AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 7, 1999
REGISTRATION NO. 333-
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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
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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.
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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
i
PAGE
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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
ii
PAGE
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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
iii
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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
iv
PAGE
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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.
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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.
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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.
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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.
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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.
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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
-------- -------- --------------- -----------
-------- -------- --------------- -----------
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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.
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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
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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.
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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
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- 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
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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.
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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
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- 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,
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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.
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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.
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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.
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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
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- 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.
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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.
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- 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:
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- 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.
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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
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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;
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- 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;
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- 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.
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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.
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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.
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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
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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%
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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$220,000.
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SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION/AWARDS
-----------------------------------------
COMMON
SHARES
ANNUAL COMPENSATION UNDERLYING
------------------------------- OTHER ANNUAL OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION GRANTED COMPENSATION
- ------------------------------------------- --------- --------- --------- ------------- ----------- -------------
(CDN$) (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.
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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.
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NEW DRUG DEVELOPMENT PROCESS OVERVIEW
Drug development is an expensive and lengthy process. Before a new drug can be
marketed, it must undergo extensive testing and regulatory review to determine
its safety and efficacy. 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.
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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/
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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:
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- 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
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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.
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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."
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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
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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.
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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.
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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.
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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
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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
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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;
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- 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
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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
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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
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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.
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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:
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- 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.
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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.
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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.
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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
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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.
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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
- --------------------------------------------------------------------------------
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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.
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TABLE OF CONTENTS
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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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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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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
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TABLE OF DEFINITIONS
TERM SECTION
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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
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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)
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TERM SECTION
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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
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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:
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(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.
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(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:
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"(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
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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.
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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.
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(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
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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
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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;
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(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,
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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.
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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.
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(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
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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.
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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.
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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
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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.
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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,
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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:
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(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
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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;
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(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
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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;
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(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.
II-1
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).
II-2
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.
II-7
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.).
II-8
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