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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934, FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996.
Commission File Number
0-19659
DNX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-2877973
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
575 Route 28, Raritan, New Jersey 08869
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 722-7900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Common Stock $0.01 par value 8,720,858
Outstanding at November 11, 1996
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DNX CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Income -
for the three and nine months ended
September 30, 1996 and 1995 4
Consolidated Statement of Stockholders' Equity -
for the nine months ended September 30, 1996 5
Consolidated Statements of Cash Flows -
for the nine months ended September 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 15
PART II. OTHER INFORMATION 16
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DNX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995
(in thousands except share and per share amounts)
Assets September 30, 1996 December 31, 1995
------ ------------------ -----------------
(unaudited)
Current assets
Cash and cash equivalents $ 15,456 20,042
Short-term investments 5,233 1,001
Trade accounts receivable, net 7,167 7,662
Prepaid expenses and other current assets 983 1,351
-------- -------
Total current assets 28,839 30,056
Property, plant and equipment, net 15,190 16,935
Intangible assets, net 964 1,035
Other assets 797 44
Restricted cash 460 777
-------- -------
$ 46,250 48,847
======== =======
Liabilities and Stockholders' Equity
Current liabilities
Short-term borrowings -- 1,399
Current portion of long-term debt 246 744
Accounts payable 2,455 2,100
Accrued expenses 3,533 2,992
Deferred revenue 2,598 3,456
-------- -------
Total current liabilities 8,832 10,691
Long-term debt, excluding current portion 7,431 7,830
Deferred income taxes 1,779 2,045
Other liabilities 876 948
-------- -------
Total liabilities 18,918 21,514
-------- -------
Stockholders' equity
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 8,713,353 in 1996
and 8,606,194 in 1995 87 86
Additional paid-in capital 57,157 57,000
Translation adjustment 640 1,095
Accumulated deficit (30,552) (30,848)
-------- -------
Total stockholders' equity 27,332 27,333
-------- -------
Commitments and contingencies
$ 46,250 48,847
======== =======
See accompanying notes to consolidated financial statements.
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DNX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Three and nine months ended September 30, 1996 and 1995
(in thousands except per share amounts)
(unaudited)
Three months ended September 30, Nine months ended September 30,
1996 1995 1996 1995
------- ------- ------- -------
Revenues:
Commercial services $ 7,286 5,267 21,606 18,317
License fees and other contracts 105 248 351 784
------- ------- ------- -------
7,391 5,515 21,957 19,101
------- ------- ------- -------
Operating expenses:
Cost of commercial services 5,691 4,791 16,966 15,529
Research and development 93 252 329 773
General, administrative and marketing 1,504 1,806 4,530 4,600
------- ------- ------- -------
7,288 6,849 21,825 20,902
------- ------- ------- -------
Income (loss) from operations 103 (1,334) 132 (1,801)
------- ------- ------- -------
Other income (expense):
Interest income 271 85 852 246
Interest expense (154) (202) (488) (613)
Other 82 122 254 474
------- ------- ------- -------
199 5 618 107
------- ------- ------- -------
Income (loss) before equity in net loss of
Nextran and income taxes 302 (1,329) 750 (1,694)
Equity in net loss of Nextran -- 519 -- 2,700
Gain on sale of Nextran, net of income taxes of $200 -- 17,266 -- 17,266
Provision (benefit) for income taxes 246 (49) 454 (45)
------- ------- ------- -------
Net income $ 56 15,467 296 12,917
======= ======= ======= =======
Earnings per common and common
equivalent share:
Primary $ 0.01 1.70 0.03 1.43
======= ======= ======= =======
Fully Diluted $ 0.01 1.70 0.03 1.43
======= ======= ======= =======
Shares used in computing per share amounts
Primary 9,381 9,072 9,287 9,018
------- ------- ------- -------
Fully Diluted 9,381 9,096 9,343 9,056
------- ------- ------- -------
See accompanying notes to consolidated financial statements.
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DNX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Nine months ended September 30, 1996
(in thousands except shares)
(unaudited)
Additional Total
Common paid-in Translation Accumulated stockholders'
stock capital adjustment deficit equity
------ ---------- ----------- ----------- -------------
Balance, December 31, 1995 $86 57,000 1,095 (30,848) 27,333
Issuance of 95,024 shares
of common stock upon
exercise of stock options
and warrants 1 90 -- -- 91
Issuance of 12,135 shares
of common stock pursuant
to 401(k) plan -- 67 -- -- 67
Translation adjustment -- -- (455) -- (455)
Net income -- -- -- 296 296
--- ------ ------ ------- -------
Balance, September 30, 1996 $87 57,157 640 (30,552) 27,332
=== ====== ====== ======= =======
See accompanying notes to consolidated financial statements.
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DNX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine months ended September 30, 1996 and 1995
(in thousands)
(unaudited)
Nine months ended
September 30,
1996 1995
-------- -------
Cash flows from operating activities:
Net income $ 296 12,917
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Non-cash items:
Depreciation and amortization 1,881 2,076
Equity in net loss of Nextran -- 2,700
Gain on sale of partnership interest in Nextran -- (17,266)
Deferred income tax expense (benefit) 13 (98)
(Gain) loss on disposal of property, plant and equipment (3) 43
Amortization of premium on short-term investments 177 44
Noncash charges 67 55
Change in operating assets and liabilities:
Decrease in accounts receivable 227 983
Decrease in prepaid expenses and other current assets 93 74
(Increase) decrease in other assets (752) 54
Increase (decrease)in accounts payable 463 (144)
Increase (decrease) in accrued expenses 669 (1,265)
Decrease in deferred revenue (746) (1,447)
Increase (decrease) in other liabilities (35) 64
-------- -------
Net cash provided by (used in) operating activities 2,350 (1,210)
-------- -------
Cash flows from investing activities:
Decrease in restricted cash 317 950
Increase in cash in escrow -- (18,000)
Purchase of property, plant and equipment (706) (623)
Proceeds from disposal of property, plant and equipment 36 6
Purchases of intangibles assets (21) (19)
Purchases of short-term investments (5,409) (2,055)
Proceeds from maturities of short-term investments 1,000 --
Proceeds from sale of partnership interest in Nextran -- 18,000
-------- -------
Net cash used in investing activities (4,783) (1,741)
-------- -------
Cash flows from financing activities:
Proceeds (payments) on short-term borrowings (1,361) 623
Proceeds from borrowings of long-term debt -- 61
Principal payments on long-term debt (893) (582)
Proceeds from stock options exercised 91 36
-------- -------
Net cash provided by (used in) financing activities (2,163) 138
-------- -------
Effect of exchange rate changes on cash 10 (38)
-------- -------
Decrease in cash and cash equivalents (4,586) (2,851)
Cash and cash equivalents, beginning of period 20,042 4,404
-------- -------
Cash and cash equivalents, end of period $ 15,456 1,553
======== =======
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 495 637
Income taxes 7 825
======== =======
See accompanying notes to consolidated financial statements.
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DNX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996
(unaudited)
Note 1. Statement of Accounting Presentation
In the opinion of DNX Corporation and Subsidiaries (as defined below) (the
"Company"), the accompanying unaudited consolidated financial statements include
all significant adjustments (consisting only of normal recurring accruals)
necessary to fairly state the Company's consolidated financial position as of
September 30, 1996, the consolidated results of operations for the three and
nine month periods ended September 30, 1996 and 1995 and the consolidated cash
flows for nine month periods ended September 30, 1996 and 1995. The consolidated
financial statements have been prepared in accordance with the requirements for
Form 10-Q and, therefore, do not include all disclosures of financial
information required by generally accepted accounting principles. The
accompanying consolidated financial statements should be read in conjunction
with the financial statements included in the Company's Annual Report on Form
10-K for the year ended December 31, 1995. The information set forth in the
accompanying consolidated balance sheet as of December 31, 1995 has been derived
from the audited consolidated balance sheet included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
Interim results are not necessarily indicative of the results for the full
year.
Note 2. Earnings Per Share
Earnings per common and common equivalent share is computed based upon the
weighted average number of common shares outstanding during the periods, plus
when their effect is dilutive, common stock equivalents consisting of certain
shares subject to stock options and warrants, and gives effect to certain
adjustments as prescribed by Securities and Exchange Commission Staff Accounting
Bulletin 83.
Note 3. Proposed Transaction
On August 19, 1996, the Company entered into certain agreements (the
"Transaction Agreements") providing for the acquisition by the Company of all
outstanding capital stock of, or equity interests in, BioClin, Inc., BioClin
Europe AG, BioClin GmbH, Kilmer N.V. and BioClin Institute of Clinical
Pharmacology GmbH, (collectively, the "BioClin Group") in consideration and
exchange for 2,632,600 shares of Common Stock (the "Proposed Transaction"). The
BioClin Group is an international contract research organization engaged in
clinical drug development services in the United States, all major European
countries, Israel, Turkey and Australia. The Proposed Transaction has been
structured, and the legal agreements have been drafted, in a manner intended to
qualify the Proposed Transaction for "pooling-of-interests" accounting
treatment. Pursuant to the Transaction Agreements, the closing of the Proposed
Transaction is subject to a number of conditions including DNX stockholder
approval and regulatory approvals. The Proposed Transaction is expected to close
during the late fourth quarter of fiscal 1996.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL SUMMARY
The Company is a contract research organization ("CRO") whose principal
activities consist of preclinical drug development services conducted through
its two wholly-owned subsidiaries, Pharmakon Research International, Inc.
("Pharmakon") and DNX Biotherapeutics, Inc. ("DNX Biotherapeutics"), currently
doing business as DNX Transgenics ("DNX Transgenics," together with Pharmakon,
the "Subsidiaries"). Pharmakon provides preclinical drug development and safety
assessment services, including in vitro and in vivo toxicological,
pharmacological and pharmacokinetics testing services, to the pharmaceutical,
biotechnology, chemical and other industries through its United States
operations and its European subsidiary, Pharmakon Europe. A primary component of
Pharmakon's preclinical drug development services consists of specialty services
such as general and safety pharmacology, continuous infusion techniques,
immunology and immunotoxicology. DNX Transgenics uses its proprietary transgenic
animal technology to provide drug development services to the pharmaceutical,
biotechnology and medical communities via the development of laboratory animal
models that more closely mimic human biological processes than conventional
laboratory animal models for use in in vivo testing for drug discovery and
development and in biomedical research.
The Company also grants sublicenses of its proprietary Pronuclear DNA
Microinjection technology, the process widely used in the pharmaceutical and
biotechnology industries to develop transgenic animals. These sublicenses
entitle the Company to receive revenues consisting of fees and, in certain
cases, royalties. Additionally, although the Company has sold its partnership
interest in Nextran, in the event that Nextran develops and commercializes
hemoglobin blood substitutes using technologies licensed to Nextran by the
Company, the Company will receive royalty income.
Pharmakon accounted for more than 95% of the Company's revenues for the
years ended December 31, 1995 and 1994 and the nine months ended September 30,
1996. Since the majority of Pharmakon Europe's revenues, which accounted for
approximately 69% of the Company's revenues for the year ended December 31, 1995
and 68% of the Company's revenues for the nine months ended September 30, 1996,
are denominated in French Francs, fluctuations in the exchange rate between the
French Franc and the U.S. dollar have an effect on the Company's operating
results (see "Liquidity and Capital Requirements - Exchange Rate Fluctuations").
FORMATION AND SALE OF NEXTRAN
On August 29, 1994, DNX Biotherapeutics entered into a Joint Venture
Agreement (the "Joint Venture Agreement") with Baxter Transplant Holdings
("Holdings"), a wholly-owned subsidiary of Baxter Healthcare Corporation
("Baxter"), which is a subsidiary of Baxter International, Inc., to form
Nextran, a Delaware general partnership, in which DNX Biotherapeutics had a 30%
partnership interest and Holdings
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has a 70% partnership interest. Pursuant to the terms of the Purchase Agreement,
dated September 22, 1995, as amended, DNX Biotherapeutics consummated the sale
of its 30% partnership interest in Nextran to Transplant Acquisition Inc.
("Acquisition"), a wholly-owned subsidiary of Baxter, for a cash purchase price
of $18 million. See Note 6 of the Notes to Consolidated Financial Statements
contained in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.
PROPOSED ACQUISITION OF THE BIOCLIN GROUP
On August 19, 1996, the Company entered into certain agreements (the
"Transaction Agreements") providing for the acquisition by the Company of all
outstanding capital stock of, or equity interests in, BioClin, Inc., BioClin
Europe AG, BioClin GmbH, Kilmer N.V. and BioClin Institute of Clinical
Pharmacology GmbH, (collectively, the "BioClin Group") in consideration and
exchange for 2,632,600 shares of Common Stock (the "Proposed Transaction"). The
BioClin Group is an international contract research organization engaged in
clinical drug development services in the United States, all major European
countries, Israel, Turkey and Australia. The Proposed Transaction has been
structured, and the legal agreements have been drafted, in a manner intended to
qualify the Proposed Transaction for "pooling-of-interests" accounting
treatment. Pursuant to the Transaction Agreements, the closing of the Proposed
Transaction is subject to a number of conditions including DNX stockholder
approval and regulatory approvals. The Proposed Transaction is expected to close
during the late fourth quarter of fiscal 1996.
RESULTS OF OPERATIONS
REVENUES
Revenues were $7,391,000 for the three months ended September 30, 1996
versus $5,515,000 for the same period in 1995, an increase of 34%. Revenues were
$21,957,000 for the nine months ended September 30, 1996 versus $19,101,000 for
the same period in 1995, an increase of 15%. The increase in revenues for the
three and nine month periods ended September 30, 1996 as compared to the same
periods in 1995 was primarily due to an increase in business activity in
preclinical drug development services in both the European and U.S.
marketplaces. The Company believes the increase in business activity is a result
of the improvement in the pharmaceutical industry outsourcing trends and
expanded cash reserves within the biotechnology sector. Additionally, revenue
for the nine months ended September 30, 1995 included approximately $420,000 of
revenue, classified as license fees and other contracts, primarily from a
government contract that was terminated in 1995.
OPERATING EXPENSES
Cost of commercial services was $5,691,000 or 78% of commercial service
revenues for the three months ended September 30, 1996 and $4,791,000 or 91% of
commercial service revenues for the same period in 1995. For the nine months
ended September 30, 1996, cost of commercial services was $16,966,000 or 79% of
commercial service revenues and $15,529,000 or 85% of commercial services
revenue for the same
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period in 1995. The increase in these costs for the three and nine month periods
ended September 30, 1996 versus the same periods in 1995 was primarily due to
(i) increased business activity, which resulted in an increase in variable costs
such as materials and supplies, and (ii) an increase in commercial service
activity associated with DNX Transgenics. The decrease in these costs as a
percent of revenues is due to the leveraging of a base cost structure of
management and scientific personnel, equipment and facilities which supported a
higher level of business in the first nine months of 1996 than experienced
during the same period in 1995.
Research and development expenses decreased 63% to $93,000 for the three
month period ended September 30, 1996 from $252,000 for the same period in 1995.
For the nine month periods ended September 30, 1996 and 1995, research and
development expense decreased 57% to $329,000 from $773,000, respectively. The
decrease in expenses was primarily the result of the shift in the strategic
focus of DNX Transgenics from the internal development of transgenic animal
models to providing commercial specialty drug development services.
General, administrative and marketing expenses were $1,504,000 for the
three months ended September 30, 1996 versus $1,806,000 for the same period in
1995. For the nine month periods ended September 30, 1996 and 1995, these
expenses were $4,530,000 and $4,600,000, respectively. Included in the general,
administrative and marketing expenses for three months ended September 30, 1995
was a charge of $498,000 of expenses associated with cost reduction programs in
Europe. The remainder of the increase in expenses was primarily the result of
increased marketing and business development expenses.
OTHER INCOME (EXPENSE)
Other income (expense) amounted to $199,000 for the three months ended
September 30, 1996 versus $5,000 for the same period last year. For the nine
months ended September 30, 1996 and 1995, other income (expense) was $618,000
and $107,000, respectively. The increase in other income for 1996 as compared to
1995 is primarily the result of (i) the increase in cash available for
investment, (ii) the reduction of debt, primarily Pharmakon Europe's short-term
borrowings under its credit lines (see "Liquidity and Capital Requirements
Debt") and (iii) the decrease in interest expense as a result of the decrease in
interest rates applicable to the Company's debt instruments. Additionally, in
the first quarter of 1995, the Company transferred its lease obligation on the
former Plainsboro pilot plant facility to a third party and sold certain
equipment associated with this facility to the same party for a total of
$600,000 to be paid in monthly installments through September 1996. Other income
for the nine months ended September 30, 1996 and 1995 includes income of
$225,000 and $401,000, respectively, associated with the transactions for this
facility.
EQUITY IN NET LOSS OF NEXTRAN
As a result of the sale of its partnership interest in Nextran in September
1995, the Company no longer records a share of Nextran's financial results of
operations in its consolidated financial statements. Prior to September 30,
1995, as a result of its minority
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equity ownership in Nextran, the Company recorded its share of Nextran's
financial results in its consolidated financial statements based on the equity
method of accounting. For the three and nine month periods ended September 30,
1995, the Company's share of Nextran's loss amounted to $519,000 and $2,700,000,
respectively.
GAIN ON SALE OF NEXTRAN
As a result of the sale of its partnership interest in Nextran in the
third quarter of 1995, the Company eliminated the remaining balance of its
Investment in Nextran from the balance sheet and recorded an estimated
non-recurring gain, net of expenses, income taxes and related accruals, of
$17,266,000.
TAXES
The Company's Pharmakon Europe subsidiary is subject to foreign income
taxes under French tax laws on the profits generated in France. The 1996 French
corporate income tax rate is approximately 37%. For the three and nine months
ended September 30, 1996, the Company recorded income tax expense of $246,000
and $454,000, respectively, as compared to income tax benefit of $49,000 and
$45,000 for the three and nine months ended September 30, 1995, respectively,
due to operating results generated by Pharmakon Europe.
The impact from United States federal and state income taxes is currently
not significant due to the Company's available net operating loss carryforwards.
At December 31, 1995, the Company had available net operating loss carryforwards
of approximately $20,318,000 for United States federal and state income tax
purposes. Such loss carry forwards expire through 2009 and 2001, respectively.
The Company also has research and development tax credit carryforwards of
approximately $2,982,000 for federal income tax reporting purposes which are
available to reduce federal income taxes, if any, through 2010. The Company has
alternative minimum tax credit carryforwards of approximately $200,000 for
federal income tax purposes which are available to reduce federal income taxes,
if any. These tax credits have an unlimited carryforward period. The Company
believes that the Proposed Transaction will have no effect on the Company's
ability to utilize the foregoing carryforwards. The Proposed Transaction,
however, will result in an ownership change under the Code. Accordingly, the
Company's ability to utilize its net operating loss carryforwards may be subject
to certain limitations in the future under the Code.
LIQUIDITY AND CAPITAL REQUIREMENTS
CASH RESERVES
The Company finances its operations and activities by relying on (i) its
operating activities for its working capital requirements, (ii) its cash
reserves and (iii) its available lines of credit. As of September 30, 1996, the
Company had cash reserves (consisting of cash and cash equivalents, short-term
investments and restricted cash) of $21,149,000. The Company invests its cash in
a diversified portfolio of high-grade money market funds,
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United States Government-backed securities and commercial paper and corporate
obligations. During the first nine months of 1996, while the Company generated
$2,350,000 from operating activities, the Company's cash reserves decreased by
$671,000 primarily due to reductions in the outstanding principal amounts of
short-term borrowings and long-term debt totaling $2,254,000 and capital
expenditures as described immediately below.
CAPITAL EXPENDITURES
During the first nine months of 1996, the Company invested a total of
approximately $706,000 in property, plant and equipment, primarily to provide
specialty services at Pharmakon Europe and to enhance information systems
capabilities for the Company's operations.
DEBT
In December 1992, Pharmakon acquired Pharmakon Europe through a stock
purchase. Included in the purchase price were promissory notes having an
aggregate principal amount of $7.0 million (the "Pharmakon Notes"). The
remaining unpaid principal balance as of September 30, 1996 of $5,000,000 will
be paid in December 1997. The payment of the Pharmakon Notes is secured by a
pledge of the capital stock of Pharmakon Europe, a pledge of certain assets of
Pharmakon, a guarantee by the Company and a security interest in fees and
royalties payable to the Company under sublicenses of its proprietary DNA
Microinjection Technology. The Pharmakon Notes require prepayments in specified
amounts upon the Company selling any of its shares of common stock of Pharmakon.
The promissory notes contain various covenants, the most restrictive of which
prohibit the payment of dividends by Pharmakon to the Company and the sale of
any Pharmakon Europe assets that are not made in the ordinary course of
business.
In connection with its new U.S. facility, in 1994 Pharmakon secured (i) a
$1.5 million 15-year mortgage with a bank and (ii) a $1.2 million 15-year
mortgage from a Pennsylvania agency, which required cash collateral of $450,000.
These two loans are also secured by mortgages on the property acquired. The cash
collateral on the mortgage loan with the Pennsylvania agency is classified as
restricted cash as of September 30, 1996. If the Company achieves certain
financial covenants, this $450,000 of cash collateral will be released.
Additionally, the favorable interest rate on the mortgage with the Pennsylvania
agency is subject to change upon review by the agency of certain future
conditions.
Pharmakon Europe has lines of credit and overdraft privileges with French
banks in the aggregate amount of 10.5 million French Francs ($2.0 million at the
exchange rates in effect on September 30, 1996). At December 31, 1995, there
were short-term borrowings outstanding under these facilities in the amount of
6.9 million French Francs ($1,399,000 at December 31, 1995). As of September 30,
1996, there were no outstanding borrowings under these credit facilities.
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In March 1993, DNX Biotherapeutics obtained a $3.0 million debt financing
facility from a bank in the form of an equipment line of credit which is
guaranteed by the Company. In connection with the curtailment of the blood
substitute program in 1993, DNX Biotherapeutics discontinued borrowings under
this line of credit and is paying the principal balance of $90,000 outstanding
on September 30, 1996 in monthly installments through January 1997. The loan is
secured by a security interest in the equipment acquired and the payments due to
the Company under the installment sale of certain equipment associated with the
transfer of the lease obligation on the former Plainsboro pilot plant facility.
In connection with the formation of Nextran, the Company entered into a
services/lease agreement whereby Nextran leases 49% of the equipment subject to
this loan and makes monthly payments to the Company equal to Nextran's
proportionate share of the monthly payment due under this loan based on the
equipment.
In May 1994, Pharmakon obtained a $500,000 equipment loan from a
Pennsylvania agency secured by certain of the equipment required in connection
with the expansion of Pharmakon's United States operations. The loan is payable
in equal monthly installments through June 2001. The funding period for this
loan ended on December 31, 1995. In April 1996, $288,000, representing the
unused proceeds from this equipment loan, was returned to the Pennsylvania
agency.
BIOCLIN TRANSACTION
Based upon unaudited financial information provided to the Company, at
September 30, 1996, the BioClin Group had cash and marketable debt securities
totaling approximately $1,873,000 and outstanding debt, consisting primarily of
short-term lines of credit, totaling approximately $9,983,000. In the event the
Proposed Transaction is consummated, a portion of the cash resources of the
combined entity may be used to reduce the indebtedness of the BioClin Group
acquired in the Proposed Transaction as well as to pay the expenses of the
Proposed Transaction.
CAPITAL REQUIREMENTS
The Company believes that with its current financial resources it has the
ability to meet its working capital requirements on an ongoing basis for the
foreseeable future. The Company anticipates that its future capital requirements
may include investment for expansion of its operating infrastructure to meet
anticipated increased demand for preclinical drug development services from the
pharmaceutical and biotechnology industries. In addition, a $5,000,000 payment
on the principal balance of the Pharmakon Notes will be due in December 1997.
Additionally, the Company from time to time is engaged in discussions regarding
strategic acquisitions, other than the Proposed Transaction, of organizations
providing various drug development services and may finance such acquisition
with its existing cash resources or by additional public or private debt or
equity financings or through the issuance of stock. In the event any such
acquisition requires financing, there can be no assurance that such financing
will be available to the Company or if available, that it will be available on
acceptable terms. Also, there can be no assurance that the Company will
consummate such an acquisition or obtain any such financing, or if consummated,
that such financing arrangements will satisfy a material portion of the
Company's capital needs. Although the Company continually
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considers and evaluates potential acquisitions and related opportunities for
growth, it has not entered into any agreements with respect to such
acquisitions, other than the Proposed Transaction. Consummation of the Proposed
Transaction is subject to a number of conditions including DNX stockholder
approval and regulatory approvals.
As a former general partner of Nextran, the Company remains obligated with
respect to certain environmental representations and warranties which expire on
August 29, 1997. Such representations and warranties are also limited by certain
financial indemnification provisions.
The Company's working capital and other capital requirements will depend
on numerous factors, including among others: success in increasing the Company's
revenues and managing its operating subsidiaries, Pharmakon and DNX Transgenics;
success in licensing the Company's DNA Microinjection technology; the exchange
rate between the United States dollar and the French Franc in the event funds
from the Company's Pharmakon Europe operation are needed to meet capital
requirements of the Company's U.S. operations; the level of Company resources
devoted to marketing and administration; technological advances; the status of
competitors; and consummation of the Proposed Transaction and payment of
expenses of the Proposed Transaction and possible reduction of the indebtedness
of the BioClin Group.
EXCHANGE RATE FLUCTUATIONS
The Company's consolidated financial statements are denominated in U.S.
dollars and, accordingly, changes in the exchange rate between the French Franc
and the U.S. dollar will affect the translation of Pharmakon Europe's revenues
and operating results into U.S. dollars for purposes of reporting the Company's
consolidated financial results, and also affect the U.S. dollar amounts actually
received by the Company from such subsidiary. Based on the assumption that
Pharmakon Europe continues to represent a significant portion of the business of
the Company, the depreciation of the U.S. dollar against the French Franc would
have a favorable impact on the Company's revenues and an unfavorable impact on
the Company's operating expenses due to the effect of such currency translation
on Pharmakon Europe's operating results; however, the appreciation of the U.S.
dollar against the French Franc would have an unfavorable impact on the
Company's revenues and a favorable impact on the Company's operating expenses.
The Company does not currently hedge its currency translation exposure.
Contracts between Pharmakon Europe and its clients are generally
denominated in French Francs. Because substantially all of Pharmakon Europe's
expenses, such as salaries, services, materials and supplies, are paid in French
Francs, its expenses are not materially affected by fluctuations in exchange
rates. However, given that the majority of Pharmakon Europe's clients and
competitors are located outside of France, exchange rate fluctuations may
materially impact contract prices and therefore may materially impact the
results of operations of Pharmakon Europe and the Company.
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The results of operations of Pharmakon Europe 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
------ --------------- ---------------
1st quarter 1995 5.1602 .1938
2nd quarter 1995 4.9161 .2034
3rd quarter 1995 4.9393 .2025
1st quarter 1996 5.0384 .1985
2nd quarter 1996 5.1578 .1939
3rd quarter 1996 5.0965 .1962
The rates in the above table represent an average exchange rate calculated using
rates quoted in The Wall Street Journal.
ACCUMULATED DEFICIT
Since its inception in 1988 until the formation and subsequent sale of its
partnership interest in Nextran in 1995, the Company has expended substantial
funds for research and development and capital expenditures. A significant
portion of such expenditures were made to support DNX Biotherapeutics' organ
transplantation and blood substitute research and development programs, which
programs were transferred to the Nextran partnership. Historically, these
programs have accounted for a substantial portion of the Company's accumulated
deficit.
NEW ACCOUNTING PRONOUNCEMENT
In October 1995, the FASB issued Statement 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). SFAS 123 presents companies with the
alternative of retaining the current accounting for stock-based compensation or
adopting a new accounting method based on the estimated fair value of equity
instruments granted during the year. Companies that do not adopt the fair value
based method of accounting will be required to adopt the disclosure provisions
of SFAS 123 for the year ending December 31, 1996. The Company expects to
continue applying its current accounting principles and upon adoption in 1996
will present the required footnote disclosures.
INFLATION
The Company believes that inflation has not had a material impact on its
results of operations.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
11.1 Statement Re: Computation of earnings per share.
27 Financial Data Schedule
b. Reports on Form 8-K
On August 19, 1996, the Company filed a Current Report on Form 8-K
to report that the Company entered into the Proposed Transaction.
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DNX CORPORATION
SIGNATURES
The financial information furnished herein has not been audited. However,
in the opinion of management, all significant adjustments necessary for a fair
presentation for the three and nine month periods ended September 30, 1996 and
1995, have been included.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 12, 1996 DNX CORPORATION
/s/ John G. Cooper
-----------------------------------------
John G. Cooper
Senior Vice President, Chief Financial
Officer and Treasurer
(Duly Authorized Officer and Chief
Accounting Officer)
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