, individually or in the aggregate, constitute a material adverse change in the financial condition or business of the Borrower and its Subsidiaries taken as a whole. 3.3 CORPORATE EXISTENCE; COMPLIANCE WITH LAW. The Borrower and each Subsidiary, (a) is (or, when formed, will be) duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has (or, when formed, will have) the corporate, partnership or limited liability company power, as the case may be, and authority, and the legal right, to own and operate its Properties, to lease the property it operates as lessee and to conduct the business in which it is currently engaged and in which it proposes to be engaged after the Closing Date, (c) is (or, when formed, will be) duly qualified as a foreign entity and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification and (d) is (or, when formed, will be) in compliance with all Requirements of Law except to the extent that the failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. -24- 3.4 CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The Borrower and each of its Subsidiaries has the corporate, partnership or limited liability company power, as the case may be, and authority, and the legal right, to make, deliver and perform the Acquisition Agreement and the Loan Documents, in each case, to which it is or will be a party, to borrow hereunder and to consummate the IRG Acquisition under the Acquisition Agreement, and the applicable Loan Party has taken all necessary corporate action to authorize (a) the borrowings on the terms and conditions of this Agreement and the Notes, (b) the execution, delivery and performance of the Acquisition Agreement and the Loan Documents to which it is or will be a party and (c) the consummation of the IRG Acquisition. Each Subsidiary has (or, when formed, will have) the corporate, partnership or limited liability company power and authority, and the legal right, to make, deliver and perform the Loan Documents to which it is or will be a party and has (or, when formed, will have) taken all corporate, partnership or limited liability company action, as the case may be, to authorize the execution, delivery and performance of such Loan Documents. Except as set forth on Schedule 3, no consent or authorization of, filing with or other act by or in respect of, any Governmental Authority or any other Person is required in connection with the borrowings hereunder, the consummation of the IRG Acquisition or with the execution, delivery, performance, validity or enforceability of this Agreement, the Notes, the other Loan Documents or the Acquisition Agreement except for any consent, authorization, filing or other act the failure to obtain or make which could not reasonably be expected to have a Material Adverse Effect. This Agreement and the Acquisition Agreement have been, and each of the Notes and the other Loan Documents to which the Borrower or any Subsidiary is or will be a party will be, duly executed and delivered by it. This Agreement and the Acquisition Agreement constitute, and each of the Notes and the other Loan Documents when executed and delivered will constitute, a legal, valid and binding obligation of the Borrower and each Subsidiary (to the extent the Borrower or such Subsidiary is a party thereto) enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 3.5 NO LEGAL BAR. The execution, delivery and performance of this Agreement, the Notes, the other Loan Documents and the Acquisition Agreement, the borrowings hereunder and the use of the proceeds thereof, and the consummation of the IRG Acquisition will not violate any Requirement of Law or Contractual Obligations of the Borrower or any Subsidiary which could reasonably be expected to have a Material Adverse Effect and will not result in, or require, the creation or imposition of any Lien on any of its properties or revenues pursuant to any such Requirement of Law or Contractual Obligation, except pursuant to the Loan Documents or -25- except as otherwise permitted pursuant to Section 6.8, which Lien could reasonably be expected to have a Material Adverse Effect. 3.6 NO MATERIAL LITIGATION. Except as set forth in Schedule 5, no litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Borrower, threatened by or against the Borrower or any Subsidiary or against any of its or their properties or revenues or by or against any "affiliated person" of the Borrower or any Subsidiary, within the meaning of the Investment Company Act, (a) on the Closing Date with respect to this Agreement, the Notes or the other Loan Documents or the Acquisition Agreement or any of the transactions contemplated hereby or thereby or (b) which could reasonably be expected to have a Material Adverse Effect. 3.7 OWNERSHIP OF PROPERTY; LIENS; CONDITION OF PROPERTIES. (a) The Borrower and each Subsidiary has (or, when formed, will have) good title in fee simple to, a valid leasehold interest in or rights as a permittee or licensee to, all of its real property, and good title to all of its other Property which is material to its business, and to the best of the Borrower's current actual knowledge, none of such Property is subject to any Lien except as permitted by Section 6.8 or as set forth in the title endorsements and policies of title insurance required to be delivered pursuant to Section 4.1. (b) All of the Properties used or useful in the conduct of the Borrower's business or the business of any Subsidiary are in good repair, working order and condition (reasonable wear and tear excepted) and suitable for use in the operation of its businesses currently conducted. 3.8 INTELLECTUAL PROPERTY. The Borrower and each Subsidiary owns, or is licensed to use, all trademarks, trade names, patents and copyrights necessary for the conduct of its business as currently conducted except for those the failure to own or license which could not reasonably be expected to have a Material Adverse Effect (the "INTELLECTUAL PROPERTY"). To the Borrower's knowledge, no claim which could reasonably be expected to have a Material Adverse Effect has been asserted and is pending by any Person challenging or questioning the use of any such Intellectual Property or the validity or effectiveness of any such Intellectual Property, nor does the Borrower or any Subsidiary know of any valid basis for any such claim. To the Borrower's knowledge, the use of such Intellectual Property by the Borrower and its Subsidiaries, if any, does not infringe on the rights of any Person, nor, to the Borrower's knowledge, does the use by other Persons of such Intellectual Property infringe on the rights of the Borrower or any Subsidiary. 3.9 TAXES. Except as previously disclosed in writing to the Lender, the Borrower and each Subsidiary has (or, when formed, -26- will have) filed or caused to be filed all tax returns which are required to be filed and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than any not yet delinquent or the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of the Borrower or such Subsidiary, as appropriate); and no tax Lien has been filed, and no claim is being asserted with respect to any such tax, fee or other charge which could reasonably be expected to have a Material Adverse Effect. 3.10 FEDERAL REGULATIONS. No part of the proceeds of any Loans are intended to be or will be used, directly or indirectly, for "purchasing" or "carrying" any Margin Stock within the respective meanings of each of the quoted terms under Regulation U or for any purpose which violates the provisions of the Regulations of the Board of Governors of the Federal Reserve System. If requested by the Lender, the Borrower will furnish to the Lender a statement to the foregoing effect in conformity with the requirements of Form U-1 referred to in Regulation U. 3.11 ERISA. No Reportable Event has occurred during the five-year period prior to the date on which this representation is made with respect to any Plan which has or would likely result in a Material Adverse Effect. Each Plan has complied in all material respects with the applicable provisions of ERISA and the Code. The present value of all accrued benefits under all Single Employer Plans maintained by the Borrower, any Subsidiary, or any Commonly Controlled Entity (based on those assumptions used to fund the Plans) did not, as of the last annual valuation date prior to the date on which this representation is made, exceed by an amount which could cause a Material Adverse Effect the value of the assets of such Plans allocable to such accrued benefits. Neither the Borrower, any Subsidiary, nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan which has or would likely result in a Material Adverse Effect. The present value (determined using actuarial and other assumptions which are reasonable in respect of the benefits provided and the employees participating) of the liability of the Borrower, each Subsidiary, if any, and each Commonly Controlled Entity for post retirement benefits (excluding benefits required by Section 4980B of the Code) to be provided to their current and former employees under plans which are welfare benefit plans (as defined in Section 3(a) of ERISA) does not, in the aggregate, exceed by an amount which could cause a Material Adverse Effect the assets under all such plans allocable to such benefits. 3.12 INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY ACT. Neither the Borrower nor any Subsidiary is an "investment company", or a company "controlled" by an "investment company", -27- within the meaning of the Investment Company Act of 1940, as amended (the "INVESTMENT COMPANY ACT"). Neither the Borrower nor any Subsidiary is a "holding company," or an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. 3.13 SUBSIDIARIES. As of the Closing Date, the Borrower has those Subsidiaries listed on Schedule 8 hereto. 3.14 PURPOSE OF LOANS. The proceeds of the Loans are intended to be and shall be used by the Borrower solely to refinance the Demand Note. 3.15 ENVIRONMENTAL MATTERS. (a) To the Borrower's knowledge after reasonable inquiry, with respect to the Properties: (i) Such Properties and all operations at such Properties are in compliance in all material respects with all applicable Environmental Laws, and there is no contamination at, under or about such Properties, or violation of any Environmental Law with respect to such Properties or the business conducted at such Properties which involves a matter or matters which has caused or are reasonably likely to cause a Material Adverse Effect. (ii) The Borrower has not received any notice of violation, alleged violation, non-compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to any of such Properties or the business conducted at such Properties which involves a matter or matters which has caused or are reasonably likely to cause a Material Adverse Effect, nor does the Borrower have knowledge or reason to believe that any such notice will be received or is being threatened except insofar as such notice or threatened notice, or any aggregation thereof, does not involve a matter or matters that is or are reasonably likely to cause a Material Adverse Effect. (iii) No judicial proceedings or governmental or administrative action is pending, or, to the knowledge of the Borrower, threatened, under any Environmental Law to which the Borrower or any of its Subsidiaries is named as a party with respect to such Properties or the business conducted at such Properties which involves a matter or matters which has caused or are reasonably likely to cause a Material Adverse Effect, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to such Properties or such business except insofar as such proceeding, action, decree, order or other requirement, or any aggregation thereof, is not reasonably likely to cause a Material Adverse Effect. -28- (b) To the Borrower's knowledge after reasonable inquiry, except to the extent set forth in Schedule 6, with respect to the Properties acquired pursuant to the IRG Acquisition: (i) Neither the Seller nor the Borrower has generated, used, transported, treated, stored, released or disposed of, or suffered or permitted anyone else to generate, use, transport, treat, store, release or dispose of any Hazardous Substance (as defined below) on or with respect to such Properties in violation of any law. (ii) There has not been any generation, use, transportation, treatment, storage, release or disposal of any Hazardous Substance on or with respect to such Properties which has created or might reasonably be expected to create any liability under any law or which would require reporting to or notification of any governmental entity. (iii) No asbestos or polychlorinated biphenyl or underground storage tank is contained in or located at such Properties. (iv) Any Hazardous Substance handled or dealt with in any way in connection with such Properties has been and is being handled or dealt with in all respect in compliance with all applicable laws. As used in this Section 3.16(b), "HAZARDOUS SUBSTANCE" means substances that are defined or listed in, or otherwise classified pursuant to, any applicable laws as "hazardous substances," "hazardous materials," "hazardous wastes" or "toxic substances," or any other formulation intended to define, list or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, radioactivity, carcinogenicity, reproductive toxicity or "EP toxicity," and petroleum and drilling fluids, produced waters and other wastes associated with the exploration, development, or production of crude oil, natural gas or geothermal energy. 3.16 ACCURACY AND COMPLETENESS OF INFORMATION. Unless otherwise expressly indicated in writing to the Lender, the documents furnished and the statements made in writing to the Lender by the Borrower in connection with the negotiation, preparation or execution of this Agreement or any of the other Loan Documents do not contain any untrue statement of fact material to the creditworthiness of the Borrower or omit to state any such material fact necessary in order to make the statements contained therein not misleading, in either case which has not been corrected, supplemented or remedied by subsequent documents furnished or statements made in writing to the Lender prior to the date hereof. The projections and pro forma financial information contained in such materials are based upon good faith estimates and assumptions believed by the Borrower to be reasonable at the -29- time made and as of the date of this Agreement, it being recognized that such projections as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such projections may differ from the projected results. 3.17 REAL PROPERTY ASSETS. Schedule 4 sets forth all real property that, as of the Closing Date, is owned or leased by the Borrower and its Subsidiaries, including all real property acquired in connection with the IRG Acquisition. 3.18 PERMITS, ETC. Except as set forth on Schedule 3, the Borrower and its Subsidiaries have (or, when formed, will have) all permits, licenses, authorizations and approvals required for each of them lawfully to acquire, own, lease, control, manage or operate their businesses as currently conducted, except for such permits, licenses, authorizations or approvals required for the lawful ownership, lease, control, management or operation of their businesses as currently conducted, the failure to obtain or maintain which will not have a Material Adverse Effect. Except as set forth on Schedule 5, no condition exists or event has occurred which, in itself or with the giving of notice or lapse of time or both, would result in the suspension, revocation, impairment, forfeiture or non-renewal of any such permit, license, authorization or approval required for the lawful ownership, lease, control, management or operation of their businesses as currently conducted, and, there is no claim that any thereof is not in full force and effect, except for such of the immediately preceding matters which are not likely or reasonably likely to cause a Material Adverse Effect. Except as set forth on Schedule 5 and for such of the immediately preceding matters and such of the following matters which are not reasonably likely to cause a Material Adverse Effect, there are (a) no judgments, decrees or orders issued, or to the Borrower's knowledge, threatened, by the any court or regulatory Person with respect to the Borrower or any Subsidiary, (b) no complaints, petitions, filings or other proceedings pending, or to the Borrower's knowledge, threatened, before the any court or regulatory Person with respect to the Borrower or any Subsidiary and (c) no events that have occurred that could reasonably be expected to result in the imposition of any financial penalty by the any court or regulatory Person upon the Borrower or any Subsidiary. 3.19 PATENTS, TRADEMARKS, ETC. Schedules A, B and C to the Security Agreement accurately and completely lists all material patents, trademarks, service marks, trade names and copyrights owned by or licensed to the Borrower and its Subsidiaries on the Closing Date. 3.20 COPYRIGHT ACT REQUIREMENTS. The Borrower and its Subsidiaries have (or, when formed, will have) recorded or deposited with and paid to the United States Copyright Office, the Registrar of Copyrights, the Patent and Trademark Office and/or -30- any other licensors of copyrighted materials, all notices, statements of account, royalty fees and other documents and instruments required under the terms and conditions of any patent, trademark, service mark, trade name and copyright used in the operation of their businesses as currently conducted and are not liable to any Person for copyright infringement under any law, rule, regulation, contract or license as a result of their business operations, all except to the extent that noncompliance with the preceding requirements would not, in the aggregate, be reasonably expected to have a Material Adverse Effect. 3.21 NATURE OF BUSINESS. Neither the Borrower nor any of its Subsidiaries is (or, when formed, will be) engaged in any material business other than the ownership and provision of clinical research and clinical design management services for the evaluation and certification of new pharmaceutical products. 3.22 CAPITAL STOCK OF BORROWER AND ITS SUBSIDIARIES. The Parent is the direct owner of all of the issued and outstanding Capital Stock of the Borrower as of the Closing Date. All Capital Stock of the Borrower and its Subsidiaries has been duly authorized and validly issued and is fully paid and non-assessable. As of the Closing Date (a) no Capital Stock of the Borrower or its Subsidiaries carries any preemptive rights, (b) neither the Borrower nor any Subsidiary is obligated to redeem or repurchase any of its Capital Stock, (c) no agreement, arrangement, or plan exists, except as has been disclosed in writing to the Lender, which could directly or indirectly affect the capital structure of the Borrower or its Subsidiaries and (d) there are no outstanding options, rights or warrants for the acquisition by any Person, directly or indirectly, of shares of the Capital Stock of the Borrower or its Subsidiaries. 3.23 RANKING OF LOANS. This Agreement and the other Loan Documents to which the Borrower is a party, when executed, and the Loans, when borrowed are and will be the direct and general obligations of the Borrower. The Borrower's obligations hereunder and thereunder rank and will rank at least PARI PASSU in priority of payment to all other Indebtedness of the Borrower. 3.24 EXECUTIVE OFFICES. The location of the Borrower's executive office and principal place of business as of the Closing Date is 5642 Hamilton Avenue, Cincinnati, Ohio 45224. 3.25 INSOLVENCY. After giving effect to the funding of Loans on the Closing Date, the application of the proceeds of such Loans as provided herein, consummation of the IRG Acquisition, and the payment of all estimated legal, underwriting, investment banking, accounting and other fees related hereto and thereto, the Borrower and each other Loan Party will be Solvent as of and on the Closing Date. -31- 3.26 LABOR MATTERS. As of the Closing Date, there are no strikes or other labor disputes against the Borrower or any Subsidiary pending, or to the Borrower's knowledge, threatened against it or any Subsidiary. 3.27 CONDEMNATION. To the Borrower's knowledge no taking of any of the Properties or any part thereof through eminent domain, conveyance in lieu thereof, condemnation or similar proceeding is pending or, to the knowledge of the Borrower, threatened by any Governmental Authority which would reasonably be expected to have a Material Adverse Effect. 3.28 LEASES, LICENSES, PERMITS, SITE USE AGREEMENTS AND OTHER OCCUPANCY AGREEMENTS. To the Borrower's knowledge, (a) true and complete copies of all material leases, licenses, permits, site use agreements and any other type of occupancy permit to which the Borrower or any Subsidiary is (or, when formed, will be) a party have been delivered to the Lender and are in full force and effect with no material defaults existing thereunder which individually or in the aggregate would have a Material Adverse Effect and (b) as of the Closing Date, all leases, licenses, permits, site use agreements and any other type of occupancy permit necessary or useful in the operation of IRG will be held by the Borrower or its Subsidiaries, except to the extent the failure to do so would not result in a Material Adverse Effect. 3.29 REPRESENTATIONS AND WARRANTIES IN ACQUISITION AGREEMENT. As of the Closing Date, the Lender has received a complete and correct copy of the Acquisition Agreement (including all exhibits, schedules and disclosure letters referred to therein or delivered pursuant thereto, if any) and all amendments thereto, waivers relating thereto and other side letters or agreements affecting the terms thereof. As of the Closing Date, the Acquisition Agreement has been duly executed and delivered by the Borrower and, to the best of the Borrower's knowledge, the Seller. To the Borrower's actual knowledge, the Seller has not defaulted with respect to, and there has not occurred any event which with the giving of notice or lapse of time would constitute a default by such Seller with respect to, its representations, warranties or covenants in the Acquisition Agreement, which default would reasonably be expected to cause a Material Adverse Effect. There is no default by the Borrower with respect to, nor has there occurred any event which with the giving of notice or lapse of time would constitute a default by the Borrower with respect to, its representations, warranties or covenants in the Acquisition Agreement, which default would reasonably be expected to cause a Material Adverse Effect. SECTION 4. CONDITIONS PRECEDENT 4.1 CONDITIONS TO CLOSING DATE. The agreement of the Lender to make the Loans requested to be made by it on the Closing Date to refinance the Demand Note, is subject to the satisfaction, -32- immediately prior to or concurrently with the making of the Loans on the Closing Date (except as otherwise expressly provided hereunder), of the following conditions precedent: (a) CREDIT AGREEMENT. The Lender shall have received this Agreement, executed and delivered by an officer of the Borrower as of the Closing Date. (b) OTHER LOAN DOCUMENTS. The Lender shall have received the Notes, the Mortgages, the Guarantees, the Security Agreement and the Environmental Compliance Agreement, in each case executed and delivered by an officer of the relevant Loan Party. (c) LETTERS OF CREDIT. The Lender shall have received the Letters of Credit, in each case executed and delivered by Banque Nationale de Paris (Canada) and the Royal Bank of Canada, as applicable. (d) INTERCREDITOR AGREEMENT. The Lender shall have received the Intercreditor Agreement, dated as of February 5, 1998, executed and delivered by officers of all of the relevant parties thereto. (e) INCUMBENCY CERTIFICATE. The Lender shall have received an incumbency certificate of the Borrower, and each other Loan Party, dated the Closing Date, executed by one of its Responsible Officers or its Secretary or Assistant Secretary. (f) CORPORATE PROCEEDINGS. The Lender shall have received a copy of the resolutions of the Board of Directors of the Borrower and each other Loan Party authorizing (i) the Loan Documents referred to in Sections 4.1(a) and 4.1(b) and to which it is or will be a party, (ii) the borrowings contemplated under Section 4.1 and (iii) the Acquisition Agreement, in each case certified by the Secretary or an Assistant Secretary of the Borrower and each other Loan Party as of the Closing Date, which certificate states that the resolutions thereby certified have not been amended, modified, revoked or rescinded and are in full force and effect. (g) ORGANIZATIONAL DOCUMENTS. The Lender shall have received copies of the articles of incorporation and by-laws of the Borrower and each other Loan Party, as of the Closing Date, certified as of the Closing Date as complete and correct copies thereof by the Secretary or an Assistant Secretary of the Borrower and each other Loan Party. (h) COSTS. The Lender shall have received payment or evidence of payment by the Borrower of all reasonable costs, expenses and taxes (including, without limitation, those payable pursuant to Section 8.5) accrued and unpaid and otherwise due and payable on or before the Closing Date by the Borrower pursuant to this Agreement. -33- (i) LEGAL OPINIONS. The Lender shall have received the following executed legal opinions: (i) the executed legal opinion of Pepper Hamilton LLP, counsel to the Borrower and the other Loan Parties substantially in the form of Exhibit D hereto; and (ii) the executed legal opinion of Pillsbury Madison & Sutro LLP, counsel to the Lender, in form and substance satisfactory to the Lender; and (iii) such other legal opinions as the Lender may reasonably request. (j) ACQUISITION AGREEMENT. The Lender shall have received copies of the Acquisition Agreement in form and substance reasonably satisfactory to the Lender, certified as true and correct and in full force and effect by the Borrower. (k) RECORDING. The Lender shall have received as of the Closing Date evidence of the recording, or of the provision acceptable to the Lender for the recording, of the Mortgages and any other documents reasonably necessary to be recorded in such office or offices as may be necessary or, in the reasonable opinion of the Lender, desirable to perfect each Lien purported to be created thereby or to otherwise protect the rights of the Lender thereunder and evidence of the filing, or of provision acceptable to the Lender for the filing, of appropriate financing statements on Form UCC-1, or amendments to existing financing statements on Form UCC-2 (as the Lender may deem appropriate), naming the Lender as secured party, duly executed by the applicable Loan Party under the Security Agreement, in such office or offices as may be necessary or, in the reasonable opinion of the Lender, desirable to perfect the security interests purported to be created by any of the Collateral Documents, including as a result of the IRG Acquisition. (l) LIEN SEARCHES. The Lender shall have received certified copies of requests for information from all relevant jurisdictions, listing all effective financing statements which name the Borrower or its Subsidiaries, as applicable, as debtor, together with copies of such financing statements, none of which, except for Liens permitted by Section 6.8 or Liens otherwise agreed to in writing by the Lender, shall cover any of the Collateral. (m) GOOD STANDING CERTIFICATES. The Lender shall have received certificates, each dated a recent date, of the Secretaries of State of the State of California and Ohio and the California Franchise Tax Board, respectively, certifying as to the existence and good standing of, and the payment of taxes by, the Borrower and each Subsidiary in such state and listing all charter -34- documents of the Borrower and each Subsidiary on file with such officials. (n) ACQUISITION. The IRG Acquisition shall have been consummated in accordance with the Acquisition Agreement, and the Lender shall have received (i) a certificate of the Borrower signed by a Responsible Officer of the Borrower to the effect that the transactions contemplated by the Acquisition Agreement have been consummated without amendment, waiver or modification of the terms thereof, except for amendments, waivers or modifications the effect of which could not reasonably be expected to have a Material Adverse Effect, or amendments, waivers or modifications agreed to in writing by the Lender and (ii) copies of the legal opinions of counsel to the Seller and the Borrower delivered pursuant to the Acquisition Agreement. (o) NO DEFAULT/REPRESENTATIONS. No Default shall have occurred and be continuing on the Closing Date or would occur after giving effect to the making of the Loans requested to be made on the Closing Date or after giving effect to the IRG Acquisition and the representations and warranties contained in this Agreement and each other Loan Document, and the representations and warranties contained in each certificate or other writing delivered to the Lender in satisfaction of the conditions set forth in this Section 4.1 prior to or on the Closing Date, except to the extent such representations and warranties expressly relate to an earlier date, shall be correct in all material respects on and as of the Closing Date, and the Lender shall have received a certificate of the Borrower to such effect in the form of Exhibit B, dated as of the Closing Date and executed by a Responsible Officer of the Borrower. (p) INSURANCE POLICIES. The Lender shall have received evidence that the insurance policies provided for in Section 5.5 and in the other Loan Documents (including but not limited to flood insurance) are in full force and effect, certified by the insurance broker therefor, together with appropriate evidence showing the Lender as an additional named insured or loss payee, as appropriate, all in form and substance reasonably satisfactory to the Lender. (q) OPERATIONAL CONSENTS. The Lender shall have received evidence, in form and substance reasonably satisfactory to the Lender, that the Borrower and its Subsidiaries have obtained all material consents and licenses, in each case as required by law or necessary for the operation of the Borrower and its Subsidiaries. (r) TITLE POLICY AND ENDORSEMENTS. The Lender shall have received a commitment for an ALTA Lender's policy of Title Insurance relating to the Mortgages naming the Lender as the insured, in an amount, containing coverage and otherwise in form and substance satisfactory to the Lender and subject only to those exceptions permitted by the Lender and such other endorsements as -35- the Lender shall reasonably request, in each case in form and substance reasonably satisfactory to the Lender and subject only to those exceptions permitted by the Lender. (s) FLOOD PLAIN. The Borrower and its Subsidiaries shall have delivered to the Lender, and the Lender shall have approved with respect to the Property encumbered by the Mortgages, evidence whether such Property is located in an area identified as a flood plain area as defined by the U.S. Department of Housing and Urban Development pursuant to the Flood Disaster Protection Act of 1973. (t) FINANCIAL STATEMENTS. The Lender shall have received the PRO FORMA balance sheet referred to in Section 3.1(b). (u) REPRESENTATIONS AND WARRANTIES; NO DEFAULT. The following statements shall be true and the Borrower's acceptance of the proceeds of such Loan shall be deemed to be a representation and warranty of the Borrower on the date of such Loan that: (A) The representations and warranties contained in this Agreement, each other Loan Document and each certificate or other writing delivered to the Lenders in connection herewith are correct on and as of such date in all material respects as though made on and as of such date except to the extent that such representations and warranties expressly relate to an earlier date; and (B) No Default has occurred and is continuing or would result from the making of the Loan to be made on such date. (v) LEGALITY. The making of the Loan shall not contravene any law, rule or regulation applicable to the Lender or the Borrower or any other Loan Party. (w) BORROWING NOTICE. The Lender shall have received borrowing notices pursuant to the provisions of this Agreement from the Borrower. (x) ADDITIONAL PROCEEDINGS. The Lender shall have received such other approvals, opinions and documents as it may reasonably request and all legal matters incident to the making of the Loans shall be reasonably satisfactory to the Lender. -36- SECTION 5. AFFIRMATIVE COVENANTS The Borrower hereby agrees that from and after the Closing Date, so long as any Note remains outstanding and unpaid or any other amount is owing to the Lender hereunder: 5.1 FINANCIAL STATEMENTS. The Borrower shall furnish to the Lender: (a) as soon as available, but in any event within 90 days after the end of each fiscal year of the Borrower, a copy of the audited consolidated and unaudited consolidating balance sheets of the Parent and its consolidated Subsidiaries as at the end of such year and the related statements of operations and retained earnings, stockholders' equity and of cash flows for such year, setting forth in each case in comparative form the figures for the previous year, reported on without a "going concern" or like qualification or exception, or other qualification arising out of the scope of the audit, by the Accountants; and (b) as soon as available, but in any event not later than 60 days after the end of each fiscal quarter of the Borrower, the unaudited consolidated and consolidating balance sheets of the Parent and its consolidated Subsidiaries as at the end of such quarter and the related unaudited statements of operations, retained earnings, stockholders' equity and of cash flows for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the previous year, certified by a Responsible Officer of the Borrower as being fairly stated in all material respects (subject to normal year-end audit adjustments); all such financial statements to be complete and correct in all material respects and to be prepared in reasonable detail and in accordance with generally accepted accounting principles in Canada applied consistently throughout the periods reflected therein and with prior periods (except as approved by the Accountants or Responsible Officer, as the case may be, and disclosed therein). 5.2 CERTIFICATES; OTHER INFORMATION. The Borrower shall: (a) furnish to the Lender concurrently with the delivery of the financial statements referred to in Section 5.1(b) a certificate of a Responsible Officer of the Borrower stating that, to the best of such Officer's knowledge, the Borrower and its Subsidiaries during such period have observed or performed in all material respects all of their agreements, and satisfied in all material respects every condition, contained in this Agreement and the other Loan Documents to which the Borrower or any Subsidiary is a party to be observed, performed or satisfied by it, and that such Responsible Officer has obtained no knowledge of any Default except as specified in such certificate; -37- (b) furnish to the Lender within five Business Days after the same are filed, copies of all financial statements and reports which the Borrower or any Subsidiary may make to, or file with, the Securities and Exchange Commission or any successor or analogous Governmental Authority; (c) furnish to the Lender as soon as available and in any event not later than August 31 of each fiscal year of the Borrower, a copy of the projected monthly cash flow and the annual operating budget for the Borrower and its Subsidiaries for the following fiscal year; (d) furnish to the Lender as soon as possible and in any event within five Business Days after a Responsible Officer has knowledge of the occurrence of a Default or, in the good faith determination of a Responsible Officer of the Borrower, a Material Adverse Effect, the written statement by a Responsible Officer of the Borrower, setting forth the details of such Default or Material Adverse Effect and the action which the Borrower proposes to take with respect thereto; (e) furnish to the Lender (i) as soon as possible and in any event within five days after the Borrower knows or has reason to know that any Termination Event with respect to any Plan has occurred, a statement of a Responsible Officer of the Borrower describing such Termination Event and the action, if any, which the Borrower proposes to take with respect thereto, (ii) promptly and in any event within five Business Days after receipt thereof by the Borrower, any Subsidiary or any of its or their ERISA Affiliates from the PBGC, copies of each notice received by the Borrower, any Subsidiary or any of its or their ERISA Affiliates of the PBGC's intention to terminate any Plan or to have a trustee appointed to administer any Plan, (iii) promptly and in any event within five Business Days after the filing thereof with the Internal Revenue Service, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Single Employer Plan maintained for or covering employees of the Borrower or any of its Subsidiaries if the present value of the accrued benefits under the Plan exceeds its assets by an amount which could cause a Material Adverse Effect and (iv) promptly and in any event within five Business Days after receipt thereof by the Borrower, any Subsidiary or any of its or their ERISA Affiliates from a sponsor of a Multiemployer Plan or from the PBGC, a copy of each notice received by the Borrower, any Subsidiary or any of its ERISA Affiliates concerning the imposition or amount of withdrawal liability under Section 4202 of ERISA or indicating that such Multiemployer Plan may enter reorganization status under Section 4241 of ERISA; (f) furnish to the Lender promptly after the commencement thereof, but in any event not later than five Business Days after service of process with respect thereto on, or the obtaining of knowledge by, the Borrower, notice of each action, suit or -38- proceeding before any court or governmental authority or other regulatory body or any arbitrator as to which there is a reasonable possibility of a determination that would have a Material Adverse Effect; (g) furnish to the Lender promptly such additional financial and other information as the Lender may from time to time reasonably request. 5.3 PAYMENT OF OBLIGATIONS. The Borrower shall, and shall cause each of its Subsidiaries to, pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its obligations of whatever nature, except where the failure to so satisfy such obligations would not have a Material Adverse Effect or except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the Borrower or such Subsidiary, as applicable. 5.4 CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. Subject to Section 6.6 and except as otherwise permitted pursuant to Section 6.1, the Borrower shall continue, and shall cause each Subsidiary to continue, to engage in business of the same general type as conducted by the Borrower or such Subsidiary as of the Closing Date or as of the date of the formation of such Subsidiary, as applicable, and preserve, renew and keep in full force and effect its corporate existence and take all reasonable action to maintain all rights, registrations, licenses, privileges and franchises necessary or desirable in the normal conduct of its business, (except to the extent that a failure to maintain such rights, registrations, licenses, privileges and franchises would not have a Material Adverse Effect) and comply with all Contractual Obligations and Requirements of Law (except to the extent that failure to comply therewith would not, in the aggregate, have a Material Adverse Effect). 5.5 MAINTENANCE OF PROPERTY; INSURANCE. (a) The Borrower shall, and shall cause each of its Subsidiaries to, keep all property useful or necessary in its business in good working order and condition (ordinary wear and tear excepted); maintain with financially sound and reputable insurance companies or associations insurance on such of its property in at least such amounts and against such risks as are usually insured against in the same general area by companies engaged in the same or a similar business; and furnish to the Lender, upon written request, full information as to the insurance carried. All such policies of insurance shall contain an endorsement, in form and substance reasonably satisfactory to the Lender in its sole discretion, showing the Lender as additional insured or loss payee, as appropriate, or as its interests appear. Such endorsement, or an independent instrument furnished to the Lender, shall provide that the insurance companies will give the Lender at least 30 days' -39- prior written notice before any such policy or policies of insurance shall be altered or canceled. All policies of insurance required to be maintained under this Agreement shall be in customary form and with insurers recognized as adequate by the Lender in its reasonable judgment and all such policies shall be in such amounts as shall be customary for similar companies in the same or similar business in the same geographical area. The Borrower shall deliver to the Lender insurance certificates certified by the Borrower's insurance brokers, as to the existence and effectiveness of each policy of insurance and evidence of payment of all premiums then due and payable therefor. In addition, the Borrower shall notify the Lender promptly of any occurrence causing a material loss of any insured Property and the estimated (or actual, if available) amount of such loss. Further, the Borrower shall maintain all insurance required under the other Loan Documents. (b) Each policy for liability insurance shall provide for all losses to be paid on behalf of the Lender and the Borrower, as their respective interests may appear, and each policy for property damage insurance shall, to the extent applicable to equipment and inventory, provide for all losses to be paid directly to the Lender. (c) Reimbursement under any liability insurance maintained by the Borrower or any Subsidiary pursuant to this Section 5.5 may be paid directly to the Person who shall have incurred liability covered by such insurance. In the case of any loss involving damage to equipment or inventory as to which Section 5.5(d) is not applicable, the Borrower will make or cause to be made the necessary repairs to or replacements of such equipment or inventory, and any proceeds of insurance maintained by the Borrower pursuant to this Section 5.5 shall be paid by the Lender to the Borrower, upon presentation of invoices and other evidence of obligations, as reimbursement for the costs of such repairs or replacements. (d) Upon the actual or constructive total loss of any equipment or inventory during the continuance of a Default, all insurance proceeds in respect of such equipment or inventory shall be paid to the Lender and applied in repayment of the Loans; provided that if no Event of Default or Default has occurred and is continuing, such proceeds shall be paid to the Borrower to repurchase replacements of such equipment or inventory. 5.6 INSPECTION OF PROPERTY; BOOKS AND RECORDS; DISCUSSIONS. The Borrower shall, and shall cause each Subsidiary to, keep proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all material dealings and transactions in relation to its business and activities; and upon reasonable notice and at such reasonable times during usual business hours, permit representatives of the Lender to visit and inspect any of -40- its properties and examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of the Borrower and its Subsidiaries with the Chief Financial Officer of the Borrower and its Subsidiaries and with its Accountants (provided that the Borrower may, if it so chooses, be present at or participate in any such discussion). 5.7 ENVIRONMENTAL LAWS. The Borrower shall, and shall cause each of its Subsidiaries to: (i) Comply with, and ensure compliance by all tenants and subtenants, if any, with, all applicable Environmental Laws and obtain and comply in all material respects with any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Laws except to the extent that failure to do so could not be reasonably expected to have a Material Adverse Effect; (ii) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities regarding Environmental Laws except to the extent that the same are being contested in good faith by appropriate proceedings; and (iii) Defend, indemnify and hold harmless the Lender, and its employees, agents, officers and directors, from and against any and all claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature known or unknown, contingent or otherwise, arising out of, or in any way relating to the violation of, noncompliance with or liability under any Environmental Laws applicable to the operations of the Borrower, each Subsidiary or the Borrower's or such Subsidiary's interest in Properties, or any orders, requirements or demands of Governmental Authorities related thereto, including, without limitation, reasonable attorneys' and consultants' fees, investigation and laboratory fees, response costs, court costs and litigation expenses, except to the extent that any of the foregoing arise out of the gross negligence or willful misconduct of the party seeking indemnification therefor. This indemnity shall continue in full force and effect and survive the termination of this Agreement and payment of the Notes. 5.8 USE OF PROCEEDS. The Borrower will use the proceeds of the Loans as set forth in Section 3.14, and not for the purchasing or carrying of any Margin Stock. 5.9 COMPLIANCE WITH LAWS, ETC. Except as set forth in Section 5.7 relating specifically to Environmental Laws, the Borrower shall comply in all material respects with all applicable -41- laws, rules, regulations and orders except where noncompliance would not reasonably be expected to have a Material Adverse Effect, such compliance to include, without limitation (a) paying before the same become delinquent all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or upon any of its Properties and (b) paying all lawful claims which if unpaid might become a Lien upon any of its Properties; PROVIDED, HOWEVER, that the Borrower shall not be required to pay and discharge or to cause to be paid and discharged any such tax, assessment, charge, levy or claim so long as (i) the validity or applicability thereof is being contested in good faith by appropriate proceedings or the failure to pay such tax, assessment, charge, levy or claim would not have a Material Adverse Effect and (ii) the Borrower shall, to the extent required by GAAP, have set aside on its books adequate reserves with respect thereto. 5.10 LEASE AND LICENSE APPROVALS. Except as set forth in Section 5.12(b), the Borrower shall notify the Lender of any leases, licenses, permits or other Occupancy Agreements relating to real property or real property interests that the Borrower or any Subsidiary executes or obtains which provide for the payment of rent or license fees in excess of $1,000,000 in any fiscal year. The Lender may request that any lease, license or other similar agreement become part of the Collateral and the Borrower shall provide or cause to be provided any and all Collateral Documents or other documents to be executed in connection therewith requested by the Lender and provide the Lender with title insurance (to the extent applicable) as a condition to approval. 5.11 ACQUISITION OF REAL PROPERTY IN FEE SIMPLE. The Borrower shall promptly notify the Lender of any documents relating to any fee simple real property interest acquired by the Borrower or any Subsidiary. The Lender may request that any such fee simple real property interest of which it receives such notice shall become part of the Collateral. The Borrower shall provide or cause to be provided any and all information relating to a real property interest which the Borrower or any Subsidiary desires to acquire and for which it is required to provide notice and, if such real property interest shall become Collateral, the Borrower shall execute any and all Collateral Documents and other documents to be executed in connection therewith requested by the Lender and shall provide the Lender with title insurance as a condition to approval. 5.12 LEASES AND LICENSES. Unless such failure is not reasonably likely to cause a Material Adverse Effect, the Borrower shall, and shall cause each Subsidiary to, perform and carry out all of the leases, licenses, permits and any other occupancy agreements relating to real property or real property interests (the "OCCUPANCY AGREEMENTS") to be performed by the Borrower or any Subsidiary and shall appear in and defend any action in which -42- the validity of any of the Occupancy Agreements relating to any real property or real property interests is at issue and shall commence and maintain any action or proceeding necessary to establish or maintain the validity of any of such Occupancy Agreements and to enforce the provisions thereof. The Borrower shall provide to the Lender true, correct and complete copies of any information relating to any of the Occupancy Agreements as the Lender may reasonably request in writing. Unless such amendment or termination is not likely to cause a Material Adverse Effect, the Borrower shall not, and shall not permit any Subsidiary to, amend in a materially adverse manner or terminate any of such Material Occupancy Agreements, without the prior written consent of the Lender, which consent shall not be unreasonably withheld or delayed. The Borrower shall immediately give notice to the Lender of any default by it or any of its Subsidiaries or, to the knowledge of the Borrower, by any other party to an Occupancy Agreement, which causes or is reasonably likely to cause a Material Adverse Effect. The Borrower shall not, and shall not permit any Subsidiary to, execute any new Material Occupancy Agreements without giving prior or concurrent notice to the Lender. 5.13 NOTICES. The Borrower will provide to the Lender, within five Business Days following receipt by the Borrower, copies of all notices received by the Borrower or any Subsidiary from the Internal Revenue Service or other taxing authority relating to any dispute regarding deductions, audits or any other material matter which, if adversely determined against the Borrower or such Subsidiary, would have a Material Adverse Effect. 5.14 EMPLOYEE CONTRACTS. The Borrower shall give to the Lender prompt notice of any material dispute arising out of, or material uncured default occurring under, any employee contract of the Borrower or any Subsidiary if any of such contracts shall be terminated or not renewed on substantially similar terms. SECTION 6. NEGATIVE COVENANTS The Borrower hereby agrees that from and after the Closing Date, except with the prior written consent of the Lender, and so long as any Note remains outstanding and unpaid or any other amount is owing to the Lender hereunder: 6.1 LIMITATION ON FUNDAMENTAL CHANGES. The Borrower shall not, and shall not permit any Subsidiary to, (a) amend its corporate charter or by-laws in any way that would have a Material Adverse Effect, (b) permit (to the extent within its control), vote to or for, or take any other action to commence or acquiesce to any bankruptcy or similar proceeding, (c) enter into any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution) except any merger, consolidation or amalgamation between or among the Loan Parties; PROVIDED THAT such Loan Party shall give the Lender -43- thirty days' prior written notice thereof and shall comply with all reasonable actions requested by the Lender to protect and maintain its security interests and Liens granted pursuant to the Loan Documents or (d) except as permitted hereby, convey, sell, lease, assign, transfer or otherwise dispose of, all or substantially all of its property, business or assets other than in connection with a consolidation of its operations, including without limitation a discontinuation of operations in one or more locations so long as such discontinuation does not affect a substantial portion of the Borrower's and its Subsidiaries' business taken as a whole. 6.2 LIMITATION ON RESTRICTED PAYMENTS. The Borrower shall not declare or pay any dividend in cash or in stock on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of Capital Stock of the Borrower or any warrants or options to purchase any such Capital Stock, whether now or hereafter outstanding (the foregoing being "RESTRICTED PAYMENTS") other than (a) Restricted Payments in favor of a Guarantor, and (b) other Restricted Payments in amounts not to exceed $1,000,000 in the aggregate in any twelve month period. 6.3 TRANSACTIONS WITH AFFILIATES. The Borrower shall not, and shall not permit any Subsidiary to, enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Subsidiary (other than wholly-owned Subsidiaries or wholly-owned Subsidiaries of the Parent) or any other Affiliate, unless such transaction (a) is otherwise permitted under this Agreement or (b) is in the ordinary course of the Borrower's or such Subsidiary's business and is upon terms no less favorable to the Borrower or such Subsidiary, than it would obtain in a comparable arm's length transaction with a Person not an Affiliate. 6.4 FISCAL YEAR. The Borrower shall not permit the fiscal year of the Borrower or any Subsidiary to end on a day other than August 31, except a change may be made to conform the fiscal year end to the Parent's fiscal year end. 6.5 UNFUNDED LIABILITIES. The Borrower shall not permit to exist, at any time, unfunded liabilities which, in the aggregate, for any and all Plans maintained for or covering employees of the Borrower or any of its Subsidiaries are an amount which has resulted or would likely result in a Material Adverse Effect. 6.6 LINE OF BUSINESS. Neither the Borrower nor any of its Subsidiaries shall engage in any material business other than the provisions of clinical research and clinical design management services for the evaluation and certification of new pharmaceutical products or services related thereto. -44- 6.7 ASSET DISPOSITIONS. Unless the consideration therefor is all cash and the Borrower makes a mandatory prepayment of Loans outstanding hereunder with such consideration, Borrower shall not make or permit any Asset Disposition other than (a) such dispositions in connection with the consolidation of its business as permitted pursuant to Section 6.1 hereof, and (b) unless otherwise consented to by the Lender (which consent shall not be unreasonably withheld or delayed), Asset Dispositions with respect to assets having a fair market value, when taken together with the fair market value of assets disposed of by the Parent and its other Subsidiaries, equals less than five percent (5%) of the total assets of the Parent and all of its Subsidiaries in any fiscal year. 6.8 LIMITATION ON LIENS. The Borrower shall not, and shall not permit any Subsidiary to, create, incur, assume or suffer to exist any Lien upon any of its Property, assets or revenues, whether now owned or hereafter acquired, except for: (a) Liens created hereunder or under any of the other Loan Documents; (b) Liens for taxes not yet delinquent or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect thereto are maintained on the books of the Borrower or a Subsidiary, as applicable, in conformity with GAAP; (c) Liens created by operation of law not securing the payment of Indebtedness from money borrowed or guaranteed, including carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 45 days or which are being contested in good faith by appropriate proceedings; (d) Pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation and deposit securing liability to insurance carriers under insurance or self-insurance arrangements; (e) Deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (f) Easements, rights of way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, would not cause a Material Adverse Effect; (g) Liens in existence on the Closing Date listed on Schedule 2, provided that no such Lien is spread to cover any -45- additional property after the Closing Date and that the amount of Indebtedness secured thereby is not increased; and (h) Liens securing capital expenditures incurred by the Parent and all of its Subsidiaries not to exceed an aggregate amount of $15,000,000 in fiscal year 1998 and of $10,000,000 in fiscal year 1999. 6.9 LIMITATION ON LOANS AND ADVANCES. The Borrower shall not, and shall not permit any Subsidiary to, make any advance, loan, extension of credit or capital contribution to any Person, except (a) extensions of trade credit in the ordinary course of business; (b) advances to employees of the Borrower and its Subsidiaries for travel, entertainment and relocation expenses in the ordinary course of business; (c) loans to Affiliates or Subsidiaries; or (d) as contemplated by the Acquisition Agreement. SECTION 7. EVENTS OF DEFAULT If any of the following events shall occur and be continuing: (a) The Borrower shall fail to pay any principal on any Note when due or the Borrower shall fail to pay interest or any other amount payable hereunder within three days after such amount becomes due; or (b) Any representation or warranty made by any Loan Party herein or in any other Loan Document, or which is contained in any certificate, document or financial or other statement furnished at any time under or in connection with this Agreement or any other Loan Document shall prove to have been incorrect in any material respect when made; or (c) The Borrower shall default in the observance or performance of any agreement contained in Section 5 or Section 6; or (d) Any Loan Party shall default in the observance or performance of any other agreement contained in this Agreement or the other Loan Documents (other than as provided in paragraphs (a) through (c) of this Section), and such default shall continue unremedied for a period of twenty Business Days after the earlier of (i) notice thereof from the Lender to the Borrower and (ii) actual knowledge thereof by a senior officer of such Loan Party; or any provision of any Loan Document shall at any time for any reason be declared null and void by a court; or (e) The validity or enforceability of any Loan Document shall at any time be contested by any Loan Party in writing, or a proceeding shall be commenced by any Loan Party or by any Governmental Authority or other Person having jurisdiction over any Loan Party, seeking to establish the invalidity or unenforceability thereof, or any Loan Party shall deny in writing -46- that it has any liability or obligation purported to be created under any Loan Document; or (f) Any Guarantee or any Letter of Credit shall cease, for any reason to be in full force and effect; or (g) The Borrower or any Loan Party shall (i) default in any payment of principal or interest, regardless of the amount, due in respect of any (A) Indebtedness (other than the Notes), or (B) any Guarantee Obligation, if such default is reasonably likely to cause a Material Adverse Effect or (ii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or Guarantee Obligation or contained in any instrument or agreement evidencing, securing or relating thereto, if the effect of such default referred to in this clause (ii) is to cause, or to permit the holder thereof to cause, such Indebtedness or Guarantee Obligation to become or be declared due and payable prior to its stated maturity or the stated maturity of any underlying obligation, as the case may be, and if the effect of such default referred to in this clause (ii) is to cause a Material Adverse Effect; or (h) (i) The Borrower or any other Loan Party shall commence any voluntary case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or the Borrower or any other Loan Party shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Borrower or any other Loan Party any involuntary case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment and (B) remains undismissed, undischarged, unstayed or unbonded for a period of 60 days; or (iii) there shall be commenced against the Borrower or any other Loan Party any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) the Borrower or any other Loan Party shall take any action in writing in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) the Borrower or any other Loan Party shall generally not, or shall be unable to, or shall admit in writing its inability to, -47- pay its debts as they become due or there shall be a general assignment for the benefit of creditors; or (i) (i) Any Person shall engage in any non-exempt "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan which would subject the Borrower or any Loan Party to any tax, penalty, or other liabilities in the aggregate exceeding $1,000,000, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee would reasonably be expected to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA (other than a standard termination) or (v) the Borrower or any Commonly Controlled Entity would reasonably be expected to incur any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan; and in each case regarding clauses (ii) through (v) above, such event or condition, together with all other such events or conditions, if any, would reasonably be expected to cause a Material Adverse Effect; or (j) One or more judgments or decrees shall be entered against the Borrower or any other Loan Party that in the aggregate are reasonably likely to have a Material Adverse Effect, and that portion of such judgements or decrees the failure to vacate, discharge, stay or bond pending appeal would be reasonably likely to have a Material Adverse Effect shall not have been vacated, discharged, stayed or bonded pending appeal within sixty days from the entry thereof or in any event five days before the date of any sale pursuant to such judgment or decree or any non-monetary judgment or order shall be entered against the Borrower or any other Loan Party that is reasonably likely to have a Material Adverse Effect and either (i) enforcement proceedings shall have been commenced by any Person upon such judgment which has not been stayed pending appeal or (ii) there shall be any period of ten 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 (k) The Parent shall cease to own directly or indirectly and beneficially 100% of the Capital Stock and Voting Power of the Borrower; or the Borrower shall cease to own 100% of the Capital Stock and Voting Power of IRG; or (l) There shall occur any default in the material observance or material performance of the Inter-Lender Agreement or either Letter of Credit or the Inter-Lender Agreement or either Letter or -48- Credit shall terminate or otherwise no longer be in full force and effect; or (m) Any material provision of any Loan Document, after delivery thereof pursuant to the provisions hereof, shall, for any reason other than pursuant to the terms thereof or an act or omission by the Lender, cease to be valid or enforceable in accordance with its terms and such cessation shall have a Material Adverse Effect, or any security interest created under any Loan Document shall for any reason other than pursuant to the terms thereof or an act or omission by the Lender, cease to be a valid and perfected first priority (except for any Lien or security interests permitted under any of the Loan Documents or which have priority by operation of law) security interest or Lien (except as otherwise stated or permitted herein or therein) in any material portion of the Collateral or the Property purported to be covered thereby; then, and in any such event, (A) if such event is an Event of Default specified in paragraph (h) above, automatically the Loans made to the Borrower hereunder (with accrued interest thereon, including interest accrued after the filing of a petition initiating any proceeding referred to in paragraph (h) above) and all other Obligations shall immediately become due and payable, and (B) if such event is any other Event of Default, the Lender may, by notice of default to the Borrower, declare the Loans (with accrued interest thereon) and all other Obligations under this Agreement and the Notes to be due and payable forthwith, whereupon the same shall immediately become due and payable. In all cases the Lender may enforce any or all of the Liens and security interests and other rights and remedies created pursuant to any Loan Document or available at law or in equity. Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived by the Borrower. SECTION 8. MISCELLANEOUS 8.1 AMENDMENTS AND WAIVERS. Neither this Agreement, nor any Note, nor any other Loan Document, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this Section. With the prior written consent of the Lender and the Borrower (and, in the case of any Loan Document other than this Agreement, the relevant Loan Party), the Borrower may (or such Loan Party, as the case may be), from time to time, enter into written amendments, supplements or modifications hereto and to the other Loan Documents for the purposes of adding any provisions to this Agreement or the other Loan Documents or changing in any manner the rights of the Lender, the Borrower or any other Loan Party hereunder or thereunder or waiving, on such terms and conditions as may be specified in such instrument, any of the requirements of this Agreement or the Notes or the other Loan Documents or any Default and its consequences. Any such -49- waiver and any such amendment, supplement or modification shall apply equally to the Lender and shall be binding upon the Borrower, the other Loan Parties, the Lender and all future holders of the Notes. In the case of any waiver, the Borrower, the other Loan Parties and the Lender, shall be restored to their former position and rights hereunder and under the outstanding Notes and any other Loan Documents, and any Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default, or impair any right consequent thereon. 8.2 NOTICES. All notices, requests and demands or other communications to or upon the respective parties hereto to be effective shall be in writing (including by telecopy), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered by hand, or 3 days after being deposited in the United States mail, certified and postage prepaid and return receipt requested, or, in the case of telecopy notice, when received, in each case addressed to the parties at their addresses as set forth on the signature pages hereof or to such other address as may be hereafter notified by the respective parties hereto; PROVIDED that any notice, request or demand to or upon the Lender pursuant to Section 2.1, 2.2, 2.3 or 2.4 or any notice to the Borrower pursuant to Section 7 shall not be effective until received. 8.3 NO WAIVER; CUMULATIVE REMEDIES. No failure to exercise and no delay in exercising, on the part of the Lender, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder 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. 8.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made hereunder and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement (but shall not be deemed to be restated unless otherwise expressly provided for). 8.5 PAYMENT OF EXPENSES AND TAXES. The Borrower agrees, whether or not the transactions contemplated hereby are consummated, (a) to pay or reimburse the Lender for all its reasonable costs and out-of-pocket expenses incurred in connection with the preparation and execution of, and any amendment, supplement or modification to, this Agreement and the Notes and the other Loan Documents and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby (including the transactions to occur on the Closing Date), -50- including, without limitation, the reasonable fees and disbursements of outside counsel to the Lender and as to any amendment, supplement or modification to this Agreement or any other Loan Document and the administration of the transactions contemplated thereby, (b) after the occurrence and during the continuance of a Default, to pay or reimburse the Lender, for all its reasonable costs and out-of-pocket expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the other Loan Documents and any such other documents or in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement in the nature of a "work-out" or of any insolvency or bankruptcy proceeding, including, without limitation, reasonable legal fees and disbursements of outside counsel to the Lender, (c) to pay, and indemnify and hold harmless Lender from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes (but not including Excluded Taxes), if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the Notes, the other Loan Documents and any such other documents and (d) to pay, and indemnify and hold harmless the Lender from and against, any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs (including, without limitation, the reasonable legal fees and disbursements of outside counsel to the Lender), expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement, the Notes, the other Loan Documents or the use of the proceeds of the Loans and any such other documents (all the foregoing, collectively, the "indemnified liabilities"), PROVIDED, that the Borrower shall have no obligation hereunder to the Lender with respect to indemnified liabilities arising from the gross negligence or willful misconduct of the Lender or its agents or attorneys-in-fact. The agreements in this Section shall survive repayment of the Notes and all other amounts payable hereunder. 8.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the Borrower, the Lender, all future holders of the Notes and their respective successors and assigns, except that the Borrower may not assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of the Lender. The Lender may assign or participate its interest hereunder, without cost or expense to the Borrower or any Loan Party. 8.7 COUNTERPARTS. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. -51- 8.8 SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 8.9 INTEGRATION. This Agreement, together with the other Loan Documents, represents the entire agreement of the Borrower and the Lender with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Lender relative to the subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents. 8.10 GOVERNING LAW. THIS AGREEMENT AND THE NOTES AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA (WITHOUT REFERENCE TO ITS CHOICE OF LAW RULES). 8.11 CLAIMS OR CONTROVERSIES SUBJECT TO JUDICIAL REFERENCE. (a) SUBMISSION TO JUDICIAL REFERENCE. Any claim or controversy alleged in or subject to a lawsuit between or among the parties to this Agreement (collectively, the "Parties" and individually, a "Party") which arises out of or relates to this Agreement, or any negotiations, correspondence or communications, whether or not incorporated or integrated into or relating to this Agreement, including but not limited to any claim or controversy which arises out of or is based upon an alleged tort, shall, at the written request of any Party, be determined by a reference in accordance with California Code of Civil Procedure Sections 638 ET SEQ. In connection with such reference, the Parties hereby expressly, intentionally and deliberately waive any right they may otherwise have to trial by jury of such claim or controversy. (b) SELECTION OF REFEREE. Within 30 days after commencement by any Party of any lawsuit subject to this Agreement, each Party shall provide the other with a list of three potential referees acceptable to it. If the lists have one or more referees in common, the person having the highest position on each list shall be the referee hereunder. If such lists do not have a common referee, the Parties shall select pursuant to the Commercial Rules of the American Arbitration Association ("AAA") a single neutral referee and submit by stipulation such referee to the court for an order of reference of such claim or controversy. However, the referee selected must be a retired state or federal court judge with at least five years of judicial experience in civil matters. In the event that the Parties do not submit such stipulation to the court within such 30 day period, any Party may move the court pursuant to this Agreement for an order of reference of such claim or controversy to a single neutral referee -52- having such qualifications. The Parties shall equally bear the fees and expenses of the referee unless the referee otherwise provides in the award. (c) POWERS OF AND LIMITATIONS ON THE REFEREE. The Referee shall have the powers provided by Title 9 of the California Code of Civil Procedure Sections 1280 ET SEQ. (the "California Arbitration Act") and the Commercial Rules of the AAA except as provided in this Agreement, including without limitation the following: (1) The referee shall determine all challenges to the legality and/or enforceability of this Agreement. (2) The referee shall apply the rules of evidence to the same extent as they would be applied in a court of law. (3) Subject to the provisions of this Agreement, the referee may order any remedy or relief, including without limitation judicial foreclosure, a deficiency judgment or equitable relief, and give effect to all legal and equitable defenses, including without limitation statutes of limitation, the statute of frauds, waiver and estoppel. (4) The Parties shall have the right to conduct discovery with respect to any dispute, controversy or issue arising out of or resulting from this Agreement pursuant to the provisions of California Code of Civil Procedure Section 1283.05, which provisions are incorporated herein by reference and made a part hereof. (5) The referee shall determine the time of the hearing. The hearing shall take place in Los Angeles, California. The hearing must be commenced within 60 days after completion of discovery, unless the referee grants a continuance upon a showing of good cause by any Party. At least 14 days before the date set for hearing, the Parties shall exchange copies of exhibits to be offered as evidence, and lists of witnesses who will testify, at such hearing. Once commenced, the hearing shall proceed day to day until completed, unless the referee grants a continuance upon a showing of good cause by any Party. Any Party may cause to be prepared, at its expense, a written transcription or electronic recordation of such hearing. (6) Any award by the referee shall be set forth in a statement of decision supported by written findings of fact and conclusions of law which the referee shall concurrently deliver to the Parties. (7) The referee shall have the authority to award in the referee's discretion reasonable attorneys' fees and costs to the prevailing party. -53- (8) The provisions of California Civil Code Sections 47 ET SEQ. shall apply to the judicial reference to the same extent as they would apply to a judicial proceeding subject to such provisions. (9) The laws of the State of California shall govern the judicial reference pursuant to this Agreement. (d) PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No provision of this Section 9.12 shall limit the right of either Party (i) to exercise any self-help remedies in accordance with applicable law or seek specific performance, (ii) to foreclose upon or sell any Collateral, by power of sale or otherwise in accordance with applicable law, or (iii) to obtain or oppose provisional remedies or necessary procedural orders from a court of competent jurisdiction, including without limitation appointment of a receiver, before, after or during the pendency of the judicial reference. The exercise of, or opposition to, any such remedy does not waive the right of any Party to judicial reference pursuant to this Agreement. (e) MISCELLANEOUS. Judgment upon the award of the referee shall be final and binding (subject to vacation or correction in the amounts set forth, respectively, in California Code of Civil Procedure Sections 1286.2, 1286.4, 1286.6 and 1286.8) and may be entered in any court of competent jurisdiction in accordance with California Code of Civil Procedure Sections 644 and 645 and no party shall take any action to contest such award or judgment except as set forth above. In the event that multiple claims are asserted, some of which are found not subject to this Agreement, the Parties agree to stay the proceedings of the claims not subject to this Agreement until all other claims are resolved in accordance with this Agreement. In the event that claims are asserted against multiple parties, some of whom are not subject to this Agreement, the Parties agree to sever the claims subject to this Agreement and resolve them in accordance with this Agreement. 8.12 ACKNOWLEDGEMENTS. The Borrower hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents; (b) the Lender has no fiduciary relationship to the Borrower solely by virtue of any of the Loan Documents, and the relationship pursuant to the Loan Documents between the Lender, on one hand, and the Borrower on the other hand, is solely that of creditor and debtor; and (c) no joint venture exists among the Lender and the Borrower. -54- 8.13 HEADINGS. Section headings herein are included for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 8.14 CONFLICT OF TERMS. Except as otherwise provided in this Agreement or any of the other Loan Documents by specific reference to the applicable provisions of this Agreement, if any provision contained in this Agreement is in conflict with, or inconsistent with, any provision in any of the other Loan Documents, the provision contained in this Agreement shall govern and control. -55- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered in Los Angeles, California by their proper and duly authorized officers as of the day and year first above written. PHOENIX INTERNATIONAL LIFE SCIENCES (U.S.) INC. By: /s/ Jean-Yves Caloz ------------------------------ Name: Jean-Yves Caloz ------------------------ Title: Secretary and Treasurer ------------------------ Address for Notices: 5642 Hamilton Avenue Cincinnati, Ohio 45224 Attention: ______________________ Telephone: (___) ________________ Facsimile: (___) ________________ BANQUE NATIONALE DE PARIS Los Angeles Branch By: /s/ Banque Nationale De Paris Signator Name: _________________________ Title: ________________________ By: /s/ Banque Nationale De Paris Signator Name: _________________________ Title: ________________________ Address for Notices: Banque Nationale de Paris 725 So. Figueroa St., Suite 2090 Los Angeles, CA 90017 Attention: Deborah Y. Gohh Telephone: (213) 688-6419 Facsimile: (213) 488-9602 Applicable Lending Office for Reference Rate Loans: 725 So. Figueroa St., Suite 2090 Los Angeles, CA 90017 Applicable Lending Office for LIBOR Loans: 725 So. Figueroa St., Suite 2090 Los Angeles, CA 90017 EX-10.22 36 EXHIBIT 10.22 Exhibit 10.22 CREDIT AGREEMENT Bearing Formal Date of February 5, 1998 among PHOENIX INTERNATIONAL LIFE SCIENCES INC. as Borrower - and - BANQUE NATIONALE DE PARIS (CANADA) and ROYAL BANK OF CANADA as Lenders TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS Section 1.1 - Definitions ......................................... 1 Section 1.2 - Headings and Table of Contents ...................... 27 Section 1.3 - References .......................................... 27 Section 1.4 - Rules of Interpretation ............................. 27 Section 1.5 - Accounting Terms and Computations ................... 27 Section 1.6 - Time ................................................ 27 ARTICLE II REPRESENTATIONS AND WARRANTIES Section 2.1 - Representations and Warranties of the Borrower ...... 28 2.1.1 Corporate Existence, Compliance with Law and Constating Documents ............................... 28 2.1.2 Governmental Approvals .............................. 28 2.1.3 Chief Executive Offices, Inventory Locations ........ 28 2.1.4 Corporate Power; Authorization; No Violation; Enforceable Obligations ................. 28 2.1.5 Approvals Required .................................. 29 2.1.6 No Litigation ....................................... 29 2.1.7 No Default .......................................... 30 2.1.8 Financial Statements, No Material Adverse Change ............................................. 30 2.1.9 Liabilities ......................................... 31 2.1.10 Pro Forma Budget .................................... 31 2.1.11 Ownership of Property; Liens ....................... 31 2.1.12 Intellectual Property ............................... 32 2.1.13 Subsidiaries ........................................ 32 2.1.14 Burdensome Restrictions ............................. 32 2.1.15 Additional Adverse Facts ............................ 33 2.1.16 Labour Matters ...................................... 33 2.1.17 Taxes ............................................... 33 2.1.18 Canadian Benefit and Pension Plans .................. 33 2.1.19 ERISA ............................................... 34 2.1.20 Accuracy of Information ............................. 34 2.1.21 No Omissions ........................................ 35 2.1.22 Environmental Matters ............................... 35 2.1.23 Competition and Anti-trust Laws ..................... 36 2.1.24 Investment Company Act of 1940 of the United States ............................................. 36 2.1.25 Full Disclosure ..................................... 37
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Page ---- 2.1.26 Solvency ............................................ 37 2.1.27 Insurance ........................................... 37 2.1.28 Millennium Compliance ............................... 37 2.1.29 Survival and Deemed Repetition ...................... 37 ARTICLE III THE CREDIT FACILITY Section 3.1 - Obligations of the Lenders .......................... 38 Section 3.2 - BNP Credit Facilities ............................... 38 3.2.1 BNP Acquisition Facility ............................ 38 3.2.2 BNP Revolver Back-Up Facility ....................... 39 3.2.3 BNP FEF Facility .................................... 39 Section 3.3 - Royal Credit Facilities ............................. 39 3.3.1 Royal Acquisition Facility .......................... 39 3.3.2 Royal Capex Facility and Extension of the Royal Capex Facility ............................... 39 3.3.3 Royal Credit Line Facility .......................... 40 3.3.4 Royal FEF Facility .................................. 40 3.3.5 Royal Visa Facility ................................. 40 Section 3.4 - Purposes of the Credit Facilities ................... 40 3.4.1 BNP Acquisition Facility ............................ 40 3.4.2 BNP Revolver Back-Up Facility ....................... 41 3.4.3 BNP FEF Facility .................................... 41 3.4.4 Royal Acquisition Facility .......................... 41 3.4.5 Royal Capex Facility ................................ 41 3.4.6 Royal Credit Line Facility .......................... 41 3.4.7 Royal FEF Facility .................................. 41 3.4.8 Royal Visa Facility ................................. 41 Section 3.5 - Manner of Borrowing ................................. 41 3.5.1 By Way of Overdraft ................................. 42 3.5.2 Prime Rate Loans and US Base Rate Loans ............. 42 3.5.3 Libor Loans ......................................... 42 3.5.4 Bankers' Acceptances ................................ 42 3.5.5 Letters of Credit ................................... 42 3.5.6 FEF Contracts ....................................... 42 3.5.7 Credit Cards ........................................ 43 Section 3.6 - Mandatory Repayments and Reductions ................. 43 3.6.1 Repayment on the Maturity Date ...................... 43 3.6.2 Automatic Reduction of the BNP Acquisition Facility and the Royal Acquisition Facility ........ 43 3.6.3 Proceeds from Sale of Assets ........................ 43 3.6.4 Proceeds from Sale or Issuance of Capital Stock or Debt ...................................... 44 Section 3.7 - Voluntary Payments .................................. 44 Section 3.8 - Cancellation ........................................ 45 Section 3.9 - Conversion Option ................................... 45 Section 3.10 - Deposit of Proceeds of Loans and Discounted Proceeds ................................ 46
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Page ---- Section 3.11 - Currency Adjustment ................................ 47 Section 3.12 - Reliance on Oral Instructions ...................... 47 Section 3.13 - Request from Taxing Authority ...................... 47 ARTICLE IV PAYMENT OF INTEREST AND FEES Section 4.1 - Payment of Interest ................................ 48 4.1.1 Interest on Prime Rate Loans ....................... 48 4.1.2 Interest on US Base Rate Loans ..................... 48 4.1.3 Interest on Libor Loans ............................ 48 4.1.4 Interest on Fixed Rate Loan ........................ 49 Section 4.2 - Default Interest ................................... 49 Section 4.3 - Nominal Rates of Interest .......................... 50 Section 4.4 - Standby Fee in respect of the Royal Capex Facility .......................................... 50 Section 4.5 - Acceptance Fee ..................................... 50 Section 4.6 - Letter of Credit Fees .............................. 50 Section 4.7 - Set Up Fees and Annual Review Fees ................. 51 ARTICLE V CONDITIONS APPLICABLE TO LIBOR LOANS Section 5.1 - Selection of Libor Interest Periods ................ 52 Section 5.2 - Alternate Basis of Borrowing ....................... 52 Section 5.3 - Illegality Relative to Libor Loans ................. 53 ARTICLE VI CONDITIONS APPLICABLE TO LETTERS OF CREDIT Section 6.1 - Initial Letters of Credit .......................... 53 Section 6.2 - Issue of Other Letters of Credit by Royal .......... 54 Section 6.3 - Restrictions on Letters of Credit .................. 54 Section 6.4 - Fees and Charges for Letters of Credit ............. 55 Section 6.5 - Interest on Amounts Paid ........................... 55 Section 6.6 - Indemnity .......................................... 55 Section 6.7 - Reimbursement Following Termination ................ 56 ARTICLE VII CONDITIONS APPLICABLE TO BANKERS' ACCEPTANCES Section 7.1 - Bankers' Acceptances ............................... 56 Section 7.2 - Conditions Applicable to Bankers' Acceptances ....................................... 56 7.2.1 Notice and Documents ............................... 56 7.2.2 Procedures for the Issue of Bankers' Acceptances ....................................... 57 7.2.3 Delivery of Bankers' Acceptances ................... 57 7.2.4 Execution of Bankers' Acceptances .................. 58
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Page ---- 7.2.5 Procedures relating to the Maturity and Face Amount of all Bankers' Acceptances ................ 58 7.2.6 Acceptance Fee ..................................... 59 7.2.7 Alternate Basis of Borrowing ....................... 59 7.2.8 Waiver of Claim .................................... 60 7.2.9 Payment by Lender on Maturity ...................... 60 ARTICLE VIII CONDITIONS APPLICABLE TO FEF CONTRACTS Section 8.1 - FEF Contracts ...................................... 60 Section 8.2 - Interest on Amounts Payable under FEF Contracts .... 61 Section 8.3 - Documentation, Fees and Charges .................... 61 ARTICLE IX PAYMENT, TAXES, INCREASED COSTS, EVIDENCE OF INDEBTEDNESS AND TIMING OF MATURITIES Section 9.1 - Place of Payment of Principal, Interest and Charges ....................................... 62 Section 9.2 - Account Debit Authorization ........................ 62 Section 9.3 - Application of Payments ............................ 62 Section 9.4 - Manner of Payment and Taxes ........................ 62 Section 9.5 - Increased Costs .................................... 63 Section 9.6 - Payment of Portion ................................. 64 Section 9.7 - Commitment and Timing of Maturities ................ 64 Section 9.8 - Evidence of Indebtedness ........................... 65 ARTICLE X SUBSIDIARY GUARANTEE AND COLLATERAL DOCUMENTS Section 10.1 - Subsidiary Guarantees .............................. 66 10.1.1 Supporting Documents ............................... 66 10.1.2 No Prejudice to Other Documents .................... 66 Section 10.2 - Security ........................................... 66 Section 10.3 - Additional Collateral and Registration ............. 67 Section 10.4 - Conflict ........................................... 68 Section 10.5 - No Prejudice to Other Security ..................... 68 ARTICLE XI CONDITIONS TO BE SATISFIED Section 11.1 - Conditions to be Satisfied ......................... 68 11.1.1 Initial Conditions to Borrowings ................... 68 11.1.2 Conditions Precedent to each Borrowing ............. 71 Section 11.2 - Waiver of Conditions Precedent ..................... 71
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Page ---- ARTICLE XII COVENANTS OF THE BORROWER Section 12.1 - Affirmative Covenants of the Borrower .............. 72 12.1.1 Payment Covenant ................................... 72 12.1.2 Corporate Existence ................................ 72 12.1.3 Conduct of Business ................................ 72 12.1.4 Compliance with Laws ............................... 72 12.1.5 Prompt Payment of Indebtedness ..................... 72 12.1.6 Insurance .......................................... 73 12.1.7 Contracts .......................................... 74 12.1.8 Financial Statements and Information ............... 75 12.1.9 Change in Auditors ................................. 76 12.1.10 Notice of Default and Other Events ................. 76 12.1.11 Notice of Breach of Permit ......................... 76 12.1.12 Notice of Litigation ............................... 77 12.1.13 Access ............................................. 77 12.1.14 Reliance ........................................... 77 12.1.15 Change of Name, New Locations ...................... 77 12.1.16 Maintenance of, and Additional, Security ........... 77 12.1.17 Liens on After-acquired Property ................... 78 12.1.18 Intellectual Property .............................. 78 12.1.19 Distributions from Subsidiaries .................... 79 12.1.20 Supplemental Disclosure ............................ 79 12.1.21 Canadian Benefit and Pension Plans ................. 79 12.1.22 ERISA Reporting .................................... 79 12.1.23 Environmental Matters .............................. 80 12.1.24 Environmental Permits .............................. 81 12.1.25 Environmental Information .......................... 81 12.1.26 Environmental Access ............................... 81 12.1.27 Saint-Laurent Property ............................. 81 12.1.28 Financial Ratios ................................... 81 12.1.29 Key Men ............................................ 82 Section 12.2 - Negative Covenants of the Borrower ................. 82 12.2.1 Negative Pledge .................................... 82 12.2.2 Sale of Assets ..................................... 83 12.2.3 Indebtedness, Guarantees, Loans .................... 83 12.2.4 Reorganization and Amalgamation .................... 83 12.2.5 No Change in Nature of Business .................... 84 12.2.6 Distributions ...................................... 84 12.2.7 Capital Expenditures ............................... 84 12.2.8 Financial Year ..................................... 84
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Page ---- ARTICLE XIII REIMBURSEMENT OF EXPENSES AND INDEMNITY Section 13.1 - Reimbursement of Expenses .......................... 84 Section 13.2 - Indemnity .......................................... 85 Section 13.3 - Survival of Indemnification Obligations ............ 87 ARTICLE XIV OTHER TAXES Section 14.1 - Other Taxes ........................................ 87 Section 14.2 - Survival of Obligations ............................ 87 ARTICLE XV EVENTS OF DEFAULT Section 15.1 - Events of Default .................................. 87 15.1.1 Failure to Pay ..................................... 87 15.1.2 Breach of Financial Covenants ...................... 88 15.1.3 Other Breaches ..................................... 88 15.1.4 Bankruptcy ......................................... 88 15.1.5 Seizure ............................................ 89 15.1.6 Judgment ........................................... 89 15.1.7 Invalidity or Unenforceability ..................... 89 15.1.8 Cross-Default ...................................... 89 15.1.9 Phoenix (USA) Term Facility and IBRD Revolving Facility ................................ 90 15.1.10 Ceasing to Carry on Business ....................... 90 15.1.11 Ownership of Subsidiaries .......................... 90 15.1.12 Representations and Warranties ..................... 90 15.1.13 Subsidiary Guarantees and Collateral Documents ......................................... 90 15.1.14 Environmental Matter ............................... 90 15.1.15 Material Adverse Change and Detrimental Legal Proceedings ................................. 90 Section 15.2 - Acceleration ....................................... 91 Section 15.3 - No Notices ......................................... 92 ARTICLE XVI REMEDIES Section 16.1 - Remedies Cumulative ................................ 92 ARTICLE XVII WAIVER OF DEFAULT Section 17.1 - Waiver of Default .................................. 93 ARTICLE XVIII INTERLENDER AGREEMENTS
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Page ---- Section 18.1 - Separate Credit Facilities ......................... 93 Section 18.2 - Event of Default ................................... 93 Section 18.3 - Intercreditor and Security Sharing Agreement ......................................... 94 Section 18.4 - Disclaimer ......................................... 94 Section 18.5 - Acknowledgement of Lenders ......................... 94 Section 18.6 - Other Transactions ................................. 95 Section 18.7 - No Preference ...................................... 95 Section 18.8 - No Association among Lenders ....................... 95 Section 18.9 - Amendment of this Article XVIII .................... 95 ARTICLE XIX SUCCESSORS AND ASSIGNS Section 19.1 - Benefit and Burden of this Agreement ............... 95 Section 19.2 - The Borrower ....................................... 95 Section 19.3 - The Lenders ........................................ 96 Section 19.4 - Disclosure ......................................... 96 Section 19.5 - Further Documents .................................. 96 Section 19.6 - Expenses ........................................... 96 ARTICLE XX COMPENSATION Section 20.1 - Set-off, Compensation .............................. 97 ARTICLE XXI JUDGMENT CURRENCY Section 21.1 - Judgment Currency .................................. 97 ARTICLE XXII GOVERNING LAW Section 22.1 - Governing Law ...................................... 98 ARTICLE XXIII NOTICE Section 23.1 - Address for Notice ................................. 98 Section 23.2 - Notice ............................................. 98
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Page ---- ARTICLE XXIV MISCELLANEOUS Section 24.1 - Severability ....................................... 99 Section 24.2 - Interest Limitation ................................ 99 Section 24.3 - Survival of Representations and Undertakings ...................................... 99 Section 24.4 - Whole Agreement .................................... 99 Section 24.5 - Amendments ......................................... 99 Section 24.6 - Counterparts ....................................... 100 Section 24.7 - Further Assurances ................................. 100 Section 24.8 - Risks of Force Majeure ............................. 100 Section 24.9 - Good Faith and Fair Consideration .................. 100 Section 24.10 - Term of Agreement .................................. 100 Section 24.11 - Formal Date ........................................ 100 Section 24.12 - Language ........................................... 101
- viii - LIST OF SCHEDULES SCHEDULE "A" - BORROWING BASE REPORT (Sections 1.1, 3.3.3, 12.1.8) SCHEDULE "B" - IBRD REVOLVING FACILITY (Sections 1.1 and 2.1.9) SCHEDULE "C" - PERMITTED LIENS (Sections 1.1, 2.1.11 and 12.2.1) SCHEDULE "D" - PHOENIX (USA) TERM FACILITY (Sections 1.1 and 2.1.9) SCHEDULE "E" - REAL PROPERTY (Sections 1.1, 2.1.11 and 12.1.17) SCHEDULE "F" - SUBSIDIARY GUARANTEE (Sections 1.1 and 10.1) SCHEDULE "G" - PLACES OF BUSINESS (AND RECORDS) (Section 2.1.3) SCHEDULE "H" - LITIGATION (Section 2.1.6) SCHEDULE "I" - LOCATIONS OF ACCOUNT DEBTORS (Sections 2.1.11(f) and 12.1.16(b)) SCHEDULE "J" - INTELLECTUAL PROPERTY (Section 2.1.12) SCHEDULE "K" - LIST OF SUBSIDIARIES AND CAPITAL STOCK HELD (Section 2.1.13) SCHEDULE "L" - LABOUR MATTERS (Section 2.1.16) SCHEDULE "M" - ENVIRONMENTAL MATTERS (Section 2.1.22) SCHEDULE "N" - NOTICE OF BORROWING (ADVANCE, CONVERSION OR CONTINUATION) (Sections 3.5, 3.9, 5.1 and 7.2.5(a))
-ix- SCHEDULE "O" - NOTICE OF BORROWING BY WAY OF LETTER OF CREDIT (Sections 3.5.5 and 6.1) SCHEDULE "P" - NOTICE OF REPAYMENT OR PREPAYMENT (Section 3.7) SCHEDULE "Q" - BNP LETTER OF GUARANTEE OF US$11,440,000 SCHEDULE "R" - ROYAL LETTER OF CREDIT OF US$14,000,000 SCHEDULE "S" - CERTIFICATE OF COMPLIANCE (Sections 11.1.1.5 and 12.1.8(e)) -x- THIS AGREEMENT bearing Formal Date of February 5, 1998 is made AMONG PHOENIX INTERNATIONAL LIFE SCIENCES INC., a corporation incorporated under the laws of Canada, having its registered office at Ville Saint-Laurent, Province of Quebec, Canada (the "BORROWER"), AND BANQUE NATIONALE DE PARIS (CANADA), a Canadian chartered bank, having its head office in the City of Montreal, Province of Quebec, Canada ("BNP" or, sometimes, a "LENDER"), AND ROYAL BANK OF CANADA, a Canadian chartered bank, having its head office in the City of Montreal, Province of Quebec, Canada ("ROYAL" or, sometimes, a "Lender"), (BNP and Royal, as well as their respective successors and assigns, being herein collectively called the "LENDERS"). WHEREAS the Borrower has requested the Lenders, acting separately and not solidarily, to provide it with Credit Facilities to, INTER ALIA, finance in part the acquisition by a Wholly-Owned Subsidiary of the Borrower of the shares of the Capital Stock of IBRD-Rostrum Global Inc. based in California, USA; and WHEREAS the Lenders have agreed to provide their respective Commitments to the Borrower, subject to the terms and conditions of this Agreement; THEREFORE, in consideration of the premises, the mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: ARTICLE I DEFINITIONS SECTION 1.1 - DEFINITIONS - ---------------------------------------- In this Agreement and the Schedules, as well as in all notices pursuant to this Agreement, unless something in the subject matter or context is inconsistent therewith, the following words and phrases shall have the following meanings: "ACCEPTANCE FEE" means the fee payable at the time of the acceptance of Bankers' Acceptances established by multiplying the face amount of such Bankers' Acceptances by: (A) the applicable Margin, in the case of BNP, and (B) the Prime Acceptance Fee increased by the applicable Margin, in the case of Royal, and by multiplying the product so obtained by a fraction having a numerator equal to the number of days in the term of such Bankers' Acceptances and a denominator of 365; "ACCOUNT FOR PAYMENTS" means, as applicable, (i) BNP's Account for Payments for all payments to BNP, or (ii) Royal's Account for Payments for all payments to Royal; "ACQUISITION TRANSACTION" means the acquisition by Phoenix (USA), of the outstanding Capital Stock of IBRD; "ACT OF BANKRUPTCY" shall have the meaning set forth in Section 15.1.4; "ADDITIONAL COMPENSATION" shall have the meaning set forth in Section 9.5; "ADVANCE" means the disbursement of funds by or on behalf of a Lender or for the account of the Borrower pursuant to Section 3.5; "AFFECTED LENDER" shall have the meaning set forth in Sections 5.2 and 5.3; "AFFECTED BORROWING" shall have the meaning set forth in Sections 5.2, 5.3 and 9.6; "AFFILIATE" means with respect to any Person, any other Person which, directly or indirectly, controls or is controlled by, or is under common control with, such Person, and for the purposes of this definition, "CONTROL" (including, with correlative meanings, the terms "CONTROLLED BY" and "UNDER COMMON CONTROL WITH") means the power to direct or cause the direction of the management and policies of any Person, whether through the ownership of shares or by contract or otherwise; and without restricting the above, one Person shall be deemed to be affiliated with another Person if one of them is the Subsidiary of the other or both are Subsidiaries of the same Person, and if two Persons are affiliated with the same Person at the same time, they are each deemed to be affiliated with each other; "AGREEMENT" or "CREDIT AGREEMENT" means this agreement, including the Schedules, as the same may be amended, modified, supplemented or restated from time to time; -2- "ANNUAL BUDGET" means the annual twelve month Consolidated and unconsolidated operations budget and business plan for the Borrower and its Subsidiaries as approved by the Board of Directors of the Borrower, which budget and business plan (i) shall be presented by division or operating unit (each operating unit to be reported separately and on a Consolidated basis) and shall include Consolidated and unconsolidated income statements, monthly cash flow statements, balance sheets and the underlying principal assumptions, (ii) shall contain evidence of compliance with all financial covenants and ratios set out in this Agreement and (iii) shall be accompanied by pro forma Consolidated and unconsolidated financial statements of the Borrower and each of its Subsidiaries; "APPLICABLE LAW" means, in respect of any person, property, transaction or event, all present or future applicable laws, statutes, regulations, treaties, judgements and decrees and (whether or not having the force of law) all applicable official directives, rules, guidelines, orders, approvals and policies of any governmental, regional, municipal or local bodies (including, without limitation, the U.S. Food and Drug Administration) having authority over any of the Credit Parties and all applicable orders and decrees of courts and arbitrators; "ASSIGNEE" shall have the meaning set forth in Section 19.3; "ASSIGNING LENDER" shall have the meaning set forth in Section 19.3; "AUDITORS" means (i) the present auditors (and any successor firms) of the Borrower, or (ii) an independent firm or independent firms of chartered accountants selected among the six largest firms of chartered accountants nationally recognized in Canada and duly appointed as auditors of the Borrower, or (iii) another independent firm or other independent firms of chartered accountants duly appointed as auditors of the Borrower and acceptable to the Lenders; "BANKERS' ACCEPTANCE" means a non-interest bearing bill of exchange on a Lender's usual form, denominated in Canadian Dollars, drawn and endorsed by the Borrower and accepted by such Lender at its Branch of Account pursuant to this Agreement; "BANKING DAY" means a Business Day on which dealings in US Dollar deposits may be carried on by and between banks in the London interbank eurodollar market; "BNP" means Banque Nationale de Paris (Canada), a signatory to this Agreement, and its successors and assigns; "BNP (LOS ANGELES)" means Banque Nationale de Paris, acting through its branch or office located at Suite 2090, 725 South Figueroa Street, Los Angeles, California, USA, or through any other of its branches or offices as to which it may notify the Lenders from time to time, and its successors and assigns; "BNP'S ACCOUNT FOR PAYMENTS" means the place or account as to which BNP may notify the Borrower from time to time; -3- "BNP ACQUISITION FACILITY" means the non-revolving term credit facility of up to US$14,000,000 or the Equivalent Amount in Canadian Dollars which, subject to the terms and conditions of this Agreement, BNP has, on the Formal Date, made available to the Borrower until the Maturity Date to finance or support the financing of approximately 50% of the cost of the Acquisition Transaction by way of a Letter of Credit (in the form set forth in SCHEDULE "Q") issued in favour of BNP (Los Angeles) to cover a portion of the Phoenix (USA) Term Facility and by way of a direct Advance available or convertible as a Prime Rate Loan, US Base Rate Loan, Libor Loan, Bankers' Acceptances or Fixed Rate Loan, or any combination thereof, to the extent not cancelled, reduced or terminated pursuant to this Agreement; "BNP CREDIT FACILITIES" means the BNP Acquisition Facility, the BNP FEF Facility and the BNP Revolver Back-Up Facility which BNP is hereby making available to the Borrower, and "BNP CREDIT FACILITY" means any one of the BNP Credit Facilities, as applicable; "BNP FEF FACILITY" means the credit facility of up to Cdn$10,000,000 which, subject to the terms and conditions of this Agreement, BNP is hereby making available to the Borrower until the Maturity Date by way of FEF Contracts Risk Amount, as well as a Cdn$5,000,000 delivery risk in respect of FEF Contracts, to the extent not cancelled, reduced or terminated pursuant to this Agreement; "BNP REVOLVER BACK-UP FACILITY" means the credit facility of up to US$7,000,000 which, subject to the terms and conditions of this Agreement, BNP is hereby making available to the Borrower until the Maturity Date by way of a Letter of Credit to be issued in favour of BNP (Los Angeles) to cover the IBRD Revolving Facility, to the extent not cancelled, reduced or terminated pursuant to this Agreement; "BORROWER" means Phoenix International Life Sciences Inc., a signatory to this Agreement, and its successors and permitted assigns; "BORROWER'S ACCOUNT" means: (A) with respect to dealings with BNP, a Canadian Dollar account and a US Dollar account of the Borrower maintained with BNP at BNP's Branch of Account, and (B) with respect to dealings with Royal, a Canadian Dollar account and a US Dollar account of the Borrower maintained with Royal at Royal's Branch of Account; "BORROWING" means a utilization and "BORROWINGS" means the aggregate of the utilizations at the relevant time by the Borrower of a Credit Facility by way of either Loans, Bankers' Acceptances, FEF Contracts, Letters of Credit or usages of credit cards expense account, to the extent available under such Credit Facility; the total amount of "Borrowings" outstanding at any time under a Credit Facility is the total amount of all Loans outstanding at that time under such Credit Facility, plus the total face amount of all Bankers' Acceptances outstanding at that time under such Credit Facility, plus the total of the FEF Contracts Risk Amount outstanding at that time under such Credit Facility, plus the total amount of all Letters of Credit outstanding at that -4- time under such Credit Facility, plus the total amount owing at that time under the credit card expense account under such Credit Facility; "BORROWING BASE" means, with respect to Borrowings under the Royal Credit Line Facility as of any date of determination thereof and as set forth in the most recent Borrowing Base Report delivered pursuant to Section 12.1.8, the sum (calculated in Canadian Dollars and using the Equivalent Amount thereof in Canadian Dollars for amounts in other currencies) of: (a) 75% of Eligible Receivables of the Borrower which are subject to the Liens of the Collateral Documents, PLUS (b) 50% of the excess (which amount shall not be negative) of (I) the costs and estimated profit in excess of progress billings on contracts in progress OVER (II) progress billings in excess of costs and estimated profit on contracts in progress, the whole determined by using the percentage of completion method, PLUS (c) 75% of federal and provincial tax credits of the Borrower filed and payable under the ITA and corresponding provincial tax legislation for scientific research and development expense, LESS the portion of those tax credits that cannot be taken into account in calculating the provisional amount to be paid as tax on capital and income tax, PLUS (d) 50% of federal and provincial tax credits of the Borrower accrued and payable under the ITA and corresponding provincial tax legislation for scientific research and development expense, LESS the portion of those tax credits that cannot be taken into account in calculating the provisional amount to be paid as tax on capital and income tax, LESS (e) all Preferred Claims; "BORROWING BASE REPORT" means a report of the Borrower substantially in the form set forth in SCHEDULE "A" delivered from time to time to Royal in accordance with Section 12.1.8(f); "BRANCH OF ACCOUNT" means with respect to each Lender, the branch or office of such Lender at the address set out opposite such Lender's name on the signature pages hereto or such other branch or office of such Lender as may be advised in writing from time to time to the Borrower by such Lender; -5- "BUSINESS DAY" means a day on which the Lenders are open for money market dealings in Montreal, Province of Quebec and Toronto, Province of Ontario, excluding Saturday, Sunday and any other day which is in any such cities a legal holiday or a day on which banking institutions are required by law or by local proclamation to close, and in respect of a Libor Loan, means a day which is also a Banking Day; "CANADIAN BENEFIT PLANS" means all material employee benefit plans maintained or contributed to by a Credit Party that are not pension plans accepted for registration under the ITA or under other applicable pension benefits or tax laws of Canada or a province or territory thereof including, without limitation, all profit sharing, savings, supplemental retirement, retiring allowance, severance, deferred compensation, welfare, bonus, supplementary unemployment benefit plans or arrangements and all life, health, dental and disability plans and arrangements in which the employees or former employees of any of the Credit Parties employed in Canada participate or are eligible to participate but excluding all stock option or stock purchase plans; "CANADIAN DOLLAR", "CANADIAN DOLLARS" and the symbols "CDN$" and "$" each means lawful money of Canada; "CANADIAN PENSION PLAN" means any plan, program, arrangement or understanding that is a pension plan for the purposes of any applicable pension benefits or tax laws of Canada or a province or territory thereof (whether or not registered under any such laws) which is maintained, administered or contributed to by (or to which there is or may be an obligation to contribute by) a Credit Party in respect to any person's employment in Canada or a province or territory thereof with the Credit Party, all related funding agreements and all related agreements, arrangements and understandings in respect of, or related to, any benefits to be provided thereunder or the effect thereof on any other compensation or remuneration of any employee; "CAPITAL EXPENDITURES" means, as to any Person, the aggregate of (a) expenditures made by such Person in respect of the purchase or other acquisition of fixed assets by such Person having a useful life of greater than one year, including, for greater certainty, Capital Lease Obligations of such Person (excluding, to the extent otherwise included herein, interest capitalized during such period in accordance with GAAP) which would, in accordance with GAAP, be set forth as capital expenditures on a consolidated statement of cash flows of such Person and (b) all investments made by such Person, other than investments which are paid for by way of the issuance of Capital Stock of such Person; "CAPITAL LEASE" means, with respect to a Person, any lease or other arrangement relating to property or assets which would be required to be accounted for as a capital lease obligation on a balance sheet of such Person if such balance sheet were prepared in accordance with GAAP; "CAPITAL LEASE OBLIGATIONS" means, with respect to a Person, the amount of the obligation of such Person under a Capital Lease that, in accordance with GAAP, would appear on a balance sheet of such Person in respect of such Capital Lease or otherwise be disclosed in a note to such balance sheet, but excluding leasehold inducements and deferred credits; -6- "CAPITAL STOCK" means any and all shares or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants or options or other arrangements to purchase any of the foregoing; "CDOR RATE" means, on any day, the annual rate which is the arithmetic average (rounded upwards, if necessary, to the nearest 0.01%) of the "BA 1 month" rates applicable to Canadian Dollar bankers' acceptances displayed and identified as such on the "Reuters Screen CDOR Page" (as defined in the International Swap and Derivatives Association, Inc. definitions, as modified and amended from time to time) as at approximately 10:00 a.m. on such day, or if such day is not a Business Day then on the immediately preceding Business Day (as adjusted after 10:00 a.m. to reflect any error in a posted rate of interest or in the posted average annual rate of interest); PROVIDED, however, if such rates do not appear on the Reuters Screen CDOR Page as contemplated, then the CDOR Rate on any day shall be the 30-day discount rate applicable to Canadian Dollar bankers' acceptances quoted by the relevant Lender as of approximately 10:00 a.m. on such day, or if such day is not a Business Day, then on the immediately preceding Business Day; "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980 of the United States, as amended from time to time; "CERCLIS" means the Comprehensive Environmental Response, Compensation and Liability Information System maintained by the US Environmental Protection Agency; "COLLATERAL" means the assets, property and undertaking upon which a Lien is purported to be created by any Collateral Document, and any agreement, instrument, document, financing statement, financing change statement, warehouse receipt, bill of lading, notice of assignment of accounts receivable, schedule of accounts receivable assigned and other written matter necessary or requested by any of the Lenders to perfect and maintain perfected the Lenders' Lien on the Collateral for the benefit of the Lenders; "COLLATERAL DOCUMENTS" means the security and related documentation to be granted to or for the benefit of the Lenders as described in Article IX and any other security or collateral documents from time to time entered into as provided in this Agreement by any of the Credit Parties in favour or for the benefit of the Lenders or either of them; "COMMITMENT" means: (a) with respect to BNP, the obligation of BNP to make available to the Borrower the BNP Credit Facilities or any of them, and (b) with respect to Royal, the obligation of Royal to make available to the Borrower the Royal Credit Facilities or any of them, -7- the whole subject to the terms and conditions of this Agreement, and when "COMMITMENT" is used without specification as to whether it is with respect to a particular Credit Facility, then "COMMITMENT" shall refer to any of the Commitments with respect to any of the BNP Credit Facilities or the Royal Credit Facilities, as appropriate, and "COMMITMENTS" of a Lender refers to all Commitments of such Lender collectively; "COMPUTER EQUIPMENT" means the computer equipment and embedded systems currently owned or used by the Borrower and any of its Subsidiaries, including, without limitation, all ancillary and communication equipment connected to it; "COMPUTER SOFTWARE" means all computer software owned or used by the Borrower or any of its Subsidiaries including, without limitation, all operating systems software comprised in the Computer Equipment and all applications software and all other software owned or used by the Borrower or any of its Subsidiaries or which the Borrower or any of its Subsidiaries is entitled to have or to use by virtue of its interest in the Computer Equipment or in software owned or used by it; "COMPUTER SYSTEMS" means the Computer Equipment and the Computer Software, collectively; "CONSOLIDATED" means produced by aggregating the relevant financial statements or accounts of the Subsidiaries of a Person on a line-by-line basis (i.e.: adding together corresponding items of assets, liabilities, revenues and expenses) with the relevant financial statements or account of such Person, eliminating inter-company balances and transactions and providing for any minority interest in Subsidiaries; "CONVERSION DATE" means a Business Day notified by the Borrower to a Lender pursuant to Section 3.9 as being a date on which the Borrower has elected to convert a Borrowing from such Lender already outstanding hereunder into another form of Borrowing; or if the Borrower is deemed to have converted a Borrowing into another form of Borrowing hereunder pursuant to Section 5.1, 5.2, 5.3, 6.5, 7.2.5 or 8.2, it shall mean the day on which such deemed conversion occurs; "COUNSEL" means, with regard to a Lender, a barrister or solicitor or firm of barristers or solicitors retained or employed by such Lender and, with regard to any Credit Party, a barrister or solicitor or firm of barristers or solicitors retained or employed by such Credit Party and acceptable to the Lenders; COVERAGE RATIO" means, for any period, the ratio of: (a) EBITDA for such period to (b) Interest Expenses for such period PLUS (I) the amount of all repayments made during such period on all interest bearing or discounted Indebtedness, whether or not evidenced by -8- any note, bond, debenture or instrument and (II) all payments made on account of any Capital Lease Obligations during such period; "CREDIT DOCUMENTS" means this Agreement, the Subsidiary Guarantees, the Collateral Documents and all other contracts, agreements, consents, powers of attorney, notices or other documents, whether heretofore, now or hereafter executed by or on behalf of any of the Credit Parties and delivered to the Lenders or either of them in connection with this Agreement or the transactions contemplated by this Agreement; "CREDIT FACILITIES" means the BNP Credit Facilities and the Royal Credit Facilities, and "CREDIT FACILITY" means any one of the BNP Credit Facilities and the Royal Credit Facilities, as applicable; "CREDIT PARTIES" means collectively, the Borrower, Phoenix (USA) and IBRD, and "CREDIT PARTY" means any one of them; "CURRENT ASSETS" means, with respect to any Person, at a particular date, inventory, accounts receivable, work in progress, trade and income tax credits, cash, term deposits and prepaid expenses; "CURRENT LIABILITIES" means, with respect to any Person, at a particular date, direct operating loans owing to the Lenders and other Persons, accounts payable and accrued charges, including outstanding cheques and all income taxes payable, but excluding the current portion of long term debt and the current portion of long term lease obligations; CURRENT RATIO" means, at any time, the ratio to 1.0 of the quotient obtained when Current Assets are divided by Current Liabilities; "DEFAULT" means any event or circumstance which constitutes an Event of Default or which, with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default; "DEPOSIT" shall have the meaning set forth in Section 20.1; "DISCOUNT" with respect to any issue of Bankers' Acceptances with the same maturity date, means the amount by which the face value of such Bankers' Acceptances exceeds the Discounted Proceeds of such Bankers' Acceptances; "DISCOUNT RATE" means, with respect to an issue of Bankers' Acceptances with the same maturity date accepted by a Lender, the rate determined by such Lender as being its discount rate, calculated on the basis of a year of 365 days, established in accordance with its normal practices at or about 10:00 a.m. on the date of issue and acceptance by it of such Bankers' Acceptances, for bankers' acceptances accepted by it having a comparable face value and an identical maturity date to the face value and maturity date of the Bankers' Acceptances forming part of such issue to be accepted by such Lender; -9- "DISCOUNTED PROCEEDS" means, in respect of any Bankers' Acceptance to be accepted by a Lender on any day, an amount (rounded to the nearest whole cent, and with one-half of one cent being rounded up) calculated on such day by multiplying: (a) the face amount of such Bankers' Acceptance, by (b) the price, where the price is determined by dividing one by the sum of one plus the product of: (i) the Discount Rate (expressed as a decimal); and (ii) a fraction, the numerator of which is the number of days in the term of such Bankers' Acceptance and the denominator of which is 365; with the price as so determined being rounded up or down to the fifth decimal place and .000005 being rounded up; "DISTRIBUTION" means: (a) any declaration, payment, setting aside for payment, or distribution of any dividends or return of capital to holders of the capital stock of a Person, and any purchase, redemption, reduction, repayment or other retirement of any shares of the capital stock of a Person, whether in cash or in kind, and (b) any payment, setting aside for payment or distribution of any management fee, management bonus, consulting fee, salary, loan or other payment to any director, former director, officer, shareholder, former shareholder, or employee of a corporation, or to any Person related by blood, adoption or marriage to any such Person or to any corporation not dealing at arm's length (as such term is defined in the ITA) with any such Person, except to the extent that such fee, bonus or other payment constitutes normal remuneration payable in the ordinary course of business of the corporation; "DRAWDOWN DATE" means a Business Day on which an Advance is to be made as specified in the notices referred to in Section 3.5; "EBITDA" means, for any period, net earnings before income taxes on such net earnings for such period PLUS, but only to the extent deducted in the computation of net earnings before income taxes on net earnings, Interest Expenses, provisions for income taxes, depreciation and amortization; "ELIGIBLE RECEIVABLES" means good quality accounts receivable of the Borrower, excluding: -10- (a) inter-company accounts between the Borrower and any of its Subsidiaries or any of its Affiliates or associates (within the meaning of the term "associate" set forth in the CANADA BUSINESS CORPORATIONS Act), (b) accounts receivable any portion of which has been due for more than 90 days, except for accounts which have been previously approved by Royal as good quality accounts receivable notwithstanding that any portion thereof may be past due beyond 90 days, in which case the portion of such accounts receivable which has been outstanding for less than 90 days may be included as "Eligible Receivables", (c) accounts receivable which represent work-in-progress, progress billing or advance payments for services not yet rendered, (d) accounts receivable which are subject to any provision prohibiting their assignment or the grant of security thereon or requiring notice of, or consent to, such assignment or grant of security, and (e) accounts receivable which are subject to any claim or assertion of a right of compensation or set-off on the part of the account debtor, to the extent of such claim or assertion, PROVIDED, in any event, that the determination of "good quality accounts receivable" shall be made in the reasonable judgment of Royal and that Royal reserves the right, acting reasonably, to eliminate any other receivables therefrom; "ENVIRONMENTAL CLAIMS" means any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of non-compliance or violation, investigations or proceedings relating in any way to any Environmental Law or any permit issued under any such Law (hereafter "CLAIMS") including without limitation (i) any and all Claims by governmental or regulatory authorities for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law and (ii) any and all Claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief in connection with Hazardous Materials or arising from alleged injury or threat of injury to health, safety or the environment; "ENVIRONMENTAL LAWS" means all applicable federal, provincial, state, municipal, local and foreign laws and regulations, ordinance, code, guideline, policy or rule of civil or common law now or hereinafter in effect and in each case as amended and any judicial or administrative order, consent, decree or judgment relating to pollution or protection of human health, Hazardous Materials or the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata, emissions, discharges, releases or threatened releases of Hazardous Materials, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials); "EQUIVALENT AMOUNT" means, on any date, the amount of one currency (the "FIRST CURRENCY") into which an amount in another currency (the "OTHER CURRENCY") may be converted using for -11- the purposes of such conversion the rate determined by the relevant Lender in accordance with its standard practices as being the rate at which such Lender, at the relevant time, considers that it may sell the Other Currency to obtain the First Currency; notwithstanding the foregoing, until notice to the contrary is given by Royal (at its discretion) to the Borrower, the "Equivalent Amount" in US Dollars of an amount in Canadian Dollars for purposes of calculating the amount of Borrowings in US Dollars remaining available from Royal or for calculating the outstanding amount of Borrowings from Royal, Royal will use a conversion rate of 1.35 Canadian Dollars for each US Dollar, which conversion rate may be changed by Royal at any time at its discretion, such change to take effect immediately; "ERISA" means the UNITED STATES EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 (or any successor legislation thereto), as amended, and any regulations promulgated and rulings issued thereunder; "ERISA AFFILIATE" means any Person that for purposes of Title IV of ERISA is a member of the controlled group of any Credit Party, within the meaning of Section 414 of the Internal Revenue Code; "ERISA EVENT" means: (a) (i) the occurrence of a reportable event, within the meaning of Section 4043 of ERISA, with respect to any Plan unless the 30-day notice requirement with respect to such event has been waived by the PBGC, or (ii) the requirements of subsection (1) of Section 4043(b) of ERISA (without regard to subsection (2) of such Section) are met with respect to a contributing sponsor, as defined in Section 4001(a)(13) of ERISA, of a Plan, and an event described in paragraph (9), (10), (11), (12) or (13) of Section 4043(c) of ERISA is reasonably expected to occur with respect to such Plan within the following 30 days, (b) the application for a minimum funding waiver with respect to a Plan, (c) the provision by the administrator of any Plan of a notice of intent to terminate such Plan, pursuant to Section 4041(a)(2) of ERISA (including any such notice with respect to a plan amendment referred to in Section 4041(e) of ERISA), (d) the cessation of operations at a facility of any Credit Party or any ERISA Affiliate in the circumstances described in Section 4062(e) of ERISA, (e) the withdrawal by any Credit Party or any ERISA Affiliate from a Multiple Employer Plan during a plan year for which it was a substantial employer, as defined in Section 4001(a)(2) of ERISA, (f) the conditions for imposition of a lien under Section 302(f) of ERISA shall have been met with respect to any Plan, -12- (g) the adoption of an amendment to a Plan requiring the provision of security to such Plan pursuant to Section 307 of ERISA, or (h) the institution by the PBGC of proceedings to terminate a Plan pursuant to Section 4042 of ERISA, or the occurrence of any event or condition described in Section 4042 of ERISA that constitutes grounds for the termination of, or the appointment of a trustee to administer, such Plan; "EVENT OF DEFAULT" means any of the events or circumstances set out in Section 15.1; "FEDERAL FUNDS EFFECTIVE RATE" means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System in the United States of America arranged by federal funds brokers, as published for such day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day in respect of such transactions received by the relevant Lender from three federal funds brokers of recognized standing selected by it; in the case of a day which is not a Business Day, the "Federal Funds Effective Rate" for such day shall be the "Federal Funds Effective Rate" in effect on the immediately preceding Business Day; "FEF CONTRACT" means a contract for the purchase or sale of, subject to availability at the sole discretion of the relevant Lender, any freely traded foreign currency with maturities not greater than 24 months from the date of issue, unless otherwise agreed by the relevant Lender; provided that for the purpose of determining the total amount of Borrowings outstanding under the BNP FEF Facility or the Royal FEF Facility, as applicable, only the FEF Contracts Risk Amount in respect thereof (together with any outstanding delivery risk in respect thereof, in the case of the BNP FEF Facility) shall be deemed to be a Borrowing; "FEF CONTRACTS RISK AMOUNT" means at any time for purposes of determining the amount of Borrowings outstanding under the BNP FEF Facility or the Royal FEF Facility, an amount determined at any relevant time by BNP or Royal, as the case may be, in accordance with its standard practices as being the amount then considered by it to represent the amount of its risk arising from all FEF Contracts previously issued and then outstanding hereunder and any FEF Contract proposed to be issued hereunder at the time of determination; the whole taking into account the FEF Contracts at their market value and in the light of the time remaining on each FEF Contract; "FIXED RATE LOAN" means the Loans granted by BNP under the BNP Acquisition Facility in respect of which the Borrower and BNP shall have agreed to establish a fixed rate of interest to apply thereto during the term remaining until the Maturity Date, as set forth in Section 3.2.1 and on which the Borrower must pay interest in accordance with Section 4.1.4; "FORMAL DATE" means February 5, 1998, as set forth in Section 24.11; -13- "GAAP" means generally accepted accounting principles in effect from time to time in Canada or, as the case may be, the United States of America, applicable to the relevant party, applied in a consistent manner from period to period; "GOVERNMENTAL APPROVAL" means any authorization, certificate, attestation, permit, approval, grant, licence, consent, registration, filing, commitment, order, judgment, direction, ordinance or decree issued or granted by or under law or by any Governmental Body, as well as acquired or vested rights acquired under or recognized pursuant to Environmental Laws; "GOVERNMENTAL BODY" means any government, parliament, legislature, regulatory authority, agency, tribunal, department, commission, board or court or other law, regulation or rule making entity (including a Minister of the Crown), national or supranational, and any corporation or other entity owned or controlled in any manner by any of the foregoing, exercising or purporting to exercise legislative, judicial, administrative or regulatory authority on behalf of any nation, state, province, municipality or district, or any subdivision thereof; "GUARANTEE" of any Person means, without duplication, all guarantees, sales made where the purchaser has recourse against the seller, endorsements (other than for collection or deposit in the ordinary course of business) and other obligations (contingent or otherwise) to pay, purchase, repurchase or otherwise acquire or become liable upon or in respect of any Indebtedness of others, investment in others, obligations to maintain the capital, working capital, solvency or general financial condition of others, or indemnities of others against or the holding harmless or protection of others from damages, losses or liabilities to the extent such guarantees, sales, endorsements and obligations, indemnities, holding harmless or protection above mentioned are incurred or made by a Person otherwise than in the ordinary course of business of such Person; the amount of each guarantee shall be deemed to be the amount of all Indebtedness of the other obligor to whom the guarantee relates, unless the guarantee is limited to a determinable amount in which case the amount of such guarantee shall be deemed to be such determinable amount; "HAZARDOUS MATERIALS" means (i) any petroleum or petroleum products, radioactive materials, asbestos in any form that is or could become friable, urea formaldehyde foam insulation, transformers or other equipment that contains dielectric fluid containing levels of polychlorinated biphenyls, and radon gas; (ii) any chemicals, materials or substances defined as or included in the definition of the "hazardous substances", "hazardous waste", "hazardous materials", "extremely hazardous waste", "restricted hazardous waste", "toxic substances", "toxic pollutants", "contaminants", or "pollutants", or words of similar import, under any applicable Environmental Law; and (iii) or any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority; "IBRD" means IBRD-Rostrum Global Inc., a corporation incorporated under the laws of the State of Delaware, United States of America, having its head office at Irvine, California, United States of America; "IBRD REVOLVING FACILITY" means a revolving demand credit facility of a maximum amount of US$7,000,000 to be made available by BNP (Los Angeles) to IBRD (and to Phoenix USA, -14- following its amalgamation with IBRD), such credit facility to be substantially upon the terms set forth in SCHEDULE "B", subject to the modifications to such terms as may be agreed to by the Lenders; "INDEBTEDNESS" of a Person means, without duplication, (a) all debts and liabilities of such Person, (b) all Capital Lease Obligations, excluding leasehold inducements and deferred credits, (c) all debts and liabilities secured by any charge, hypothec, lien, encumbrance on or other security interest in or mortgage, assignment, pledge or hypothecation of property or assets owned or acquired by such Person even though such Person has not assumed or become liable for the debts and liabilities secured thereby, (d) all debts and liabilities of such Person representing the deferred acquisition cost of property or assets created or arising under any conditional sale agreement or other title retention agreement even though the rights and remedies of the seller under such agreement in the event of default are limited to repossession or sale of property or assets covered thereby, (e) all debts and liabilities of such Person under any bankers' or trade acceptance credit facility or any standby or commercial letter of credit or guarantee facility, (f) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (g) all obligations of such Person to purchase, redeem, retire, decease or otherwise make any payment in respect of any Capital Stock of or other ownership or profit interest in such Person or any other Person, valued, in the case of redeemable preferred stock, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends, (h) all obligations of such Person in respect of interest rate, foreign exchange or commodity price hedging arrangements, (i) all obligations of such Person for production payments from property operated by or on behalf of such Person and other similar arrangements with respect to natural resources, and (f) all Guarantees; "INDEMNITEES" shall have the meaning set forth in Section 13.2; -15- "INTELLECTUAL PROPERTY" means all patents, industrial designs, trade-marks, trade secrets and know-how including, without limitation, environmental technology, biotechnology and other technologies, confidential information, trade-names, goodwill, copyrights, integrated circuit topographies, software and all other forms of intellectual and industrial property, and all rights and options to use any of the foregoing and any registrations and applications for registration of any of the foregoing; "INSUFFICIENCY" means, with respect to any Plan, the amount, if any, of its unfunded benefit liabilities, as defined in Section 4001(a)(18) of ERISA; "INTEREST DATE" means the first day of each month; "INTEREST DETERMINATION DATE" means with respect to a Libor Loan, the date which is two Banking Days prior to the first day of the Libor Interest Period applicable to such Libor Loan; "INTEREST EXPENSE" means, with respect to any Person, for any period, the interest expense of such Person during such period as determined in accordance with GAAP including, without limitation, interest in respect of bank indebtedness, bankers acceptances, discounts and acceptance fees and the interest portion of payments under Capital Leases; "INTEREST PAYMENT DATE" means with respect to a Prime Rate Loan and a US Base Rate Loan, each Interest Date or if such Interest Date is not a Business Day, the immediately following Business Day; "INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986 of the United States of America, as amended from time to time, and the regulations and rulings issued thereunder; "ITA" means the INCOME TAX ACT (Canada) and the regulations promulgated thereunder, as amended or re-enacted from time to time; "JUDGMENT CONVERSION DATE" shall have the meaning set forth in Section 21.1; "JUDGMENT CURRENCY" means judgment currency as defined in Section 21.1; "LENDERS" means BNP and Royal, and their respective successors and assigns and "LENDER" means any one of them; "LETTER OF CREDIT" means a letter of guarantee (including a letter of guarantee or letter of credit guaranteeing the reimbursement of any advance payment or of holdbacks, a performance guarantee or a bid guarantee and including letters of credit and letters of guarantee issued or to be issued by BNP and Royal, respectively, to BNP (Los Angeles) under the BNP Acquisition Facility, the BNP Revolver Back-Up Facility and the Royal Acquisition Facility), a letter of credit or an acceptance under a letter of credit issued by a Lender under this Agreement, in each case denominated in any freely tradable currencies acceptable to such Lender, PROVIDED that letters of credit shall (unless agreed otherwise by the issuing Lender) be subject to the current -16- Uniform Customs and Practice for Documentary Credits as published by the International Chamber of Commerce; "LIBOR" means with respect to a Libor Loan during the relevant Libor Interest Period: (a) the rate per annum (expressed on the basis of a 360-day year) shown on Telerate, page 3750, as published by the British Bankers Association as of 11:00 a.m. (London, England time) on the Interest Determination Date for US Dollar deposits for a period comparable to such Libor Interest Period, and if different rates are quoted for US Dollar deposits in varying amounts, in an amount which is closest to the amount of such Libor Loan, or (b) if for any reason the Telerate rates are unavailable to determine the rate applicable to a Libor Loan, "Libor" for such Libor Loan during the relevant Libor Interest Period, shall mean the rate of interest per annum (expressed on the basis of a 360-day year) determined by reference to the rates quoted on the Reuters Monitor Screen (page LIBO) as being the arithmetic average (rounded upwards, if necessary, to the nearest whole multiple of 1/16th of 1%) of the rates offered in London, England by reference banks shown on such screen as of 11:00 a.m. (London, England time) on the Interest Determination Date to make deposits with leading banks in the London interbank eurodollar market in US Dollars for a period equal to such Libor Interest Period, and if different rates are quoted for deposits in varying amounts, in the amount which is closest to such Libor Loan, or (c) if for any reason, neither the Telerate rates nor the Reuters Monitor Screen rates are available in respect of the relevant Libor Interest Period, "Libor" for such Libor Loan during the relevant Libor Interest Period, shall mean the annual rate of interest (expressed on the basis of a year of 360 days and rounded upwards, if necessary, to the nearest whole multiple of 1/16th of 1%) at which BNP (in the case of Libor Loans granted by BNP) or Royal (in the case of Libor Loans granted by Royal), in accordance with its normal practices, would be prepared to offer to leading banks in the London interbank eurodollar market for delivery on the first day of the relative Libor Interest Period for a period equal to such Libor Interest Period based on the number of days comprised therein, deposits in US Dollars of amounts comparable to such Libor Loan (and of any other Libor Loan of such Lender having a Libor Interest Period of the same duration and commencing on the same date) to be outstanding under this Agreement during such Libor Interest Period, at or about 11:00 a.m. (London, England time) on the applicable Interest Determination Date; "LIBOR INTEREST DATE" means the last day of each Libor Interest Period, or if the Borrower selects a Libor Interest Period longer than three months, it shall mean the date falling every three months after the beginning of such Libor Interest Period and on the last day of the Libor Interest Period so selected; "LIBOR INTEREST PERIOD" means with respect to a Libor Loan, the initial period of approximately one month, two months, three months or six months (or any other period agreed to by the relevant Lender), as selected by the Borrower and notified to the relevant Lender pursuant to -17- Section 3.5 or 3.9, but always subject to availability to such Lender) commencing on and including the Drawdown Date or Conversion Date, as the case may be, applicable to such Libor Loan and ending on and including the last day of such period, and, thereafter (subject to availability to such Lender), each successive period, if any, of approximately one month, two months, three months or six months (or any other period agreed to by such Lender), as selected by the Borrower for such Libor Loan and notified to the relevant Lender pursuant to Section 5.1, but in all cases expiring no later than on the relevant Maturity Date; "LIBOR LOAN" means, at any given time, the Loan or any portion thereof which the Borrower has elected pursuant to Section 3.5, 3.9 or 5.1 to denominate in US Dollars and on which the Borrower must pay interest in accordance with Section 4.1.3; "LIEN" means any hypothec, security interest, mortgage, pledge, prior claim, lien, claim, charge, cession, transfer, assignment or encumbrance of whatever kind or nature that secures the payment of any Indebtedness or liability or the observance or performance of any obligation, including any title retention agreement, lessor's interest under a Capital Lease or analogous instrument in, of, or on any property or the income or profits therefrom of a Person; "LOANS" means at any given time, the aggregate of the Borrowings made available by the Lenders to, or to the order of, the Borrower by way of Prime Rate Loans, US Base Rate Loans, Libor Loans or Fixed Rate Loan; "LOAN ACCOUNT" means the account or accounts established by each Lender pursuant to Section 9.8; "LOSSES" shall have the meaning set forth in Section 13.2; "MARGIN" means, as applicable: (a) in respect of the BNP Credit Facilities: (i) for Prime Rate Loans and US Base Rate Loans: 1/2 of 1% per annum, (ii) for Libor Loans: 1 3/4% per annum, (iii) for the calculation of the Acceptance Fee: 1 3/4% per annum, or such other rate as may, at aNy time, be fixed by BNP upon 30 days' notice to the Borrower, and (iv) for the calculation of the Letter of Credit fees payable in respect of the standby Letter of Credit issued under the BNP Acquisition Facility: 1-2/5% per annum, PROVIDED that in the event that Borrowings outstanding under the BNP Acquisition Facility exceed US$7,000,000 as at November 30, 1998, the "Margins" set forth in subparagraphs (i), (ii), (iii) and (iv) of this paragraph (a), insofar as they form part of the BNP Acquisition Facility, will each automatically be increased by 1/4 of 1% per annum -18- as and from such date, and PROVIDED FURTHER that in the event that Borrowings outstanding under the BNP Acquisition Facility exceed US$7,000,000 as at May 31, 1999, the "Margins" set forth in subparagraphs (i), (ii), (iii) and (iv) of this paragraph (a), insofar as they form part of the BNP Acquisition Facility (as already increased by 1/4 of 1% per annum), will each automatically be further increased by another 1/4 of 1% per annum as and from such date; (b) in respect of the Royal Capex Facility: (i) for Prime Rate Loans and US Base Rate Loans: 1/4 of 1% per annum, (ii) for Libor Loans: 1 1/2% per annum, and (iii) for the calculation of the Acceptance Fee: the Prime Acceptance Fee then in effect, increased by 1/2 of 1% per annum; and (c) in respect of the Royal Credit Line Facility: (i) for Prime Rate Loans: zero, (ii) for US Base Rate Loans: 1/8 of 1% per annum, (iii) for Libor Loans: 1-1/4% per annum, and (iii) for the calculation of the Acceptance Fee: the Prime Acceptance Fee then in effect, increased by 1/4 of 1% per annum; "MATERIAL ADVERSE CHANGE" means any event, development or circumstance which, in the opinion of either of the Lenders, acting reasonably, has had or would reasonably be expected to have: (a) a material adverse effect on the Acquisition Transaction, (b) a material adverse effect on the business, assets, property, operations, condition (financial or otherwise) or prospects of any Credit Party, or (c) an adverse effect on the validity or enforceability of any of the Credit Documents or the rights and remedies of either of the Lenders under any of the Credit Documents not attributable solely to the fault or neglect of the Lenders; "MATERIAL ADVERSE EFFECT" means, when used with reference to any event or circumstance, an event or circumstance which, in the opinion of either of the Lenders, acting reasonably, has had or would reasonably be expected to have: -19- (a) a material adverse effect on the Acquisition Transaction, (b) a material adverse effect on the business, assets, property, operations, condition (financial or otherwise) or prospects of any Credit Party, or (c) a material adverse effect on the ability of any of the Credit Parties to perform and discharge its obligations under any of the Credit Documents, or (d) an adverse effect on the validity or enforceability of any of the Credit Documents or the rights and remedies of either of the Lenders under any of the Credit Documents not attributable solely to the fault or neglect of the Lenders; "MATURITY DATE" means: (a) with respect to the BNP Credit Facilities, other than the BNP FEF Facility: February 19, 2000, or if such date is not a Business Day, the immediately following Business Day, except for the Loans and/or Bankers' Acceptances under the BNP Acquisition Facility which shall mature and be owing on February 5, 2000, or if such date is not a Business Day, the immediately following Business Day, (b) with respect to the BNP FEF Facility: the earlier of (i) the date upon which BNP shall, at its sole discretion, terminate the availability of such Credit Facility and (ii) the relevant times set forth in the Credit Documents relating to FEF Contracts with BNP, (c) with respect to the Royal Acquisition Facility: February 19, 2000, or if such date is not a Business Day, the immediately following Business Day, unless the expiry of the standby Letter of Credit issued thereunder is extended beyond such date, in which case the "Maturity Date" with respect thereto shall be the date of such expiry, (d) with respect to the Royal Capex Facility: February 19, 2000, or if such date is not a Business Day, the immediately following Business Day, or such later date falling one year later as may be agreed to by Royal pursuant to Section 3.3.2; (e) with respect to the Royal FEF Facility and the Royal Visa Facility: the earlier of (i) the date upon which Royal shall, at its sole discretion, terminate the availability of such Credit Facilities and (ii) the relevant times set forth in the Credit Documents relating to the FEF Contracts with Royal or to the Royal Visa Facility, as applicable, and (f) with respect to the Royal Credit Line Facility: the date set forth in any demand notice of Royal to the Borrower terminating the Royal Credit Line Facility; "MILLENNIUM COMPLIANT" means that the Computer Systems Software are capable of the following functions before, during and after January 1, 2000: -20- (a) handling date information involving all and any dates before, during and after January 1, 2000, including, accepting date input (either from an internal or external source), providing date output and performing date calculations in whole or in part and any date format (i.e., julian, gregorian, international or any other format), (b) operating accurately without interruption on and in respect of any and all dates before, during and after January 1, 2000 and without any change in performance, (c) responding to and processing any digit year input (either from an internal or external source) without creating any ambiguity as to the century, and (d) receiving, storing, providing and communicating date output information without creating any ambiguity as to the century; "MULTIEMPLOYER PLAN" means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, to which any Credit Party or any ERISA Affiliate is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions; "MULTIPLE EMPLOYER PLAN" means a single employer plan, as defined in Section 4001(a)(15) of ERISA, that: (a) is maintained for employees of any Credit Party or any ERISA Affiliate and at least one Person other than such Credit Party or ERISA Affiliates or (b) was so maintained and in respect of which any Credit Party or ERISA Affiliate could have liability under Section 4064 or 4069 of ERISA in the event such plan has been or were to be terminated; "NET WORTH" means the sum of the following, determined on a Consolidated basis in accordance with GAAP: (a) the amount of the issued and outstanding paid up share capital of the Borrower, PLUS (b) the amount of capital surplus and retained earnings (or, in the case of a surplus or retained earnings deficit, MINUS the amount of such deficit), and (c) PLUS OR MINUS foreign exchange adjustments; "NPL" means the National Priorities List under CERCLA; "OBLIGATIONS" means all the liability, obligations and Indebtedness of the Borrower at any time and from time to time existing or arising under or in connection with this Agreement and the other Credit Documents; -21- "PBGC" means the Pension Benefit Guaranty Corporation of the United States (or any successor thereto); "PERMITTED LIENS" has the meaning given to it in SCHEDULE "C"; "PERSON" or "PERSONS" has the meaning set forth in Section 1.4; "PHOENIX (USA)" means Phoenix International Life Sciences (U.S.) Inc., a Subsidiary of the Borrower incorporated under the laws of the State of Delaware, United States of America, having its head office at Cincinnati, Ohio, United States of America; "PHOENIX (USA) TERM FACILITY" means a non-revolving term credit facility of a maximum amount of US$28,000,000 made available by BNP (Los Angeles) to Phoenix (USA) for a term of two years to finance the acquisition by Phoenix (USA) of the Capital Stock of IBRD, such credit facility to be substantially upon the terms set forth in SCHEDULE "D", subject to the modifications to such terms as may be agreed to by the Lenders; "PLAN" means a Single Employer Plan or a Multiple Employer Plan; "PREFERRED CLAIMS" means the aggregate amount of claims ranking prior to the Lien of the Collateral Documents on Eligible Receivables such as, but not limited to: (a) the claims secured by any Lien granted or registered prior to the date of execution or registration of the Collateral Documents; (b) the claims of Her Majesty in Right of Canada which are due and payable and which are not contested in good faith and by appropriate measures before a court or governmental authority: (i) for deductions at source of which the Borrower is liable pursuant to the ITA, (ii) for amounts of which a Credit Party is liable pursuant to Part IX of the EXCISE TAX ACT (Canada) as modified by Chapter 45 of the Statutes of Canada and as may be further modified from time to time (tax on goods and services), and (iii) for deductions, interests, penalties and other amounts payable by a Person pursuant to Part III of the EMPLOYMENT INSURANCE ACT (Canada); (c) the claims of Her Majesty in right of a province of Canada which are due and payable and which are not contested in good faith and by appropriate measures before a court or governmental authority: (i) pursuant to a fiscal law granting to the government of such province or any department thereof a Lien (whether or not filed or registered) in respect of Eligible Receivables of the Borrower, and -22- (ii) for dues in respect of industrial accidents and occupational diseases; (d) the 30-day claims of an unpaid seller provided under Section 81.1 of the BANKRUPTCY AND INSOLVENCY ACT (Canada), in respect of sold goods which are identifiable; (e) the claims of the lessor of leased premises in respect of rental which is due but remains unpaid, (f) the claims of employees with respect to salaries, earnings and other remuneration; and (g) the claims of any creditor in any foreign jurisdiction similar in effect to the claims listed in subparagraph (a) to (f) of this definition; "PRIME ACCEPTANCE FEE" means the annual rate announced by Royal from time to time as its reference rate then in effect for determining fees on Canadian Dollar bankers' acceptances accepted by Royal in Canada; "PRIME RATE" in effect on any one day means the rate of interest per annum that is the greater of (i) the interest rate per annum publicly announced on such day by BNP in the case of amounts owing to BNP hereunder or by Royal in the case of amounts owing to Royal hereunder, as being its reference rate then in effect for determining interest rates on commercial loans in Canadian Dollars made in Canada by BNP or Royal, as applicable, and (ii) the annual rate of interest equal to the sum of the CDOR Rate PLUS 1% per annum, the whole as adjusted from time to time without notice to the Borrower; "PRIME RATE LOAN" means at any given time, the Loan or any portion thereof which the Borrower has elected, pursuant to Section 3.5 or 3.9, to denominate in Canadian Dollars and on which the Borrower must pay interest in accordance with Section 4.1.1; "PROPERTIES" shall have the meaning set forth in Section 2.1.22(a); "PURCHASE MONEY OBLIGATIONS" means (a) any Lien created, issued or assumed after the date of this Agreement to secure Indebtedness not in excess of the value of the underlying property assumed as a part of, or issued or incurred to provide funds to pay, the purchase price of any real immovable or personal or movable property, PROVIDED that such Lien is limited to the property so acquired and is created, issued or assumed substantially concurrently with the acquisition of such property; and (b) any renewal, refunding or extension of any such Lien securing Indebtedness in a principal amount not in excess of the unpaid principal amount of the Indebtedness secured thereby immediately prior to such renewal, refunding or extension; -23- "REAL PROPERTY" means the immovable property, real property and interests described in SCHEDULE "E", and any immovable property or real property acquired by any of the Credit Parties in the future; "RESPONSIBLE OFFICER" means, with respect to any Person, the chief executive officer, the president, a vice president, the secretary or the managing director and, with respect to financial matters, the chief financial officer or treasurer of such Person; "ROYAL" means Royal Bank of Canada, a signatory to this Agreement, and its successors and assigns; "ROYAL'S ACCOUNT FOR PAYMENTS" means: (a) for all payments in Canadian Dollars hereunder to Royal, the place or account as to which Royal may notify the Borrower from time to time for the payment of Canadian Dollars to Royal, and (b) for all payments in US Dollars hereunder to Royal, the place or account as to which Royal may notify the Borrower from time to time for the payment of US Dollars to Royal, or such other place(s) or account(s) as may be agreed upon by Royal and the Borrower from time to time; "ROYAL ACQUISITION FACILITY" means the non-revolving term credit facility of up to the Equivalent Amount in US Dollars of Cdn$20,000,000 which, subject to the terms and conditions of this Agreement, Royal has, on the Formal Date, made available to the Borrower until the Maturity Date to support the financing of approximately 50% of the cost of the Acquisition Transaction, by way of a standby Letter of Credit (in the form set forth in SCHEDULE "R") issued in favour of BNP (Los Angeles) to cover a portion of the Phoenix (USA) Term Facility, to the extent not cancelled, reduced or terminated pursuant to this Agreement; "ROYAL CAPEX FACILITY" means the revolving credit facility of up to Cdn$15,000,000 or the Equivalent Amount in US Dollars which, subject to the terms and conditions of this Agreement, Royal is hereby making available to the Borrower until the Maturity Date by way of Prime Rate Loans, US Base Rate Loans, Libor Loans or Bankers' Acceptances, or any combination thereof, to the extent not cancelled, reduced or terminated pursuant to this Agreement; "ROYAL CREDIT FACILITIES" means the Royal Acquisition Facility, the Royal Capex Facility, the Royal FEF Facility, the Royal Credit Line Facility and the Royal Visa Facility which Royal is hereby making available to the Borrower, and "ROYAL CREDIT FACILITY" means any one of the Royal Credit Facilities, as applicable; -24- "ROYAL FEF FACILITY" means the credit facility of up to Cdn$4,000,000 which, subject to the terms and conditions of this Agreement, Royal is hereby making available to the Borrower until the Maturity Date by way of FEF Contracts Risk Amount, to the extent not cancelled, reduced or terminated pursuant to this Agreement; "ROYAL CREDIT LINE FACILITY" means the demand revolving credit facility of up to Cdn$10,000,000 or the Equivalent Amount in US Dollars which, subject to the terms and conditions of this Agreement, Royal is hereby making available to the Borrower, until terminated at Royal's sole discretion, by way of Prime Rate Loans, US Base Rate Loans, Libor Loans, Bankers' Acceptances or (subject to a sub-limit of Cdn$1,500,000 or the Equivalent Amount in other freely convertible currencies acceptable to Royal) Letters of Credit, or any combination thereof, to the extent not cancelled, reduced or terminated pursuant to this Agreement; "ROYAL VISA FACILITY" means the credit facility of up to Cdn$100,000 which, subject to the terms and conditions of this Agreement, Royal is hereby making available to the Borrower by way of corporate expense cards account, to the extent not cancelled, reduced or terminated pursuant to this Agreement or the other Credit Documents relating thereto; "SCHEDULES" means the schedules to this Agreement as the same may be amended, modified, supplemented or restated from time to time; "SHAREHOLDERS' EQUITY" in respect of the Borrower, means the shareholders' equity of the Borrower determined in accordance with Canadian GAAP; "SINGLE EMPLOYER PLAN" means a single employer plan, as defined in Section 4001(1)(15) of ERISA, that (a) is maintained for employees of any Credit Party or ERISA Affiliate and no Person other than a Credit Party and its ERISA Affiliates, or (b) was so maintained and in respect of which any Credit Party or ERISA Affiliate could have liability under Section 4069 of ERISA in the event such plan has been or were to be terminated; "SOLVENT" means, when used with respect to any Person, that (a) the aggregate of such Person's property is, at a fair valuation, sufficient, or, if disposed of at a fairly conducted sale under legal process, would be sufficient, to enable payment of all such Person's obligations, due and accruing due, (b) such Person is able to meet its obligations as they generally become due, (c) such Person has not ceased paying its current obligations in the ordinary course of business as they generally become due, and -25- (d) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond its ability to pay as such debts and liabilities mature, (e) such person is not engaged, and is not about to engage, in business or a transaction for which its property would constitute an unreasonably small capital, and (f) such Person is otherwise solvent under Applicable Law; "SUBSIDIARY" means, with respect to any Person, any other Person (a) securities of which having ordinary voting power to elect a majority of the board of the directors (or other persons having similar functions) or (b) other ownership or participating interests of which ordinarily constituting a majority voting interest, are at the time, directly or indirectly, owned by such first Person, or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries; unless otherwise specified, any Person which is a Subsidiary of a Subsidiary of another Person is deemed to be a "SUBSIDIARY" of such other Person; "SUBSIDIARY GUARANTEE" means a guarantee executed and delivered by a Subsidiary of the Borrower, as required under this Agreement, substantially in the form of SCHEDULE "F", as amended, restated, supplemented or otherwise modified from time to time; "TAX" includes all present and future taxes, levies, imposts, stamp taxes, duties, charges to tax, fees, deductions and any restrictions or conditions resulting in a charge to tax and all penalty, interest and other payments on or in respect thereof, imposed, assessed, levied or collected by or under the laws of any country or government, or any political subdivision or taxing authority thereof, but does not include any tax on the overall income of a Lender; "US BASE RATE" in effect on any one day, means the rate of interest per annum that is the greater of (i) the interest rate per annum publicly announced on such day by BNP in the case of amounts owing to BNP hereunder or by Royal in the case of amounts owing to Royal hereunder as being its reference rate then in effect for determining interest rates on commercial loans in US Dollars made in Canada by BNP or Royal, as applicable and (ii) the annual rate of interest equal to the sum of the Federal Funds Effective Rate then in effect PLUS 1% per annum, the whole as adjusted from time to time without notice to the Borrower; "US BASE RATE LOAN" or "US BASE RATE LOANS" means at any given time, the Loan, or any portion thereof which the Borrower has elected, pursuant to Section 3.5 or 3.9 to denominate in US Dollars and on which the Borrower must pay interest in accordance with Section 4.1.2; "US DOLLARS", the symbol "US$", "UNITED STATES DOLLARS" or "LAWFUL MONEY OF THE UNITED STATES" each means lawful money of the United States of America in same day immediately available funds, or if such funds are not available, the form of money of the United States of America that is customarily used in the settlement of international banking transactions on the day any payment is due to be made hereunder; "WELFARE PLAN" means a welfare plan, as defined in Section 3(1) of ERISA; -26- "WHOLLY-OWNED SUBSIDIARY" means, with respect to any Person, any Subsidiary all of the outstanding Capital Stock of which is owned by such Person either directly or indirectly through other Wholly-Owned Subsidiaries; "WITHDRAWAL LIABILITY" has the meaning specified in Part I of Subtitle E of Title IV of ERISA. SECTION 1.2 - HEADINGS AND TABLE OF CONTENTS - ----------------------------------------------------------- The headings of the Articles, Sections, Subsections or paragraphs herein and the table of contents are inserted for convenience of reference only and shall not affect the construction or interpretation of this Agreement. SECTION 1.3 - REFERENCES - --------------------------------------- Unless the context otherwise requires or unless otherwise provided, all references to Sections, Subsections, Articles and Schedules are to Sections, Subsections, and Articles of and Schedules to, this Agreement. The words "HERETO", "HEREIN", "HEREOF", "HEREUNDER" and similar expressions mean and refer to this Agreement. SECTION 1.4 - RULES OF INTERPRETATION - ---------------------------------------------------- In this Agreement, unless the context otherwise requires or unless otherwise provided, the singular includes the plural and vice versa, "MONTH" means a calendar month and "PERSON" or "PERSON" includes any individual, firm, company, corporation, government, governmental body or agency, instrumentality and unincorporated body of persons, partnership, limited partnership, association, trust or joint venture, and "IN WRITING" or "WRITTEN" includes printing, typewriting or any electronic means of communication capable of being legibly reproduced at the point of reception, including telecopier, telex or telegraph. SECTION 1.5 - ACCOUNTING TERMS AND COMPUTATIONS - -------------------------------------------------------------- Each accounting term used in this Agreement has the meaning assigned to it under GAAP unless otherwise defined herein and reference to any balance sheet item or income statement item means such item as computed from the applicable statement prepared in accordance with GAAP. All financial statements required to be delivered hereunder shall be made and prepared in accordance with GAAP consistently applied throughout the periods involved. SECTION 1.6 - TIME - --------------------------------- Except where otherwise indicated in this Agreement, any reference to a time shall mean local time in the City of Montreal, Province of Quebec, Canada. -27- ARTICLE II REPRESENTATIONS AND WARRANTIES SECTION 2.1 - REPRESENTATIONS AND WARRANTIES OF THE BORROWER - --------------------------------------------------------------------------- The Borrower represents and warrants to each of the Lenders as follows: 2.1.1 CORPORATE EXISTENCE, COMPLIANCE WITH LAW AND CONSTATING DOCUMENTS: each of the Credit Parties (i) is a corporation duly incorporated and organized and is validly subsisting under the laws of its jurisdiction of incorporation, (ii) has the requisite power and authority to own, operate and lease its properties and assets and to conduct its business as now, heretofore and proposed to be conducted, (iii) is duly qualified and in good standing under the laws of each jurisdiction where its ownership, lease or operation of properties or assets or the conduct of its business as now conducted requires such qualification except where the failure to be so qualified would not have a Material Adverse Effect and (iv) to the best of the knowledge and belief of the Borrower, is in compliance with all Applicable Laws including, without limitation, all Environmental Laws and with its constating documents and its by-laws except to the extent that the failure to comply therewith would not have a Material Adverse Effect; 2.1.2 GOVERNMENTAL APPROVALS: each of the Credit Parties has obtained all Governmental Approvals which are necessary for the conduct of its business as presently conducted, the failure to obtain which would have a Material Adverse Effect, and each such Governmental Approval is in full force and effect, is a good, valid and subsisting approval which has not been surrendered, forfeited or become void or voidable, and there are no proceedings in progress, and to the best of the knowledge of any Responsible Officer of the Borrower, there are no proceedings pending or threatened, which may result in the revocation, suspension or modification of any such Governmental Approval which would have a Material Adverse Effect; 2.1.3 CHIEF EXECUTIVE OFFICES, INVENTORY LOCATIONS: on the date hereof, the locations of the chief executive offices, principal places of business, and other material offices and places of business of each of the Credit Parties are specified in SCHEDULE "G", and such offices and places of business specified for each Credit Party are the sole offices and places of business of such Credit Party. On the date hereof, none of the Credit Parties keeps records regarding its accounts receivable or inventory at any location other than the locations set forth in SCHEDULE "G" in respect of such Credit Party; 2.1.4 CORPORATE POWER; AUTHORIZATION; NO VIOLATION; ENFORCEABLE OBLIGATIONS: the execution, delivery and performance by each Credit Party of any Credit Document -28- to be executed, delivered and performed by it and the creation of all Liens provided for herein and therein: (i) are within the corporate power of the Credit Party; (ii) have been duly authorized by all necessary or proper corporate or other action; (iii) are not in contravention of, and do not conflict with, violate or result in a breach of any provision of the constating documents or by-laws of the Credit Party or any Applicable Law; (iv) will not conflict with or result in the breach or termination of, constitute a default under, or accelerate any performance required by, any indenture, mortgage, hypothec, deed of trust, lease, agreement or other instrument to which the Credit Party is a party or by which the Credit Party or any of its property is bound (or would be bound but for such default), where such conflict, breach, termination, default or acceleration would have a Material Adverse Effect; (v) will not result in the creation or imposition of any Lien upon any of the property of any of the Credit Parties other than those in favour of the Lenders and (vi) do not require the consent or approval of any Governmental Body or any other Person except to the extent that such consents and approvals have been obtained; each of the Credit Documents to be delivered at such time shall have been duly executed and delivered by each Credit Party which is a party thereto, and shall constitute a legal, valid and binding obligation of each Credit Party which is a party thereto enforceable against each of them, in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium laws or similar laws affecting creditors' rights generally and to general principles of equity; 2.1.5 APPROVALS REQUIRED: no material registration, publication, order, permit, filing, consent, authorization, licence, decree or approval of, from or with any Person, including any Governmental Body, or in any public office or any other place, is necessary (i) in order to ensure the legality, validity, binding effect and enforceability of any of the Credit Documents, (ii) in order that the Credit Parties may grant to the Lenders Liens in the Collateral pursuant to the Collateral Documents, (iii) in order that each Lender may exercise any of its rights or remedies under the Credit Documents or (iv) in order to ensure the legality, validity, binding effect and enforceability of the Acquisition Transaction, except, in each instance, to the extent that such registration, publication, order, permit, filing, consent, licence, decree or approval has been made or obtained and evidence thereof satisfactory to each Lender has been delivered to the Lenders; 2.1.6 NO LITIGATION: except as disclosed in the relevant financial statements of a Credit Party delivered to any of the Lenders or as set forth in SCHEDULE "H", no action, litigation, arbitration, claim or proceeding is now pending or, to the best of the knowledge of the Borrower, threatened against any of the Credit Parties at law, in equity or otherwise, before any Governmental Body, or before any arbitrator or panel or arbitrators in any jurisdiction. None of such matters disclosed in such financial statements or set forth in SCHEDULE "H", nor all of such matters taken together, if determined adversely, has or could reasonably be expected to have a Material Adverse Effect. None of the matters set forth therein questions the -29- validity of the Acquisition Transaction or the Credit Documents or any action taken or to be taken pursuant thereto; 2.1.7 NO DEFAULT : none of the Credit Parties is in default, nor to the best of the knowledge of the Borrower is any third party in default, under or with respect to any contract, agreement, lease, license or other instrument to which any of the Credit Parties is a party where such default has or could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing; 2.1.8 FINANCIAL STATEMENTS, NO MATERIAL ADVERSE CHANGE (a) the audited Consolidated and the unaudited unconsolidated financial statements of the Borrower and the unaudited unconsolidated financial statements of the other Credit Parties, which have been furnished to the Lenders on or before the date hereof, have been prepared using accounting methods, procedures and policies which are in accordance with GAAP applied on a basis consistent with that of prior years and present fairly the financial positions of each of the Credit Parties, on a Consolidated basis or on an unconsolidated basis, as the case may be, in each case as at the dates thereof, and the results of operations and the statements of cash flows for the periods then ended (as to any unaudited interim financial statements, subject to normal year-end audit adjustments and the absence of footnotes). Such statements include, without limitation: (i) the audited Consolidated and the unaudited unconsolidated financial statements of the Borrower and the unaudited unconsolidated financial statements of Phoenix (USA), for the two most recent fiscal years ended before the date hereof with respect to which such financial statements are available, and (ii) the forecasted pro forma Consolidated balance sheet of the Borrower as at February 28, 1998, adjusted to give effect to the completion of the Acquisition Transaction and the transactions contemplated by this Agreement, (b) as of the date hereof, neither the Borrower and its Subsidiaries on a Consolidated basis, nor any of the Credit Parties alone, had any material obligations, contingent liabilities or liabilities in the form of Taxes or any long-term leases or unusual forward long-term commitments which would be required by GAAP to be reflected in the balance sheet of such Credit Party and which are not reflected in the latest financial statements referred to in Section 2.1.8(a), -30- (c) since the date of the financial statements referred to in Section 2.1.8(a), there has been no Material Adverse Change; 2.1.9 LIABILITIES: as of the date hereof, none of the Credit Parties had any debts, liabilities or obligations to any Person, whether direct or indirect, absolute or contingent, matured or not, or other obligations for the payment of money which, according to GAAP, are material to the applicable Credit Party, and which are not disclosed in the audited Consolidated balance sheet of such Credit Party referred to in Section 2.1.8(a) and the related audited Consolidated statements of net earnings and cash flows and the notes thereto, other than the Phoenix (USA) Term Facility and the IBRD Revolving Facility and other than under this Agreement; 2.1.10 PRO FORMA BUDGET: the pro forma annual budget of the Borrower and its Subsidiaries dated January 21, 1998 provided to the Lenders for the period ending August 31, 1998 is based upon reasonable estimates and assumptions, all of which are fair in light of current conditions, have been prepared on the basis of the such implied assumptions and reflect the reasonable estimate of the Borrower of the results of operations and other information projected therein; 2.1.11 OWNERSHIP OF PROPERTY; LIENS (a) each of the Credit Parties has good and marketable title to all of the Real Property described on SCHEDULE "E" and identified in such Schedule as being owned by such Credit Party, free and clear of all Liens, except Permitted Liens. On the date hereof, none of the Credit Parties owns any immovable property or real property other than those described in SCHEDULE "E". Each of the Credit Parties has received all deeds, assignments, waivers, consents, non-disturbance and recognition or similar agreements, bills of sale and other documents, and duly effected all recordings, filings and other actions necessary to establish, protect and perfect its right, title and interest in and to all such property owned by it, except where the failure to receive such documents or effect such recordings, filings or other actions would not have a Material Adverse Effect, (b) each Credit Party has good and marketable title to all of the Collateral upon which a Lien is purported to be created by any Collateral Document to which it is a party free and clear of all Liens except Permitted Liens. None of the Credit Parties is restricted or limited in any way from granting the Lien on any of the Collateral purported to be granted and created by any of the Collateral Documents to which it is a party. Except with respect to such as may have been filed or registered in respect of the Lien in favour of the Lenders under the Collateral Documents or in respect of Permitted Liens, to the best of the knowledge of the Borrower after due enquiry, no effective financing statement, application for the registration -31- of a hypothec or other instrument similar in effect covering all or part of the Collateral is on file in any filing or recording office. To the best knowledge of the Borrower after due enquiry, none of the Credit Parties has received notice from any party asserting, claiming or exercising any right of deduction, set-off, compensation or other right or claim with respect to any material amount or portion of the Collateral, (c) SCHEDULE "I" sets out, as of the date hereof, the nations and the states and/or provinces in which all of each of the Borrower's and Phoenix (USA)'s account debtors are located, together with the aggregate amount of accounts receivable owing by such account debtors in each relevant jurisdiction, in each case where the aggregate amount of such accounts receivable in such relevant jurisdiction exceeds Cdn$500,000 or the Equivalent Amount thereof in any other currency; 2.1.12 INTELLECTUAL PROPERTY: each Credit Party owns all material Intellectual Property necessary to conduct its business as now conducted by it. Each material Intellectual Property owned by any of the Credit Parties is listed, together with Canadian and all foreign Intellectual Property application or registration numbers, where applicable, in SCHEDULE "J". To the best of the knowledge of the Borrower, each Credit Party conducts its business without material infringement or claim of material infringement of any Intellectual Property of others. To the best of the knowledge of the Borrower, there is no material infringement or claim of material infringement by others of any Intellectual Property of any Credit Party; 2.1.13 SUBSIDIARIES: on the date hereof, the Subsidiaries of each of the Credit Parties, together with their respective jurisdictions of organization, the authorized and issued and outstanding Capital Stock by class and number of each such Subsidiary and of any partnership, joint venture, corporation, association or other business organization of which any Credit Party or any of its Subsidiaries owns, directly or indirectly, any Capital Stock, or, in the case of any public corporation, 10% of the Capital Stock, together with the number and class of such Capital Stock beneficially owned by any Credit Party or any of its Subsidiaries are set out in SCHEDULE "K". All such Capital Stock was issued in compliance with all Applicable Laws and is owned beneficially and of record (including all economic rights and benefits and voting rights with respect thereto) by the Persons designated in such Schedule. Except as set forth in such Schedule, none of the Credit Parties owns or controls, directly or indirectly, any interest in any partnership, joint venture, corporation, association or other business organization of any nature; 2.1.14 BURDENSOME RESTRICTIONS: no contract, lease, agreement or other instrument to which any Credit Party is a party or is bound contains any provision or restriction outside customary commercial practice which is likely to have a Material Adverse Effect and no provision of Applicable Laws has a Material Adverse Effect, or -32- insofar as the Borrower can reasonably foresee, will have a Material Adverse Effect; 2.1.15 ADDITIONAL ADVERSE FACTS: no fact or circumstance is known to the Borrower that, either alone or in conjunction with all other such facts and circumstances, has had or could reasonably be expected to have a Material Adverse Effect; 2.1.16 LABOUR MATTERS: on the date hereof, except as set out in SCHEDULE "L", there are no strikes or other labour disputes against any Credit Party pending or, to the best of the knowledge of the Borrower, apprehended. All material amounts due from any Credit Party on account of employee income taxes (including, without limitation, source deductions), workers' compensation, unemployment insurance, health and welfare insurance and other social security of every kind, and vacation pay have been paid or accrued as a liability on the books of the applicable Credit Party. There are no complaints or charges against any Credit Party pending or, to the best of the knowledge of the Borrower, threatened to be filed with any Governmental Body or arbitrator based on, arising out of, in connection with, or otherwise relating to the employment or termination of employment by any Credit Party which could have a Material Adverse Effect; 2.1.17 TAXES: each of the Credit Parties has filed when due all Tax returns, reports and statements required to be filed by it with the appropriate Governmental Body. Each of the Credit Parties has paid when due all Taxes due and payable and, in the case of Taxes not due or payable, has made adequate provision for such Taxes in its books and records in accordance with GAAP consistently applied; there are no unpaid assessments or reassessments for any Taxes of any Credit Party in respect of which adequate provision is not reflected in the financial statements required to be delivered to the Lenders hereunder and there are no outstanding disputes relating to Taxes of any Credit Party in respect of which adequate provision is not reflected in the financial statements required to be delivered to the Lenders hereunder. Each of the Credit Parties has properly withheld or collected from its employees, customers and any other applicable payees, and remitted to the appropriate Governmental Body, all Taxes required to be withheld or collected and remitted under any Applicable Laws; 2.1.18 CANADIAN BENEFIT AND PENSION PLANS: the Canadian Pension Plans are duly registered under the provisions of the ITA and any other Applicable Laws and no event has occurred which is reasonably likely to cause the loss of such registered status. The Canadian Pension Plans and the Canadian Benefits Plans have been administered in accordance with the ITA and all other Applicable Laws. All material obligations of each Credit Party (including fiduciary and funding obligations) required to be performed in connection with the Canadian Pension Plans and the funding media therefor have been performed. No promises of benefit improvements under the Canadian Pension Plans or the Canadian Benefit Plans have been made except where such improvement could not have a Material -33- Adverse Effect. There have been no improper withdrawals or applications of the assets of the Canadian Pension Plans or the Canadian Benefit Plans. Each of the Canadian Pension Plans and the Canadian Benefit Plans is fully funded and there exist no going concern unfunded actuarial liabilities or solvency deficiencies in respect of such plans; 2.1.19 ERISA: (a) no ERISA Event has occurred or is reasonably expected to occur with respect to any Plan, (b) as of the last annual actuarial valuation date, if any, the funded current liability percentage, as defined in Section 302(d)(8) of ERISA, of each Plan exceeds 90% and there has been no material adverse change in the funding status of any such Plan since such date, (c) Schedule "B" (Actuarial Information) to the most recent annual report (Form 5500 Series) for each Plan, if any, copies of which have been filed with the Internal Revenue Service of the United States, is complete and accurate and fairly presents the funding status of such Plan, and since the date of such Schedule "B" there has been no material adverse change in such funding status, (d) neither any Credit Party nor any ERISA Affiliate has incurred or is reasonably expected to incur any Withdrawal Liability to any Multiemployer Plan, (e) neither any Credit Party nor any ERISA Affiliate has been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or has been terminated, within the meaning of Title IV of ERISA, and no such Multiemployer Plan is reasonably expected to be in reorganization or to be terminated, within the meaning of Title IV of ERISA; 2.1.20 ACCURACY OF INFORMATION: all information concerning the Credit Parties, provided by the Borrower to the Lenders in respect of the Credit Parties, is true and accurate in all material respects and the said information contains no material misstatement of fact nor does it omit a material fact which is necessary to make such information not misleading, and there is no fact which the Borrower has not disclosed in writing to the Lenders which materially and adversely affects, or so far as the Borrower can now reasonably foresee, will materially and adversely affect the assets, liabilities, affairs, business, prospects, operations or conditions, financial or otherwise, of any of the Credit Parties or their respective ability to perform their obligations under this Agreement or any document contemplated herein; -34- 2.1.21 NO OMISSIONS: neither the Borrower nor any of its Subsidiaries has withheld from the Lenders any information relating to the financial condition, business or prospects of the Borrower, or any of its Subsidiaries which could reasonably be expected to be material to a prospective lender contemplating a loan of the size and nature contemplated in this Agreement; 2.1.22 ENVIRONMENTAL MATTERS: except as set forth in SCHEDULE "M" hereto and except for issues the aggregate cost of remedying the same would not, in the opinion of either of the Lenders, exceed Cdn$500,000, or the Equivalent Amount in US Dollars: (a) the use of any contaminant, waste material (hazardous or other) or other substance on the properties owned or occupied by any of the Credit Parties (herein referred to as the "PROPERTIES") and the emission, transportation or disposal of such substances in or onto the Properties into the environment or by or allowed by any of the Credit Parties or by prior occupants of the Properties has at all times been effected in compliance with all applicable Environmental Laws, (b) all required certificates, permits, authorizations and registers have been obtained or maintained, as the case may be, in respect of the operations of each of the Credit Parties, including, without limitation, any permits, certificates and registers required for air emissions, effluent discharges, release of contaminants, production of hazardous materials, conduct of hazardous activities and waste disposal, (c) the operations and activities of each of the Credit Parties and the use of the Properties by the Credit Parties, including the construction and modification of any building or equipment on the Properties have been effected in compliance with all applicable Environmental Laws, (d) no contaminant, waste material (hazardous or other) or other substance has been released or spilled into the environment from the Properties which has not been cleaned up in conformity with all applicable Environmental Laws and to the satisfaction of the appropriate authorities, (e) proper procedures are used in respect of all Properties for the handling and storage of PCB waste, (f) procedures for spill prevention and containment as well as leak detection testing have been or are presently being established at all Properties, (g) all underground storage tanks located on the Properties have been installed and maintained in conformity with all government standards and no -35- leakage has been detected from such tanks which has not been remedied in accordance with all applicable Environmental Laws, (h) there are no pending or, to the best knowledge of the Borrower, threatened material Environmental Claims against any of the Credit Parties, (i) to the best of the Borrower's knowledge, the Properties incurred no environmental damage or contamination prior to any of the Credit Parties taking ownership or control of the Properties, (j) no terms of any credit or financing arrangements between any of the Credit Parties and any financial institution have been altered or terminated as a result of considerations of environmental risk linked to any of the Properties, (k) there are no facts, circumstances, conditions or occurrences on any Property that could reasonably be anticipated (i) to form the basis of an Environmental Claim against any of the Credit Parties, or any Properties or assets; or (ii) to cause such Properties or assets to be subject to any restrictions on the ownership, occupancy, use or transferability of such Properties under any applicable Environmental Law, and (l) none of the Properties is listed or proposed for listing on the NPL or the CERCLIS or any analogous foreign, state or local list or is adjacent to any such property; 2.1.23 COMPETITION AND ANTI-TRUST LAWS: each of the Credit Parties is in compliance with all competition and anti-trust legislation insofar as any of its acquisitions as of the date hereof (including, without limitation, the Acquisition Transaction) may be concerned, and the Borrower has no indication and no reason to believe that any such acquisitions might be challengeable on any competition or anti-trust grounds by Canadian or foreign governmental authorities; 2.1.24 INVESTMENT COMPANY ACT OF 1940 OF THE UNITED STATES: neither any Credit Party nor any of its Subsidiaries is an "investment company", or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the INVESTMENT COMPANY ACT of 1940 of the United States of America, as amended. Neither the making of any Advances, nor the acceptance of any Bankers' Acceptance, nor the issuance of any Letters of Credit, nor the application of the proceeds or repayment thereof by the Borrower, nor the consummation of the other transactions contemplated hereby, will violate any provision of such Act or any rule, regulation or order of the Securities and Exchange Commission thereunder. -36- 2.1.25 FULL DISCLOSURE: the information, exhibits, certificates, financial statements and reports provided to the Lenders by any Credit Party under any of the Credit Documents or filed with any Governmental Body in connection with the Acquisition Transaction do not, to the best of the knowledge of the Borrower, contain any untrue statement of a material fact or omit to state a material fact which may be necessary to make the statements contained herein and therein not misleading; 2.1.26 SOLVENCY: as of the date hereof, each Credit Party is individually and, together with its Subsidiaries, Solvent and after giving effect to the Acquisition Transaction and the payment of all estimated legal, investment banking, accounting and other fees related hereto and thereto, and after giving effect to the transactions contemplated by the Credit Documents, on the date hereof and at all times thereafter, each Credit Party and its Subsidiaries will be Solvent; 2.1.27 INSURANCE: each of the Credit Parties maintains or causes to be maintained insurance in accordance with the requirements under Section 12.1.6 and all premiums and other sums of money payable for that purpose have been paid; 2.1.28 MILLENNIUM COMPLIANCE: by June 30, 1999, the Borrower shall have used all its best efforts to cause: (a) the Computer Systems to be Millennium Compliant, (b) the Computer Systems not to require any remedial work or replacement to enable them (or any part of them) to continue functioning accurately before, during and after January 1, 2000 in the manner set forth in the definition of "Millennium Compliant", and (c) the Computer Systems and each element of them to pass and continue to pass date information between each other (and any third parties' computer systems with which they habitually communicate) in a way which does not, and will not, create inaccuracies, errors or problems before, during and after January 1, 2000; 2.1.29 SURVIVAL AND DEEMED REPETITION: the representations and warranties contained in Section 2.1 as well as all representations and warranties contained in any certificate or material delivered hereunder shall: (a) survive the execution and delivery of this Agreement and shall continue in effect until payment and performance of all debts, liabilities and obligations under this Agreement and under all other Credit Documents, (b) be deemed to be repeated on each Drawdown Date, Conversion Date and on each date of renewal of a Bankers' Acceptance or Libor Loan hereunder -37- as if made on and as of such date, unless made as of a date specified in such representation and warranty, in which case such representation and warranty shall be deemed to be repeated as of such specified date, and (c) will be deemed to have been relied upon by the Lenders notwithstanding any investigation heretofore or hereafter made by any of the Lenders or by their Counsel or any other representatives of any of the Lenders. ARTICLE III THE CREDIT FACILITY SECTION 3.1 - OBLIGATIONS OF THE LENDERS - ------------------------------------------------------- Relying on each of the representations and warranties set out in Article II and subject to the terms and conditions herein contained, the Lenders individually as separate obligors, and not as solidary obligors, agree to make their respective Commitments available to the Borrower. SECTION 3.2 - BNP CREDIT FACILITIES - -------------------------------------------------- Subject to the terms and conditions of this Agreement, BNP hereby establishes in favour of the Borrower the BNP Credit Facilities which shall be available until the applicable Maturity Date as follows: 3.2.1 BNP ACQUISITION FACILITY: the BNP Acquisition Facility, being a non-revolving term credit in a maximum aggregate amount of US$14,000,000 or the Equivalent Amount in Canadian Dollars, has been made available by BNP to the Borrower (a) by way of the issuance of a Letter of Credit in the principal amount of US$11,440,000 (in the form set forth in SCHEDULE "Q" and any renewal or extension thereof) in favour of BNP (Los Angeles) guaranteeing a portion of the Phoenix (USA) Term Facility, (b) through a single Advance in the principal amount of US$2,560,000 by way of Prime Rate Loan, US Base Rate Loan, Libor Loan or Bankers' Acceptances, or (c) by way of any combination of the foregoing; the Borrower agrees that the amount of such Letter of Credit and Advance constitute Borrowings hereunder which are subject to the terms and conditions of this Agreement; Should the Borrower elect to have a portion of the BNP Acquisition Facility outstanding by way of Loan or Bankers' Acceptances, the Borrower will have the option, which it may exercise only once by giving a ten day prior notice thereof to BNP, to convert all such Loans and Borrowings by way of Bankers' Acceptances into a Fixed Rate Loan denominated in US Dollars, expiring on the applicable Maturity Date and bearing such fixed rate of interest as shall have been offered by -38- BNP to the Borrower and accepted by the Borrower at least two Business Days prior to the Conversion Date with respect thereto; 3.2.2 BNP REVOLVER BACK-UP FACILITY: the BNP Revolver Back-Up Facility, being a credit in a maximum aggregate amount of US$7,000,000, is hereby made available by BNP to the Borrower by way of a Letter of Credit (in the form of a letter of guarantee) in favour of BNP (Los Angeles) in the same amount as the IBRD Revolving Facility and guaranteeing the IBRD Revolving Facility; 3.2.3 BNP FEF FACILITY: the BNP FEF Facility, allowing the entering into of FEF Contracts between the Borrower and BNP, is hereby made available to the Borrower (a) for a maximum aggregate amount of Cdn$10,000,000 of FEF Contracts Risk Amount, PROVIDED that the aggregate spot -------- settlement amounts of all FEF Contracts to be entered into under the BNP FEF Facility may at no time exceed Cdn$100,000,000 or the Equivalent Amount in other currencies as well as (b) for a maximum aggregate amount of Cdn$5,000,000 of delivery risk on the Borrower which BNP will accept by agreeing to execute its obligation in respect of an FEF Contract before receiving confirmation that the Borrower has delivered its counterpart upon expiry of the FEF Contract. SECTION 3.3 - ROYAL CREDIT FACILITIES - ---------------------------------------------------- Subject to the terms and conditions of this Agreement, Royal hereby establishes in favour of the Borrower the Royal Credit Facilities which shall be available until the applicable Maturity Date as follows: 3.3.1 ROYAL ACQUISITION FACILITY: the Royal Acquisition Facility, being a non-revolving term credit in a maximum aggregate amount of the Equivalent Amount in US Dollars of Cdn$20,000,000, has been made available by Royal to the Borrower by way of the issuance of a standby Letter of Credit in the principal amount of US$14,000,000 in favour of BNP (Los Angeles) (in the form set forth in SCHEDULE "R") guaranteeing a portion of the Phoenix (USA) Term Facility; 3.3.2 ROYAL CAPEX FACILITY AND EXTENSION OF THE ROYAL CAPEX FACILITY: the Royal Capex Facility, being a revolving term credit in a maximum aggregate amount of Cdn$15,000,000 or the Equivalent Amount in US Dollars, is hereby made available by Royal to the Borrower by way of Prime Rate Loans, US Base Rate Loans, Libor Loans or Bankers' Acceptances, or any combination thereof. Provided no Default or Event of Default has occurred and is continuing (without having been waived or cured as permitted herein), Royal, in its sole discretion, may offer to extend the Maturity Date for the Royal Capex Facility for an additional period of 12 months beginning on the then current Maturity Date of the Royal Capex Facility, by giving written notice thereof to the Borrower prior to the -39- initial Maturity Date, in which case the Borrower shall have ten days following such notice to accept in writing such offer of extension; 3.3.3 ROYAL CREDIT LINE FACILITY: the Royal Credit Line Facility, being a demand revolving credit in a maximum aggregate amount of Cdn$10,000,000 or the Equivalent Amount in US Dollars, has been made available by Royal to the Borrower by way of Prime Rate Loans, US Base Rate Loans, Libor Loans, Bankers' Acceptances or (subject to the sub-limit set forth in Section 6.3) Letters of Credit, or any combination thereof, PROVIDED that the aggregate amount of all Borrowings -------- outstanding under the Royal Credit Line Facility may at no time exceed the Borrowing Base as set forth in the most recent Borrowing Base Report delivered to Royal pursuant to Section 12.1.8; the Borrower agrees that the amounts already made available to the Borrower by Royal by way of Advances (as evidenced by the accounts and records of Royal) constitute Borrowings hereunder which are subject to the terms and conditions of this Agreement; 3.3.4 ROYAL FEF FACILITY: the Royal FEF Facility, allowing the entering into of FEF Contracts between the Borrower and Royal, is hereby made available to the Borrower for a maximum aggregate amount of Cdn$4,000,000 of FEF Contracts Risk Amount, PROVIDED that the aggregate amounts of all FEF Contracts to be entered into under the Royal FEF Facility may at no time exceed Cdn$20,000,000 or the Equivalent Amount in other currencies; 3.3.5 ROYAL VISA FACILITY: the Royal Visa Facility, providing for corporate expense cards bearing the Visa mark to be issued by Royal to officers, employees or other representatives of the Borrower in accordance with Royal's standard practices for such service, is hereby made available to the Borrower in a maximum aggregate amount of Cdn$100,000. The Borrower shall execute all documentation and undertakings which may be required by Royal in respect of the Royal Visa Facility and the issuance of credit cards thereunder, and the Borrower shall comply with the provisions of all such documents and undertakings and make, or cause the making of, the payment of all amounts charged on the accounts for such credit cards when due, irrespective of any dispute or irregularity in respect of the use of any such cards. In the event of inconsistency between the terms contained in the said documentation and undertakings and the terms contained herein, the former shall prevail. The indemnity provisions set forth in Section 13.2 shall apply in respect of the Royal Visa Facility and the credit cards issued thereunder. SECTION 3.4 - PURPOSES OF THE CREDIT FACILITIES - -------------------------------------------------------------- 3.4.1 BNP ACQUISITION FACILITY: the BNP Acquisition Facility shall have been used exclusively to finance or support the financing of approximately 50% of the cost -40- of the Acquisition Transaction by guaranteeing the Phoenix (USA) Term Facility in favour of BNP (Los Angeles) and by making a direct Advance to the Borrower; 3.4.2 BNP REVOLVER BACK-UP FACILITY: the BNP Revolver Back-Up Facility shall be used exclusively to guarantee the IBRD Revolving Facility in favour of BNP (Los Angeles); 3.4.3 BNP FEF FACILITY: the BNP FEF Facility shall be used exclusively to allow the Borrower to enter into FEF Contracts with BNP, subject to the FEF Contracts Risk Amount in respect thereof never exceeding Cdn$10,000,000; 3.4.4 ROYAL ACQUISITION FACILITY: the Royal Acquisition Facility shall have been used exclusively to support the financing of approximately 50% of the cost of the Acquisition Transaction by guaranteeing the Phoenix (USA) Term Facility in favour of BNP (Los Angeles); 3.4.5 ROYAL CAPEX FACILITY: the Royal Capex Facility shall be used to finance Capital Expenditures and for other general corporate purposes of the Borrower; 3.4.6 ROYAL CREDIT LINE FACILITY: the Royal Credit Line Facility shall be used to finance the Borrower's operations generally through the financing of accounts receivable of the Borrower and income tax credits for scientific research and development expense of the Borrower; 3.4.7 ROYAL FEF FACILITY: the Royal FEF Facility shall be used exclusively to allow the Borrower to enter into FEF Contracts with Royal, subject to the FEF Contracts Risk Amount in respect thereof never exceeding Cdn$4,000,000; 3.4.8 ROYAL VISA FACILITY: the Royal Visa Facility shall be used exclusively for the corporate expense cards program of the Borrower. SECTION 3.5 - MANNER OF BORROWING - ------------------------------------------------ The parties acknowledge that the BNP Acquisition Facility, the Royal Acquisition Facility and a portion of the Royal Credit Line Facility have already been made available or advanced to the Borrower on or after the Formal Date and constitute outstanding Borrowings hereunder. Subject to the provisions of this Agreement and provided no Default or Event of Default has occurred and is continuing (without having been waived as provided herein), the Borrower may from time to time request Borrowings (in addition to the Borrowings already outstanding as acknowledged in the preceding paragraph of this Section) from a Lender under a Credit Facility, up to the amount of its Commitment with respect thereto, to the extent not cancelled, reduced or terminated under this Agreement: -41- 3.5.1 BY WAY OF OVERDRAFT: with respect to a Prime Rate Loan or a US Base Rate Loan from Royal under the Royal Credit Line Facility, by creating an overdraft in the Borrower's Account maintained with Royal, in which case Royal will make an Advance into the said Borrower's Account in a minimum amount of Cdn$25,000 or US$25,000, as the case may be, or any multiple thereof so as to cover the overdraft; 3.5.2 PRIME RATE LOANS AND US BASE RATE LOANS: with respect to Borrowing by way of a Prime Rate Loan or a US Base Rate Loan otherwise than by overdraft under the Royal Credit Line Facility as contemplated in Section 3.5.1 (which Borrowing must be in a minimum amount of Cdn$25,000 or US$25,000, as the case may be, or the undrawn amount of the applicable Commitment), upon giving to BNP or Royal, as the case may be, an irrevocable telephone notice at least by 10:30 a.m. on the Business Day preceding the Drawdown Date or Conversion Date, as the case may be, followed by a written confirmation on the same day addressed to BNP or Royal, as the case may be, substantially in the form set forth in SCHEDULE "N", or such other form as BNP or Royal, as applicable, may approve; 3.5.3 LIBOR LOANS: with respect to a Libor Loan (which must be in a minimum amount of US$1,000,000 or any multiple thereof), upon giving to BNP or Royal, as the case may be, an irrevocable telephone notice at least by 10:30 a.m. on the Interest Determination Date applicable thereto, followed by a written confirmation on the same day addressed to BNP or Royal, as the case may be, substantially in the form set forth in SCHEDULE "N", or such other form as BNP or Royal, as the case may be, may approve; 3.5.4 BANKERS' ACCEPTANCES: with respect to a Borrowing by way of Bankers' Acceptances (which must be in a minimum aggregate amount of Cdn$500,000 and in increments of Cdn$100,000), upon giving to Royal an irrevocable telephone notice at least by 10:30 a.m. two Business Days prior to the Drawdown Date, Conversion Date or date of renewal at maturity, as the case may be, followed by a written confirmation on the same day addressed to BNP or Royal, as the case may be, substantially in the form set forth in SCHEDULE "N", or such other form as BNP or Royal, as the case may be, may approve; 3.5.5 LETTERS OF CREDIT: with respect to a Borrowing by way of Letter of Credit, upon giving to BNP or Royal, as the case may be, an irrevocable written notice at least three Business Days prior to the anticipated date of issuance of such Letter of Credit substantially in the form set forth in SCHEDULE "O", or such other form as BNP or Royal, as the case may be, may approve, such notice to be given after the making of appropriate arrangements with BNP or Royal, as the case may be, for the purpose of the Letter of Credit to be so issued as provided in Section 6.1; 3.5.6 FEF CONTRACTS: with respect to a Borrowing by way of FEF Contracts, by making appropriate arrangements with a Lender as provided in Section 8.1; and -42- 3.5.7 CREDIT CARDS: with respect to Borrowings from Royal by way of the use of credit cards issued by Royal under the credit cards expense account made available under the Royal Visa Facility; and, subject to the terms hereof, such Borrowings shall be made available to the Borrower to the extent that BNP or Royal, as the case may be, shall have determined that on the related Drawdown Date, Conversion Date or date of renewal at maturity, as the case may be, its relevant Commitment remaining unadvanced and uncancelled hereunder is then sufficient to allow for the requested Borrowing; and for such purpose, the Equivalent Amount in Canadian Dollars or US Dollars, as applicable, of all outstanding Borrowings shall be calculated at each such time. SECTION 3.6 - MANDATORY REPAYMENTS AND REDUCTIONS - ---------------------------------------------------------------- 3.6.1 REPAYMENT ON THE MATURITY DATE: subject to the other terms and conditions of this Agreement, the Borrower covenants and agrees to fully repay to each Lender all Borrowings outstanding with such Lender under each Credit Facility on the Maturity Date applicable to such Credit Facility (as may be extended as provided herein in the case of the Royal Capex Facility), at which time all amounts of principal, interest, fees and other amounts then outstanding in respect of the said Credit Facility shall be due and payable by the Borrower to the relevant Lender, without penalty other than the indemnities contemplated by Section 13.2; 3.6.2 AUTOMATIC REDUCTION OF THE BNP ACQUISITION FACILITY AND THE ROYAL ACQUISITION FACILITY: the BNP Acquisition Facility and the Royal Acquisition Facility, as well as each Lender's Commitment in respect thereof, shall automatically reduce, without penalty (except as provided in the Phoenix (USA) Term Facility), without any action required on the part of either Lender, concurrently with the scheduled reduction of the Phoenix (USA) Term Facility; 3.6.3 PROCEEDS FROM SALE OF ASSETS: the Borrower covenants and agrees (a) that the net proceeds in excess of Cdn$500,000, or the Equivalent Amount in other currencies, from any sale (either through a single transaction or a series of related transactions) of assets owned by the Borrower and conducted outside the normal course of business of the Borrower, shall be used by the Borrower to permanently repay and reduce or retire Borrowings under the RBC Capex Facility and to permanently reduce and cancel the Commitment in respect thereof in a like amount and (b) that the net proceeds in excess of US$50,000 from any sale (either through a single transaction or a series of related transactions) of assets owned by Phoenix (USA) or IBRD and conducted outside the normal course of business of the said entities, shall be used to permanently repay and reduce or retire borrowings under the Phoenix (USA) Term Facility, with a concurrent pro-rata reduction of the Letters of Credit respectively issued under the BNP Acquisition Facility and the Royal Acquisition Facility, the whole without penalty other than -43- the indemnities contemplated by Section 13.2 and as provided in the Phoenix (USA) Term Facility; and 3.6.4 PROCEEDS FROM SALE OR ISSUANCE OF CAPITAL STOCK OR DEBT: the Borrower covenants and agrees that the net proceeds from any public or private issuance by the Borrower, Phoenix (USA) or IBRD of Capital Stock or of debt or debt instruments shall first be used to permanently repay and reduce or retire borrowings under the Phoenix (USA) Term Facility with a concurrent pro-rata reduction of the Letters of Credit respectively issued under the BNP Acquisition Facility and the Royal Acquisition Facility, the whole without penalty other than the indemnities contemplated by Section 13.2 and as provided in the Phoenix (USA) Term Facility. SECTION 3.7 - VOLUNTARY PAYMENTS - ----------------------------------------------- The Borrower may, without penalty (other than pursuant to the following provisions of this Section and Section 13.2), repay or otherwise retire the Borrowings outstanding hereunder in whole or in part from time to time, in minimum amounts similar to the minimum amounts, if any, set forth for Borrowings under Section 3.5 or any whole multiple thereof or the remaining balance due in respect of the relevant Credit Facility, with accrued interest and fees applicable thereto, by making repayment of the Royal Credit Line Facility through deposits of funds in the Borrower's account or upon giving an irrevocable telephone notice to BNP or Royal, as the case may be, followed by written confirmation on the same day substantially in the form set forth in SCHEDULE "P", or such other form as BNP or Royal, as the case may be, may approve, within notice periods preceding the anticipated repayment similar to the notice periods required for the relevant form of Borrowing by Section 3.5. Any amount prepaid by the Borrower (whether through a payment or through a reduction of the face amount of the relevant Letter of Credit) under the BNP Acquisition Facility or the Royal Acquisition Facility may not be re-borrowed under this Agreement and shall constitute a permanent reduction of the Commitment in respect of such Credit Facility. Notwithstanding the foregoing, a Borrowing outstanding: (a) by way of Libor Loans may not be so repaid or prepaid prior to the last day of the applicable Libor Interest Period, unless the repayment or prepayment is accompanied by the payment to the relevant Lender of the indemnity to be paid under Section 13.2 hereof in connection with the amount being repaid; (b) by way of Letters of Credit may only be repaid or retired prior to the expiry date thereof by (i) the relevant Lender being fully released and discharged of all its liabilities and obligations arising from such Letters of Credit and by written evidence satisfactory to such Lender of such release and discharge being delivered to it, or (ii) by way of the issue to the relevant Lender by a bank acceptable to such Lender of a full unconditional counter-guarantee or indemnity in favour of such Lender acceptable to it in respect of such Letters of Credit; -44- (c) by way of Bankers' Acceptances may not be so repaid or prepaid save for a repayment on the Maturity Date of the relevant Bankers' Acceptances; (d) by way of FEF Contracts may not be so repaid or prepaid save for a payment on the expiry of the related FEF Contracts or by paying the indemnities set forth in Section 13.2 hereof; (e) by way of a Fixed Rate Loan with BNP may not be prepaid prior to the expiry thereof, unless the prepayment is accompanied by (i) the payment to BNP of a prepayment premium of Cdn$100,000, except if such prepayment is made with the proceeds of a public offering or a private placement or with internally generated funds and (ii) the payment to BNP of the indemnity, if any, to be paid under Section 13.2 hereof in connection with the amount being prepaid. SECTION 3.8 - CANCELLATION - ----------------------------------------- The Borrower may at any time, upon giving not less than three Business Days prior written notice thereof to Royal, cancel and reduce any portion of the Commitment in respect of the Royal Capex Facility, in minimum amounts of Cdn$1,000,000 or multiples thereof (or the Equivalent Amount thereof in US Dollars or any combination of Canadian Dollars and US Dollars), or the remaining balance of the Commitment in respect of the Royal Capex Facility. Such notice of cancellation with respect to any drawn portion of the Royal Capex Facility shall be without effect unless on or before the last day of such notice period (i) such drawn portion shall have been repaid or otherwise retired in accordance herewith, (ii) the accrued interest on such drawn portion shall have been paid and (iii) any other fees and charges in connection therewith shall have been paid. Any amount so reduced and cancelled may not be reinstated hereunder and any such cancellation and reduction is irrevocable and shall permanently reduce the Commitment of Royal in respect of the Royal Capex Facility in the amount of such cancellation and reduction. SECTION 3.9 - CONVERSION OPTION - ---------------------------------------------- The Borrower may, during the term of this Agreement, upon giving to BNP or Royal, as applicable, prior irrevocable telephone notice within notice periods similar to those provided in Section 3.5, followed by written confirmation on the same day substantially in the form and substance set out in SCHEDULE "N", effective on any Business Day, convert, in whole or in part, any form of Borrowing outstanding under a BNP Credit Facility or a Royal Credit Facility into any other form of Borrowing available under the relevant Credit Facility, provided that: (a) no Default or Event of Default has occurred and is continuing; (b) a Libor Loan may be converted, in whole or in part, only on the last day of the relevant Libor Interest Period, and provided that if less than all such Libor Loan is converted, then after such conversion not less than US$1,000,000 (and multiples thereof) shall remain as a Libor Loan; -45- (c) a conversion into a Borrowing by way of Libor Loans shall only be made to the extent that the conditions outlined in Section 3.11, 5.2 or 5.3 shall not exist on the relevant Conversion Date; (d) a Borrowing by way of Bankers' Acceptances may be converted, in whole or in part, only on the relevant maturity date of such Bankers' Acceptances and provided that if less than all Borrowings by way of Bankers' Acceptances are converted, then after such conversion not less than Cdn$500,000 (and multiples of Cdn$100,000 in excess thereof) shall remain as Borrowings by way of Bankers' Acceptances; (e) a conversion into a Borrowing by way of Bankers' Acceptances shall only be made to the extent that the conditions outlined in Section 3.11 or 7.2.7 shall not exist on the relevant Conversion Date; (f) a Borrowing by way of Letter of Credit may be converted, in whole or in part, only on the relevant expiry date of such Letter of Credit; and (g) on the Conversion Date, the amount of the outstanding Borrowings (after any such conversion) would not exceed the relevant Commitment at that time; AND PROVIDED FURTHER that if, pursuant to the foregoing provisions of this Section 3.9, a Borrowing denominated in Canadian Dollars is to be converted into a Borrowing denominated in US Dollars, or VICE VERSA, the calculation of the converted amount shall be made by using the Equivalent Amount of the amount to be converted as then determined, and such Borrowing shall thereupon be repaid or retired in the original outstanding currency and forthwith re-advanced or reinstated without novation in the other currency selected by the Borrower, be equal to such Equivalent Amount and be repayable in such other currency with interest accruing thereon on the basis of the Borrowing selected by the Borrower. The conversion of any Borrowing as provided above shall not be deemed to constitute a repayment of any Borrowing hereunder or a new Advance of funds hereunder. With respect to all matters referred to in this Section, the determination by a Lender shall be final and conclusive, save in the case of manifest error. SECTION 3.10 - DEPOSIT OF PROCEEDS OF LOANS AND DISCOUNTED PROCEEDS - -------------------------------------------------------------------------------- Until such time as a Lender is otherwise directed by the Borrower in writing, such Lender shall deposit to the Borrower's Account on the applicable Drawdown Date the proceeds of each Borrowing by way of Loans made on such Drawdown Date and the Discounted Proceeds in respect of each Bankers' Acceptance accepted and purchased by such Lender on such Drawdown Date. SECTION 3.11 - CURRENCY ADJUSTMENT - ----------------------------------------------- -46- If, on any day during the term of this Agreement, a Lender determines that as a result of a change in the exchange rate of the currency against another currency or for any other reason, the Borrowings under a Credit Facility would exceed the Commitment in respect of such Credit Facility (or such applicable lesser amount if a portion thereof has been cancelled, reduced or terminated pursuant to the terms of this Agreement), as determined by the relevant Lender on such day, the Borrower shall forthwith, upon demand by the said Lender, repay and retire the Borrowings under the relevant Credit Facility to the extent of the amount of such excess (subject to the provisions of Section 13.2). SECTION 3.12 - RELIANCE ON ORAL INSTRUCTIONS - ---------------------------------------------------------- Each Lender shall be entitled to act upon the oral instructions of any Person who such Lender believes is a person the Borrower has identified in writing from time to time to such Lender as being a Person authorized by the Borrower to give instructions regarding the completion and issuance of Letters of Credit, Bankers' Acceptances or FEF Contracts or credit cards and the drawdown or conversion of Borrowings and no Lender shall be responsible for any error or omission in such instructions or in the performance thereof except in the case of gross negligence or wilful misconduct by that Lender or its employees. Any such oral instructions so given shall be immediately confirmed in writing by the Borrower to the applicable Lender. The Borrower may revoke the authority of such Persons so authorized by notifying the relevant Lender, in writing, which notice shall be effective on the Business Day immediately following the date of its actual receipt by such Lender. Any instructions given to any Lender before the day such notice becomes effective shall remain effective for the purpose of this Agreement. SECTION 3.13 - REQUEST FROM TAXING AUTHORITY - ---------------------------------------------------------- If, in respect of the Borrower, any Lender receives a request to pay specified amounts to the Receiver General of Canada or other applicable federal or provincial taxing authority by virtue of Section 224(1.1) of the ITA or any analogous provision of any other provincial or federal taxing statute then, so long as such request may require such Lender to make payments to the Receiver General of Canada or other applicable federal or provincial taxing authority, such Lender may, but shall not be obligated to, make further Advances under this Agreement and shall have the right to comply with such request(s). ARTICLE IV PAYMENT OF INTEREST AND FEES SECTION 4.1 - PAYMENT OF INTEREST - ------------------------------------------------ The Borrower covenants and agrees to pay to the relevant Lender at or before 11:00 a.m. on each relevant day hereafter set forth, interest on Loans outstanding from time to time from the date of -47- the respective Advances and conversions to the date of payment in full at the rates per annum (subject to the provisions of Section 4.2) determined as follows: 4.1.1 INTEREST ON PRIME RATE LOANS: the Borrower shall pay to the relevant Lender on each outstanding Prime Rate Loan of such Lender, as evidenced by the Loan Account, interest in Canadian Dollars for value on each Interest Date at a rate per annum equal to the Prime Rate PLUS the applicable Margin. Each change in the fluctuating interest rate for a Prime Rate Loan will take place concurrently with the corresponding change in the Prime Rate. Such interest shall accrue from day to day, shall be payable monthly in arrears on each Interest Payment Date and shall be calculated on the daily outstanding balance of such Prime Rate Loan on the basis of the actual number of days elapsed (including the first day but excluding the last day of any period of time during which a Prime Rate Loan is outstanding) in a year of 365 days; 4.1.2 INTEREST ON US BASE RATE LOANS: the Borrower shall pay to the relevant Lender on each outstanding US Base Rate Loan of such Lender, as evidenced by the Loan Account, interest in US Dollars for value on each Interest Date at a rate per annum equal to the US Base Rate PLUS the applicable Margin. Each change in the fluctuating interest rate for a US Base Rate Loan will take place concurrently with the corresponding change in the US Base Rate. Such interest shall accrue from day to day, shall be payable monthly in arrears on each Interest Payment Date and shall be calculated on the daily outstanding balance of such US Base Rate Loan on the basis of the actual number of days elapsed (including the first day but excluding the last day of any period of time during which a US Base Rate Loan is outstanding) in a year of 365 days; 4.1.3 INTEREST ON LIBOR LOANS: the Borrower shall pay to the relevant Lender on each outstanding Libor Loan of such Lender interest in US Dollars for value on each relative Libor Interest Date of each Libor Interest Period applicable to such Libor Loan, as evidenced by the Loan Account, at a rate per annum equal to Libor PLUS the applicable Margin. Such interest shall accrue from day to day, shall be payable in arrears on each Libor Interest Date and shall be calculated on the daily outstanding balance of such Libor Loan on the basis of the actual number of days elapsed (including the first day of each Libor Interest Period but excluding the last day thereof) divided by 360 days; and 4.1.4 INTEREST ON FIXED RATE LOAN: the Borrower shall pay to BNP on the Fixed Rate Loan, if any, established pursuant to the second paragraph of Section 3.2.1, as evidenced by the Loan Account, interest in US Dollars for value on each Interest Date at a rate per annum equal to the applicable rate offered by BNP and accepted by the Borrower pursuant to the said provisions of Section 3.2.1. Such interest shall accrue from day to day, shall be payable in arrears on each Interest Payment Date and shall be calculated on the daily outstanding balance of such Fixed Rate Loan on the basis of the actual number of days elapsed (including the first day of -48- the period thereof but excluding the last thereof) divided by 360 or 365 days as agreed to at the time of the establishment of the Fixed Rate Loan. For purposes of disclosure under the INTEREST ACT (Canada), the yearly rates of interest to which the rates determined in accordance with the foregoing provisions of Section 4.1 are equivalent, are the rates so determined multiplied by the actual number of days in the year and divided by 365 when calculating interest on a Prime Rate Loan, a US Base Rate Loan or (if the interest applicable thereto has been agreed to be calculated on 365 days at the time of the establishment thereof) on the Fixed Rate Loan, or by 360 when calculating interest on a Libor Loan or (if the interest applicable thereto has been agreed to be calculated on 360 days at the time of the establishment thereof) on the Fixed Rate Loan. Each determination by a Lender of the applicable rate of interest in respect of a Borrowing pursuant to this Section 4.1 shall, in the absence of manifest error, be final, conclusive and binding on the Borrower. SECTION 4.2 - DEFAULT INTEREST - --------------------------------------------- Subject to the following provisions of this Section 4.2, upon a default by the Borrower in the payment of any sum hereunder when due (whether of principal, interest, fees, expenses or other amounts), the Borrower covenants and agrees to pay interest on such sum to the Lender or Lenders to which the said sum is owing, calculated at a rate per annum equal to: (a) the Prime Rate PLUS the Margin applicable to Prime Rate Loans, if such sum is owed in Canadian Dollars or currencies other than US Dollars, and (b) the US Base Rate PLUS the Margin applicable to US Base Rate Loans, if such sum is owed in US Dollars, increased in each case, to the extent permitted by law, by 2% per annum from the date of such default so long as such default shall continue, before and after demand and judgment, such interest to be compounded monthly on each Interest Date and to be payable on demand. Such interest shall accrue from day to day on the basis of the actual number of days elapsed divided by 365. Notwithstanding the foregoing, upon a default by the Borrower in the payment of any Acceptance Fee when payable hereunder, the Borrower covenants and agrees to pay interest on the unpaid amount of such Acceptance Fee to the relevant Lender, calculated at the rate of 15% per annum, based on a year of 365 days, from the date of such default so long as such default shall continue, before and after demand and judgment, such interest to be compounded monthly on each Interest Date and to be payable on demand. For purposes of disclosure under the INTEREST ACT (Canada), the yearly rate of interest to which each of the rates set forth in this Section 4.2 is equivalent is the rate so determined multiplied by the actual number of days in the year and divided by 365. -49- SECTION 4.3 - NOMINAL RATES OF INTEREST - ------------------------------------------------------ The parties acknowledge that the rates of interest specified in this Agreement are nominal rates and that all interest payments and computations are to be made without allowance or deduction for deemed reinvestment. SECTION 4.4 - STANDBY FEE IN RESPECT OF THE ROYAL CAPEX FACILITY - ------------------------------------------------------------------------------- As and by way of a standby fee, the Borrower covenants and agrees to pay to Royal monthly in arrears on each Interest Payment Date from the date of execution of this Agreement, an amount in Canadian Dollars equal to 3/8 of 1% per annum of that portion of the Royal Capex Facility in excess of Cdn$5,000,000 from time to time remaining undrawn pursuant to Section 3.5 and uncancelled pursuant to Section 3.8, computed daily (on the basis of a year of 365 days) from and including the date of execution of this Agreement (or from and including the Interest Date of the relevant month, as the case may be), up to and excluding the next Interest Date. For purposes of calculating the standby fees payable to Royal pursuant to this Section 4.4, the Loans outstanding under the Royal Capex Facility in currencies other than Canadian Dollars on each day will be deemed to be outstanding in the Equivalent Amount thereof in Canadian Dollars as in effect on the relevant Interest Date. SECTION 4.5 - ACCEPTANCE FEE - ------------------------------------------- Upon acceptance of a Bankers' Acceptance by a Lender hereunder, the Borrower shall pay to the said Lender the applicable Acceptance Fee as set forth in Section 7.2.6. SECTION 4.6 - LETTERS OF CREDIT FEES - --------------------------------------------------- The Borrower shall, prior to the issue of any Letter of Credit at its request under this Agreement and upon the acceptance of any draft thereunder and the making of any payments thereunder and upon the making of amendments in respect thereof, pay to the Lender issuing or having issued such Letter of Credit, letter of credit fees, letter of guarantee fees, acceptance fees, drawing fees, amendment fees and other fees, as the case may be, as may be established by the relevant Lender on the appropriate date or at such other rates as may be negotiated from time to time by the Borrower and the said Lender. The issuance fees shall be based upon the face amount of the Letter of Credit issued and calculated on the number of days that the Letter of Credit is to be outstanding on the basis of 365 days. Notwithstanding the preceding paragraph: (a) the Borrower shall pay to BNP, a non-refundable fee with respect to the Letter of Credit issued under the BNP Acquisition Facility at a rate per annum equal to the applicable Margin, for the entire term of such Letter of Credit, which fee shall be payable quarterly in advance on the date of issuance of such Letter of Credit and thereafter, on the basis of the then outstanding face amount of such Letter of Credit, on the same date of each of the -50- months of May, August, November and February of each year until termination of such Letter of Credit; (b) the Borrower shall pay in advance to Royal the following non-refundable fees with respect to the Letter of Credit issued under the Royal Acquisition Facility, namely: (i) upon issuance of such Letter of Credit, an amount equal to 1 2/5% per annum of the face amount of such Letter of Credit for the entire period of the Royal Acquisition Facility from the date of issuance of the said Letter of Credit to and including the stated date of expiry of such Letter of Credit, (ii) on November 30, 1998 (if the said Letter of Credit still remains outstanding), an amount equal to 1/4 of 1% per annum of the then outstanding face amount of the said Letter of Credit for the period from and including November 30, 1998 to and including the Maturity Date of the Royal Acquisition Facility, and (iii) on May 31, 1999 (if the said Letter of Credit still remains outstanding) an amount equal to 1/4 of 1% per annum of the then outstanding face amount of the said Letter of Credit for the period from and including May 31, 1999 to and including the stated date of expiry of such Letter of Credit. SECTION 4.7 - SET UP FEES AND ANNUAL REVIEW FEES - --------------------------------------------------------------- As and by way of set up fees, the Borrower shall have paid to each of the Lenders, prior to the execution of this Agreement, the non-refundable set up fees respectively agreed to between the Borrower and each Lender in their separate offers or confirmations of financing to the Borrower dated January 30, 1998, in the case of BNP, and dated February 3, 1998, in the case of Royal. In addition, the Borrower undertakes to pay to Royal, as and by way of annual review fees, at the latest on the fifth day following annual written confirmation by Royal to the Borrower of the Royal Credit Facilities (and of any amendments thereto) the amount agreed to between the Borrower and Royal in Royal's confirmation of financing to the Borrower dated February 3, 1998. ARTICLE V CONDITIONS APPLICABLE TO LIBOR LOANS SECTION 5.1 - SELECTION OF LIBOR INTEREST PERIODS - ---------------------------------------------------------------- All Libor Loans shall be drawn down in the minimum amounts set forth in Section 3.5 and shall be for a Libor Interest Period, subject to availability to each Lender, respectively. -51- If the Borrower has chosen a Borrowing by way of a Libor Loan pursuant to Section 3.5 or has made a conversion into a Libor Loan pursuant to Section 3.9, the Borrower shall, prior to the expiry of the then current relevant Libor Interest Period, select and irrevocably notify the applicable Lender of the next Libor Interest Period to apply without novation (subject to availability to such Lender) to such Libor Loan or of the intention of the Borrower to repay or convert such Libor Loan at the end of the relative Libor Interest Period, such notice to be given by telephone within notice periods similar to those provided in Section 3.5, followed by written confirmation on the same day substantially in form and substance as set out in SCHEDULE "N". If the Borrower shall choose a new Libor Interest Period for an outstanding Libor Loan, and thus to renew such Borrowing without novation in the same form of Loan, the new Libor Interest Period shall commence on and include the last day of the relative Libor Interest Period during which such choice is made. If the Borrower fails to so notify the relevant Lender as provided in this Section, the Borrower shall be deemed to have notified such Lender of its intention to convert without novation the relevant Libor Loan into a US Base Rate Loan. SECTION 5.2 - ALTERNATE BASIS OF BORROWING - --------------------------------------------------------- If at any time during the term of this Agreement, a Lender determines in good faith (which determination shall be final, conclusive and binding upon the Borrower) that: (a) adequate and fair means do not exist for ascertaining the rate of interest with respect to a Libor Loan to be made by it; (b) the cost to such Lender of making, funding or maintaining its Libor Loan does not accurately reflect the effective cost thereof; (c) the making or continuing of Libor Loans by such Lender has been made impracticable by the occurrence of any event which materially and adversely affects the London interbank eurodollar market; or (d) deposits in US Dollars are not available to such Lender in the London interbank eurodollar market in sufficient amounts in the ordinary course of business for the applicable Libor Interest Period to make, fund or maintain a Libor Loan during such Libor Interest Period, then, the Lender affected by such event or circumstance (the "AFFECTED LENDER"), shall notify the Borrower of such determination in writing with an indication of the Borrowing affected by such determination (the "AFFECTED BORROWINGS"). For so long as the circumstances referred to in Section 5.2(a), (b), (c) or (d) shall continue and until notice to the contrary is given to the Borrower by the Affected Lender, the Affected Lender shall not be obligated to make any further Affected Borrowings available under the Credit Facilities. The principal amount of all outstanding Affected Borrowings granted by the Affected Lender shall, at the expiry of the related Libor Interest Period, be converted without novation into such other form of available Borrowings as the Borrower may request by notice to the Affected Lender or failing such notice -52- by the Borrower, into US Base Rate Loans, and thereafter such Affected Lender shall only be obligated to extend Affected Borrowings in such other forms of Borrowings or US Base Rate Loans, as the case may be. SECTION 5.3 - ILLEGALITY RELATIVE TO LIBOR LOANS - --------------------------------------------------------------- If the adoption of any Applicable Law, or any change therein or in the interpretation or application thereof by any court or by any governmental or other authority or central bank or comparable agency or any other entity charged with the interpretation or administration thereof or compliance by any Lender with any request or direction (whether or not having the force of law but if not, compliance with which is generalized and standard in the banking industry) of any such authority, central bank or comparable agency or entity now or hereafter makes it unlawful or impossible for any Lender to make, fund or maintain the Libor Loans or a portion thereof or to perform its obligations under this Agreement, such Lender (the "AFFECTED LENDER") may, by written notice thereof to the Borrower, suspend its obligations under this Agreement with respect to the Loans affected by such illegality or prohibition (the "AFFECTED BORROWINGS") for the duration of the period of such illegality or prohibition, and the Borrower shall, to the extent possible and subject to the provisions of Section 13.2, forthwith (or at the end of such period as the Affected Lender in its discretion agrees) convert without novation the Affected Borrowings or such portion thereof together with accrued interest thereon for the remainder of the related Libor Interest Period(s) into such other forms of Borrowings as the Borrower may request by notice to the Affected Lender within not more than two Business Days after receipt by the Borrower of the notice of the Affected Lender, and, for the period between such notice by the Affected Lender and such notice by the Borrower or failing such notice by the Borrower, into US Base Rate Loans, and thereafter such Affected Lender shall only be obligated to extend its Affected Borrowings in such other forms of Borrowings or US Base Rate Loans, as the case may be. ARTICLE VI CONDITIONS APPLICABLE TO LETTERS OF CREDIT SECTION 6.1 - INITIAL LETTERS OF CREDIT - ------------------------------------------------------ The Borrower acknowledges that: (a) the Letter of Credit in the initial face amount of US$11,440,000 issued on February 5, 1998 by BNP in favour of BNP (Los Angeles) under the BNP Acquisition Facility, a copy of which is set forth in SCHEDULE "Q", (b) the Letter of Credit in the initial face amount of US$14,000,000 issued on February 5, 1998 by Royal in favour of BNP (Los Angeles) under the Royal Acquisition Facility, a copy of which is set forth in SCHEDULE "R", and -53- (c) the Letter of Credit in the initial face amount of US$7,000,000 to be issued by BNP in favour of BNP (Los Angeles) under the BNP Revolver Back-Up Facility, as any such Letter of Credit may be extended, amended, replaced or otherwise modified from time to time, shall constitute Letters of Credit requested to be issued by the Lenders hereunder and for which the Borrower shall be fully and irrevocably liable in accordance with the provisions of this Agreement, including more particularly the reimbursement and indemnity provisions of this Article VI. SECTION 6.2 - ISSUE OF OTHER LETTERS OF CREDIT BY ROYAL - ---------------------------------------------------------------------- Prior to effecting Borrowings by way of Letters of Credit under the Royal Credit Line Facility, the Borrower shall make arrangements with Royal for the issuance of the said Letters of Credit. All such Letters of Credit shall be issued at the request of the said Borrower and under the indemnity described in Section 6.6. Prior to effecting Borrowings by way of Letters of Credit under the Royal Credit Line Facility, the Borrower, after having made arrangements with Royal as provided above, may give written notice thereof to Royal at the latest on the third Business Day preceding the anticipated date of issuance substantially in the form of SCHEDULE "O", or such other form or by such other method as Royal may approve, and shall execute and deliver to Royal duly completed Letters of Credit application(s) and other documents, using such form(s) as may be approved by Royal at the time of issue. In the event of any inconsistency between the terms contained in such application(s) and documents, and the terms contained herein, the former shall prevail. SECTION 6.3 - RESTRICTIONS ON LETTERS OF CREDIT - -------------------------------------------------------------- In addition to the Letters of Credit already issued under the BNP Acquisition Facility and the Royal Acquisition Facility and the Letter of Credit to be issued under the BNP Revolver Back-Up Facility, letters of Credit hereunder may only be issued under the Royal Credit Line Facility. A Lender may refuse to issue any particular Letter of Credit at any time at its sole discretion. Letters of Credit issued under the BNP Revolver Back-Up Facility and the Royal Credit Line Facility and any renewals or extensions thereof shall, by their terms, expire not later than one year following the date of issue or the date of extension or renewal thereof, as the case may be, and the aggregate outstanding amount of all Letters of Credit issued under the Royal Credit Line Facility may at no time exceed Cdn$1,500,000 or the Equivalent Amount in other currencies. SECTION 6.4 - FEES AND CHARGES FOR LETTERS OF CREDIT - ------------------------------------------------------------------- The Borrower shall pay to the Lender issuing or having issued a Letter of Credit hereunder, the said Lender's fees set forth in Section 4.6 at the prevailing rates, as well as the fees of any correspondent bank for or in connection with such Letter of Credit and documents thereunder. -54- SECTION 6.5 - INTEREST ON AMOUNTS PAID - ----------------------------------------------------- Subject to Section 6.6 hereof, if a Lender makes a payment under a Letter of Credit issued or outstanding in accordance herewith, the amount or amounts so paid by the said Lender shall, unless otherwise funded by or for the account of the Borrower, be deemed to constitute a Prime Rate Loan if such payment is made in Canadian Dollars or any currency other than US Dollars and a US Base Rate Loan if such payment is made in US Dollars, and the amount so paid shall bear interest accordingly from the date of payment by the relevant Lender until full repayment by the Borrower and shall be repayable on demand. If such payment is made in a currency other than Canadian Dollars or US Dollars, the amount of such payment shall be deemed to constitute a Prime Rate Loan in an amount equal to the Equivalent Amount thereof in Canadian Dollars. SECTION 6.6 - INDEMNITY - -------------------------------------- If and when a payment is made by a Lender pursuant to a Letter of Credit issued by it, the Borrower shall forthwith pay to the said Lender, in the currency(ies) in which such payment was made, the whole amount so paid under the said Letter of Credit and if the Borrower fails to make such payment, the amount of such payment shall be deemed to constitute a demand Loan hereunder in accordance with Section 6.5 hereof. Without restriction to the foregoing, the Borrower shall, in addition, indemnify the issuing Lender and hold it harmless from and against any claims, demands, losses, costs, liabilities, actions, judgements or suits, damages and expenses, including legal fees and expenses reasonably incurred which such Lender may suffer or incur by reason of having issued any Letter of Credit or having properly accepted drafts or documents thereunder or by reason of false or incomplete information being provided by or on behalf of the Borrower to the said Lender in respect of Borrowings or proposed Borrowings by way of Letters of Credits or acceptances thereunder or by reason of any action taken, admitted or suffered to be taken in good faith in reliance upon any instructions, applications, request or order from the Borrower or any other party for whose account such Letter of Credit was issued or upon other paper or documents reasonably believed by the relevant Lender to be genuine in connection with a Letter of Credit or acceptances under a Letter of Credit issued by it. The reimbursement and indemnity obligations of the Borrower herein shall not be released, discharged or otherwise affected by any circumstance or occurrence whatsoever including, without limitation, (A) the lack of validity or enforceability of the underlying Letter of Credit or any acceptance or other documentation presented for drawing thereunder, or (B) any dealing by a Lender with a beneficiary or negotiating, advising or confirming bank in connection with Letters of Credit and acceptances thereunder. SECTION 6.7 - REIMBURSEMENT FOLLOWING TERMINATION - ---------------------------------------------------------------- When a Lender shall have determined at its discretion that it is no longer liable under a Letter of Credit outstanding hereunder, and provided all amounts owing in respect of the Credit Facilities have then been fully and undefeasibly paid to the Lenders, such Lender will reimburse to the -55- Borrower, without interest, such amount, if any, as shall have been paid by the Borrower to such Lender in respect of such Letter of Credit upon a demand for full repayment of the Credit Facilities or of any Credit Facility. ARTICLE VII CONDITIONS APPLICABLE TO BANKERS' ACCEPTANCES SECTION 7.1 - BANKERS' ACCEPTANCES - ------------------------------------------------- The Borrower may effect Borrowings under the BNP Acquisition Facility (to the extent not converted into a Fixed Rate Loan), the Royal Capex Facility and the Royal Credit Line Facility by way of Bankers' Acceptances denominated in Canadian Dollars in accordance with the provisions of Section 3.5 and this Article VII. For the purposes of this Agreement, the full face value of Bankers' Acceptances, without Discount, shall be used when calculations are made to determine the amount of Borrowings. Each determination by the relevant Lender of the Acceptance Fee, of the Discount Rate, of the Discounted Proceeds and of the Discount applicable to Bankers' Acceptances to be accepted by it shall, in the absence of manifest error, be final, conclusive and binding on the Borrower. SECTION 7.2 - CONDITIONS APPLICABLE TO BANKERS' ACCEPTANCES - -------------------------------------------------------------------------- 7.2.1 NOTICE AND DOCUMENTS: the Borrower shall request that Advances be made by way of Bankers' Acceptances, that outstanding Borrowings be converted into Bankers' Acceptances or that Borrowings outstanding by way of Bankers' Acceptances be renewed in the same form of Borrowing, by giving on a timely basis the notice required under Section 3.5, 3.9 or 7.2.5, as applicable. Each Lender may at any time cease to accept Bankers' Acceptances hereunder or set limits on the overall value of Bankers' Acceptances to be accepted hereunder. The Borrower shall execute and deliver to each Lender the documentation relating to Bankers' Acceptances usually required by such Lender from its clients. In the event of inconsistency between the terms contained in the said documentation and the terms contained herein, the former shall prevail; 7.2.2 PROCEDURES FOR THE ISSUE OF BANKERS' ACCEPTANCES: 7.2.2.1 Bankers' Acceptances issued pursuant to this Agreement: (a) will be denominated in Canadian Dollars, in amounts of Cdn$100,000 or multiples thereof, -56- (b) will be issued in minimum aggregate amounts of Cdn$500,000, (c) will have a term of 30 to 180 days, subject to availability, and shall not allow for days of grace, (d) will mature on a Business Day on or before the Maturity Date, and (e) may be held by the relevant Lender for its own account or sold or traded in the money market, either directly or through stock brokers or dealers; 7.2.2.2 Upon each issue of Bankers' Acceptances: (a) which are purchased by a Lender for its own account, the Borrower shall be entitled to be credited with the Discounted Proceeds thereof, less the Acceptance Fee, (b) as a result of the conversion of outstanding Borrowings into Bankers' Acceptances or as a result of the renewal of outstanding Bankers' Acceptances, the Borrower shall, concurrently with the conversion or renewal, pay in advance out of its own funds to the accepting Lender an amount equal to the Discount applicable to such issue, to be applied against the principal of the Borrowing being so converted or renewed, plus the applicable Acceptance Fee; 7.2.3 DELIVERY OF BANKERS' ACCEPTANCES: if the Borrower has chosen a Borrowing by way of Bankers' Acceptances, the Borrower shall have delivered to the relevant Lender for acceptance at its Branch of Account, at the latest by 10:00 a.m. on the Business Day preceding the date of issue of the related Bankers' Acceptances, an appropriate number of signed and endorsed forms of Bankers' Acceptances in order to allow such Lender to accept such instruments in the aggregate and face amounts and for the maturities chosen by the Borrower. In this respect, Royal will deliver from time to time to the Borrower blank forms of Bankers' Acceptances to be signed and returned by the Borrower in order to maintain an adequate supply of such instruments for acceptance hereunder. No Lender shall be responsible or liable for its failure to accept a Bankers' Acceptance as required hereunder if the cause of such failure is, in whole or in part, due to the failure of the Borrower to provide duly executed and endorsed drafts to such Lender on a timely basis nor shall any Lender be liable for any damage, loss or other claim arising by reason of any loss or improper use of any such instrument except a loss or improper use arising by reasons of the gross negligence or wilful misconduct of such Lender or its employees; -57- 7.2.4 EXECUTION OF BANKERS' ACCEPTANCES: drafts of the Borrower to be accepted as Bankers' Acceptances hereunder shall be signed by a duly authorized officer or duly authorized officers of the Borrower. Notwithstanding that any person whose signature appears on any Bankers' Acceptance as one of such officers may no longer be an authorized signatory for the Borrower at the date of issuance of a Bankers' Acceptance, such signature shall nevertheless be valid and sufficient for all purposes as if such authority had remained in force at the time of such issuance and any such Bankers' Acceptance so signed shall be binding on the Borrower; 7.2.5 PROCEDURES RELATING TO THE MATURITY AND FACE AMOUNT OF ALL BANKERS' ACCEPTANCES: (a) If Bankers' Acceptances are outstanding hereunder, the Borrower shall prior to the date of maturity of the then current Bankers' Acceptances, irrevocably notify the Lender having accepted them of the intention of the Borrower to repay, renew or convert such Borrowing at the maturity of the related Bankers' Acceptances, such notice to be given by telephone within notice periods similar to those provided in Section 3.5, followed by written confirmation on the same day substantially in the form attached as SCHEDULE "N", (b) if the Borrower shall choose to renew a Borrowing outstanding by way of Bankers' Acceptances in the same form of Borrowing, the Borrower shall cause the term of the new Bankers' Acceptances to commence on and include the date of maturity of the relative Bankers' Acceptances being renewed. If the Borrower fails to so notify the relevant Lender as provided in Subsection 7.2.5(a), the Borrower shall be deemed to have notified the said Lender of its intention to convert the relevant Borrowing by way of Bankers' Acceptances into a Prime Rate Loan, (c) the Borrower shall, by no later than 11:00 a.m. on the maturity date of each Bankers' Acceptance, pay to the Lender having accepted Bankers' Acceptances hereunder an amount equal to the face amount of all Bankers' Acceptances accepted by such Lender and maturing on that day by effecting such payment out of its own funds, or by converting such Borrowing by way of Bankers' Acceptances into another form of Borrowing then available hereunder or by renewing such Bankers' Acceptances hereunder, the whole subject to the payment of the Discount as provided in Subsection 7.2.2.2(b); and in each case of conversion or renewal, the Discounted Proceeds, together with the Discount paid in respect thereof, shall be applied to the reduction of the Borrowing being converted or renewed, as the case may be, and (d) in the event that the Borrower fails to provide payment of the face amount of a Bankers' Acceptance on its maturity date as required pursuant to -58- Subsection 7.2.5(c), then the Canadian Dollar amount of such failed payment shall be deemed for all purposes of this Agreement to be and shall be treated in all respects as a Borrowing by way of a Prime Rate Loan as and from such maturity date; 7.2.6 ACCEPTANCE FEE: the Borrower shall pay to each Lender the Acceptance Fee in Canadian Dollars forthwith upon the acceptance hereunder by such Lender of a Bankers' Acceptance issued by the Borrower. The Borrower authorizes and directs the Lenders to deduct from the Discounted Proceeds of Bankers' Acceptances purchased by them for their own account, the amount of each such Acceptance Fee upon the issue of each Bankers' Acceptance; 7.2.7 ALTERNATE BASIS OF BORROWING: if at any time during the term of this Agreement, a Lender determines in good faith (which determination shall be final, conclusive and binding upon the Borrower) that by reasons of circumstances or changes affecting the market for Bankers' Acceptances: (a) it is no longer possible to establish the Discount Rate in respect of Bankers' Acceptances, or (b) the market for Bankers' Acceptances no longer exists, is too weak for its normal use or is not capable in the normal course of business to absorb Bankers' Acceptances accepted hereunder, then, such Lender shall immediately notify the Borrower of its determination in writing. For so long as the circumstances referred to in paragraphs (a) or (b) of this subsection shall continue, no further Borrowings will be available by way of Bankers' Acceptances from such Lender and thereafter, until notice to the contrary is given to the Borrower by such Lender, the said Lender shall only be obligated to make other forms of Borrowings available to the Borrower hereunder, and the principal amount of all Borrowings outstanding by way of Bankers' Acceptances shall, at the expiry of the related Bankers' Acceptances, be converted without novation into such other form of Borrowing as the Borrower may request by notice to the relevant Lender or failing such notice, into Prime Rate Loans; 7.2.8 WAIVER OF CLAIM: the Borrower shall have no right to set up as against either of the Lenders any defence or right of action, of indemnification or of set-off or compensation or any similar claim of any nature whatsoever which the Borrower may have had at any time or may have in the future with respect to any holder of one or more Banker's Acceptance(s) issued hereunder; 7.2.9 PAYMENT BY LENDER ON MATURITY: on the maturity date of each Bankers' Acceptance issued by a Lender hereunder, such Lender will pay to the redeeming holder, if any, of each Bankers' Acceptance, at the time of presentment thereof, the face amount of such Bankers' Acceptance. -59- ARTICLE VIII CONDITIONS APPLICABLE TO FEF CONTRACTS SECTION 8.1 - FEF CONTRACTS - ------------------------------------------ Prior to effecting Borrowings by way of FEF Contract under this Agreement, the Borrower shall make arrangements with the relevant Lender for the execution of such FEF Contract and all documentation, agreements and master agreements requested by such Lender in respect thereof, including appropriate confirmations relating thereto. In the event of inconsistency between the terms contained in such documentation and the terms contained herein, the former shall prevail. Borrowings by way of FEF Contracts shall be made available by such Lender entering into FEF Contracts with the Borrower provided, however, that the said Lender shall have no obligation to make such Borrowing available to the Borrower and to enter into any FEF Contract hereunder unless such Lender, in its absolute discretion, is satisfied that the FEF Contracts Risk Amount for purposes of such Borrowing, when taken together with the FEF Contracts Risk Amount of all other outstanding FEF Contracts, does not exceed (a) Cdn$10,000,000 (with a maximum spot settlement risk for all outstanding FEF Contracts not to exceed Cdn$100,000,000) with respect to all FEF Contracts entered into with BNP and (b) Cdn$4,000,000 (with a maximum spot settlement risk for all outstanding FEF Contracts not to exceed Cdn$20,000,000) with respect to all FEF Contracts entered into with Royal. In addition, BNP accepts a delivery risk on the Borrower for an aggregate maximum amount of Cdn$5,000,000 with respect to all FEF Contracts between the Borrower and BNP, whereby BNP executes its obligations in respect of an FEF Contract before receiving confirmation that the Borrower has delivered its counterpart upon expiry of the same FEF Contract. Accordingly, for delivery under an FEF Contract of any amount denominated in a currency other than Canadian Dollars the Equivalent Amount of which exceeds Cdn$5,000,000, the Borrower undertakes to deliver and pay its counterpart in respect of such FEF Contract before BNP may be required to execute its own obligation with respect to such FEF Contract. Notwithstanding the foregoing, a Lender may in any event refuse to enter into any particular FEF Contract if, acting reasonably, it is not satisfied with the conditions of issue (including, without limitation, the duration thereof) the currencies thereof or generally, the market risk relating to the issue of such FEF Contract. Moreover, a Lender may, in its entire discretion, refuse to enter into any FEF Contract, the purpose of which is to control, fix or regulate currency exchange fluctuation in connection with a currency which, in the opinion of such Lender, is not freely convertible. It is expressly understood and agreed that unless otherwise acknowledged and agreed to in writing by a Lender, all FEF Contracts entered into during the term of this Agreement between the Borrower and such Lender shall, for so long as they remain outstanding, constitute a Borrowing made by the Borrower under this Agreement and outstanding under the BNP FEF Facility or the Royal FEF Facility, as applicable. -60- SECTION 8.2 - INTEREST ON AMOUNTS PAYABLE UNDER FEF CONTRACTS - ---------------------------------------------------------------------------- If the Borrower fails to pay to a Lender when due any and all amounts payable under any FEF Contract or any and all other amounts payable hereunder by the Borrower in respect of the cancellation or termination of any FEF Contract or otherwise related to Borrowings outstanding under the BNP FEF Facility or the Royal FEF Facility, as applicable, all such amounts not paid when due shall be deemed to be converted into and to constitute a Prime Rate Loan in the case of an amount owing in Canadian Dollars or in any currency other than US Dollars and shall be deemed to constitute a US Base Rate Loan in the case of an amount owing in US Dollars; any such Prime Rate Loan and US Base Rate Loan shall be payable to the relevant Lender forthwith on demand and shall bear interest accordingly from the date such amounts so become due until full payment to the Lender; if the amount the Borrower has so failed to pay is denominated in a currency other than Canadian Dollars or US Dollars, then upon the Borrower failing to pay such amount, the indebtedness of the Borrower to the relevant Lender in respect thereof shall, for the purposes of the foregoing, be converted into the Equivalent Amount thereof in Canadian Dollars using the spot buying rate of the said Lender as in effect on the date of such conversion. SECTION 8.3 - DOCUMENTATION, FEES AND CHARGES - ------------------------------------------------------------ The Borrower undertakes to execute and deliver to each Lender all such Lender's standard documentation which the Lender may require from time to time in respect of FEF Contracts, including all confirmations thereof when required. The Borrower also undertakes to pay to each Lender, at its request, the said Lender's usual fees and charges at the prevailing rates in respect of FEF Contracts entered into hereunder. ARTICLE IX PAYMENT, TAXES, INCREASED COSTS, EVIDENCE OF INDEBTEDNESS AND TIMING OF MATURITIES SECTION 9.1 - PLACE OF PAYMENT OF PRINCIPAL, INTEREST AND CHARGES - -------------------------------------------------------------------------------- All payments of principal, interest, additional interest, fees (other than the standby fee, the set-up fees and the annual review fees pursuant to Sections 4.4 and 4.7 which shall be payable as provided in such Sections) and other charges to be made by the Borrower pursuant to this Agreement shall be made in the currency in which the Borrowing is outstanding for value on the day such amount is due and if such day is not a Business Day, on the Business Day next following, by payment or transfer of monies to the appropriate Account for Payments. Any amounts received from the Borrower after 3:00 p.m., on any Business Day, shall be applied to the appropriate payment, repayment or prepayment due on such day, on the next following Business Day. Until so applied, interest shall continue to accrue as provided in this Agreement on the amount of such payment, repayment or prepayment. -61- SECTION 9.2 - ACCOUNT DEBIT AUTHORIZATION - -------------------------------------------------------- The Borrower authorizes and directs each Lender, in its discretion, to automatically debit, by mechanical, electronic or manual means, the bank accounts of the Borrower maintained with it for all amounts payable by the Borrower under this Agreement, including but not limited to the repayment of principal and the payment of interest, fees, expenses and all other charges for the keeping of such bank accounts. SECTION 9.3 - APPLICATION OF PAYMENTS - ---------------------------------------------------- All payments received by a Lender from or on behalf of the Borrower pursuant to this Agreement shall be applied prior to the occurrence of an Event of Default to such liabilities of the Borrower as the Borrower shall indicate to such Lender at the time such payment is made and, if no such indication is made or if an Event of Default has occurred, to the liabilities of the Borrower hereunder in such order as such Lender shall from time to time decide. SECTION 9.4 - MANNER OF PAYMENT AND TAXES - -------------------------------------------------------- The Borrower shall make all payments to the Lenders pursuant to this Agreement without set-off, compensation or counterclaim, free and clear of, and exempt from, and without deduction for or on account of, any Tax. If any Tax is deducted or withheld from any payments, the Borrower shall promptly remit to the affected Lender an amount which shall be equal to the Tax so deducted or withheld, together with certified copies of the relevant official receipts or other evidence satisfactory to the affected Lender, evidencing payment to the appropriate taxing authority of each such Tax by the Borrower on behalf of the affected Lender. If the Borrower is prevented by operation of law or otherwise from paying, causing to be paid or remitting such Tax, the Borrower shall pay to the affected Lender such additional amounts as may be necessary to ensure that such Lender receives a net amount in the appropriate currency equal to the full amount it would have received had such Tax not been so deducted or withheld. The obligations of the Borrower under this Section 9.4 to effect payments for Taxes shall survive the repayment of the principal and interest on the Borrowings and the payment of all other amounts due hereunder if such Taxes have not been paid. SECTION 9.5 - INCREASED COSTS - -------------------------------------------- If after the date of execution hereof, any introduction of any Applicable Law or any change or introduction of a change in any Applicable Law (whether or not having the force of law but if not, compliance with which is generalized and standard in the banking industry) or in the interpretation or application thereof by any court or by any governmental agency, central bank or other judicial, governmental, administrative or other authority or entity charged with the administration thereof or any change in the compliance of a Lender therewith, or if present or future compliance by a Lender with any new or changed request or directive (compliance with -62- which is in accordance with the practice of responsible banks or financial institutions) from any central bank or other fiscal authority (whether or not having the force of law), now or hereafter: (a) subjects a Lender to, or causes the withdrawal or termination of a previously granted exemption with respect to, any Tax or changes the basis of taxation, or increases any existing Tax, on payments of principal, interest, fees or other amounts payable by the Borrower to such Lender under this Agreement (except for taxes on the overall net income of such Lender and capital taxes payable by such Lender imposed by the jurisdiction in which its principal or lending offices are located), (b) imposes, modifies or deems applicable any reserve, special deposit, deposit insurance or similar requirements against assets held by, or deposits in or for the account of or loans by or any other acquisition of funds by, an office of such Lender or with respect to Bankers' Acceptances, Letters of Credit, FEF Contracts or credit cards expense account arrangements hereunder, (c) imposes on such Lender or expects there to be maintained by such Lender any capital adequacy or additional capital requirements in respect of any Borrowing or the Commitment of such Lender hereunder or any other condition with respect to this Agreement, or (d) imposes any Tax or reserves or deemed reserves with respect to the undrawn portion of the Commitment of a Lender; and the result of any of the foregoing, in the sole determination of the affected Lender acting reasonably, shall be to increase the cost to, or reduce the amount of principal, interest or other amount received or receivable by such Lender hereunder or its effective return hereunder in respect of making, maintaining or funding Loans, Bankers' Acceptances, Letters of Credit, FEF Contracts or credit cards expense account arrangements under this Agreement, such Lender shall, acting reasonably, determine that amount of money which shall compensate such Lender for such increase in cost or reduction in income (herein referred to as "ADDITIONAL COMPENSATION"). Upon such Lender having determined that it is entitled to Additional Compensation in accordance with the provisions of this Section 9.5, such Lender shall promptly so notify the Borrower and the other Lender. Such Lender shall provide to the Canadian Borrower a photocopy of, or an extract from, the relevant law, rule, guideline, regulation, treaty or official directive and a certificate of a duly authorized officer of such Lender setting forth the Additional Compensation and the basis of calculation therefor, which shall be conclusive evidence of such Additional Compensation in the absence of manifest error. The Borrower shall pay to such Lender within ten Business Days of the giving of such notice such Lender's Additional Compensation calculated to the date of such notification. Such Lender shall be entitled to be paid such Additional Compensation from time to time to the extent that the provisions of this Section 9.5 are then applicable notwithstanding that such Lender has previously been paid any Additional Compensation. Such Lender shall make commercially reasonable efforts to limit the incidence of any such Additional Compensation, including seeking recovery for the account of the Borrower, by appealing any assessment at the expense of the Borrower upon the Borrower's -63- request, provided such Lender, in its sole determination, suffers no appreciable economic, legal, regulatory or other disadvantage. The obligation of the Borrower under this Section 9.5 shall survive the repayment of the principal and interest on the Borrowings and the payment of all other amounts due hereunder. SECTION 9.6 - PAYMENT OF PORTION - ----------------------------------------------- Notwithstanding the provisions hereof, if a Lender gives the notice provided for in Section 9.5 with respect to any Borrowing (an "AFFECTED BORROWING"), the Borrower may at its option, upon ten Business Days notice to that effect given to such Lender (which notice shall be irrevocable), unless such prepayment or assignment causes a Default to have occurred hereunder, prepay in full without penalty such Affected Borrowing outstanding together with accrued and unpaid interest on the principal amount so prepaid up to the date of such prepayment, such Additional Compensation as may be applicable to the date of such payment and all costs, losses and expenses incurred by such Lender by reason of the liquidation or re-employment of deposits or other funds or for any other reason whatsoever resulting from the repayment of such Affected Borrowing or any part thereof on other than the last day of the applicable interest period or term. Upon such payment being made, such Lender's obligations in respect of such Affected Borrowing under this Agreement shall terminate. SECTION 9.7 - COMMITMENT AND TIMING OF MATURITIES - ---------------------------------------------------------------- The Borrower shall only be entitled to convert an outstanding Borrowing into another form of Borrowing hereunder or to renew an outstanding Borrowing at the maturity thereof if, immediately prior to the relevant Conversion Date or prior to the expiry of the then current relevant Libor Interest Period or prior to the maturity of the relevant Bankers' Acceptances or Letters of Credit , as applicable, the total of all the Borrowings then outstanding under the relevant Credit Facility (converted, if necessary, into the Equivalent Amount thereof in Canadian Dollars) does not exceed the Commitment with respect to such Credit Facility (or such applicable lesser amount if a portion thereof has been cancelled or reduced pursuant to the terms of this Agreement). However, the Borrower shall be entitled to effect the conversion or renewal if, concurrently therewith, it pays to the relevant Lender an amount equal to the difference between such outstanding total amount and the relevant Commitment. The Borrower shall time the maturities of the Libor Interest Periods and the Bankers' Acceptances so that they fall on or before the applicable date on which principal is due to be paid in respect thereof under this Agreement in an amount at least equal to the amount of such principal being repaid so as not to exceed the relevant Commitment following such applicable date. If the Borrower fails to time such maturities in such way in respect of a Libor Loan, the relevant Lender will make the necessary arrangements for early termination of such Libor Interest Periods, in an amount sufficient to effect the repayment of principal in accordance with this Agreement, and the Borrower will pay to the relevant Lender an amount equal to any loss or expense incurred by such Lender as a result of such early termination, including but not limited to all reasonable sums (whether in respect of principal, interest or otherwise) paid or payable by a -64- Lender for funds borrowed by such Lender in order to fund or maintain the amount of any such unpaid amount, as well as any costs incurred in maintaining or rearranging deposits as a result of early termination; a certificate of the relevant Lender setting forth the basis for the determination of the amount necessary to indemnify it is, in the absence of manifest error, conclusive and binding upon the Borrower for all purposes. If the Borrower fails to time the maturities of Bankers' Acceptances as set forth above, the Borrower will, on demand by the Lender having accepted the said Bankers' Acceptances, pay to such Lender an amount in Canadian Dollars equal to the face value of the relevant unmatured Bankers' Acceptances or such lesser amount as will cover the deficiency, and, upon such payment, the Borrower shall be released of its liability to the said Lender in respect of such unmatured Bankers' Acceptances, to the extent of the amount so paid. SECTION 9.8 - EVIDENCE OF INDEBTEDNESS - ----------------------------------------------------- Each Lender shall open and maintain in its books, accounts and records evidencing the Borrowings made available by it under this Agreement. Each Lender shall record therein the amount of each Borrowing made available by it, by way of Loans and shall record therein each payment of principal on account thereof and shall record the Bankers' Acceptances accepted, paid and cancelled by it, the Letters of Credit and acceptances thereunder issued or accepted by it hereunder and the payments and cancellations in respect thereof, the FEF Contracts entered into by it with the Borrower hereunder and all payments in respect thereof and the credit cards issued under the Royal Visa Facility and all debits and credits in respect thereof, and all other amounts becoming due to such Lender under this Agreement, including interest, fees and charges and all payments on account thereof. Such accounts and records will constitute, in the absence of manifest error, PRIMA FACIE evidence of the Indebtedness of the Borrower owing to such Lender pursuant to this Agreement, the date of each Borrowing made available by such Lender and the amount thereof and the amounts which and the dates on which the Borrower has made payments from time to time on account of the principal thereof and interest thereon, fees and charges and Bankers' Acceptances accepted, paid and cancelled by such Lender, Letters of Credit and acceptances thereunder issued, accepted and paid by or to such Lender hereunder, FEF Contracts entered into and paid or terminated hereunder and credit cards issued and cancelled under the Royal Visa Facility and payments in respect thereof. ARTICLE X SUBSIDIARY GUARANTEE AND COLLATERAL DOCUMENTS SECTION 10.1 - SUBSIDIARY GUARANTEES - -------------------------------------------------- The Borrower shall deliver or cause to be delivered to the Lenders a Subsidiary Guarantee duly authorized and executed by each of the Credit Parties (other than the Borrower), the whole to serve as continuing guarantee for the payment and performance of the Obligations of the Borrower to the Lenders, both present and future, in respect of the Credit Facilities, the whole subject to the following: -65- 10.1.1 SUPPORTING DOCUMENTS: the execution of a Subsidiary Guarantee by a Credit Party shall be accompanied by certified copies of such Credit Party's constating documents, by-laws (or other equivalent document), directors' resolution authorizing the execution of such Subsidiary Guarantee, together with the legal opinion of Counsel, in form and substance acceptable to the Lenders, as to the status of such Credit Party, the due authorization and execution by it of such Subsidiary Guarantee and the validity and enforceability thereof under the laws applicable to such Credit Party; and 10.1.2 NO PREJUDICE TO OTHER DOCUMENTS: this Agreement and the other Credit Documents shall not be prejudiced by any other guarantee, security or Collateral Document, whether collateral or additional, now or hereafter held by the Lenders or either of them in respect of the Obligations, or by any exchange, release, substitution or variation of any such guarantee, security or Collateral Document or by the taking of any additional guarantee, security or Collateral Documents. SECTION 10.2 - SECURITY - ------------------------------------- The Borrower shall cause to be delivered to the Lenders, as general and continuing collateral security for the payment and performance of all Obligations to the Lenders, or either of them, both present or future, in respect of the Credit Facilities, first-ranking security over all movable or personal assets and all Real Property of the Credit Parties, subject only to Permitted Liens, all of which security shall be in form and substance satisfactory to the Lenders and shall include the documents listed below: (a) documents creating security under Section 427 of the BANK ACT (Canada) with respect to all present and future inventory of the Borrower, (b) a hypothec granted by the Borrower in favour of the Lenders, jointly, pursuant to which the Borrower grants to the Lenders a Lien on all the Real Property of the Borrower located in the Province of Quebec and the universality of all its present and future movable property, corporeal or incorporeal, wherever located, including a Lien over all the present and future outstanding Capital Stock of its Subsidiaries owned by or registered in favour of the Borrower, (c) security agreements granted by the Borrower in favour of the Lenders pursuant to which the Borrower grants to the Lenders a Lien on all of its personal or movable property, present and future, corporeal or incorporeal, wherever located, (d) a pledge agreement (which may be contained in the general security agreements referred to in paragraph (c) of this Section) granted by the Borrower in favour of the Lenders pursuant to which the Borrower pledges in favour of the Lenders all the present and future outstanding Capital Stock of the Credit Parties (other than the Borrower) owned by or registered in favour of the Borrower, together with all stock powers/powers of attorney -66- endorsed in blank by the Borrower, all necessary or desirable resolutions of the board of directors of the relevant corporation authorizing the transfer and registration of such Capital Stock in the name of the Lenders or their nominee and irrevocable proxies regarding such Capital Stock, (e) hypothecs granted by each Credit Party (other than the Borrower) located in the Province of Quebec and security agreements and mortgages granted by each Credit Party (other than the Borrower) having assets or doing business outside the Province of Quebec, in favour of the Lenders, pursuant to which such Credit Party grants to the Lenders a Lien on all of its personal or movable property, present and future, corporeal and incorporeal, wherever located (including a Lien over the shares of the Capital Stock of any of its Subsidiaries which is a Credit Party to be documented in a manner similar to that set forth in paragraph (d) of this Section) and on all the Real Property of such Credit Party, and all such Collateral Documents shall be supported by appropriate opinions of Counsel as to matters required to be dealt with by the Lenders and, if required by the Lenders, title opinions with respect to each Real Property charged under the Collateral Documents. SECTION 10.3 - ADDITIONAL COLLATERAL AND REGISTRATION - ------------------------------------------------------------------- The Borrower shall also promptly execute and deliver, and cause to be executed and delivered, to the Lenders, at the Borrower's own cost and expense, such additional or complementary security documents or such confirmations or such notices or documents containing such further description of properties (including replacement and additions to the properties forming part of the Collateral) charged or intended to be charged by the Collateral Documents as may in the reasonable opinion of the Lenders or their Counsel be necessary or advisable to create and maintain a first ranking security position on the assets and revenues of the Credit Parties, as set forth in Section 10.2, subject to Permitted Liens. The Borrower shall cause to be promptly made all registrations and filings and to be delivered all opinions, necessary, in the opinion of either of the Lenders or their Counsel, to render the Collateral Documents fully effective as first ranking security, subject to Permitted Liens (including registrations against land and, if required by the Lenders, title opinions in respect thereof). SECTION 10.4 - CONFLICT - ------------------------------------- In the case of conflict, discrepancy or difference between the provisions of this Agreement and any of the Collateral Documents, the provisions of this Agreement shall govern provided, however, that nothing herein shall limit or restrict the rights and remedies of the Lenders under any of the Collateral Documents in the absence of actual conflict, discrepancy or difference. SECTION 10.5 - NO PREJUDICE TO OTHER SECURITY - ----------------------------------------------------------- -67- This Agreement and the Subsidiary Guarantees and Collateral Documents (which are in addition to and not in substitution for any other security now or hereafter held by the Lenders) shall not be prejudiced by any other guarantee or security, whether collateral or additional, now or hereafter held by the Lenders in respect of the Borrower's obligations to the Lenders, or by any exchange, release, substitution or variation of any such guarantee or security or by taking of any additional guarantee or security. ARTICLE XI CONDITIONS TO BE SATISFIED SECTION 11.1 - CONDITIONS TO BE SATISFIED - ------------------------------------------------------- The obligation of the Lenders to make available to the Borrower Borrowings hereunder following the execution of this Agreement, is subject to and conditional upon each of the following terms and conditions first having been satisfied: 11.1.1 INITIAL CONDITIONS TO BORROWINGS: prior to the drawdown of such of the Borrowings as are not outstanding on the date of execution hereof, there shall have been delivered to each of the Lenders, in form and substance satisfactory to the Lenders: 11.1.1.1 a duly executed copy of this Agreement, 11.1.1.2 a certified copy of the constating documents and by-laws of each of the Credit Parties certified by a Responsible Officer of the related Credit Party, accompanied by good standing or equivalent certificates issued by the appropriate Governmental Body of each relevant jurisdiction; 11.1.1.3 a duly certified copy of a resolution or resolutions of the Board of Directors of each Credit Party relating to the authority of each Credit Party to execute and deliver and to perform its obligations under the Credit Documents to which it is a party and all other instruments, agreements, certificates and papers and other documents provided for or contemplated by the said Credit Documents and the manner in which and by whom the foregoing documents are to be executed and delivered, certified by a Responsible Officer of the relevant Credit Party as of the date of execution of the relevant Credit Document or other relevant document, 11.1.1.4 a certificate of each Credit Party setting forth specimen signatures of the individuals authorized to sign on its behalf the Credit -68- Documents to which it is a party and the instruments, agreements, certificates, papers and other documents provided for or contemplated by said Credit Documents, 11.1.1.5 a certificate of compliance of a Responsible Officer of the Borrower relating to the Credit Parties in form and substance substantially as attached as SCHEDULE "S", 11.1.1.6 evidence (i) of the due registration, recording or filing of the Credit Documents in all jurisdictions necessary to protect or perfect the security and rights created thereby (including each jurisdiction, other than England and Italy, wherein account debtors of the Borrower are located if the aggregate amount of accounts receivable owing to the Borrower by such account debtors located in the said jurisdiction exceeds Cdn$500,000 or the Equivalent Amount in currencies other than Canadian Dollars) and (ii) of the delivery to the Lenders of the share certificates representing the Capital Stock of Phoenix (USA) and IBRD, duly endorsed in blank (or accompanied by duly executed blank transfer certificates) and accompanied by duly executed proxies in respect thereof, 11.1.1.7 evidence of appropriate insurance coverage as provided in Section 12.1.6, showing the Lenders as loss payees thereof, 11.1.1.8 evidence that BNP (Los Angeles) has made available (i) to Phoenix (USA) the Phoenix (USA) Term Facility and (ii) to IBRD the IBRD Revolving Facility, 11.1.1.9 evidence that Phoenix (USA) has completed the Acquisition Transaction, 11.1.1.10 evidence of the payment of all fees and expenses contemplated herein, to the extent then owing, 11.1.1.11 a copy of the Laidlaw waste management contract, 11.1.1.12 evidence that all Governmental Approvals under Environmental Laws have been obtained and are in effect with respect to each of the Credit Parties, 11.1.1.13 (intentionally left blank), 11.1.1.14 evidence that each Credit Party has all necessary Governmental Approvals to operate a contract research organization (CRO), -69- 11.1.1.15 evidence (a) of the discharge of all Liens in favour of Bank of Montreal affecting the assets of the Borrower, or (b) of the full repayment and cancellation of all existing credit facilities granted by Bank of Montreal to the Borrower, including the termination or assignment of all outstanding foreign exchange forward contracts between the Borrower and Bank of Montreal, 11.1.1.16 (intentionally left blank), 11.1.1.17 evidence of the discharge of all Liens affecting the Credit Parties which are not Permitted Liens, 11.1.1.18 execution between the Lenders and BNP (Los Angeles) of an intercreditor and security sharing agreement in form and substance acceptable to the Lenders, 11.1.1.19 the favourable opinion of Counsel to each of the Credit Parties as to the status of each Credit Party, its power and capacity to enter into and perform its obligations under all Credit Documents to which it is to be a party, as to the due authorization and execution by the relevant Credit Party of such Credit Documents and as to the validity, binding effect and enforceability of each such Credit Documents and of any security intended to be created thereby and -70- as to such other matters as the Lenders may reasonably require, each such favourable opinion to be in form and substance satisfactory to each of the Lenders, 11.1.1.20 the favourable opinions of Counsel in the States of California, New Jersey, Ohio and Pennsylvania as to registration and enforceability of the Liens and rights to be created in each said jurisdictions pursuant to the Collateral Documents, and 11.1.1.21 the favourable opinion of Lenders' Counsels as to such matters as the Lenders may reasonably require; 11.1.2 CONDITIONS PRECEDENT TO EACH BORROWING: the obligation of the Lenders to make any Borrowing available to the Borrower following the execution of this Agreement is subject to the following conditions: (a) the representations and warranties of the Borrower contained in this Agreement shall be true and correct as at each Drawdown Date, Conversion Date and date of renewal of a form of Borrowing hereunder, (b) the relevant Lender shall have received the timely notice of Borrowing required pursuant to Section 3.5, 3.9, 5.1, 6.1 or 7.2.5, as applicable, (c) with respect to Borrowings under the Royal Credit Line Facility, a copy of the most recent Borrowing Base Report required by Section 12.1.8(f), and (d) no Default or Event of Default shall have occurred and be continuing (provided that if such Default or Event of Default shall have been waived as provided herein, such Default or Event of Default shall not be deemed to exist or continue in respect of the particular instance having been waived or during the waiver period, as applicable). SECTION 11.2 - WAIVER OF CONDITIONS PRECEDENT - ----------------------------------------------------------- The terms and conditions of Section 11.1 are inserted for the sole benefit of each Lender and may be waived by a Lender, in whole or in part, with or without terms or conditions, in respect of all or any portion of the Borrowings without prejudicing the rights of each of such Lender to assert such terms and conditions in whole or in part in respect of any other Borrowing. -71- ARTICLE XII COVENANTS OF THE BORROWER SECTION 12.1 - AFFIRMATIVE COVENANTS OF THE BORROWER - ------------------------------------------------------------------ While any Obligations remain outstanding or either of the Lenders has any obligations under any of the Credit Documents, the Borrower covenants and agrees with each Lender that, unless each of the Lenders shall otherwise consent in writing: 12.1.1 PAYMENT COVENANT: it will, and it will cause each of its Subsidiaries to, duly and punctually pay all sums of money due and payable by it under the terms of this Agreement and any other Credit Document at the times and places, in the currencies, and in the manner specified; 12.1.2 CORPORATE EXISTENCE: it will, and it will cause each of its Subsidiaries to, do or cause to be done all things necessary to keep in full force and effect its corporate existence and all rights, franchises, licences, approvals, privileges, consents and qualifications to carry on its business or to own, lease or operate property in each jurisdiction in which it carries on business or owns, leases or operates property where the failure to do so would have a Material Adverse Effect; 12.1.3 CONDUCT OF BUSINESS: it will, and it will cause each of its Subsidiaries to: (a) conduct its business in a proper and efficient manner, (b) diligently maintain, repair, use and operate its property and premises in a proper and efficient manner, and (c) maintain its physical assets in good condition such that each asset may be used at all times for the purpose for which it was intended; 12.1.4 COMPLIANCE WITH LAWS: it will, and will cause each of its Subsidiaries to, comply in all material respects with all Applicable Laws including, without limitation, Environmental Laws, ERISA and the RACKETEER INFLUENCED AND CORRUPT ORGANIZATIONS Chapter of the ORGANIZED CRIME CONTROL ACT OF 1970 of the United States of America, except to the extent failure to comply with such laws does not have a Material Adverse Effect; 12.1.5 PROMPT PAYMENT OF INDEBTEDNESS: it will, and it will cause each of its Subsidiaries, to promptly pay and discharge when due: (a) any Indebtedness outstanding, (b) Taxes charged or attributable to it, and -72- (c) obligations which may result in Liens (other than Permitted Liens) on its assets; unless the relevant payment, Tax or obligation is being actively and diligently contested in good faith by appropriate proceedings and is adequately reserved against on its books in accordance with GAAP, as applicable, or unless failure to comply with this Section 12.1.5 would not have a Material Adverse Effect; 12.1.6 INSURANCE: it will: (a) maintain and will cause each of its Subsidiaries to maintain with financially sound, independent and reputable insurers insurance: (A) upon all its buildings, plant and other property and assets which are of an insurable nature against such liabilities and risks including, without limitation, all risk property damage, business interruption and third party liability insurance, in such amounts, with such deductibles and in such manner, that adequately protects it and such subsidiaries and as is customary for companies carrying on businesses similar that being carried on by it or by such Subsidiaries, as the case may be, and, if applicable, as may be required by Applicable Law, or as otherwise may be reasonably requested by any of the Lenders, and, in any event, in amounts sufficient to prevent it or any of its Subsidiaries from becoming a co-insurer, except to the extent of the deductibles permitted above; (B) (i) that names each of the Lenders, as an additional insured under all liability coverages and as loss payee under all property, casualty and business interruption coverages and includes a mortgage clause acceptable to each of the Lenders; (ii) that provides that all insurance proceeds aggregating Cdn$500,000 or less per occurrence, or the Equivalent Amount thereof in any other currency, shall be payable to the Borrower or the relevant Subsidiary, as the case may be, and that all insurance proceeds aggregating more than Cdn$500,000 per occurrence, or the Equivalent Amount thereof in any other currency, shall be payable to the Lenders, and it is agreed that any such proceeds received by the Lenders shall be received as mandatary for the Borrower or the relevant Subsidiary, as the case may be and, provided that no Default or Event of Default has occurred and is continuing, shall be paid forthwith by the Lenders to the Borrower or Subsidiary, as the case may be, and, in the case of insurance proceeds in respect of damage to property, shall be used by the Borrower or Subsidiary, as the case may be, to repair or replace such property; PROVIDED HOWEVER, that after a Default or an ---------------- Event of Default has occurred and while such Default or Event of Default is continuing, all insurance proceeds shall be payable to the Lenders, and a notice from the Lenders notifying an insurer of a Default or an Event of Default shall be sufficient evidence of a Default or an Event of Default for the purpose of this provision; and (iii) that provides that the insurers thereof will give to the Lenders at least 30 days prior written notice before any of the policies evidencing such insurance is modified, terminated or cancelled except that 15 days prior written notice shall be given in the case of non-payment of any premium; PROVIDED -73- HOWEVER, that in respect of insurance to be maintained by any Subsidiary of the Borrower this clause (B) shall only be applicable to the extent that such Subsidiary is required to grant to the Lenders collateral security under or pursuant to this Agreement, (b) duly and punctually pay or cause to be paid the premiums and other sums of money payable in connection with such insurance, (c) after a Default or an Event of Default has occurred and while such Default or Event of Default is continuing, hold separate from all other funds, as mandatary of the Lenders, and pay to the Lenders promptly all insurance proceeds received and payable to the Lenders, and cause each of its Subsidiaries to do so, and (d) promptly deliver to each Lender from time to time upon request such information relating to the insurance required to be maintained under this Section 12.1.6, including insurers' certificates of insurance addressed to the Lenders confirming that such insurance is in effect and that the Lenders may rely on such certificates; 12.1.7 CONTRACTS: it will, and will cause each of its Subsidiaries to: (a) faithfully observe, perform and discharge the covenants, conditions and obligations imposed on it by any contract, agreement, lease, license or other instrument in which it has any interest or to which it is a party, except to the extent and for so long as its obligation to do so is contested in good faith by it unless failure to comply with this Section 12.1.7 does not have a Material Adverse Effect, and (b) do all other things necessary or expedient in order to preserve, protect, maintain and renew any such contract, agreement, lease, license or other instrument and all of its rights thereunder and under each renewal or replacement thereof, to the extent necessary for the conduct of the business -74- of the Borrower or such Subsidiary, unless failure to comply with this Section 12.1.7 does not have a Material Adverse Effect; 12.1.8 FINANCIAL STATEMENTS AND INFORMATION: it will, and will cause each of its Subsidiaries to, keep and maintain proper books of account and other accounting records and it will furnish or cause to be furnished to each Lender: (a) as soon as available and, in any event, within 60 days after the end of the first three quarterly accounting periods in each fiscal year, copies of the Consolidated and unconsolidated financial statements of the Borrower, and the unconsolidated financial statements of each Subsidiary and Affiliate of the Borrower, prepared in-house in accordance with GAAP as of the close of such quarter, setting forth in each case in comparative form the figures for the corresponding periods of the previous fiscal year, (b) as soon as available and, in any event, within 90 days after the end of each fiscal year, copies of the Consolidated and unconsolidated financial statements of the Borrower, and the unaudited unconsolidated financial statements of each Subsidiary and Affiliate of the Borrower, as of the end of such fiscal year, together with comparative figures for the immediately preceding fiscal year, all prepared in accordance with GAAP in reasonable detail and accompanied, in the case of the Borrower, by the unqualified opinion thereon of the Auditors, except with respect to a qualification or exception relating to a change in its application of accounting principles, which change shall be concurred in by the Auditors, (c) as soon as available and, in any event, within 120 days after the end of each fiscal year, the Borrower's annual report to its shareholders, (d) within 90 days of its fiscal year end commencing with the fiscal year ending on August 31, 1998 an Annual Budget for the current fiscal year in form and substance acceptable to the Lenders, (e) concurrently with the financial statements referred to in Sections 12.1.8(a) and 12.1.8(b), a compliance certificate, signed by a Responsible Officer of the Borrower, substantially in the form of SCHEDULE "S", certifying (a) that the financial and other information contained therein is true and correct in all material respects as of the date the certificate is delivered to the Lenders, (b) that the officer executing such certificate has no knowledge of any Default or Event of Default, which is continuing or, if such officer does have knowledge of any such Default or Event of Default, describing the Default or Event of Default, including the date of its commencement and any remedial action taken, (c) that the officer executing such certificate has no knowledge of any Material Adverse Effect which has not been cured or waived in writing by the Lenders, and -75- (d) as to certain details and calculations, as specified therein, with respect to compliance with the covenants set forth in Section 12.1.28, (f) within 60 days after the end of each quarterly accounting period in each fiscal year, a report signed by a Responsible Officer of the Borrower setting forth, as at the end of such quarterly period, the Borrowing Base of the Borrower as well as the order backlog of the Borrower, such report to be in the form and substance of SCHEDULE "A", (g) promptly after the same are sent, copies of all financial statements, reports and other disclosure information which the Borrower or any of its Subsidiaries makes public or sends to its common or preferred stockholders as a class, and promptly after the same are filed, copies of all regular or periodic reports or similar materials filed by the Borrower or any of its Subsidiaries with any securities exchange or securities commission or similar governmental authority, and (h) promptly following the request of a Lender therefor, such other information relating to the Borrower or any of its Subsidiaries, including without limitation, information relating to their financial or other condition, business, assets, operations or prospects, as a Lender may from time to time reasonably request, in each case, in form and substance and certified in a manner satisfactory to the requesting Lender; 12.1.9 CHANGE IN AUDITORS: it will promptly give notice to each Lender of a change in its Auditors and the reasons underlying the change; 12.1.10 NOTICE OF DEFAULT AND OTHER EVENTS: it will promptly, after obtaining knowledge thereof, give notice to each Lender of the occurrence of any Default or Event of Default and of any event which constitutes a default to comply with any of the terms and conditions of the Phoenix (USA) Term Facility or the IBRD Revolving Facility, including the date of its commencement and the action which it or its relevant Subsidiary proposes to take with respect to the same and the estimated date when the same will be remedied or resolved; it will also promptly after the occurrence of any event which has had or is reasonably likely to have a Material Adverse Effect notify each Lender of the details thereof; 12.1.11 NOTICE OF BREACH OF PERMIT: it will give prompt written notice to each Lender of any breach of any certificate, approval, permit, consent, order or direction concerning its operations or that of any of its Subsidiaries or concerning the installation or operation of any of its equipment or facility or machinery, equipment or facility of any of its Subsidiaries or concerning any structure, activity, or facility on any of its lands or premises or the lands or premises of any of its Subsidiaries, which breach could have a Material Adverse Effect; -76- 12.1.12 NOTICE OF LITIGATION: it will promptly give notice to each Lender of the occurrence of any litigation, proceeding or dispute affecting it or any of its Subsidiaries if its result could have a Material Adverse Effect and will from time to time provide all reasonable information requested by any Lender concerning the status of any such litigation, proceeding or dispute; 12.1.13 ACCESS: it will, and will cause each of its Subsidiaries to, permit each Lender or representatives of any Lender, to inspect its properties, as the case may be, and make abstracts from and copies of their books, accounts and records and discuss their affairs with its management, all at such reasonable times as such Person may desire upon giving prior reasonable notice to whole at the expenses of the Borrower; 12.1.14 RELIANCE: it will permit each Lender to rely on the authority of the individuals providing any certificate, report, notices and other information delivered under any of the Credit Documents including, without limitation, the certificate and reports delivered under Section 12.1.8, until notice to the contrary is received by each Lender; 12.1.15 CHANGE OF NAME, NEW LOCATIONS: it will advise each Lender or cause each Lender to be advised in writing not less than 30 days before any of the Credit Parties (A) makes any change to its name or (B) changes the location of its chief executive office or principal place of business or acquires any new such locations, other than those set forth in SCHEDULE "G"; before any such change of name or of location or before any acquisition of another location (whether by purchase, lease or otherwise) by the Borrower or any of its Subsidiaries, the Borrower shall provide the Lenders with such financing statements, charges, assignments, hypothecs, security interests, (and, on a best efforts basis, landlord agreements, warehouseman/bailee agreements, mortgagee consents and agreements), other Credit Documents and legal opinions as any of the Lenders may reasonably require in order to assure and maintain the perfected, first priority Lien on the Collateral, subject only to Permitted Liens, and to assure access thereto; 12.1.16 MAINTENANCE OF, AND ADDITIONAL, SECURITY: it will fully and effectually maintain and keep maintained and cause each of the other Credit Parties having granted security to the Lenders pursuant to any of the Credit Documents to fully and effectually maintain and keep maintained the Liens granted pursuant to the Credit Documents as valid, effective and perfected, first priority Liens at all times -77- (subject to Permitted Liens) so long as any of the Obligations shall be outstanding and will, in this respect, comply with the provisions of Article X. Without restricting the foregoing, within 60 days of a request therefor by the Lenders, the Borrower shall, at its expense, cause additional Liens to be granted to the Lenders and/or registrations, recordings or filings to be made, in England and/or Italy and/or any other jurisdiction (as the Lenders may reasonably designate in the said request) so as to ensure that the Lenders shall have first priority Liens (subject to Permitted Liens) over the accounts receivable owing to the Borrower by account debtors located in the said jurisdiction for aggregate amounts in excess of Cdn$500,000 or the Equivalent Amount in currencies other than Canadian Dollars, the whole supported by legal opinions satisfactory to the Lenders; 12.1.17 LIENS ON AFTER-ACQUIRED PROPERTY: it will promptly notify the Lenders of any Real Property owned or acquired by the Borrower or any of the other Credit Parties after the date hereof which is not listed on SCHEDULE "E" and not then subject to a Lien in favour of the Lenders. It will, within 30 days after the request of the Lenders, execute or cause to be executed by the relevant Credit Party in favour of and deliver to the Lenders all agreements and other documentation necessary to establish in favour of the Lenders perfected, first priority Liens (subject to Permitted Liens) in all such Real Property, in form and substance satisfactory to the Lenders, and opinions of counsel acceptable to the Lenders, in form and substance satisfactory to the Lenders, as to, among other things, the validity and perfection of such Liens and the enforceability of such Liens, PROVIDED that the requirements of this Section 12.1.17 shall not apply to Subsidiaries, if any, not required to provide security to the Lenders pursuant to this Agreement; 12.1.18 INTELLECTUAL PROPERTY it will, and it will cause each of its Subsidiaries to, make application to register its material Intellectual Property, as is appropriate in its best interests, and use its best efforts to preserve and maintain all of its material Intellectual Property, as is appropriate in its best interests; with respect to all options or licence rights constituting material Intellectual Property in which security was granted to the Lenders pursuant to any of the Credit Documents, it shall promptly deliver or cause to be delivered to the Lenders, in form and substance satisfactory to them, acting reasonably, an agreement duly executed by each owner and (in the case of rights sub-licensed to any of the Credit Parties) licensor of such Intellectual Property consenting to the grant of security in such rights and Lenders' use of such rights on the exercise of their rights and remedies under the Credit Documents; 12.1.19 DISTRIBUTIONS FROM SUBSIDIARIES: it shall cause all of its Subsidiaries to make cash Distributions to or for the benefit of the Borrower so as to ensure that the -78- Borrower shall at all times remain Solvent and able to meet its payment and other Obligations under all Credit Documents; 12.1.20 SUPPLEMENTAL DISCLOSURE. the Borrower will promptly supplement each Schedule with respect to any matter arising after the date hereof which, if existing on or before the date hereof, would have been required to be set out or described in such Schedule or which is necessary to correct any information in such Schedule which has been rendered inaccurate after the date hereof; provided, however, that such supplemental disclosure shall not constitute a cure or waiver of any Default or Event of Default arising or existing as a result of the matter so disclosed; 12.1.21 CANADIAN BENEFIT AND PENSION PLANS: (a) for each existing Canadian Pension Plan and Canadian Benefit Plan and for any Canadian Pension Plan or Canadian Benefit Plan hereafter adopted, it will, and will cause its Subsidiaries to, perform, in a timely fashion, all obligations (including fiduciary, funding, investment and administration obligations) required to be performed in connection with such plan and the funding media therefor in accordance with the terms of such plan and all Applicable Laws, (b) it will, and will cause its Subsidiaries to, deliver to the Lenders (i) if requested by a Lender, acting reasonably, promptly after the filing thereof by it or one of its Subsidiaries with the appropriate authorities, copies of each annual and other return, report or valuation with respect to each Canadian Pension Plan, copies of any actuarial report with respect to each Canadian Pension Plan and a copy of the audited annual financial report with respect to each Canadian Pension Plan and (ii) promptly after receipt thereof, a copy of any direction, notice or other communication in respect of any breach of Applicable Law relating to the Canadian Pension Plans and Canadian Benefit Plans of the Borrower and its Subsidiaries (a) which would have the effect of increasing the funding obligation in respect of each such plan, or (b) which could result in the imposition of any Lien on any of the properties or assets of the Borrower or one of its Subsidiaries, as well as a copy of any order or ruling that such Credit Party may receive from any applicable authority with respect to any Canadian Pension Plan or Canadian Benefit Plan; 12.1.22 ERISA REPORTING: the Borrower will make, or cause its Subsidiaries to make, the following reporting to the Lenders: (a) ERISA EVENTS AND ERISA REPORTS: (i) promptly and, in any event, within ten days after the Borrower or any of its Subsidiaries or any ERISA Affiliate knows or has reason to know that any ERISA Event has occurred, -79- a statement of a Responsible Officer of the Borrower describing such ERISA Event and the action, if any, that the Borrower or such Subsidiary or such ERISA Affiliate has taken and proposes to take with respect thereto, and (ii) on the date any records, documents or other information must be furnished to the PBGC with respect to any Plan pursuant to Section 4010 of ERISA, a copy of such records, documents and information; (b) PLAN TERMINATIONS: promptly and, in any event, within two Business Days after receipt thereof by the Borrower or any of its Subsidiaries or any ERISA Affiliate, copies of each notice from the PBGC stating its intention to terminate any Plan or to have a trustee appointed to administer any Plan; (c) ACTUARIAL REPORTS: promptly upon receipt thereof by the Borrower or any of its Subsidiaries or any ERISA Affiliate, a copy of the annual actuarial valuation report for each Plan the funded current liability percentage (as defined in Section 302(d)(8) of ERISA) of which is less than 90%; (d) PLAN ANNUAL REPORTS: promptly and, in any event, within 30 days after the filing thereof with the Internal Revenue Service of the United States of America, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Plan; and (e) MULTIEMPLOYER PLAN NOTICES: promptly and, in any event, within five Business Days after receipt thereof by the Borrower or any of its Subsidiaries or any ERISA Affiliate from the sponsor of a Multiemployer Plan, copies of each notice concerning (i) the imposition of Withdrawal Liability by any such Multiemployer Plan, (ii) the reorganization or termination, within the meaning of Title IV of ERISA, of any such Multiemployer Plan or (iii) the amount of liability incurred, or that may be incurred, by the Borrower or such Subsidiary or any ERISA Affiliate in connection with any event described in clause (i) or (ii); 12.1.23 ENVIRONMENTAL MATTERS: it shall, and shall cause each of its Subsidiaries to, comply strictly and in all respects with the requirements of environmental protection laws, regulations, by-laws and other requirements applicable to its property and activities and shall notify the Lenders immediately in the event of any release or discovery of any contaminant upon, under, over or within its property or any continguous real property or any real property on or near which a contaminant could reasonably be anticipated to be released that may materially adversely affect its property and activities; 12.1.24 ENVIRONMENTAL PERMITS: it shall, and shall cause each of its Subsidiaries to, promptly forward to the Lenders copies of all notices, permits, orders, demands or other documents and reports in connection with any release or the presence of any -80- contaminant or any matters relating to environmental protection laws or otherwise as they materially affect its property and activities; 12.1.25 ENVIRONMENTAL INFORMATION: it shall, and shall cause each of its Subsidiaries to, provide the Lenders, upon demand and at the Borrower's expense, with all the information that a Lender may reasonably require regarding the environmental situation of the Borrower or any of its Subsidiaries, notably concerning their respective activities, movable and immovable property, including an environmental audit report prepared by an environmental engineering firm acceptable to the Lenders. The Borrower acknowledges that it will be reasonable for a Lender to periodically request from the Borrower a confirmation that the statements regarding the environment contained herein are still true and that as of the date of such confirmation, no event occurred that may materially affect in any way its property and activities or that of its Subsidiaries insofar as environmental protection is concerned; 12.1.26 ENVIRONMENTAL ACCESS: it shall, and shall cause each of its Subsidiaries to, allow each Lender and its agents reasonable access to its property or to any information regarding its property or activities to enable such Lender to assess the risk that the environmental situation of the Borrower or any of its Subsidiaries represents to the Lenders, to anticipate its effect or to take corrective action; 12.1.27 SAINT-LAURENT PROPERTY: within 30 days from the date of execution of this Agreement, the Borrower shall deliver to the Lenders, in form and substance satisfactory to the Lenders, a copy of a subdivision plan dated no earlier than in 1995 and a copy of a title report (which need not be addressed to the Lenders) with respect to the Real Property of the Borrower located in Saint-Laurent described in SCHEDULE "E"; such plan, if dated more than three months prior to the date of execution of this Agreement, shall be accompanied by a certificate of a Responsible Officer of the Borrower to the effect that the said Real Property has not been subject to any structural change since the date of the said plan and that such plan accurately sets forth the present state of the said Real Property; 12.1.28 FINANCIAL RATIOS: the Borrower will maintain, on a Consolidated basis: 12.1.28.1 a Shareholders' Equity of not less than: -81- - Cdn$110,000,000, as at February 28, 1998 through to November 29, 1998, - Cdn$115,000,000, as at November 30, 1998 through to August 30, 1999, - Cdn$120,000,000, as at August 31, 1999 and at all times thereafter; 12.1.28.2 a Coverage Ratio, for each period of four consecutive fiscal quarters, of not less than: - for the period of four consecutive fiscal quarters ending on February 28, 1998: 4.00:1.00, - for the period of four consecutive fiscal quarters ending on May 31, 1998: 3.25:1.00, - commencing with the period of four consecutive fiscal quarters ending August 31, 1998 and for each period of four consecutive fiscal quarters thereafter: 1.75:1.00; 12.1.28.3 a Current Ratio of not less than: - at all times during the fiscal year ending August 31, 1998: 1.00:1.00, - at all times during the fiscal year ending August 31, 1999: 1.15:1.00, and - at all times after August 31, 1999: 1.35:1.00; and 12.1.29 KEY MEN: the Borrower shall ensure that Dr. John W. Hooper and Dr. Lucien Steru shall remain closely associated with the Borrower or its Subsidiaries, either as employees, officers or directors, on a permanent basis until the termination of this Agreement. SECTION 12.2 NEGATIVE COVENANTS OF THE BORROWER - ------------------------------------------------------------- While any Obligations remain outstanding or either of the Lenders have any obligations under any of the Credit Documents, the Borrower covenants and agrees with each of the Lenders that, unless the Lenders shall otherwise consent in writing: 12.2.1 NEGATIVE PLEDGE: it will not, nor will it permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon any of its undertaking, property, -82- rights, revenues or assets, whether now owned or hereafter acquired, save for Permitted Liens; 12.2.2 SALE OF ASSETS: it will not, and will not permit any of its Subsidiaries to, sell, alienate, assign, lease or otherwise dispose of any of its property and assets, whether now owned or possessed or hereafter acquired or possessed, or enter into any sale and leaseback transaction with respect to any such property or assets, save for sales, alienations, assignments or leases of property and assets of the Borrower and its Subsidiaries in the ordinary course of business and for the purpose of carrying on the same and save for dispositions of assets having a fair market value of less than five percent of the total assets of the Borrower and all its Subsidiaries in any fiscal year, unless otherwise consented to by the Lenders (which consent shall not be unreasonably withheld or delayed); 12.2.3 INDEBTEDNESS, GUARANTEES, LOANS: it will not, nor will it permit the other Credit Parties to, incur additional Indebtedness, or enter into or assume any responsibility under any Guarantee, or make any additional loans to or investments in any other Person, if the aggregate amount of the foregoing additional indebtedness, guarantees and loans at any one time outstanding would exceed US$1,600,000, including, for purposes of clarification, the following: (a) Guarantees outstanding on the date hereof in favour of Star Bank, N.A. of Cincinnati in the principal amount of US$1,300,000, and (b) a Guarantee outstanding on the date hereof in favour of Human Biologics International Inc. in the principal amount of US$300,000; 12.2.4 REORGANIZATION AND AMALGAMATION: it will not, and will not permit any of the other Credit Parties to, wind up, liquidate or dissolve its business, affairs or assets or enter into any transaction of reorganization, amalgamation, merger or consolidation, or convey, sell, lease or otherwise dispose of (or agree to do any of the foregoing at any future time) any substantial part of its property and assets, save as permitted under Section 12.2.2, and except that IBRD may be amalgamated with Phoenix (USA) (the continuing corporation from any such amalgamation, the "CONTINUING CORPORATION"); provided that (i) the Lenders have received 30 days' prior written notice of such amalgamation, (ii) the Continuing Corporation shall have assumed all of the obligations of the amalgamating corporations under all the Credit Documents to which one or more amalgamating corporations are parties and shall have agreed to be bound by all such Credit Documents in one or more supplemental indentures in form and substance satisfactory to the Lenders, acting reasonably, and shall have delivered such supplemental indentures to the Lenders, (iii) no condition or event shall exist either at the time of or immediately after any such amalgamation and after giving full effect thereto or after the Continuing Corporation complies with the provisions of clause (ii) above which constitutes a Default or Event of Default, -83- (iv) such amalgamation shall be carried out on such terms and in such manner as will preserve and not impair or be prejudicial to the interests of the Lenders, (v) after giving effect to such amalgamation, the Lenders shall have a perfected, first priority Lien, subject only to Permitted Liens, in all property rights and assets of the Continuing Corporation and (vi) the Lenders shall have received such other documents, instruments, agreements, waivers, consents, legal opinions (including, without limitation, as to each amalgamation being on terms as to preserve and not impair any of the rights and remedies of the Lenders) and certificates as the Lenders may request in connection with such transactions; 12.2.5 NO CHANGE IN NATURE OF BUSINESS: it will not, and it will ensure that each of the other Credit Parties do not significantly change the nature of its business; 12.2.6 DISTRIBUTIONS: it will not, and will not permit any of its Subsidiaries to, make any Distribution other than as required by Section 12.1.19; 12.2.7 CAPITAL EXPENDITURES: it will not, and will not allow any of its Subsidiaries to undertake any Capital Expenditures (including investments) hereafter exceeding an aggregate amount of Cdn$15,000,000 in fiscal year 1998 and of Cdn$10,000,000 in fiscal year 1999; and 12.2.8 FINANCIAL YEAR: it will not, and it will cause each of its Subsidiaries not to, change its financial year, except for a change thereof to a financial year-end identical to that of the Borrower; ARTICLE XIII REIMBURSEMENT OF EXPENSES AND INDEMNITY SECTION 13.1 - REIMBURSEMENT OF EXPENSES - ------------------------------------------------------ All statements, reports, certificates, opinions and other documents or information required to be furnished to the Lenders or either of the Lenders by the Borrower or the other Credit Parties under this Agreement and the other Credit Documents shall be supplied without cost to the Lenders. Furthermore, the Borrower agrees to reimburse promptly to the Lenders or either of the Lenders on demand, all of the Lenders' reasonable legal fees, costs and other out-of-pocket expenses (and tax on goods and services in respect thereof) incurred from time to time in the preparation, negotiation, execution, registration, if applicable, and operation of this Agreement and the related documents, including the Subsidiary Guarantees and the Collateral Documents. In addition, the Borrower agrees to pay all of such legal fees, costs and expenses (and tax on goods and services in respect thereof) of each of the Lenders incurred in the enforcement of this Agreement and of any other document to be executed and issued as provided herein, including the Subsidiary Guarantees and the Collateral Documents. -84- The Borrower will reimburse the Lenders and either of them promptly with interest after written demand at a rate per annum equal to the applicable rate set forth in Section 4.2 for any and all expenditures which the Lenders or either of them may from time to time make, lay out or expend pursuant to this Section 13.1 and in providing such protection in respect of insurance, discharge of Liens, Taxes, dues, assessments, governmental charges, fines and penalties lawfully imposed, repairs, attorney's fees and other matters as the Borrower or any other Credit Party is obligated herein or in any other Credit Document to provide, but fails to provide. Such reimbursement obligations shall be an additional Indebtedness due from the Borrower and shall be payable by the Borrower on demand. The Lenders though privileged so to do, shall be under no obligation to the Borrower to make any such expenditure and the making thereof by a Lender shall not relieve the Borrower or any other Credit Party of any default in that respect. SECTION 13.2 - INDEMNITY - -------------------------------------- Whether or not a Default or an Event of Default has occurred, the Borrower covenants and undertakes to indemnify, defend, protect and hold harmless each of the Lenders and its directors, officers, employees, attorneys, trustees and agents (collectively, the "INDEMNITEES") against and from all losses, damages (including foreseeable and unforeseeable consequential damages and punitive damages), expenses, liabilities, obligations, penalties, actions, judgements, suits, claims, costs, expenses and disbursements (including reasonable attorneys' and consultants' fees and disbursements) (hereinafter, "LOSSES") which any Indemnitee may sustain or incur (including, without limitation, any loss of profit and expenses a Lender may incur (a) by reason of the liquidation, re-employment or re-deployment of deposits or other funds acquired by such Lender to fund or to maintain the Borrowings, (b) by reason of any interest, charges or other amounts paid or payable by a Lender to providers of funds borrowed or acquired in order to make, to fund or to maintain the Borrowings or any amount unpaid by the Borrower or other Credit Party hereunder or under any of the other Credit Documents or (c) by reason of the termination, or otherwise in connection with, any Letter of Credit or FEF Contract) as a consequence of or in connection with (including without limitation, in connection with any investigation, litigation or proceeding or preparation of a defence in connection therewith): 13.2.1 the Acquisition Transaction, 13.2.2 the Credit Facilities and any use made or proposed to be made with the proceeds thereof, 13.2.3 any failure of the Borrower to borrow in the amount and on the date specified therefor in any notice of Borrowing pursuant to this Agreement, 13.2.4 any failure of the Borrower to timely provide a conversion or renewal notice when required in respect of any Borrowing pursuant to the terms hereof, 13.2.5 any failure of the Borrower to make a payment, repayment, prepayment or conversion specified in a notice of repayment, prepayment or conversion hereunder, or when otherwise due hereunder, -85- 13.2.6 the payment by the Borrower of principal amounts in respect of a Libor Loan or a Bankers' Acceptance on any day other than the last day of the related Libor Interest Period or other than the date of maturity of such Bankers' Acceptance, as the case may be, 13.2.7 the payment of amounts owing in respect of an FEF Contract on a day other than the scheduled expiry thereof, 13.2.8 the issuance of any Letter of Credit as contemplated herein or any of the matters contemplated by the provisions of Section 6.6, 13.2.9 the issuance of credit cards under the Royal Visa Facility and any use of such credit cards or any claim made in respect thereof, 13.2.10 any misrepresentation by the Borrower or any other Credit Party contained in or delivered in writing in connection with this Agreement, the other Credit Documents or the Acquisition Transaction, 13.2.11 the occurrence of a Default or an Event of Default, 13.2.12 defending and/or counterclaiming or claiming over against third parties in respect of any action or matter in connection with or relating to this Agreement, or the other Credit Documents, or 13.2.13 the actual or alleged presence of Hazardous Materials on, under or in any Properties or the escape, seepage, leakage, spillage, discharge, emission or release from, any Property or into or upon any land, the atmosphere, or any watercourse, body of water or wetland, of any Hazardous Materials or any Environmental Claim relating to the Borrower, any other Credit Party or any other Subsidiaries of the Borrower, or any of the Properties or arising out of the use of any of the Properties; and the provisions of and undertakings and indemnification set out in this Section shall survive the satisfaction and release of the Subsidiary Guarantees, the Collateral Documents and other security for, and payment and satisfaction of the Indebtedness and liability of the Borrower to the Lenders pursuant to this Agreement and the other Credit Documents. Without restricting the foregoing provisions, in the event that BNP's Fixed Rate Loan is repaid prior to the expiry of its term as agreed to at the time of the granting thereof, the Borrower will pay to BNP an additional indemnity equal to the surplus of (a) the interest which the repaid amount would have produced, at the applicable interest rate on the date of reimbursement, for the period beginning at such date and ending on the Maturity Date, over (b) the interest which the repaid amount would have produced, for the same period, at BNP's then prevailing rate for a term deposit of the same amount and period, as posted by BNP. -86- SECTION 13.3 - SURVIVAL OF INDEMNIFICATION OBLIGATIONS - -------------------------------------------------------------------- Without prejudice to the survival or termination of any other agreement of the Borrower under this Agreement, the obligations of the Borrower under Sections 13.1 and 13.2 shall survive the payment of principal and interest on all Borrowings and the termination of the Commitments. ARTICLE XIV OTHER TAXES SECTION 14.1 - OTHER TAXES - ---------------------------------------- The Borrower covenants and agrees that it will pay any documentary, stamp or other Taxes (including interest and penalties) which may be payable or determined to be payable by any governmental or taxation authority in respect of the execution and delivery of this Agreement, the other Credit Documents and the related documents, including the Bankers' Acceptances, Letters of Credit or acceptances thereunder, FEF Contracts and credit cards issued under the Royal Visa Facility and transactions thereunder or the performance of the terms and provisions hereof or thereof, and will save each of the Lenders harmless against any loss or liability resulting from non-payment or delay in payment of any such documentary, stamp or other Taxes. SECTION 14.2 - SURVIVAL OF OBLIGATIONS - ---------------------------------------------------- The obligation of the Borrower under Section 14.1 to pay the Taxes referred to therein shall survive the payment of principal and interest on all Borrowings and the termination of the Commitment if such Taxes have not been paid. ARTICLE XV EVENTS OF DEFAULT SECTION 15.1 - EVENTS OF DEFAULT - ---------------------------------------------- The occurrence of any one or more of the following events or circumstances shall constitute an Event of Default under this Agreement: 15.1.1 FAILURE TO PAY: if the Borrower defaults (a) in the payment of any principal sum payable hereunder when the same shall become due and payable or (b) in the payment of any interest, fees or other sum payable hereunder other than principal within three days of the time the same shall become due and payable; -87- 15.1.2 BREACH OF FINANCIAL COVENANTS: if the Borrower breaches any financial ratio set forth in Section 12.1.28 of this Agreement; 15.1.3 OTHER BREACHES: if the Borrower fails to carry out or observe any covenant or condition contained in this Agreement (other than under Sections 12.1.1 or 12.1.28) or in any other agreement with a Lender, to be observed or performed by the Borrower and such failure, if capable of being cured, shall remain uncured for a period of 10 days following notice by a Lender; 15.1.4 BANKRUPTCY: the occurrence of any Act of Bankruptcy (as defined below); for the purposes of this Section 15.1.4, an "ACT OF BANKRUPTCY" means any of the following: (a) any Credit Party admits in writing its inability to pay its debts generally as they become due, (b) any Credit Party makes a general assignment for the benefit of creditors, (c) any Credit Party becomes subject to any bankruptcy proceedings which it is not contesting in good faith, diligently and by appropriate means or which proceedings continue undischarged, unstayed or undismissed for a period of 45 days, (d) any Credit Party submits to or makes any application for the purpose of suspension of payment of its liabilities, (e) any Credit Party petitions to or applies to any tribunal or authority for the appointment of any administrator, receiver, trustee or intervenor for it or for any substantial part of its property, (f) any Credit Party commences or has commenced against it any proceedings (including a notice of intention or a proposal under the BANKRUPTCY AND INSOLVENCY ACT (Canada) and including any proceeding under the COMPANIES CREDITORS' ARRANGEMENT ACT (Canada)) under any domestic or foreign law, statute, regulation or decree whether now or hereafter in effect, relating to it or its debt, reorganization, arrangement, adjustment, dissolution or liquidation, which proceedings it is not contesting in good faith, diligently and by appropriate means or which proceedings continue undischarged, unstayed or undismissed for a period of 45 days, (g) any Credit Party becomes bankrupt within the meaning of the BANKRUPTCY AND INSOLVENCY ACT (Canada), or any successor or equivalent legislation in any jurisdiction, -88- (h) any Credit Party by any act indicates its consent to, approval of, or acquiescence in any bankruptcy, reorganization or insolvency proceeding under any domestic or foreign law relating to bankruptcy, insolvency or relief of debtors or any proceeding for the appointment of a receiver or trustee for itself or for any substantial part of its property or suffers any such receivership or trustee to remain undischarged for a period of 45 days, (i) the directors or shareholders of any Credit Party pass a resolution for the winding-up or dissolution of such Credit Party, or any Credit Party instigates proceedings for its winding-up or dissolution or consents to, approves of or acquiesces in, any filing or petition with respect to such proceedings, (j) either Lender receives a request, in respect of the Borrower, from any relevant taxing authority as contemplated by Section 3.13; 15.1.5 SEIZURE: if an encumbrancer takes possession of any part of the assets of any Credit Party having a book value or a fair value in excess of Cdn$500,000 or the Equivalent Amount in other currencies, or if a seizure, distress or execution or any similar process is levied or enforced thereagainst and remains unsatisfied for such period as would permit such part thereof, to be sold thereunder; 15.1.6 JUDGMENT: if a final judgment or order of a court for the payment of money in excess of Cdn$500,000 or the Equivalent Amount in any other currency is rendered against any Credit Party and is not paid or discharged within 30 days; 15.1.7 INVALIDITY OR UNENFORCEABILITY: if at any time a court of competent jurisdiction makes any judgment or order or any law, ordinance, decree or regulation is enacted, the effect whereof is to render this Agreement or any of the other Credit Documents or any material provision hereof or thereof, invalid or unenforceable, and if within 30 days after the making of such judgment, order, law, ordinance, decree or regulation, the Borrower fails to furnish or cause to be furnished to the Lenders replacement documents evidencing and, where applicable, guaranteeing or securing its Indebtedness hereunder which are adequate in the opinion of the Lenders; 15.1.8 CROSS-DEFAULT: if any Credit Party fails to pay upon demand, in the case of monies payable on demand, or at maturity, or within any applicable period of grace, any obligation for monies borrowed, raised or guaranteed in an amount of Cdn$500,000 or more or the Equivalent Amount in any other currency or fails to observe or perform any term, covenant or agreement contained in any agreement by which it is bound evidencing or securing monies borrowed, raised or guaranteed in an amount of Cdn$500,000 or more or the Equivalent Amount in any other currency, and, as a result, the holder or holders, or beneficiary or -89- beneficiaries, thereof or of any such obligations issued thereunder cause or are entitled to cause the acceleration of the maturity thereof or of any such obligation; 15.1.9 PHOENIX (USA) TERM FACILITY AND IBRD REVOLVING FACILITY: if there occurs an "event of default" within the meaning of the Phoenix (USA) Term Facility or the IBRD Revolving Facility, PROVIDED that any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied; 15.1.10 CEASING TO CARRY ON BUSINESS: if any Credit Party ceases or threatens to cease to carry on in the ordinary course its business or a substantial part thereof; 15.1.11 OWNERSHIP OF SUBSIDIARIES: if either of Phoenix (USA) or IBRD ceases at any time to be Wholly-Owned Subsidiaries of the Borrower; 15.1.12 REPRESENTATIONS AND WARRANTIES: if any representation or warranty made by any Credit Party in this Agreement, in any other Credit Document or in any document or certificate furnished to the Lenders in connection herewith or therewith shall prove at any time to have been incorrect in any material respect, as at the date made or deemed to have been made; 15.1.13 SUBSIDIARY GUARANTEES AND COLLATERAL DOCUMENTS: if any of the Subsidiary Guarantees and Collateral Documents ceases for any reason to be in full force and effect at any time, with or without the Lenders being notified thereof; 15.1.14 ENVIRONMENTAL MATTER: if there occurs a material breach of any law, regulation, by-law or requirement, whether federal, provincial, state, municipal or otherwise, concerning pollution of the environment, toxic materials, or other environmental hazards, or public health and safety, affecting any of the Credit Parties' property or activities; or 15.1.15 MATERIAL ADVERSE CHANGE AND DETRIMENTAL LEGAL PROCEEDINGS: if, in the opinion, of either of the Lenders: (a) there occurs an event, act, circumstance or condition (financial or other) which constitutes a Material Adverse Change, or (b) any Credit Party is subject to legal proceedings detrimental to the affairs of the Borrower, and such act, circumstance or condition or such legal proceeding, if capable of being remedied or terminated, has not been remedied or terminated in a manner satisfactory to the Lenders within ten days following written notice thereof by a Lender to the Borrower. -90- SECTION 15.2 - ACCELERATION Without in any way restricting the right of BNP, at its sole discretion, to terminate at any time the BNP FEF Facility and of Royal, at its sole discretion, to terminate at any time the Royal Credit Line Facility, the Royal FEF Facility and the Royal Visa Facility, or any of them, and to require at any time the payment of any Borrowings under demand facilities hereunder, upon the occurrence and during the continuance of any Event of Default with respect to a Lender, such Lender may declare its Commitment to be terminated and thereby terminate the right of the Borrower to apply for further Borrowings from such Lender, and in addition such Lender may, by written notice to the Borrower declare all Indebtedness and liabilities of the Borrower outstanding to the said Lender hereunder to be immediately due and payable without presentation, demand, protest or other notice of any kind, all of which are expressly waived by the Borrower, provided that the Commitments of both Lenders and the right of the Borrower to apply for further Borrowings shall automatically be terminated and all Indebtedness and liabilities of the Borrower to the Lenders outstanding hereunder shall be immediately due and payable without any written notice to the Borrower as provided above and without any other presentation, demand, protest or other notice of any kind if an Event of Default has occurred in respect of a Credit Party pursuant to Section 15.1.4. In such event, the Borrower shall pay immediately to the Lender having given the written notice or to both Lenders (in the case of an Event of Default under Section 15.1.4), as applicable, and the Borrower hereby acknowledges that it shall then be indebted for the payment of all amounts owing or payable under this Agreement to the Lender having given the aforementioned written notice or to both Lenders (in the case of an Event of Default under Section 15.1.4), as applicable, including, without limitation: (a) all principal and interest owing in respect of outstanding Loans with such Lender or Lenders, as applicable, (b) the face amount of all Bankers' Acceptances accepted by the said Lender or Lenders, as applicable, and outstanding, together with the Discount and Acceptable Fees unpaid in respect thereof, (c) an amount equal to the full outstanding amount of all Letters of Credit issued hereunder by such Lender or Lenders, as applicable, together with all fees and costs in respect thereof, (d) an amount equal to all such amounts, if any, as would then have to be paid by the Borrower to the said Lender or Lenders, as applicable, in respect of any FEF Contracts then outstanding which are terminated as provided herein or as provided in such FEF Contracts, and (e) all fees, costs, expenses and indemnities payable by the Borrower under this Agreement, failing which all rights and remedies of the Lender having given the aforesaid written notice or of both Lenders (in the case of an Event of Default under Section 15.1.4), as applicable, shall -91- thereupon become enforceable. The Borrower shall have no right to set up as against either of the Lenders any defence or right of action, of indemnification or of set-off or compensation or any similar claim of any nature whatsoever which the Borrower may have had at any time or may have in the future with respect to any holder of one or more Banker's Acceptance(s) issued hereunder or to any beneficiary or other Person in connection with one or more Letter(s) of Credit issued hereunder or FEF Contract(s) entered into as contemplated herein. SECTION 15.3 - NO NOTICES - ------------------------------------- Save as otherwise expressly provided for herein, no notice or mise en demeure of any kind shall be required to be given to the Borrower by the Lenders for the purpose of putting the Borrower in default, the latter being in default by the mere lapse of time allowed for the performance of an obligation or by the mere happening of an event or circumstance constituting an Event of Default. ARTICLE XVI REMEDIES SECTION 16.1 - REMEDIES CUMULATIVE - ------------------------------------------------ Subject to Section 17.1 and for greater certainty, it is expressly understood and agreed that the rights and remedies of the Lenders under this Agreement are cumulative and are in addition to and not in substitution for any rights or remedies provided by law; any single or partial exercise by a Lender of any right or remedy for a default or breach of any term, covenant, condition or agreement herein contained, shall not be deemed to be a waiver of or to alter, affect or prejudice any other right or remedy or other rights or remedies to which a Lender may be lawfully entitled for the same default or breach, and any waiver by a Lender of the strict observance, performance or compliance with any term, covenant, condition or agreement herein contained, and any indulgence granted by a Lender, shall be deemed not to be a waiver of that or any subsequent default. Each Lender may, to the extent permitted by Applicable Law, bring suit at law, in equity or otherwise for any available relief or purpose including but not limited to (A) the specific performance of any covenant or agreement contained in this Agreement, or in any other Credit Document, (B) an injunction against a violation of any of the terms hereof or thereof, (C) the exercise of any power granted hereby or thereby or by law, or (D) obtaining and enforcing judgment for any and all amounts due in respect of the Borrowings or amounts otherwise due hereunder or under any other Credit Document. -92- ARTICLE XVII WAIVER OF DEFAULT SECTION 17.1 - WAIVER OF DEFAULT - ---------------------------------------------- (a) If at any time after the occurrence of an Event of Default concerning a Lender, the Borrower offers to cure completely such Event of Default and to pay all expenses, advances and damages to such Lender consequent to such Event of Default, with interest at the rates or increased rates then applicable to the respective outstanding Borrowings, then the said Lender may, but shall not be obligated to, accept such offer and payment, but such action shall not affect any subsequent Event of Default or impair any rights consequent thereon; (b) no waiver by a Lender of any Event of Default shall in any way be, or be construed to be, a waiver by such Lender of any future or subsequent Event of Default, to the extent permitted by Applicable Law; and (c) no Event of Default may be waived or discharged orally by a Lender but (in each case) only by an instrument in writing signed by such Lender. ARTICLE XVIII INTERLENDER AGREEMENTS SECTION 18.1 - SEPARATE CREDIT FACILITIES - ------------------------------------------------------- The parties hereto acknowledge (A) that the Royal Credit Facilities are made available to the Borrower by Royal, and that the Royal Credit Facilities are to be administered by Royal independently without any intervention of BNP except as herein set forth and (B) that the BNP Credit Facilities are made available to the Borrower by BNP, and that the BNP Credit Facilities are to be administered by BNP independently without any intervention of Royal, except as herein set forth. Notwithstanding the foregoing, Royal and BNP will cooperate with each other and exchange information in respect of the Credit Parties as deemed appropriate from time to time, and the Borrower hereby consents to such exchange of information. SECTION 18.2 - EVENT OF DEFAULT - --------------------------------------------- In the event that an officer or employee of a Lender familiar with the terms of this Agreement learns of any Event of Default or receives any material information from a Credit Party in respect thereof, such information shall be promptly notified to the other Lender. -93- SECTION 18.3 - INTERCREDITOR AND SECURITY SHARING AGREEMENT - ------------------------------------------------------------------------- The Lenders agree that the provisions of the intercreditor and security sharing agreement referred to in Section 11.1.1.18 shall apply in respect of their dealings with the Credit Parties and the realization of the Liens on the Collateral following an Event of Default. SECTION 18.4 - DISCLAIMER - --------------------------------------- No Lender makes any representation or warranty, and accepts any responsibility, with respect to the due execution, legality, validity, sufficiency or enforceability of this Agreement and the other Credit Documents or any instrument or document referred to herein or therein. No Lender assumes any responsibility for the financial condition of the Credit Parties or for the payment of any of the Borrowings. No Lender assumes any responsibility with respect to the accuracy, authenticity, legality, validity, sufficiency or enforceability of any documents, papers, materials or other information furnished by the Borrower or any other Credit Party or Person to either Lender in connection with the Credit Documents or any matter referred to herein or therein. No Lender shall be liable to the other Lender for any error in judgment or for any action taken or omitted by it or with respect to anything which it may do or refrain from doing in the reasonable exercise of its own judgment or which may seem to it to be necessary or desirable in the circumstances, except for gross negligence or wilful misconduct. SECTION 18.5 - ACKNOWLEDGEMENT OF LENDERS - ------------------------------------------------------- Each Lender acknowledges that it has been, and will continue to be, solely responsible for making its own independent appraisal of and investigation into the financial condition, creditworthiness, affairs, status and nature of the Credit Parties and accordingly each Lender confirms to the other Lender that it has not relied, and will not hereafter rely on the other Lender. (a) to check or enquire on its behalf into the adequacy, accuracy or completeness of any information provided by any Credit Party or in connection with the Credit Documents (whether or not such information has been or is hereafter circulated to such other Lender); or (b) to assess or keep under review on its behalf the financial condition, creditworthiness, affairs, status or nature of any Credit Party. In addition, each Lender acknowledges that a copy of this Credit Agreement, of the Schedules thereto and of the other Credit Documents have been made available to it for its review and that it is satisfied with the form and substance thereof. -94- SECTION 18.6 - OTHER TRANSACTIONS - ----------------------------------------------- Each Lender may, outside the scope of this Agreement, deal with the Borrower and the other Credit Parties in all transactions and generally do any banking business with the Credit Parties, without having any liability to account to the other Lender therefor. SECTION 18.7 - NO PREFERENCE - ------------------------------------------ No Lender shall have, previous to this Agreement, entered into or, subsequent to this Agreement, enter into any arrangement with the Credit Parties or any other Person, without the prior written consent of the other Lender, which would have the effect of giving such Lender preference or priority over the other Lender in respect of the Indebtedness of the Borrower under this Agreement. SECTION 18.8 - NO ASSOCIATION AMONG LENDERS - --------------------------------------------------------- Nothing contained in this Agreement and no action taken pursuant to it shall, or shall be deemed to, constitute the Lenders a partnership, association, joint venture or other similar entity. SECTION 18.9 - AMENDMENT OF THIS ARTICLE XVIII - ------------------------------------------------------------ The provisions of this Article XVIII may be amended or added to, from time to time, by execution by the Lenders of an instrument in writing and such instrument in writing shall validly and effectively amend or add to any or all of the provisions of this Article XVIII without requiring the execution of such instrument in writing by the Borrower provided such amendment or addition does not adversely affect the rights or obligations of the Borrower. ARTICLE XIX SUCCESSORS AND ASSIGNS SECTION 19.1 - BENEFIT AND BURDEN OF THIS AGREEMENT - ----------------------------------------------------------------- This Agreement shall enure to the benefit of and be binding on the parties hereto, their respective successors and any permitted assignees or transferees of some or all of the parties' rights or obligations hereunder. SECTION 19.2 - THE BORROWER - ----------------------------------------- The Borrower shall not assign or transfer all or any part of its rights or obligations hereunder without the prior written consent of both Lenders. -95- SECTION 19.3 - THE LENDERS - ---------------------------------------- A Lender (herein sometimes called an "ASSIGNING LENDER") may, with the prior consent of the other Lender and the Borrower (such consent not to be unreasonably withheld), assign all or part of its rights to, and may have its obligations in respect of, the Credit Facilities in which it participates assumed by any other person (the "ASSIGNEE") without cost to the Borrower. An assignment shall be for a minimum amount of Cdn$5,000,000 or the Equivalent Amount in US Dollars and shall become effective when the Borrower has been notified of it by the Assigning Lender and has received from the Assignee an undertaking (addressed to all the parties to this Agreement) to be bound by this Agreement and to perform the obligations assigned to it, in form and substance reasonably satisfactory to the Assigning Lender and the Borrower. Any such Assignee shall be and be treated as a Lender for all purposes of this Agreement, shall be entitled to the full benefit hereof, shall be subject to the obligations hereunder to the same extent as if it were an original party in respect of the rights or obligations assigned to it and shall have a Commitment hereunder equal to that portion of the Assigning Lender's Commitment assumed by it, and the Assigning Lender shall be released and discharged accordingly and to the same extent. In the event that BNP or Royal assigns all of its rights hereunder to an Assignee, and thereby ceases to be a Lender, all references in this Agreement to BNP or Royal, as the case may be, shall for all purposes be deemed to be replaced by references to such Assignee. SECTION 19.4 - DISCLOSURE - --------------------------------------- Each Lender may disclose to any serious prospective Assignee, on a confidential basis, such information concerning the Credit Parties as it considers appropriate. SECTION 19.5 - FURTHER DOCUMENTS - ---------------------------------------------- The Borrower will, at the expense of the Assigning Lender, execute such further documents and instruments and do such other things as an Assigning Lender may reasonably request for the purpose of any assignment pursuant to Section 19.3, including without limitation all such documents, instruments and things as may reasonably be required by the Assignee's Counsel to ensure that the Assignee may benefit from the Collateral Documents. SECTION 19.6 - EXPENSES - ------------------------------------- A Lender which assigns all or any part of its rights hereunder as set forth in Section 19.3 shall be responsible for, and pay on demand to the other Lender, all expenses, including but not limited to legal fees (and value-added tax thereon), incurred by the other Lender in connection with such assignment, including all expenses relating to the documents, instruments and things required to ensure that the Assignee may benefit from the Collateral Documents. -96- ARTICLE XX COMPENSATION SECTION 20.1 - SET-OFF, COMPENSATION - -------------------------------------------------- Each Lender is authorized (but not obligated) at any time or from time to time, without notice to any Credit Party or to any other Person, any such notice being expressly waived by the Credit Parties, to set off, compensate and to apply any and all deposits (general or special) held for or in the name of a Credit Party and any Indebtedness or liability at any time owing or payable by such Lender to or for the credit of or the account of such Credit Party against and on account of the obligations and liabilities of the said Credit Party owing or payable to such Lender under this Agreement or the other Credit Documents, irrespective of currency and of whether or not such Lender has made any demand under this Agreement or the other Credit Documents and whether or not these obligations and liabilities of the said Credit Party, or any of them, have matured. The provisions of this Section 20.1 shall not restrict such rights as the Lenders may be entitled to without relying upon the provisions of this Agreement. For the purposes of the application of this Section 20.1, the Credit Parties and the Lenders agree that the benefit of any term applicable to any Lender's deposit, credit, Indebtedness, liability or obligation (collectively referred to in this Section 20.1 as the "DEPOSIT") shall be lost immediately before the time when such Lender shall exercise its rights under this Section 20.1 in respect of a relevant Deposit of such Lender. ARTICLE XXI JUDGMENT CURRENCY SECTION 21.1 - JUDGMENT CURRENCY - ---------------------------------------------- If for the purpose of obtaining judgment in any court in any jurisdiction with respect to the Credit Documents, it becomes necessary to convert into the currency of such jurisdiction (herein called the "JUDGMENT CURRENCY") any amount due under the Credit Documents in any currency other than the Judgment Currency, then conversion shall be made at the rate of exchange prevailing on the Business Day preceding (a) the date of actual payment of the amount due, in the case of proceedings in the courts of any jurisdiction that will give effect to such conversion being made on such day, or (b) the day on which the judgment is given, in the case of proceedings in the courts of the Province of Quebec or of any other jurisdiction (the applicable date as of which such conversion is made pursuant to this Section being hereinafter called the "JUDGMENT CONVERSION DATE"). For this purpose, "RATE OF EXCHANGE" means the rate at which the Lender to which the relevant amount is owed would be prepared on the relevant date, to sell the currency of the amount due under the Credit Documents at one of its principal offices against the Judgment Currency. In the event that there is a change in the rate of exchange prevailing between the Judgment Conversion Date and the date of payment of the amount due, the relevant Credit Party will, on the date of payment, pay such additional amounts (if any) as may be necessary to ensure that the amount paid on such date is the amount in the Judgment Currency -97- which, when converted at the rate of exchange prevailing on the date of payment, is the amount then due under the Credit Documents in Canadian Dollars or US Dollars, as the case may be. Any additional amount due under this Section 21.1 will be due as a separate debt and shall not be affected by judgment being obtained for any other sums due under or in respect of the Credit Documents. ARTICLE XXII GOVERNING LAW SECTION 22.1 - GOVERNING LAW - ------------------------------------------ The parties agree that this Agreement is conclusively deemed to be made under, and for all purposes to be governed by and construed in accordance with, the laws of the Province of Quebec and federal laws of Canada applicable therein. ARTICLE XXIII NOTICE SECTION 23.1 - ADDRESS FOR NOTICE - ----------------------------------------------- Unless otherwise provided in this Agreement, any demand, request or notice to be given under this Agreement shall be given by delivering the same or by mailing, by registered mail, postage prepaid or by telexing by way of tested telex or by telecopying the same, addressed as indicated opposite the names of the signatories on the signature pages of this Agreement, or to such other address as may be notified by any party to the others pursuant to Section 23.2. SECTION 23.2 - NOTICE - ----------------------------------- Any such demand, request or notice sent as aforesaid shall be deemed to have been received by the party to whom it is addressed (a) upon receipt, if delivered or sent by registered mail (b) on the Business Day next following the date of transmission if telexed and the appropriate answerback is received and (c) if telecopied before 3:00 p.m. on a Business Day, on that day and if telecopied after 3:00 p.m. on a Business Day, on the Business Day next following the date of transmission; provided, however, that in the event normal mail service, telecopier service or telex service shall be interrupted by strike, force majeure or other cause, then the party sending the demand, request or notice, shall utilize any other mode of communication which shall ensure prompt receipt of such demand, request or notice by the other party or parties. -98- ARTICLE XXIV MISCELLANEOUS SECTION 24.1 - SEVERABILITY - ----------------------------------------- Any provision of this Agreement which is or becomes prohibited or unenforceable in any jurisdiction, does not invalidate, affect or impair the remaining provisions thereof and any such prohibition or unenforceability in any jurisdiction does not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 24.2 - INTEREST LIMITATION - ------------------------------------------------ The parties agree that no provision of this Agreement shall have the effect of imposing on the Borrower any obligation to pay interest (as such term is defined in section 347 of the Criminal Code of Canada) to a Lender at a rate in excess of 60% per annum, taking into account all other amounts which must be taken into account for the purpose thereof; and, to such extent, the Borrower's obligation to pay interest hereunder is so limited. SECTION 24.3 - SURVIVAL OF REPRESENTATIONS AND UNDERTAKINGS - ------------------------------------------------------------------------- The representations and warranties made by the Borrower in Article II of this Agreement and the covenants, undertakings and agreements contained in this Agreement survive the execution and delivery of this Agreement and continue in full force and effect until the full payment and satisfaction of all liabilities and obligations of the Borrower to the Lenders under this Agreement. SECTION 24.4 - WHOLE AGREEMENT - -------------------------------------------- This Agreement constitutes the whole and entire agreement between the parties hereto with respect to the subject matter thereof and cancels and supersedes any prior offers, agreements, undertakings, declarations and representations, written or verbal in respect thereof. SECTION 24.5 - AMENDMENTS - --------------------------------------- No amendment, modification or waiver of any provision of this Agreement or consent to any departure by the Borrower from any provision of this Agreement will in any event be effective unless it is signed by all parties hereto or unless it is in conformity with Section 18.9 and then the amendment, modification, waiver or consent will be effective only in the specific instance, for the specific purpose and for the specific length of time for which it is given. Notwithstanding the foregoing paragraph, BNP and Royal are hereby authorized to correct any typographical error or other error of an editorial nature in this Agreement and to substitute such corrected text in the counterparts of this Agreement, provided that such corrections do not modify in any manner the meaning or the interpretation of this Agreement. -99- SECTION 24.6 - COUNTERPARTS - ----------------------------------------- This Agreement may be executed in any number of counterparts, each of which when executed and delivered is an original but all of which taken together constitute one and the same instrument; any party may execute this Agreement by signing any counterpart of it and may communicate such signing by telecopier or otherwise. SECTION 24.7 - FURTHER ASSURANCES - ----------------------------------------------- The Borrower and the Lenders shall do all such further acts and execute and deliver all such further documents as shall be reasonably required in order to fully perform and carry out the terms of this Agreement. SECTION 24.8 - RISKS OF FORCE MAJEURE - --------------------------------------------------- The Borrower expressly assumes all risks of superior force, such that it shall be bound to timely execute each and every of its obligations under this Agreement and the other Credit Documents notwithstanding the existence or occurrence of any event or circumstance constituting a superior force within the meaning of Article 1693 of the CIVIL CODE OF QUEBEC. SECTION 24.9 - GOOD FAITH AND FAIR CONSIDERATION - -------------------------------------------------------------- The Borrower acknowledges and declares that it has entered into this Agreement freely and of its own will. In particular, the Borrower acknowledges that this Agreement and the other Credit Documents were negotiated by it and the Lenders in good faith, and that there was no exploitation of the Borrower by the Lenders, nor is there any serious disproportion between the consideration provided by the Lenders and that provided by the Borrower. SECTION 24.10 - TERM OF AGREEMENT - ---------------------------------------------- The term of this Agreement is until the later of the termination of all Commitments and payment in full of all the obligations of the Borrower incurred pursuant to this Agreement. SECTION 24.11 - FORMAL DATE - ---------------------------------------- This Agreement shall bear the formal date of February 5, 1998 notwithstanding the actual date of execution thereof by the parties hereto and may be referred to as bearing such date. -100- SECTION 24.12 - LANGUAGE - ------------------------------------- The Borrower and the Lenders confirm that they have requested that this Agreement, the other Credit Documents and all documents and notices contemplated hereby or thereby be drawn up in the English language. L'Emprunteur et les Preteurs confirment avoir requis que cette convention, les autres documents de credit et tous les documents et avis qui y sont envisages soient rediges en langue anglaise. IN WITNESS WHEREOF the parties hereto have caused this Agreement to be duly executed at Montreal, Canada on the 13th day of March, 1998. ADDRESS: Phoenix International Life Sciences Inc. 2350 Cohen Street Saint-Laurent, Quebec, Canada H4R 2N6 ATTENTION: Senior Vice-President and Chief Financial Officer Telecopier: (514) 333-7306 Telephone: (514) 335-8323 PHOENIX INTERNATIONAL LIFE SCIENCES INC. (AS BORROWER) By: /s/ Jean-Yves Caloz Name: Jean-Yves Caloz, C.A. Title: Senior Vice-President and Chief Financial Officer ADDRESS: Royal Bank of Canada Business Banking Centre 610 St-Jean Boulevard Suite 201 Pointe-Claire, Quebec, Canada H9R 3K2 ATTENTION: Assistant Manager Telecopier: (514) 630-3453 Telephone: (514) 630-3459 ROYAL BANK OF CANADA (AS LENDER) By: /s/ Colin Marson Name: Colin Marson Title: Senior Account Manager -101- ADDRESS: Banque Nationale de Paris (Canada) Tour BNP, 4th Floor 1981 McGill College Avenue Montreal, Quebec, Canada H3A 2W8 ATTENTION: Vice-President, Deputy Manager Commercial and Export Banking Telecopier: (514) 285-2955 Telephone: (514) 285-7509 BANQUE NATIONALE DE PARIS (CANADA) (AS LENDER) By: /s/ Bernard Kennepohl --------------------------------- Name: Bernard Kennepohl Title: Vice-President, Deputy Manager Commercial and Export Banking By: /s/ Richard Belzil --------------------------------- Name: Richard Belzil Title: Assistant Vice-President Commercial and Export Banking -102- EX-10.23 37 EXHIBIT 10.23 Exhibit 10.23 UNCONDITIONAL GUARANTY November 18, 1998 Chrysalis International Corporation Chrysalis International Preclinical Services Corporation Chrysalis DNX Transgenic Sciences Corporation Chrysalis International Clinical Services Corporation (Individually and collectively "Borrower") Phoenix International Life Sciences Inc. ("Guarantor") First Union National Bank ("Bank") 123 South Broad Street Philadelphia, Pennsylvania 19109 To induce Bank to continue in financing arrangements with Borrower and to grant forbearance to Borrower pursuant to that certain Forbearance Agreement of even date herewith between Borrower and Bank (the "Forbearance Agreement), Guarantor hereby absolutely, irrevocably and unconditionally guarantees to Bank and its successors, assigns and affiliates the timely payment and performance of all liabilities and obligations of Borrower to Bank and its affiliates, including, but not limited to, all obligations under any notes, loan agreements, security agreements, letters of credit, instruments, accounts receivable, contracts, drafts, leases, chattel paper, indemnities, acceptances, repurchase agreements, overdrafts, and the Loan Documents defined below, however and whenever incurred or evidenced, whether primary, secondary, direct, indirect, absolute, contingent, due or to become due, now existing or hereafter contracted or acquired, and all modifications, extensions or renewals thereof, including without limitation all principal, interest, charges, and costs and expenses incurred thereunder (including attorneys' fees and other costs of collection incurred, regardless of whether suit is commenced) (collectively, the "Guaranteed Obligations"). Guarantor further covenants and agrees: GUARANTOR'S LIABILITY. This Guaranty is a continuing and unconditional guaranty of payment and performance and not of collection. The parties to this Guaranty are jointly and severally obligated hereunder. This Guaranty does not impose any obligation on Bank to extend or continue to extend credit or otherwise deal with Borrower at any subsequent time. This Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time any payment of the Guaranteed Obligations is rescinded, avoided or for any other reason must be returned by Bank, and the returned payment shall remain payable as part of the Guaranteed Obligations, all as though such payment had not been made. Except to the extent the provisions of this Guaranty give the Bank additional rights, this Guaranty shall not be deemed to supersede or replace any other guaranties given to Bank by Guarantor; and the obligations guaranteed hereby shall be in addition to any other obligations guaranteed by Guarantor pursuant to any other agreement of guaranty given to Bank and other guaranties of the Guaranteed Obligations. TERMINATION OF GUARANTY. Guarantor may terminate this Guaranty by written notice, delivered personally to or received by certified or registered United States Mail by an authorized officer of the Bank at the address for notices provided herein. Such termination shall be effective with respect to Guaranteed Obligations arising more than 15 days after the date such written notice is received by said Bank officer. Guarantor may not terminate this Guaranty as to Guaranteed Obligations (including any subsequent extensions, modifications or compromises of the Guaranteed Obligations) then existing. Termination of this Guaranty by any single Guarantor will not affect the existing and continuing obligations of any other guarantor hereunder. APPLICATION OF PAYMENTS. Monies received from any source by Bank for application toward payment of the Guaranteed Obligations may be applied to such Guaranteed Obligations in any manner or order deemed appropriate by Bank. CONSENT TO MODIFICATIONS. Guarantor CONSENTS AND AGREES THAT BANK MAY FROM TIME TO TIME, IN ITS SOLE DISCRETION, WITHOUT AFFECTING, IMPAIRING, LESSENING OR RELEASING THE OBLIGATIONS OF THE GUARANTOR HEREUNDER: permit any change in the business or other dealings and relations of Borrower or any other guarantor with Bank, all in such manner and upon such terms as Bank may deem appropriate, and without notice to or further consent from Guarantor. No invalidity, irregularity, discharge or unenforceability of, or action or omission by Bank relating to any part of, the Guaranteed Obligations or any security therefor shall affect or impair this Guaranty. WAIVERS AND ACKNOWLEDGMENTS. Guarantor WAIVES AND RELEASES THE FOLLOWING RIGHTS, DEMANDS, AND DEFENSES Guarantor may have with respect to Bank and collection of the Guaranteed Obligations: (a) promptness and diligence in collection of any of the Guaranteed Obligations from Borrower or any other person liable thereon, and in foreclosure of any security interest and sale of any property serving as collateral for the Guaranteed Obligations; (b) any law or statute that requires that Bank make demand upon, assert claims against, or collect from Borrower or other persons or entities, foreclose any security interest, sell collateral, exhaust any remedies, or take any other action against Borrower or other persons or entities prior to making demand upon, collecting from or taking action against Guarantor with respect to the Guaranteed Obligations; (c) any law or statute that requires that Borrower or any other person be joined in, notified of or made part of any action against Guarantor; (d) that Bank preserve insure or perfect any security interest in collateral or sell or dispose of collateral in a particular manner or at a particular time; (e) notice of any new transactions or other relationships between Bank, Borrower and/or any guarantor, and of changes in the financial condition of, ownership of, or business structure of Borrower or any other guarantor; (f) presentment, protest, notice of dishonor, notice of default, demand for payment, notice of intention to accelerate maturity, notice of acceleration of maturity, notice of sale, and all other notices of any kind whatsoever; (g) the right to assert against Bank any defense (legal or equitable), set-off, counterclaim, or claim that Guarantor may have at any time against Borrower or any other party liable to Bank; (h) all defenses relating to invalidity, insufficiency, unenforceability, enforcement, release or impairment of Bank's lien on any collateral, of the Loan Documents, or of any other guaranties held by Bank; (i) any claim or defense that acceleration of maturity of the Guaranteed Obligations is stayed against Guarantor because of the stay of assertion or of acceleration of claims against any other person or entity for any reason including the bankruptcy or insolvency of that person or entity; and (j) the benefit of any exemption claimed by Guarantor. Guarantor acknowledges and represents that it has relied upon its own due diligence in making its own independent appraisal of Borrower, Borrower's business affairs and financial condition, and any collateral; Guarantor will continue to be responsible for making its own independent appraisal of such matters; and Guarantor has not relied upon and will not hereafter rely upon Bank for information regarding Borrower or any collateral. FINANCIAL CONDITION. Guarantor warrants, represents and covenants to Bank that on and after the date hereof: (a) the fair saleable value of Guarantor's assets exceeds its liabilities, Guarantor is meeting its current liabilities as they mature, and Guarantor is and shall remain solvent; (b) all financial statements of Guarantor furnished to Bank are correct and accurately reflect the financial condition of Guarantor as of the respective dates thereof; (c) since the date of such financial statements, there has not occurred a material adverse change in the financial condition of Guarantor; (d) there are not now pending any court or administrative proceedings or undischarged judgments against Guarantor, no federal or state tax liens have been filed or threatened against Guarantor, and Guarantor is not in default or claimed default under any agreement; and (e) at such reasonable times as Bank requests, Guarantor will furnish Bank with such financial information as Guarantor makes available to its shareholders, generally. INTEREST. Regardless of any other provision of this Guaranty or other Loan Documents, if for any reason the effective interest on any of the Guaranteed Obligations should exceed the maximum lawful interest, the effective interest shall be deemed reduced to and shall be such maximum lawful interest, and any sums of interest which have been collected in excess of such maximum lawful interest shall be applied as a credit against the unpaid principal balance of the Guaranteed Obligations. DEFAULT. If any of the following events occur, a default ("Default") under this Guaranty shall exist: (a) Failure of timely payment or performance of the Guaranteed Obligations or a default under any Loan Document; (b) A breach of any agreement or representation contained or referred to in the Guaranty, or any of the Loan Documents, or contained in any other contract or agreement of Guarantor with Bank or its affiliates, whether now existing or hereafter arising; (c) The death of, appointment of a guardian for, dissolution of, termination of existence of, loss of good standing status by, appointment of a receiver for, assignment for the benefit of creditors of, or the commencement of any insolvency or bankruptcy proceeding by or against, Guarantor or any general partner of or the holder(s) of the majority ownership interests of Guarantor; (d) the occurrence of a Terminating Event under the Forbearance Agreement; and/or (e) The entry of any monetary judgment or the assessment against, the filing of any tax lien against, or the issuance of any writ of garnishment or attachment against any property of or debts due Guarantor. If a Default occurs, the Guaranteed Obligations shall be due immediately and payable without notice. Guarantor shall pay interest on the Guaranteed Obligations from such Default at the highest rate of interest charged on any of the Guaranteed Obligations, subject to the Pledge Agreement. ATTORNEY'S FEES AND OTHER COSTS OF COLLECTION. Guarantor shall pay all of Bank's reasonable expenses incurred to enforce or collect any of the Guaranteed Obligations, including, without limitation, reasonable arbitration, paralegals', attorneys' and experts' fees and expenses, whether incurred without the commencement of a suit, in any suit, arbitration, or administrative proceeding, or in any appellate or bankruptcy proceeding. MISCELLANEOUS. (a) ASSIGNMENT. This Guaranty and other Loan Documents shall inure to the benefit of and be binding upon the parties and their respective heirs, legal representatives, successors and assigns. Bank shall not, without the prior written consent of Guarantor, assign this Guaranty, the Pledge and Assignment and Agreement, or Bank's interest in the Loan Documents, or any collateral securing the Loan Documents. (b) APPLICABLE LAW; CONFLICT BETWEEN DOCUMENTS. This Guaranty and other Loan Documents shall be governed by and construed under the laws of the state named in Bank's address shown above without regard to that state's conflict of laws principles. If the terms of this Guaranty should conflict with the terms of any commitment letter that survives closing, the terms of this Guaranty shall control. (c) JURISDICTION. Guarantor irrevocably agrees to non-exclusive personal jurisdiction in the state named in Bank's address shown above. (d) SEVERABILITY. If any provision of this Guaranty or of the other Loan Documents shall be prohibited or invalid under applicable law, such provision shall be ineffective but only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Guaranty or other document. (e) NOTICES. Any notices to Guarantor shall be sufficiently given, if in writing and mailed or delivered to the Guarantor's address shown above or such other address as provided hereunder, and to Bank, if in writing and mailed or delivered to Bank's office address shown above or such other address as Bank may specify in writing from time to time. In the event that Guarantor changes Guarantor's address at any time prior to the date the Guaranteed Obligations are paid in full, Guarantor agrees to promptly give written notice of said change of address by registered or certified mail, return receipt requested, all charges prepaid. (f) PLURAL; CAPTIONS. All references in the Loan Documents to borrower, guarantor, person, document or other nouns of reference mean both the singular and plural form, as the case may be, and the term "person" shall mean any individual, person or entity. The captions contained in the Loan Documents are inserted for convenience only and shall not affect the meaning or interpretation of the Loan Documents. (g) BINDING CONTRACT. Guarantor by execution of and Bank by acceptance of this Guaranty agree that each party is bound to all terms and provisions of this Guaranty. (h) AMENDMENTS, WAIVERS AND REMEDIES. No waivers, amendments or modifications of this Guaranty and other Loan Documents shall be valid unless in writing and signed by an officer of Bank and Guarantor. No waiver by Bank of any Default shall operate as a waiver of any other Default or the same Default on a future occasion. Neither the failure nor any delay on the part of Bank in exercising any right, power, or privilege granted pursuant to this Guaranty and other Loan Documents shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise or the exercise of any other right, power or privilege. All remedies available to Bank with respect to this Guaranty and other Loan Documents and remedies available at law or in equity shall be cumulative and may be pursued concurrently or successively. (i) PARTNERSHIPS. If Guarantor is a partnership, the obligations, liabilities and agreements on the part of Guarantor shall remain in full force and effect an fully applicable notwithstanding any changes in the individuals comprising the partnership. The term "Guarantor" includes any altered or successive partnerships, and predecessor partnership(s) and the partners shall not be released from any obligations or liabilities hereunder. (j) LOAN DOCUMENTS. The term "Loan Documents" refers to all documents executed by Borrower in favor of Bank including, but not limited to, documents identified in the Forbearance Agreement, and includes the Forbearance Agreement SECURITY; NO RECOURSE. Guarantor has granted Bank a security interest in the collateral (the "Collateral") described in that certain Pledge and Assignment Agreement of even date herewith (the "Pledge Agreement"). Notwithstanding anything to the contrary set forth herein, Bank's recourse against Guarantor upon the occurrence of a Default shall be limited to the Collateral and Bank's other remedies set forth in the Pledge Agreement. Guarantor shall not be responsible for the value of the Collateral afte its pledge to Bank. Bank shall not assert or commence any legal or equitable proceeding before any court, agency or other body against Guarantor on account of this Guaranty. Guarantor shall have no liability to Bank under this Guaranty, except to the extent of Guarantor's interest in the Collateral. Notwithstanding Bank's agreement to limit recourse against the Guarantor to the Collateral, in the event Guarantor disputes its liabilities and obligations under this Guaranty and/or the Pledge Agreement, and/or opposes any application of the Collateral to the Guaranty Obligations, in the event Bank prevails in any such dispute, Guarantor acknowledges and agrees that Guarantor shall be liable to Bank for repayment of Bank's reasonable fees and expenses (including attorneys' fees and disbursements) incurred in connection with any such dispute or opposition, and the obligation in respect of such expenses shall be a full recourse obligation of Guarantor. ARBITRATION. Upon demand of any party hereto, whether made before or after institution of any judicial proceeding, any claim or controversy arising out of or relating to the Loan Documents between parties hereto (a "Dispute") shall be resolved by binding arbitration conducted under and governed by the Commercial Financial Disputes Arbitration Rules (the "Arbitration Rules") of the American Arbitration Association (the "AAA") and the Federal Arbitration Act. Disputes may include, without limitation, tort claims, counterclaims, a dispute as to whether a matter is subject to arbitration, claims brought as class actions, or claims arising from documents executed in the future. A judgment upon the award may be entered in any court having jurisdiction. Notwithstanding the foregoing, this arbitration provision does not apply to disputes under or related to swap agreements. SPECIAL RULES. All arbitration hearings shall be conducted in the city named in the address of Bank first stated above. A hearing shall begin within 90 days of demand for arbitration and all hearings shall conclude within 120 days of demand for arbitration. These time limitations may not be extended unless a party shows cause for extension and then for no more than a total of 60 days. The expedited procedures set forth in Rule 51 ET SEQ. of the Arbitration Rules shall be applicable to claims of less than $1,000,000.00. Arbitrators shall be licensed attorneys selected from the Commercial Financial Dispute Arbitration Panel of the AAA. The parties do not waive applicable Federal or state substantive law except as provided herein. PRESERVATION AND LIMITATION OF REMEDIES. Notwithstanding the preceding binding arbitration provisions, the parties agree to preserve, without diminution, certain remedies that any party may exercise before or after an arbitration proceeding is brought. The parties shall have the right to proceed in any court of proper jurisdiction or by self-help to exercise or prosecute the following remedies, as applicable: (i) all rights to foreclose against any real or personal property or other security by exercising a power of sale or under applicable law by judicial foreclosure including a proceeding to confirm the sale; (ii) all rights of self-help including peaceful occupation of real property and collection of rents, set-off, and peaceful possession of personal property; (iii) obtaining provisional or ancillary remedies including injunctive relief, sequestration, garnishment, attachment, appointment of receiver and filing an involuntary bankruptcy proceeding; and (iv) when applicable, a judgment by confession of judgment. Any claim or controversy with regard to any party's entitlement to such remedies is a Dispute. The parties agree that they shall not have a remedy of punitive or exemplary damages against other parties in any Dispute and hereby waive any right or claim to punitive or exemplary damages they have now or which may arise in the future in connection with any Dispute whether the Dispute is resolved by arbitration or judicially. WAIVER OF JURY TRIAL. THE PARTIES ACKNOWLEDGE THAT BY AGREEING TO BINDING ARBITRATION THEY HAVE IRREVOCABLY WAIVED ANY RIGHT THEY MAY HAVE TO JURY TRIAL WITH REGARD TO A DISPUTE. IN WITNESS WHEREOF, Guarantor, on the day and year first written above, has caused this Unconditional Guaranty to be executed under seal. PHOENIX INTERNATIONAL LIFE SCIENCES INC. CORPORATE By: /s/ Jean-Yves Caloz SEAL --------------------------------------------------- Name: Jean-Yves Caloz Title: Senior Vice President and Secretary EX-10.24 38 EXHIBIT 10.24 Exhibit 10.24 PLEDGE AND ASSIGNMENT AGREEMENT [LOGO] This Pledge and Assignment Agreement, dated November 18, 1998, is executed and delivered by Phoenix International Life Sciences Inc. ("Debtor"), a Delaware corporation, in favor of First Union National Bank ("Bank"), a national bank having offices at 123 South Broad Street, Philadelphia, Pennsylvania 19109. For value received and in order to secure payment and performance of the obligations under the Unconditional Guaranty (the "Guaranty") of even date herewith given by Debtor to Bank, pursuant to which Debtor guaranties, as a surety, the existing and future debts, liabilities and obligations of 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 (severally and collectively, "Borrower") including, without limitation, the indebtedness under the Loan Documents as defined in the Guaranty and evidenced by that certain Term Note dated August 29, 1997 in the principal sum of Five Million ($5,000,000.00) Dollars executed and delivered by Borrower to CoreStates Bank, N.A. (predecessor-in-interest to Bank) and held by Bank (the "Note"), and all other Obligations (as defined herein), Debtor hereby executes and delivers this Pledge and Assignment Agreement (the "Assignment") and sells, pledges, assigns, transfers and grants to Bank a continuing security interest in the Collateral (as defined herein), as security for the Obligations. Debtor and Bank further covenant and agree: COLLATERAL: "Collateral" means all right, title and interest in, to and under Chrysalis International Pledged Collateral Account No. 2000002575049, and all cash and non-cash proceeds thereof. OBLIGATIONS: "Obligations" mean the existing and future debts, liabilities and obligations of Debtor to Bank in accordance with the Guaranty; provided, however, that Debtor's liability to Bank shall not exceed the value of the Collateral. POWER OF ATTORNEY. Debtor irrevocably constitutes and appoints Bank as its true and lawful attorney-in-fact, with full power and authority in the place and name of Debtor, to take any and all appropriate action and to execute any and all documents and instruments that may be necessary or desirable to accomplish the purpose and carry out the terms of this Assignment endorsements desirable for transfer or delivery of any Collateral, registration of any Collateral under applicable laws, retitling any Collateral, and the filing of financing statements, or a copy of this Assignment as such. This power of attorney is coupled with an interest and shall be irrevocable. Neither Bank nor anyone acting on its behalf shall be liable for acts, omissions, errors in judgment, or mistakes in fact in such capacity as attorney-in-fact. The Debtor ratifies all acts of Bank as its attorney-in-fact. DEBTOR'S REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Debtor represents, warrants and agrees: (i) Debtor is the owner of the Collateral free and clear of any liens, security interests, and claims, and has full power and authority to use and encumber the same as Collateral, and as long as any of the Obligations remain outstanding, Debtor will not grant a security interest or lien in, or otherwise encumber, sell, transfer or assign, the Collateral to any other person, and will keep the Collateral free from all adverse claims or encumberances; will otherwise preserve and protect by whatever means necessary the respective rights of the Debtor and Bank in the Collateral, and will promptly notify Bank of any claims against or notices asserting an interest in the Collateral. All securities and security entitlements pledged as Collateral are fully paid and non-assessable and if certificated, have been delivered to Bank with unrestricted endorsements. (ii) All income, dividends, earnings and profits with respect to the Collateral shall be reported for state and federal income tax purposes as attributable to the Debtor and not Bank, and Bank or any other person authorized to report income distributions, are authorized to issue IRS Forms 1099 indicating Debtor as the recipient of such income, earnings and profits. (iii) If Debtor fails to pay any tax or assessment relating to the Collateral or this Assignment as required and when due, Bank may, at its option, pay or discharge same, although it is not required to do so. (iv) Debtor shall reimburse Bank immediately upon demand for and indemnify and hold it harmless from and against all claims, liabilities, losses, costs and expenses, including reasonable attorneys' fees and disbursements, incurred or suffered by the Bank in connection with the Collateral, this Assignment or any Collateral Agreement; such claims, liabilities, losses, costs and expenses shall include, but not be limited to, all those in connection with the exercise of any right or remedy granted hereunder, any claim and the prosectuion or defence thereof arising out of or in any way connected with this Assignment, the collection or enforcement of the Obligations, the sale or purchase or attempted sale or purchase of any part of the Collateral, and any payments for whatever reason made to Third Party. All amounts payable by Debtor under this subsection shall be a part of the Obligations and secured by the Collateral. (v) Debtor's principal place of business and/or residence is the address set forth herein; Debtor maintains its books and records at such location. COLLATERAL VALUE. The Fiar Market Value of the Collateral shall at all times be not less than the outstanding balance of the Note and an amount equal to the interest which would accrue on such principal Obligations for thirty (30) days at the non-default rate of interest set forth in the Loan Documents. NO TRADING OF COLLATERAL. Until a Default occurs, Debtor shall have the right to collect and receive all interest with respect to the Collateral; provided, however, Debtor may not sell, transfer, exchange for other property or cash ("Trade") or otherwise exercise rights with respect to the Collateral or receive any distributions or proceeds from the Collateral without the prior written consent of the Bank, and any such distributions or proceeds received shall be held in trust for, and immediately delivered to, Bank. Any consent pursuant to this paragraph shall be in Bank's sole discretion. COLLATERAL DUTIES. Debtor agrees that Bank shall be under no duty to: (i) sell, realize upon, collect or protect the Collateral or give any notice with respect thereto; (ii) preserve the rigths of the Debtor with respect to the Collateral against third parties; (iii) seek payment from any particular source; or (iv) perform or fulfill any obligation of Debtor hereunder or under any other agreement. Without limiting the generality of the foregoing, Bank shall not be obligated to ascertian, notify Debtor of, or take any action in connection with any conversion, call, redemption, retirement or any other event relating to any of the Collateral. Debtor acknowledges Bank is not an investment advisor or insurer with respect to the Collateral; and Bank has no duty to advise the Debtor of any actual or anticipated changes in the value of the Collateral. DEFAULT. A default ("Default") under this Assignment occurs upon: (i) the failure of timely payment or performance of any of the Obligations; (ii) any default under, or any breach of any representation or agreement contained or referred to in this Assignment or in any other Loan Document; (iii) any attempt to terminate, revoke, rescind, modify or violate the terms of this Assignment without the prior written consent of Bank; or (iv) the making of any levy, seizure or attachment upon any Collateral; and/or (vi) the death of, appointment of a guardian for, dissolution of, termination of existence of, loss of good standing status by, appointment of a receiver for, assignment for the benefit of creditors of, or commencement of any insolvency or bankruptcy proceeding by or against, an Debtor. RIGHTS AND REMEDIES. Upon the occurrence of a Default, and while such Default continues: Bank may deal with any and all of the Collateral as it deems fit, and/or may liquidate all or a portion of the Collateral, applying the proceeds to the Obligations in any manner it deems appropriate. Such rights include, but are not limited to, the right, at Bank's option and without prior written notice to Debtor or any obligor under the Obligations, to (i) transfer into Bank's name or the name of its nominee, all or any part of the Collateral; (ii) receive all interest, dividends, and other proceeds of the Collateral; (iii) notify any person obligated on any Collateral of the security interest of Bank therein and require 2 such person to make payment directly to Bank; (iv) demand, sue for, collect or receive the Collateral and any proceeds thereof, and/or make any settlement or compromise as Bank deems desirable with respect to any Collateral; and (v) exercise any voting, conversion, registration, purchase or other rights of an owner, holder or entitlement holder of the Collateral. Debtor agrees that Bank may exercise its rights under this Assignment without regard for the actual or potential tax consequences to Debtor under federal or state law and without regard to any instructions or directives given Bank by Debtor. DEBTOR'S RIGHTS UPON EXERCISE OF REMEDIES. Upon the Bank's application of the Collateral to satisfy the Obligations, Bank shall immediately assign, endorse, convey and deliver to Debtor all of its right, title and interest in and to all Loan Documents and any mortgages, liens and security interests which secure or evidence Borrower's obligations under the Loan Documents, free and clear of liens, claims and encumbrances. Bank shall have all of the rights and remedies of a secured party under the applicable law. Notwithstanding anything herein, in the Loan Documents, or in the applicable law to the contrary. Debtor waives any and all requirements that the Bank sell or dispose of all or part of the Collateral at any particular time, regardless of whether Debtor has requested such sale or disposition. Upon Bank's request, Debtor will, at its own expense, do or cause to be done all other acts and things as may be necessary to make the sale of the Collateral valid, binding and in compliance with applicable law. REMEDIES ARE CUMULATIVE. No failure on the part of Bank to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by Bank or any right, power or remedy hereunder preclude any other or further exercise thereof of the exercise of any other right, power or remedy. The remedies herein provided are cumulative and are not exclusive of any remedies provided by law or in equity. DISCHARGE. All rights and obligations of the Bank and security interests hereunder, and all obligations of the Debtor hereunder, shall be absolute and unconditional, not discharged or impaired irrespective of any lack of validity or enforceability of any Loan Document. To the extent permitted by law, the Debtor hereby waives any rights under any valuation, stay, appraisement, extension redemption laws now existing or which may hereafter exist and which, but for the provision, might be applicable to any sale or disposition or the Collateral by the Bank; and any other circumstance which might otherwise constitute a defense available to, or a discharge of, the Borrower, any guarantor, other obligor or the Debtor in respect of the Obligations. DEFINITIONS. The terms set forth below shall be defined as follows: "AFFILIATE" means First Union Corporation and any of its direct and indirect affiliates and subsidiaries; "ISSUER" means a person who creates a share, participation or other interest in its property or in an enterprise, or undertakes an obligation that is an uncertificated security, including a mutual fund or who directly or indirectly creates a fractional interest in its rights or property which is represented by a security certificate: "LOAN DOCUMENTS" has the meaning set forth in the Guaranty. MISCELLANEOUS PROVISIONS. TITLE; ASSIGNMENT. Bank represents and warrants that it is the owner and holder of the Loan Documents, that it has full power and authority to enter into this Agreement and convey the Loan Documents and other rights provided for herein to Debtor, that it will not sell, assign, encumber, transfer, convey, hypothecate or alienate the Loan Documents or any mortgages, liens or security interests which secure the obligations under the Loan Documents without Debtor's prior written consent in its sole discretion. Notwithstanding anything to the contrary set forth herein or in the Guaranty, Bank shall not amend, modify, waive, terminate, extinguish, release or alienate the Loan Documents, any mortgages, liens or security interests which secure obligations under the Loan Documents or any rights against the Borrower. The Assignment and other Loan Documents shall inure to the benefit of and be binding upon the parties and their respective heirs, legal representatives. 3 successors and assigns. Any attempt by Debtor to assign its interests and obligations hereunder without Bank's prior written consent is null and void. APPLICABLE LAW; CONFLICT BETWEEN DOCUMENTS. This Assignment and other Loan Documents shall be governed by and construed under the laws of the state named in Bank's address shown above without regard to that state's conflict of laws principles. JURISDICTION. Debtor irrevocably agrees to a non-exclusive personal jurisdiction in the state named in Bank's address shown above. SEVERABILITY. If any provision of this Assignment or of the other Loan Documents shall be prohibited or invalid under applicable law, such provision shall be ineffective but only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Assignment or other such document. NOTICES. Any notices to Debtor shall be sufficiently given, if in writing and mailed or delivered to the Debtor's address shown above or such other address as provided hereunder, and to Bank, if in writing and mailed or delivered to Bank's office address shown above or such other address as Bank may specify in writing from time to time. In the event that Debtor changes Debtor's address at any time prior to the date the Obligations are paid in full, Debtor agrees to promptly give written notice of said change of address by registered or certified mail, return receipt requested, all charges prepaid. PLURAL: CAPTIONS. All references in the Loan Documents to Debtor, guarantor, person, document or other nouns of reference mean both the singular and plural form, as the case may be, and the terms "Debtor" or "person" shall mean any individual, person or entity, and if more than one shall be joint and several. The captions contained in the Loan Documents are inserted for convenience only and shall not affect the meaning or interpretation of the Loan Documents. BINDING CONTRACT. Debtor and Bank by execution of this Assignment agree that each party is bound to all terms and provisions of this Assignment. IN WITNESS WHEREOF, the Debtor and Bank have caused this Assignment to be duly executed as of the day and year first above written. DEBTOR: (CORPORATE SEAL) PHOENIX INTERNATIONAL LIFE SCIENCES INC. ATTEST: BY: /s/ Jean-Yves Caloz ------------------------ -------------------------------- Name: Name: Jean-Yves Caloz Title: Title: Senior Vice President and Secretary BANK: FIRST UNION NATIONAL BANK By: /s/ Elizabeth B. Styer -------------------------------- Name: Elizabeth B. Styer Title: Senior Vice President
(SIGNATURES CONTINUED ON THE FOLLOWING PAGE) 4 ACKNOWLEDGEMENT AND AGREEMENT OF BORROWER Borrower acknowledges that Debtor agreed that the foregoing Assignment and related Guaranty in favor of Bank as an accommodation to Borrower. Borrower agreed that in the event Bank exercises its rights against the Collateral, Debtor shall have, and shall be entitled to enact all rights and remedies against Borrower under the Loan Documents. CHRYSALIS INTERNATIONAL CORPORATION By: /s/ PAUL J. SCHMITT --------------------------------------- Name: Paul J. Schmitt Title: Chairman, President & CEO CHRYSALIS INTERNATIONAL PRECLINICAL SERVICES CORPORATION By: /s/ PAUL J. SCHMITT --------------------------------------- Name: Paul J. Schmitt Title: Chairman & CEO CHRYSALIS DNX TRANSGENIC SCIENCES CORPORATION By: /s/ PAUL J. SCHMITT --------------------------------------- Name: Paul J. Schmitt Title: President & CEO CHRYSALIS INTERNATIONAL CLINICAL SERVICES CORPORATION By: /s/ PAUL J. SCHMITT --------------------------------------- Name: Paul J. Schmitt Title: Chairman 5 EX-10.25 39 EXHIBIT 10.25 Exhibit 10.25 Phoenix International Life Sciences Inc. November 18, 1998 Page 1 November 18, 1998 Phoenix International Life Sciences Inc. c/o Paul DeFilippo, Esquire GIBBONS, DEL DEO, DOLAN, GRIFFINGER & VECCHIONE One Riverfront Plaza Newark, NJ 07102-5497 RE: CHRYSALIS INTERNATIONAL CORPORATION AND ITS AFFILIATED COMPANIES ("BORROWER") WITH FIRST UNION NATIONAL BANK ("BANK") Gentlemen: On this date, Phoenix International Life Sciences Inc. ("Phoenix"), a Canadian corporation, has executed and delivered to Bank its Unconditional Guaranty. To secure its liabilities and obligations under the Unconditional Guaranty, Phoenix has executed and delivered to Bank its Pledge and Assignment Agreement. In consideration of the execution and delivery by Phoenix to Bank of the Unconditional Guaranty and the Pledge and Assignment Agreement, Phoenix shall have the right, at its option, exercisable on five (5) days' prior written notice to Bank, to acquire from Bank all right, title and interest of Bank in and to the Loan Documents (as defined in the Unconditional Guaranty), and all mortgages, liens and security interests which secure any obligations under the Loan Documents. At closing, Bank shall transfer, convey, assign, endorse and deliver to Phoenix all of its right, title and interest in the Loan Documents and all mortgages, liens and security interests securing or evidencing same, free and clear of all liens, claims and encumbrances. The consideration payable for the acquisition by Phoenix of Bank's rights as set forth herein shall be the outstanding principal indebtedness under the Term Note, all accrued and unpaid interest thereon and all sums reimbursable to Bank in connection therewith (including, without limitation, reasonable attorneys' fees). Payment of such consideration may be made by Phoenix's irrevocable direction to liquidate the Collateral for the Unconditional Guaranty. The sale and assignment by Bank to Phoenix hereunder shall be without warranty, representation or recourse of any kind or of any nature whatsoever, except (1) that Bank shall warrant and represent that Bank has not previously sold, assigned Phoenix International Life Sciences Inc. November 18, 1998 Page 2 or transferred such indebtedness or any rights attendant thereto, (2) that Bank has free and clear title to and the power and authority to sell and assign such indebtedness and rights to Phoenix, and (3) that the consideration payable by Phoenix represents the amount due to Bank from Borrower. It shall be a condition precedent to the exercise by Phoenix of the option to acquire the indebtedness evidenced by the Term Note that the Unconditional Guaranty of the indebtedness of Borrower owing Bank and the Pledge and Assignment Agreement to secure such liabilities and obligations be in full force and effect, and that Bank shall have a perfected interest in the collateral described in the Pledge and Assignment Agreement. If the foregoing accurately sets forth our agreement and understanding concerning the subject matter of this letter, please execute this letter in the space provided below and return it to the undersigned. Very truly yours, FIRST UNION NATIONAL BANK By: /s/ Elizabeth B. Styer ------------------------------------------ Elizabeth B. Styer, Senior Vice President The undersigned, intending to be legally bound, hereby acknowledges and consents to the terms set forth in the foregoing letter this 18th day of November, 1998. PHOENIX INTERNATIONAL LIFE SCIENCES INC. By: /s/ Jean-Yves Caloz ----------------------------------- Name: Jean Yves Caloz Title: Senior Vice President and Secretary EX-10.26 40 EXHIBIT 10.26 Exhibit 10.26 LOAN AGREEMENT THIS LOAN AGREEMENT made and entered into as of June 12, 1995 between the Director of Development of the State of Ohio (the "Director"), and Phoenix International Life Sciences (U.S.) Inc., a Delaware corporation (the "Company"), under the circumstances summarized in the following recitals (the capitalized terms used in the recitals being used therein as defined in Article I hereof): A. Pursuant to the Act, the Director is authorized, among other things, to make loans to assist in the financing of an Eligible Project. B. The Company has requested that the Director provide the financial assistance for the Project hereinafter described. C. The Director has determined that the Project constitutes an Eligible Project and that the financial assistance to be provided pursuant to this Agreement is appropriate under the Act and will be in furtherance and in implementation of the public policy set forth in the Act. D. The financial assistance to be provided pursuant to this Agreement has been reviewed and approved by the Development Financing Advisory Board and the Controlling Board, pursuant to the Act. NOW, THEREFORE, in consideration of the premises and the representations and agreements hereinafter contained, the Director and the Company agree as follows: ARTICLE 1 DEFINITIONS Section 1.1. USE OF DEFINED TERMS. In addition to the words and terms elsewhere defined in this Agreement or by reference to the Security Document or other instruments, the words and terms set forth in Section 1.2 hereof shall have the meanings therein set forth unless the context or use expressly indicates different meaning or intent. Such definitions shall be equally applicable to both the singular and plural forms of any of the words and terms therein defined. Section 1.2. DEFINITIONS. As used herein: "Act" means Chapter 166, Ohio Revised Code, as from time to time enacted and amended. "Agreement" means this Loan Agreement, as from time to time amended or supplemented. "Allowable Costs" means "allowable costs" of the Project within the meaning of the Act. "Application" means the Application of the Company, dated November 10, 1994, submitted to the Director requesting assistance under the Act. "City" means the City of Cincinnati, Hamilton County, Ohio. "Closing Date" means June 12, 1995, the date of execution and delivery of the Loan Documents. "Commitment" means the Commitment Letter between the Director and the Company dated February 23, 1995. "Completion Date" means the date of completion of the Project, as certified by the Company pursuant to Section 3.5 hereof. "Controlling Board" means the Controlling Board of the State. "Cost Certification" means a certification of the Company, as of a specified date, setting forth in reasonable detail the costs incurred and, if appropriate, to be incurred by the Company in completing the provision of the Project, including a detail by category of all Allowable Costs. "Development Financing Advisory Board" means the Development Financing Advisory Board of the State. "Disbursement Date" means on or before June 12, 1995, or such subsequent date as may be established by the Director in writing in accordance with Section 3.7 hereof for the Disbursement of the Loan. "Eligible Project" means an "eligible project" within the meaning of the Act. "Environmental Laws" means all federal, state, local and foreign laws relating to pollution or protection of the environment, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment (including without limitation ambient air, surface water, ground water, or land), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes, and any and all regulations, codes, plans, orders, decrees, judgments, injunctions, notices or demand letters issued, entered, promulgated or approved thereunder. "Event of Default" means any of the events described as an event of default in Section 5.1 hereof. "Final Cost Certification" means the cost certification dated as of the Completion Date. "Governing Instruments" means the certificate of incorporation and by-laws of the Company. "Governmental Authority" means, collectively, the State, any political subdivision thereof, any municipality, and any agency, department, commission, board or bureau of any of the foregoing having jurisdiction over the Project. The terms "Hazardous Substance", "Release", "Owner", "Operator", "Environment", and "Natural Resources" shall have the same meanings and definitions as set forth in the Comprehensive Environmental Response Compensation and Liability Act, as amended, 42 U.S.C. Section 9601 ET SEQ. and regulations promulgated thereunder (collectively "CERCLA") and any corresponding state or local law or regulation, provided, however, that as used herein the term Hazardous Substance shall also include: (i) any Pollutant or Contaminant as defined by CERCLA or by any other Environmental Law (ii) any Solid Waste, Hazardous Constituent or Hazardous Waste as defined by, or as otherwise identified by, the Resource Conservation and Recovery Act as amended 42 U.S.C. Section 6901 ET SEQ. or regulations promulgated thereunder (collectively "RCRA") or by any other Environmental Law; and (iii) crude oil, petroleum, and fractions or distillates thereof. "Letter of Credit Issuer" means Star Bank, National Association. "Letter of Credit" means the one hundred percent (100%) irrevocable Letter of Credit in the stated amount of $1,353,000.00 issued to the Director for the account of the Company. "Letter of Credit Documents" means all documents evidencing or securing the Letter of Credit. "Loan" means the loan by the Director to the Company in the total sum of the Loan Amount, to be disbursed pursuant to Section 3.8 hereof. "Loan Amount" means the lesser of (i) One Million Three Hundred Fifty Three Thousand and 00/100 Dollars ($1,353,000.00) or (ii) thirty-three percent (33%) of the Allowable Costs of the Project, as determined by the Director in his sole discretion pursuant to this Agreement. "Loan Approval Documents" means, with respect to the Loan, the Recommendation of the Director to the Development Financing Advisory Board dated December 8, 1994, the Resolution of the Development Financing Advisory Board dated December 8, 1994, the Approval of the Controlling Board dated January 23, 1995, and the Commitment. "Loan Documents" means all documents and instruments delivered to or required by the Director to evidence or secure the Loan, including this Agreement, as required by the Commitment and this Agreement. "Note" means the promissory note, in the form attached hereto as Exhibit A, evidencing the obligation of the Company to repay the Loan. "Notice Address" means: (a) As to the Director: Department of Development 77 South High Street P.O. Box 1001 Columbus, Ohio 43216-1001 Attn: Director (b) As to the Company: Phoenix International Life Sciences (U.S.) Inc. 4625 Dobrin Street Saint-Laurent (Montreal), Quebec Canada H4R 2P7 Attn: Jean-Yves Caloz Treasurer or such additional or different address, notice of which is given under Section 6.2 hereof. "Plans and Specifications" means the plans and specifications or other appropriate documents describing the Project prepared by or at the direction of the Company. "Project" means the Project Site and the Project Facilities, together constituting an Eligible Project. "Project Facilities" means the buildings, structures, additions and improvements described in Exhibit B attached hereto and more particularly described in the Plans and Specifications. "Project Purposes" means to pay certain costs incurred by the Company in connection with (i) the acquisition of a parcel of real estate containing approximately twenty-six (26) acres, together with the appurtenances thereto located in Cincinnati, Hamilton County, Ohio, and (ii) the acquisition of Emerson North Hospital, containing approximately 75,000 square feet. "Project Site" means the real estate described in Exhibit C attached hereto. "Provision" means the acquisition of the Project. "Security Document" means the Letter of Credit, of even date herewith, as the same may be from time to time amended or supplemented. "State" means the State of Ohio. Section 1.3. CERTAIN WORDS AND REFERENCES. Any reference herein to the Director shall include those succeeding to his functions, duties or responsibilities pursuant to or by operation of law or lawfully performing such functions. Any reference to a section or provision of the Constitution of the State or to the Act or to a section, provision or chapter of the Ohio Revised Code shall include such section, provision or chapter as from time to time amended, modified, revised, supplemented or superseded. The terms "hereof," "hereby," "herein," "hereto," "hereunder" and similar terms refer to this Agreement; and the term "heretofore" means before, and the term "hereafter" means after, the Closing Date. ARTICLE 2 DETERMINATIONS AND REPRESENTATIONS Section 2.1. DETERMINATIONS OF THE DIRECTOR. Pursuant to the Act and on the basis of the representations and other information provided by the Company, the Director has heretofore made certain determinations, as set forth in the Loan Approval Documents, which are hereby confirmed, and the Director hereby determines that the financial assistance to be provided by the State pursuant to this Agreement will conform to the requirements of the Act, including Section 166.07 thereof, and will further and implement the purposes of the Act by creating new jobs or preserving existing jobs and employment opportunities and improving the economic welfare of the people of the State. Section 2.2. REPRESENTATIONS OF THE COMPANY. The Company hereby represents and warrants that: (a) It is a corporation for profit duly organized, validly existing and in good standing under the laws of the State of Delaware and is qualified and licensed to do business and own property in the State of Ohio. (b) It has full power and authority to execute, deliver and perform the Loan Documents and the Letter of Credit Documents, and to enter into and carry out the transactions contemplated thereby. Such execution, delivery and performance do not, and will not, violate any provision of law applicable to the Company or the Governing Instruments of the Company and do not, and will not, conflict with or result in a default under any agreement or instrument to which the Company is a party or by which it or any of its property or assets is or may be bound. The Loan Documents and the Letter of Credit Documents have, by proper action, been duly authorized, executed and delivered and all necessary actions have been taken to constitute the Loan Documents and the Letter of Credit Documents legal, valid and binding obligations of the Company. (c) The provision of financial assistance pursuant to the Loan Approval Documents and this Agreement induced the Company to provide the Project, thereby creating new jobs or preserving existing jobs and employment opportunities and improving the economic welfare of the people of the State. (d) The provision of the Project will be completed and the Project will be operated and maintained in such manner as to conform with all applicable zoning, planning, building, environmental and other applicable governmental regulations imposed by Governmental Authority and as to be consistent with the purposes of the Act. (e) It presently intends that the Project will be used and operated in a manner consistent with the Project Purposes until the date on which the Loan has been fully repaid, and the Company knows of no reason why the Project will not be so operated. (f) There are no actions, suits or proceedings pending or threatened against or affecting the Company or the Project which, if adversely determined, would individually or in the aggregate materially impair the ability of the Company to perform any of its obligations under the Loan Documents or the Letter of Credit Documents or adversely affect the financial condition of the Company. (g) The Company is not in default under any of the Loan Documents or the Letter of Credit Documents, or in the payment of any indebtedness for borrowed money or under any agreement or instrument evidencing any such indebtedness, and no event has occurred which by notice, the passage of time or otherwise would constitute any such event of default. (h) The Project Site is zoned by the City under a zoning ordinance which permits the Provision of the Project thereon in accordance with the Plans and Specifications and the operation of the Company's business; and all utilities, including water, storm and sanitary sewer, gas, electric and telephone, and rights of access to public ways shall be available or will be provided to the Project Site in sufficient locations and capacities to meet the requirements of operating the Project and of any applicable Governmental Authority. (i) No representation or warranty of the Company contained in any of the Loan Approval Documents, Loan Documents or Letter of Credit Documents, and no statement contained in any certificate, schedule, list, financial statement or other instrument furnished to the Director or the Letter of Credit Issuer by or on behalf of the Company (including, without limitation, the Application) contains any untrue statement of a material fact, or omits to state a material fact necessary to make the statements contained herein or therein not misleading. (j) The financial statements of the Company heretofore delivered to the Director are true and correct, in all respects, have been prepared in accordance with generally accepted accounting principles consistently applied, and fairly present the financial condition and the results of operation of the Company as of the dates thereof. No materially adverse change has occurred in the financial condition of the Company reflected therein since the respective dates thereof. (k) All proceeds of the Loan shall be used for the payment of Allowable Costs relating to Provision of the Project. No part of any such proceeds shall be knowingly paid to or retained by the Company or any partner, officer, shareholder, director or employee of the Company as a fee, kick-back or consideration of any type. The Company has no identity of interest with the general contractor or any architect, subcontractor, laborer or materialman performing work or services or supplying materials in connection with the provision of the Project. (1) The Company has a good and marketable title to a fee simple interest in the Project Site and Project Facilities, subject in all cases to no lien, charge, easement, condition, restriction or encumbrance except as set forth on Schedule 2.2(l). (m) The Project Site has never, and does not currently contain, nor is it contaminated by, any hazardous or toxic waste materials in violation of any applicable environmental laws or regulations, including, but not limited to, Section 103 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 USC Section 9601 et seq. and Chapter 3734 of the Ohio Revised Code; and no "clean-up" of the Project Site has occurred pursuant to any applicable federal or state environmental laws or regulations which would give rise to (i) liability on the part of any person, entity or association to reimburse any governmental authority for the costs of any such "clean-up," or (ii) a lien or encumbrance on the Project Site. (n) The Company is Solvent and upon consummation of the transactions contemplated by this Agreement will be Solvent. "Solvent" means that: (a) the present fair salable value of the Company's assets is in excess of the total amount of its liabilities (including contingent liabilities); (b) the Company does not have unreasonably small capital and is able to pay its debts as they become due; and (c) the Company does not intend to or believe it will incur obligations beyond its ability to pay as they mature. ARTICLE 3 LOAN; PROVISION OF PROJECT; CONDITIONS TO DISBURSEMENT DATE Section 3.1. LOAN AND REPAYMENT. On the terms and conditions of this Agreement and the Commitment, the Director shall lend to the Company the Loan Amount to assist in the financing of the Project. The Loan shall be evidenced by this Agreement and the Note and secured by the Security Document and other Loan Documents, as applicable. Those instruments shall be executed and delivered by the Company to the Director on the Closing Date, concurrently with the execution and delivery of this Agreement and the delivery of all other documents and the satisfaction of all other closing conditions required by this Agreement and the Commitment. The Loan shall be disbursed on the Disbursement Date pursuant to Section 3.8 hereof upon the satisfaction of the conditions set forth in Section 3.6 hereof. The Loan shall be disbursed only from, and only to the extent that on the Disbursement Date funds not heretofore committed are available to make the Loan from moneys in, the "Facilities Establishment Fund" created by the Act. The terms of repayment of the Loan shall be as set forth in the Note and the Company shall make all payments required to be made under the Note as and when due. Section 3.2. PROVISION OF PROJECT. The Company (a) has commenced the Provision of the Project; (b) shall pay all expenses incurred in such Provision from funds made available therefor in accordance with this Agreement or otherwise; and (c) shall demand, sue for, levy and recover all sums of money and debts which may be due and payable under the terms of any contract, order, receipt, guaranty, warranty, writing or instruction in connection with the Provision of the Project and will enforce the terms of any contract, agreement, obligation, bond or other performance security with respect thereto. The Company confirms its agreement in the Commitment that all wages paid to laborers and mechanics employed on the Provision of the Project shall be paid at not less than the prevailing rates of wages for laborers and mechanics for the class of work called for by the Project, which wages shall be determined in accordance with the requirements of Chapter 4115, Ohio Revised Code, for determination of prevailing wage rates; provided that if the Company undertakes, as part of the Project, work to be performed by its regular bargaining unit employees who are covered under a collective bargaining agreement which was in existence prior to the date of the Commitment, the rate of pay provided under the applicable collective bargaining agreement may be paid to such employees. Section 3.3. PLANS AND SPECIFICATIONS: INSPECTIONS. At his option, the Director may retain, at the Company's expense, an architect, engineer, appraiser or other consultant for the purpose of approving the Plans and Specifications, verifying costs and performing inspections as Provision of the Project progresses. Such inspections or approvals of Plans and Specifications or the Project Facilities shall impose no responsibility or liability of any nature upon the Director, the State, their agents, representatives or designees nor, without limitation, carry any warranty or representation as to the adequacy or safety of the structures or any of their component parts or any other physical condition or feature pertaining to the Project Facilities. The Company shall, at the request of the Director, make periodic reports (including, if required, submission of updated Cost Certifications) to the Director concerning the status of completion and the expenditure of costs in respect thereof. The Company may revise the Plans and Specifications from time to time; provided that no revision shall be made (a) which would change the Project Purposes to purposes other than those permitted by the Act; (b) without obtaining, to the extent required by law, the approval of any applicable Governmental Authority; and (c) without the prior written approval of the Director if such revision would change the amounts set forth in the most recently furnished Cost Certification. In any event, all revisions to the Plans and Specifications shall be promptly filed with the Director. Section 3.4. COMPANY REQUIRED TO PAY COSTS IN EVENT PROCEEDS INSUFFICIENT. In the event that the proceeds of the Loan are not sufficient to pay all costs of the Project, the Company will, nonetheless and irrespective of the cause of such deficiency, complete the Project in accordance with the Plans and Specifications and pay all costs of such completion in full from its own funds or other equity sources. Section 3.5. COMPLETION DATE. The Completion Date shall occur not later than June 12, 1995, and shall be evidenced to the Director by a certificate of the Company substantially in the form of Exhibit 3.5 attached hereto and made a part hereof stating the Completion Date, that all licenses, permits and approvals, including a certificate of occupancy, required by any Governmental Authority have been procured and/or obtained, that all improvements and additions reflected in the Plans and Specifications have been made, that all costs of providing the Project have been paid and the date as of which operation of the Project shall commence, which certificate shall be accompanied by the Final Cost Certification, and if Provision of the Project entailed construction, by a completed Forms AIA-G702 and G703. Section 3.6. CONDITIONS TO DISBURSEMENT. The disbursement of the Loan shall be made on or before the Disbursement Date, provided the Director shall have received the following on or before the Disbursement Date: (a) the executed Note; (b) the items required by Section 3.5 hereof; (c) certification by the Company that its representations and warranties made in the Loan Approval Documents, the Loan Documents and the Letter of Credit Documents remain true, accurate and complete as of the Disbursement Date and no default or event which, by notice, the passage of time or otherwise, would constitute a default, exists under the Loan Documents or the Letter of Credit Documents; (d) certificate of occupancy; (e) evidence of the liability and property insurance for the Project; (f) evidence of zoning compliance; (g) evidence of availability and adequacy of utilities; (h) copies of all building permits; (i) Cost Certifications; (j) the duly executed Security Document; (k) the Company's Certificates of Corporate Good Standing issued by the Secretaries of the States of Delaware and Ohio, dated within ten (10) days of the Disbursement Date; (1) certified copies of the resolutions of the Company authorizing execution and delivery of all documents with respect to the Loan and the Letter of Credit; (m) certificate of incumbency as to the Company; (n) copies, certified by the Company to be true, correct and complete, of the following: (i) the Governing Instruments of the Company; and (ii) the Letter of Credit Documents; (o) an opinion of the Company's counsel, which sets forth the following: (i) that the Company is a corporation duly organized and validly existing under the laws of, and in good standing with, the State of Delaware, and is qualified and licensed to do business in the State of Ohio; (ii) that the Company has power and authority to own its properties and conduct its business; (iii) that the execution of the Loan Documents by the Company does not conflict with the Governing Instruments of the Company; (iv) that the Agreement, the Loan Documents, the Note, Security Document and the Letter of Credit Documents have been duly authorized, executed and delivered by the Company or the Letter of Credit Issuer, as the case may be, and are valid and binding instruments, enforceable against the Company in accordance with their respective terms, except as such enforcement may be limited by bankruptcy, insolvency or other laws or equitable principles affecting the enforcement of creditor's rights generally; and that the Company or the Letter of Credit Issuer, as the case may be, has taken all actions necessary to authorize the execution and delivery of the same; (v) that there are no actions, suits or proceedings, at law or in equity, or before or by any court, public board or body, pending or threatened or affecting the Company or the Project which, if adversely determined, would individually or in the aggregate materially impair the ability of the Company to perform any of its obligations under the Loan Documents, or would materially adversely affect the financial condition of the Company; (vi) that the use and operation of the Project for its intended purposes comply with all applicable zoning ordinances, regulations and Environmental Laws affecting the Project, and all requirements for such use and operation have been satisfied; (vii) that all authorizations, certificates, licenses and permits which are required by any governmental authority and which are necessary for the lawful use, occupancy and operation of the Project have been obtained; (viii) that the execution of the Loan Documents and consummation of the transactions contemplated in this Agreement will not result in a breach or violation or default under any judgment, decree, loan, mortgage, agreement, indenture or other instrument applicable to the Company; (ix) that the Company is not in default under any contract, agreement or other instrument by which it is bound, in the payment of any monetary obligation, or with respect to any judgment, order, injunction or regulation of any court or governmental authority, and there exists no condition or event which after notice or lapse of time or both would constitute any such default. (p) All licenses and permits required by Governmental Authority; (q) such other certifications, documents or opinions as the Director may reasonably request. Section 3.7. POSTPONEMENT OF DISBURSEMENT DATE. At the written request of the Company setting forth the reasons therefor and received at least twenty (20) days prior to the Disbursement Date, the Director may, but shall be under no obligation to, postpone the Disbursement Date to a later date. No such postponement will be deemed to have been granted unless stated in a writing signed by the Director specifying the length of the extension given. If for any reason the Loan shall not have been disbursed on or before the Disbursement Date or such subsequent date as the Director shall have specified in writing pursuant to the preceding sentence, this Agreement shall automatically terminate and, subject to the provisions of Section 3.9 hereof, be of no further force and effect. For purposes of this Section, time is of the essence. Section 3.8. DISBURSEMENT OF LOAN. The Director shall disburse the Loan by delivering funds in the Loan Amount to the Company upon confirmation by the Director, exercising his sole discretion, that the conditions specified in Section 3.6 hereof have been satisfied and the confirmation by the Director that the applicable Security Document has been duly executed and delivered by the Company. Section 3.9. PAYMENT OF COSTS; INDEMNIFICATION. The Company shall pay all costs incident to the Loan, including, without limitation as applicable, recording and title fees, title examination and insurance fees, escrow fees, all costs and expenses incurred by the Director and the fees and expenses of the counsel and accountants assisting in this matter at the request of the Director or his representative. The Company shall defend, indemnify and hold the Director and any officials of the State harmless against any and all loss, cost, expense, claims or actions arising out of or connected with the execution and delivery of this Agreement or any other Loan Documents and the preparation of documents relating to the disbursement of the Loan, including all aforementioned costs and expenses, regardless of whether or not the disbursement of the Loan shall actually occur. The provisions of this Section will survive the termination of this Agreement. ARTICLE 4 ADDITIONAL COVENANTS AND AGREEMENTS Section 4.1. INFORMATION CONCERNING OPERATIONS. At the request of the Director and, in any event, within seventy-five (75) days after the last day of each fiscal year of the Company beginning with the fiscal year in which the Completion Date occurs, the Company shall furnish to the Director a report on Project operations setting forth the total number of employees then employed on the Project and such other employment, economic and statistical data concerning the Project as may reasonably be requested by the Director. Section 4.2. AFFIRMATIVE COVENANTS OF THE COMPANY. Throughout the term of this Agreement, the Company shall: (a) Taxes and Assessments. Pay and discharge promptly, or cause to be paid and discharged promptly, when due and payable, all taxes, assessments and governmental charges or levies imposed upon it, its income or any of its property, or upon any part thereof, as well as all claims of any kind (including claims for labor, materials and supplies) which, if unpaid, might by law become a lien or charge upon its property. (b) Maintain Existence. Do or cause to be done all things necessary to preserve and keep in full force and effect its existence and its material rights and franchises. (c) Maintain Property. Maintain and keep its property in good repair, working order and condition, and from time to time make all repairs, renewals and replacements which, in the opinion of the Company, are necessary and proper so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this subsection (c) shall prevent the Company from selling or otherwise disposing of any property whenever, in the good faith judgment of the Company, such property is obsolete, worn out, without economic value or unnecessary for the conduct of the business of the Company. (d) Maintain Insurance. Keep all of its insurable property insured against loss or damage by fire and other risks, maintain public liability insurance against claims for personal injury, death, or property damage suffered by others upon, in or about any premises occupied by the Company; and maintain all such worker's compensation or similar insurance as may be required under the laws of any state or jurisdiction in which it may be engaged in business. All insurance for which provision has been made in this subsection (d) shall be maintained against such risks and in at least such amounts as such insurance is usually carried by persons engaged in the same or similar businesses, and all insurance herein provided for shall be effected and maintained in force under a policy or policies issued by insurers of recognized responsibility, except that it may effect worker's compensation or similar insurance in respect of operations in any state or other jurisdiction either through an insurance fund operated by such state or other jurisdiction or by causing to be maintained a system or systems of self-insurance which is in accordance with applicable law. (e) Furnish Information. Furnish to the Director: (i) Quarterly Reports. Within thirty (30) days after the end of each quarterly period of each fiscal year of the Company, the balance sheet of the Company as at the end of such quarterly period, together with related statements of income and retained earnings (or accumulated deficit) and changes in financial position for such quarterly period, setting forth in comparative form the corresponding figures as at the end of or for the corresponding quarter of the previous fiscal year, all in reasonable detail, prepared in accordance with generally accepted accounting principles applied on a consistent basis, subject to usual year-end audit adjustments. (ii) Annual Reports. Within seventy-five (75) days after the last day of each fiscal year of the Company, a copy of its audit report containing a balance sheet of the Company as at the end of such fiscal year, together with related statements of income and retained earnings (or accumulated deficit) and changes in financial position for such fiscal year, setting forth in comparative form the corresponding figures as at the end of or for the previous fiscal year, all in reasonable detail and all examined by and accompanied by a review letter or opinion of its independent certified public accountants to the effect that such financial statements were prepared in accordance with generally accepted accounting principles consistently applied and present fairly the Company's financial position at the close of such periods and the results of its operations for such periods and that the Company is not in default under any of its material financial obligations. (iii) Certificate; No Default. With the financial reports required to be furnished under this Section, a certificate of the Company's chief executive officer or chief financial officer stating that (a) no Event of Default has occurred and is continuing and no event or circumstance which would constitute an Event of Default, but for the requirement that notice be given or time elapse or both, has occurred and is continuing, or, if such an Event of Default or such event or circumstance has occurred and is continuing, a statement as to the nature thereof and the action which the Company proposes to take with respect thereto, and that (b) no action, suit or proceeding by it or against it at law or in equity, or before any governmental instrumentality or agency, is pending or threatened, which, if adversely determined, would materially impair the right or ability of the Company to carry on the business which is contemplated in connection with the Project or would materially impair the right or ability of the Company to perform the transactions contemplated by this Agreement or the other Loan Documents or would materially and adversely affect its business, operations, properties, assets or condition, all as of the date of such certificate, except as disclosed in such certificate. (iv) Other Information. Such other information respecting the business, properties or the condition or operations, financial or otherwise, of the Company as the Director may reasonably request, Including, without limitation, annually, a certificate executed by an officer of the Company certifying the number of employees of the Company employed at the Project Site at the time of the closing of the Loan, the number of employees of the Company employed at the Project Site added during the immediately preceding year, and the total number of current employees of the Company employed at the Project Site. (f) Deliver Notice. Forthwith upon learning of any of the following, deliver written notice thereof to the Director, describing the same and the steps being taken by the Company with respect thereto: (i) the occurrence of an Event of Default or an event or circumstance which would constitute an Event of Default, but for the requirement that notice be given or time elapse or both, or (ii) any action, suit or proceeding by it or against it at law or in equity, or before any governmental instrumentality or agency, instituted or threatened which, if adversely determined, would materially impair the right or ability of the Company to carry on the business which is contemplated in connection with the Project or would materially impair the right or ability of the Company to perform the transactions contemplated by the Loan Documents, or would materially and adversely affect its business, operations, properties, assets or condition, or (iii) the occurrence of a Reportable Event, as defined in the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), under, or the institution of steps by the Company to withdraw from, or the institution of any steps to terminate, any employee benefit plan as to which the Company may have liability. (g) Inspection Rights. At any reasonable time and from time to time, permit the Director, or any agents or representatives thereof, to examine and make copies of and abstract from the records and books of account of, and visit the properties of, the Company and discuss the general business affairs of the Company with any of its officers; provided, however, that the Company reserves the right to restrict access to any of its facilities in accordance with reasonably adopted procedures relating to safety and security. Section 4.3. NEGATIVE COVENANTS OF THE COMPANY. Throughout the term of this Agreement, the Company shall not: (a) Maintain Existence. Sell, transfer or otherwise dispose of all, or substantially all, of its assets, consolidate with or merge into any other entity, or permit one or more entities to consolidate with or merge into it; provided, however, that the Company may, without violating the agreement contained in this subsection (a), consolidate with or merge into another entity, or permit one or more other entities to consolidate with or merge into it, or sell, transfer or otherwise dispose of all, or substantially all, of its assets and thereafter dissolve if: (i) the prior written consent of the Director is obtained; (ii) the surviving, resulting or transferee entity, as the case may be, assumes in writing all of the obligations of the Company hereunder (if such surviving, resulting or transferee entity is other than the Company); and (iii) the surviving, resulting or transferee entity, as the case may be, is an entity duly organized and validly existing under the laws of the State or duly qualified to do business therein, and has a net worth of not less than that of the Company immediately prior to such disposition, consolidation or merger, transfer or change of form. (b) ERISA. Voluntarily terminate any employee benefit plan or other plan (a "Plan") maintained for employees of the Company and covered by Title IV of ERISA, so as to result in any material liability of the Company to the Pension Benefit Guaranty Corporation ("PBGC"), enter into any Prohibited Transaction (as defined in Section 4975 of the Internal Revenue Code of 1954, as amended, and in ERISA) involving any Plan which results in any material liability of the Company to the PBGC, cause any occurrence of any Reportable Event (as defined in Title IV of ERISA) which results in any material liability of it to the PBGC, or allow or suffer to exist any other event or condition which results in any material liability of the Company to the PBGC. (c) Agreements. Enter into any agreement containing any provision which would be violated or breached by the performance of its obligations hereunder or under any instrument or document delivered or to be delivered by it hereunder or in connection herewith. (d) Assignment or Lease. In whole or in part, assign this Agreement or lease or grant the right to occupy or use the Project to others, without the prior written consent of the Director. (e) Operation of Project. Without the prior written consent of the Director, suspend or discontinue operation of the Project. Section 4.4. ENVIRONMENTAL MATTERS. Throughout the term of this Agreement, the Company shall: (a) ensure that the Project Site remains in compliance with all Environmental Laws and will not place or permit to be placed any Hazardous Substances on the Project Site except as not prohibited by applicable law or appropriate governmental authorities; (b) maintain a system to assure and monitor continued compliance with all applicable Environmental Laws which system shall Include periodic reviews of such compliance; (c) (i) employ in connection with its use of the Project Site appropriate technology necessary to maintain compliance with any applicable Environmental Laws and (ii) dispose of any and all Hazardous Waste generated at the Project Site only at facilities and with carriers that maintain valid permits under RCRA and any other applicable Environmental Laws; use its best efforts to obtain certificates of disposal, such as hazardous waste manifest receipts, from all treatment, transport, storage or disposal facilities or operators employed by the Company in connection with the transport or disposal of any Hazardous Waste generated at the Project Site; (d) In the event the Company obtains, gives or receives notice of any Release or threat of Release of a reportable quantity of any Hazardous Substances at the Project Site (any such event being hereinafter referred to as a "Hazardous Discharge") or receives any notice of violation, request for information or notification that it is potentially responsible for investigations or cleanup of environmental conditions at the Project Site, demand letter or complaint, order, citation, or other written notice with regard to any Hazardous Discharge or violation of Environmental Laws affecting the Project Site or Company's interest therein (any of the foregoing is referred to herein as an "Environmental Complaint") from any Person or entity, including any state agency responsible in whole or in part for environmental matters in the state in which the Project Site is located or the United States Environmental Protection Agency (any such person or entity hereinafter the "Authority"), then the Company shall, within five (5) business days, given written notice of same to the Director detailing facts and circumstances of which the Company is aware giving rise to the Hazardous Discharge or Environmental Complaint. Such information is to be provided to allow the Director to protect his security interest in the Project Site and is not intended to create nor shall it create any obligation upon the Director with respect thereto; (e) promptly forward to the Director copies of any request for information, notification of potential liability, demand letter relating to potential responsibility with respect to the investigation or cleanup of Hazardous Substances at any other site owned, operated or used by Company to dispose of Hazardous Substances and shall continue to forward copies of correspondence between the Company and the Authority regarding such claims to the Director until the claim is settled. The Company shall promptly forward to the Director copies of all documents and reports concerning a Hazardous Discharge at the Project Site that the Company is required to file under any Environmental Laws; (f) respond promptly to any Hazardous Discharge or Environmental Complaint and take all necessary action in order to safeguard the health of any Person and to avoid subjecting the Project Site to any lien. If Company shall fail to respond promptly to any Hazardous Discharge or Environmental Complaint or Company shall fail to comply with any of the requirements of any Environmental Laws, the Director may, but without the obligation to do so, for the sole purpose of protecting the Director's interest hereunder: (A) give such notices or (B) enter onto the Project Site (or authorized third parties to enter onto the Project Site) and take such actions as the Director (or such third parties as directed by the Director) deem reasonably necessary or advisable, to clean up, remove, mitigate or otherwise deal with any Hazardous Discharge or Environmental Complaint. All reasonable costs and expenses incurred by the Director (or such third parties) in the exercise of any such rights, including any sums paid In connection with any judicial or administrative investigation or proceedings, fines and penalties, together with interest thereon from the date expended at the Default Rate shall be paid upon demand by the Company and until paid shall be added to and become a part of the obligations created by the terms of this Agreement or the Note or any other agreement between the Director and Company; (g) Promptly upon the written request of the Director from time to time, provide Director, at the Company's expense, with an environmental site assessment or environmental audit report prepared by an environmental engineering firm acceptable in the reasonable opinion of the Director, to assess with a reasonable degree of certainty the existence of a Hazardous Discharge and the potential costs in connection with abatement, cleanup and removal of any Hazardous Substances found on, under, at or within the Project Site. Any report or investigation of such Hazardous Discharge proposed and acceptable to an appropriate Authority that is charged to oversee the clean-up of such Hazardous Discharge shall be acceptable to the Director. If such estimates, individually or in the aggregate, exceed $100,000, the Director shall have the right to require the Company to post a bond, letter of credit or other security reasonably satisfactory to the Director to secure payment of these costs and expenses; (h) defend and indemnify the Director and hold the Director harmless from and against all loss, liability, damage and expense, claims, costs, fines and penalties, including reasonable attorney's fees, suffered or incurred by the Director under or on account of any Environmental Laws, including, without limitation, the assertion of any lien thereunder, with respect to any Hazardous Discharge, the presence of any Hazardous Substances affecting any of the Project Site, whether or not the same originates or emerges from the Project Site or any contiguous real estate, including any loss of value of the Project Site as a result of the foregoing except to the extent such loss, liability, damage and expense is attributable to any Hazardous Discharge resulting from actions on the part of the Director. (i) The Company's obligations under this Section 4.4 shall arise upon the discovery of the presence of any Hazardous Substances at the Project Site, whether or not any federal, state, or local environmental agency has taken or threatened any action in connection with the presence of any Hazardous Substances. The Company's obligation and the indemnifications hereunder shall survive the termination of this Agreement. ARTICLE 5 EVENTS OF DEFAULT AND REMEDIES; TERMINATION Section 5.1. EVENTS OF DEFAULT. Each of the following shall be an "Event of Default": (a) The Company shall fail to pay any amount payable pursuant to this Agreement on the date on which such payment is due and payable or under the Note within ten (10) days after the date on which such payment is due and payable; or (b) The Company shall fail to observe and perform any agreement, term or condition contained in this Agreement other than as required pursuant to subsection (a) above, and such failure continues for a period of thirty (30) days after notice of such failure is given to the Company by the Director, or for such longer period as the Director may agree to in writing; provided, that if the failure is of such nature that it can be corrected but not within the applicable period, such failure shall not constitute an Event of Default so long as the Company institutes curative action within the applicable period and diligently pursues such action to completion; or (c) Any representation or warranty made by the Company (or any of its officers) herein or in any other Loan Documents, Loan Approval Documents or Letter of Credit Documents or in connection herewith or therewith shall prove to have been incorrect in any material respect when made; or (d) The Company shall fail to pay any indebtedness of the Company, or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, by acceleration, on 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; or any other default under any agreement or instrument relating to any such indebtedness, or any other event, shall occur and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such default or event is to accelerate, or to permit the acceleration of, the maturity of such indebtedness; 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 (e) The Company commences a voluntary case concerning it under titles of the United States Code entitled "Bankruptcy" as now or hereafter in effect, or any successor thereto (the "Bankruptcy Code"); or an involuntary case is commenced against the Company under the Bankruptcy Code and relief is ordered against the Company, or the petition is controverted but is not dismissed within sixty (60) days after the commencement of the case; or the Company is not generally paying its debts as such debts become due; or a custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or substantially all of the property of the Company; or the Company commences any other proceeding under any reorganization, arrangement, readjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect; or there is commenced against the Company any such proceeding which remains undismissed for a period of sixty (60) days; or the Company is adjudicated insolvent or bankrupt; or the Company fails to controvert in a timely manner any such case under the Bankruptcy Code or any such proceeding or any order of relief or other order approving any such case or proceeding or in the appointment of any custodian or the like of or for it or any substantial part of its property or suffers any such appointment to continue undischarged or unstayed for a period of sixty (60) days; or the Company makes a general assignment for the benefit of creditors; or any action is taken by the Company for the purpose of effecting any of the foregoing; or a receiver or trustee or any other officer or representative of the court or of creditors, or any court, governmental officer or agency, shall under color of legal authority, take and hold possession of any substantial part of the property or assets of the Company for a period in excess of sixty (60) days; or (f) A judgment or order for the payment of money in excess of Ten Thousand Dollars ($10,000.00) shall be rendered against the Company and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of thirty (30) 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 (g) Any default under the Note, the Security Document, any other Loan Document or the Letter of Credit Documents shall have occurred and be continuing; or (h) The Company fails to meet its minimum funding requirements under Section 301 et seq. of ERISA, with respect to any of its Plans. Section 5.2. REMEDIES ON DEFAULT. Whenever an Event of Default shall have happened and be subsisting, any one or more of the following remedial steps may be taken: (a) If the Loan has not been disbursed, the Director may terminate any and all of its obligations under this Agreement and the Commitment; (b) The Director may declare all payments under the Note to be immediately due and payable, whereupon the same shall become immediately due and payable; (c) The Director may have access to, inspect, examine and make copies of the books and records accounts and financial data of the Company; or (d) The Director may pursue all remedies now or hereafter existing at law or in equity to collect all amounts then due and thereafter to become due under this Agreement, the Security Document, the Note or any other Loan Documents, or to enforce the performance and observance of any other obligation or agreement of the Company under the Loan Documents. Section 5.3. NO REMEDY EXCLUSIVE. No remedy conferred upon or reserved to the Director by this Agreement is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Agreement, each other Loan Document, or now or hereafter existing at law, in equity or by statute. No delay or omission to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right and power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Director to exercise any remedy reserved to it in this Article, it shall not be necessary to give any notice, other than such notice as may be expressly provided for herein or required by law. Section 5.4. AGREEMENT TO PAY ATTORNEYS' FEES AND EXPENSES. If an Event of Default shall occur and the Director should incur expenses, including attorney's fees, in connection with the enforcement of this Agreement, or any other Loan Document, or the collection of sums due thereunder, the Company shall reimburse the Director for the expenses so incurred upon demand. If any such expenses are not so reimbursed, the amount thereof, together with interest thereon from the date of demand for payment at 5% in excess of the then applicable rate under the Note (the "Default Rate"), shall constitute indebtedness under this Agreement and the Note and in any action brought to collect such indebtedness or to enforce this Agreement or the Note, the Director shall be entitled to seek the recovery of such expenses in such action. Section 5.5. NO WAIVER. No failure by the Director to insist upon the strict performance by the Company of any provision hereof shall constitute a waiver of his right to strict performance and no express waiver shall be deemed to apply to any other existing or subsequent right to remedy the failure by the Company to observe or comply with any provision hereof. ARTICLE 6 MISCELLANEOUS Section 6.1. TERM OF AGREEMENT. This Agreement shall be and remain in full force and effect from the date of its delivery until (a) the termination of this Agreement pursuant to Section 5.2(a) hereof or (b) such time as the Loan shall have been fully repaid and all other sums payable by the Company under this Agreement, the Security Document, the Note and the other Loan Documents shall have been paid. Section 6.2. NOTICES. All notices, certificates, requests or other communications hereunder shall be in writing and shall be deemed to be sufficiently given when mailed by registered or certified mail, postage prepaid, and addressed to the appropriate Notice Address. The Company or the Director may, by notice given hereunder, designate any further or different addresses to which subsequent notices, certificates, requests or other communications shall be sent. Section 6.3. EXTENT OF COVENANTS OF THE DIRECTOR; NO PERSONAL LIABILITY. All covenants, obligations and agreements of the Director contained in this Agreement shall be effective to the extent authorized and permitted by applicable law. No such covenant, obligation or agreement shall be deemed to be a covenant, obligation or agreement of any present or future Director in other than his official capacity acting pursuant to the Act. Section 6.4. BINDING EFFECT. This Agreement shall inure to the benefit of and shall be binding in accordance with its terms upon the Director, the Company and their respective successors and assigns. Section 6.5. AMENDMENTS AND SUPPLEMENTS. This Agreement may not be amended or supplemented except by an instrument in writing executed by the Director and the Company. Section 6.6. EXECUTION COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be regarded as an original and all of which shall constitute but one and the same instrument. Section 6.7. SEVERABILITY. If any provision of this Agreement, or any covenant, obligation or agreement contained herein is determined by a court to be invalid or unenforceable, such determination shall not affect any other provision, covenant, obligation or agreement, each of which shall be construed and enforced as if such invalid or unenforceable portion were not contained herein. Such invalidity or unenforceability shall not affect any valid and enforceable application thereof, and each such provision, covenant, obligation or agreement, shall be deemed to be effective, operative, made, entered into or taken in the manner and to the full extent permitted by law. Section 6.8. CAPTIONS. The captions and headings in this Agreement shall be solely for convenience of reference and shall in no way define, limit or describe the scope or intent of any provisions or Sections of this Agreement. Section 6.9. GOVERNING LAW: JURISDICTION. This Agreement shall be deemed to be a contract made under the laws of the State and for all purposes shall be governed by and construed in accordance with the laws of the State. The Company agrees that the state and federal courts in Hamilton County, Ohio or any other court in which the Director initiates proceedings have exclusive jurisdiction over all matters arising out of this Agreement, and that service of process in any such proceeding shall be effective if mailed to the Company at its Notice Address. THE COMPANY HEREBY WAIVES THE RIGHT TO TRIAL BY JURY OF ANY MATTERS ARISING OUT OF THIS AGREEMENT. THE COMPANY HEREBY WAIVES ANY CONFLICT OF INTEREST WHICH MAY EXIST AS THE RESULT OF DIRECTOR'S ATTORNEY CONFESSING JUDGMENT AND CONSENTS TO THE DIRECTOR'S ATTORNEY RECEIVING A LEGAL FEE FROM THE DIRECTOR FOR HIS SERVICES IN CONFESSING JUDGMENT. Section 6.10. CONFESSION OF JUDGMENT. The Company authorizes any attorney of record to appear for it in any court of record in the State of Ohio, after any amount hereunder becomes due and payable whether by its terms or upon default, waive the issuance and services of process, and release all errors, and confess a judgment against it in favor of the holder of the Note, for the principal amount of such amount due hereunder or under the Note plus interest thereon, together with court costs and attorneys' fees. Stay of execution and all exemptions are hereby waived. If an amount due hereunder is referred to an attorney for collection, and the payment is obtained without the entry of a judgment, the Company shall pay to the holder of the Note its attorneys' fees. IN WITNESS WHEREOF, this Agreement has been executed and delivered all as of the date hereinbefore written. WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE. PHOENIX INTERNATIONAL LIFE DIRECTOR OF DEVELOPMENT OF THE SCIENCES (U.S.) INC. STATE OF OHIO, ACTING ON BEHALF OF THE STATE By: /s/ Jean-yves Caloz By: /s/ Donald E. Jakeway ---------------------------- ----------------------------- Jean-Yves Caloz, Donald E. Jakeway, Treasurer Director EXHIBIT A PROMISSORY NOTE $1,353,000.00 June 12, 1995 For value received, PHOENIX INTERNATIONAL LIFE SCIENCES (U.S.) INC., a Delaware Corporation (the "Company"), promises to pay to the order of THE DIRECTOR OF DEVELOPMENT OF THE STATE OF OHIO (the "Director"), at 77 South High Street, P.O. Box 1001, Columbus, Ohio 43216-1001, or at such other address as may be designated in writing by the Director, the principal sum of One Million Three Hundred Fifty-Three Thousand and 00/100 Dollars ($1,353,000.00) with interest on the amount of principal from time to time outstanding from the Disbursement Date as specified under and defined in the Loan Agreement between the Director and the Company of even date (the "Loan Agreement"), at the rate of two percent (2%) per annum until paid. Accrued interest on this Note shall be due and payable monthly on the first day of each calendar month commencing on the first day of August, 1995. The principal amount of this Note shall be paid in sixty (60) consecutive monthly installments of Twenty-Three Thousand Seven Hundred Fifteen and 06/100 Dollars ($23,715.06) each, which shall be due and payable on the first day of each calendar month commencing on the first day of August, 1997 (the "First Installment Date") and ending on the first day of July, 2002 (the "Last Installment Date"); provided that the amount of the installment payable on the Last Installment Date shall be equal to the balance of the principal sum outstanding, together with interest accrued thereon and any other amounts outstanding hereunder or under the Loan Agreement. In addition, the Company promises to pay to the order of the Director a monthly service fee equal to one twelfth (1/12) of one-quarter (1/4) of one percent (1%) of the principal balance from time to time outstanding under this Note. The annual rate of interest stated herein shall apply to a 360-day period, and amounts of interest due hereunder shall be computed upon the basis of 30-day months. Installments of principal and interest shall be applied first to interest as provided herein and the balance to principal due hereunder. The Company may prepay all or any portion of the principal sum hereof at any time without penalty. All such prepayments shall be applied to the payment of the principal installments due hereon in the inverse order of their maturity, and shall be accompanied by the payment of accrued interest on the amount of the prepayment to the date thereof. This Note does not of itself constitute a commitment by the Director to make any disbursement of the Loan (as defined in the Loan Agreement) to the Company. The conditions for making such a disbursement are set forth in the Loan Agreement. The disbursements made by the Director to the Company shall not exceed the face amount of this Note and the total amount of such disbursement is limited by and subject to the conditions for making disbursement of the Loan as set forth in the Loan Agreement. For the period during which a default shall exist in the payment of any installment of principal, interest and monthly service fee due and payable hereunder, whether by acceleration or otherwise, a late charge equal to five percent (5%) of each such installment shall be assessed, in addition to all other sums due hereunder, for each month during which the default exists. If any provision hereof is in conflict with any statute or rule of law of the State of Ohio or is otherwise unenforceable for any reason whatsoever, then such provision shall be deemed separable from and shall not invalidate any provision of this Note. The payment of this Note and all interest hereon is secured by a one hundred percent (100%) Irrevocable Letter of Credit in the stated amount of $1,353,000.00 issued by Star Bank, National Association to the Director for the account of the Company. The covenants, conditions and agreements contained in the Letter of Credit Documents (as defined in the Loan Agreement) and the Loan Agreement are hereby made a part of this Note. If default be made in the payment of any installment of interest, or of principal and interest, under this Note, in either case continuing for a period of ten (10) days after any such payment shall have become due and payable, or if an "Event of Default," as defined in the Loan Agreement or the Letter of Credit Documents, shall have occurred and be subsisting, then, at the option of the Director, the entire principal sum payable hereunder and all interest accrued thereon shall become due and payable at once, without demand or notice. This Note was executed in Cincinnati, Ohio, and shall be construed in accordance with the laws of Ohio. THE COMPANY HEREBY WAIVES THE RIGHT TO TRIAL BY JURY OF ANY MATTERS ARISING OUT OF THIS NOTE. THE COMPANY HEREBY WAIVES ANY CONFLICT OF INTEREST WHICH MAY EXIST AS THE RESULT OF DIRECTOR'S ATTORNEY CONFESSING JUDGMENT AND CONSENTS TO THE DIRECTOR'S ATTORNEY RECEIVING A LEGAL FEE FROM THE DIRECTOR FOR HIS SERVICES IN CONFESSING JUDGMENT. [REMAINDER OF PAGE INTENTIONALLY BLANK] WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE. PHOENIX INTERNATIONAL LIFE SCIENCES (U.S.) INC. By:/s/ Jean-yves Caloz ---------------------------------------- Jean-Yves Caloz, Treasurer STATE OF OHIO ) ) SS. COUNTY OF HAMILTON ) The foregoing instrument was acknowledged before me this_____ day of ________________, 1995 by Jean-Yves Caloz, Treasurer of Phoenix International Life Sciences (U.S.) Inc., a Delaware corporation. ----------------------------- Notary Public EX-21 41 EXHIBIT 21 Exhibit 21
COMPANY LEGAL NAME: LOCATION: PHOENIX INTERNATINAL LIFE SCIENCES INC. MONTREAL, CANADA PHOENIX INTERNATIONAL LIFE SCIENCES (U.S.) INC. CINCINNATI, US PHOENIX INTERNATIONAL LIFE SCIENCES (IBRD) INC. IRVINE, CA, USA PHOENIX INTERNATIONAL LIFE SCIENCES (ICCR) INC. NEPTUNE, NEW JERSEY PHOENIX INTERNATIONAL FRANCE SA FRANCE, EUROPE PHOENIX INTERNATIONAL PHARMACOLOGY SA FRANCE, EUROPE PHOENIX INTERNATIONAL EUROPE BELGIUM, EUROPE ITEM HOLDING SA FRANCE, EUROPE ITEM INTERNATIONAL SARL FRANCE, EUROPE PHOENIX INTERNATIONAL LIFE SCIENCES ESPANA SA SPAIN, EUROPE METI MADRID SA SPAIN, EUROPE PHOENIX INTERNATIONAL GB LIMITED UK, EUROPE PHOENIX INTERNATIONAL LIFE SCIENCES WUPPERTAL GmBH WUPPERTAL, EUROPE PHOENIX INTERNATIONAL ITALIA SRL ITALY, EUROPE PHOENIX INTERNATIONAL ROMANIA SRL ROMANIA, EUROPE PHOENIX INTERNATIONAL MUNCHEN GmbH MCKNIGHT LABORATORIES GmbH GERMANY, EUROPE INSTITUT FUR KLINISHE PHARMAKOLOGIE GmbH (IPHAR) GERMANY, EUROPE PHOENIX INTERNATIONAL SWITZERLAND AG WANGEN, EUROPE ANAWA TRADING AG WANGEN, EUROPE ANAWA HOLDING AG SWITZERLAND, EUROPE CLINSERVE AG FRIBOURG, EUROPE CLINSERVE GmbH HAMBURG, EUROPE HUMAN BIOLOGICS INTERNATIONAL INC. NEVEDA, USA CLINIC D'ENCRONOLOGIE GODIN & ST.PIERRE MTL, CANADA INSTITUTE FUR PHARMAKODYNAMISCHE FORSCHUNG MUNICH, GERMAY
EX-23.1 42 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Summary Consolidated Financial Information of Phoenix", "Selected Consolidated Financial Information of Phoenix" and "Experts" and to the use of our report dated October 9, 1998, except for Note 18 which is as of December 18, 1998, with respect to the consolidated financial statements of Phoenix International Life Sciences Inc. ("Phoenix") in the Registration Statement on form F-4 for the registration of common shares and options to purchase common shares of Phoenix in connection with the proposed merger of Phoenix and Chrysalis International Corporation contemplated therein. Montreal, Canada, Ernst & Young LLP April 5, 1999 Chartered Accountants EX-23.2 43 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated December 10, 1998, with respect to the consolidated financial statements of IBRD-Rostrum Global Inc. in to the Registration Statement on Form F-4 for the registration of common shares and options to purchase Common Shares of Phoenix International Life Sciences Inc. ("Phoenix") in connection with the proposed merger of Phoenix and Chrysalis International Corporation contemplated therein. Irvine, California Ernst & Young LLP April 5, 1999 Chartered Accountants EX-23.3 44 EXHIBIT 23.3 Exhibit 23.3 INDEPENDENT AUDITORS' CONSENT We consent to the inclusion in this Registration Statement of Phoenix International Life Sciences, Inc. on Form F-4 of our report related to IBRD-Rostrum Global Inc. and subsidiaries, dated March 4, 1997, and to the reference to us under the heading "Experts" in the proxy statement/prospectus, which is part of this Registration Statement. DELOITTE & TOUCHE LLP Costa Mesa, California April 5, 1999 - --------------------------- EX-23.4 45 EXHIBIT 23.4 EXHIBIT 23.4 CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors Chrysalis International Corporation We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in this Registration Statement on Form F-4 of Phoenix International Life Sciences Inc. Our report dated February 5, 1999 contains an explanatory paragraph that states that Chrysalis International Corporation has suffered recurring losses from operations, has a net working capital deficiency and is in default of its debt covenants which raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty. KPMG LLP Philadelphia, Pennsylvania April 5, 1999 EX-23.6 46 EXHIBIT 23.6 EXHIBIT 23.6 CONSENT OF VECTOR SECURITIES INTERNATIONAL, INC. April 6, 1999 PERSONAL AND CONFIDENTIAL Board of Directors Board of Directors Chrysalis International Corporation Phoenix International 575 Route 28 Life Sciences Inc. Raritan, New Jersey 08869 2350 Cohen Street Saint-Laurent (Montreal) Quebec H4R 2N6 Canada Re: Proxy Statement of Chrysalis International Corporation on Schedule 14A Pursuant to Section 14(a) of the Securities Exchange Act of 1934 and Registration Statement on Form F-4 under the Securities Act of 1933 -------------------------------------------------------------------- Ladies and Gentlemen: Reference is made to our opinion letter dated November 13, 1998 as to the fairness from a financial point of view as of the date of the opinion letter to the holders of common stock, par value $0.01 per share, of Chrysalis International Corporation, a Delaware corporation (the "Company") of the consideration to be received by such stockholders pursuant to the terms of the draft Agreement and Plan of Merger, dated November 12, 1998, among (i) Phoenix International Life Sciences Inc., a public corporation constituted under the laws of Canada ("Phoenix"), (ii) Phoenix Merger Sub Corp., a Delaware corporation and a wholly-owned subsidiary of Phoenix and (iii) the Company. The foregoing opinion letter is provided for the information and assistance of the Board of Directors of the Company in connection with its consideration of the transaction contemplated therein and is not to be used, circulated, quoted or otherwise referred to for any other purpose, nor is it to be filed with, included in or referred to in whole or in part in any registration statement, proxy statement or any other document, except in accordance with our prior written consent. We understand that the Company has determined to include our opinion in the above-referenced Proxy Statement and Registration Statement on Form F-4. In that regard, we hereby consent to the reference to the opinion of our Firm under the captions "Summary-The Merger-Opinion of Chrysalis' Financial Advisor," "The Merger-Background of the Merger," "The Merger-Reasons for the Merger," "The Merger-Opinion of the Financial Advisor to the Chrysalis Board" and "Management's Discussion and Analysis of Financial Condition and Results of Operations of Chrysalis-Liquidity and Capital Requirements-Capital Requirements" and to the inclusion of the foregoing opinion in the above referenced Proxy Statement and Registration Statement on Form F-4. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933 or the rules and regulations of the Securities and Exchange Commission thereunder. Very truly yours, /s/ Vector Securities International, Inc. Vector Securities International, Inc. ---------------------------------------- EX-99.2 47 EX-99.2 CHRYSALIS INTERNATIONAL CORPORATION BOARD OF DIRECTORS PROXY FOR SPECIAL MEETING, APRIL 30, 1999 The undersigned, having received the Notice of Meeting and Joint Proxy Statement/Prospectus, hereby makes, constitutes and appoints Desmond H. O'Connell, Paul J. Schmitt and John G. Cooper, and each of them (each with full power of substitution respectively), trust and lawful attorneys and proxies for the undersigned to represent and vote, as indicated on the other side, all shares of Common Stock, $.01 par value, of CHRYSALIS INTERNATIONAL CORPORATION held of record by the undersigned on March 1, 1999 at the Special Meeting of Stockholders of Chrysalis International Corporation to be held on April 30, 1999 at the Somerset Hills Hotel, 200 Liberty Corner Road, Warren, New Jersey, and all postponements and adjournments thereof. (CONTINUED ON THE REVERSE SIDE) SEE REVERSE SIDE Please mark your A /X/ votes as in this example FOR AGAINST ABSTAIN 1. The adoption of the Agreement and Plan of / / / / / / Merger, dated as of November 18, 1998, as amended by Amendment No. 1 dated as of March 24, 1999, which provides for the merger of a wholly owned subsidiary of Phoenix International Life Sciences Inc. with and into Chrysalis. 2. In their discretion, to transact such other matters as may arise relating to the conduct of the Special Meeting of stockholders or any adjournments or postponements thereof. This proxy when property executed will be voted in the manner directed, if no discretion is made this proxy will be voted FOR proposal No. 1. Do you plan to attend the Special Meeting? Yes / / No / / Signature _________________________________________________ Date ________, 1999 NOTE: Please sign this proxy as the name(s) appear above. When signing as attorney, executor, administrator, trustee or guardian, please sign full title as such. EX-99.3 48 EXHIBIT 99.3 Exhibit 99.3 CHRYSALIS INTERNATIONAL CORPORATION 575 Route 28 Rariton, New Jersy 08869 LETTER TO PARTICIPANTS IN THE CHRYSALIS EMPLOYEE SAVINGS PLAN SHAREHOLDER VOTE TO ADOPT MERGER AGREEMENT We are enclosing materials being sent to all of the stockholders of Chrysalis International Corporation, a Delaware corporation (the "Company"), relating to a special meeting (the "Special Meeting") of the stockholders of the Company to be held at 9:00 a.m., local time, on April 30, 1999 at the Somerset Hills Hotel, 200 Liberty Corner Road, Warren, New Jersey. At the Special Meeting, the stockholders of the Company will be asked to vote on a proposal to adopt the merger agreement (the "Merger Agreement") among the Company, Phoenix International Life Sciences Inc., a company constituted under the laws of Canada ("Phoenix"), and Phoenix Merger Sub Corp., a Delaware corporation and a newly formed wholly owned subsidiary of Phoenix. The merger is described more fully in the Proxy Statement /Prospectus, a copy of which is enclosed for your information. - ------------------------------------------------------------------------------- PLEASE NOTE THAT PURSUANT TO THE PLAN (AS DEFINED BELOW), THESE MATERIALS ARE BEING DELIVERED TO PERSONS PARTICIPATING IN THE PLAN AS OF MARCH 1, 1999. IF YOU NO LONGER PARTICIPATE IN THE PLAN AND HAVE RECEIVED THE ENTIRE BALANCE OF YOUR ACCOUNT (AS DEFINED BELOW), PLEASE DISREGARD THESE MATERIALS. IF YOU HAVE ANY QUESTIONS REGARDING YOUR STATUS AS A PARTICIPANT IN THE PLAN, PLEASE CONTACT KENDRA RUSSANO AT THE COMPANY AT (908) 722-7900 ext. 22. - ------------------------------------------------------------------------------- Under the terms of the Chrysalis Employee Savings Plan (the "Plan"), shares of Chrysalis Common Stock owned by the Plan under the Company Stock Fund (the "Fund") are held by Scudder Trust Company, the Trustee under the Plan ("Trustee"), for the benefit of participants who have a portion of their account ("Account") under the Plan invested in shares of Chrysalis Common Stock. This means that instead of direct ownership of shares of Chrysalis Common Stock, you have an undivided interest in the shares of Chrysalis Common Stock owned by the Trustee, that is, you are a "beneficial" stockholder. Since you are a beneficial owner of shares of Chrysalis Common Stock, a copy of the Proxy Statement/Prospectus is being sent to you. You are urged to examine it carefully. YOU CANNOT VOTE THE SHARES OF CHRYSALIS COMMON STOCK ALLOCATED TO YOUR ACCOUNT AT THE SPECIAL MEETING. YOU CAN ONLY VOTE THESE SHARES AS DESCRIBED BELOW. If you are also a direct stockholder of the Company, you will receive under separate cover another copy (or copies) of the Proxy Statement/Prospectus and proxy card which should be used to vote the shares of Chrysalis Common Stock you own directly. Only the Trustee can vote shares of Chrysalis Common Stock owned by the Plan (the "Plan Shares"). The Plan provides for a pass through to participants of the decision regarding how to vote, or whether to abstain from voting, Plan Shares. This letter describes how the merger affects your interest under the Plan and sets forth the special procedures that must be followed in order for you to give valid and timely voting instructions to the Trustee (or its agent). AS A PARTICIPANT IN THE PLAN, YOU CAN VOTE SHARES OF CHRYSALIS COMMON STOCK BENEFICIALLY OWNED BY YOU UNDER THE PLAN ONLY BY FOLLOWING THESE INSTRUCTIONS. IF THE MERGER AGREEMENT IS ADOPTED BY THE HOLDERS OF THE MAJORITY OF THE SHARES OF CHRYSALIS COMMON STOCK AND THE MERGER IS CONSUMMATED, PAYMENT OF THE MERGER CONSIDERATION WILL NOT BE PAID DIRECTLY TO YOU; RATHER, PAYMENT WILL BE RECEIVED BY THE TRUSTEE ON YOUR BEHALF AND WILL AFFECT YOUR INTEREST IN THE PLAN, AS DESCRIBED BELOW. Under the Plan, as a participant, you may direct the Trustee (or its agent) how to vote the shares of Chrysalis Common Stock allocated to your Account by following the procedures described in this Letter to Participants. You also may direct the Trustee (or its agent) not to vote the shares of Chrysalis Common Stock allocated to your Account or to withdraw any voting instruction you have directed it to make. Before making a decision you should read carefully the enclosed Proxy Statement/Prospectus and Voting Instruction Form. The Trustee makes no recommendation as to whether or how to vote the shares of Chrysalis Common Stock allocated to your Account. The merger is conditioned upon, among other things, the adoption of the Merger Agreement by the holders of at least a majority of the outstanding shares of Chrysalis Common Stock. See the Proxy Statement/Prospectus for more details and for a description of the other conditions to the merger. If the conditions to the merger are satisfied, Phoenix Merger Sub Corp will be merged with and into the Company with the Company as the surviving corporation. In connection with the merger, each share of Chrysalis Common Stock will be converted into the right to receive the consideration described in the Proxy Statement/Prospectus. Please see the Proxy Statement/Prospectus regarding whether or not, pursuant to Delaware law, shareholders will be entitled to appraisal rights in connection with the merger. The Trustee (or its agent) will vote the Plan Shares of Chrysalis Common Stock in accordance with the directions of Plan participants on the enclosed Voting Instruction Form. If the Trustee (or its agent) has not received your completed voting instructions before five full business days prior to the Special Meeting, the Trustee will abstain from voting the shares of Chrysalis Common Stock allocated to your Account, which will have the same effect as a vote against the Merger Agreement. You may withdraw or change any voting instructions you give to the Trustee by submitting a revised Voting Instruction Form, marked to show that the form is a revised form, to the Trustee before five full business days prior to the Special Meeting. It is very important that you read all of the enclosed materials and follow the instructions carefully if you wish to direct the Trustee how to vote, or to abstain from voting, the shares of Chrysalis Common Stock allocated to your Account. THE TRUSTEE (OR ITS AGENT) WILL TREAT YOUR VOTING DIRECTIONS CONFIDENTIALLY AND WILL NOT DISCLOSE THEM TO THE COMPANY. Whether or not you return a Voting Instruction Form to the Trustee (or its agent), if the Merger Agreement is adopted and the merger is consummated, the Merger Consideration that is delivered or paid for the shares of Chrysalis Common Stock will be held by the Trustee in the Fund and will be held therein until you direct the Trustee otherwise by calling (800) 541-7705. If you choose to direct the Trustee (or its agent) to vote, or to abstain from voting, shares of Chrysalis Common Stock allocated to your Account, the enclosed Voting Instruction Form must be returned to the Trustee (or its agent). The address to which the Form can be mailed or delivered is shown on the enclosed reply envelope. PLEASE NOTE THAT THE DEADLINE FOR THE TRUSTEE TO VOTE SHARES OF CHRYSALIS COMMON STOCK IS ARPIL 30, 1999. YOUR VOTING INSTRUCTION FORM MUST BE RECEIVED BY THE TRUSTEE (OR ITS AGENT) BEFORE APRIL 23, 1999. All questions and requests for assistance should be addressed to Kendra Russano at the Company at (908) 722-7900 ext. 22. IF YOU DO NOT SIGN THE FORM OR IF YOU DO NOT PROPERLY FILL IT OUT, YOUR DIRECTIONS WILL NOT BE ACCEPTED AND THE VOTING INSTRUCTION FORM, AS WELL AS YOUR DIRECTIONS, WILL BE VOID AND YOUR SHARES WILL NOT BE VOTED. 2 CHRYSALIS INTERNATIONAL CORPORATION 575 Route 28 Rariton, New Jersy 08869 VOTING INSTRUCTION FORM FOR SHARES IN THE CHRYSALIS EMPLOYEE SAVINGS PLAN ("PLAN") TO SCUDDER TRUST COMPANY: I am a participant in the above-referenced Plan who beneficially owns shares of Common Stock of Chrysalis International Corporation ("Shares"), and, as such, I received a copy of the Letter to Participants. I wish to direct you as follows with respect to Shares allocated to my Account: VOTING INSTRUCTIONS ____ By checking this space, I direct the Trustee to vote the Shares allocated to my Account under the Plan FOR the adoption of the Agreement and Plan of Merger, dated as of November 18, 1998, as amended by Amendment No. 1 dated as of March 24, 1999, which provides for the merger of a wholly owned subsidiary of Phoenix International Life Sciences Inc. with and into the Company. ____ By checking this space, I direct the Trustee to vote the Shares allocated to my Account under the Plan AGAINST the approval and adoption of the Agreement and Plan of Merger, dated as of November 18, 1998, as amended by Amendment No. 1 dated as of March 24, 1999, which provides for the merger of a wholly owned subsidiary of Phoenix International Life Sciences Inc. with and into the Company. ____ By checking this space, I direct the Trustee NOT to vote any Shares allocated to my Account under the Plan. I have read and understand the Proxy Statement/Prospectus and the Letter to Participants. I hereby direct Scudder Trust Company, as Plan Trustee, to follow the direction set forth above. Whether or not I have directed the Trustee (or its agent) to vote Shares allocated to my Account on my behalf, if the Merger Agreement is adopted and the merger is consummated, I understand that the Trustee will hold the Merger Consideration payable for Shares allocated to my Account in the Fund and that the Merger Consideration will be held therein until I direct the Trustee otherwise by calling (800) 541-7705. - --------------------------------- ----------------------------------- DATE SIGNATURE OF PARTICIPANT - --------------------------------- ----------------------------------- SOCIAL SECURITY NUMBER PLEASE PRINT NAME AND ADDRESS ----------------------------------- ----------------------------------- ----------------------------------- TELEPHONE NO. NOTE: THIS VOTING INSTRUCTION FORM MUST BE PROPERLY COMPLETED AND SIGNED IF IT IS TO BE FOLLOWED. IF THE FORM IS NOT SIGNED, THE DIRECTIONS INDICATED WILL NOT BE ACCEPTED. PLEASE RETURN THIS VOTING INSTRUCTION FORM TO THE TRUSTEE (OR ITS AGENT) USING THE PREADDRESSED REPLY ENVELOPE PROVIDED WITH YOUR VOTING INSTRUCTION MATERIALS, BEFORE APRIL 23, 1999. YOUR DIRECTION HOW TO HAVE SHARES OF CHRYSALIS COMMON STOCK ALLOCATED TO YOUR ACCOUNT VOTED, OR TO HAVE SUCH SHARES OF CHRYSALIS COMMON STOCK NOT VOTED, WILL BE KEPT CONFIDENTIAL. IF YOU DO NOT RETURN THIS FORM BY THE DEADLINE, PLAN SHARES OF CHRYSALIS COMMON STOCK ALLOCATED TO YOUR ACCOUNT WILL NOT BE VOTED. -----END PRIVACY-ENHANCED MESSAGE-----